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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

 

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

For the fiscal year ended May 31, 2017.

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 1-15829

FEDEX CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware

62-1721435

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

942 South Shady Grove Road, Memphis, Tennessee

38120

(Address of Principal Executive Offices)

(ZIP Code)

Registrant’s telephone number, including area code: (901) 818-7500

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

 

 

 

Title of each class

 

Name of each exchange on which registered

 

Common Stock, par value $0.10 per share

New York Stock Exchange

Floating Rate Notes due 2019

New York Stock Exchange

0.500% Notes due 2020

New York Stock Exchange

1.000% Notes due 2023

New York Stock Exchange

1.625% Notes due 2027

New York Stock Exchange

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

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

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  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  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.

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

 

 

 

 

 

 

Large accelerated filer

Accelerated filer             

Non-accelerated filer

Smaller reporting company 

Emerging growth company 

 

 

(Do not check if a smaller reporting company)

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the closing price as of the last business day of the Registrant’s most recently completed second fiscal quarter, November 30, 2016, was approximately $47.2 billion. The Registrant has no non-voting stock.

As of July 13, 2017, 268,257,434 shares of the Registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement to be delivered to stockholders in connection with the 2017 annual meeting of stockholders to be held on September 25, 2017 are incorporated by reference in response to Part III of this Report.


 

 

 


 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

 

 

 

ITEM 1. Business

3

ITEM 1A. Risk Factors

19

ITEM 1B. Unresolved Staff Comments

20

ITEM 2. Properties

20

ITEM 3. Legal Proceedings

22

ITEM 4. Mine Safety Disclosures

23

               Executive Officers of the Registrant

24

 

 

PART II

 

 

 

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

26

ITEM 6. Selected Financial Data

27

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

27

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

27

ITEM 8. Financial Statements and Supplementary Data

27

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

27

ITEM 9A. Controls and Procedures

27

ITEM 9B. Other Information

27

 

 

PART III

 

 

 

ITEM 10. Directors, Executive Officers and Corporate Governance

28

ITEM 11. Executive Compensation

28

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

28

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

28

ITEM 14. Principal Accountant Fees and Services

28

 

 

PART IV

 

 

 

ITEM 15. Exhibits, Financial Statement Schedules

29

ITEM 16. Form 10-K Summary

29

 

 

FINANCIAL SECTION

 

 

 

Table of Contents

32

Management’s Discussion and Analysis

33

Consolidated Financial Statements

81

Other Financial Information

126


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EXHIBITS

 

 

 

Exhibit Index

E-14

Exhibit 10.40

 

Exhibit 10.129

 

Exhibit 10.130

 

Exhibit 10.131

 

Exhibit 10.140

 

Exhibit 12

 

Exhibit 21

 

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

 

FedEx Corporation (“FedEx”) was incorporated in Delaware on October 2, 1997 to serve as the parent holding company and provide strategic direction to the FedEx portfolio of companies. FedEx provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. These companies are included in the following business segments:

 

 

FedEx Express: Federal Express Corporation (“FedEx Express”) is the world’s largest express transportation company, offering time-definite delivery to more than 220 countries and territories, connecting markets that comprise more than 99% of the world’s gross domestic product. The FedEx Express segment also includes FedEx Trade Networks, Inc. (“FedEx Trade Networks”), which provides international trade services, specializing in customs brokerage and global ocean and air freight forwarding, and FedEx CrossBorder, LLC (“FedEx Cross Border”), which provides e-commerce technologies that enable international transactions for e-tailers and consumers worldwide. During 2017, we announced that effective June 1, 2017 products and solutions offered by FedEx SupplyChain Systems, Inc. (“FedEx SupplyChain Systems”) would be combined with similar offerings within FedEx Custom Critical, Inc. (“FedEx Custom Critical”), FedEx Express and FedEx Supply Chain Distribution System, Inc. (“FedEx Supply Chain”), formerly GENCO Distribution System, Inc. (“GENCO”).

 

 

TNT Express: Acquired near the end of our 2016 fourth quarter, TNT Express B.V. (“TNT Express”) is an international express transportation, small-package ground delivery and freight transportation company. TNT Express services are primarily classified by the speed, distance, weight and size of consignments. While a majority of its shipments are between businesses, TNT Express also offers business-to-consumer services to select key customers. TNT Express provides road and air delivery services in Europe, the Middle East and Africa, Asia-Pacific and the Americas.

 

 

FedEx Ground: FedEx Ground Package System, Inc. (“FedEx Ground”) is a leading North American provider of small-package ground delivery services. FedEx Ground provides low-cost, day-certain service to any business address in the U.S. and Canada, as well as residential delivery to 100% of U.S. residences through its FedEx Home Delivery service. FedEx SmartPost is a FedEx Ground service that specializes in the consolidation and delivery of high volumes of low-weight, less time-sensitive business-to-consumer packages primarily using the U.S. Postal Service (“USPS”) for final delivery to residences. The FedEx Ground segment also includes FedEx Supply Chain, which provides integrated supply chain management solutions.

 

 

FedEx Freight: FedEx Freight, Inc. (“FedEx Freight”) is a leading U.S. provider of less-than-truckload (“LTL”) freight services across all lengths of haul, offering: FedEx Freight Priority, when speed is critical to meet a customer’s supply chain needs; and FedEx Freight Economy, when a customer can trade time for cost savings. The FedEx Freight segment also offers freight delivery service to most points in Canada, Mexico, Puerto Rico and the U.S. Virgin Islands, and includes FedEx Custom Critical, a leading North American provider of time-specific, critical shipment services.

 

 

FedEx Services: FedEx Corporate Services, Inc. (“FedEx Services”) provides sales, marketing, information technology, communications, customer service, technical support, billing and collections services for U.S. customers of our major business units and certain back-office functions that support our other companies. The FedEx Services segment includes FedEx Office and Print Services, Inc. (“FedEx Office”), which provides document and business services and retail access to our package transportation businesses.  

 

In 2017, TNT Express’s results are disclosed as a reportable segment and are also combined with the FedEx Express reportable segment to reflect a management reporting structure referred to as the FedEx Express group. As described in more detail below, the integration of FedEx Express and TNT Express has proceeded in a manner such that in the first quarter of 2018 we will report one integrated FedEx Express segment (currently reported as the FedEx Express group). For more information about the FedEx Express group and our reportable segments, please see “Business Segments.” For financial information concerning our reportable business segments, refer to the accompanying financial section, which includes management’s discussion and analysis of results of operations and financial condition and our consolidated financial statements.

 

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Our website is located at fedex.com. Detailed information about our services, e-commerce tools and solutions, and citizenship efforts can be found on our website. In addition, we make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to such reports available, free of charge, through our website, as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (“SEC”). The Investor Relations page of our website, http://investors.fedex.com, contains a significant amount of information about FedEx, including our SEC filings and financial and other information for investors. The information that we post on our Investor Relations website could be deemed to be material information. We encourage investors, the media and others interested in FedEx to visit this website from time to time, as information is updated and new information is posted. The information on our website, however, is not incorporated by reference in, and does not form part of, this Annual Report on Form 10-K.

 

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

 

TNT Express Cyber-Attack

 

In June 2017, TNT Express worldwide operations were significantly affected due to the infiltration of an information technology virus known as Petya. For further information about the cyber-attack, see the section titled “TNT Express Cyber-Attack” included in Item 7 of this Annual Report on Form 10-K (“Management’s Discussion and Analysis of Results of Operations and Financial Condition”).

 

Strategy

 

FedEx has developed a unique business strategy whereby our companies compete collectively, operate independently and manage collaboratively, which allows us to provide a broad portfolio of transportation, e-commerce and business services to our customers. Our companies compete collectively by standing as one brand worldwide and speaking with one voice, they operate independently by focusing on our independent networks to meet distinct customer needs, and they manage collaboratively by working together to sustain loyal relationships with our workforce, customers and investors.  

 

Our “compete collectively, operate independently, manage collaboratively” strategy allows us to manage our business as a portfolio, in the long-term best interest of the enterprise, not a particular operating company. As a result, we base decisions on capital investment, expansion of delivery, information technology and retail networks, and service additions or enhancements upon achieving the highest overall long-term return on capital for our business as a whole. For each FedEx company, we focus on making appropriate investments in the technology and assets necessary to optimize our long-term earnings performance and cash flow. Our business strategy also provides flexibility in sizing our operating companies to align with varying macroeconomic conditions and customer demand for the market segments in which they operate, allowing us to leverage and manage change. Volatility and uncertainty have become the norms in the global transportation market, and we are able to use our flexibility to accommodate changing conditions in the global economy. To that end, we continue to modernize our aircraft fleet with more fuel efficient and lower-emission aircraft and expand and rationalize network capacity at FedEx Ground where we continue to see growing package volumes.

 

While our business strategy guides our operating companies to compete collectively and manage collaboratively, we continue to believe that operating independent networks, each focused on its own respective markets, results in optimal service quality and reliability from each business unit. Each FedEx company focuses exclusively on the market sectors in which it has the most expertise and can be independently enhanced and managed to provide outstanding service to our customers. Each company’s operations, cost structure and culture are designed to serve the unique customer demands of a particular market segment and as a result, we are able to adapt our networks in response to changing needs.

 

Our business strategy allows us to respond to our current and potential customers’ evolving needs that are shaped by the following four key trends that are driving global commerce:

 

 

Growth of e-commerce: E-commerce continues to be a catalyst for the other trends below and is a vital growth engine for businesses, as the internet is increasingly being used to purchase goods and services. While our residential e-commerce revenues are much smaller than our business-to-business revenues, it is the fastest growing market and requires constant innovation to make delivery to consumers more efficient. Through our global transportation and technology networks, we contribute to and benefit from the growth of e-commerce.

 

 

Globalization of trade: As the world’s economy has become more fully integrated, companies are sourcing and selling globally. With customers in more than 220 countries and territories, we facilitate this supply chain through our global reach, delivery services and information capabilities. Despite the recent slow-down in global trade growth, we continue to believe that globalization will drive international volume growth over the long term.

 

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Faster, more efficient supply chains: While the growth of global trade has slowed, companies of all sizes continue to depend on the delivery of just-in-time inventory to help them compete. We have taken advantage of the move toward more efficient supply chains by helping customers obtain more visibility into their supply chains and near real-time information to manage inventory in motion, thereby reducing overhead and obsolescence and speeding time-to-market.

 

 

Influx of high-tech businesses and high-value-added goods: High-tech and high-value-added goods have increased as a percentage of total economic output, and our various operating companies offer a unique menu of services to fit virtually all shipping needs of high-tech and high-value-added industries.

 

These trends have produced an unprecedented expansion of customer access — to goods, services and information. Through our global transportation, information technology and retail networks, we help to make this access possible. We continue to position our companies to facilitate and capitalize on this access and to achieve stronger long-term growth, productivity and profitability. Three areas of focus that will allow us to accelerate performance going forward are:

 

 

Investment: We continue to take advantage of market growth and meet customers’ increasing demands for our services.

 

 

Integration: We are building on our record of success as we integrate acquisitions we have made in recent years.

 

 

Innovation: We are rapidly advancing information-technology solutions targeting efficiency and customer convenience.

 

In particular, in May 2016 we acquired TNT Express, which is the largest acquisition in FedEx history. This acquisition rapidly accelerates our European and global growth, substantially enhances our global footprint through TNT Express’s lower-cost road networks in Europe, the Middle East and Asia, and expands our capabilities and solutions for our customers. The benefits of the integration of the FedEx Express and TNT Express businesses are extensive. For instance, we are implementing new technology and processes and optimizing the location of our facilities and stations to deliver unmatched service. We will benefit from efficiencies, improved stop densities and economies of scale facilitated by integrated pick-up and delivery operations. Additionally, we will operate one integrated global express network, allowing us to capitalize on technology and solutions to most efficiently route parcels and freight through our integrated hub, linehaul and intercontinental air network. We also will improve the efficiency of staff functions and processes with innovative information technology solutions, streamlined support functions, and the realization of significant sourcing savings globally. Furthermore, we will grow revenue by offering a best-in-class portfolio of services through a single sales team, with a single online customer facing tool, and through revenue management activities focused on improved market share, yield and profitability.

 

The integration of FedEx Express and TNT Express is expected to be completed by the end of 2020, and significant progress towards that goal was made during 2017. The integration of the two businesses generally occurs at a country level, and our leadership teams, which were put in place in 2017 and are comprised of FedEx Express and former TNT Express executives, have identified and are using three different integration models: (1) direct serve to direct serve; (2) global service participant (FedEx Express model) or associate (TNT Express model) to direct serve; and (3) global service participant to associate or associate to global service participant. Using these models, we have begun successfully integrating the two businesses on a country-by-country basis. We will continue to refine our integration plans, however, particularly in light of the recent cyber-attack at TNT Express. For further information about the cyber-attack, see the section titled “TNT Express Cyber-Attack” included in Item 7 of this Annual Report on Form 10-K.

 

Operationally, we have begun a phased conversion of the intercontinental flights operated by ASL Airlines Belgium (formerly TNT Airways) to FedEx Express operations. In particular, in April 2017 we began operating a flight linking TNT Express’s European air hub in Liege, Belgium to the FedEx World Hub in Memphis, Tennessee, giving TNT Express customers direct access to the portfolio of FedEx services offered in the U.S. and Canada. We also have implemented operation information technology that is foundational to the integration, including technology that allows us to handle FedEx Express packages in the TNT Express network and TNT Express packages in the FedEx Express network, and technology that allows for the management of customer inquiries across both the FedEx Express and TNT Express customer service platforms.

 

While the TNT Express and FedEx Express integration was a primary area of focus in 2017, we also introduced additional innovative solutions and made other important investments that benefit our customers, including:

 

 

Entering into a long-term alliance agreement with Walgreens Co., which will offer convenient access to FedEx Ground and FedEx Express dropoff and pickup services at thousands of Walgreens locations across the U.S.

 

 

Launching FedEx Fulfillment, an e-commerce solution provided by FedEx Supply Chain that helps small and medium-sized businesses fulfill orders from multiple channels, including websites and online marketplaces, and manage inventory for their retail stores.

 

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Adding a compressed natural gas (“CNG”) tractor fleet at FedEx Freight and a CNG fueling station to FedEx Freight’s Oklahoma City Service Center, which exemplify FedEx’s commitment to connecting the world responsibly and resourcefully.

 

 

Expanding the FedEx First Overnight service offered by FedEx Express to more than 4,400 ZIP Codes across the U.S. With this expansion, the service now reaches more than 32,000 ZIP Codes for next-business day delivery, helping us continue to meet the growing demand of business-to-business customers requiring timely, next-day early delivery.

 

Reputation and Responsibility

 

By competing collectively under the FedEx brand, our operating companies benefit from one of the world’s most recognized brands. FedEx is one of the most trusted and respected companies in the world, and the FedEx brand name is a powerful sales and marketing tool. Among the many reputation awards we received during 2017, FedEx ranked 11th in FORTUNE magazine’s “World’s Most Admired Companies” list — the 17th consecutive year FedEx has ranked among the top 20 in the FORTUNE Most Admired Companies list. Additionally, FedEx was included on the Reputation Institute’s 2017 “Most Reputable Companies in the World” list, which measures the reputations of thousands of the world’s most prestigious companies. Lastly, in 2017 FedEx was again listed on Corporate Responsibility Magazine’s “100 Best Corporate Citizens” list.

 

FedEx is well recognized as a leader, not only in the transportation industry and for technological innovation, but also in global citizenship. We understand that a sustainable global business is tied to our global citizenship, and we are committed to connecting the world responsibly and resourcefully. Our latest published update to our global citizenship report is available at http://csr.fedex.com. These reports describe how we think about our responsibilities in the area of global citizenship and include important goals and metrics that demonstrate our commitment to fulfilling these responsibilities.

 

Our People

 

Along with a strong reputation among customers and the general public, FedEx is widely acknowledged as a great place to work. For example, in 2017 FedEx was named to FORTUNE magazine’s list of the “100 Best Companies to Work For” in the U.S. Additionally, FedEx was chosen as one of the 2016 “10 Best Workplaces for African Americans” by global research and consulting firm Great Place to Work® and FORTUNE magazine.

 

FedEx also supports an inclusive workplace culture and is committed to the education, recruitment, development and advancement of diverse team members worldwide, and we are recognized for our commitment to those efforts. For instance, in 2016 FedEx was named by Black Enterprise as one of the “Top 40 Best Companies for Diversity,” and in 2017 it was named one of “America’s Top Corporations for Women’s Business Enterprises” by the Women’s Business Enterprise National Council.

 

At FedEx, it is our people — our greatest asset — that give us our strong reputation. In addition to superior physical and information networks, FedEx has an exemplary human network, with more than 400,000 team members who are “absolutely, positively” focused on safety, the highest ethical and professional standards, and the needs of their customers and communities. Through our internal Purple Promise and Humanitarian Award programs, we recognize and reward employees who enhance customer service and promote human welfare. For additional information on our people-first philosophy and workplace initiatives, see http://csr.fedex.com.

 

Our Community

 

FedEx is committed to actively supporting the communities we serve worldwide through the strategic investment of our people, resources and network. We provide financial contributions, in-kind charitable shipping services and volunteer efforts by our team members to help a variety of non-profit organizations achieve their goals and make a measurable impact on the world. We have the following five core giving pillars:

 

 

Delivering for Good: Lending our global network and unparalleled logistics expertise to organizations with mission-critical needs in times of disaster and to help communities heal, learn and thrive.

 

 

Sustainable Transportation: Scaling existing solutions and investing in new ideas to improve mobility, reduce congestion, and decrease pollution in communities around the world.

 

 

Employment Pathways: Connecting teens and young adults in underserved populations to skills and career training that lead to greater access to jobs and opportunity, especially in the fields of technology and logistics.

 

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Road Safety: Leveraging FedEx’s safety expertise to reduce road crash fatalities by improving road conditions and educating drivers and pedestrians – especially child pedestrians – around the world.

 

 

Global Entrepreneurship: Advancing women and minority-owned small businesses globally through training and increased access to resources, capital and new markets.

 

We also have the following two strategic giving areas:

 

 

Local Market Commitment: Investing resources where our customers and team members live to improve public safety, education systems, economic development and quality of life.

 

 

Diversity & Inclusion: Promoting inclusion, celebrating culture and history, and empowering young people from diverse backgrounds.

 

In 2016, FedEx announced that it will invest $200 million in more than 200 communities by 2020 through its global giving platform, FedEx Cares. FedEx invested $46.21 million and $55.41 million in charitable contributions in 2016 and 2017, respectively, benefiting communities globally. FedEx also supports communities throughout the U.S. with an annual United Way employee giving campaign. Additionally, more than 20,000 FedEx team members volunteered more than 93,000 hours of service during the 2016 FedEx Cares Week, a period dedicated to service projects in 500 communities in the U.S. and other regions FedEx serves around the globe. For additional information on our community involvement and our FedEx Cares strategy, see http://fedexcares.com.

 

The Environment

 

In furtherance of our commitment to protecting the environment, we initiated an effort to increase FedEx Express vehicle fuel efficiency 50% from a 2005 baseline by 2025, a goal that we increased from 30% in 2016. We also continue with our goal to reduce aircraft emissions intensity by 30% by 2020 on an emissions per available-ton-mile basis, a goal that we increased from 20% in 2012. We have also established a goal of obtaining 30% of our jet fuel from alternative fuels by the year 2030. These efforts help us continue to reduce our environmental footprint as evidenced in 2016 when our aircraft fleet achieved a 22% reduction in emissions intensity since 2005 and our FedEx Express surface vehicle fleet exceeded its goal of increased FedEx Express vehicle fuel efficiency of 20% five years early.

 

To reduce the cost of fuel use and associated greenhouse gas (“GHG”) emissions, we have implemented efficiencies in flight operations through our global FedEx Fuel Sense program, and we have replaced many of our older airplanes with more fuel-efficient models. These two initiatives saved more than 153 million gallons of jet fuel and avoided almost 1.5 million metric tons of CO2 emissions in 2016. We have an impressive global alternative fuel fleet with approximately 2,700 alternative fuel vehicles, including hybrid, electric, compressed or liquefied natural gas, liquefied petroleum gas and hydrogen fueled vehicles. Eighteen of our facilities around the world now generate renewable energy, which collectively avoided more than 7,000 metric tons of CO2 emissions in 2016. In addition, twelve FedEx Express facilities in the U.S. have received certification in Leadership in Energy and Environmental Design (LEED®), the U.S. Green Building Council’s system for rating the environmental performance of buildings. FedEx Express has made LEED certification the standard for newly built U.S. facilities.

 

We also continue to evaluate the environmental impacts of our packaging and copy and print services, and minimize waste generation through efforts that include recycling and the use of copy paper with recycled content, among other environmentally responsible available choices. In 2016, 98% of paper purchased for use by FedEx Office was Forest Stewardship Council or other third-party-certified as sustainably sourced. We also use FedEx-branded cardboard packaging at FedEx Express and FedEx Ground, which is made from almost 60% recycled content. One example of our environmentally-responsible activities is the Sustainable Purchasing Leadership Council, a U.S. nonprofit organization that supports and recognizes sustainable procurement of which we are a founding member. We continue to support the Council by participating in technical advisory groups and applying best practice guidance to our own supply chain sustainability initiatives. For additional information on the ways we are minimizing our impact on the environment, see http://csr.fedex.com.

 

Governance

 

FedEx has an independent Board of Directors committed to the highest quality corporate governance. The Board has taken significant steps to enhance its accountability to stockholders in recent years. For example, in March 2016, our Board of Directors adopted a proxy access bylaw that permits up to 20 stockholders owning 3% or more of FedEx’s outstanding voting stock continuously for at least three years to nominate and include in FedEx’s proxy materials director nominees constituting up to two individuals or 20% of the Board, whichever is greater, provided that the stockholder(s) and the nominee(s) satisfy the requirements specified in our Bylaws.

 

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Our Board of Directors periodically reviews all aspects of our governance policies and practices, including our Corporate Governance Guidelines and our Code of Business Conduct and Ethics, in light of best practices and makes whatever changes it deems appropriate to further our longstanding commitment to the highest standards of corporate governance. The Guidelines and the Code, which apply to all of our directors, officers and employees, including our principal executive officer and senior financial officers, are available in the corporate governance section of the Investor Relations page of our website at http://investors.fedex.com. We will post in the Governance & Citizenship section of the Investor Relations page of our website information regarding any amendment to, or waiver from, the provisions of the Code to the extent such disclosure is required.

 

Business Segments

 

The following describes in more detail the operations of each of our reportable segments:

 

FedEx Express Group

 

On May 25, 2016, we acquired TNT Express, a leading international express transportation, small-package ground delivery and freight transportation company. For 2017, TNT Express’s results are disclosed as a reportable segment and combined with the FedEx Express reportable segment in a reporting structure referred to as the FedEx Express group. During 2017, these segments each had discrete financial information that was regularly reviewed when evaluating performance and making resource allocation decisions. However, they are combined for financial reporting discussion purposes into a collective business as a result of their management reporting structure.

 

As described above, the integration process is proceeding in a manner such that commencing in the first quarter of 2018 we will report one FedEx Express segment (currently reported as the FedEx Express group) when the financial information for the FedEx Express and TNT Express segments will begin to merge and only the results of the FedEx Express group will be regularly reviewed when evaluating performance and making resource allocation decisions.

 

FedEx Express Segment

 

FedEx Express

 

Overview

 

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 offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight, connecting markets that generate more than 99% of the world’s gross domestic product through door-to-door, customs-cleared service, with a money-back guarantee. FedEx Express’s unmatched air route authorities and extensive transportation infrastructure, combined with leading-edge information technologies, make it the world’s largest express transportation company. FedEx Express employs approximately 169,000 employees and has approximately 66,000 drop-off locations (including FedEx Office centers and FedEx OnSite locations, such as certain Walgreens stores), 657 aircraft and approximately 58,000 vehicles and trailers in its integrated global network.

 

Services

 

FedEx Express offers 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. FedEx Express offers 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. FedEx Express also offers U.S. 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. In 2017, FedEx Express expanded its FedEx First Overnight service to more than 4,400 ZIP Codes across the U.S. With this expansion, the service now reaches more than 32,000 ZIP Codes for next-business day delivery, helping us continue to meet the growing demand of business-to-business customers requiring timely, next-day early delivery.

 

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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. FedEx Express also offers 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, FedEx Express offers 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 FedEx Express and FedEx Ground packages en route to their homes, and can choose various delivery options.

 

For information regarding FedEx Express e-shipping tools and solutions, see “FedEx Services — Customer-Driven Technology.”

 

International Expansion

 

In May 2016, we acquired TNT Express, which has express delivery operations in Europe, the Middle East and Africa, Asia-Pacific and South America. This acquisition rapidly accelerates our European and global growth, substantially enhances our global footprint through TNT Express’s lower-cost road networks in Europe, the Middle East and Asia, and expands our capabilities and solutions to our customers. We are in the process of integrating TNT Express operations with the FedEx Express network, which is expected to be completed by the end of 2020. For more information regarding the progress we made on the integration during 2017 and the impact that the recent cyber-attack at TNT Express may have on the integration going forward, see “Strategy.”

 

In addition to the TNT Express acquisition, we made several global strategic acquisitions over the past several years, including in South Africa, Poland, Brazil and Mexico. These acquisitions give us more robust global transportation networks and added capabilities in important international markets. In recent years, we also have expanded our capabilities in the Asia-Pacific markets, including through the establishment of: our Asia-Pacific hub at the Guangzhou Baiyun International Airport in southern China, which began operations in 2009; our North Pacific regional hub at the Kansai International Airport in Osaka, Japan, which opened in April 2014 and serves as a consolidation point for shipments from northern Asia to the U.S.; and our plans for a new International Express and Cargo Hub in Shanghai, which will be located at Shanghai’s Pudong International Airport and is slated for completion by the end of 2018. These hubs 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.

 

U.S. Postal Service Agreement

 

In 2013, FedEx Express entered into a new seven-year agreement with the USPS under which FedEx Express provides airport-to-airport transportation of USPS Priority Mail Express and Priority Mail within the United States. On February 22, 2017, the parties entered into an amendment to the agreement whereby the initial renewal period provided in the agreement was exercised in part and the agreement’s period of performance was extended through September 29, 2024. FedEx Express also provides transportation and delivery for the USPS’s international delivery service called Global Express Guaranteed 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

 

FedEx Express periodically publishes list prices in its Service Guides for the majority of its 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. On January 2, 2017, FedEx Express implemented a 3.9% average list price increase for U.S. domestic, U.S. export and U.S. import services and a change to the U.S. domestic dimensional weight divisor.

 

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FedEx Express has an indexed fuel surcharge for U.S. domestic and U.S. outbound shipments and for shipments originating internationally, where legally and contractually possible. Effective February 6, 2017, FedEx Express fuel surcharges are adjusted on a weekly basis. The fuel surcharge is based on a weekly fuel price from two weeks prior to the week in which it is assessed. Prior to February 6, 2017, our fuel surcharge for FedEx Express incorporated a timing lag of approximately six to eight weeks before it was adjusted for changes in fuel prices. For example, the fuel surcharge index in effect at FedEx Express in January 2017 was set based on November 2016 fuel prices. In addition, on November 2, 2015, we updated the tables used to determine our fuel surcharge at FedEx Express. 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: 2017 — 2.51%; 2016 — 1.84%; and 2015 — 6.34%. 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

 

FedEx Express’s primary sorting facility, located in Memphis, serves as the center of the company’s multiple hub-and-spoke system. A second national hub facility is located in Indianapolis. In addition to these national hubs, FedEx Express operates 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 its worldwide network, FedEx Express operates city stations and employs 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 (“Properties”) under the caption “FedEx Express Segment.”

 

FedEx Office offers retail access to FedEx Express shipping services at all of its retail locations. FedEx Express also has alliances with certain other retailers to provide in-store drop-off sites, including at certain Walgreens stores. 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 2017, FedEx Express 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 “FedEx Express — Pricing.”

 

The following table sets forth FedEx Express’s costs for jet fuel and its percentage of FedEx Corporation consolidated revenues for the last five fiscal years:

 

Fiscal Year

 

Total Jet

Fuel Cost

(in millions)

 

 

Percentage of

Consolidated

Revenues

 

2017

 

$

1,855

 

 

 

3.1

%

2016

 

 

1,726

 

 

 

3.4

 

2015

 

 

2,816

 

 

 

5.9

 

2014

 

 

3,506

 

 

 

7.7

 

2013

 

 

3,683

 

 

 

8.3

 

 

Most of FedEx Express’s vehicle fuel needs are satisfied by retail purchases with various discounts.

 

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 macroeconomic 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, innovative service offerings and the fit within the customer’s overall supply chain.

 

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Competitors within the U.S. include other package delivery concerns, principally United Parcel Service, Inc. (“UPS”), passenger airlines offering express package services, regional delivery companies, air freight forwarders and the USPS. FedEx Express’s principal international competitors are DHL, UPS, foreign postal authorities, freight forwarders, passenger airlines and all-cargo airlines. We also compete with startup companies that combine technology with crowdsourcing to focus on local market needs. In addition, some high volume package shippers, such as Amazon.com, are developing in-house delivery capabilities and may become competitors. Many of FedEx Express’s 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 FedEx Express.

 

Employees

 

David L. Cunningham, Jr. is the President and Chief Executive Officer of FedEx Express, which is headquartered in Memphis, Tennessee. As of May 31, 2017, FedEx Express employed approximately 117,000 permanent full-time and approximately 52,000 permanent part-time employees. FedEx Express’s international employees represent 37% of all employees.

 

The pilots at FedEx Express, who represent a small number of our total employees, are represented by the Air Line Pilots Association, International (“ALPA”) and are employed under a collective bargaining agreement that took effect on November 2, 2015. The collective bargaining agreement is scheduled to become amendable in November 2021, after a six-year term. In addition to our pilots at FedEx Express, certain of FedEx Express’s non-U.S. employees are unionized.

 

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

 

FedEx Trade Networks

 

FedEx Trade Networks provides international trade services, specializing in customs brokerage and global ocean and air freight forwarding. FedEx Trade Networks also provides international trade advisory services, including assistance with the Customs-Trade Partnership Against Terrorism program, and through its WorldTariff subsidiary, publishes customs duty and tax information for over 180 customs areas worldwide. Additionally, FedEx Trade Networks provides customs clearance services for FedEx Express at its major U.S. hub facilities.

 

As trade throughout the world grows, so does the FedEx Trade Networks solutions portfolio. Value-added services of FedEx Trade Networks include over 120 freight forwarding offices in 29 countries and Global Trade Data, an information tool that allows customers to track and manage imports. FedEx Trade Networks has approximately 5,000 employees and 138 offices in over 120 service locations throughout North America and in Africa, Asia-Pacific, Europe, India, Latin America and the Middle East. FedEx Trade Networks maintains a network of air and ocean freight-forwarding service providers and has entered into strategic alliances to provide services in certain countries in which it does not have owned offices.

 

Additionally, in 2015 we made the acquisition of Bongo International, LLC (“Bongo”), a leader in cross-border enablement technologies and solutions. The Bongo acquisition filled a strategic gap in our global portfolio, allowing us to help retailers and e-tailers grow by reaching international e-commerce consumers. In 2016, we completed the integration of Bongo with FedEx Trade Networks, and in 2017 we rebranded Bongo as FedEx Cross Border. FedEx Cross Border is an e-commerce enabler that provides international technology solutions such as duty calculations, package tracking, international shipping costs and currency conversion calculations.

 

TNT Express Segment

 

Overview

 

TNT Express is a leading international express transportation, small-package ground delivery and freight transportation company. TNT Express collects, transports and delivers documents, parcels and freight on a day-definite or time-definite basis. TNT Express services are primarily classified by the speed, distance, weight and size of consignments. Whereas the majority of its shipments are between businesses, TNT Express also offers business-to-consumer services to select key customers. TNT Express operates road transportation networks and delivers to over 200 countries and has more than one million shipments daily.

 

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Services

 

TNT Express provides two types of express services — Express and Economy Express. The Express services are day-definite and delivered next-day or fastest-by-air for distances for which next-day is not possible. The Economy Express services are also day-definite and are delivered fastest-by-road, except for intercontinental deliveries which depend on air. For both Express and Economy Express services, TNT has time-definite options for customers requiring delivery before a certain time. TNT also provides specialized or extremely urgent deliveries which include products such as same-day, value-added and non-standard freight services.

 

Pricing

 

TNT Express periodically updates list prices for the majority of its services. In general, shipping rates are based on the selected service, destination zone, (volumetric) weight, and any ancillary service charge. TNT Express offers its customers discounted prices generally based on actual or potential volumes and/or revenue.

 

TNT Express has an indexed fuel surcharge that varies by region or country and by product. The fuel surcharge percentage is subject to monthly adjustment based upon the price of a designated fuel type. Updated information on the fuel surcharge is available at tnt.com.

 

If a customer has requirements that fall outside of TNT Express’s standard service levels, but are acceptable under its standard operating procedures, TNT Express will provide the service with an additional charge to cover the additional costs incurred. For instance, collections and deliveries in certain remote and less accessible locations will incur an out-of-area charge.

 

Operations

 

TNT Express has a worldwide presence with domestic, regional and intercontinental delivery. TNT Express’s customers are primarily large companies and multinationals, as well as small and medium-sized enterprises. The main industries served by TNT Express are industrial, automotive, high-tech and healthcare.

 

Services are delivered through a combination of physical infrastructures such as hubs, depots and vehicles, and electronic infrastructures such as track-and-trace systems. TNT Express operates road networks in Europe, the Middle East, Asia, Australia and South America. TNT Express’s unique European road network connects more than 40 countries through 19 road hubs and over 540 depots. Approximately 39,000 owner-operator vehicles and 7,000 company-owned or company-leased vehicles support TNT Express’s business. Principal competitors of TNT Express include DHL, UPS, DPD (a subsidiary of France’s La Poste’s GeoPost), General Logistics Systems (a Royal Mail-owned parcel delivery group), foreign postal authorities and freight forwarders.

 

As a condition precedent to its acquisition by FedEx, TNT Express sold its two airlines, TNT Airways and Pan Air Líneas Aéreas, to ASL Aviation Group, as European regulations prohibit foreign ownership of European-based airlines. TNT Express and ASL Aviation Group entered into a multi-year service agreement to operate certain flights for the FedEx-TNT Express combination. The airlines operate primarily out of TNT’s central air hub in Liege, Belgium. In April 2017, FedEx Express began operating a flight linking TNT Express’s European air hub in Liege, Belgium to the FedEx World Hub in Memphis, Tennessee, giving TNT Express customers direct access to the portfolio of FedEx services offered in the U.S. and Canada.

 

As of May 31, 2017, TNT Express had approximately 54,000 employees, all of whom are employed outside the U.S. TNT Express also relies upon subcontractors and agents to conduct its pickup-and-delivery and linehaul operations. David Binks is the President and Chief Executive Officer of TNT Express (he reports to the FedEx Express President and Chief Executive Officer). TNT Express’s headquarters are located in Hoofddorp, The Netherlands.

 

FedEx Ground Segment

 

FedEx Ground

 

Overview

 

By leveraging the FedEx brand, maintaining a low cost structure and efficiently using information technology and advanced automation systems, FedEx Ground continues to enhance its competitive position as a leading provider of business and residential money-back guaranteed ground package delivery services. FedEx Ground serves customers in the North American small-package market, focusing on business and residential delivery of packages weighing up to 150 pounds. Ground service is provided to 100% of the continental U.S. population and overnight service of up to 400 miles to nearly 100% of the continental U.S. population. Service is also provided to nearly 100% of the Canadian population. In addition, FedEx Ground offers service to Alaska and Hawaii through a ground and air network operation coordinated with other transportation providers.

 

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FedEx Ground continues to improve the speed, reach and service capabilities of its network, by reducing transit time for many of its lanes and introducing or expanding overnight ground service in many metropolitan areas. FedEx Ground’s ongoing network expansion program is substantially increasing the company’s daily pickup capacity through the addition of new hubs featuring the latest automated sorting technology, the expansion of existing hubs and the expansion or relocation of other existing facilities.

 

The company offers our FedEx Home Delivery service, which reaches 100% of U.S. residences. FedEx Home Delivery is dedicated to meeting the delivery needs of residential customers and provides routine Saturday and evening delivery and premium options such as day-specific, appointment and signature delivery. FedEx Home Delivery brings unmatched services to residential shippers and their customers and is the first residential ground package delivery service to have offered a money-back guarantee. The FedEx SmartPost service specializes in the consolidation and delivery of high volumes of low-weight, less time-sensitive business-to-consumer packages using the USPS for final delivery to any residential address or PO Box in the U.S. and is an important component of our FedEx Ground service offerings.

 

Additionally, FedEx Delivery Manager 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 FedEx Ground packages en route to their homes and can choose various delivery options.

 

Pricing

 

FedEx Ground periodically publishes list prices for the majority of its services in its Service Guide. In general, U.S. 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. As previously announced, on January 2, 2017, FedEx Ground and FedEx Home Delivery average list prices increased by an average of 4.9% and the dimensional weight divisor for shipments within the U.S. was changed. 

 

Effective February 6, 2017, FedEx Ground fuel surcharges are adjusted on a weekly basis. The fuel surcharge is based on a weekly fuel price from two weeks prior to the week in which it is assessed. Prior to February 6, 2017, our fuel surcharge for the FedEx Ground business incorporated a timing lag of approximately six to eight weeks before they were adjusted for changes in fuel prices. For example, the fuel surcharge index in effect at FedEx Ground in January 2017 was set based on November 2016 fuel prices. 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

 

FedEx Ground operates a multiple hub-and-spoke sorting and distribution system consisting of 588 facilities, including 36 hubs, in the U.S. and Canada. FedEx Ground conducts its operations primarily with approximately 57,000 owner-operated vehicles and approximately 58,000 company-owned trailers. To provide FedEx Home Delivery service and FedEx SmartPost Service, FedEx Ground leverages its pickup operation and hub and linehaul network.

 

Advanced automated sorting technology is used to streamline the handling of millions of packages daily. Using overhead laser and six-sided camera-based bar code scan technology, hub conveyors electronically guide packages to their appropriate destination chute, where they are loaded for transport to their respective destination terminals for local delivery. Software systems and internet-based applications are also deployed to offer customers new ways to connect internal package data with external delivery information. FedEx Ground provides shipment tracing and proof-of-delivery signature functionality through the FedEx website, fedex.com. For additional information regarding FedEx Ground e-shipping tools and solutions, see “FedEx Services — Customer-Driven Technology.”

 

FedEx Office offers retail access to FedEx Ground shipping services at all of its retail locations. FedEx Ground is also available as a service option at all FedEx Authorized ShipCenters and other FedEx OnSite locations, including at certain Walgreens stores, located in the U.S.  

 

As of May 31, 2017, FedEx Ground had approximately 88,000 employees. In addition, FedEx Ground relies on independent small businesses to conduct its linehaul and pickup-and-delivery operations, as the use of independent contractors is well suited to the needs of the ground delivery business and its customers. Henry J. Maier is the President and Chief Executive Officer of FedEx Ground. FedEx Ground is headquartered in the Pittsburgh, Pennsylvania area, and its primary competitors are UPS, the USPS and regional delivery carriers. We also compete with startup companies that combine technology with crowdsourcing to focus on local market needs. In addition, some high volume package shippers, such as Amazon.com, are developing in-house delivery capabilities and may become competitors.

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Independent Contractor Model

 

FedEx Ground is involved in lawsuits and other proceedings (such as state tax or other administrative challenges) where the classification of its independent contractors is at issue. The court has granted final approval of all 20 settlements of the cases in the multidistrict litigation. These cases involve a contractor model which FedEx Ground has not operated since 2011. In addition, we are defending contractor-model cases that are not or are no longer part of the multidistrict litigation. These cases are in varying stages of litigation. We will continue to vigorously defend ourselves in these proceedings and continue to believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that FedEx Ground is not an employer or joint employer of the drivers of the company’s independent contractors. For a description of these proceedings, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”) and Note 18 of the accompanying consolidated financial statements.

 

FedEx Ground previously announced plans to implement the Independent Service Provider (“ISP”) model throughout its entire U.S. pickup and delivery network, including the 29 states that had not yet begun transitioning to the ISP model. The transition to the ISP model in these 29 states is being accomplished on a district-by-district basis and is expected to be completed in the second half of calendar 2020. As of May 31, 2017, more than 45% of FedEx Ground volume was being delivered by small businesses operating under the ISP model. The costs associated with these transitions will be recognized in the periods incurred and are not expected to be material to any future quarter.

 

FedEx Supply Chain

 

On January 30, 2015, we acquired GENCO, a leading North American third party logistics provider, and during 2017 we rebranded GENCO as FedEx Supply Chain. FedEx Supply Chain is a supply chain solution provider specializing in Product Lifecycle Logistics® for technology, retail, consumer and industrial goods, and healthcare industries. With more than 12,000 employees at approximately 110 facilities, FedEx Supply Chain provides a comprehensive range of integrated logistics services to enable growth, minimize cost, mitigate supply chain risk and improve customer services. Service offerings include inbound logistics, warehousing and distribution, fulfillment, contract packaging and product configuration, systems integration, returns process and disposition, test, repair, refurbishment, product liquidation and managed transportation. FedEx Supply Chain is headquartered in the Pittsburgh, Pennsylvania area, and has a small number of employees that are members of unions.

 

In 2017, FedEx Supply Chain launched FedEx Fulfillment, an e-commerce solution that helps small and medium-sized businesses fulfill orders from multiple channels, including websites and online marketplaces, and manage inventory for their retail stores. The FedEx Fulfillment platform is designed to be an easy-to-use and all-in-one logistics solution through which customers have complete visibility into their products, giving them an easy way to track items, manage inventory, analyze trends, and make more informed decisions by better understanding shoppers’ spending behaviors.

 

FedEx Freight Segment

 

FedEx Freight

 

FedEx Freight is a leading U.S. provider of LTL freight services, offering choice, simplicity and reliability to meet the needs of LTL shippers — FedEx Freight Priority, when speed is critical to meet supply chain needs, and FedEx Freight Economy, when time can be traded for cost savings. Through one comprehensive network of service centers and advanced information systems, FedEx Freight provides service to virtually every U.S. ZIP Code (including Alaska and Hawaii) with industry-leading transit times. FedEx Freight Priority, which has the fastest published transit times of any nationwide LTL service, offers a no-fee money-back guarantee on eligible shipments. Internationally, FedEx Freight Canada offers FedEx Freight Priority service, serving most points in Canada, as well as FedEx Freight Priority and FedEx Freight Economy service between Canada and the U.S. In addition, FedEx Freight serves Mexico, Puerto Rico and the U.S. Virgin Islands via alliances.

 

Through its many service offerings, FedEx Freight can match customers’ time-critical needs with industry-leading transit times. With the expansion of FedEx electronic solutions, LTL shippers have the convenience of a single shipping and tracking solution for FedEx Freight, FedEx Express and FedEx Ground. These solutions make freight shipping easier and provide customers easy access to their account information. The FedEx Freight Advance Notice feature available on FedEx Freight Priority shipments uses the company’s innovative technology systems to proactively notify FedEx Freight customers via the internet, e-mail or fax when a shipment may be delayed beyond its estimated delivery date, providing customers with greater visibility and control of their LTL freight shipments. Customers can also process cross-border LTL shipments to and from Canada and Mexico, as well as intra-Canada and -Mexico shipments, through FedEx Ship Manager at fedex.com, FedEx Ship Manager Software, FedEx Ship Manager Server and FedEx Web Services. Additionally, FedEx Freight A.M. Delivery offers freight delivery by 10:30 a.m. within and between the U.S. and Canada, backed by a money-back guarantee.

 

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In 2016, FedEx Freight introduced the FedEx Freight box, which makes transporting LTL shipments simple with improved flexibility, increased security, better shipment integrity and no freight classification. The FedEx Freight box comes in two sizes: a standard freight box that requires a pallet to ship and a smaller freight box with an integrated pallet. The ability to choose between freight boxes makes freight shipping accessible to any business. With a distance-based pricing structure, the FedEx Freight box allows customers to ship LTL with flat rates. The FedEx Freight box was initially introduced into selected markets during the second half of 2016, and was subsequently rolled out to customers nationwide in June 2016.

 

FedEx Freight has an indexed fuel surcharge, which is subject to weekly adjustment based on the national U.S. on-highway average price for a gallon of diesel fuel. On January 2, 2017, FedEx Freight implemented a 4.9% average increase in certain U.S. and other shipping rates, and the FedEx Freight Extreme Length surcharge changed from $85 to $150 and began to be applied to shipments with dimensions of 12 feet or greater versus the prior 15 feet. FedEx Freight also implemented zone-based pricing on U.S. and other LTL shipping rates on January 4, 2016.

 

As of May 31, 2017, the FedEx Freight segment was operating approximately 66,000 vehicles and trailers from a network of nearly 370 service centers and had approximately 41,000 employees. Michael L. Ducker is the President and Chief Executive Officer of FedEx Freight, which is based in Memphis, Tennessee. FedEx Freight’s primary competitors are YRC Worldwide Inc. (which includes YRC Regional Transportation and YRC Freight), XPO Logistics, Inc., UPS Freight, Old Dominion Freight Line, Inc. and ABF Freight (an ArcBest company).

 

In 2014 and 2015, the International Brotherhood of Teamsters (“Teamsters”) petitioned for National Labor Relations Board elections at sixteen FedEx Freight facilities. The Teamsters lost the vote or withdrew the petition prior to the election at twelve facilities and won the vote at four facilities. Petitions for decertification of the Teamsters were filed for the Charlotte and East Philadelphia facilities on June 19, 2017. The election was held in Charlotte on July 7, 2017, and the drivers voted to decertify the Teamsters. The election in East Philadelphia will be held on July 19, 2017. We have begun bargaining with the unions in the two other locations. No new petitions for elections were filed in 2017.

 

FedEx Custom Critical

 

FedEx Custom Critical provides a range of expedited, time-specific freight-shipping services throughout the U.S., Canada and Mexico. Among its services are Surface Expedite, providing exclusive-use shipping and time-definite services; Air Expedite, offering an array of expedited air solutions to meet customers’ critical delivery times; and White Glove Services, for shipments that require extra care in handling, temperature control or specialized security. Service from FedEx Custom Critical is available 24 hours a day, 365 days a year. FedEx Custom Critical continuously monitors shipments through an integrated proprietary shipment-control system, including two-way satellite communications on exclusive-use shipments.

 

FedEx Services Segment

 

FedEx Services

 

FedEx Services provides our other companies with sales, marketing, information technology, communications, customer service, technical support, billing and collection services, and certain other back-office support. Through FedEx Services, we provide a convenient single point of access for many customer support functions, enabling us to more effectively sell the entire portfolio of transportation services and to help ensure a consistent and outstanding experience for our customers.

 

David J. Bronczek and Robert B. Carter each serve as the Co-President and Co-Chief Executive Officer of FedEx Services, which is based in Memphis, Tennessee. As of May 31, 2017, the FedEx Services segment had approximately 31,000 employees (including approximately 15,000 at FedEx Office).

 

Customer-Driven Technology

 

FedEx is a world leader in technology, and FedEx 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, in May 2016 FedEx ranked No. 1 in the first-ever InformationWeek Elite 100 Decade Award category, recognizing the 10 companies that have ranked the highest on average in the InformationWeek Elite 100, a compilation of the top business technology innovators in the U.S., over the prior 10 years. FedEx ranked No. 5 overall on the 2016 InformationWeek Elite 100 list. Additionally, FedEx was named a recipient of the 2017 CIO 100 Award from International Data Group’s CIO magazine. The annual award program recognizes organizations around the world that exemplify the highest level of operational and strategic excellence in information technology.

 

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Our technology strategy is driven by our desire for customer satisfaction. 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 our award-winning website, together with our customer integrated solutions. The fedex.com website was launched over 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, pay invoices and access FedEx Office services. The advanced tracking capability within FedEx Tracking provides customers with a consolidated view of inbound and outbound shipments.

 

FedEx Mobile is a suite of solutions including the FedEx mobile application, FedEx mobile website and SMS text messaging. The FedEx Mobile app provides convenience for recipients to track packages, get quick rates and estimated delivery times, quickly find the nearest FedEx location and easily access FedEx Delivery Manager to customize home deliveries. It is available on Android™ and Apple devices. The FedEx mobile website has expanded to more than 193 countries and territories and 26 languages. FedEx Mobile allows customers to track packages, create shipping labels, view account-specific rate quotes and access drop-off location information. SMS Notifications allows customers to track or follow a package via text messaging, and it is currently available in five countries.

 

With FedEx Office Print Online and proprietary iPhone and Android mobile apps, customers can use their laptops or mobile devices, accessing their personal cloud accounts, and print directly to any FedEx Office location in the U.S., or have their order delivered right to their door. Customers also have the flexibility of using FedEx Office’s Print & Go solutions to print at self-serve locations from USBs, the cloud or through email. Accessing files using popular cloud providers Google Drive™, Dropbox, Box, Microsoft OneDrive® and from FedEx Office’s own My Online Documents is easy. If customers have their files on a mobile device or laptop, they can email them to printandgo@fedex.com and with the retrieval code they receive they can conveniently print the files at the self-serve kiosks in any FedEx Office location. FedEx Office provides options for customers to choose the best access method they need for quick service or more robust printing projects. FedEx also uses 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, FedEx Services has a package laboratory providing FedEx Express, FedEx Ground and FedEx Freight customers with free package testing and design services.

 

We design our e-commerce tools and solutions 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. Our 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 sponsorships and special events. For example, FedEx sponsors:

 

 

The FedExCup on the PGA TOUR.

 

 

The FedEx St. Jude Classic, a PGA TOUR event that has raised 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.

 

 

The UEFA Europa League, a major European soccer cup competition that spans 192 teams across 54 European nations.

 

 

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

 

 

FedExForum in Memphis, TN.

 

- 16 -


 

Information Security

 

FedEx Services has a team of highly qualified professionals dedicated to securing information about our customers’ shipments and protecting our customers’, vendors’ and employees’ privacy, and we strive to provide a safe, secure online environment for our customers. We are committed to compliance with applicable information security laws, regulations and industry standards — including, for example, the Payment Card Industry Data Security Standard, a set of comprehensive requirements for enhancing payment account data security developed by the Payment Card Industry Security Standards Council. For a description of risks related to information security, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

 

Global ISO 9001 Certification

 

FedEx Services provides our customers with a high level of service quality, as evidenced by our ISO 9001 certification for our global express and ground operations. ISO 9001 registration is required by thousands of customers around the world. FedEx’s global certification, encompassing the processes of FedEx Express, FedEx Ground and FedEx Services, 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.

 

FedEx Office

 

As of May 31, 2017, FedEx Office operated more than 1,800 customer facing centers, providing convenient access to printing and shipping expertise with reliable service. The FedEx Office network features retail stores, centralized production centers, corporate on-site print centers, and on-site business centers at hotels, convention centers and universities. Services include copying and digital printing, professional finishing, document creation, direct mail, signs and graphics, computer rentals, free Wi-Fi and corporate print solutions. FedEx Office also provides customers convenient access to the full range of FedEx Express and FedEx Ground shipping services. Customers may have their FedEx Express and FedEx Ground packages delivered to any FedEx Office customer-facing location nationwide through the Hold at FedEx Location service, free of charge. Additionally, FedEx SameDay City is available in 25 markets across the U.S., allowing customers to get their packages across town in the same day with local delivery by FedEx Office uniformed team members in branded FedEx Office delivery vehicles.

 

FedEx Office also offers packing services, and packing supplies and boxes are included in its retail offerings. By allowing customers to have items professionally packed by specially trained FedEx Office team members and then shipped using FedEx Ground day-definite shipping and time-definite global FedEx Express shipping services, FedEx Office offers a complete “pack-and-ship” solution. FedEx Office also offers FedEx Pack Plus, which includes custom box building capabilities and techniques, a robust assortment of specialty boxes and additional packing supplies, equipment and tools to serve our customers’ needs.

 

Almost all FedEx Office locations provide local pickup and delivery service for print jobs completed by FedEx Office. A FedEx courier picks up a customer’s print job at the customer’s location and then returns the finished product to the customer. Options and services vary by location.  

 

Trademarks

 

The “FedEx” trademark, service mark and trade name is essential to our worldwide business. FedEx, FedEx Express, FedEx Ground, FedEx Freight, FedEx Office, FedEx Services, FedEx Supply Chain, FedEx Trade Networks, FedEx Custom Critical, FedEx Cross Border and TNT Express, among others, are trademarks, service marks and trade names of Federal Express Corporation or the respective companies 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 contractors and 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 (the “Federal Aviation Act”), both the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration (“FAA”) exercise regulatory authority over FedEx Express.

 

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 the ability of FedEx Express to operate its aircraft in the most efficient manner. FedEx Express holds 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 FedEx Express maintains its standards of safety and meets the operational requirements of the regulations.

- 17 -


 

 

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 FedEx Express, 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. FedEx Express holds various certificates issued by the DOT, authorizing FedEx Express 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 FedEx Express to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static, but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. It is reasonably possible that these rules or other future security requirements could impose material costs on us.

 

FedEx Express participates in the Civil Reserve Air Fleet (“CRAF”) program. Under this program, the U.S. Department of Defense may requisition for military use certain of FedEx Express’s wide-bodied aircraft in the event of a declared need, including a national emergency. FedEx Express is 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 its participation in the CRAF program, FedEx Express is entitled to bid on peacetime military cargo charter business. FedEx Express, together with a consortium of other carriers, currently contracts with the U.S. government for such charter flights.

 

Ground. The ground transportation performed by FedEx Express is integral to its 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. FedEx Express is registered in those states that require registration.

 

The operations of FedEx Ground, FedEx Freight and FedEx Custom Critical in interstate commerce are currently regulated by the DOT and the Federal Motor Carrier Safety Administration, which retain limited oversight authority over motor carriers. Federal legislation preempts regulation by the states of rates and service in intrastate freight transportation.

 

Like other interstate motor carriers, our operations, including those at FedEx Express, 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. FedEx Express’s international authority permits it to carry cargo and mail from points in its 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 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 the ability of FedEx Express to operate its air network in the most efficient manner, and efficient operations often utilize open skies provisions of aviation agreements. Additionally, global air cargo carriers, such as FedEx Express, are subject to current and potential additional aviation security regulation by foreign governments.

 

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

 

Communication. Because of the extensive use of radio and other communication facilities in its aircraft and ground transportation operations, FedEx Express is subject to the Federal Communications Commission Act of 1934, as amended. Additionally, the Federal Communications Commission regulates and licenses FedEx Express’s activities pertaining to satellite communications.

 

- 18 -


 

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. FedEx Express’s 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 FedEx Express’s aircraft operations in some of the localities where they apply but do not have a material effect on any of FedEx Express’s significant markets. Congress’s passage of the Airport Noise and Capacity Act of 1990 established a National Noise Policy, which enabled FedEx Express to plan for noise reduction and better respond to local noise constraints. FedEx Express’s international operations are also subject to noise regulations in certain of the countries in which it operates.

 

Concern over climate change, including the impact of global warming, has led to significant U.S. and international legislative and regulatory efforts to limit GHG emissions, including our aircraft and diesel engine emissions. For example, in 2009, the European Commission approved the extension of the European Union Emissions Trading Scheme (“ETS”) for GHG emissions to the airline industry. Under this decision, all FedEx Express flights that are wholly within the European Union are now covered by the ETS requirements, and each year we are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such flights. Also, in October 2016, the International Civil Aviation Organization (“ICAO”) passed a resolution adopting the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which is a global, market-based emissions offset program to encourage carbon-neutral growth beyond 2020. CORSIA is scheduled to take effect by 2021. ICAO continues to develop details regarding implementation, but compliance with CORSIA will increase our operating costs. Additionally, in July 2016, the EPA issued a finding that aircraft engine GHG emissions cause or contribute to air pollution that may reasonably be anticipated to endanger public health or welfare. This finding is a regulatory prerequisite to the EPA’s adoption of a new certification standard for aircraft emissions. For additional information on such efforts to regulate GHG emissions 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, the disposal of waste oil and the disposal of toners and other products used in FedEx Office’s copy machines. 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 designed to ensure compliance with these regulations.

 

Customs. Our activities, including customs brokerage and freight forwarding, are subject to regulation by U.S. Customs and Border Protection and the TSA within the Department of Homeland Security (customs brokerage and security issues), the U.S. Federal Maritime Commission (ocean freight forwarding) and the DOT (air freight forwarding). Our offshore operations are subject to similar regulation by the regulatory authorities of foreign jurisdictions.

 

Labor. All U.S. employees at FedEx Express are covered by the Railway Labor Act of 1926, as amended (the “RLA”), while labor relations within the U.S. at our other companies are governed by the National Labor Relations Act of 1935, as amended (the “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 National Mediation Board 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.

 

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, FedEx Express and its 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 at FedEx Express, 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 FedEx Express employees from the jurisdiction of the RLA, thereby exposing the FedEx Express network to sporadic labor disputes and the risk that small groups of employees could disrupt the 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 or NLRA. 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 70 through 76 of this Annual Report on Form 10-K.

 

- 19 -


 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

FedEx Express Segment

 

FedEx Express’s principal owned and leased properties include its aircraft, vehicles, major sorting and handling facilities, administration buildings, FedEx Drop Boxes and data processing and telecommunications equipment.

 

Aircraft and Vehicles

 

As of May 31, 2017, FedEx Express’s aircraft fleet consisted of the following:

 

Description

 

Owned

 

 

Leased

 

 

Total

 

 

Maximum Gross

Structural Payload

(Pounds per Aircraft)(1)

 

Boeing 747-400

 

 

2

 

 

 

 

 

 

2

 

 

 

261,400

 

Boeing B777F

 

 

27

 

 

 

3

 

 

 

30

 

 

 

233,300

 

Boeing MD11

 

 

41

 

 

 

16

 

 

 

57

 

 

 

192,600

 

Boeing MD10-30

 

 

12

 

 

 

1

 

 

 

13

 

 

 

175,900

 

Boeing MD10-10

 

 

26

 

 

 

 

 

 

26

 

 

 

137,500

 

Boeing 767F

 

 

43

 

 

 

3

 

 

 

46

(2)

 

 

127,100

 

Airbus A300-600

 

 

32

 

 

 

36

 

 

 

68

 

 

 

106,600

 

Airbus A310-300

 

 

10

 

 

 

 

 

 

10

 

 

 

83,170

 

Boeing B757-200

 

 

119

 

 

 

 

 

 

119

 

 

 

63,000

 

ATR-72

 

 

21

 

 

 

 

 

 

21

 

 

 

17,970

 

ATR-42

 

 

26

 

 

 

 

 

 

26

 

 

 

12,070

 

Cessna 208B

 

 

239

 

 

 

 

 

 

239

 

 

 

2,830

 

Total

 

 

598

 

 

 

59

 

 

 

657

 

 

 

 

 

 

(1) 

Maximum gross structural payload includes revenue payload and container weight.

(2)

Includes one aircraft not currently in operation and undergoing modification.

 

At May 31, 2017, FedEx Express operated approximately 58,000 vehicles and trailers.

 

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, 2017, with the year of expected delivery:

 

 

 

B767F(1)

 

 

B777F(2)

 

 

Total

 

2018

 

 

14

 

 

 

4

 

 

 

18

 

2019

 

 

15

 

 

 

2

 

 

 

17

 

2020

 

 

16

 

 

 

3

 

 

 

19

 

2021

 

 

10

 

 

 

3

 

 

 

13

 

2022

 

 

10

 

 

 

4

 

 

 

14

 

Thereafter

 

 

6

 

 

 

 

 

 

6

 

Total

 

 

71

 

 

 

16

 

 

 

87

 

(1)

As of May 31, 2017, our obligation to purchase four 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, 2017, our obligation to purchase six 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, 2017, deposits and progress payments of $729 million had been made toward aircraft purchases and other planned aircraft-related transactions. Also see Note 17 of the accompanying consolidated financial statements for more information about our purchase commitments.

- 20 -


 

 

Sorting and Handling Facilities

 

At May 31, 2017, FedEx Express 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

 

 

 

3,768,345

 

 

 

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

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

 

 

Kansai Airports

 

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.

 

FedEx Express’s primary sorting facility, which serves as the center of its multiple hub-and-spoke system, is located at the Memphis International Airport. FedEx Express’s facilities at the Memphis International Airport also include aircraft hangars, aircraft ramp areas, vehicle parking areas, flight training and fuel facilities, the FedEx Cold Chain Center, administrative offices and warehouse space.

 

FedEx Express leases these facilities from the Memphis-Shelby County Airport Authority (the “Authority”). The lease obligates FedEx Express to maintain and insure the leased property and to pay all related taxes, assessments and other charges. The lease is subordinate to, and FedEx Express’s rights thereunder could be affected by, any future lease or agreement between the Authority and the U.S. government.

 

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

 

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Administrative and Other Properties and Facilities

 

The World Headquarters of FedEx Express is located in southeastern Shelby County, Tennessee. FedEx Express owns or leases 624 facilities for city station operations in the U.S. In addition, 576 city stations are owned or leased throughout FedEx Express’s 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.

 

As of May 31, 2017, FedEx Express had approximately 39,000 Drop Boxes. FedEx Express customers can also ship from approximately 22,000 staffed drop-off locations, including FedEx Office centers and FedEx Authorized ShipCenters. Internationally, FedEx Express had approximately 19,000 drop-off locations.

 

TNT Express Segment

 

TNT Express corporate offices are located in Hoofddorp, The Netherlands. As of May 31, 2017, TNT Express had nearly 1,000 facilities worldwide, including road hubs, air hubs, depots and office facilities. These facilities are strategically located to cover the geographic areas served by TNT Express. TNT Express operates a central air hub near Liege, Belgium and a central European road hub in Duiven, The Netherlands. Approximately 39,000 owner-operator vehicles and 7,000 company-owned or company-leased vehicles support TNT Express’s business.

 

FedEx Ground Segment

 

FedEx Ground’s corporate offices are located in the Pittsburgh, Pennsylvania area. As of May 31, 2017, FedEx Ground had approximately 58,000 company-owned trailers and owned or leased 588 facilities, including 36 hubs. In addition, approximately 57,000 owner-operated vehicles support FedEx Ground’s business. Of the 394 facilities that support FedEx Home Delivery, 345 are co-located with existing FedEx Ground facilities. Leased facilities generally have terms of five years or less. The 36 hub facilities are strategically located to cover the geographic area served by FedEx Ground. The hub facilities average approximately 436,000 square feet and range in size from approximately 107,000 to 825,500 square feet. In addition, FedEx Supply Chain has 110 facilities through which it operates its supply chain logistics services.

 

FedEx Freight Segment

 

FedEx Freight’s corporate headquarters are located in Memphis, Tennessee, with some administrative offices for the FedEx Freight business in Harrison, Arkansas. As of May 31, 2017, the FedEx Freight segment operated approximately 66,000 vehicles and trailers and nearly 370 service centers, which are strategically located to provide service throughout North America. These facilities range in size from approximately 1,000 to 220,000 square feet of office and dock space. FedEx Custom Critical’s headquarters are located in Green, Ohio.

 

FedEx Services Segment

 

FedEx Services’ corporate headquarters are located in Memphis, Tennessee. FedEx Services leases state-of-the-art technology centers in Collierville, Tennessee and Colorado Springs, Colorado. These facilities house personnel responsible for strategic software development and other functions that support FedEx’s technology and e-commerce solutions.

 

FedEx Office’s corporate headquarters are located in Plano, Texas in leased facilities. As of May 31, 2017, FedEx Office operated more than 1,800 customer facing centers and also operated 33 centralized production centers. Substantially all FedEx Office centers are leased, generally for terms of five to ten years with varying renewal options. FedEx Office centers are generally located in strip malls, office buildings or stand-alone structures and customer-facing centers average approximately 3,800 square feet in size.

 

FedEx Services has an agreement with Office Depot, Inc. to offer FedEx Express and FedEx Ground shipping services at Office Depot and OfficeMax retail locations (approximately 1,400 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 over 5,000 franchised and independent “pack and ship” retail locations.

 

ITEM 3. LEGAL PROCEEDINGS

 

FedEx 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 18 of the accompanying consolidated financial statements.

 

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ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.


- 23 -


 

EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding executive officers of FedEx is as follows (included herein pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K):

 

 

 

 

Name and Office

 

 Age 

 

Positions and Offices Held and Business Experience

 

Frederick W. Smith

Chairman and Chief Executive Officer

72

Chairman and Chief Executive Officer of FedEx since January 1998; Chairman of FedEx Express since 1975; President of FedEx from January 1998 to February 2017; Chairman, President and Chief Executive Officer of FedEx Express from April 1983 to January 1998; Chief Executive Officer of FedEx Express from 1977 to January 1998; and President of FedEx Express from June 1971 to February 1975.

 

 

 

David J. Bronczek

President and Chief Operating Officer

63

President and Chief Operating Officer of FedEx since February 2017; President and Chief Executive Officer of FedEx Express from January 2000 to February 2017; Executive Vice President and Chief Operating Officer of FedEx Express from January 1998 to January 2000; Senior Vice President — Europe, Middle East and Africa of FedEx Express from June 1995 to January 1998; Senior Vice President — Europe, Africa and Mediterranean of FedEx Express from June 1993 to June 1995; Vice President — Canadian Operations of FedEx Express from February 1987 to March 1993; and various management positions in sales and operations at FedEx Express from 1976 to 1987. Mr. Bronczek serves as a director of International Paper Company, an uncoated paper and packaging company.

 

 

 

Robert B. Carter

Executive Vice President — FedEx Information Services and Chief Information Officer

58

Executive Vice President — FedEx Information Services and Chief Information Officer of FedEx since January 2007; Executive Vice President and Chief Information Officer of FedEx from June 2000 to January 2007; Corporate Vice President and Chief Technology Officer of FedEx from February 1998 to June 2000; Vice President — Corporate Systems Development of FedEx Express from September 1993 to February 1998; Managing Director — Systems Development of FedEx Express from April 1993 to September 1993. Mr. Carter serves as a director of New York Life Insurance Company, a mutual life insurance company.

 

 

 

Donald F. Colleran

Executive Vice President — Chief Sales Officer

61

Executive Vice President — Chief Sales Officer of FedEx since January 2017; Executive Vice President — Global Sales of FedEx Services from 2006 to January 2017; Senior Vice President — International Sales from 2003 to 2006; Senior Vice President — Canada of FedEx Express from 2000 to 2003; Vice President — Sales/APAC from 1997 to 2000; and various management positions in sales from 1989 to 1997.

 

 

 

David L. Cunningham, Jr.

President and Chief Executive Officer, FedEx Express

55

President and Chief Executive Officer of FedEx Express since February 2017; Executive Vice President and Chief Operating Officer of FedEx Express from 2015 to February 2017; Regional President — APAC of FedEx Express from 1999 to 2015; Vice President — South Pacific of FedEx Express from 1997 to 1999; Vice President — Finance, Asia/Pacific of FedEx Express from 1994 to 1997; and various management positions in finance from 1989 to 1994.

 

 

 

Michael L. Ducker

President and Chief Executive Officer, FedEx Freight Corporation

63

President and Chief Executive Officer of FedEx Freight since January 2015; Executive Vice President and Chief Operating Officer and President of International for FedEx Express from December 2009 to January 2015; Executive Vice President and President of International of FedEx Express from December 1999 to December 2009; Senior Vice President of Asia/Pacific of FedEx Express from September 1995 to December 1999; and various management positions in operations at FedEx Express from 1978 to 1995. Mr. Ducker serves as a director of International Flavors & Fragrances Inc., a global creator of flavors and fragrances used in consumer products.

 

 

 

- 24 -


 

 

 

 

Name and Office

 

 Age 

 

Positions and Offices Held and Business Experience

 

Alan B. Graf, Jr.

Executive Vice President and Chief Financial Officer

63

Executive Vice President and Chief Financial Officer of FedEx since January 1998; Executive Vice President and Chief Financial Officer of FedEx Express from February 1996 to January 1998; Senior Vice President and Chief Financial Officer of FedEx Express from December 1991 to February 1996; Vice President and Treasurer of FedEx Express from August 1987 to December 1991; and various management positions in finance and a senior financial analyst of FedEx Express from 1980 to 1987. Mr. Graf serves as a director of Mid-America Apartment Communities, Inc., a real estate investment trust that focuses on acquiring, constructing, developing, owning and operating apartment communities, and as a director of NIKE, Inc., a designer and marketer of athletic footwear, apparel, equipment and accessories for sports and fitness activities.

 

 

 

Henry J. Maier

President and Chief Executive Officer, FedEx Ground

63

President and Chief Executive Officer of FedEx Ground since June 2013; Executive Vice President — Strategic Planning and Communications of FedEx Ground from September 2009 to June 2013; Senior Vice President — Strategic Planning and Communications of FedEx Ground from December 2006 to September 2009; Vice President — Marketing of FedEx Services from March 2000 to December 2006; Vice President — Marketing and Communications of FedEx Ground from June 1999 to March 2000; and various management positions in logistics, sales, marketing and communications with RPS, Inc. and Caliber Logistics, Inc. from 1986 to 1999. Mr. Maier serves as a director of Kansas City Southern, a transportation holding company that has railroad investments in the U.S., Mexico and Panama.

 

 

 

Christine P. Richards

Executive Vice President, General Counsel and Secretary

62

Executive Vice President, General Counsel and Secretary of FedEx since June 2005; Corporate Vice President — Customer and Business Transactions of FedEx from March 2001 to June 2005; Senior Vice President and General Counsel of FedEx Services from March 2000 to June 2005; Staff Vice President — Customer and Business Transactions of FedEx from November 1999 to March 2001; Vice President — Customer and Business Transactions of FedEx Express from 1998 to November 1999; and various legal positions with FedEx Express from 1984 to 1998.

 

 

 

Rajesh Subramaniam

Executive Vice President — Chief Marketing and Communications Officer

51

Executive Vice President — Chief Marketing & Communications Officer of FedEx since January 2017; Executive Vice President — Marketing & Communications of FedEx Services from 2013 to January 2017; Senior Vice President — Marketing from 2006 to 2013; Senior Vice President — Canada of FedEx Express from 2003 to 2006; Vice President — Marketing/APAC of FedEx Express from 2000 to 2003; Vice President — APAC, EC & CS of FedEx Express from 1999 to 2000; various management and marketing analyst positions from 1991 to 1999. Mr. Subramaniam serves as a director of First Horizon National Corporation, a financial services holding company.

 

Executive officers are elected by, and serve at the discretion of, the Board of Directors. There is no arrangement or understanding between any executive officer and any person, other than a director or executive officer of FedEx or of any of its subsidiaries acting in his or her official capacity, pursuant to which any executive officer was selected. There are no family relationships between any executive officer and any other executive officer or director of FedEx.

 

- 25 -


 

PART II

 

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

 

FedEx’s common stock is listed on the New York Stock Exchange under the symbol “FDX.” As of July 13, 2017, there were 12,218 holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low sale prices, as reported on the NYSE, and the cash dividends paid per share of common stock.

 

 

 

Sale Prices

 

 

 

 

 

 

 

High

 

 

Low

 

 

Dividend

 

Fiscal Year Ended May 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

199.17

 

 

$

182.89

 

 

$

0.40

 

Third Quarter

 

 

201.57

 

 

 

183.87

 

 

 

0.40

 

Second Quarter

 

 

192.58

 

 

 

158.20

 

 

 

0.40

 

First Quarter

 

 

169.57

 

 

 

145.00

 

 

 

0.40

 

Fiscal Year Ended May 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

169.30

 

 

$

137.30

 

 

$

0.25

 

Third Quarter

 

 

160.67

 

 

 

119.71

 

 

 

0.25

 

Second Quarter

 

 

164.94

 

 

 

140.01

 

 

 

0.25

 

First Quarter

 

 

185.19

 

 

 

130.01

 

 

 

0.25

 

 

FedEx also paid a cash dividend on July 6, 2017 ($0.50 per share). We expect to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by our Board of Directors. We evaluate the dividend payment amount on an annual basis at the end of each fiscal year. There are no material restrictions on our ability to declare dividends, nor are there any material restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances.

 

The following table provides information on FedEx’s repurchases of our common stock during the fourth quarter of 2017.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total Number of

Shares Purchased

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares  Purchased

as Part of

Publicly

Announced

Programs

 

 

Maximum

Number of

Shares That May

Yet Be Purchased

Under the

Programs

 

Mar. 1-31, 2017

 

 

75,000

 

 

$

189.09

 

 

 

75,000

 

 

 

16,735,000

 

Apr. 1-30, 2017

 

 

340,000

 

 

 

190.29

 

 

 

340,000

 

 

 

16,395,000

 

May 1-31, 2017

 

 

375,000

 

 

 

190.90

 

 

 

375,000

 

 

 

16,020,000

 

Total

 

 

790,000

 

 

$

190.47

 

 

 

790,000

 

 

 

 

 

 

The repurchases were made under the stock repurchase program approved by our Board of Directors and announced on January 26, 2016 and through which we are authorized to purchase, in the open market or in the privately negotiated transactions, up to an aggregate of 25 million shares of our common stock. As of July 13, 2017, 15.8 million shares remained authorized for purchase under the January 2016 stock repurchase program, which is the only such program that currently exists. The program does not have an expiration date.

- 26 -


 

ITEM 6. SELECTED FINANCIAL DATA

 

Selected financial data as of and for the five years ended May 31, 2017 is presented on page 127 of this Annual Report on 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 33 through 77 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 126 of this Annual Report on Form 10-K.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

FedEx’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 17, 2017 thereon, are presented on pages 80 through 125 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

 

The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of May 31, 2017 (the end of the period covered by this Annual Report on Form 10-K).

 

Assessment of Internal Control Over Financial Reporting

 

Management’s report on our internal control over financial reporting is presented on page 78 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 79 of this Annual Report on Form 10-K.

 

Changes in Internal Control Over Financial Reporting

 

During our fiscal quarter ended May 31, 2017, 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.  

- 27 -


 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information regarding members of the Board of Directors, compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, FedEx’s Code of Business Conduct and Ethics and certain other aspects of FedEx’s corporate governance (such as the procedures by which FedEx’s stockholders may recommend nominees to the Board of Directors and information about the Audit Committee, including its members and our “audit committee financial expert”) will be presented in FedEx’s definitive proxy statement for its 2017 annual meeting of stockholders, which will be held on September 25, 2017, and is incorporated herein by reference. Information regarding executive officers of FedEx is included above in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant” pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K. Information regarding FedEx’s Code of Business Conduct and Ethics is included above in Part I, Item 1 of this Annual Report on Form 10-K under the caption “Reputation and Responsibility — Governance.”

 

ITEM 11. EXECUTIVE COMPENSATION

 

Information regarding director and executive compensation will be presented in FedEx’s definitive proxy statement for its 2017 annual meeting of stockholders, which will be held on September 25, 2017, and is incorporated herein by reference.

 

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

 

Information regarding security ownership of certain beneficial owners and management and related stockholder matters, as well as equity compensation plan information, will be presented in FedEx’s definitive proxy statement for its 2017 annual meeting of stockholders, which will be held on September 25, 2017, and is incorporated herein by reference.

 

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

 

Information regarding certain relationships and transactions with related persons (including FedEx’s policies and procedures for the review and preapproval of related person transactions) and director independence will be presented in FedEx’s definitive proxy statement for its 2017 annual meeting of stockholders, which will be held on September 25, 2017, and is incorporated herein by reference.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Information regarding the fees for services provided by Ernst & Young LLP during 2017 and 2016 and the Audit Committee’s administration of the engagement of Ernst & Young LLP, including the Committee’s preapproval policies and procedures (such as FedEx’s Policy on Engagement of Independent Auditor), will be presented in FedEx’s definitive proxy statement for its 2017 annual meeting of stockholders, which will be held on September 25, 2017, and is incorporated herein by reference.

 

- 28 -


 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

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

 

FedEx’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 17, 2017 thereon, are listed on page 32 and presented on pages 80 through 125 of this Annual Report on Form 10-K. FedEx’s “Schedule II — Valuation and Qualifying Accounts,” together with the report of Ernst & Young LLP dated July 17, 2017 thereon, is presented on pages 129 through 130 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’s consolidated financial statements or the notes thereto.

 

(a)(3) Exhibits

 

See the Exhibit Index on pages E-1 through E-14 for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.

 

Item 16. Form 10-K Summary

 

None.

 

- 29 -


 

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.

 

 

FEDEX CORPORATION

 

 

 

 

 

Dated: July 17, 2017

By:

/s/ Frederick W. Smith

 

 

 

 

Frederick W. Smith

 

 

 

Chairman and Chief Executive Officer

 

 

Power of Attorney. KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Frederick W. Smith, Alan B. Graf, Jr. and John L. Merino, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with any and all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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 and in the capacities and on the dates indicated.

 

Signature

 

Capacity

 

Date

 

 

 

 

 

/s/ Frederick W. Smith

 

Chairman and Chief Executive Officer and Director

(Principal Executive Officer)

July 17, 2017

Frederick W. Smith

 

 

/s/ Alan B. Graf, Jr.

 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

July 17, 2017

Alan B. Graf, Jr.

 

 

/s/ John L. Merino

 

Corporate Vice President and Principal Accounting Officer

(Principal Accounting Officer)

July 17, 2017

John L. Merino

 

 

/s/ James L. Barksdale

 

Director

July 17, 2017

James L. Barksdale

 

 

 

/s/ John A. Edwardson

 

Director

July 17, 2017

John A. Edwardson

 

 

 

/s/ Marvin R. Ellison

 

Director

July 17, 2017

Marvin R. Ellison

 

 

 

- 30 -


 

Signature

 

Capacity

 

Date

 

 

 

/s/ John C. (“Chris”) Inglis

 

 

 

Director

 

 

July 17, 2017

John C. (“Chris”) Inglis

 

 

 

/s/ Kimberly A. Jabal

 

Director

July 17, 2017

Kimberly A. Jabal

 

 

 

/s/ Shirley Ann Jackson

 

Director

July 17, 2017

Shirley Ann Jackson

 

 

 

/s/ R. Brad Martin

 

Director

July 17, 2017

R. Brad Martin

 

 

 

/s/ Joshua Cooper Ramo

 

Director

July 17, 2017

Joshua Cooper Ramo

 

 

 

/s/ Susan C. Schwab

 

Director

July 17, 2017

Susan C. Schwab

 

 

 

/s/ David P. Steiner

 

Director

July 17, 2017

David P. Steiner

 

 

 

/s/ Paul S. Walsh

 

Director

July 17, 2017

Paul S. Walsh

 

 

 

 

 

 

- 31 -


 

FINANCIAL SECTION TABLE OF CONTENTS

 

 

PAGE

 

 

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

 

 

 

Overview of Financial Section

33

 

 

Results of Operations and Outlook

35

 

 

Recent Accounting Guidance

45

 

 

Reportable Segments

47

 

 

FedEx Services Segment

47

FedEx Express Group

49

FedEx Express Segment

51

 

 

TNT Express Segment

55

 

 

FedEx Ground Segment

56

 

 

FedEx Freight Segment

58

 

 

Financial Condition

60

 

 

Liquidity

60

 

 

Capital Resources

61

 

 

Liquidity Outlook

61

 

 

Contractual Cash Obligations and Off-Balance Sheet Arrangements

63

 

 

Critical Accounting Estimates

64

 

 

Retirement Plans

64

 

 

Self-Insurance Accruals

66

 

 

Long-Lived Assets

67

 

 

Contingencies

69

 

 

Risk Factors

70

 

 

Forward-Looking Statements

77

 

 

Consolidated Financial Statements

 

 

 

Management’s Report on Internal Control over Financial Reporting

78

 

 

Reports of Independent Registered Public Accounting Firm

79

 

 

Consolidated Balance Sheets May 31, 2017 and 2016

81

Consolidated Statements of Income Years Ended May 31, 2017, 2016 and 2015

83

 

 

Consolidated Statements of Comprehensive Income Years Ended May 31, 2017, 2016 and 2015

84

 

 

Consolidated Statements of Cash Flows Years Ended May 31, 2017, 2016 and 2015

85

 

 

Consolidated Statements of Changes in Stockholders’ Investment Years Ended May 31, 2017, 2016 and 2015

86

 

 

Notes to Consolidated Financial Statements

87

 

 

Other Financial Information

 

 

 

Quantitative and Qualitative Disclosures about Market Risk

126

 

 

Selected Financial Data

127

 

 

Report of Independent Registered Public Accounting Firm

129

 

 

Schedule II – Valuation and Qualifying Accounts

130

 

 

Computation of Ratio of Earnings to Fixed Charges

131

- 32 -


 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND

FINANCIAL CONDITION

OVERVIEW OF FINANCIAL SECTION

The financial section of the FedEx Corporation (“FedEx” or the “Company”) 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 and practices and the transactions that underlie our financial results. The following MD&A describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx. The discussion in the financial section should be read in conjunction with the other sections of this Annual Report, particularly “Item 1. Business” and our detailed discussion of risk factors included in this MD&A.

ORGANIZATION OF INFORMATION

Our MD&A is composed of three major sections: Results of Operations, Financial Condition and Critical Accounting Estimates. These sections include the following information:

 

Results of operations includes an overview of our consolidated 2017 results compared to 2016 results, and 2016 results compared to 2015 results. This section also includes a discussion of key actions and events that impacted our results, as well as our outlook for 2018.

 

The overview is followed by a financial summary and analysis (including a discussion of both historical operating results and our outlook for 2018) for each of our transportation segments.

 

Our financial condition is reviewed through an analysis of key elements of our liquidity, capital resources and contractual cash obligations, including a discussion of our cash flows and our financial commitments.

 

Critical accounting estimates discusses those financial statement elements that we believe are most important to understanding the material judgments and assumptions incorporated in our financial results.

 

We conclude with a discussion of risks and uncertainties that may impact our financial condition and operating results.

DESCRIPTION OF BUSINESS

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; TNT Express B.V. (“TNT Express”), an international express, small-package ground delivery and freight transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments.

Our FedEx Services segment provides sales, marketing, information technology, communications, customer service, technical support, billing and collection services, and certain back-office functions that support our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (“FedEx Office”). See “Reportable Segments” for further discussion and refer to “Item 1. Business” for a more detailed description of each of our operating companies.

- 33 -


 

The key indicators necessary to understand our operating results include:

 

the overall customer demand for our various services based on macroeconomic factors and the global economy;

 

the volumes of transportation services provided through our networks, primarily measured by our average daily volume and shipment weight and size;

 

the mix of services purchased by our customers;

 

the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per shipment or hundredweight for LTL freight shipments);

 

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

 

the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.

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

Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2017 or ended May 31 of the year referenced and comparisons are to the prior year. References to our transportation segments include, collectively, our FedEx Express group, which includes the FedEx Express and TNT Express segments, the FedEx Ground segment and the FedEx Freight segment. In 2017, TNT Express’s results are disclosed as a reportable segment and are also combined with the FedEx Express segment to reflect a management reporting structure referred to as the FedEx Express group. Because TNT Express was acquired near the end of 2016, its financial results were immaterial and were included in “Eliminations, corporate and other” in that period.

- 34 -


 

RESULTS OF OPERATIONS AND OUTLOOK

CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the years ended May 31.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

2017(1)

 

 

2016(2)

 

 

2015

 

 

2017/2016

 

 

2016/2015

 

 

Consolidated revenues

 

$

60,319

 

 

$

50,365

 

 

$

47,453

 

 

 

20

 

 

 

6

 

 

Operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment(3)

 

 

2,678

 

 

 

2,519

 

 

 

1,584

 

 

 

6

 

 

 

59

 

 

TNT Express segment

 

 

84

 

 

 

 

 

 

 

 

NM

 

 

NM

 

 

FedEx Ground segment

 

 

2,292

 

 

 

2,276

 

 

 

2,172

 

 

 

1

 

 

 

5

 

 

FedEx Freight segment

 

 

397

 

 

 

426

 

 

 

484

 

 

 

(7

)

 

 

(12

)

 

Eliminations, corporate and other(4)(5)

 

 

(414

)

 

 

(2,144

)

 

 

(2,373

)

 

 

81

 

 

10

 

 

Consolidated operating income(5)

 

 

5,037

 

 

 

3,077

 

 

 

1,867

 

 

 

64

 

 

 

65

 

 

Operating margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment(3)

 

 

9.8

%

 

 

9.5

%

 

 

5.8

%

 

 

30

 

bp

370

 

bp

TNT Express segment

 

 

1.1

%

 

 

 

 

 

 

 

NM

 

 

NM

 

 

FedEx Ground segment

 

 

12.7

%

 

 

13.7

%

 

 

16.7

%

 

 

(100

)

bp

 

(300

)

bp

FedEx Freight segment

 

 

6.2

%

 

 

6.9

%

 

 

7.8

%

 

 

(70

)

bp

 

(90

)

bp

Consolidated operating margin(4)(5)

 

 

8.4

%

 

 

6.1

%

 

 

3.9

%

 

 

230

 

bp

 

220

 

bp

Consolidated net income(5)

 

$

2,997

 

 

$

1,820

 

 

$

1,050

 

 

 

65

 

 

 

73

 

 

Diluted earnings per share

 

$

11.07

 

 

$

6.51

 

 

$

3.65

 

 

 

70

 

 

 

78

 

 

 

- 35 -


 

The following table shows changes in revenues and operating income by reportable segment for 2017 compared to 2016 and 2016 compared to 2015 (in millions).

 

 

 

Year-over-Year Changes

 

 

 

Revenues

 

 

Operating Income

 

 

 

2017/2016

 

 

2016/2015

 

 

2017/2016(1)(2)

 

 

2016/2015(2)

 

FedEx Express segment(3)

 

$

907

 

 

$

(788

)

 

$

159

 

 

$

935

 

TNT Express segment

 

 

7,401

 

 

 

 

 

 

84

 

 

 

 

FedEx Ground segment

 

 

1,501

 

 

 

3,590

 

 

 

16

 

 

 

104

 

FedEx Freight segment

 

 

243

 

 

 

9

 

 

 

(29

)

 

 

(58

)

FedEx Services segment

 

 

28

 

 

 

48

 

 

 

 

 

 

 

Eliminations, corporate and other(4)(5)

 

 

(126

)

 

 

53

 

 

 

1,730

 

 

 

229

 

 

 

$

9,954

 

 

$

2,912

 

 

$

1,960

 

 

$

1,210

 

 

(1)

Operating income in 2017 includes TNT Express integration expenses and restructuring charges of $327 million ($121 million in “Eliminations, corporate and other,” $117 million at FedEx Express and $89 million at TNT Express) and increased intangible asset amortization of $74 million as a result of the TNT Express acquisition. Operating income for 2017 also includes $39 million of charges for legal reserves related to certain pending U.S. Customs and Border Protection matters involving FedEx Trade Networks and $22 million of charges in connection with the settlement of and certain expected losses relating to independent contractor litigation matters at FedEx Ground. See Note 18 of the accompanying consolidated financial statements for additional information.

(2)

Includes transaction, financing and integration-planning expenses related to our TNT Express acquisition, as well as the immaterial financial results of TNT Express from the date of acquisition, aggregating $132 million during 2016. These expenses are predominantly included in “Eliminations, corporate and other.”

(3)

FedEx Express segment 2015 expenses include impairment and related charges of $276 million resulting from the decision to permanently retire and adjust the retirement schedule of certain aircraft and related engines.

(4)

Operating income includes a gain of $24 million in 2017 and losses of $1.5 billion in 2016 and $2.2 billion in 2015 associated with our mark-to-market pension accounting further discussed in Note 13 of the accompanying consolidated financial statements.

(5)

Operating income in 2016 includes provisions related to independent contractor litigation matters at FedEx Ground for $256 million and expenses related to the settlement of a U.S. Customs and Border Protection notice of action in the amount of $69 million, in each case net of recognized immaterial insurance recovery. Operating income for 2015 includes a $197 million charge in the fourth quarter to increase the legal reserve associated with the settlement of a legal matter at FedEx Ground to the amount of the settlement, which is further discussed in Note 18 of the accompanying consolidated financial statements.

 

Overview

Our segment results improved in 2017 as a result of yield and volume growth and continued cost management at our FedEx Express segment, as well as the inclusion of TNT Express. In addition, tax benefits from the implementation of new foreign currency tax regulations and the adoption of a new accounting standard for share-based payments, further discussed in the “Income Taxes” section below, benefited results. These factors were partially offset by TNT Express integration expenses, including restructuring charges (described below), network expansion costs at FedEx Ground, one fewer operating day at FedEx Express and FedEx Ground and higher operating expenses at FedEx Freight.

We incurred an aggregate of $327 million ($245 million, net of tax, or $0.91 per diluted share) in 2017 of TNT Express integration expenses, including restructuring charges. The integration expenses are predominantly incremental costs directly associated with the integration of TNT Express, including professional and legal fees, salaries and wages, advertising expenses and travel. Internal salaries and wages are included only to the extent the individuals are assigned full time to integration activities. These costs were incurred at FedEx Corporation, FedEx Express and TNT Express. The identification of these costs as integration-related expenditures is subject to our disclosure controls and procedures. In addition, we incurred $74 million ($57 million, net of tax, or $0.21 per diluted share) in 2017 of increased intangible asset amortization as a result of the TNT Express acquisition.

Operating income in 2017 includes a $24 million gain ($6 million, net of tax, or $0.02 per diluted share) associated with our fourth quarter mark-to-market (“MTM”) retirement plans adjustment. Our 2017 results also include $39 million ($24 million, net of tax, or $0.09 per diluted share) of charges for legal reserves related to certain pending U.S. Customs and Border Protection (“CBP”) matters involving FedEx Trade Networks and $22 million ($13 million, net of tax, or $0.05 per diluted share) of charges related to the settlement of and certain expected losses relating to independent contractor litigation matters involving FedEx Ground. These items are included in “Eliminations, corporate and other.”

- 36 -


 

Our results for 2016 include a $1.5 billion loss ($946 million, net of tax, or $3.39 per diluted share) associated with our fourth quarter MTM retirement plans adjustment, provisions for the settlement of and expected losses related to independent contractor litigation matters involving FedEx Ground of $256 million ($158 million, net of tax, or $0.57 per diluted share), and expenses related to the settlement of a CBP notice of action in the amount of $69 million ($43 million, net of tax, or $0.15 per diluted share). These items are included in “Eliminations, corporate and other.” Also during 2016, we incurred transaction, financing and integration-planning expenses related to our TNT Express acquisition of $132 million ($125 million, net of tax, or $0.45 per diluted share), which includes the impact of certain costs not deductible for tax purposes as a result of the acquisition. These expenses also include TNT Express’s financial results from the time of acquisition, which are immaterial, and are predominantly included in “Eliminations, corporate and other.” While these items had a significant impact to our consolidated results, our 2016 segment performance benefited from higher operating income at FedEx Express as our profit improvement program that commenced in 2013 continued to constrain expense growth while improving revenue quality, and the positive net impact of fuel. Two additional operating days also benefited all our transportation segments in 2016. These factors were partially offset by lower than anticipated revenue at FedEx Freight and network expansion costs, higher self-insurance expenses and increased purchased transportation rates at FedEx Ground. In addition, higher incentive compensation accruals, which were not impacted by the charges and credits described above, negatively impacted our overall results.

During 2016, a favorable tax impact from an internal corporate legal entity restructuring to facilitate the integration of FedEx Express and TNT Express was recorded in the amount of $76 million (or $0.27 per diluted share).

Our results for 2015 include a $2.2 billion loss ($1.4 billion, net of tax, or $4.81 per diluted share) associated with our MTM retirement plans adjustment.

- 37 -


 

The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) for the years ended May 31 (TNT Express volume trends are not presented, as it was acquired on May 25, 2016):

 

(1)

International domestic average daily package volume represents our international intra-country operations.

- 38 -


 

The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends for the years ended May 31 (TNT Express yield trends are not presented, as it was acquired on May 25, 2016):