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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

 

  x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2015.

OR

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number 1-7806

FEDERAL EXPRESS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   71-0427007

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3610 Hacks Cross Road, Memphis, Tennessee   38125
(Address of Principal Executive Offices)   (ZIP Code)

Registrant’s telephone number, including area code: (901) 369-3600

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

     

Name of each exchange on which registered

None     None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Rule 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨       Accelerated filer ¨   Non-accelerated filer x    Smaller reporting company ¨
    (Do not check if a smaller reporting company)   

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The Registrant is a wholly owned subsidiary of FedEx Corporation, a Delaware corporation, and there is no market for the Registrant’s common stock, par value $0.10 per share. As of July 14, 2015, 1,000 shares of the Registrant’s common stock were outstanding.

The Registrant meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format permitted by General Instruction I(2).

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I              Page           

ITEM 1. Business

     3   

ITEM 1A. Risk Factors

     12   

ITEM 1B. Unresolved Staff Comments

     12   

ITEM 2. Properties

     12   

ITEM 3. Legal Proceedings

     16   

ITEM 4. Mine Safety Disclosures

     16   
PART II   

ITEM  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     17   

ITEM 6. Selected Financial Data

     17   

ITEM 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition

     17   

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     17   

ITEM 8. Financial Statements and Supplementary Data

     17   

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     17   

ITEM 9A. Controls and Procedures

     17   

ITEM 9B. Other Information

     18   
PART III   

ITEM 10. Directors, Executive Officers and Corporate Governance

     19   

ITEM 11. Executive Compensation

     19   

ITEM  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     19   

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

     19   

ITEM 14. Principal Accountant Fees and Services

     19   
PART IV   

ITEM 15. Exhibits, Financial Statement Schedules

     21   
FINANCIAL SECTION   

Table of Contents

     24   

Management’s Discussion and Analysis

     25   

Consolidated Financial Statements

     43   

Other Financial Information

     73   
EXHIBITS   

Exhibit Index

     E-1   

Exhibit 12

  

Exhibit 18

  

 

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Exhibit 23

  

Exhibit 24

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINK BASE DOCUMENT

  

EX-101 DEFINITIONS LINK BASE DOCUMENT

  

EX-101 LABELS LINK BASE DOCUMENT

  

EX-101 PRESENTATION LINK BASE DOCUMENT

  

 

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PART I

ITEM 1. BUSINESS

Overview

Federal Express Corporation (“FedEx Express”) invented express distribution over 40 years ago in 1973 and remains the industry leader, providing rapid, reliable, time-definite delivery of packages and freight to more than 220 countries and territories through an integrated global network. FedEx Express is a wholly owned subsidiary of FedEx Corporation (“FedEx”), which was incorporated in Delaware on October 2, 1997 to serve as the parent holding company of FedEx Express. We offer a wide range of U.S. domestic and international shipping services for delivery of package and freight, connecting markets that generate more than 90% of the world’s gross domestic product through door-to-door, customs-cleared service, with a money-back guarantee. Our unmatched air route authorities and extensive transportation infrastructure, combined with leading-edge information technologies, make us the world’s largest express transportation company. We employ approximately 166,000 employees and have approximately 53,000 drop-off locations (including FedEx Office centers), 647 aircraft and approximately 56,000 vehicles and trailers in our integrated global network.

FedEx Corporate Services, Inc. (“FedEx Services”), a wholly owned subsidiary of FedEx, provides us and other FedEx subsidiaries with sales, marketing, information technology, communications, customer service and certain other back-office support. FedEx Services and its subsidiary FedEx TechConnect, Inc. (“FedEx TechConnect”) provide a convenient single point of access for many customer support functions, enabling FedEx to more effectively sell the entire portfolio of transportation services and to help ensure a consistent and outstanding experience for our customers.

FedEx’s wholly owned subsidiary FedEx Office and Print Services, Inc. (“FedEx Office”) provides customer access to our shipping services. FedEx Office has approximately 1,800 customer facing centers and its network of centers provides convenient access points to our services for higher margin retail customers. In addition, FedEx Office offers packing services, and packing supplies and boxes are included in its retail offerings.

FedEx Services has an agreement with OfficeMax North America, Inc. to offer FedEx Express and FedEx Ground shipping services at OfficeMax retail locations (approximately 800 locations). Additionally, the FedEx Authorized Ship Center program offers U.S. domestic and international FedEx Express and FedEx Ground shipping and drop-off services through a network of approximately 5,500 franchised and independent “pack and ship” retail locations. These additional staffed drop-off locations complement FedEx’s existing retail network, including FedEx Office centers, and further expand customer access to our services.

Except as otherwise specified, any reference to a year indicates our fiscal year ended May 31 of the year referenced.

Services

We offer a wide range of U.S. domestic and international shipping services for delivery of packages and freight. Overnight and deferred package services are backed by money-back guarantees and extend to nearly the entire U.S. population. We offer three U.S. overnight package delivery services: FedEx First Overnight, FedEx Priority Overnight and FedEx Standard Overnight. FedEx SameDay service is available for urgent shipments up to 150 pounds to virtually any U.S. destination. We also offer U.S.

 

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express overnight and deferred freight services backed by money-back guarantees to handle the needs of the time-definite freight market. Additionally, FedEx One Rate gives U.S. customers a simple, predictable flat rate shipping option that is calculated based on the packaging type, service selected and destination.

International express and deferred package delivery with a money-back guarantee is available to more than 220 countries and territories, with a variety of time-definite services to meet distinct customer needs. FedEx International Priority package services provide time-definite delivery within one, two or three business days worldwide. FedEx International Economy package services provide time-definite delivery within five business days worldwide. FedEx International First package services provide time-definite delivery to select postal codes in 20 key global markets, with delivery to select U.S. ZIP Codes as early as 8:00 a.m. from more than 90 countries in one or two business days, delivery by 10 a.m. in one business day to Canada and by 11:00 a.m. in one business day to Mexico. We also offer domestic pickup-and-delivery services within certain non-U.S. countries, including the United Kingdom, Canada, China, India, Mexico, Brazil, France, Poland and South Africa. In addition, we offer comprehensive international express and deferred freight services, backed by a money-back guarantee, real-time tracking and advanced customs clearance.

We also provide FedEx Delivery Manager, which allows our U.S. residential customers to customize home deliveries to fit their schedule by providing a range of options to schedule dates, locations and times of delivery. By signing up at fedex.com, customers can receive notification of packages en route to their homes, and can choose various delivery options.

We provide our customers with a high level of service quality, as evidenced by FedEx’s ISO 9001 certification for our global express and ground operations. ISO 9001 registration is required by thousands of customers around the world. Our global certification enhances our single-point-of-access strategy and solidifies our reputation as the quality leader in the transportation industry. ISO 9001 is currently the most rigorous international standard for Quality Management and Assurance. ISO standards were developed by the International Organization for Standardization in Geneva, Switzerland to promote and facilitate international trade. More than 150 countries, including European Union members, the U.S. and Japan, recognize ISO standards.

Information regarding our e-shipping tools and solutions can be found below (“Customer-Driven Technology”). In addition, detailed information about all of our delivery services, e-shipping tools and solutions and FedEx’s citizenship efforts can be found on the FedEx website, fedex.com. The information on the FedEx website, however, is not incorporated by reference in, and does not form a part of, this Report.

International Expansion

We are focused on the long-term expansion of our international presence, especially in key markets such as China, India, Europe, Latin America and Southern Africa. In April 2015, FedEx entered into a conditional agreement to acquire TNT Express N.V. (“TNT Express”), which has express delivery operations in Europe, the Middle East and Africa, Asia-Pacific and the Americas. Following the closing of the acquisition, FedEx anticipates integrating the TNT Express operations with the FedEx Express network. This acquisition will expand FedEx’s global portfolio, particularly in Europe, lower its costs to serve European markets by increasing density in its pickup-and-delivery operations and accelerate its global growth.

In 2014 we made a strategic move in Southern Africa by acquiring the businesses operated by our service provider in the following seven countries: South Africa, Botswana, Malawi, Mozambique, Namibia, Swaziland and Zambia. These acquisitions, along with our 2013 acquisitions of transportation companies in Poland, France and Brazil and our 2012 acquisition of a Mexican domestic express package delivery company, gives us more robust global transportation networks and added capabilities in important international markets, continues our strategic European, Latin American and African growth plans and are expected to provide important contributions to our long-term growth, productivity and profitability. As part of our European growth strategy, we plan to open a new gateway facility in 2016 for inbound and outbound shipments for Denmark, Finland, Norway and Sweden. The building is a milestone for our growth in the Nordics region, which has seen the opening of eight new stations since 2011. The facility will give customers better connectivity from the Nordics to Europe and the rest of the world.

 

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Since we began serving mainland China in 1984, we have expanded our service to cover more than 400 cities across the country and, in 2009, we began operations at our Asia-Pacific hub at the Guangzhou Baiyun International Airport in southern China. Our new North Pacific regional hub at the Kansai International Airport in Osaka, Japan, which opened in April 2014, serves as a consolidation point for shipments from northern Asia to the U.S., and operates as an international gateway for customers in western Japan. Additionally, in October 2012, we announced plans to establish a new International Express and Cargo Hub in Shanghai. This new facility, with designated onsite customs clearance, will be located at Shanghai’s Pudong International Airport and is slated for completion in early 2017. These hubs will allow us to continue to better serve our global customers doing business in the Asia-Pacific markets.

To facilitate the use of our growing international network, we offer a full range of international trade consulting services and a variety of online tools that enable customers to more easily determine and comply with international shipping requirements.

Profit Improvement Initiatives

During 2013, we saw challenging global economic conditions, as ongoing shifts from priority to deferred shipping services significantly impacted profitability. In response to these trends, in 2013 we announced programs targeting annual profitability improvement of $1.6 billion. Our plans position FedEx Express to exit 2016 with a run rate of $1.6 billion of additional operating profit from the then 2013 base business. Our profit improvement programs include multiple initiatives that are reducing our overall cost structure and enhancing the quality of our revenue.

In 2015, we made substantial progress in achieving our profit improvement goals through management of network capacity to match customer demand, reduction of structural costs and modernization of our fleet. FedEx Services has reduced its total expenses while investing in major information technology transformation projects. In addition, our incentive compensation programs have been gradually reinstated so that 2016 business plan objectives represent more fully funded compensation targets.

During 2014, FedEx completed a voluntary program offering cash buyouts to eligible U.S.-based employees in certain staff functions. We are also streamlining support functions and eliminating redundant systems and processes. At the same time, in addition to modernizing our air fleet, we are transforming our U.S. domestic express network by closing and realigning regional and district facilities, reorganizing pickup-and-delivery operations while maintaining our outstanding service levels, improving flight and crew scheduling, refining aircraft maintenance processes and improving fuel efficiency of our vehicle fleet.

Internationally, we are working to improve the quality of our international revenue as customers continue to make more economical choices in a low-growth global economy by moving the linehaul of certain slower-moving shipments to third-party transportation providers and better leveraging capacity within our international network through, for example, the reduction of flights to and from Asia. Recent

 

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international acquisitions will also help drive increases in international domestic revenues. Lastly, we are improving revenue quality by adding value for our customers with innovative and market-leading solutions and adding services for vertical industries including healthcare and aerospace. Our way forward is clear, as we continue to make FedEx Express an even leaner, more efficient business.

Customer-Driven Technology

We are a world leader in technology, and our founder Frederick W. Smith’s vision that “the information about a package is as important as the delivery of the package itself” remains at the core of our comprehensive technology strategy. In fact, FedEx ranked No. 6 overall on the 2015 InformationWeek Elite 100 list – a compilation of the top business technology innovators in the U.S.

Our technology strategy is driven by our desire for customer satisfaction. Through FedEx Services, we strive to build technology solutions that will solve our customers’ business problems with simplicity, convenience, speed and reliability. The focal point of our strategy is the award-winning FedEx website, together with our customer integrated solutions.

The fedex.com website was launched nearly 20 years ago, and during that time, customers have shipped and tracked billions of packages at fedex.com. The fedex.com website is widely recognized for its speed, ease of use and customer-focused features. At fedex.com, our customers ship packages, determine international documentation requirements, track package status and pay invoices. The advanced tracking capability within FedEx Tracking provides customers with a consolidated view of inbound and outbound shipments.

FedEx Mobile is a suite of services available on most web-enabled mobile devices, such as the BlackBerry® and Android™ smartphones, and includes enhanced support for Apple products, such as the iPhone®, iPod touch® and iPad® devices. The FedEx Mobile website has expanded to more than 220 countries and territories and 26 languages. FedEx Mobile allows customers to track the status of packages, create shipping labels, get account-specific rate quotes and access drop-off location information. FedEx Office has its own iPhone®, iPad® and Android™ apps that allow customers to print directly from their devices to any FedEx Office location in the U.S. or have the order delivered right to their door, while also allowing customers to get account-specific pricing, track print orders or packages, or find the nearest FedEx Office location. FedEx Office self-serve printers give customers even more flexibility by allowing direct USB access to print documents, as well as the ability to retrieve and print documents from customers’ cloud accounts. We also use wireless data collection devices to scan bar codes on shipments, thereby enhancing and accelerating the package information available to our customers.

FedEx continues to provide customers with innovative solutions. For example, in May 2014 FedEx TechConnect opened a package laboratory providing our customers with free package testing and design services.

Our e-commerce tools and solutions are designed to be easily integrated into our customers’ applications, as well as into third-party software developed by leading e-procurement, systems integration and enterprise resource planning companies. The FedEx Ship Manager suite of solutions offers a wide range of options to help our customers manage their parcel and LTL shipping and associated processes.

Marketing

The FedEx brand name is symbolic of outstanding service, reliability and speed. Emphasis is placed on promoting and protecting the FedEx brand, one of our most important assets. As a result, FedEx is one of the most widely recognized brands in the world. In addition to television, print and digital advertising, we promote the FedEx brand through corporate sponsorships and special events. For example, FedEx sponsors:

 

 

PGA TOUR and the Champions Tour golf organizations, as the “Official Shipping Company,” and FedExCup, a season-long points competition for PGA TOUR players

 

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The Title sponsor of the FedEx St. Jude Classic, a PGA TOUR event that raises millions of dollars for St. Jude Children’s Research Hospital

 

 

The National Football League (“NFL”), as its “Official Delivery Service Sponsor” and “Official Office Services Provider of the NFL”

 

 

FedExField in Washington, DC

 

 

The #11 Joe Gibbs Racing Toyota Camry driven by Denny Hamlin in the NASCAR Sprint Cup Series

 

 

ATP World Tour men’s professional tennis circuit and French Open tennis tournament

 

 

FedExForum in Memphis, TN

U.S. Postal Service Agreement

In 2013, we entered into a new seven-year agreement with the USPS for the provision of domestic air transportation services to the USPS for its First Class, Priority and Express Mail that runs through September 2020. We also provide transportation and delivery for the USPS’s international delivery service called Global Express Guaranteed (“GXG”) under a separate agreement. For more information about our relationship with the USPS, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

Pricing

We periodically publish list prices in our Service Guides for the majority of our services. In general, shipping rates are based on the service selected, destination zone, weight, size, any ancillary service charge and whether the customer charged the shipment to a FedEx account. We offer our customers discounts generally based on actual or potential average daily revenue produced. As announced in September 2014, we increased shipping rates by an average of 4.9% for U.S. domestic, U.S. export and U.S. import services, effective January 5, 2015.

We have an indexed fuel surcharge for U.S. domestic and U.S. outbound shipments and for shipments originating internationally, where legally and contractually possible. The surcharge percentage is subject to monthly adjustment based on a rounded average of a certain spot price for jet fuel. For example, the fuel surcharge for May 2015 was based on the average spot price for jet fuel published for March 2015. Changes to our fuel surcharge, when calculated according to the average spot price for jet fuel and our trigger points, are applied effective from the first Monday of the month. These trigger points may change from time to time, but information on the fuel surcharge for each month is available at fedex.com approximately two weeks before the surcharge is applicable. We routinely review our fuel surcharges and our fuel surcharge methodology. On February 2, 2015, we updated the tables used to determine our fuel surcharges. The weighted average U.S. domestic and U.S. outbound fuel surcharge as a percentage of the base rates for the past three years was: 2015 — 6%; 2014 — 9%; and 2013 — 12%. The 2013 percentage reflects certain fuel surcharge reductions that were associated with our 2013 base rate

 

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increase. See the “Fuel” section of Item 7 of this Annual Report on Form 10-K (“Management’s Discussion and Analysis of Results of Operations and Financial Condition”) for a description and discussion of the net impact of fuel on our operating results.

Operations

Our primary sorting facility, located in Memphis, serves as the center of our multiple hub-and-spoke system. A second national hub facility is located in Indianapolis. In addition to these national hubs, we operate regional hubs in Newark, Oakland, Fort Worth and Greensboro and major metropolitan sorting facilities in Los Angeles and Chicago.

Facilities in Anchorage, Paris, Guangzhou, Cologne/Bonn and Osaka serve as sorting facilities for express package and freight traffic moving to and from Asia, Europe and North America. Additional major sorting and freight handling facilities are located at Narita Airport in Tokyo, Stansted Airport outside London and Pearson Airport in Toronto. The facilities in Guangzhou, Paris, Cologne/Bonn and Osaka are also designed to serve as regional hubs for their respective market areas. A facility in Miami — the Miami Gateway Hub — serves our South Florida, Latin American and Caribbean markets.

Throughout our worldwide network, we operate city stations and employ a staff of customer service agents, cargo handlers and couriers who pick up and deliver shipments in the station’s service area. In some international areas, independent agents (Global Service Participants) have been selected to complete deliveries and to pick up packages. For more information about our sorting and handling facilities, see Part I, Item 2 of this Annual Report on Form 10-K under the caption “Sorting and Handling Facilities.”

FedEx Office offers retail access to our shipping services at all of its U.S. and Canadian retail locations. We also have alliances with certain other retailers to provide in-store drop-off sites. Our unmanned FedEx Drop Boxes provide customers the opportunity to drop off packages in office buildings, shopping centers and corporate or industrial parks.

Fuel Supplies and Costs

During 2015, we purchased jet fuel from various suppliers under contracts that vary in length and which provide for estimated amounts of fuel to be delivered. The fuel represented by these contracts is purchased at market prices. Because of our indexed fuel surcharge, we do not have any jet fuel hedging contracts. See “Pricing.”

The following table sets forth our costs for jet fuel and its percentage of our total revenues for the last five fiscal years:

 

Fiscal Year

   Total Jet
Fuel  Cost
(in millions)
     Percentage of  Total
Revenues
 

2015

   $ 2,816         10.8

2014

     3,506         13.5   

2013

     3,683         14.0   

2012

     3,867         15.0   

2011

     3,178         13.2   

Most of our vehicle fuel needs are satisfied by retail purchases with various discounts.

 

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Competition

As described in Item 1A of this Annual Report on Form 10-K (“Risk Factors”), the express package and freight markets are both highly competitive and sensitive to price and service, especially in periods of little or no macro-economic growth. The ability to compete effectively depends upon price, frequency, capacity and speed of scheduled service, ability to track packages, extent of geographic coverage, reliability and innovative service offerings.

Competitors within the U.S. include other package delivery concerns, principally United Parcel Service, Inc. (“UPS”), passenger airlines offering express package services, regional delivery concerns, air freight forwarders and the USPS. Our principal international competitors are DHL, UPS, TNT Express, foreign postal authorities, freight forwarders, passenger airlines and all-cargo airlines. Many of our international competitors are government-owned, -controlled or -subsidized carriers, which may have greater resources, lower costs, less profit sensitivity and more favorable operating conditions than we do.

Employees

We are headquartered in Memphis, Tennessee. David J. Bronczek is our President and Chief Executive Officer. As of May 31, 2015, we employed approximately 114,000 permanent full-time and approximately 52,000 permanent part-time employees, of which 13% are employed in the Memphis area. Our international employees represent 37% of all employees.

Our pilots, who constitute a small percentage of our total employees, are represented by the Air Line Pilots Association, International (“ALPA”), and are employed under a collective bargaining agreement. This agreement became amendable in March 2013, and the parties are currently in negotiations. In October 2014, we formally requested assistance from the National Mediation Board (“NMB”) to mediate the negotiations and the NMB has been actively mediating the talks since that time. The NMB is the U.S. governmental agency that oversees labor agreements for entities covered by the Railway Labor Act of 1926, as amended (“RLA”). The conduct of mediated negotiations has no impact on our operations.

Attempts by other labor organizations to organize certain other groups of employees occur from time to time. Although these organizing attempts have not resulted in any certification of a U.S. domestic collective bargaining representative (other than ALPA), we cannot predict the outcome of these labor activities or their effect, if any, on us or our employees. Certain of our non-U.S. employees are unionized. We believe our employee relations are excellent.

Trademarks

The “FedEx” trademark, service mark and trade name is essential to our worldwide business. FedEx and FedEx Express, among others, are trademarks, service marks and trade names of Federal Express Corporation for which registrations, or applications for registration, are on file, as applicable. We have authorized, through licensing arrangements, the use of certain of our trademarks, service marks and trade names by our Global Service Participants to support our business. In addition, we license the use of certain of our trademarks, service marks and trade names on promotional items for the primary purpose of enhancing brand awareness.

Regulation

Air. Under the Federal Aviation Act of 1958, as amended, both the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration (“FAA”) exercise regulatory authority over us.

 

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The FAA’s regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards and maintenance, as well as personnel and ground facilities, which may from time to time affect our ability to operate our aircraft in the most efficient manner. We hold an air carrier certificate granted by the FAA pursuant to Part 119 of the federal aviation regulations. This certificate is of unlimited duration and remains in effect so long as we maintain our standards of safety and meet the operational requirements of the regulations.

In September 2010, the FAA proposed rules that would significantly reduce the maximum number of hours on duty and increase the minimum amount of rest time for our pilots, and thus require us to hire additional pilots and modify certain of our aircraft. When the FAA issued final regulations in December 2011, all-cargo carriers, including us, were exempt from these new pilot fatigue requirements, and instead required to continue complying with previously enacted flight and duty time rules. In December 2012, the FAA reaffirmed the exclusion of us from the new rule. It is reasonably possible, however, that future security or flight safety requirements could impose material costs on us.

The DOT’s authority relates primarily to economic aspects of air transportation. The DOT’s jurisdiction extends to aviation route authority and to other regulatory matters, including the transfer of route authority between carriers. We hold various certificates issued by the DOT, authorizing us to engage in U.S. and international air transportation of property and mail on a worldwide basis.

Under the Aviation and Transportation Security Act of 2001, as amended, the Transportation Security Administration (“TSA”), an agency within the Department of Homeland Security, has responsibility for aviation security. The TSA requires us to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static, but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. It is reasonably possible that these rules or other future security requirements could impose material costs on us.

We participate in the Civil Reserve Air Fleet (“CRAF”) program. Under this program, the U.S. Department of Defense may requisition for military use certain of our wide-bodied aircraft in the event of a declared need, including a national emergency. We are compensated for the operation of any aircraft requisitioned under the CRAF program at standard contract rates established each year in the normal course of awarding contracts. Through our participation in the CRAF program, we are entitled to bid on peacetime military cargo charter business. We, together with a consortium of other carriers, currently contract with the U.S. government for charter flights.

Ground. The ground transportation performed by us is integral to our air transportation services. The enactment of the Federal Aviation Administration Authorization Act of 1994 abrogated the authority of states to regulate the rates, routes or services of intermodal all-cargo air carriers and most motor carriers. States may now only exercise jurisdiction over safety and insurance. We are registered in those states that require registration.

Like other interstate motor carriers, we are subject to certain DOT safety requirements governing interstate operations. In addition, vehicle weight and dimensions remain subject to both federal and state regulations.

International. Our international authority permits us to carry cargo and mail from points in our U.S. route system to numerous points throughout the world. The DOT regulates international routes and practices and is authorized to investigate and take action against discriminatory treatment of U.S. air carriers abroad. The right of a U.S. carrier to serve foreign points is subject to the DOT’s approval and generally

 

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requires a bilateral agreement between the U.S. and the foreign government. In addition, the carrier must then be granted the permission of such foreign government to provide specific flights and services. The regulatory environment for global aviation rights may from time to time impair our ability to operate our air network in the most efficient manner. Additionally, global air cargo carriers, such as us, are subject to current and potential additional aviation security regulation by foreign governments.

Our operations outside of the U.S., such as our growing international domestic operations, are also subject to current and potential regulations, including certain postal regulations and licensing requirements, that restrict, make difficult and sometimes prohibit, our ability to compete effectively in parts of the international domestic transportation and logistics market.

Communication. Because of the extensive use of radio and other communication facilities in our aircraft and ground transportation operations, we are subject to the Federal Communications Commission Act of 1934, as amended. Additionally, the Federal Communications Commission regulates and licenses our activities pertaining to satellite communications.

Environmental. Pursuant to the Federal Aviation Act, the FAA, with the assistance of the U.S. Environmental Protection Agency (“EPA”), is authorized to establish standards governing aircraft noise. Our aircraft fleet is in compliance with current noise standards of the federal aviation regulations. In addition to federal regulation of aircraft noise, certain airport operators have local noise regulations, which limit aircraft operations by type of aircraft and time of day. These regulations have had a restrictive effect on our aircraft operations in some of the localities where they apply but do not have a material effect on any of our significant markets. Congress’s passage of the Airport Noise and Capacity Act of 1990 established a National Noise Policy, which enabled us to plan for noise reduction and better respond to local noise constraints. Our international operations are also subject to noise regulations in certain of the countries in which we operate.

Concern over climate change, including the impact of global warming, has led to significant U.S. and international legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions, including our aircraft emissions. For example, in 2015, the EPA issued a proposed finding on GHG emissions from aircraft and its relationship to air pollution. The final finding is a regulatory prerequisite to the EPA’s adoption of a new certification standard for aircraft emissions. Additionally, in 2009, the European Commission approved the extension of the European Union Emissions Trading Scheme (“ETS”) for GHG emissions, to the airline industry. Under this decision, all of our flights that are wholly within the European Union are now covered by the ETS requirements, and each year we are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such flights. For a description of such efforts and their potential effect on our cost structure and operating results, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

We are subject to federal, state and local environmental laws and regulations relating to, among other things, the shipment of dangerous goods, contingency planning for spills of petroleum products and the disposal of waste oil. Additionally, we are subject to numerous regulations dealing with underground fuel storage tanks, hazardous waste handling, vehicle and equipment emissions and noise and the discharge of effluents from our properties and equipment. We have environmental management programs to ensure compliance with these regulations.

Labor. All of our U.S. employees are covered by the RLA, while labor relations within the U.S. at most of FedEx’s companies are governed by the National Labor Relations Act (“NLRA”). Under the RLA, groups that wish to unionize must do so across nationwide classes of employees. The RLA also requires mandatory government-led mediation of contract disputes supervised by the NMB before a union can strike or an employer can replace employees or impose contract terms. This part of the RLA helps minimize the risk of strikes that would shut down large portions of the economy. Under the NLRA, employees can unionize in small localized groups, and government-led mediation is not a required step in the negotiation process.

 

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The RLA was originally passed to govern railroad and express carrier labor negotiations. As transportation systems evolved, the law expanded to cover airlines, which are the dominant national transportation systems of today. As an air express carrier with an integrated air/ground network, we and our employees have been covered by the RLA since the founding of the company in 1971. The purpose of the RLA is to offer employees a process by which to unionize (if they choose) and engage in collective bargaining while also protecting global commerce from damaging work stoppages and delays. Specifically, the RLA ensures that an entire transportation system, such as ours, cannot be shut down by the actions of a local segment of the network.

The U.S. Congress has, in the past, considered adopting changes in labor laws that would make it easier for unions to organize units of our employees. For example, there is always a possibility that Congress could remove most of our employees from the jurisdiction of the RLA, thereby exposing our network to sporadic labor disputes and the risk that small groups of employees could disrupt our entire air/ground network. In addition, federal and state governmental agencies have and may continue to take actions that could make it easier for our employees to organize under the RLA. For a description of these potential labor law changes, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

ITEM 1A. RISK FACTORS

We present information about our risk factors on pages 35 through 39 of this Annual Report on Form 10-K.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our principal owned and leased properties include our aircraft, vehicles, national, regional and metropolitan sorting facilities, administration buildings, FedEx Drop Boxes and data processing and telecommunications equipment.

 

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Aircraft and Vehicles

As of May 31, 2015, our aircraft fleet consisted of the following:

 

Description

   Owned      Leased      Total     Maximum Gross
Structural Payload

(Pounds per Aircraft) (1)
 

Boeing B777F

     25         0         25        233,300   

Boeing MD11

     31         25         56        192,600   

Boeing MD10-30

     12         1         13        175,900   

Boeing MD10-10

     36         0         36        137,500   

Boeing 767F

     18         3         21 (2)      127,100   

Airbus A300-600

     32         36         68        106,600   

Airbus A310-200/300

     21         0         21        83,170   

Boeing B757-200

     119         0         119 (3)      63,000   

ATR 72-202/212

     21         0         21        17,970   

ATR 42-300/320

     26         0         26        12,070   

Cessna 208B

     241         0         241        2,830   
  

 

 

    

 

 

    

 

 

   

Total

     582         65         647     
  

 

 

    

 

 

    

 

 

   

 

 

(1) 

Maximum gross structural payload includes revenue payload and container weight.

 

(2) 

Includes four aircraft not currently in operation and awaiting completion of modification.

 

(3) 

Includes eighteen aircraft not currently in operation and awaiting completion of modification.

 

 

The B777Fs are two-engine, wide-bodied cargo aircraft that have a longer range and larger capacity than any other aircraft we operate.

 

 

The MD11s are three-engine, wide-bodied aircraft that have a longer range and larger capacity than MD10s.

 

 

The MD10s are three-engine, wide-bodied aircraft that have received an Advanced Common Flightdeck (ACF) modification, which includes a conversion to a two-pilot cockpit, as well as upgrades of electrical and other systems.

 

 

The B767Fs are two-engine, long-range, wide-bodied cargo aircraft.

 

 

The A300s and A310s are two-engine, wide-bodied aircraft that have a longer range and more capacity than B757s.

 

 

The B757s are two-engine, narrow-bodied aircraft configured for cargo service.

 

 

The ATR and Cessna 208 turbo-prop aircraft are leased to independent operators to support FedEx Express operations in areas where demand does not justify use of a larger aircraft.

An inventory of spare engines and parts is maintained for each aircraft type.

In addition, we lease smaller aircraft to operators, and these operators use the aircraft to move FedEx packages to and from airports served by our larger jet aircraft. The lease agreements generally call for the lessee to provide the flight crews, maintenance, fuel and other supplies required to operate the aircraft, and we reimburse the lessee for these items. Our lease agreements are for terms not exceeding one year and are generally cancelable upon 30 days’ notice.

At May 31, 2015, we operated approximately 56,000 ground transport vehicles, including pickup-and-delivery vans, larger trucks called container transport vehicles and over-the-road tractors and trailers.

 

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Aircraft Purchase Commitments

The following table is a summary of the number and type of aircraft we were committed to purchase as of May 31, 2015, with the year of expected delivery:

 

           B767F(1)                  B777F (2)                  Total        

2016

     11         2         13   

2017

     12                 12   

2018

     11         2         13   

2019

     6         2         8   

2020

             3         3   

Thereafter

             9         9   
  

 

 

    

 

 

    

 

 

 

Total

     40         18         58   
  

 

 

    

 

 

    

 

 

 

 

(1) 

As of May 31, 2015, our obligation to purchase three of these aircraft was conditioned upon there being no event that causes FedEx Express or its employees to not be covered by the RLA.

(2) 

As of May 31, 2015, our obligation to purchase nine of these aircraft was conditioned upon there being no event that causes FedEx Express or its employees to not be covered by the RLA.

As of May 31, 2015, deposits and progress payments of $472 million had been made toward aircraft purchases and other planned aircraft-related transactions. Also see Note 14 of the accompanying consolidated financial statements for more information about our purchase commitments.

Sorting and Handling Facilities

At May 31, 2015, we operated the following major sorting and handling facilities:

 

Location

   Acres      Square
Feet
     Sorting
Capacity
(per hour) (1)
    

Lessor

   Lease
Expiration
Year

National

              

Memphis, Tennessee

     784         3,663,000         475,000       Memphis-Shelby County Airport Authority    2036

Indianapolis, Indiana

     316         2,509,000         214,000       Indianapolis Airport Authority    2028

Regional

              

Fort Worth, Texas

     168         948,000         76,000       Fort Worth Alliance Airport Authority    2021

Newark, New Jersey

     70         595,000         156,000       Port Authority of New York and New Jersey    2030

Oakland, California

     75         448,935         63,000       City of Oakland    2036

Greensboro, N. Carolina

     165         593,000         29,000       Piedmont Triad Airport Authority    2031

 

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Metropolitan

              

Chicago, Illinois

     66         597,000         23,000       City of Chicago    2018/2028 (5)

Los Angeles, California

     34         305,300         57,000       City of Los Angeles    2021/2025 (6)

International

              

Anchorage, Alaska (2)

     64         332,000         25,000       State of Alaska, Department of Transportation and Public Facilities    2023

Paris, France (3)

     111         1,238,000         63,000       Aeroports de Paris    2029

Cologne, Germany (3)

     11         325,000         20,000       Cologne Bonn Airport    2040

Guangzhou, China (4)

     155         873,006         64,000       Guangdong Airport Management Corp.    2029

Osaka, Japan (4)

     17         425,206         9,000       New Kansai International Airport Co., Ltd.    2024

 

 

(1) 

Documents and packages.

 

(2) 

Handles international express package and freight shipments to and from Asia, Europe and North America.

 

(3) 

Handles intra-Europe express package and freight shipments, as well as international express package and freight shipments to and from Europe.

 

(4) 

Handles intra-Asia express package and freight shipments, as well as international express package and freight shipments to and from Asia.

 

(5) 

Property is held under two separate leases — lease for original hub expires in 2018, and lease for new facility expires in 2028.

 

(6) 

Property is held under two separate leases — lease for sorting and handling facility expires in 2021, and lease for ramp expansion expires in 2025.

Our primary sorting facility, which serves as the center of our multiple hub-and-spoke system, is located at the Memphis International Airport. Our facilities at the Memphis International Airport also include aircraft hangars, aircraft ramp areas, vehicle parking areas, flight training and fuel facilities, administrative offices and warehouse space. We lease these facilities from the Memphis-Shelby County Airport Authority (the “Authority”). The lease obligates us to maintain and insure the leased property and to pay all related taxes, assessments and other charges. The lease is subordinate to, and our rights thereunder could be affected by, any future lease or agreement between the Authority and the U.S. government.

We have additional international sorting-and-handling facilities located at Narita Airport in Tokyo, Stansted Airport outside London and Pearson Airport in Toronto. We also have a substantial presence at airports in Hong Kong, Taiwan, Dubai and Miami.

Administrative and Other Properties and Facilities

We own or lease 638 facilities for city station operations in the U.S. In addition, 606 city stations are owned or leased throughout our international network. The majority of these leases are for terms of five to ten years. City stations serve as a sorting and distribution center for a particular city or region. We believe that suitable alternative facilities are available in each locale on satisfactory terms, if necessary.

 

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As of May 31, 2015, we had approximately 41,000 Drop Boxes. We also have approximately 15,000 FedEx Authorized ShipCenters and other types of staffed drop-off locations, such as FedEx Office centers. Internationally, we had approximately 7,000 drop-off locations.

 

ITEM 3. LEGAL PROCEEDINGS

FedEx Express and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business. For a description of material pending legal proceedings, see Note 15 of the accompanying consolidated financial statements.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

FedEx Express is a wholly owned subsidiary of FedEx, and there is no market for FedEx Express’s common stock.

 

ITEM 6. SELECTED FINANCIAL DATA

Omitted under the reduced disclosure format permitted by General Instruction I(2)(a) of Form 10-K.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Management’s discussion and analysis of results of operations and financial condition is presented on pages 25 through 39 of this Annual Report on Form 10-K.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative information about market risk is presented on page 73 of this Annual Report on Form 10-K.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FedEx Express’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 14, 2015 thereon, are presented on pages 42 through 72 of this Annual Report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

Our management, 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 Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to 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 May 31, 2015 (the end of the period covered by this Annual Report on Form 10-K).

 

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Assessment of Internal Control Over Financial Reporting

Management’s report on our internal control over financial reporting is presented on page 40 of this Annual Report on Form 10-K. The report of Ernst & Young LLP with respect to our internal control over financial reporting is presented on page 41 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

During our fiscal quarter ended May 31, 2015, 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.

 

ITEM 9B. OTHER INFORMATION

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Omitted under the reduced disclosure format permitted by General Instruction I(2)(c) of Form 10-K.

 

ITEM 11. EXECUTIVE COMPENSATION

Omitted under the reduced disclosure format permitted by General Instruction I(2)(c) of Form 10-K.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Omitted under the reduced disclosure format permitted by General Instruction I(2)(c) of Form 10-K.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Omitted under the reduced disclosure format permitted by General Instruction I(2)(c) of Form 10-K.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Of the fees Ernst & Young LLP billed FedEx for services provided during 2015 and 2014, we estimate that the following amounts were for services related to FedEx Express. These amounts (in thousands) represent the fees that Ernst & Young LLP directly billed to FedEx Express, as well as that portion of Ernst & Young LLP’s fees that FedEx allocated to FedEx Express through management fees.

 

             2015                      2014          

Audit fees

   $ 10,063       $ 9,518   

Audit-related fees

     520         527   

Tax fees

     327         364   

All other fees

     6         7   
  

 

 

    

 

 

 

Total

   $ 10,916       $ 10,416   

 

   

Audit Fees. Represents fees for professional services provided for the audit of FedEx Express’s annual financial statements and review of FedEx Express’s quarterly financial statements, for the audit of FedEx Express’s internal control over financial reporting and for audit services provided in connection with other statutory or regulatory filings.

 

   

Audit-Related Fees. Represents fees for assurance and other services related to the audit of FedEx Express’s financial statements. The fees for 2015 and 2014 include fees for benefit plan audits and international accounting and reporting compliance.

 

   

Tax Fees. Represents fees for professional services provided primarily for domestic and international tax compliance and advice. Tax compliance and preparation fees totaled $195,000 in 2015 and $149,000 in 2014.

 

   

All Other Fees. Represents fees for products and services not otherwise included in the categories above. The amounts shown for 2015 and 2014 include fees for online technical resources.

 

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To help ensure the independence of our independent registered public accounting firm, the Audit Committee of the Board of Directors of FedEx has adopted a Policy on Engagement of Independent Auditor, which is available in the Governance & Citizenship section of the Investor Relations page of our website at http://investors.fedex.com.

Pursuant to the Policy on Engagement of Independent Auditor, the Audit Committee preapproves all audit services and non-audit services to be provided to FedEx by its independent registered public accounting firm. The Audit Committee may delegate to one or more of its members the authority to grant the required approvals, provided that any exercise of such authority is presented at the next Audit Committee meeting.

The Audit Committee may preapprove for up to one year in advance the provision of particular types of permissible routine and recurring audit-related, tax and other non-audit services, in each case described in reasonable detail and subject to a specific annual monetary limit also approved by the Audit Committee. The Audit Committee must be informed about each such service that is actually provided. In cases where a service is not covered by one of those approvals, the service must be specifically preapproved by the Audit Committee no earlier than one year prior to the commencement of the service.

Each audit or non-audit service that is approved by the Audit Committee (excluding tax services performed in the ordinary course of FedEx’s business and excluding other services for which the aggregate fees are expected to be less than $25,000) will be reflected in a written engagement letter or writing specifying the services to be performed and the cost of such services, which will be signed by either a member of the Audit Committee or by an officer of FedEx authorized by the Audit Committee to sign on behalf of FedEx.

The Audit Committee will not approve any prohibited non-audit service or any non-audit service that individually or in the aggregate may impair, in the Audit Committee’s opinion, the independence of the independent registered public accounting firm.

In addition, FedEx’s independent registered public accounting firm may not provide any services, including financial counseling and tax services, to any FedEx officer, Audit Committee member or FedEx managing director (or its equivalent) in the Finance department or to any immediate family member of any such person.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2) Financial Statements; Financial Statement Schedules

FedEx Express’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 14, 2015 thereon, are listed on page 24 and presented on pages 42 through 72 of this Annual Report on Form 10-K. FedEx Express’s “Schedule II — Valuation and Qualifying Accounts,” together with the report of Ernst & Young LLP dated July 14, 2015 thereon, is presented on pages 74 through 75 of this Annual Report on Form 10-K. All other financial statement schedules have been omitted because they are not applicable or the required information is included in FedEx Express’s consolidated financial statements or the notes thereto.

(a)(3) Exhibits

See the Exhibit Index on pages E-1 through E-8 for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

      FEDERAL EXPRESS CORPORATION
Dated: July 14, 2015       By:   /s/ DAVID J. BRONCZEK  
        David J. Bronczek  
        President and Chief Executive Officer  

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

Signature

  

Capacity

 

Date

/s/ DAVID J. BRONCZEK

David J. Bronczek

  

President, Chief Executive Officer

and Director

(Principal Executive Officer)

  July 14, 2015

/s/ ELISE L. JORDAN

Elise L. Jordan

  

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

  July 14, 2015

/s/ FREDERICK W. SMITH *

Frederick W. Smith

  

Chairman of the Board of Directors

  July 14, 2015

/s/ ROBERT B. CARTER *

Robert B. Carter

  

Director

  July 14, 2015

/s/ DAVID L. CUNNINGHAM, JR.*

David L. Cunningham, Jr.

   Executive Vice President and Chief Operating Officer and Director   July 14, 2015

/s/ T. MICHAEL GLENN *

T. Michael Glenn

   Director   July 14, 2015

 

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Signature

  

Capacity

 

Date

/s/ ALAN B. GRAF, JR. *

Alan B. Graf, Jr.

  

Director

  July 14, 2015

/s/ JAMES R. PARKER *

James R. Parker

  

Executive Vice President – Air Operations and Director

  July 14, 2015

/s/ CHRISTINE P. RICHARDS *

Christine P. Richards

  

Director

  July 14, 2015

*By:

 

 /s/ ELISE L. JORDAN

    
 

Elise L. Jordan

Attorney-in-Fact

     July 14, 2015

 

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FINANCIAL SECTION TABLE OF CONTENTS

 

         PAGE      
Management’s Discussion and Analysis of Results of Operations and Financial Condition   

Overview of Financial Section

     25   

Results of Operations

     26   

Recent Accounting Guidance

     34   

Risk Factors

     35   

Forward-Looking Statements

     39   
Consolidated Financial Statements   

Management’s Report on Internal Control over Financial Reporting

     40   

Reports of Independent Registered Public Accounting Firm

     41   

Consolidated Balance Sheets
May 31, 2015 and 2014

     43   

Consolidated Statements of Income
Years Ended May 31, 2015, 2014 and 2013

     45   

Consolidated Statements of Comprehensive Income
Years Ended May 31, 2015, 2014 and 2013

     46   

Consolidated Statements of Cash Flows
Years Ended May 31, 2015, 2014 and 2013

     47   

Consolidated Statements of Changes in Owner’s Equity
Years Ended May 31, 2015, 2014 and 2013

     48   

Notes to Consolidated Financial Statements

     49   
Other Financial Information   

Quantitative and Qualitative Disclosures about Market Risk

     73   

Report of Independent Registered Public Accounting Firm

     74   

Schedule II – Valuation and Qualifying Accounts

     75   

Computation of Ratio of Earnings to Fixed Charges

     76   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

OVERVIEW OF FINANCIAL SECTION

The financial section of the Federal Express Corporation (“FedEx Express”) Annual Report on Form 10-K (“Annual Report”) consists of the following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”), the Consolidated Financial Statements and the notes to the Consolidated Financial Statements, and Other Financial Information, all of which include information about our significant accounting policies, practices and the transactions that underlie our financial results. The following MD&A is abbreviated pursuant to General Instruction I(2)(a) of Form 10-K. Our MD&A includes an overview of our consolidated 2015 results compared to 2014, and 2014 results compared to 2013. Our MD&A also includes a discussion of key actions and events that impacted our results, as well as a discussion of our outlook for 2016. For additional information, including a discussion of liquidity, capital resources and contractual cash obligations, as well as our critical accounting estimates, see the Annual Report on Form 10-K for the fiscal year ended May 31, 2015 of our parent company, FedEx Corporation (“FedEx”). The discussion in the financial section should be read in conjunction with the other sections of this Annual Report, particularly “Item 1: Business” and our detailed discussion of risk factors included in this MD&A.

DESCRIPTION OF BUSINESS

We are the world’s largest express transportation company. Our sister company FedEx Corporate Services, Inc. (“FedEx Services”) provides us and our other sister companies, including FedEx Ground Package System, Inc. (“FedEx Ground”), with customer-facing sales, marketing, information technology, communications and certain back-office support, as well as retail access for our customers through FedEx Office and Print Services, Inc. (“FedEx Office”) and customer service, technical support and billing and collection services through FedEx TechConnect, Inc.

The operating expenses line item “Intercompany charges” on the financial summary represents an allocation that primarily includes salaries and benefits, depreciation and other costs for the sales, marketing, information technology and customer service support provided to us by FedEx Services and FedEx Office’s net operating costs. These costs are allocated based on metrics such as relative revenues or estimated services provided. For the international regions of FedEx Express, similar functions are performed on a regional basis by FedEx Express and reported in expense line items outside of intercompany charges. “Intercompany charges” also includes allocated charges from our parent for management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe the total amounts allocated approximate the net cost of providing these functions. FedEx allocation methodologies are refined periodically, as necessary, to reflect changes in our business.

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 that 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 affiliated company revenues and expenses are not separately identified in the following financial information, as the amounts are not material.

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 volume of shipments transported through our network, as measured by our average daily volume and shipment weight;

 

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the mix of services purchased by our customers;

 

 

the prices we obtain for our services, as measured by yield (revenue per package or pound);

 

 

our ability to manage our cost structure (capital expenditures and operating expenses) to match shifting volume levels; and

 

 

the timing and amount of fluctuations in fuel prices and our ability to offset these fluctuations through our fuel surcharges.

The majority of our operating expenses are directly impacted by revenue and volume levels. Accordingly, we expect these operating expenses to fluctuate on a year-over-year basis consistent with the change in revenues and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than changes in revenues and volume. The line item “Other operating expenses” predominantly includes costs associated with outside service contracts (such as security, facility services, and cargo handling), insurance, professional fees, uniforms and advertising.

Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2015 or ended May 31 of the year referenced and comparisons are to the prior year.

RESULTS OF OPERATIONS

Retirement Plans Mark-to-Market Adjustment

On June 12, 2015, we announced a change in our accounting method for recognizing actuarial gains and losses for defined benefit pension and postretirement healthcare benefits. This method of accounting is referred to as “mark-to-market” or MTM accounting. Historically, we have recognized actuarial gains and losses, subject to a corridor, by amortizing them into operating results over the average future service period of active employees in these plans. We have elected to immediately recognize actuarial gains and losses in our consolidated operating results in the year in which the gains and losses occur. This change will provide greater transparency into operating results by more quickly recognizing the effects of economic and interest rate conditions on plan obligations, investments and assumptions. The actuarial gains and losses are measured annually as of May 31 and, accordingly, are recorded during the fourth quarter. In addition, for purposes of calculating the expected return on plan assets, we will no longer use an averaging technique permitted under accounting principles generally accepted in the United States for the market-related value of plan assets but instead will use actual fair value of plan assets. We have applied these changes retrospectively.

Additionally, although the actual asset returns of our funded plans are recognized in each fiscal year through the MTM adjustment, we continue to recognize an expected return on plan assets (“EROA”) in the determination of net pension cost.

 

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We offer a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income, net income and operating margin (dollars in millions) for the years ended May 31, and amounts have been recast to conform to the current year presentation reflecting the pension accounting changes further discussed in this MD&A and Note 1 and Note 10 of the accompanying consolidated financial statements:

 

                       Percent
Change
 
     2015     2014     2013     2015/
2014
    2014/
2013
 

Revenues:

         

Package:

         

U.S. overnight box

  $ 6,704     $ 6,555     $ 6,513       2        1   

U.S. overnight envelope

    1,629       1,636       1,705              (4

U.S. deferred

    3,342       3,188       3,020       5        6   
 

 

 

   

 

 

   

 

 

     

Total U.S. domestic package revenue

    11,675       11,379       11,238       3        1   

International priority

    6,251       6,451       6,586       (3     (2

International economy

    2,301       2,229       2,046       3        9   
 

 

 

   

 

 

   

 

 

     

Total international export package revenue

    8,552       8,680       8,632       (1     1   

International domestic(1)

    1,406       1,446       1,398       (3     3   
 

 

 

   

 

 

   

 

 

     

Total package revenue

    21,633       21,505       21,268       1        1   

Freight:

         

U.S.

    2,300       2,355       2,562       (2     (8

International priority

    1,588       1,594       1,678              (5

International airfreight

    180       205       276       (12     (26
 

 

 

   

 

 

   

 

 

     

Total freight revenue

    4,068       4,154       4,516       (2     (8

Other

    393       389       409       1        (5
 

 

 

   

 

 

   

 

 

     

Total revenues

      26,094         26,048         26,193              (1

Operating expenses:

         

Salaries and employee benefits

    9,600       9,340       9,363       3          

Purchased transportation

    1,765       1,767       1,649              7   

Rentals and landing fees

    1,665       1,678       1,659       (1     1   

Depreciation and amortization

    1,449       1,476       1,338       (2     10   

Fuel

    3,199       3,943       4,129       (19     (5

Maintenance and repairs

    1,351       1,177       1,239       15        (5

Business realignment, impairment and other charges(2)

    276             243       NM        NM   

Retirement plans mark-to-market adjustment(3)

    1,262       16       (814     NM        NM   

Intercompany charges(4)

    1,948       1,989       2,325       (2     (14

Other

    3,260       3,264       3,308              (1
 

 

 

   

 

 

   

 

 

     

Total operating expenses

    25,775       24,650       24,439       5        1   
 

 

 

   

 

 

   

 

 

     

Operating income

  $ 319     $ 1,398     $ 1,754       (77     (20
 

 

 

   

 

 

   

 

 

     

Operating margin

    1.2     5.4     6.7     (420 )bp      (130 )bp 

Other income (expense):

         

Interest, net

    19       22       42       (14     (48

Other, net

    (159     (106     (88     50        20   
 

 

 

   

 

 

   

 

 

     
    (140     (84     (46     67        83   
 

 

 

   

 

 

   

 

 

     

Income before income taxes

    179       1,314       1,708       (86     (23

Provision for income taxes

    35       453       644       (92     (30
 

 

 

   

 

 

   

 

 

     

Net income

  $ 144      $ 861     $ 1,064       (83     (19
 

 

 

   

 

 

   

 

 

     

 

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     Percent of Revenue  
     2015     2014     2013  

Operating expenses:

      

Salaries and employee benefits

                 36.8                 35.9                 35.8

Purchased transportation

     6.8       6.8       6.3  

Rentals and landing fees

     6.4       6.4       6.3  

Depreciation and amortization

     5.5       5.7       5.1  

Fuel

     12.3       15.1       15.8  

Maintenance and repairs

     5.2       4.5       4.7  

Business realignment, impairment and other charges(2)

     1.0             0.9  

Retirement plans MTM adjustment(3)

     4.8       0.1       (3.1

Intercompany charges(4)

     7.5        7.6        8.9  

Other

     12.5       12.5       12.6  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     98.8       94.6        93.3   
  

 

 

   

 

 

   

 

 

 

Operating margin

     1.2     5.4     6.7
  

 

 

   

 

 

   

 

 

 

 

(1) 

International domestic revenues represent our international intra-country express operations.

 

(2) 

2015 includes $276 million of impairment and related charges resulting from the decision to permanently retire and adjust the retirement schedule of certain aircraft and related engines. 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.

 

(3) 

Operating income includes a loss of $1.3 billion in 2015, a loss of $16 million in 2014 and a gain of $814 million in 2013 associated with our mark-to-market pension accounting further discussed in this MD&A and Note 1 and Note 10 of the accompanying consolidated financial statements.

 

(4) 

Includes allocations of $258 million in 2013 for business realignment costs.

 

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The following table compares selected statistics (in thousands, except yield amounts) for the years ended May 31:

 

                           Percent
Change
 
      2015      2014      2013      2015/
2014
    2014/
2013
 

Package Statistics

             

Average daily package volume (ADV):

             

U.S. overnight box

     1,240        1,164        1,134        7       3  

U.S. overnight envelope

     527        538        574        (2     (6

U.S. deferred

     916        869        835        5       4  
  

 

 

    

 

 

    

 

 

      

Total U.S. domestic ADV

     2,683        2,571        2,543        4       1  

International priority

     410        410        421              (3

International economy

     176        170        155        4       10  
  

 

 

    

 

 

    

 

 

      

Total international export ADV

     586        580        576        1       1  

International domestic(1)

     853        819        785        4       4  
  

 

 

    

 

 

    

 

 

      

Total ADV

     4,122        3,970        3,904        4       2  
  

 

 

    

 

 

    

 

 

      

Revenue per package (yield):

             

U.S. overnight box

   $ 21.29      $ 22.18      $ 22.52        (4     (2

U.S. overnight envelope

     12.15        11.97        11.66        2       3  

U.S. deferred

     14.36        14.44        14.18        (1     2  

U.S. domestic composite

     17.13        17.42        17.33        (2     1  

International priority

     60.05        61.88        61.28        (3     1  

International economy

     51.54        51.75        51.77               

International export composite

     57.50        58.92        58.72        (2      

International domestic(1)

     6.49        6.95        6.99        (7     (1

Composite package yield

     20.66        21.32        21.36        (3      

Freight Statistics

             

Average daily freight pounds:

             

U.S.

     7,833        7,854        7,612              3  

International priority

     2,887        2,922        3,048        (1     (4

International airfreight

     684        798        1,066        (14     (25
  

 

 

    

 

 

    

 

 

      

Total average daily freight pounds

             11,404                11,574                11,726        (1     (1
  

 

 

    

 

 

    

 

 

      

Revenue per pound (yield):

             

U.S.

   $ 1.16      $ 1.18      $ 1.32        (2     (11

International priority

     2.17        2.15        2.16        1        

International airfreight

     1.04        1.01        1.01        3        

Composite freight yield

     1.40        1.41        1.51        (1     (7

 

(1) 

International domestic statistics represent our international intra-country express operations.

Revenues

Our total revenues were flat in 2015 as U.S. and international package volume and base yield growth were offset by lower fuel surcharges and unfavorable exchange rates.

U.S. domestic volumes increased 4% in 2015 driven by both our overnight box and deferred service offerings. U.S. domestic yields decreased 2% in 2015 due to the negative impact of lower fuel surcharges, which were partially offset by higher rates. International export volumes grew 1%, driven by a 4% growth in our international economy service offering. The 2% decrease in international export yields in 2015 was due to the negative impact of lower fuel surcharges and unfavorable exchange rates, which were partially offset by higher rates and weight per package. International domestic revenues declined 3% in 2015 due to the negative impact of unfavorable exchange rates, which were partially offset by a 4% volume increase.

Our revenues decreased 1% in 2014 due to lower fuel surcharges, lower freight revenue, lower exchange rates and one fewer operating day, partially offset by revenue growth in our U.S. and international export package base business. In addition, the continuing demand shift from our priority international services to our economy international services dampened revenue growth.

 

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Freight yields decreased 7% in 2014 due to lower fuel surcharges and lower rates. Freight average daily pounds decreased by 1% in 2014 due to weakness in global economic conditions and capacity reductions. U.S. domestic yields increased 1% in 2014 primarily due to higher rates and weight per package, partially offset by lower fuel surcharges. International export package revenues increased 1% in 2014 as base business growth was offset by lower fuel surcharges and the demand shift to our lower-yielding economy services. International priority yields increased 1% in 2014, while international priority volumes declined 3%. Within this category, volumes for lower-yielding distribution services declined, while international priority volumes, excluding these distribution services, increased 1%. International domestic average daily volumes increased 4% in 2014 primarily due to prior year international business acquisitions.

On February 2, 2015, we updated the tables used to determine fuel surcharges. On September 16, 2014, we announced a 4.9% average list price increase for our U.S. domestic, U.S. export and U.S. import services effective January 5, 2015. In January 2014, we implemented a 3.9% average list price increase for our U.S. domestic, U.S. export and U.S. import services.

Retirement Plans MTM Adjustments

We incurred noncash pre-tax mark-to-market losses of $1.3 billion in 2015 and $16 million in 2014 and an $814 million gain in 2013 from actuarial adjustments to pension and postretirement healthcare plans related to the measurement of plan assets and liabilities. For more information see further discussion in Note 1 and Note 10 of the accompanying consolidated financial statements.

Business Realignment, Impairment and Other Charges

In May 2015, we made the decision to retire from service seven Boeing MD11 aircraft and 12 related engines, four Airbus A310-300 aircraft and three related engines, three Airbus A300-600 aircraft and three related engines and one Boeing MD10-10 aircraft and three related engines and related parts, and adjusted the retirement schedule of an additional 23 aircraft and 57 engines. As a consequence of this decision, impairment and related charges of $276 million, of which $246 million was noncash, were recorded in the fourth quarter. The decision to permanently retire these aircraft and engines aligns with our plans to rationalize capacity and modernize our aircraft fleet to more effectively serve its customers. These combined changes will not have a material impact on our near-term depreciation expense.

In 2013 we recorded $401 million of costs associated with our business realignment program, both directly and through intercompany allocations. Additionally, results for 2013 were negatively impacted by a $100 million impairment charge as a result of the decision to retire 10 aircraft and related engines from service.

Operating Income

Our operating income for 2015 includes a $1.3 billion loss associated with our mark-to-market pension accounting as described above. In addition, we recorded charges of $276 million associated with the decision to permanently retire and adjust the retirement schedule of certain aircraft and related engines. Our operating income and margin were also negatively impacted by higher maintenance expense and higher incentive compensation accruals. These factors were partially offset by U.S. domestic and international package base yield and volume growth, benefits associated with our profit improvement program, the positive net impact of fuel, lower international expenses due to currency exchange rates, lower depreciation expense and a lower year-over-year impact from severe winter weather.

Within operating expenses, salaries and employee benefits increased 3% in 2015 due to the timing of annual merit increases for many of our employees and higher incentive compensation accruals, which were partially offset by the benefits from our voluntary employee severance program. Maintenance and repairs expense increased 15% in 2015 primarily due to the timing of aircraft

 

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maintenance events. Depreciation and amortization expense decreased 2% in 2015 driven by the expiration of accelerated depreciation for certain aircraft that were retired from service during the year.

Fuel expense decreased 19% in 2015 due to lower aircraft fuel prices. The net impact of fuel had a significant benefit in 2015 to operating income. See the “Fuel” section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results.

Our operating income and operating margin in 2014 were positively impacted by the inclusion in 2013 of costs associated with our business realignment program and an aircraft impairment charge as discussed below. In addition, our results in 2014 benefited from the revenue growth in our U.S. and international export package business, our voluntary employee severance program and lower maintenance expense. These factors were partially offset by lower freight revenues, a significant negative net impact of fuel and higher depreciation expense. In addition, operating income in 2014 reflects one fewer operating day and year-over-year negative impact of severe weather.

In 2014, salaries and employee benefits were flat due to the delayed timing or absence of annual merit increases for many of our employees, benefits from our voluntary employee severance program and lower variable incentive compensation. Intercompany charges decreased 14% in 2014 due to the inclusion in the prior year results of costs associated with the business realignment program at FedEx Services, as well as lower allocated sales and information technology costs. Our maintenance and repairs costs decreased 5% in 2014 due to network reductions and the benefits from the retirement of aircraft and related engines, as well as the timing of major maintenance events. Depreciation and amortization expense increased 10% during 2014 as a result of $74 million of year-over-year incremental accelerated depreciation due to the shortened life of certain aircraft scheduled for retirement, and aircraft placed into service. Purchased transportation costs increased 7% in 2014 due to higher utilization of third-party transportation providers, including recent business acquisitions.

Fuel costs decreased 5% in 2014 due to lower aircraft fuel prices and usage. The net impact of fuel had a significant negative impact on operating income in 2014.

In 2013, we incurred a noncash pre-tax mark-to-market gain of $814 million from actuarial adjustments to pension and postretirement healthcare plans related to the measurement of plan assets and liabilities. In addition, in 2013 we recorded $401 million of costs associated with our business realignment program, both directly and through intercompany allocations, and results for 2013 were negatively impacted by a $100 million impairment charge as a result of the decision to retire 10 aircraft and related engines from service.

Fuel

Fuel expense decreased 19% in 2015 due to lower aircraft fuel prices. However, fuel prices represent only one component of the two factors we consider meaningful in understanding the impact of fuel on our business. Consideration must also be given to the fuel surcharge revenue we collect. Accordingly, we believe discussion of the net impact of fuel on our results, which is a comparison of the year-over-year change in these two factors, is important to understand the impact of fuel on our business. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative weighted-average fuel surcharge percentages in effect for 2015, 2014, and 2013 below.

The index used to determine our fuel surcharges incorporates a timing lag of approximately six to eight weeks before they are adjusted for changes in fuel prices. For example, the fuel surcharge index in effect in May 2015 was set based on March 2015 fuel prices. In addition, the structure of the table that is used to determine our fuel surcharge does not adjust immediately for changes in fuel price, but allows for the fuel surcharge revenue charged to our customers to remain unchanged as long as fuel prices remain within certain ranges.

Beyond these factors, the manner in which we purchase fuel also influences the net impact of fuel on our results. For example, our contracts for jet fuel purchases are tied to various indices, including the U.S. Gulf Coast index.

 

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While many of these indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for jet fuel. Furthermore, under these contractual arrangements, approximately 75% of our jet fuel is purchased based on the index price for the preceding week, with the remainder of our purchases tied to the index price for the preceding month, rather than based on daily spot rates. These contractual provisions mitigate the impact of rapidly changing daily spot rates on our jet fuel purchases.

Because of the factors described above, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term.

We routinely review our fuel surcharges and our fuel surcharge methodology. On February 2, 2015, we updated the tables used to determine our fuel surcharges.

The net impact of fuel had a significant benefit in 2015 to operating income. This was driven by decreased fuel prices during 2015 versus the prior year, which was partially offset by the year-over-year decrease in fuel surcharge revenue during these periods.

The net impact of fuel on our operating results does not consider the effects that fuel surcharge levels may have on our business, including changes in demand and shifts in the mix of services purchased by our customers. While fluctuations in fuel surcharge percentages can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges we obtain for these services and the level of pricing discounts offered. Our U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the years ended May 31:

 

         2015             2014             2013      

U.S. Domestic and Outbound Fuel Surcharge:

      

Low

                   1.50                   8.00                   10.00

High

     9.50       10.50       14.50  

Weighted-average

     6.34       9.47       11.84  

International Fuel Surcharges:

      

Low

     0.50       12.00       12.00  

High

     18.00       19.00       20.50  

Weighted-average

     12.80       16.26       17.02  

Other Income (Expense) and Income Taxes

Other expense increased in 2015 primarily due to higher management fees from FedEx. Net interest income decreased in 2014 primarily due to a decrease in capitalized interest related to progress payments on aircraft purchases. Other expense increased in 2014 primarily due to higher management fees from FedEx.

Our effective tax rate was 19.8% in 2015, 34.5% in 2014 and 37.7% in 2013. Due to its effect on income before income taxes, the adoption of MTM accounting reduced our 2015 effective tax rate by 14.6% and increased our effective tax rates by 0.9% in 2014 and 2.7% in 2013. Our permanent reinvestment strategy with respect to unremitted earnings of our foreign subsidiaries provided a benefit of approximately $46 million to our 2015 provision for income taxes. Our cumulative permanently reinvested foreign earnings were $1.9 billion at the end of 2015 and $1.6 billion at the end of 2014.

For 2016, we expect our effective tax rate to be approximately 35.0% prior to any year-end mark-to-market adjustment. The actual rate, however, will depend on a number of factors, including the amount and source of operating income and the impact of the MTM adjustment.

 

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Additional information on income taxes, including our effective tax rate reconciliation, liabilities for uncertain tax positions and global tax profile can be found in Note 9 of the accompanying consolidated financial statements.

Business Acquisitions

In 2014, we expanded our international service offerings by completing our acquisition of the businesses operated by our previous service provider, Supaswift (Pty) Ltd., in seven countries in Southern Africa, for $36 million in cash from operations. The financial results of this business are included in our financial results from the date of acquisition.

In 2013, we completed our acquisitions of Rapidão Cometa Logística e Transporte S.A., a Brazilian transportation and logistics company, for $398 million; TATEX, a French express transportation company, for $55 million; and Opek Sp. z o.o., a Polish domestic express package delivery company, for $54 million. The financial results of these businesses are included in our financial results from their respective date of acquisition.

The financial results of these acquired businesses were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.

Profit Improvement Programs

During 2013, we announced profit improvement programs primarily through initiatives at FedEx Express and FedEx Services targeting annual profitability improvement of $1.6 billion at FedEx Express. Our plans position FedEx Express to exit 2016 with a run rate of $1.6 billion in additional operating profit from the then 2013 base business. Our ability to achieve the profit improvement target and other benefits from these programs is dependent upon a number of factors, including the health of the global economy and future customer demand.

In 2015, we made substantial progress in achieving our profit improvement goals through management of network capacity to match customer demand, reduction of structural costs and modernization of our fleet. FedEx Services has reduced its total expenses while investing in major information technology transformation projects. In addition, our incentive compensation programs have been gradually reinstated so that 2016 business plan objectives represent more fully funded compensation targets.

During 2014, FedEx completed a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain staff functions. Costs of the benefits provided under the voluntary employee severance program were recognized in 2013 when eligible employees accepted their offers. Payments under this program were made at the time of departure.

The direct costs of the program are included in the caption “Business realignment, impairment and other charges” while the allocated costs are included in the caption “Intercompany charges” in our consolidated statements of income. Also included in those captions are other external costs directly attributable to our business realignment activities, such as professional fees. See Note 1 of the accompanying consolidated financial statements for further discussion of the voluntary employee severance program.

In May 2015, we made the decision to retire from service seven Boeing MD11 aircraft and 12 related engines, four Airbus A310-300 aircraft and three related engines, three Airbus A300-600 aircraft and three related engines and one Boeing MD10-10 aircraft and three related engines and related parts, and adjusted the retirement schedule of an additional 23 aircraft and 57 engines. As a consequence of this decision, impairment and related charges of $276 million, of which $246 million was noncash, were recorded in the fourth quarter. The decision to permanently retire these aircraft and engines aligns with our plans to rationalize capacity and modernize our aircraft fleet to more effectively serve our customers. These combined changes will not have a material impact on our near-term depreciation expense.

In 2013, we retired from service two Airbus A310-200 aircraft and four related engines, three Airbus A310-300 aircraft and two related engines and five Boeing MD10-10 aircraft and 15 related engines, to align with our plans to modernize our aircraft fleet and

 

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improve our global network. As a consequence of this decision, a noncash impairment charge of $100 million was recorded in 2013. All of these aircraft were temporarily idled and not in revenue service.

In addition, actions in 2012 and 2013 related to aircraft fleet modernization resulted in a depreciation expense increase of $69 million in 2013 and an additional $74 million in year-over-year accelerated depreciation expense in 2014.

Outlook

We expect revenues and earnings to increase during 2016 prior to any year-end MTM adjustment, primarily due to improved U.S. domestic and international export package yields, as we continue to focus on revenue quality while managing costs. In addition, we expect operating income to improve through the continued execution of our profit improvement programs, including managing network capacity to match customer demand, reducing structural costs, modernizing our fleet and driving productivity increases throughout our U.S. and international operations.

Capital expenditures are expected to remain at current levels in 2016 driven by our aircraft fleet modernization programs, as we add new aircraft that are more reliable, fuel-efficient and technologically advanced and retire older, less-efficient aircraft.

See “Risk Factors” for a discussion of potential risks and uncertainties that could materially affect our future performance.

Seasonality of Business

Our business is cyclical in nature, as seasonal fluctuations affect volumes, revenues and earnings. Historically, the U.S. express package business experiences an increase in volumes in late November and December. International business, particularly in the Asia-to-U.S. market, peaks in October and November in advance of the U.S. holiday sales season. Our first and third fiscal quarters, because they are summer vacation and post winter-holiday seasons, have historically experienced lower volumes relative to other periods. Shipment levels, operating costs and earnings for our company can also be adversely affected by inclement weather, particularly the impact of severe winter weather in our third fiscal quarter.

Contractual Cash Obligations

Our expected capital expenditures for 2016 include $1.6 billion in investments for delivery of aircraft as well as progress payments toward future aircraft deliveries. We have several aircraft modernization programs underway which are supported by the purchase of Boeing 777 Freighter (“B777F,”) Boeing 767-300 Freighter (“B767F”) and Boeing 757 (“B757”) aircraft. These aircraft are significantly more fuel-efficient per unit than the aircraft types previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to replace older aircraft. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements. During September 2014, we entered into an agreement to purchase four additional B767F aircraft, the delivery of which will begin in 2017 and continue through 2019.

RECENT ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

On June 1, 2013, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) requiring additional information about reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. We have adopted this guidance by including expanded accumulated other comprehensive income disclosure requirements in Note 8 of our consolidated financial statements.

 

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On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States (and International Financial Reporting Standards) which has been subsequently updated to defer the effective date of the new revenue recognition standard by one year. This standard will be effective for us beginning in fiscal 2019. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. Based on our preliminary assessment, we do not anticipate that the new guidance will fundamentally change our revenue recognition policies, practices or systems.

We believe that no other new accounting guidance was adopted or issued during 2015 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

RISK FACTORS

Our financial and operating results are subject to many risks and uncertainties, as described below.

We are directly affected by the state of the economy. While macro-economic risks apply to most companies, we are particularly vulnerable. The transportation industry is highly cyclical and especially susceptible to trends in economic activity. Our primary business is to transport goods, so our business levels are directly tied to the purchase and production of goods — key macro-economic measurements. When individuals and companies purchase and produce fewer goods, we transport fewer goods, and as companies expand the number of distribution centers and move manufacturing closer to consumer markets, we transport goods shorter distances. In addition, we have a relatively high fixed-cost structure, which is difficult to quickly adjust to match shifting volume levels. Moreover, as we continue to grow our international business, we are increasingly affected by the health of the global economy, the rate of growth of global trade and the typically more volatile economies of emerging markets. In 2015, we saw a continued customer preference for slower, less costly shipping services.

Our business depends on our strong reputation and the value of the FedEx brand. The FedEx brand name symbolizes high-quality service, reliability and speed. FedEx is one of the most widely recognized, trusted and respected brands in the world, and the FedEx brand is one of our most important and valuable assets. In addition, we have a strong reputation among customers and the general public for high standards of social and environmental responsibility and ethics. The FedEx brand name and our reputation are powerful sales and marketing tools, and we devote significant resources to promoting and protecting them. Adverse publicity (whether or not justified) relating to activities by our employees or agents, such as customer service mishaps or noncompliance with laws, could tarnish our reputation and reduce the value of our brand. With the increase in the use of social media outlets such as YouTube and Twitter, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to defend against. Damage to our reputation and loss of brand equity could reduce demand for our services and thus have an adverse effect on our financial condition, liquidity and results of operations, as well as require additional resources to rebuild our reputation and restore the value of the FedEx brand.

We rely heavily on information and technology to operate our transportation and business networks, and any cybersecurity incident or other disruption to FedEx’s technology infrastructure could result in the loss of critical confidential information or adversely impact our reputation, business or results of operations. Our ability to attract and retain customers and to compete effectively depends in part upon the sophistication and reliability of FedEx’s technology network, including the ability to provide features of service that are important to our customers and to protect our confidential business information and the information provided by our customers. We are subject to risks imposed by cybersecurity incidents, which can range from uncoordinated

 

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individual attempts to gain unauthorized access to FedEx’s information technology systems, to sophisticated and targeted measures directed at FedEx’s and our systems, customers or service providers. Additionally, risks such as code anomalies, “Acts of God,” transitional challenges in migrating operating company functionality to FedEx’s enterprise automation platform, data leakage and human error pose a direct threat to our and FedEx’s products, services and data.

Any disruption to FedEx’s complex, global technology infrastructure, including those impacting its computer systems and fedex.com, could result in the loss of confidential business or customer information, adversely impact our customer service, volumes and revenues or could lead to litigation or investigations, resulting in significant costs. These types of adverse impacts could also occur in the event the confidentiality, integrity or availability of company and customer information was compromised due to a data loss by FedEx or a trusted third party. While FedEx has invested and continues to invest in technology security initiatives, information technology risk management and disaster recovery plans, these measures cannot fully insulate FedEx from cybersecurity incidents, technology disruptions or data loss, which could adversely impact our competitiveness and results of operations. Additionally, the cost and operational consequences of implementing further data or system protection measures could be significant.

Our transportation business is impacted by the price and availability of fuel. We must purchase large quantities of fuel to operate our aircraft and vehicles, and the price and availability of fuel can be unpredictable and beyond our control. To date, we have been mostly successful in mitigating over time the expense impact of higher fuel costs through our indexed fuel surcharges, as the amount of the surcharges is closely linked to the market prices for fuel. If we are unable to maintain or increase our fuel surcharges because of competitive pricing pressures or some other reason, fuel costs could adversely impact our operating results. Additionally, if fuel prices rise sharply, even if we increase our fuel surcharge, we could experience a lag time in implementing the surcharge, which could adversely affect our short-term operating results. Even if we are able to offset the cost of fuel with our surcharges, high fuel surcharges could move our customers away from our higher-yielding services to our lower-yielding services or even reduce customer demand for our services altogether. In addition, disruptions in the supply of fuel could have a negative impact on our ability to operate our transportation network.

Our business is capital intensive, and we must make capital decisions based upon projected volume levels. We make significant investments in aircraft, vehicles, technology, package handling facilities, sort equipment and other assets to support our network. We also make significant investments to rebrand, integrate and grow the companies that we acquire. The amount and timing of capital investments depend on various factors, including our anticipated volume growth. We must make commitments to purchase or modify aircraft years before the aircraft are actually needed. We must predict volume levels and fleet requirements and make commitments for aircraft based on those projections. Missing our projections could result in too much or too little capacity relative to our shipping volumes. Overcapacity could lead to asset dispositions or write-downs and undercapacity could negatively impact service levels.

We face intense competition. The express transportation market is both highly competitive and sensitive to price and service, especially in periods of little or no macro-economic growth. Some of our competitors have more financial resources than we do, or they are controlled or subsidized by foreign governments, which enables them to raise capital more easily. We also compete with regional transportation providers that operate smaller and less capital-intensive transportation networks. We believe we compete effectively with these companies — for example, by providing more reliable service at compensatory prices. However, an irrational pricing environment can limit our ability not only to maintain or increase our prices (including our fuel surcharges in response to rising fuel costs), but also to maintain or grow our market share.

If we and FedEx do not successfully execute or effectively operate, integrate, leverage and grow acquired businesses, our financial results and reputation may suffer. Our strategy for long-term growth, productivity and profitability depends in part on our ability to make prudent strategic acquisitions and to realize the benefits we expect when we make those acquisitions. In furtherance of this strategy, over the past several years, we have acquired businesses in Europe, Latin America and Africa. Additionally, in April 2015, FedEx entered into a conditional agreement to acquire TNT Express N.V. (“TNT Express”). While FedEx expects to

 

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successfully execute the TNT Express acquisition, it may not be able to complete the transaction on favorable terms, on a timely basis or at all. Additionally, while we anticipate that our past and future acquisitions will enhance our value proposition to customers and improve our long-term profitability, there can be no assurance that we will realize our expectations within the time frame we have established, if at all.

Labor organizations attempt to organize groups of our employees from time to time, and potential changes in labor laws could make it easier for them to do so. If we are unable to continue to maintain good relationships with our employees and prevent labor organizations from organizing groups of our employees, our operating costs could significantly increase and our operational flexibility could be significantly reduced. Despite continual organizing attempts by labor unions, other than our pilots, all of our U.S. employees have thus far chosen not to unionize. The U.S. Congress has, in the past, considered adopting changes in labor laws, however, that would make it easier for unions to organize units of our employees. For example, there is always a possibility that Congress could remove most of our employees from the purview of the Railway Labor Act of 1926, as amended (“RLA”). For additional discussion of the RLA, see Part I, Item 1 of this Annual Report on Form 10-K under the caption “Regulation.” Such legislation could expose our customers to the type of service disruptions that the RLA was designed to prevent — local work stoppages in key areas that interrupt the timely flow of shipments of time-sensitive, high-value goods throughout our global network. Such disruptions could threaten our ability to provide competitively priced shipping options and ready access to global markets. In addition, federal and state governmental agencies, such as the National Labor Relations Board, have and may continue to take actions that could make it easier for our employees to organize under the RLA.

We may not be able to achieve our profit improvement goal by the end of 2016. In 2013, we announced profit improvement programs that include cost reductions, modernization of our aircraft fleet, transformation of our U.S. domestic operations and international profit improvements. To this end, since 2013, we have retired from service 25 aircraft and 42 related engines, and we have adjusted the retirement schedule of numerous aircraft and engines, in an effort to rationalize capacity and modernize our aircraft fleet. Additionally, during 2014, FedEx completed a voluntary buyout program offering cash buyouts to eligible U.S.-based employees. We will continue to work towards our goal of annual profitability improvement of $1.6 billion by the end of 2016. Our ability to achieve this objective is dependent on a number of factors, including the health of the global economy and future customer demand. In light of these factors, we may not be able to achieve our goal.

The transportation infrastructure continues to be a target of terrorist activities. Because transportation assets continue to be a target of terrorist activities, governments around the world are adopting or are considering adopting stricter security requirements that will increase operating costs and potentially slow service for businesses, including those in the transportation industry. For example, the U.S. Transportation Security Administration requires us to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static, but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. Thus, it is reasonably possible that these rules or other future security requirements could impose material costs on us or slow our service to our customers. Moreover, a terrorist attack directed at FedEx or other aspects of the transportation infrastructure could disrupt our operations and adversely impact demand for our services.

The regulatory environment for global aviation or other transportation rights may impact our operations. Our extensive air network is critical to our success. Our right to serve foreign points is subject to the approval of the Department of Transportation and generally requires a bilateral agreement between the U.S. and foreign governments. In addition, we must obtain the permission of foreign governments to provide specific flights and services. Our growing international domestic operations are also subject to current and potential regulations, including certain postal regulations and licensing requirements, that restrict, make difficult and sometimes prohibit, our ability to compete effectively in parts of the international domestic transportation and logistics market. Regulatory actions affecting global aviation or transportation rights or a failure to obtain or maintain aviation or other transportation rights in important international markets could impair our ability to operate our network.

 

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We may be affected by global climate change or by legal, regulatory or market responses to such change. Concern over climate change, including the impact of global warming, has led to significant U.S. and international legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions, including our aircraft emissions. For example, in 2015, the U.S. Environmental Protection Agency (the “EPA”) issued a proposed finding on GHG emissions from aircraft and its relationships to air pollution. The final finding is a regulatory prerequisite to the EPA’s adoption of a new certification standard for aircraft emissions. Additionally, in 2009, the European Commission approved the extension of the European Union Emissions Trading Scheme (“ETS”) for GHG emissions, to the airline industry. Under this decision, all our flights that are wholly within the European Union are now covered by the ETS requirements, and each year we are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such flights. In addition, the U.S. Congress has, in the past, considered bills that would regulate GHG emissions, and some form of federal climate change legislation is possible in the future. Increased regulation regarding GHG emissions, especially aircraft emissions, could impose substantial costs on us. These costs include an increase in the cost of the fuel and other energy we purchase and capital costs associated with updating or replacing our aircraft or vehicles prematurely. Until the timing, scope and extent of such regulation becomes known, we cannot predict its effect on our cost structure or our operating results. It is reasonably possible, however, that it could impose material costs on us. Moreover, even without such regulation, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the airline and transportation industries could harm our reputation and reduce customer demand for our services. Finally, given the broad and global scope of our operations and our susceptibility to global macro-economic trends, we are particularly vulnerable to the physical risks of climate change that could affect all of humankind, such as shifts in weather patterns and world ecosystems.

A localized disaster in a key geography could adversely impact our business. While we operate an integrated network with assets distributed throughout the world, there are concentrations of key assets within our network that are exposed to adverse weather conditions or localized risks from natural or manmade disasters such as tornados, floods, earthquakes or terrorist attacks. The loss of a key location such as our Memphis super hub or one of FedEx’s information technology centers could cause a significant disruption to our operations and cause us to incur significant costs to reestablish or relocate these functions. Moreover, resulting economic dislocations, including supply chain and fuel disruptions, could adversely impact demand for our services.

Our business may be adversely impacted by disruptions or modifications in service by the USPS. The USPS is a significant customer of ours, and thus, disruptions or modifications in services by the USPS or any resulting structural changes to its operations, network, service offerings or pricing could have an adverse effect on our operations and financial results.

We are also subject to other risks and uncertainties that affect many other businesses, including:

 

   

increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits;

 

   

the increasing costs of compliance with federal, state and foreign governmental agency mandates (including the Foreign Corrupt Practices Act and the U.K. Bribery Act) and defending against inappropriate or unjustified enforcement or other actions by such agencies;

 

   

the impact of any international conflicts on the U.S. 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 business resulting from new domestic or international government laws and regulation;

 

   

changes in foreign currency exchange rates, especially in the Chinese yuan, euro, British pound, Brazilian real, Mexican peso and the Canadian dollar, which can affect our sales levels and foreign currency sales prices;

 

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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 and discrimination and retaliation claims, and any other legal or governmental proceedings;

 

   

the outcome of future negotiations to reach new collective bargaining agreements — including with the union that represents our pilots (the current pilot contract became amendable in March 2013, and the parties are currently in negotiations);

 

   

the impact of technology developments on our operations and on demand for our services, and FedEx’s ability to continue to identify and eliminate unnecessary information technology redundancy and complexity throughout the FedEx organization;

 

   

governmental underinvestment in transportation infrastructure, which could increase our costs and adversely impact our service levels due to traffic congestion or sub-optimal routing of our vehicles and aircraft;

 

   

widespread outbreak of an illness or any other communicable disease, or any other public health crisis; and

 

   

availability of financing on terms acceptable to FedEx and FedEx’s ability to maintain its current credit ratings, especially given the capital intensity of our operations.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including (but not limited to) those contained in “Outlook” and the “Retirement Plans” and “Contingencies” notes to the consolidated financial statements, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, the risk factors identified above and the other risks and uncertainties you can find in FedEx’s and our press releases and other SEC filings.

As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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MANAGEMENT’S REPORT ON INTERNAL

CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes, among other things, defined policies and procedures for conducting and governing our business, sophisticated information systems for processing transactions and a properly staffed, professional internal audit department at FedEx. Mechanisms are in place to monitor the effectiveness of our internal control over financial reporting and actions are taken to correct all identified deficiencies. Our procedures for financial reporting include the active involvement of senior management, FedEx’s Audit Committee and our staff of highly qualified financial and legal professionals.

Management, with the participation of our principal executive and financial officers, assessed our internal control over financial reporting as of May 31, 2015, the end of our fiscal year. Management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

Based on this assessment, management has concluded that our internal control over financial reporting was effective as of May 31, 2015.

The effectiveness of our internal control over financial reporting as of May 31, 2015, 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 on Form 10-K. Ernst & Young LLP’s report on the Company’s internal control over financial reporting is included in this Annual Report on Form 10-K.

 

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder

Federal Express Corporation

We have audited Federal Express Corporation’s internal control over financial reporting as of May 31, 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Federal Express Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Federal Express Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Federal Express Corporation as of May 31, 2015 and 2014, and the related consolidated statements of income, comprehensive (loss) income, changes in owner’s equity, and cash flows for each of the three years in the period ended May 31, 2015 of Federal Express Corporation and our report dated July 14, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Memphis, Tennessee

July 14, 2015

 

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder

Federal Express Corporation

We have audited the accompanying consolidated balance sheets of Federal Express Corporation as of May 31, 2015 and 2014, and the related consolidated statements of income, comprehensive (loss) income, changes in owner’s equity and cash flows for each of the three years in the period ended May 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal Express Corporation at May 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2015, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company has elected to change its methods of accounting for actuarial gains and losses and the calculation of expected return on plan assets related to its pension and other postretirement benefit plans in fiscal year 2015.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Federal Express Corporation’s internal control over financial reporting as of May 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated July 14, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Memphis, Tennessee

July 14, 2015

 

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FEDERAL EXPRESS CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

     May 31,  
     2015      2014  
            (As Adjusted)  

ASSETS

     

CURRENT ASSETS

     

Cash and cash equivalents

   $ 884      $ 858  

Receivables, less allowances of $92 and $80

     1,549        1,705  

Spare parts, supplies and fuel, less allowances of $204 and $211

     394        395  

Deferred income taxes

     378        401  

Due from parent company and other FedEx subsidiaries

     501        505  

Prepaid expenses and other

     108        103  
  

 

 

    

 

 

 

Total current assets

     3,814        3,967  

PROPERTY AND EQUIPMENT, AT COST

     

Aircraft and related equipment

     16,186        15,632  

Package handling and ground support equipment

     2,883        2,861  

Vehicles

     2,232        2,279  

Computer and electronic equipment

     770        795  

Facilities and other

     4,215        4,185  
  

 

 

    

 

 

 
     26,286        25,752  

Less accumulated depreciation and amortization

     12,392        12,272  
  

 

 

    

 

 

 

Net property and equipment

     13,894        13,480  

OTHER LONG-TERM ASSETS

     

Goodwill

     1,448        1,561  

Other assets

     1,104        959  
  

 

 

    

 

 

 

Total other long-term assets

     2,552        2,520  
  

 

 

    

 

 

 
   $   20,260      $   19,967  
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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FEDERAL EXPRESS CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

     May 31,  
     2015     2014  
           (As Adjusted)  

LIABILITIES AND OWNER’S EQUITY

    

CURRENT LIABILITIES

    

Current portion of long-term debt

   $ 7     $  

Accrued salaries and employee benefits

     1,014       902  

Accounts payable

     1,257       1,394  

Accrued expenses

     1,056       1,019  

Due to other FedEx subsidiaries

     1,932        1,265  
  

 

 

   

 

 

 

Total current liabilities

     5,266        4,580   

LONG-TERM DEBT, LESS CURRENT PORTION

     239       239  

OTHER LONG-TERM LIABILITIES

    

Deferred income taxes

     1,712       1,935   

Pension, postretirement healthcare and other benefit obligations

     1,251       1,208  

Self-insurance accruals

     711       667  

Deferred lease obligations

     572       643  

Deferred gains, principally related to aircraft transactions

     178       203  

Other liabilities

     117       96  
  

 

 

   

 

 

 

Total other long-term liabilities

     4,541       4,752   

COMMITMENTS AND CONTINGENCIES

    

OWNER’S EQUITY

    

Common stock, $0.10 par value; 1,000 shares authorized, issued and outstanding

            

Additional paid-in capital

     608       608  

Retained earnings

     9,839       9,695  

Accumulated other comprehensive (loss) income

     (233     93  
  

 

 

   

 

 

 

Total owner’s equity

     10,214       10,396  
  

 

 

   

 

 

 
   $   20,260     $   19,967  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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FEDERAL EXPRESS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(IN MILLIONS)

 

     Years ended May 31,  
     2015     2014     2013  
           (As Adjusted)  

REVENUES

   $ 26,094     $ 26,048     $ 26,193  

OPERATING EXPENSES:

      

Salaries and employee benefits

     9,600        9,340       9,363  

Purchased transportation

     1,765       1,767       1,649  

Rentals and landing fees

     1,665       1,678       1,659  

Depreciation and amortization

     1,449       1,476       1,338  

Fuel

     3,199       3,943       4,129  

Maintenance and repairs

     1,351       1,177       1,239  

Business realignment, impairment and other charges

     276             243  

Retirement plans mark-to-market adjustment

     1,262       16       (814

Intercompany charges

     1,948        1,989       2,325  

Other

     3,260       3,264       3,308  
  

 

 

   

 

 

   

 

 

 
     25,775       24,650       24,439  
  

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     319       1,398       1,754  

OTHER INCOME (EXPENSE):

      

Interest income

     19       22       42  

Other, net

     (159     (106     (88
  

 

 

   

 

 

   

 

 

 
     (140     (84     (46
  

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     179       1,314       1,708  

PROVISION FOR INCOME TAXES

     35       453       644  
  

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 144     $ 861     $ 1,064  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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FEDERAL EXPRESS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(IN MILLIONS)

 

     Years Ended May 31,  
     2015     2014     2013  
           (As Adjusted)  

NET INCOME

   $         144     $         861     $         1,064  

OTHER COMPREHENSIVE (LOSS) INCOME:

      

Foreign currency translation adjustments, net of tax benefit of $35 in 2015, tax expense of $1 in 2014 and tax benefit of $13 in 2013

     (321     (23     36  

Amortization of prior service credit and other, net of tax benefit of $2, $3, and $12

     (5            10  
  

 

 

   

 

 

   

 

 

 
     (326     (23     46  
  

 

 

   

 

 

   

 

 

 

COMPREHENSIVE (LOSS) INCOME

   $ (182   $ 838     $ 1,110  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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FEDERAL EXPRESS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

 

     Years ended May 31,  
     2015     2014     2013  
           (As Adjusted)  

Operating Activities:

      

Net income

   $ 144     $ 861     $ 1,064  

Adjustments to reconcile net income to cash provided by operating activities:

      

Depreciation and amortization

     1,449       1,476       1,338  

Provision for uncollectible accounts

     115       100       135  

Deferred income taxes and other noncash items

     (205     84        227   

Business realignment, impairment and other charges

     246             174  

Retirement plans mark-to-market adjustment

     1,262       16       (814

Changes in assets and liabilities:

      

Receivables

     (178     (179     (12

Other current assets

     (173     (104     44  

Accounts payable and other liabilities

     (214     (140     826   

Other, net

     40       (1     3  
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     2,486       2,113       2,985  

Investing Activities:

      

Capital expenditures

     (2,369     (1,985     (2,055

Proceeds from asset dispositions and other

     4       3       25  

Business acquisitions, net of cash acquired

           (36     (483
  

 

 

   

 

 

   

 

 

 

Cash used in investing activities

     (2,365     (2,018     (2,513

Financing Activities:

      

Principal payments on debt

           (4     (417
  

 

 

   

 

 

   

 

 

 

Cash used in financing activities

           (4     (417
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (95     (2     2  
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     26       89       57  

Cash and cash equivalents at beginning of period

     858       769       712  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 884     $ 858     $ 769  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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FEDERAL EXPRESS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN OWNER’S EQUITY

(IN MILLIONS)

 

     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Owner’s
Equity
 

Balance at May 31, 2012 - as adjusted

   $       $ 608      $ 7,776     $ 70     $ 8,454  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

                   1,064             1,064  

Other comprehensive income, net of tax of $25

                         46       46  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at May 31, 2013 - as adjusted

            608        8,840       116       9,564  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

                   861             861  

Other comprehensive loss, net of tax of $2

                         (23     (23

Transfer to other FedEx subsidiaries

                   (6           (6
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at May 31, 2014 - as adjusted

            608        9,695       93       10,396  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

                   144              144  

Other comprehensive loss, net of tax of $37

                         (326     (326
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at May 31, 2015

   $       $ 608      $ 9,839     $ (233   $ 10,214  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS. Federal Express Corporation (“FedEx Express”) is the world’s largest express transportation company and a wholly owned subsidiary of FedEx Corporation (“FedEx”).

FISCAL YEARS. Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2015 or ended May 31 of the year referenced.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of FedEx Express and its subsidiaries, substantially all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. We are not the primary beneficiary of, nor do we have a controlling financial interest in, any variable interest entity. Accordingly, we have not consolidated any variable interest entity.

REVENUE RECOGNITION. Revenue is recognized upon delivery of shipments. For shipments in transit, revenue is recorded based on the percentage of service completed at the balance sheet date. Estimates for future billing adjustments to revenue and accounts receivable are recognized at the time of shipment for money-back service guarantees and billing corrections. Delivery costs are accrued as incurred.

Certain of our revenue-producing transactions are subject to taxes, such as sales tax, assessed by governmental authorities. We present these revenues net of tax.

ACCOUNTS RECEIVABLE ARRANGEMENT. We maintain an accounts receivable arrangement with FedEx TechConnect, Inc. (“FedEx TechConnect”), a subsidiary of FedEx Corporate Services, Inc. (“FedEx Services”). FedEx Services is a wholly owned subsidiary of FedEx. Under this arrangement, FedEx TechConnect records and collects receivables associated with our domestic package delivery functions, while we continue to recognize revenue for the transportation services provided. Our net receivables recorded by FedEx TechConnect totaled $1.7 billion at May 31, 2015 and May 31, 2014. See Note 16 for further discussion of this arrangement.

CREDIT RISK. We routinely grant credit to many of our customers for transportation services without collateral. The risk of credit loss in our trade receivables is substantially mitigated by our credit evaluation process, short collection terms and sales to a large number of customers, as well as the low revenue per transaction for most of our services. Allowances for potential credit losses are determined based on historical experience and the impact of current economic factors on the composition of accounts receivable. Historically, credit losses have been within management’s expectations.

ADVERTISING. Advertising and promotion costs are expensed as incurred and are classified in other operating expenses. Advertising and promotion expenses were $77 million in 2015, $85 million in 2014 and $109 million in 2013. In addition, FedEx Services performs marketing functions for us and the related charges are allocated to us and are reflected on the line item “Intercompany charges” on the consolidated statements of income. We believe the total amounts allocated approximate the costs of providing such services.

CASH EQUIVALENTS. Cash in excess of current operating requirements is invested in short-term, interest-bearing instruments with maturities of three months or less at the date of purchase and is stated at cost, which approximates market value.

SPARE PARTS, SUPPLIES AND FUEL. Spare parts (principally aircraft-related) are reported at weighted-average cost. Allowances for obsolescence are provided for spare parts currently identified as excess or obsolete as well as expected to be on hand at the date the aircraft are retired from service. These allowances are provided over the estimated useful life of the related aircraft and engines. The majority of our supplies and our fuel are reported at weighted-average cost.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

PROPERTY AND EQUIPMENT. Expenditures for major additions, improvements and flight equipment modifications are capitalized when such costs are determined to extend the useful life of the asset or are part of the cost of acquiring the asset. Expenditures for equipment overhaul costs of engines or airframes prior to their operational use are capitalized as part of the cost of such assets as they are costs required to ready the asset for its intended use. Maintenance and repairs costs are charged to expense as incurred, except for certain aircraft engine maintenance costs incurred under third-party service agreements. These agreements, which became effective June 1, 2014, resulted in costs being expensed based on cycles or hours flown and are subject to annual escalation. These service contracts transfer risk to third party service providers and generally fix the amount we pay for maintenance to the service provider as a rate per cycle or flight hour, in exchange for maintenance and repairs under a predefined maintenance program. We capitalize certain direct internal and external costs associated with the development of internal-use software. Gains and losses on sales of property used in operations are classified within operating expenses.

For financial reporting purposes, we record depreciation and amortization of property and equipment on a straight-line basis over the asset’s service life or related lease term, if shorter. For income tax purposes, depreciation is computed using accelerated methods when applicable.

Reclassifications have been made to the 2014 consolidated financial statements to conform to the current year’s presentation. The consolidated balance sheet for 2014 reflects the reclassification of $70 million of facilities and other that were previously presented in computer and electronic equipment. The reclassification has no impact on the net book value of property and equipment, total assets, or depreciation expense.

The depreciable lives and net book value of our property and equipment are as follows (dollars in millions):

 

            Net Book Value at May 31,  
     Range      2015      2014  

Wide-body aircraft and related equipment

     15 to 30 years       $ 7,548      $ 7,223  

Narrow-body and feeder aircraft and related equipment

     5 to 18 years         2,943        2,639  

Package handling and ground support equipment

     5 to 30 years         711        723  

Vehicles

     3 to 12 years         846        913  

Computer and electronic equipment

     2 to 10 years         144        196  

Facilities and other

     2 to 30 years         1,702        1,786  

Substantially all property and equipment have no material residual values. The majority of aircraft costs are depreciated on a straight-line basis over 15 to 30 years. We periodically evaluate the estimated service lives and residual values used to depreciate our property and equipment. In May 2015, we adjusted the depreciable lives of 23 aircraft and 57 engines. These changes will not have a material impact on near-term depreciation expense. In May 2013, we made the decision to accelerate the retirement of 76 aircraft and related engines to aid in our fleet modernization and improve our global network. In May 2012, we shortened the depreciable lives for 54 aircraft and related engines to accelerate the retirement of these aircraft, resulting in a depreciation expense increase of $69 million in 2013. As a result of these accelerated retirements, we had an additional $74 million in year-over-year depreciation expense in 2014.

Depreciation expense, excluding gains and losses on sales of property and equipment used in operations, was $1.4 billion in 2015, $1.5 billion in 2014 and $1.3 billion in 2013. Depreciation and amortization expense includes amortization of assets under capital lease.

CAPITALIZED INTEREST. Interest on funds used to finance the acquisition and modification of aircraft, including purchase deposits and construction of certain facilities up to the date the asset is ready for its intended use is capitalized and included in the cost of the asset if the asset is actively under construction. Capitalized interest was $28 million in 2015, $25 million in 2014 and $43 million in 2013.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, an impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.

We operate an integrated transportation network, and accordingly, cash flows for most of our operating assets to be held and used are assessed at a network level, not at an individual asset level, for our analysis of impairment.

In the normal management of our aircraft fleet, we routinely idle aircraft and engines temporarily due to maintenance cycles and adjustments of our network capacity to match seasonality and overall customer demand levels. Temporarily idled assets are classified as available-for-use, and we continue to record depreciation expense associated with these assets. These temporarily idled assets are assessed for impairment on a quarterly basis. The criteria for determining whether an asset has been permanently removed from service (and, as a result, potentially impaired) include, but are not limited to, our global economic outlook and the impact of our outlook on our current and projected volume levels, including capacity needs during our peak shipping seasons; the introduction of new fleet types or decisions to permanently retire an aircraft fleet from operations; or changes to planned service expansion activities. At May 31, 2015, we had one aircraft temporarily idled. This aircraft has been idled for approximately two months and is expected to return to revenue service.

In May 2015, we made the decision to retire from service seven Boeing MD11 aircraft and 12 related engines, four Airbus A310-300 aircraft and three related engines, three Airbus A300-600 aircraft and three related engines and one Boeing MD10-10 aircraft and three related engines and related parts, and adjusted the retirement schedule of an additional 23 aircraft and 57 engines. As a consequence of this decision, impairment and related charges of $276 million, of which $246 million was noncash, were recorded in the fourth quarter. The decision to permanently retire these aircraft and engines aligns with our plans to rationalize capacity and modernize our aircraft fleet to more effectively serve our customers.

In 2013, we retired from service two Airbus A310-200 aircraft and four related engines, three Airbus A310-300 aircraft and two related engines and five Boeing MD10-10 aircraft and 15 related engines. As a consequence of this decision, a noncash impairment charge of $100 million was recorded in 2013. All of these aircraft were temporarily idled and not in revenue service.

GOODWILL. Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. Several factors give rise to goodwill in our acquisitions, such as the expected benefit from synergies of the combination and the existing workforce of the acquired business. Goodwill is reviewed at least annually for impairment. In our evaluation of goodwill impairment, we perform a qualitative assessment to determine if it is more likely than not that the fair value of our company is less than its carrying amount. If the qualitative assessment is not conclusive, we proceed to a two-step process to test goodwill for impairment including comparing the fair value with its carrying value (including attributable goodwill). Fair value is determined using an income or market approach incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures. Fair value determinations may include both internal and third-party valuations. Unless circumstances otherwise dictate, we perform our annual impairment testing in the fourth quarter, and at May 31, 2015 we do not believe that our goodwill is at risk.

PENSION AND POSTRETIREMENT HEALTHCARE PLANS. Our defined benefit plans are measured using actuarial techniques that reflect management’s assumptions for discount rate, investment returns on plan assets, salary increases, expected retirement,

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

mortality, employee turnover and future increases in healthcare costs. We determine the discount rate (which is required to be the rate at which the projected benefit obligation could be effectively settled as of the measurement date) with the assistance of actuaries, who calculate the yield on a theoretical portfolio of high-grade corporate bonds (rated Aa or better) with cash flows that are designed to match our expected benefit payments in future years. Our expected rate of return is a judgmental matter which is reviewed on an annual basis and revised as appropriate.

A majority of our employees are covered by the FedEx Corporation Employees’ Pension Plan, which is sponsored by our parent, FedEx. Additionally, we also sponsor or participate in nonqualified benefit plans covering certain employee groups and other pension plans covering certain of our international groups. The accounting guidance related to employers’ accounting for defined benefit pension and other postretirement plans requires recognition in the balance sheet of the funded status of defined benefit pension and other postretirement benefit plans, and the recognition of unrecognized gains or losses and prior service costs or credits.

During the fourth quarter of 2015, we changed our method of accounting for our defined benefit pension and postretirement healthcare plans. Under our new method of accounting, we will immediately recognize changes in the fair value of plan assets and actuarial gains or losses in our operating results annually in the fourth quarter each year. Further, we voluntarily changed our method for determining the expected return on plan assets (“EROA”), which is used in the calculation of pension and other postretirement expense for funded postretirement benefit plans for interim periods. We now use the fair value of plan assets to calculate the EROA. The new methods of accounting are collectively referred to as “mark-to-market” or MTM accounting. Historically, we recognized actuarial gains and losses, subject to a corridor, as a component of other comprehensive income and amortized these gains and losses as a component of pension and postretirement healthcare expenses over the average future service period of the covered employees. Previously, we used a calculated value method to determine the value of plan assets and amortized changes in the fair value of plan assets over a period no longer than four years.

We believe the immediate recognition of actuarial gains and losses under MTM accounting is a preferable method of accounting as it aligns the recognition of changes in the fair value of plan assets and liabilities in the income statement with the fair value accounting principles that are used to measure the net funded status of the plans in our balance sheet. MTM accounting also eliminates the impact on future periods of the amortization of the increasingly material amount of accumulated actuarial losses resulting from persistently low interest rates and changes in demographic assumptions.

The adoption of MTM accounting is a voluntary change in accounting principle that is required to be adopted retrospectively. Therefore all periods presented have been recast to conform to the current year presentation reflecting the retirement plan accounting changes as discussed further in Note 10.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The cumulative effect of the change on retained earnings as of June 1, 2012, was a pre-tax reduction of $140 million, with an offset to accumulated other comprehensive income (OCI) and therefore no net impact to owner’s equity. The impact of all adjustments made to the financial statements presented is summarized below (amounts in millions):

 

     2014     2013  
     Previously           Effect
of
    Previously           Effect
of
 
     Reported     Adjusted     Change     Reported     Adjusted     Change  

Consolidated Statements of Income

            

Operating expenses

            

Salaries and employee benefits

   $ 9,600     $ 9,340     $ (260   $ 9,730     $ 9,363     $ (367

Retirement plans MTM adjustment

           16       16             (814     (814

Intercompany charges

     2,000       1,989       (11     2,344       2,325       (19

Operating Income

     1,143       1,398       255       554       1,754       1,200  

Income Before Income Taxes

     1,059       1,314       255       508       1,708       1,200  

Provision for Income Taxes

     355       453       98       178       644       466  

Net Income

     704       861       157       330       1,064       734  

Consolidated Statements of Comprehensive Income

            

Net Income

     704       861       157       330       1,064       734  

Amortization of prior service credit and other, net of tax

     (6           6       (2     10       12  

Comprehensive Income

     675       838       163       364       1,110        746   

Consolidated Balance Sheets

            

Due from parent company and other FedEx subsidiaries

     502       505       3       430       432       2  

Due to other FedEx subsidiaries

     910       1,265       355        1,064       1,685       621   

Deferred income taxes

     3,196        1,935        (1,261     2,833        1,468        (1,365

Retained Earnings

     8,944       9,695       751       8,246       8,840       594  

Accumulated other comprehensive income (loss)

     (65     93       158       (36     116       152  

Consolidated Statements of Cash Flows

            

Operating Activities

            

Net Income

     704       861       157       330       1,064       734  

Deferred income taxes and other noncash items

     246       84        (162     128       227        99   

Retirement plans MTM adjustment

           16       16             (814     (814

Accounts payable and other liabilities

     (129     (140     (11     845       826        (19

INCOME TAXES. Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The liability method is used to account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid.

We recognize liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the related provision.

We classify interest related to income tax liabilities as interest expense and, if applicable, penalties are recognized as a component of income tax expense. The income tax liabilities and accrued interest and penalties that are due within one year of the balance sheet date are presented as current liabilities. The noncurrent portion of our income tax liabilities and accrued interest and penalties are recorded in the caption “Other liabilities” in the accompanying consolidated balance sheets.

SELF-INSURANCE ACCRUALS. We are self-insured for costs associated with workers’ compensation claims, vehicle accidents and general business liabilities, and benefits paid under employee healthcare and long-term disability programs. Accruals are primarily based on the actuarially estimated cost of claims, which includes incurred-but-not-reported claims. Current workers’ compensation claims, vehicle and general liability, employee healthcare claims and long-term disability are included in accrued expenses. We self-insure up to certain limits that vary by type of risk. Periodically, we evaluate the level of insurance coverage and adjust insurance levels based on risk tolerance and premium expense.

LEASES. We lease certain aircraft, facilities, equipment and vehicles under capital and operating leases. The commencement date of all leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the property. In addition to minimum rental payments, certain leases provide for contingent rentals based on equipment usage, principally related to aircraft leases. Rent expense associated with contingent rentals is recorded as incurred. Certain of our leases contain fluctuating or escalating payments and rent holiday periods. The related rent expense is recorded on a straight-line basis over the lease term. The cumulative excess of rent payments over rent expense is accounted for as a deferred lease asset and recorded in “Other assets” in the accompanying consolidated balance sheets. The cumulative excess of rent expense over rent payments is accounted for as a deferred lease obligation. Leasehold improvements associated with assets utilized under capital or operating leases are amortized over the shorter of the asset’s useful life or the lease term.

DEFERRED GAINS. Gains on the sale and leaseback of aircraft and other property and equipment are deferred and amortized ratably over the life of the lease as a reduction of rent expense. Substantially all of these deferred gains are related to aircraft transactions.

FOREIGN CURRENCY TRANSLATION. Translation gains and losses of foreign operations that use local currencies as the functional currency are accumulated and reported, net of applicable deferred income taxes, as a component of accumulated other comprehensive income within owner’s equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local currency are included in the caption “Other, net” in the accompanying consolidated statements of income and were immaterial for each period presented.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. Our pilots, which represent a small number of our total employees, are employed under a collective bargaining agreement. The contract became amendable in March 2013, and the parties are currently in negotiations. In October 2014, we formally requested assistance from the National Mediation Board (“NMB”) to mediate the negotiations and the NMB has been actively mediating the talks since that time. The NMB is the U.S. governmental agency that oversees labor agreements for entities covered by the Railway Labor Act of 1926, as amended. The conduct of mediated negotiations has no impact on our operations. In addition to our pilots, certain non-U.S. employees are unionized.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

STOCK-BASED COMPENSATION. We participate in the stock-based compensation plans of our parent, FedEx. We recognize compensation expense for stock-based awards under the provisions of the accounting guidance related to share-based payments. This guidance requires recognition of compensation expense for stock-based awards using a fair value method.

FedEx uses the Black-Scholes pricing model to calculate the fair value of stock options. Our total share-based compensation expense was $44 million in 2015, $39 million in 2014 and $36 million in 2013.

BUSINESS REALIGNMENT COSTS. During 2013, FedEx announced profit improvement programs primarily through initiatives at FedEx Express and FedEx Services and completed a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain staff functions. Costs of the benefits provided under the voluntary program were recognized as special termination benefits in the period that eligible employees accepted their offers. Payments under this program were made at the time of departure.

The voluntary buyout program included voluntary severance payments and funding to healthcare reimbursement accounts, with the voluntary severance calculated based on four weeks of gross base salary for every year of FedEx service up to a maximum payment of two years of pay. Eligible employees vacated positions in phases during 2013 and 2014.

We incurred costs of $401 million during 2013 associated with our business realignment activities, both directly and through intercompany allocations primarily from FedEx Services. These costs related primarily to severance for employees who accepted voluntary buyouts in the third and fourth quarters of 2013. The direct costs of the buyout program are included in the caption “Business realignment, impairment and other charges” while the allocated costs are included in the caption “Intercompany charges” in our consolidated statements of income. Also included in those captions are other external costs directly attributable to our business realignment activities, such as professional fees.

USE OF ESTIMATES. The preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses and the disclosure of contingent liabilities. Management makes its best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include: self-insurance accruals; retirement plan obligations; long-term incentive accruals; tax liabilities; loss contingencies; litigation claims; and impairment assessments on long-lived assets (including goodwill).

NOTE 2: RECENT ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

On June 1, 2013, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) requiring additional information about reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. We have adopted this guidance by including expanded accumulated other comprehensive income disclosure requirements in Note 8 of our consolidated financial statements.

On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States (and

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

International Financial Reporting Standards) which has been subsequently updated to defer the effective date of the new revenue recognition standard by one year. This standard will be effective for us beginning in fiscal 2019. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. Based on our preliminary assessment, we do not anticipate that the new guidance will fundamentally change our revenue recognition policies, practices or systems.

We believe that no other new accounting guidance was adopted or issued during 2015 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

NOTE 3: BUSINESS COMBINATIONS

In 2014, we expanded the international service offerings of FedEx Express by completing our acquisition of the businesses operated by our previous service provider Supaswift (Pty) Ltd., in seven countries in Southern Africa, for $36 million in cash from operations. The financial results of this business are included in the FedEx Express segment from the date of acquisition.

In 2013, we completed our acquisitions of Rapidão Cometa Logística e Transporte S.A., a Brazilian transportation and logistics company, for $398 million; TATEX, a French express transportation company, for $55 million; and Opek Sp. z o.o., a Polish domestic express package delivery company, for $54 million. The financial results of these businesses are included in our results of operations from their respective date of acquisition.

The financial results of these acquired businesses were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.

NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL. The carrying amount of goodwill and changes therein are as follows (in millions):

 

Balance as of May 31, 2013

   $ 1,526  

Goodwill acquired(1)

     24  

Purchase adjustments and other(2)

     11  
  

 

 

 

Balance as of May 31, 2014

             1,561  

Purchase adjustments and other(2)

     (113
  

 

 

 

Balance as of May 31, 2015(3)

   $ 1,448  
  

 

 

 

 

(1) 

Goodwill acquired relates to the acquisitions of transportation companies in Poland, France and Brazil in 2013 and the acquisition of transportation companies in Southern Africa in 2014. See Note 3 for related disclosures.

(2) 

Primarily currency translation adjustments and acquired goodwill related to immaterial acquisitions.

(3) 

We do not have any accumulated impairment losses associated with our goodwill.

OTHER INTANGIBLE ASSETS. The net book value of our other intangible assets was $41 million at May 31, 2015 and $56 million at May 31, 2014. Amortization expense for intangible assets was $14 million in 2015, $15 million in 2014 and $22 million in 2013. Estimated amortization expense is expected to be immaterial in 2016 and beyond.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 5: SELECTED CURRENT LIABILITIES

The components of selected current liability captions at May 31 were as follows (in millions):

 

     2015      2014  

Accrued Salaries and Employee Benefits

     

Salaries

   $ 264      $ 200  

Employee benefits, including variable compensation

     270        221  

Compensated absences

     480        481  
  

 

 

    

 

 

 
   $ 1,014      $ 902  
  

 

 

    

 

 

 

Accrued Expenses

     

Self-insurance accruals

   $ 353      $ 313  

Taxes other than income taxes

     218        247  

Other

     485        459  
  

 

 

    

 

 

 
   $   1,056      $      1,019  
  

 

 

    

 

 

 

NOTE 6: LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

The components of long-term debt (net of discounts), along with maturity dates for the years subsequent to May 31, 2015, are as follows (in millions):

 

     May 31,  
      2015      2014  

Senior unsecured debt

     

Interest rate of 7.60%, due in 2098

   $         239      $         239  
  

 

 

    

 

 

 
     239        239  

Capital lease obligations

     7         
  

 

 

    

 

 

 
     246        239  

Less current portion

     7         
  

 

 

    

 

 

 
   $ 239      $ 239  
  

 

 

    

 

 

 

Interest on our fixed-rate notes is paid semi-annually. Long-term debt, exclusive of capital leases, had estimated fair values of $345 million at May 31, 2015 and $326 million at May 31, 2014. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

FedEx issues other financial instruments in the normal course of business to support our operations. We had letters of credit at May 31, 2015 of $297 million issued on our behalf by FedEx and $393 million in outstanding surety bonds placed by third-party insurance providers. These instruments are required under certain U.S. self-insurance programs and are also used in the normal course of international operations. The underlying liabilities insured by these instruments are reflected in our balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds themselves.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 7: LEASES

We utilize certain aircraft, land, facilities and equipment under capital and operating leases that expire at various dates through 2046. We leased 10% of our total aircraft fleet under operating leases as of May 31, 2015 and May 31, 2014. A portion of our supplemental aircraft are leased by us under agreements that provide for cancellation upon 30 days’ notice. Our leased facilities include national, regional and metropolitan sorting facilities and administrative buildings.

Rent expense under operating leases for the years ended May 31 was as follows (in millions):

 

           2015                  2014                  2013        

Minimum rentals

   $         1,281      $         1,292      $         1,287  

Contingent rentals(1)

     137        138        123  
  

 

 

    

 

 

    

 

 

 
   $ 1,418      $ 1,430      $ 1,410  
  

 

 

    

 

 

    

 

 

 

 

(1) 

Contingent rentals are based on equipment usage.

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at May 31, 2015 is as follows (in millions):

 

     Operating Leases  
     Aircraft
  and Related  
Equipment
     Facilities
  and Other  
     Total
  Operating  
Leases
 
        

2016

   $ 461      $ 676      $ 1,137  

2017

     400        846        1,246  

2018

     329        531        860  

2019

     273        457        730  

2020

     190        394        584  

Thereafter

     360        3,265        3,625  
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,013      $ 6,169      $ 8,182  
  

 

 

    

 

 

    

 

 

 

Property and equipment recorded under capital leases and future minimum lease payments under capital leases were immaterial at May 31, 2015 and 2014. The weighted-average remaining lease term of all operating leases outstanding at May 31, 2015 was approximately six years. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

We make payments under certain leveraged operating leases that are sufficient to pay principal and interest on certain pass-through certificates. The pass-through certificates are not our direct obligations, nor do we guarantee them.

We are the lessee in a series of operating leases covering a portion of our leased aircraft. The lessors are trusts established specifically to purchase, finance and lease aircraft to us. These leasing entities meet the criteria for variable interest entities. We are not the primary beneficiary of the leasing entities as the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates us to absorb decreases in value or entitles us to participate in increases in the value of the aircraft. As such, we are not required to consolidate these entities as the primary beneficiary. Our maximum exposure under these leases is included in the summary of future minimum lease payments.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 8: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table provides changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax, reported in our financial statements for the years ended May 31 (in millions, amounts in parentheses indicate debits to AOCI):

 

         2015             2014             2013      

Foreign currency translation gain (loss):

      

Balance at beginning of period

   $ 71     $ 94     $ 58  

Translation adjustments

     (321     (23     36  
  

 

 

   

 

 

   

 

 

 

Balance at end of period

     (250     71       94  
  

 

 

   

 

 

   

 

 

 

Retirement plans adjustments:

      

Balance at beginning of period

     22       22       12  

Prior service cost arising during period

     (3            

Reclassifications from AOCI

     (2           10  
  

 

 

   

 

 

   

 

 

 

Balance at end of period

     17       22       22  
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss) at end of period

   $ (233   $ 93     $ 116  
  

 

 

   

 

 

   

 

 

 

Due to its immateriality, the table presenting details of reclassifications from AOCI has been excluded from this disclosure.

NOTE 9: INCOME TAXES

Our operations are included in the consolidated federal income tax return of FedEx. Our income tax provision approximates the amount which would have been recorded on a separate return basis. The components of the provision for income taxes for the years ended May 31 were as follows (in millions):

 

             2015                     2014                     2013          

Current provision (benefit)

      

Domestic:

      

Federal

   $ 83     $ (79   $ (123

State and local

     8       (7     (6

Foreign

     202       184       159  
  

 

 

   

 

 

   

 

 

 
     293       98       30  
  

 

 

   

 

 

   

 

 

 

Deferred provision (benefit)

      

Domestic:

      

Federal

     (237     292       582  

State and local

     (16     44       73  

Foreign

     (5     19       (41
  

 

 

   

 

 

   

 

 

 
     (258     355       614  
  

 

 

   

 

 

   

 

 

 
   $ 35     $ 453     $ 644  
  

 

 

   

 

 

   

 

 

 

Pre-tax earnings (loss) of foreign operations for 2015, 2014 and 2013 were $701 million, $367 million and $(84) million, respectively. These amounts represent only a portion of total results associated with international shipments and accordingly, do not represent our international results of operations.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

A reconciliation of total income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate (35%) to income before taxes for the years ended May 31 was as follows (in millions):

 

             2015                     2014                     2013          

Taxes computed at federal statutory rate

   $ 63     $ 460     $ 598  

Increases (decreases) in income tax from:

      

State and local income taxes, net of federal benefit

     (5     24       44  

Foreign operations

     (31     (38     (24

U.S. federal income tax credits

     (5     (4     (3

Non-deductible items

     20       17       29  

Other, net

     (7     (6      
  

 

 

   

 

 

   

 

 

 
   $ 35     $ 453     $ 644  
  

 

 

   

 

 

   

 

 

 

Effective Tax Rate

                 19.8                 34.5                 37.7
  

 

 

   

 

 

   

 

 

 

The significant components of deferred tax assets and liabilities as of May 31 were as follows (in millions):

 

     2015      2014  
     Deferred Tax
Assets
    Deferred Tax
Liabilities
     Deferred Tax
Assets
    Deferred Tax
Liabilities
 

Property, equipment, leases and intangibles

   $ 80     $ 2,892      $ 117     $ 2,884  

Employee benefits

     2,297       10        1,839       10  

Self-insurance accruals

     366              343        

Other

     315       1,423        275       1,215  

Net operating loss/credit carryforwards

     263              275        

Valuation allowances

     (187            (194      
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 3,134     $ 4,325      $ 2,655     $ 4,109  
  

 

 

   

 

 

    

 

 

   

 

 

 

The net deferred tax liabilities as of May 31 have been classified in the balance sheets as follows (in millions):

 

     2015     2014  

Current deferred tax assets

   $             378     $             401  

Noncurrent deferred tax assets(1)

     143       80  

Noncurrent deferred tax liabilities

     (1,712     (1,935
  

 

 

   

 

 

 
   $ (1,191   $ (1,454
  

 

 

   

 

 

 

 

(1)

Noncurrent deferred tax assets are included in the line item Other Assets in our consolidated Balance Sheet.

The defined benefit retirement plans deferred taxes allocated from our parent, FedEx are reflected above and are remeasured annually.

We have $837 million of net operating loss carryovers in various foreign jurisdictions and $157 million of state operating loss carryovers. The valuation allowances primarily represent amounts reserved for operating loss and tax credit carryforwards, which expire over varying periods starting in 2016. As a result of this and other factors, we believe that a substantial portion of these deferred tax assets may not be realized.

Permanently reinvested earnings of our foreign subsidiaries amounted to $1.9 billion at the end of 2015 and $1.6 billion at the end of 2014. We have not recognized deferred taxes for U.S. federal income tax purposes on those earnings. In 2015, our permanent reinvestment strategy with respect to unremitted earnings of our foreign subsidiaries provided an approximate $46 million benefit

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

to our provision for income taxes. Were the earnings to be distributed, in the form of dividends or otherwise, these earnings could be subject to U.S. federal income tax and non-U.S. withholding taxes. Unrecognized foreign tax credits potentially could be available to reduce a portion of any U.S. tax liability. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits. Cash in offshore jurisdictions associated with our permanent reinvestment strategy totaled $478 million at the end of 2015 and $471 million at the end of 2014.

As a U.S. airline, we are required by Federal Aviation Administration and other rules to conduct our air operations, domestic and international, through a U.S. company. However, we serve more than 220 countries and territories around the world, and are required to establish legal entities in many of them. Most of our entities in those countries are operating entities, engaged in picking up and delivering packages and performing other transportation services. We are continually expanding our global network to meet our customers’ needs, which requires increasing investment outside the U.S. We typically use cash generated overseas to fund these investments and have a foreign holding company which manages our investments in several foreign operating companies.

We are subject to taxation in the U.S. and various U.S. state, local and foreign jurisdictions. The IRS is currently examining our 2012 and 2013 tax returns. It is reasonably possible that certain income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

 

     2015     2014     2013  

Balance at beginning of year

   $ 33     $ 44     $ 45  

Increases for tax positions taken in the current year

           1       1  

Increases for tax positions taken in prior years

     3       1       3  

Decreases for tax positions taken in prior years

     (2     (4     (2

Settlements

           (4     (7

Increases due to acquisitions

                 4  

Decreases from lapse of statute of limitations

           (4     (2

Changes due to currency translation

     (5     (1     2  
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   $                 29     $                 33     $                 44  
  

 

 

   

 

 

   

 

 

 

Our liabilities recorded for uncertain tax positions include $26 million at May 31, 2015 and $30 million at May 31, 2014 associated with positions that if favorably resolved would provide a benefit to our effective tax rate. We classify interest related to income tax liabilities as interest expense and, if applicable, penalties are recognized as a component of income tax expense. The balance of accrued interest and penalties was $17 million on May 31, 2015 and May 31, 2014. Total interest and penalties included in our consolidated statements of income are immaterial.

It is difficult to predict the ultimate outcome or the timing of resolution for tax positions. Changes may result from the conclusion of ongoing audits, appeals or litigation in state, local, federal and foreign tax jurisdictions, or from the resolution of various proceedings between the U.S. and foreign tax authorities. Our liability for uncertain tax positions includes no matters that are individually or collectively material to us. It is reasonably possible that the amount of the benefit with respect to certain of our unrecognized tax positions will increase or decrease within the next 12 months, but an estimate of the range of the reasonably possible changes cannot be made. However, we do not expect that the resolution of any of our uncertain tax positions will have a material effect on us.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 10: RETIREMENT PLANS

RETIREMENT PLANS SPONSORED BY FEDEX

We sponsor or participate in programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. The accounting for pension and postretirement healthcare plans includes numerous assumptions, such as: discount rates; expected long-term investment returns on plan assets; future salary increases; employee turnover; mortality; and retirement ages.

During the fourth quarter of 2015, we adopted mark-to-market (MTM) accounting for the recognition of our actuarial gains and losses related to our defined benefit pension and postretirement healthcare plans as described in Note 1. Our fourth quarter MTM adjustment includes adjustments for retirement plans sponsored by us as well as an allocated portion of adjustments for the defined benefit plans sponsored by our parent, FedEx.

A summary of our retirement plans costs over the past three years is as follows (in millions):

 

     2015      2014      2013  

Pension plans sponsored by FedEx

   $ 77      $ 163      $ 234  

Defined benefit pension plans

     42        44        36  

Defined contribution plans

     246        237        233  

Postretirement healthcare plans

     62        62        62  

Retirement plans MTM adjustment

     1,262        16        (814
  

 

 

    

 

 

    

 

 

 
   $             1,689      $             522      $             (249
  

 

 

    

 

 

    

 

 

 

PENSION PLANS. A majority of our employees are covered by the FedEx Corporation Employees’ Pension Plan (“FedEx Plan”), a defined benefit pension plan sponsored by our parent, FedEx. The plan covers certain U.S. employees age 21 and over, with at least one year of service. Pension benefits for most employees are accrued under a cash balance formula we call the Portable Pension Account. Under the Portable Pension Account, the retirement benefit is expressed as a dollar amount in a notional account that grows with annual credits based on pay, age and years of credited service, and interest on the notional account balance. The Portable Pension Account benefit is payable as a lump sum or an annuity at retirement at the election of the employee. The plan interest credit rate varies from year to year based on a U.S. Treasury index. Prior to 2009, certain employees earned benefits using a traditional pension formula (based on average earnings and years of service). Benefits under this formula were capped on May 31, 2008 for most employees. We also sponsor or participate in nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans covering certain of our international employees. Our employees comprise approximately 72% of the participants in the FedEx Plan. For more information about this plan and the related accounting assumptions, refer to the financial statements of FedEx included in its Form 10-K for the year ended May 31, 2015.

PENSION PLAN ASSUMPTIONS. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations and the expected long-term rate of return on plan assets.

We use a measurement date of May 31 for our pension and postretirement healthcare plans. Management reviews the assumptions used to measure pension costs on an annual basis. Economic and market conditions at the measurement date impact these assumptions from year to year. Actuarial gains or losses are generated for changes in assumptions and to the extent that actual results differ from those assumed. These actuarial gains and losses are immediately recognized and expensed in a fourth quarter mark-to-market adjustment.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The weighted-average actuarial assumptions for the FedEx Plan were as follows:

 

     Pension Plans  
     2015     2014     2013  

Discount rate used to determine benefit obligation

                 4.42                 4.60                 4.79

Discount rate used to determine net periodic benefit cost

     4.60       4.79       4.44  

Rate of increase in future compensation levels used to determine
benefit obligation

     4.62       4.56       4.54  

Rate of increase in future compensation levels used to determine
net periodic benefit cost

     4.56       4.54       4.62  

Expected long-term rate of return on assets

     7.75       7.75       8.00  

FedEx’s consolidated expected long-term rate of return on plan assets was 7.75% in 2015 and 2014 and 8% in 2013. However, for 2016, FedEx lowered its EROA assumption for long-term returns on plan assets to 6.50% as they continue to implement their asset and liability management strategy. In lowering this assumption FedEx considered its historical returns, current capital markets outlook and investment strategy for their plan assets, including the impact of the duration of the plan liability.

We incurred a net periodic benefit cost, prior to the year-end MTM adjustment, of $70 million in 2015, $157 million in 2014 and $227 million in 2013, for our participation in the FedEx Plan. Ongoing pension costs in 2015 were lower than 2014 due to the favorable impact of significant returns on plan assets. Pension costs in 2014 were lower than 2013 due to the favorable impact of significant returns on plan assets.

Information regarding the funded status of the FedEx Plan at May 31 was as follows (in millions):

 

     2015     2014  

Projected benefit obligation (“PBO”)

   $         25,554     $         22,737  

Fair value of plan assets

     22,291       20,814  
  

 

 

   

 

 

 

Funded status

   $ (3,263   $ (1,923
  

 

 

   

 

 

 

Certain of our employees participate in a nonqualified defined benefit pension plan sponsored by FedEx. Our participants in this nonqualified defined benefit plan make up approximately 30% of the participants in the plan. FedEx has accumulated benefit obligations (“ABOs”) aggregating approximately $227 million at May 31, 2015 and $236 million at May 31, 2014 and PBOs aggregating approximately $227 million at May 31, 2015 and $237 million at May 31, 2014 related to this plan. This plan is not funded because such funding provides no current tax deduction and would be deemed current compensation to plan participants.

DEFINED CONTRIBUTION PLANS. Defined contribution plans are in place covering a majority of U.S. employees and certain international employees. Most U.S. employees are covered under the FedEx 401(k) plan. Pilots are covered under a 401(a) money purchase pension plan, as well as their own 401(k) plan. Expense for our employees under these plans was $246 million in 2015, $237 million in 2014 and $233 million in 2013.

RETIREMENT PLANS SPONSORED BY FEDEX EXPRESS

PENSION PLANS. We also sponsor nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans covering certain of our international employees. The nonqualified benefit plans are not funded because such funding provides no current tax deduction and would be deemed current compensation to plan participants. The international defined benefit pension plans provide benefits primarily based on earnings and years of service and are funded in compliance with local laws and practices.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Beginning April 6, 2012, the United Kingdom pension plan formula changed for future benefit accruals to a cash balance formula, which is expressed as an amount in a notional account that grows with annual credits based on pay and interest on the notional account balance and is converted to a pension with an insurance company at retirement. Prior benefits were accrued using a traditional pension formula (based on final earnings and years of service). In addition, employees earning benefits under the cash balance design are eligible to contribute into a defined contribution plan where the company matches 200% of the employee’s contribution up to 6%. For the plans sponsored by us, our assets are primarily invested in equities and fixed income securities. Fair value disclosures have not been provided for these international defined benefit pension plans since the assets are primarily managed at an individual country level. The amount of assets in these plans having significant unobservable inputs (Level 3), if any, would be immaterial to our financial statements.

POSTRETIREMENT HEALTHCARE PLANS. We sponsor a plan offering medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents. For Medicare eligible non-pilot retirees and their eligible dependents, we only provide a fixed subsidy toward a Health Reimbursement Account (HRA) with Extend Health, which may be used for the premium payment for a Medigap policy. U.S. employees become eligible for these benefits at age 55 and older, if they have permanent, continuous service of at least 10 years after attainment of age 45 if hired prior to January 1, 1988, or at least 20 years after attainment of age 35 if hired on or after January 1, 1988. Postretirement healthcare benefits are capped at 150% of the 1993 per capita projected employer cost, which has been reached and therefore, these benefits are not subject to additional future inflation.

The accounting guidance related to postretirement benefits requires recognition in the balance sheet of the funded status of defined benefit pension and other postretirement benefit plans, and the recognition in either expense or accumulated other comprehensive income (“AOCI”) of unrecognized gains or losses and prior service costs or credits. The funded status is measured as the difference between the fair value of the plan’s assets and the PBO or APBO of the plan.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the plans currently sponsored by us, the following table provides a reconciliation of the changes in the pension and postretirement healthcare plans’ benefit obligations and fair value of assets for our employees over the two-year period ended May 31, 2015 and a statement of the funded status as of May 31, 2015 and 2014 (in millions):

 

     Pension Plans     Postretirement
Healthcare
Plans
 
           2015                 2014           2015     2014  

Accumulated Benefit Obligation (“ABO”)

   $ 746     $ 722      
  

 

 

   

 

 

     

Changes in Projected Benefit Obligation (“PBO”) and Accumulated Postretirement Benefit Obligation (“APBO”)

        

PBO/APBO at the beginning of year

   $ 875     $ 763     $ 699     $ 659  

Service cost

     38       39       30       30  

Interest cost

     29       29       32       32  

Actuarial loss

     89       20       8       5  

Benefits paid

     (24     (22     (71     (60

Settlements

     (4     (2            

Curtailments

     (2                  

Amendments

     3                    

Participant contributions

     3       3       35       33  

Foreign currency exchange rate changes

     (113     46       (1      

Other

     (2     (1            
  

 

 

   

 

 

   

 

 

   

 

 

 

PBO/APBO at the end of year

   $ 892     $ 875     $ 732     $ 699  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in Plan Assets

        

Fair value of plan assets at the beginning of year

   $ 463     $ 386     $     $  

Actual return on plan assets

     72       24              

Company contributions

     39       36       36       27  

Benefits paid

     (24     (22     (71     (60

Settlements

     (4     (2            

Foreign currency exchange rate changes

     (48     39              

Other

     1       2       35       33  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at the end of year

   $ 499     $ 463     $     $  
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded Status of the Plans

   $ (393   $ (412   $ (732   $ (699
  

 

 

   

 

 

   

 

 

   

 

 

 

Amount Recognized in the Balance Sheet at May 31:

Noncurrent asset

   $ 26       5      

Current pension, postretirement healthcare and other benefit obligations

     (8   $ (10   $ (32   $ (31

Noncurrent pension, postretirement healthcare and other benefit obligations

     (411     (407     (700     (668
  

 

 

   

 

 

   

 

 

   

 

 

 

Net amount recognized

   $ (393   $ (412   $ (732   $ (699
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts Recognized in AOCI and not yet reflected in Net Periodic Benefit Cost:

        

Prior service (credit) cost and other

   $ (20   $ (28   $ 1     $ 1  

Amounts Recognized in AOCI and not yet reflected in Net Periodic Benefit Cost expected to be amortized in next year’s Net Periodic Benefit Cost:

        

Prior service credit and other

   $ (2   $ (3   $     $  

 

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Table of Contents

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following table presents plans sponsored by us on a disaggregated basis to show those plans (as a group) in an unfunded position. The fair value of plan assets for pension plans with a PBO or ABO in excess of plan assets at May 31 were as follows (in millions):

 

     PBO Exceeds the Fair Value
of Plan Assets
 
     2015     2014  

Pension Benefits

    

Fair value of plan assets

   $ 93     $ 99  

PBO

     (513     (516
  

 

 

   

 

 

 

Net funded status

   $ (420   $ (417
  

 

 

   

 

 

 
     ABO Exceeds the Fair
Value of Plan Assets
 
     2015     2014  

Pension Benefits

    

ABO(1)

   $ (366   $ (364

Fair value of plan assets

     93       98  

PBO

     (513     (515
  

 

 

   

 

 

 

Net funded status

   $ (420   $ (417
  

 

 

   

 

 

 

 

(1)

ABO not used in determination of funded status.

In the plans currently sponsored by us, net periodic benefit cost for FedEx Express employees for the three years ended May 31 were as follows (in millions):

 

     Pension Plans     Postretirement Healthcare Plans  
     2015     2014     2013     2015      2014      2013  

Service cost

   $ 38     $ 39     $ 32     $ 30      $ 30      $ 33  

Interest cost

     29       29       27       32        32        29  

Expected return on plan assets

     (23     (22     (21                    

Recognized actuarial losses (gains) and other

     35       15       36       8        5        (25
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $         79     $         61     $         74     $         70      $         67      $         37  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Due to its immateriality, the table showing amounts recognized in OCI has been excluded from this disclosure.

The weighted-average actuarial assumptions for the plans sponsored by us were as follows:

 

     Pension Plans     Postretirement Healthcare Plans  
     2015     2014     2013     2015     2014     2013  
            

Discount rate used to determine benefit obligation

     2.98     3.59     3.66     4.62     4.74     4.91

Discount rate used to determine net periodic benefit cost

     3.59       3.66       4.08       4.74       4.91       4.55  

Rate of increase in future compensation levels used to determine benefit obligation

     3.27       3.38       3.30                    

Rate of increase in future compensation levels used to determine net periodic benefit cost

     3.38       3.30       3.00                    

Expected long-term rate of return on assets

     5.13       5.14       6.41                    

 

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Table of Contents

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Benefit payments for FedEx Express employees in the plans sponsored by us, which reflect expected future service, are expected to be paid as follows for the years ending May 31 (in millions):

 

     Pension Plans      Postretirement
Healthcare Plans
 

2016

   $ 22      $ 32  

2017

     25        33  

2018

     26        35  

2019

     28        36  

2020

     29        38  

2021-2025

     195        223  

We expect to make pension plan contributions in 2016 approximating $33 million. 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 7.3% during 2016, decreasing to an annual growth rate of 4.5% in 2029 and thereafter. A 1% change in these annual trend rates would not have a significant impact on the APBO at May 31, 2015 or 2015 benefit expense because the level of these benefits is capped.

 

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Table of Contents

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 11: BUSINESS SEGMENT INFORMATION

We are engaged in a single line of business and operate in one business segment – the worldwide express transportation and distribution of time-sensitive shipments. We are the world’s largest express transportation company, and use a global air-and-ground network to speed delivery of time-sensitive shipments. We operate an integrated transportation network in providing these worldwide services and use our network assets (particularly aircraft) interchangeably around the world as demand and other circumstances dictate a need.

The following table presents revenue by service type and geographic information for the years ended or as of May 31 (in millions):

REVENUE BY SERVICE TYPE

 

     2015      2014      2013  

Package:

        

U.S. overnight box

   $ 6,704      $ 6,555      $ 6,513  

U.S. overnight envelope

     1,629        1,636        1,705  

U.S. deferred

     3,342        3,188        3,020  
  

 

 

    

 

 

    

 

 

 

Total U.S. domestic package revenue

     11,675        11,379        11,238  

International priority

     6,251        6,451        6,586  

International economy

     2,301        2,229        2,046  
  

 

 

    

 

 

    

 

 

 

Total international export package revenue

     8,552        8,680        8,632  
  

 

 

    

 

 

    

 

 

 

International domestic(1)

     1,406        1,446        1,398  
  

 

 

    

 

 

    

 

 

 

Total package revenue

     21,633        21,505        21,268  

Freight:

        

U.S.

     2,300        2,355        2,562  

International priority

     1,588        1,594        1,678  

International airfreight

     180        205        276  
  

 

 

    

 

 

    

 

 

 

Total freight revenue

     4,068        4,154        4,516  

Other

     393        389        409  
  

 

 

    

 

 

    

 

 

 
   $         26,094      $         26,048      $         26,193  
  

 

 

    

 

 

    

 

 

 

GEOGRAPHICAL INFORMATION(2)

        

Revenues:

        

U.S.

   $ 14,015      $ 13,775      $ 13,837  

International

     12,079        12,273        12,356  
  

 

 

    

 

 

    

 

 

 
   $ 26,094      $ 26,048      $ 26,193  
  

 

 

    

 

 

    

 

 

 

Noncurrent assets:

        

U.S.

   $ 13,889      $ 13,317      $ 12,717  

International

     2,557        2,683        2,614  
  

 

 

    

 

 

    

 

 

 
   $ 16,446      $ 16,000      $ 15,331  
  

 

 

    

 

 

    

 

 

 

 

(1) 

International domestic revenues represent our international intra-country express operations.

 

(2) 

International revenue includes shipments that either originate in or are destined to locations outside the United States, which could include U.S. payors. Noncurrent assets include property and equipment, goodwill and other long-term assets. Our flight equipment is registered in the U.S. and is included as U.S. assets; however, many of our aircraft operate internationally.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for income taxes for the years ended May 31 was as follows (in millions):

 

     2015     2014     2013  

Cash payments for:

      

Income taxes

   $          544     $          235     $          243  

Income tax refunds received

     (226     (182     (213
  

 

 

   

 

 

   

 

 

 

Cash tax payments, net

   $ 318     $ 53     $ 30  
  

 

 

   

 

 

   

 

 

 

NOTE 13: GUARANTEES AND INDEMNIFICATIONS

In conjunction with certain transactions, primarily the lease, sale or purchase of operating assets or services in the ordinary course of business, we may provide routine guarantees or indemnifications (e.g., environmental, fuel tax and software infringement), the terms of which range in duration, and often they are not limited and have no specified maximum obligation. As a result, the overall maximum potential amount of the obligation under such guarantees and indemnifications cannot be reasonably estimated. Historically, we have not been required to make significant payments under our guarantee or indemnification obligations and no amounts have been recognized in our financial statements for the underlying fair value of these obligations.

We provide guarantees on certain FedEx unsecured debt instruments aggregating $7.0 billion at May 31, 2015, jointly and severally with other affiliated companies in the FedEx consolidated group. In addition, we guarantee, jointly and severally with other affiliated companies in the FedEx consolidated group, FedEx’s $1.0 billion revolving credit agreement, which backs its commercial paper program. At May 31, 2015, no commercial paper was outstanding and the entire $1.0 billion under the revolving credit agreement was available for future borrowings. The guarantees are full and unconditional and are required by the lenders since FedEx has no independent assets or operations.

Special facility revenue bonds have been issued by certain municipalities primarily to finance the acquisition and construction of various airport facilities and equipment. These facilities were leased to us and are accounted for as operating leases. We have unconditionally guaranteed $483 million in principal of these bonds (with total future principal and interest payments of approximately $578 million as of May 31, 2015) through these leases.

NOTE 14: COMMITMENTS

Annual purchase commitments under various contracts as of May 31, 2015 were as follows (in millions):

 

     Aircraft and
Aircraft-Related
       Other(1)        Total  

2016

   $ 1,255       $ 72       $ 1,327  

2017

     1,024         47         1,071  

2018

     1,399         40         1,439  

2019

     1,017         10         1,027  

2020

     662         8         670  

Thereafter

     3,786         72         3,858  
  

 

 

    

 

 

    

 

 

 
   $ 9,143       $ 249       $         9,392  
  

 

 

    

 

 

    

 

 

 

 

(1)

Primarily advertising and promotions contracts.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of May 31, 2015, our obligation to purchase three Boeing 767-300 Freighter (“B767F”) aircraft and nine Boeing 777 Freighter (“ B777F”) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered

 

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Table of Contents

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

by the Railway Labor Act of 1926, as amended. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

We have several aircraft modernization programs underway which are supported by the purchase of B777F, B767F and B757 aircraft. These aircraft are significantly more fuel-efficient per unit than the aircraft types previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to replace older aircraft. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements.

During September 2014, we entered into an agreement to purchase four additional B767F aircraft, the delivery of which will begin in 2017 and continue through 2019.

We had $472 million in deposits and progress payments as of May 31, 2015 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our consolidated balance sheets. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of May 31, 2015, with the year of expected delivery:

 

         B767F              B777F              Total      

2016

     11        2         13  

2017

     12                12  

2018

     11        2         13  

2019

     6        2         8  

2020

            3         3  

Thereafter

            9         9  
  

 

 

    

 

 

    

 

 

 

Total

     40        18         58  
  

 

 

    

 

 

    

 

 

 

NOTE 15: CONTINGENCIES

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 January 14, 2014, the U.S. Department of Justice (“DOJ”) issued a Grand Jury Subpoena to FedEx Express relating to an asbestos matter previously investigated by the U.S. Environmental Protection Agency. On May 1, 2014, the DOJ informed us that it had determined to continue to pursue the matter as a criminal case, citing seven asbestos-related regulatory violations associated with removal of roof materials from a hangar in Puerto Rico during cleaning and repair activity, as well as violation of waste disposal requirements. Loss is reasonably possible; however, the amount of any loss is expected to be immaterial.

Department of Justice Indictment — Internet Pharmacy Shipments. In the past, we received requests for information from the DOJ in the Northern District of California in connection with a criminal investigation relating to the transportation of packages for online pharmacies that may have shipped pharmaceuticals in violation of federal law. In July 2014, the DOJ filed a criminal indictment in the United States District Court for the Northern District of California in connection with the matter. A superseding indictment was filed in August 2014. The indictment alleges that FedEx Corporation, FedEx Express and FedEx Services, together with certain pharmacies, conspired to unlawfully distribute controlled substances, unlawfully distributed controlled substances and conspired to unlawfully distribute misbranded drugs. The superseding indictment adds conspiracy to launder money counts related to services provided to and payments from online pharmacies. We continue to believe that our employees have acted in good faith at all times and that we have not engaged in any illegal activities.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Accordingly, we will vigorously defend ourselves in this matter. If we are convicted, remedies could include fines, penalties, forfeiture and compliance conditions. Given the early stage of this proceeding, we cannot estimate the amount or range of loss, if any; however, it is reasonably possible that it could be material if we are convicted.

Other Matters. In August 2010, a third-party consultant who works with shipping customers to negotiate lower rates filed a lawsuit in federal district court in California against FedEx and United Parcel Service, Inc. (“UPS”) alleging violations of U.S. antitrust law. This matter was dismissed in May 2011, but the court granted the plaintiff permission to file an amended complaint, which FedEx received in June 2011. In November 2011, the court granted our motion to dismiss this complaint, but again allowed the plaintiff to file an amended complaint. The plaintiff filed a new complaint in December 2011. On April 30, 2015, the court dismissed the case, finding that the plaintiff failed to provide certain evidence necessary to allow the case to proceed. The plaintiff filed a notice of appeal on May 26, 2015.

In February 2011, shortly after the initial lawsuit was filed, we received a demand for the production of information and documents in connection with a civil investigation by the DOJ into the policies and practices of FedEx and UPS for dealing with third-party consultants who work with shipping customers to negotiate lower rates. In November 2012, the DOJ served a civil investigative demand on the third-party consultant seeking all pleadings, depositions and documents produced in the lawsuit. We are cooperating with the investigation, do not believe that we have engaged in any anti-competitive activities and will vigorously defend ourselves in any action that may result from the investigation. While the litigation proceedings and the DOJ investigation move forward, and the amount of loss, if any, is dependent on a number of factors that are not yet fully developed or resolved, the amount of any loss is expected to be immaterial.

On June 30, 2014, we received a Statement of Objections from the French Competition Authority (“FCA”) addressed to FedEx Express France, formerly known as TATEX, regarding an investigation by the FCA into anticompetitive behavior that is alleged to have occurred primarily in the framework of trade association meetings that included the former general managers of TATEX prior to our acquisition of that company in July 2012. In September 2014, FedEx Express France submitted its observations in response to the Statement of Objections to the FCA. In April 2015, the FCA issued a report responding to the observations submitted by all companies involved in the investigation. We submitted an answer to the FCA’s report in early July. Loss in this matter is probable, and we established an accrual for the estimated probable loss. This amount was immaterial.

FedEx Express and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not have a material adverse effect on our financial position, results of operations or cash flows.

NOTE 16: PARENT/AFFILIATE TRANSACTIONS

Affiliate company balances that are currently receivable or payable relate to charges for services provided to or by other FedEx affiliates, which are settled on a monthly basis, or the net activity from participation in FedEx’s consolidated cash management program. In addition, we are allocated net interest on these amounts at market rates.

We maintain an accounts receivable arrangement with FedEx TechConnect. Under this arrangement, we recognize revenue for the transportation services provided to our U.S. customers and factor the related receivables to FedEx TechConnect for collection. We have no continuing involvement with the receivables transferred to FedEx TechConnect. Our net receivables recorded by FedEx TechConnect totaled $1.7 billion at May 31, 2015 and at May 31, 2014.

The costs of FedEx Services, FedEx TechConnect and FedEx Office and Print Services, Inc., as well as charges for management fees from our parent, are allocated to us and are included in the expense line item “Intercompany charges, net” based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of providing the functions.

 

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FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 17: SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)

 

(in millions)

   First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

2015 (1)

           

Revenues

   $ 6,584      $ 6,715      $ 6,388      $ 6,407  

Operating income (Previously reported)

     327        442        357        N/A   

Retirement plans accounting changes

     47        47        47        N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss) (As adjusted)

     374        489        404        (948
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (Previously reported)

     195        274        214        N/A   

Retirement plans accounting changes, net of tax

     30        30        30        N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) (As adjusted)

     225        304        244        (629
  

 

 

    

 

 

    

 

 

    

 

 

 

2014 (1)

           

Revenues

   $ 6,346      $ 6,546      $ 6,426      $ 6,730  

Operating income (Previously reported)

     230        322        126        465  

Retirement plans accounting changes

     68        67        68        52  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (As adjusted)

     298        389        194        517  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (Previously reported)

     146        198        64        296  

Retirement plans accounting changes, net of tax

     42        41        42        32  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (As adjusted)

     188        239        106        328  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The fourth quarter of 2015 includes a $1.3 billion retirement plans mark-to-market loss and $276 million of impairment and related charges resulting from the decision to permanently retire and adjust the retirement schedule of certain aircraft and related engines. In addition, the first, second and third quarters of 2015 and all quarters of 2014 have been recast to conform to the current year presentation reflecting the retirement plans accounting changes.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATES. While we currently have market risk sensitive instruments related to interest rates, we have no significant exposure to changing interest rates on our long-term debt because the interest rates are fixed on all of our long-term debt. As disclosed in Note 6 to the accompanying consolidated financial statements, we had outstanding fixed-rate, long-term debt (exclusive of capital leases) with estimated fair values of $345 million at May 31, 2015 and $326 million at May 31, 2014. Market risk for fixed-rate, long-term debt is estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates and amounts to $18 million as of May 31, 2015 and May 31, 2014. The underlying fair values of our long-term debt were estimated based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

We have interest rate risk with respect to our pension and postretirement benefit obligations. Changes in interest rates impact our liabilities associated with these benefit plans, as well as the amount of pension and postretirement benefit expense recognized. Declines in the value of plan assets could diminish the funded status of our pension plans and potentially increase our requirement to make contributions to the plans. Substantial investment losses on plan assets would also increase pension expense.

FOREIGN CURRENCY. While we are a global provider of transportation services, the substantial majority of our transactions are denominated in U.S. dollars. The principal foreign currency exchange rate risks to which we are exposed are in the Chinese yuan, euro, British pound, Brazilian real, Mexican peso and the Canadian dollar. 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 2015, foreign currency fluctuations had a moderately positive impact on operating income. The impact of foreign currency fluctuations was slightly negative in 2014. However, favorable foreign currency fluctuations also may have had an offsetting impact on the price we obtained or the demand for our services, which is not quantifiable. At May 31, 2015, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which our transactions are denominated would result in an increase in operating income of $36 million for 2016. This theoretical calculation required under SEC guidelines assumes that each exchange rate would change in the same direction relative to the U.S. dollar, which is not consistent with our actual experience in foreign currency transactions. In addition to the direct effects of changes in exchange rates, fluctuations in exchange rates also affect the volume of sales or the foreign currency sales price as competitors’ services become more or less attractive. The sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

COMMODITY. While we have market risk for changes in the price of jet 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.”

OTHER. We do not purchase or hold any derivative financial instruments for trading purposes.

 

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder

Federal Express Corporation

We have audited the consolidated financial statements of Federal Express Corporation as of May 31, 2015 and 2014, and for each of the three years in the period ended May 31, 2015, and have issued our report thereon dated July 14, 2015 (included elsewhere in this Annual Report on Form 10-K). Our audits also included the financial statement schedule listed in Item 15(a) in this Annual Report on Form 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this schedule based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Memphis, Tennessee

July 14, 2015

 

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SCHEDULE II

FEDERAL EXPRESS CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED MAY 31, 2015, 2014, AND 2013

(IN MILLIONS)

 

            ADDITIONS              

DESCRIPTION

   BALANCE
AT
BEGINNING
OF YEAR
     CHARGED
TO
EXPENSES
     CHARGED
TO

OTHER
ACCOUNTS
    DEDUCTIONS     BALANCE
AT
END OF
YEAR
 

Accounts Receivable Reserves:

            

Allowance for Doubtful Accounts

            

2015

   $ 23      $ 115      $     $ 109 (a)    $ 29  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

2014

     32        100              109 (a)      23  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

2013

     33        135              136 (a)      32  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for Revenue Adjustments

            

2015

   $ 57      $      $ 500 (b)    $ 494 (c)    $ 63  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

2014

     52               443 (b)      438 (c)      57  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

2013

     54               398 (b)      400 (c)      52  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
Inventory Valuation Allowance:             

2015

   $ 211      $ 20      $     $ 27     $ 204  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

2014

     204        19              12       211  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

2013

     183        23              2       204  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) Uncollectible accounts written off, net of recoveries.

 

(b) Principally charged against revenue.

 

(c) Service failures, rebills and other.

 

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FEDERAL EXPRESS CORPORATION

COMPUTATION OF RATIO OF EARNINGS (LOSS) TO FIXED CHARGES

(UNAUDITED)

(IN MILLIONS, EXCEPT RATIOS)

 

     Year Ended May 31,  
     2015      2014      2013      2012(1)     2011  
            (As Adjusted)  

Earnings (loss):

             

Income (loss) before income taxes

   $ 179      $ 1,314      $ 1,708      $ (1,005   $ 1,019  

Add back:

             

Portion of rent expense representative of interest factor

     574        577        598        566        611  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Earnings (loss) as adjusted

   $ 753      $ 1,891      $ 2,306      $ (439   $ 1,630  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fixed Charges:

             

Capitalized interest

   $ 28      $ 25      $ 43      $ 80      $ 61  

Portion of rent expense representative of interest factor

     574        577        598        566        611  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 602      $ 602      $ 641      $ 646      $ 672  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ratio of Earnings to Fixed Charges

     1.3        3.1        3.6               2.4  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

The loss in 2012 was inadequate to cover fixed charges. Additional earnings of $1,085 million would have been necessary to bring the ratio for this period to 1.0.

 

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Table of Contents

EXHIBIT INDEX

 

    Exhibit    

    Number    

  

Description of Exhibit

   Certificate of Incorporation and Bylaws
  3.1    Restated Certificate of Incorporation of FedEx Express, as amended. (Filed as Exhibit 3.1 to FedEx’s FY98 Third Quarter Report on Form 10-Q and incorporated herein by reference.)
  3.2    By-laws of FedEx Express. (Filed as Exhibit 3.2 to FedEx Express’s FY93 Annual Report on Form 10-K and incorporated herein by reference.)
   Facility Lease Agreements
10.1    Composite Lease Agreement dated May 21, 2007 (but effective as of January 1, 2007) between the Memphis-Shelby County Airport Authority and FedEx Express (the “Composite Lease Agreement”). (Filed as Exhibit 10.1 to FedEx’s FY07 Annual Report on Form 10-K, and incorporated herein by reference.)
10.2    First Amendment dated December 29, 2009 (but effective as of September 1, 2008) to the Composite Lease Agreement. (Filed as Exhibit 10.1 to FedEx’s FY10 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.3    Second Amendment dated March 30, 2010 (but effective as of June 1, 2009) and Third Amendment dated April 27, 2010 (but effective as of July 1, 2009), each amending the Composite Lease Agreement. (Filed as Exhibit 10.3 to FedEx’s FY10 Annual Report on Form 10-K, and incorporated herein by reference.)
10.4    Fourth Amendment dated December 22, 2011 (but effective as of December 15, 2011) to the Composite Lease Agreement. (Filed as Exhibit 10.4 to FedEx’s FY12 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.5    Fifth Amendment dated December 19, 2012 (but effective as of January 1, 2013) to the Composite Lease Agreement. (Filed as Exhibit 10.5 to FedEx’s FY13 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.6    Sixth Amendment dated September 19, 2013 (but effective as of July 1, 2014) to the Composite Lease Agreement. (Filed as Exhibit 10.5 to FedEx’s FY14 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
   Aircraft-Related Agreements
10.7    Boeing 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 granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). (Filed as Exhibit 10.1 to FedEx’s FY07 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.8    Supplemental Agreement No. 1 dated as of June 16, 2008 to the Boeing 777 Freighter Purchase Agreement. (Filed as Exhibit 10.13 to FedEx’s FY08 Annual Report on Form 10-K, and incorporated herein by reference.)    

 

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Table of Contents

    Exhibit    

    Number    

  

Description of Exhibit

10.9    Supplemental Agreement No. 2 dated as of July 14, 2008 to the Boeing 777 Freighter Purchase Agreement. (Filed as Exhibit 10.3 to FedEx’s FY09 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.10    Supplemental Agreement No. 3 dated as of December 15, 2008 (and related side letters) to the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.4 to FedEx’s FY09 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.11    Supplemental Agreement No. 4 dated as of January 9, 2009 (and related side letters) to the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY09 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.12    Side letters dated May 29, 2009 and May 19, 2009, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.17 to FedEx’s FY09 Annual Report on Form 10-K, and incorporated herein by reference.)
10.13    Supplemental Agreement No. 5 dated as of January 11, 2010 to the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.3 to FedEx’s FY10 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.14    Supplemental Agreement No. 6 dated as of March 17, 2010, Supplemental Agreement No. 7 dated as of March 17, 2010, and Supplemental Agreement No. 8 (and related side letters) dated as of April 30, 2010, each amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.22 to FedEx’s FY10 Annual Report on Form 10-K, and incorporated herein by reference.)
10.15    Supplemental Agreement No. 9 dated as of June 18, 2010, Supplemental Agreement No. 10 dated as of June 18, 2010, Supplemental Agreement No. 11 (and related side letter) dated as of August 19, 2010, and Supplemental Agreement No. 13 (and related side letter) dated as of August 27, 2010, each amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY11 First Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.16    Supplemental Agreement No. 12 (and related side letter) dated as of September 3, 2010, Supplemental Agreement No. 14 (and related side letter) dated as of October 25, 2010, and Supplemental Agreement No. 15 (and related side letter) dated as of October 29, 2010, each amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY11 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)

 

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Table of Contents

    Exhibit    

    Number    

  

Description of Exhibit

10.17    Supplemental Agreement No. 16 (and related side letters) dated as of January 31, 2011, and Supplemental Agreement No. 17 dated as of February 14, 2011, each amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY11 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.18    Supplemental Agreement No. 18 (and related side letter) dated as of March 30, 2011 to the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.26 to FedEx’s FY11 Annual Report on Form 10-K, and incorporated herein by reference.)
10.19    Supplemental Agreement No. 19 (and related side letter) dated as of October 27, 2011, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY12 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.20    Supplemental Agreement No. 20 (and related side letters) dated as of December 14, 2011, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY12 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.21    Supplemental Agreement No. 21 dated as of June 29, 2012, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY13 First Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.22    Supplemental Agreement No. 22 (and related side letters) dated as of December 11, 2012, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY13 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.23    Supplemental Agreement No. 23 (and related side letters) dated as of December 10, 2013, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.4 to FedEx’s FY14 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.24    Boeing 767-3S2 Freighter Purchase Agreement dated as of December 14, 2011 between The Boeing Company and FedEx Express (the “Boeing 767-3S2 Freighter Purchase Agreement”). Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY12 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.25    Supplemental Agreement No. 1 (and related side letters) dated as of June 29, 2012, amending the Boeing 767-3S2 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY13 First Quarter Report on Form 10-Q, and incorporated herein by reference.)

 

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Table of Contents

    Exhibit    

    Number    

  

Description of Exhibit

10.26    Supplemental Agreement No. 2 dated as of October 8, 2012, amending the Boeing 767-3S2 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY13 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.27    Supplemental Agreement No. 3 (and related side letters) dated as of December 11, 2012, amending the Boeing 767-3S2 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY13 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.28    Supplemental Agreement No. 4 (and related side letter) dated as of December 10, 2013, amending the Boeing 767-3S2 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.3 to FedEx’s FY14 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.29    Supplemental Agreement No. 5 (and related side letter) dated as of September 29, 2014, amending the Boeing 767-3S2 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.30    Letter Agreement dated as of January 22, 2015, amending the Boeing 767-3S2 Freighter Purchase Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.5 to FedEx’s FY15 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
   U.S. Postal Service Agreements
10.31    Transportation Agreement dated April 23, 2013 between the USPS and FedEx Express (the “USPS Transportation Agreement”). Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.52 to FedEx Corporation’s FY13 Annual Report on Form 10-K, and incorporated herein by reference.)
10.32    Amendment dated May 28, 2013, amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.53 to FedEx’s FY13 Annual Report on Form 10-K, and incorporated herein by reference.)
10.33    Amendment dated June 24, 2013, amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY14 First Quarter Report on Form 10-Q, and incorporated herein by reference.)

 

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Table of Contents

    Exhibit    

    Number    

  

Description of Exhibit

10.34    Amendment dated October 10, 2013 (but effective as of September 30, 2013), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY14 Second Quarter Report on Form 10-Q/A (Amendment No. 1), and incorporated herein by reference.)
10.35    Amendment dated October 15, 2013 (but effective as of October 10, 2013), amending the USPS Transportation Agreement. (Filed as Exhibit 10.2 to FedEx’s FY14 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.36    Amendment dated November 7, 2013 (but effective as of October 1, 2013), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.3 to FedEx’s FY14 Second Quarter Report on Form 10-Q/A (Amendment No. 1), and incorporated herein by reference.)
10.37    Amendment dated November 7, 2013 (but effective as of December 15, 2013), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.4 to FedEx’s FY14 Second Quarter Report on Form 10-Q/A (Amendment No. 1), and incorporated herein by reference.)
10.38    Amendment dated December 16, 2013 (but effective as of November 4, 2013), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY14 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.39    Amendment dated December 16, 2013 (but effective as of December 2, 2013), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY14 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.40    Amendment dated March 27, 2014 (but effective as of January 6, 2014), 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. (Filed as Exhibit 10.38 to FedEx’s FY14 Annual Report on Form 10-K, and incorporated herein by reference.)
10.41    Amendment dated March 27, 2014 (but effective as of February 3, 2014), 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. (Filed as Exhibit 10.39 to FedEx’s FY14 Annual Report on Form 10-K, and incorporated herein by reference.)
10.42    Amendment dated March 27, 2014 (but effective as of March 3, 2014), 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. (Filed as Exhibit 10.40 to FedEx’s FY14 Annual Report on Form 10-K, and incorporated herein by reference.)

 

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Table of Contents

    Exhibit    

    Number    

  

Description of Exhibit

10.43    Amendment dated April 16, 2014 (but effective as of March 31, 2014), 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. (Filed as Exhibit 10.41 to FedEx’s FY14 Annual Report on Form 10-K, and incorporated herein by reference.)
10.44    Amendment dated May 27, 2014 (but effective as of April 28, 2014), 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. (Filed as Exhibit 10.42 to FedEx’s FY14 Annual Report on Form 10-K, and incorporated herein by reference.)
10.45    Amendment dated May 27, 2014 (but effective as of May 14, 2014), amending the USPS Transportation Agreement. (Filed as Exhibit 10.43 to FedEx’s FY14 Annual Report on Form 10-K, and incorporated herein by reference.)
10.46    Amendment dated June 25, 2014 (but effective as of June 2, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY15 First Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.47    Amendment dated June 25, 2014 (but effective as of June 2, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY15 First Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.48    Amendment dated September 9, 2014 (but effective as of June 27, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.3 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.49    Amendment dated September 9, 2014 (but effective as of September 30, 2013), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.4 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.50    Amendment dated September 9, 2014 (but effective as of June 27, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.5 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.51    Amendment dated September 24, 2014 (but effective as of June 30, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.6 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)

 

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Table of Contents

    Exhibit    

    Number    

  

Description of Exhibit

10.52    Amendment dated September 30, 2014 (but effective as of July 28, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.7 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.53    Amendment dated October 1, 2014 (but effective as of September 1, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.8 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.54    Amendment dated September 30, 2014 (but effective as of September 29, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.9 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.55    Amendment dated November 4, 2014 (but effective as of September 29, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.10 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.56    Amendment dated November 4, 2014 (but effective as of December 1, 2013), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.11 to FedEx’s FY15 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.57    Amendment dated December 23, 2014 (but effective as of October 27, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.1 to FedEx’s FY15 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.58    Amendment dated December 10, 2014 (but effective as of November 24, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.2 to FedEx’s FY15 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.59    Amendment dated December 23, 2014 (but effective as of January 5, 2015), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.3 to FedEx’s FY15 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
10.60    Amendment dated February 19, 2015 (but effective as of December 1, 2014), amending the USPS Transportation Agreement. Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. (Filed as Exhibit 10.4 to FedEx’s FY15 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)

 

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Table of Contents

    Exhibit    

    Number    

  

Description of Exhibit

   Financing Agreement
10.61    Five-Year Credit Agreement dated as of April 26, 2011, among FedEx, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders. (Filed as Exhibit 99.1 to FedEx’s Current Report on Form 8-K dated April 26, 2011 and filed April 29, 2011, and incorporated herein by reference.)
10.62    First Amendment dated March 1, 2013 amending the Five-Year Credit Agreement dated April 26, 2011, among FedEx, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders. (Filed as Exhibit 10.6 to FedEx’s FY13 Third Quarter Report on Form 10-Q, and incorporated herein by reference.)
   FedEx Express is not filing any other instruments evidencing any indebtedness because the total amount of securities authorized under any single such instrument does not exceed 10% of the total assets of FedEx Express and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request.
   Other Exhibits
*12    Statement re Computation of Ratio of Earnings to Fixed Charges (presented on page 76 of this Annual Report on Form 10-K).
*18    Letter on Change in Accounting Principles.
*23    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
*24    Powers of Attorney.
*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.

 

 

* Filed herewith.

 

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