GENERAL
The following Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates ofFedEx Corporation ("FedEx"). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year endedMay 31, 2020 ("Annual Report"). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results. We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating collaboratively and innovating digitally, under the respected FedEx brand. Our primary operating companies areFederal Express Corporation ("FedEx Express"), the world's largest express transportation company;FedEx Ground Package System, Inc. ("FedEx Ground"), a leading North American provider of small-package ground delivery services; andFedEx Freight Corporation ("FedEx Freight"), a leading North American provider of less-than-truckload ("LTL") freight transportation services. These companies represent our major service lines and, along withFedEx Corporate Services, Inc. ("FedEx Services"), constitute 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 operating segments. See the "Reportable Segments" section of this MD&A for further discussion. Additional information on our businesses can be found in our Annual Report.
The key indicators necessary to understand our operating results include:
• the overall customer demand for our various services based on 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, and we expect these operating expenses to fluctuate on a year-over-year basis consistent with changes in revenue and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than those factors strictly related to changes in revenue and volumes. The line item "Other operating expense" includes costs associated with outside service contracts (such as facility services and cargo handling, temporary labor and security), insurance, professional fees and uniforms. Except as otherwise specified, references to years indicate our fiscal year endingMay 31, 2021 or endedMay 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, theFedEx Express segment, the FedEx Ground segment and the FedEx Freight segment. - 21 - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS CONSOLIDATED RESULTS The following tables compare summary operating results and changes in revenue and operating income (loss) (dollars in millions, except per share amounts) for the periods endedFebruary 28, 2021 andFebruary 29, 2020 : Three Months Ended Percent Nine Months Ended Percent 2021 2020 Change 2021 2020 Change Revenue$ 21,510 $ 17,487 23$ 61,394 $ 51,859 18 Operating income (loss): FedEx Express segment 463 137 238 2,073 658 215 FedEx Ground segment 702 355 98 2,088 1,341 56 FedEx Freight segment 119 113 5 645 448 44
Corporate, other and eliminations (279 ) (194 ) (44 )
(746 ) (505 ) (48 ) Consolidated operating income 1,005 411 145 4,060 1,942 109 Operating margin: FedEx Express segment 4.3 % 1.5 % 280 bp 6.7 % 2.4 % 430 bp FedEx Ground segment 8.8 % 6.1 % 270 bp 9.3 % 8.2 % 110 bp FedEx Freight segment 6.5 % 6.5 % - bp 11.5 % 8.2 % 330 bp Consolidated operating margin 4.7 % 2.4 % 230 bp 6.6 % 3.7 % 290 bp Consolidated net income$ 892 $ 315 183$ 3,363 $ 1,620 108 Diluted earnings per share$ 3.30 $ 1.20 175$ 12.55 $ 6.17 103 Change in Revenue Change in Operating Income (Loss) Three Months Nine Months Three Months Nine Months Ended Ended Ended Ended FedEx Express segment$ 1,864 $ 3,850 $ 326 $ 1,415 FedEx Ground segment 2,135 6,025 347 747 FedEx Freight segment 98 111 6 197 FedEx Services segment 2 9 - - Corporate, other and eliminations (76 ) (460 ) (85 ) (241 )$ 4,023 $ 9,535 $ 594 $ 2,118 Overview Residential delivery volume growth, reflecting increased e-commerce demand accelerated by the coronavirus ("COVID-19") pandemic, as well as yield improvement related to pricing initiatives, continued in the third quarter, driving strong growth in our revenue and operating income during the third quarter and nine months of 2021. We continued to incur increased operating expenses to support unprecedented levels of demand for our services in the COVID-19 pandemic environment. Our business is labor and capital intensive in nature, which has required us to incur higher costs to operate our networks during the pandemic, including increased wage rates and costs associated with additional personnel in place to support our operations and to meet regulatory requirements. Higher costs associated with operating our seven-day network at FedEx Ground and operating our air network to support higher demand in key international supply chains impacted by constrained commercial air capacity were also incurred in the third quarter and nine months of 2021. In addition, we incurred increased operating expenses related to personal protective equipment and medical/safety supplies, as well as additional security and cleaning services, in order to protect our team members and customers during the COVID-19 pandemic, of approximately$60 million in the third quarter and$210 million in the nine months of 2021. Our consolidated operating income improved during both the third quarter and nine months of 2021 due to residential volume growth at FedEx Ground, international export andU.S. domestic package volume growth atFedEx Express and pricing initiatives across all of our transportation segments. Higher variable incentive compensation expense negatively impacted year-over-year third quarter comparisons by approximately$485 million and nine-month comparisons by approximately$895 million , which includes approximately$125 million in special bonuses paid inJanuary 2021 to our front-line operational team members atFedEx Express . Severe winter weather also negatively impacted year-over-year third quarter and nine-month operating income comparisons by an estimated$350 million , primarily affecting revenue. Additionally, higher purchased transportation expenses at FedEx Ground were incurred in both the third quarter and nine months of 2021. - 22 -
-------------------------------------------------------------------------------- During the second quarter of 2020, we recorded asset impairment charges of$66 million ($50 million , net of tax, or$0.19 per diluted share) associated with the decision to permanently retire certain aircraft and related engines atFedEx Express . See Note 1 of the accompanying unaudited condensed consolidated financial statements for additional information. We incurred integration expenses totaling$49 million ($39 million , net of tax, or$0.14 per diluted share) in the third quarter and$146 million ($113 million , net of tax, or$0.42 per diluted share) in the nine months of 2021, a$23 million decrease from the third quarter and a$61 million decrease from the nine months of 2020. The integration expenses are predominantly incremental costs directly associated with the integration of TNT Express, including professional and legal fees, salaries and employee benefits, travel and advertising expenses. Internal salaries and employee benefits are included only to the extent the individuals are assigned full-time to integration activities. These costs were incurred atFedEx Express and FedEx Corporate. The identification of these costs as integration-related expenditures is subject to our disclosure controls and procedures. The integration expenses do not include costs associated with our business realignment activities. See the "Business Realignment Costs" section of this MD&A for further information. Consolidated net income in the nine months of 2021 includes a pre-tax, noncash mark-to-market ("MTM") net loss of$52 million ($41 million , net of tax, or$0.15 per diluted share) associated with freezing our TNT Express Netherlands Pension Plan. See the "Retirement Plan MTM Adjustment" section of this MD&A and Note 7 of the accompanying unaudited condensed consolidated financial statements for additional information. The comparison of net income between 2021 and 2020 is affected by a tax benefit of$299 million ($1.12 per diluted share) recognized during the nine months of 2021, of which we recognized$108 million during the third quarter of 2021 from a tax rate increase inthe Netherlands applied to deferred tax balances and associated with voluntary contributions to our tax-qualifiedU.S. domestic pension plans ("U.S. Pension Plans") and a benefit of$191 million during the second quarter of 2021 primarily attributable to guidance issued by the Internal Revenue Service ("IRS"). We also recognized a tax benefit of$133 million ($0.51 per diluted share) during the nine months of 2020 from the reduction of a valuation allowance. See the "Income Taxes" section of this MD&A for further information. - 23 -
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The following graphs for
[[Image Removed]]
(1) International domestic average daily package volume relates to our
international intra-country operations. International export average daily
package volume relates to our international priority and economy services.
(2) International average daily freight pounds relate to our international
priority, economy and airfreight services. - 24 -
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The following graphs for
[[Image Removed]]
(1) International export revenue per package relates to our international
priority and economy services. International domestic revenue per package
relates to our international intra-country operations.
(2) International revenue per pound relates to our international priority,
economy and airfreight services. - 25 -
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Revenue Revenue increased 23% in the third quarter and 18% in the nine months of 2021 primarily due to volume growth in residential delivery services at FedEx Ground andU.S. domestic package volume growth atFedEx Express , both reflecting increased e-commerce demand accelerated by the COVID-19 pandemic. International export package volume growth atFedEx Express and pricing initiatives across all of our transportation segments also contributed to the increase in revenue during the third quarter and nine months of 2021. These positive factors were partially offset by lower fuel surcharges at all of our transportation segments and severe winter weather during the third quarter and nine months of 2021, as well as one fewer operating weekday at all of our transportation segments in the third quarter of 2021. At FedEx Ground, revenue increased 37% in both the third quarter and nine months of 2021 primarily due to residential delivery volume growth. Revenue atFedEx Express increased 21% in the third quarter and 14% in the nine months of 2021 due to international export andU.S. domestic package volume growth. International export volume increased in the third quarter and nine months of 2021 driven by strong demand for international priority shipments due to air freight capacity constraints. FedEx Freight revenue increased 6% in the third quarter of 2021 primarily due to higher revenue per shipment and increased average daily shipments. Revenue at FedEx Freight increased 2% in the nine months of 2021 primarily due to higher revenue per shipment, partially offset by decreased average daily shipments.
Operating Expenses
The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods endedFebruary 28, 2021 andFebruary 29, 2020 : Three Months Ended Percent Nine Months Ended Percent 2021 2020 Change 2021 2020 Change Operating expenses: Salaries and employee benefits$ 8,010 $ 6,382 26$ 22,305 $ 18,704 19 Purchased transportation 5,660 4,558 24 16,044 12,914 24 Rentals and landing fees 1,131 964 17 3,073 2,808 9 Depreciation and amortization 956 908 5 2,818 2,688 5 Fuel 756 879 (14 ) 1,946 2,639 (26 ) Maintenance and repairs 822 684 20 2,443 2,226 10 Business realignment costs 10 - NM 10 - NM Asset impairment charges - - - - 66 NM Other 3,160 2,701 17 8,695 7,872 10 Total operating expenses 20,505 17,076 20 57,334 49,917 15 Operating income$ 1,005 $ 411 145$ 4,060 $ 1,942 109 Percent of Revenue Three Months Ended Nine Months Ended 2021 2020 2021 2020 Operating expenses: Salaries and employee benefits 37.2 % 36.5 % 36.3 % 36.1 % Purchased transportation 26.3 26.1 26.1 24.9 Rentals and landing fees 5.3 5.5 5.0 5.4 Depreciation and amortization 4.4 5.2 4.6 5.2 Fuel 3.5 5.0 3.2 5.1 Maintenance and repairs 3.8 3.9 4.0 4.3 Business realignment costs 0.1 - - - Asset impairment charges - - - 0.1 Other 14.7 15.4 14.2 15.2 Total operating expenses 95.3 97.6 93.4 96.3 Operating margin 4.7 % 2.4 % 6.6 % 3.7 % - 26 -
-------------------------------------------------------------------------------- Volume growth, as discussed in the "Revenue" section of this MD&A, contributed to a 26% increase in salaries and employee benefits expense in the third quarter and a 19% increase in the nine months of 2021, as well as an increase in purchased transportation costs of 24% in both the third quarter and nine months of 2021. Higher variable incentive compensation expense and merit increases also contributed to an increase in salaries and employee benefits in both the third quarter and nine months of 2021. In addition, purchased transportation costs were also higher in both the third quarter and nine months of 2021 primarily due to increased residential product mix at FedEx Ground.
Fuel
The following graph for our transportation segments shows our average cost of vehicle and jet fuel per gallon for the five most recent quarters:
[[Image Removed]] Fuel expense decreased 14% in the third quarter and 26% in the nine months of 2021 due to lower fuel prices. Fuel prices represent only one component of the factors we consider meaningful in understanding the impact of fuel on our business. Consideration must also be given to the fuel surcharge revenue we collect. Accordingly, we believe discussion of the net impact of fuel on our results, which is a comparison of the year-over-year change in these two factors, is important to understand the impact of fuel on our business. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative weighted-average fuel surcharge percentages in effect for the third quarters of 2021 and 2020 in the accompanying discussion of each of our transportation segments. Because of the factors described above, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term. The net impact of fuel on operating income described below and for each segment below excludes the impact from table changes.
The net impact of fuel had a slightly negative impact to operating income in the third quarter and nine months of 2021 as lower fuel surcharges outpaced decreased fuel prices.
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Business Realignment Costs
InJanuary 2021 ,FedEx Express announced a workforce reduction plan inEurope as it nears the completion of the network integration of TNT Express. The plan will impact between 5,500 and 6,300 employees inEurope across operational teams and back-office functions. The execution of the plan is subject to a works council consultation process that will occur over an 18-month period in accordance with local country processes and regulations. We incurred costs of$10 million ($8 million , net of tax, or$0.03 per diluted share) during the third quarter of 2021 associated with our business realignment activities. These costs are related to certain employee severance arrangements. We expect the pre-tax cost of our business realignment activities to range from$300 million to$575 million . These charges are expected to be incurred through fiscal 2023 and will be classified as business realignment costs. We expect savings from our business realignment activities to be between$275 million and$350 million on an annualized basis beginning in fiscal 2024. The actual amount and timing of business realignment costs and related cost savings resulting from the workforce reduction plan are dependent on local country consultation processes and regulations and negotiated social plans and may differ from our current expectations and estimates.
Asset Impairment Charges
During the second quarter of 2020, we made the decision to permanently retire from service 10 Airbus A310-300 aircraft and 12 related engines atFedEx Express to align with the needs of theU.S. domestic network and modernize its aircraft fleet. As a consequence of this decision, noncash impairment charges of$66 million ($50 million , net of tax, or$0.19 per diluted share) were recorded in theFedEx Express segment in the second quarter of 2020.
Retirement Plan MTM Adjustment
We incurred a pre-tax, noncash MTM net loss of$52 million ($41 million , net of tax, or$0.15 per diluted share) in the second quarter of 2021 related to amendments to the TNT Express Netherlands Pension Plan. Benefits for approximately 2,100 employees were frozen effectiveDecember 31, 2020 . OnJanuary 1, 2021 , these employees began earning pension benefits under a separate, multi-employer pension plan. See Note 7 of the accompanying unaudited condensed consolidated financial statements for additional information.
Income Taxes
Our effective tax rate was 15.0% for the third quarter and 17.2% for the nine months of 2021, compared to 25.0% for the third quarter and 18.5% for the nine months of 2020. The tax rate for the third quarter of 2021 includes benefits of$108 million from a tax rate increase inthe Netherlands applied to our deferred tax balances and associated with voluntary contributions to ourU.S. Pension Plans. The tax rate for the nine months of 2021 also includes a benefit of$191 million from an increase in our 2020 tax loss primarily attributable to an Application for Change in Accounting Method discussed below and other accelerated deductions claimed on the 2020 tax return. The tax rate for the nine months of 2020 included a$133 million benefit from a valuation allowance reduction. We filed an application with theIRS in 2020 requesting approval to change our accounting method for depreciation to allow retroactive application of tax regulations issued during 2020 on certain assets placed in service during 2018 and 2019. During the second quarter of 2021, theIRS issued guidance granting automatic approval to change the method of accounting for these assets resulting in an income tax benefit of$130 million for the second quarter. We are subject to taxation inthe United States and variousU.S. state, local and foreign jurisdictions. We are currently under examination by theIRS for the 2016 and 2017 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next twelve months and could result in a change in our balance of unrecognized tax benefits. The impact of any changes is not expected to be material to our consolidated financial statements. During the second quarter of 2021, we filed suit inU.S. District Court for the Western District of Tennessee challenging the validity of a tax regulation related to the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of the Tax Cuts and Jobs Act ("TCJA"). Our lawsuit seeks to have the court declare this regulation invalid and order the refund of overpayments ofU.S. federal income taxes for 2018 and 2019 attributable to the denial of foreign tax credits under the regulation. We have recorded a cumulative benefit of$233 million through 2019 attributable to our interpretation of the TCJA and the Internal Revenue Code. We continue to pursue this lawsuit; however, if we are ultimately unsuccessful in defending our position, we may be required to reverse the benefit previously recorded. - 28 - --------------------------------------------------------------------------------
Business Acquisitions
OnDecember 23, 2020 , we acquiredShopRunner, Inc. ("ShopRunner"), an e-commerce platform that directly connects brands and merchants with online shoppers, for$225 million in cash from operations. The majority of the purchase price was allocated to goodwill and intangibles. The financial results ofShopRunner are included in "Corporate, other and eliminations" from the date of acquisition and were not material to our results of operations.
Outlook
We anticipate continued increased demand for our e-commerce services at FedEx Ground andFedEx Express , international export volume growth atFedEx Express and pricing initiatives across all of our transportation segments to drive improved revenue and operating income in the fourth quarter of 2021. In addition, higher yields and volume are anticipated to drive revenue and operating income growth at the FedEx Freight segment in the fourth quarter of 2021. We expect higher variable incentive compensation accruals, higher labor costs, increased maintenance costs and increased supply and other costs related to the COVID-19 pandemic to be incurred in the fourth quarter of 2021. Going forward, we may incur costs associated with debt reduction and refinancing transactions, which may be material. See the "Liquidity Outlook" section of this MD&A for more information. In addition, we will record$100 million of expense in the fourth quarter of 2021 related to our recently announced pledge toYale University to advance carbon sequestration solutions. Governmental, business and individuals' actions in response to the COVID-19 pandemic are expected to continue to impact the demand for commercial air travel, thereby reducing available air freight capacity. As a result of these ongoing capacity constraints, we expect continued strong demand for international priority shipments in the fourth quarter of 2021 to necessitate increased usage of our assets to support demand in key international supply chains. We will continue managing network capacity, flexing our network and making adjustments as needed to align with volumes and operating conditions. We have expanded FedEx Ground seven-day residential delivery coverage to virtually all of theU.S. population and will continue to optimize our network capacity to meet evolving customer needs. During the fourth quarter of 2021, we will continue to focus on last-mile residential delivery optimization, including by directing certainU.S. day-definite residentialFedEx Express shipments into the FedEx Ground network to increase efficiency and lower our cost-to-serve. We also are focused on improving revenue quality and lowering costs through advanced technology aimed at improving productivity and safety. We are continuing to execute our TNT Express integration plans and are scheduled to complete the integration of theFedEx Express and TNT Express linehaul and pickup-and-delivery operations and begin offering an enhanced portfolio of international services in 2021. We will leverage the capabilities that TNT Express adds to our portfolio, which are expected to improve our European revenue and profitability, which continue to underperform our expectations for that market. We expect to complete the final phase of international air network interoperability in early calendar 2022.
We expect to incur approximately
As we approach the completion of the physical network integration of TNT Express in 2022, we are evaluating opportunities and pursuing initiatives in addition to the integration to continue to transform and optimize theFedEx Express international business, particularly inEurope . These actions are focused on reducing the complexity and fragmentation of our international business, improving efficiency to meet changing customer expectations and business dynamics, lowering costs, increasing profitability and improving service levels. We expect to incur additional costs, over multiple years, which may be material, including transformation costs and capital investments related to these actions. As part of this strategy, inJanuary 2021 we announced a workforce reduction plan inEurope . We expect the pre-tax cost of the severance benefits to be provided under the plan to range from$300 million to$575 million in cash expenditures through fiscal 2023. See the "Business Realignment Costs" section of this MD&A for additional information. Our expectations for the fourth quarter of 2021 are dependent on key external factors, including continued recovery inU.S. industrial production and global trade, no additional COVID-19-related business restrictions and current fuel price expectations.
Other Outlook Matters. For details on key 2021 capital projects, refer to the "Liquidity Outlook" section of this MD&A.
See "Forward-Looking Statements" and Part II, Item 1A "Risk Factors" for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.
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RECENT ACCOUNTING GUIDANCE
See Note 1 of the accompanying unaudited condensed consolidated financial statements for a discussion of recent accounting guidance.
REPORTABLE SEGMENTS
FedEx Express SegmentFedEx Express (express transportation, small-package ground delivery and freight transportation)FedEx Custom Critical, Inc. ("FedEx Custom Critical") (time-critical transportation)FedEx Cross Border Holdings, Inc. ("FedEx Cross Border") (cross-border e-commerce technology and e-commerce transportation solutions) FedEx Ground Segment FedEx Ground (small-package ground delivery) FedEx Freight Segment FedEx Freight (LTL freight transportation) FedEx Services Segment FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services and back-office functions) FEDEX SERVICES SEGMENT
The operating expense line item "Intercompany charges" on the accompanying unaudited condensed consolidated financial statements of our transportation segments reflects the allocations from the FedEx Services segment to the respective operating segments. The allocations of net operating costs are based on metrics such as relative revenue or estimated services provided.
The FedEx Services segment provides direct and indirect support to our operating segments, and we allocate all of the net operating costs of the FedEx Services segment to reflect the full cost of operating our businesses in the results of those segments. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance is evaluated based on the impact of its total allocated net operating costs on our operating segments. We believe these allocations approximate the net cost of providing these functions. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.
CORPORATE, OTHER AND ELIMINATIONS
Corporate and other includes corporate headquarters costs for executive officers and certain legal and finance functions, as well as certain other costs and credits not attributed to our core business. These costs are not allocated to the other business segments. Also, the results of theFedEx Logistics, Inc. ("FedEx Logistics") andFedEx Office and Print Services, Inc. ("FedEx Office") operating segments, as well as the results ofShopRunner beginningDecember 23, 2020 , are included in Corporate and other.FedEx Logistics provides integrated supply chain management solutions, specialty transportation, customs brokerage and global ocean and air freight forwarding. FedEx Office provides an array of document and business services and retail access to our customers for our package transportation businesses. In the third quarter and nine months of 2021, the decrease in revenue in "Corporate, other and eliminations" was due to a significant decline in non-shipping revenue at FedEx Office resulting from the COVID-19 pandemic. The transfer ofFedEx Custom Critical and FedEx Cross Border into theFedEx Express segment contributed to the decrease in revenue in the third quarter and nine months of 2021. These factors were partially offset by higher transportation yields driven by constrained market capacity resulting from the COVID-19 pandemic in the third quarter and nine months of 2021. Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment in order to optimize our resources. For example, during the nine months of 2021, FedEx Freight provided road and intermodal support for both FedEx Ground andFedEx Express and FedEx Ground provided delivery support for certainFedEx Express packages as part of our last-mile optimization efforts. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenue of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenue and expenses are eliminated in our consolidated results and are not separately identified in the following segment information because the amounts are not material. - 30 - --------------------------------------------------------------------------------
FEDEX EXPRESS SEGMENT
FedEx Express offers a wide range ofU.S. domestic and international shipping services for delivery of packages and freight including priority, deferred and economy services, which provide delivery on a time-definite or day-definite basis. The following tables compare revenue, operating expenses, operating income (dollars in millions), operating margin and operating expenses as a percent of revenue for the periods endedFebruary 28, 2021 andFebruary 29, 2020 : Three Months Ended Percent Nine Months Ended Percent 2021 2020 Change 2021 2020 Change Revenue: Package: U.S. overnight box$ 2,078 $ 1,865 11$ 5,951 $ 5,595 6 U.S. overnight envelope 444 459 (3 ) 1,305 1,395 (6 ) U.S. deferred 1,418 1,127 26 3,718 3,063 21 TotalU.S. domestic package revenue 3,940 3,451 14 10,974 10,053 9 International priority 2,596 1,710 52 7,423 5,344 39 International economy 653 810 (19 ) 1,927 2,538 (24 ) Total international export package revenue 3,249 2,520 29 9,350 7,882 19 International domestic(1) 1,162 1,075 8 3,456 3,316 4 Total package revenue 8,351 7,046 19 23,780 21,251 12 Freight: U.S. 860 739 16 2,492 2,132 17 International priority 775 439 77 2,165 1,376 57 International economy 383 499 (23 ) 1,162 1,556 (25 ) International airfreight 56 61 (8 ) 196 197 (1 ) Total freight revenue 2,074 1,738 19 6,015 5,261 14 Other(2) 363 140 159 1,008 441 129 Total revenue 10,788 8,924 21 30,803 26,953 14 Operating expenses: Salaries and employee benefits 4,352 3,520 24 12,016 10,297 17 Purchased transportation 1,460 1,212 20 4,213 3,711 14 Rentals and landing fees 650 538 21 1,696 1,556 9 Depreciation and amortization 490 478 3 1,449 1,409 3 Fuel 647 744 (13 ) 1,672 2,241 (25 ) Maintenance and repairs 549 429 28 1,642 1,460 12 Business realignment costs 10 - NM 10 - NM Asset impairment charges - - - - 66 NM Intercompany charges 509 500 2 1,456 1,469 (1 ) Other 1,658 1,366 21 4,576 4,086 12 Total operating expenses 10,325 8,787 18 28,730 26,295 9 Operating income$ 463 $ 137 238$ 2,073 $ 658 215 Operating margin 4.3 % 1.5 % 280 bp 6.7 % 2.4 % 430 bp
(1) International domestic revenue relates to our international intra-country
operations.
(2) Includes the operations of
the periods endedFebruary 28, 2021 . - 31 -
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Percent of Revenue Three Months Ended Nine Months Ended 2021 2020 2021 2020 Operating expenses: Salaries and employee benefits 40.3 % 39.5 % 39.0 % 38.2 % Purchased transportation 13.5 13.6 13.7 13.8 Rentals and landing fees 6.0 6.0 5.5 5.8 Depreciation and amortization 4.6 5.4 4.7 5.2 Fuel 6.0 8.3 5.4 8.3 Maintenance and repairs 5.1 4.8 5.4 5.4 Business realignment costs 0.1 - - - Asset impairment charges - - - 0.2 Intercompany charges 4.7 5.6 4.7 5.5 Other 15.4 15.3 14.9 15.2 Total operating expenses 95.7 98.5 93.3 97.6 Operating margin 4.3 % 1.5 % 6.7 % 2.4 %
The following table compares selected statistics (in thousands, except yield
amounts) for the periods ended
Three Months Ended Percent Nine Months Ended Percent 2021 2020 Change 2021 2020 Change Package Statistics Average daily package volume (ADV): U.S. overnight box 1,529 1,258 22 1,421 1,240 15 U.S. overnight envelope 508 536 (5 ) 501 548 (9 ) U.S. deferred 1,562 1,215 29 1,367 1,067 28 Total U.S. domestic ADV 3,599 3,009 20 3,289 2,855 15 International priority 765 542 41 736 546 35 International economy 294 293 - 283 300 (6 ) Total international export ADV 1,059 835 27 1,019 846 20 International domestic(1) 2,353 2,405 (2 ) 2,427 2,475 (2 ) Total ADV 7,011 6,249 12 6,735 6,176 9 Revenue per package (yield): U.S. overnight box$ 21.91 $ 23.54 (7 )$ 22.04 $ 23.75 (7 ) U.S. overnight envelope 14.08 13.59 4 13.72 13.39 2 U.S. deferred 14.65 14.73 (1 ) 14.32 15.11 (5 ) U.S. domestic composite 17.66 18.21 (3 ) 17.56 18.53 (5 ) International priority 54.71 50.07 9 53.08 51.53 3 International economy 35.87 43.88 (18 ) 35.85 44.44 (19 ) International export composite 49.49 47.90 3 48.30 49.01 (1 ) International domestic(1) 7.96 7.09 12 7.49 7.05 6 Composite package yield$ 19.21 $ 17.90 7$ 18.58 $ 18.11 3 Freight Statistics Average daily freight pounds: U.S. 9,943 8,356 19 9,426 8,244 14 International priority 6,286 4,752 32 6,000 4,924 22 International economy 12,135 13,806 (12 ) 12,435 14,252 (13 ) International airfreight 1,417 1,422 - 1,534 1,567 (2 ) Total average daily freight pounds 29,781 28,336 5 29,395 28,987 1 Revenue per pound (yield): U.S.$ 1.40 $ 1.40 -$ 1.39 $ 1.36 2 International priority 1.99 1.47 35 1.90 1.47 29 International economy 0.51 0.57 (11 ) 0.49 0.57 (14 ) International airfreight 0.64 0.68 (6 ) 0.67 0.66 2 Composite freight yield$ 1.12 $ 0.97 15$ 1.08 $ 0.96 13
(1) International domestic statistics relate to our international intra-country
operations. - 32 -
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FedEx Express Segment Revenue
FedEx Express segment revenue increased 21% in the third quarter and 14% in the nine months of 2021 due to international export andU.S. domestic package volume growth, partially offset by lower fuel surcharges. Revenue was also positively impacted by pricing initiatives resulting from global air freight capacity constraints in the third quarter and nine months of 2021. These factors were partially offset by severe winter weather in the third quarter and nine months of 2021 and one fewer operating weekday in the third quarter of 2021. International export package average daily volumes increased 27% in the third quarter and 20% in the nine months of 2021 led by volume growth fromAsia-Pacific andEurope . International export package yields increased 3% in the third quarter of 2021 primarily due to favorable exchange rates. International export package yields decreased 1% in the nine months of 2021 primarily due to lower fuel surcharges, partially offset by favorable exchange rates and pricing initiatives resulting from global air freight capacity constraints.U.S. domestic package average daily volumes increased 20% in the third quarter and 15% in the nine months of 2021 driven by growth in deferred service offerings, reflecting increased e-commerce demand resulting from the COVID-19 pandemic, as well as growth in overnight box service offerings.U.S. domestic package yields decreased 3% in the third quarter and 5% in the nine months of 2021 due to lower package weights and lower fuel surcharges. Average daily freight pounds increased 5% in the third quarter and 1% in the nine months of 2021 primarily due to volume growth in international priority andU.S. services. Composite freight yields increased 15% in the third quarter and 13% in the nine months of 2021 primarily due to improved base yields. Other revenue increased 159% in the third quarter and 129% in the nine months of 2021 due to the transfer ofFedEx Custom Critical and FedEx Cross Border into theFedEx Express segment.FedEx Express's U.S. domestic and outbound fuel surcharge and international fuel surcharge ranged as follows for the periods endedFebruary 28, 2021 andFebruary 29, 2020 : Three Months Ended Nine Months Ended 2021 2020 2021 2020U.S. Domestic and Outbound Fuel Surcharge: Low 4.61 % 7.25 % 2.73 % 7.21 % High 6.44 8.00 6.44 8.45 Weighted-average 5.21 7.38 4.13 7.48 International Export and Freight Fuel Surcharge: Low 2.96 6.66 0.28 6.66 High 19.88 18.09 19.88 18.56 Weighted-average 13.48 15.23 11.51 15.47 International Domestic Fuel Surcharge: Low 4.25 2.98 2.62 2.98 High 20.39 19.18 20.39 19.47 Weighted-average 6.28 7.32 6.04 7.36
FedEx Express Segment Operating Income
FedEx Express segment operating income increased substantially in the third quarter and nine months of 2021 due to international export andU.S. domestic package volume growth.FedEx Express segment operating results include benefits of approximately$30 million in the third quarter and$165 million in the nine months of 2021 from a reduction in aviation excise taxes provided by the Coronavirus Aid, Relief, and Economic Security Act, which expired onDecember 31, 2020 . These factors were partially offset by higher variable incentive compensation expense of approximately$340 million in the third quarter and$570 million in the nine months of 2021, which includes approximately$125 million in special bonuses paid inJanuary 2021 to our front-line operational team members. In addition, severe winter weather negatively impacted operating income by an estimated$240 million in the third quarter and nine months of 2021, primarily affecting revenue. One fewer operating weekday also negatively impacted operating income in the third quarter of 2021. We continued to incur increased costs of operating our global network in the COVID-19 pandemic environment in the third quarter and nine months of 2021, which is partially impacted by constrained commercial air capacity. Results for the nine months of 2020 were negatively impacted by$66 million of asset impairment charges associated with the decision to permanently retire certain aircraft and related engines.FedEx Express segment results included$41 million of integration expenses in the third quarter and$121 million of such expenses in the nine months of 2021, a$21 million decrease from the third quarter and a$47 million decrease from the nine months of 2020. - 33 -
-------------------------------------------------------------------------------- Salaries and employee benefits expense increased 24% in the third quarter and 17% in the nine months of 2021 primarily due to staffing to support volume growth and higher variable incentive compensation expense. In addition, higher labor expenses and increased costs associated with network contingencies as a result of the COVID-19 pandemic contributed to the increase in salaries and employee benefits expense in both the third quarter and nine months of 2021. Purchased transportation expense increased 20% in the third quarter and 14% in the nine months of 2021 primarily due to the transfer ofFedEx Custom Critical and FedEx Cross Border into theFedEx Express segment. Other operating expense increased 21% in the third quarter and 12% in the nine months of 2021 primarily due to higher outside service contract expense and bad debt expense. Additionally, higher operating supplies, partially offset by decreased travel, both driven by the COVID-19 pandemic, negatively impacted other operating expense in the nine months of 2021. Maintenance and repairs expense increased 28% in the third quarter and 12% in the nine months of 2021 primarily due to an increase in flight hours resulting from higher package volumes. Fuel expense decreased 13% in the third quarter and 25% in the nine months of 2021 due to lower fuel prices, partially offset by higher aircraft and vehicle usage. The net impact of fuel had a slightly negative impact to operating income in the third quarter and nine months of 2021 as lower fuel surcharges outpaced decreased fuel prices. See the "Fuel" section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results. - 34 - --------------------------------------------------------------------------------
FEDEX GROUND SEGMENT
FedEx Ground service offerings include day-certain delivery to businesses in theU.S. andCanada and to 100% ofU.S. residences. The following tables compare revenue, operating expenses, operating income (dollars in millions), operating margin, selected package statistics (in thousands, except yield amounts) and operating expenses as a percent of revenue for the periods endedFebruary 28, 2021 andFebruary 29, 2020 : Three Months Ended Percent Nine Months Ended Percent 2021 2020 Change 2021 2020 Change Revenue$ 7,980 $ 5,845 37$ 22,364 $ 16,339 37 Operating expenses: Salaries and employee benefits 1,652 1,046 58 4,483 2,888 55 Purchased transportation 3,745 2,908 29 10,524 7,772 35 Rentals 306 256 20 859 744 15 Depreciation and amortization 214 197 9 623 585 6 Fuel 6 4 50 15 11 36 Maintenance and repairs 125 101 24 356 286 24 Intercompany charges 480 405 19 1,358 1,174 16 Other 750 573 31 2,058 1,538 34 Total operating expenses 7,278 5,490 33 20,276 14,998 35 Operating income$ 702 $ 355 98$ 2,088 $ 1,341 56 Operating margin 8.8 % 6.1 % 270 bp 9.3 % 8.2 % 110 bp Average daily package volume 13,206 10,536 25 12,347 9,637 28 Revenue per package (yield)$ 9.72 $ 8.78 11$ 9.49 $ 8.90 7 Percent of Revenue Three Months Ended Nine Months Ended 2021 2020 2021 2020 Operating expenses: Salaries and employee benefits 20.7 % 17.9 % 20.0 % 17.7 % Purchased transportation 46.9 49.7 47.1 47.6 Rentals 3.8 4.4 3.8 4.5 Depreciation and amortization 2.7 3.4 2.8 3.6 Fuel 0.1 0.1 0.1 0.1 Maintenance and repairs 1.6 1.7 1.6 1.7 Intercompany charges 6.0 6.9 6.1 7.2 Other 9.4 9.8 9.2 9.4 Total operating expenses 91.2 93.9 90.7 91.8 Operating margin 8.8 % 6.1 % 9.3 % 8.2 %
FedEx Ground Segment Revenue
FedEx Ground segment revenue increased 37% in both the third quarter and nine months of 2021 primarily due to residential delivery volume growth reflecting increased e-commerce demand accelerated by the COVID-19 pandemic. Additionally, improved yield related to pricing initiatives positively impacted revenue in the third quarter and nine months of 2021. These factors were partially offset by severe winter weather in the third quarter and nine months of 2021 and one fewer operating weekday in the third quarter of 2021. Average daily volume increased 25% in the third quarter and 28% in the nine months of 2021 primarily due to continued growth in residential services driven by e-commerce, as well as growth in commercial services. FedEx Ground yields increased 11% in the third quarter and 7% in the nine months of 2021 primarily due to pricing initiatives. - 35 -
-------------------------------------------------------------------------------- The FedEx Ground fuel surcharge is based on a rounded average of the nationalU.S. on-highway price for a gallon of diesel fuel, as published by theDepartment of Energy . The fuel surcharge ranged as follows for the periods endedFebruary 28, 2021 andFebruary 29, 2020 : Three Months Ended Nine Months Ended 2021 2020 2021 2020 Low 5.75 % 6.50 % 5.50 % 6.50 % High 7.00 7.00 7.00 7.25 Weighted-average 6.30 6.91 5.93 6.96
FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 98% in the third quarter and 56% in the nine months of 2021 primarily due to residential delivery volume growth and yield improvement. These factors were partially offset by higher purchased transportation service provider settlements related to residential product mix, increased labor expenses and higher self-insurance accruals in the third quarter and nine months of 2021. In addition, severe winter weather negatively impacted operating income by an estimated$85 million in the third quarter and nine months of 2021, primarily affecting revenue. Purchased transportation expense increased 29% in the third quarter and 35% in the nine months of 2021 due to higher volume and increased residential product mix. Salaries and employee benefits expense increased 58% in the third quarter and 55% in the nine months of 2021 due to additional staffing to support volume growth, including costs associated with operating our seven-day network, merit increases and higher variable incentive compensation expense. In addition, higher labor expenses and increased costs associated with network contingencies as a result of the COVID-19 pandemic contributed to the increase in salaries and employee benefits expense in both the third quarter and nine months of 2021. Other operating expense increased 31% in the third quarter and 34% in the nine months of 2021 primarily due to higher self-insurance accruals, higher outside service contract expense and increased volume-related expenses. The net impact of fuel had a slight benefit to operating income in the third quarter and nine months of 2021 as decreased fuel prices outpaced lower fuel surcharges. See the "Fuel" section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results. - 36 - --------------------------------------------------------------------------------
FEDEX FREIGHT SEGMENT
FedEx Freight LTL service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following tables compare revenue, operating expenses, operating income (dollars in millions), operating margin, selected statistics and operating expenses as a percent of revenue for the periods endedFebruary 28, 2021 andFebruary 29, 2020 : Three Months Ended Percent Nine Months Ended Percent 2021 2020 Change 2021 2020 Change Revenue$ 1,836 $ 1,738 6$ 5,598 $ 5,487 2 Operating expenses: Salaries and employee benefits 911 846 8 2,684 2,665 1 Purchased transportation 203 176 15 582 550 6 Rentals 57 54 6 172 158 9 Depreciation and amortization 104 92 13 315 283 11 Fuel 103 130 (21 ) 258 385 (33 ) Maintenance and repairs 54 59 (8 ) 164 192 (15 ) Intercompany charges 128 133 (4 ) 369 389 (5 ) Other 157 135 16 409 417 (2 ) Total operating expenses 1,717 1,625 6 4,953 5,039 (2 ) Operating income$ 119 $ 113 5$ 645 $ 448 44 Operating margin 6.5 % 6.5 % - bp 11.5 % 8.2 % 330 bp Average daily shipments (in thousands): Priority 72.6 70.5 3 74.0 75.5 (2 ) Economy 31.1 29.8 4 31.3 31.8 (2 ) Total average daily shipments 103.7 100.3 3 105.3 107.3 (2 ) Weight per shipment (lbs): Priority 1,110 1,137 (2 ) 1,104 1,144 (3 ) Economy 950 1,000 (5 ) 988 980 1 Composite weight per shipment 1,062 1,096 (3 ) 1,070 1,096 (2 ) Revenue per shipment: Priority$ 275.44 $ 265.17 4$ 266.30 $ 259.61 3 Economy 315.11 308.65 2 310.39 299.59 4 Composite revenue per shipment$ 287.32 $ 279.40 3$ 279.42 $ 272.09 3 Revenue per hundredweight: Priority$ 24.82 $ 23.33 6$ 24.12 $ 22.69 6 Economy 33.16 30.85 7 31.40 30.57 3 Composite revenue per hundredweight$ 27.06 $ 25.49 6$ 26.12 $ 24.84 5 Percent of Revenue Three Months Ended Nine Months Ended 2021 2020 2021 2020 Operating expenses: Salaries and employee benefits 49.6 % 48.7 % 48.0 % 48.6 % Purchased transportation 11.1 10.1 10.4 10.0 Rentals 3.1 3.1 3.1 2.9 Depreciation and amortization 5.7 5.3 5.6 5.1 Fuel 5.6 7.5 4.6 7.0 Maintenance and repairs 2.9 3.4 2.9 3.5 Intercompany charges 7.0 7.6 6.6 7.1 Other 8.5 7.8 7.3 7.6 Total operating expenses 93.5 93.5 88.5 91.8 Operating margin 6.5 % 6.5 % 11.5 % 8.2 % - 37 -
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FedEx Freight Segment Revenue
FedEx Freight segment revenue increased 6% in the third quarter of 2021 primarily due to higher revenue per shipment and increased average daily shipments, partially offset by lower fuel surcharges and one fewer operating weekday. FedEx Freight segment revenue increased 2% in the nine months of 2021 primarily due to higher revenue per shipment, partially offset by lower fuel surcharges and decreased average daily shipments. In addition, severe winter weather negatively impacted revenue in the third quarter and nine months of 2021. Revenue per shipment increased 3% in both the third quarter and nine months of 2021 primarily due to higher base rates reflecting our ongoing revenue quality initiatives, partially offset by lower fuel surcharges and lower weight per shipment. Average daily shipments increased 3% in the third quarter of 2021 due to volumes returning to pre-COVID-19 levels. Despite the increased demand in the third quarter of 2021, demand for our service offerings in the nine months of 2021 was negatively impacted by the COVID-19 pandemic and related supply chain disruptions, resulting in a 2% decrease in average daily shipments. The weekly indexed fuel surcharge is based on the average of theU.S. on-highway prices for a gallon of diesel fuel, as published by theDepartment of Energy . The indexed FedEx Freight fuel surcharge ranged as follows for the periods endedFebruary 28, 2021 andFebruary 29, 2020 : Three Months Ended Nine Months Ended 2021 2020 2021 2020 Low 21.40 % 23.00 % 21.00 % 23.00 % High 24.00 24.00 24.00 24.40 Weighted-average 22.50 23.70 21.60 23.80
FedEx Freight Segment Operating Income
FedEx Freight segment operating income increased 5% in the third quarter and 44% in the nine months of 2021 driven by continued focus on revenue quality initiatives, aligning our cost structure with current business levels and improving operational efficiencies. These positive factors more than offset the negative impact on volumes from the COVID-19 pandemic and weaker economic conditions for the nine months of 2021. In addition, severe winter weather negatively impacted operating income by an estimated$25 million in the third quarter and nine months of 2021, primarily affecting revenue. Salaries and employee benefits expense increased 8% in the third quarter of 2021 primarily due to higher variable incentive compensation expense, higher volumes and merit increases. Purchased transportation expense increased 15% in the third quarter and 6% in the nine months of 2021 primarily due to higher utilization of third-party purchased transportation and rail providers. Fuel expense decreased 21% in the third quarter and 33% in the nine months of 2021 primarily due to lower fuel prices. The net impact of fuel had a moderately negative impact to operating income in the third quarter and nine months of 2021 as lower fuel surcharges outpaced decreased fuel prices. See the "Fuel" section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results. - 38 - --------------------------------------------------------------------------------
FINANCIAL CONDITION LIQUIDITY Cash and cash equivalents totaled$8.9 billion atFebruary 28, 2021 , compared to$4.9 billion atMay 31, 2021 . The following table provides a summary of our cash flows for the nine-month periods endedFebruary 28, 2021 andFebruary 29, 2020 (in millions): 2021 2020 Operating activities: Net income$ 3,363 $ 1,620 Noncash charges and credits 5,479 4,944 Changes in assets and liabilities (1,450 ) (3,286 ) Cash provided by operating activities 7,392
3,278
Investing activities: Capital expenditures (4,202 ) (4,705 ) Business acquisitions, net of cash acquired (225 ) - Proceeds from asset dispositions and other 88
15
Cash used in investing activities (4,339 ) (4,690 ) Financing activities: Proceeds from short-term borrowings, net - 298 Principal payments on debt (105 ) (1,045 ) Proceeds from debt issuances 970 2,093 Proceeds from stock issuances 482 38 Dividends paid (513 ) (509 ) Purchase of treasury stock - (3 ) Other, net (13 ) (5 ) Cash provided by financing activities 821
867
Effect of exchange rate changes on cash 101 (8 ) Net increase (decrease) in cash and cash equivalents$ 3,975 $ (553 ) Cash and cash equivalents at the end of period$ 8,856 $ 1,766 Cash flows from operating activities increased$4.1 billion in the nine months of 2021 primarily due to higher net income, the timing of variable incentive compensation payments and lower pension contributions. Capital expenditures decreased during the nine months of 2021 primarily due to lower spending related to vehicles across all of our transportation segments. See the "Capital Resources" section of this MD&A for a discussion of capital expenditures during 2021 and 2020. DuringAugust 2020 ,FedEx Express issued$970 million of Pass Through Certificates, Series 2020-1AA (the "Certificates") with a fixed interest rate of 1.875% due inFebruary 2034 utilizing pass through trusts. The Certificates are secured by 19 Boeing aircraft. The payment obligations ofFedEx Express in respect of the Certificates are fully and unconditionally guaranteed by FedEx.FedEx Express is using the proceeds from the issuance for general corporate purposes. See Note 4 of the accompanying consolidated financial statements for additional information regarding the terms of the Certificates. - 39 - --------------------------------------------------------------------------------
CAPITAL RESOURCES
Our operations are capital intensive, characterized by significant investments in aircraft, vehicles and trailers, technology, facilities, and package handling and sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, availability of satisfactory financing and actions of regulatory authorities. The following table compares capital expenditures by asset category and reportable segment for the periods endedFebruary 28, 2021 andFebruary 29, 2020 (in millions): Percent Change 2021/2020 Three Months Ended Nine Months Ended Three Months Nine Months 2021 2020 2021 2020 Ended Ended Aircraft and related equipment$ 536 $ 399 $ 1,809 $ 1,527 34 18 Package handling and ground support equipment 304 228 865 636 33 36 Vehicles and trailers 139 260 280 920 (47 ) (70 ) Information technology 189 239 560 704 (21 ) (20 ) Facilities and other 208 313 688 918 (34 ) (25 ) Total capital expenditures$ 1,376 $ 1,439 $ 4,202 $ 4,705 (4 ) (11 ) FedEx Express segment$ 732 $ 929 $ 2,564 $ 2,941 (21 ) (13 ) FedEx Ground segment 349 275 940 818 27 15 FedEx Freight segment 130 97 228 414 34 (45 ) FedEx Services segment 145 110 392 415 32 (6 ) Other 20 28 78 117 (29 ) (33 ) Total capital expenditures$ 1,376 $ 1,439 $ 4,202 $ 4,705 (4 ) (11 ) Capital expenditures decreased during the nine months of 2021 primarily due to lower spending related to vehicles across all of our transportation segments, as well as lower spending related to facilities atFedEx Express , partially offset by higher spending related to aircraft atFedEx Express and increased spending on package handling equipment at FedEx Ground.
GUARANTOR FINANCIAL INFORMATION
We are providing the following information in compliance with Rule 13-01 of Regulation S-X, "Financial Disclosures about Guarantors and Issuers ofGuaranteed Securities " with respect to our senior unsecured debt securities and the Certificates. As ofFebruary 28, 2021 , we had outstanding$22.0 billion of senior unsecured debt securities and$944 million of Certificates. Substantially all of the senior unsecured notes were issued by FedEx under a shelf registration statement and are guaranteed by certain direct and indirect subsidiaries of FedEx ("Guarantor Subsidiaries"). FedEx owns, directly or indirectly, 100% of each Guarantor Subsidiary. The guarantees are (1) unsecured obligations of the respective Guarantor Subsidiary, (2) rank equally with all of their other unsecured and unsubordinated indebtedness, and (3) are full and unconditional and joint and several. If we sell, transfer or otherwise dispose of all of the capital stock or all or substantially all of the assets of a Guarantor Subsidiary to any person that is not an affiliate of FedEx, the guarantee of that Guarantor Subsidiary will terminate and holders of debt securities will no longer have a direct claim against such subsidiary under the guarantee. Additionally, FedEx fully and unconditionally guarantees the payment obligations ofFedEx Express in respect of the Certificates. See Note 6 to the financial statements included in our Annual Report for additional information regarding the terms of the senior unsecured debt securities and Note 4 of the accompanying consolidated financial statements for additional information regarding the terms of the Certificates. - 40 -
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The following tables present summarized financial information for FedEx (as Parent) and the Guarantor Subsidiaries on a combined basis after transactions and balances within the combined entities have been eliminated.
Parent and Guarantor Subsidiaries
The following table presents the summarized balance sheet information as of
February 28, May 31, 2021 2020 Current Assets$ 14,277 $ 11,014 Intercompany Receivable 4,443 3,985 Total Assets 87,174 62,089 Current Liabilities 9,393 7,030 Intercompany Payable - 519 Total Liabilities 54,330 49,844
The following table presents the summarized statement of income information for
the nine-month period ended
Revenue$ 44,991 Intercompany Charges, net (2,060 ) Operating Income 2,967 Intercompany Charges, net 107 Income Before Income Taxes 3,187 Net Income$ 2,692
The following tables present summarized financial information for FedEx (as
Parent Guarantor) and
Parent Guarantor and Subsidiary Issuer
The following table presents the summarized balance sheet information as of
February 28, May 31, 2021 2020 Current Assets$ 7,213 $ 4,444 Intercompany Receivable - 3,918 Total Assets 65,473 57,375 Current Liabilities 4,934 3,546 Intercompany Payable 5,193 7,853 Total Liabilities 46,327 45,140
The following table presents the summarized statement of income information for
the nine-month period ended
Revenue$ 17,048 Intercompany Charges, net (764 ) Operating Income 833 Intercompany Charges, net 418 Income Before Income Taxes 2,399 Net Income$ 2,332 - 41 -
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LIQUIDITY OUTLOOK In response to current business and economic conditions as referenced above in the "Outlook" section of this MD&A, we have and will continue to actively manage our cash flow and seek to protect capital for unforeseen challenges from the ongoing pandemic. With$8.9 billion in cash and$3.5 billion in available liquidity under our$2.0 billion five-year credit agreement (the "Five-Year Credit Agreement") and$1.5 billion 364-day credit agreement ("the 364-Day Credit Agreement" and together with the Five-Year Credit Agreement, the "Credit Agreements"), we believe that our cash and cash equivalents, cash flow from operations and available financing sources will be adequate to meet internal and external liquidity needs, including our capital expenditure expectations discussed below. As business and economic conditions improve, we will be evaluating our capital allocation strategy with a priority on strengthening our balance sheet. Our cash and cash equivalents balance atFebruary 28, 2021 includes$2.4 billion of cash in foreign jurisdictions associated with our permanent reinvestment strategy. We are able to access the majority of this cash without a material tax cost, as the enactment of the TCJA significantly reduced the cost of repatriating foreign earnings from aU.S. tax perspective. We do not believe that the indefinite reinvestment of these funds impairs our ability to meet ourU.S. domestic debt or working capital obligations. Our capital expenditures are expected to be approximately$5.7 billion in 2021, a$0.2 billion decrease from 2020. The increase in our expected capital expenditures from the estimate in our Annual Report is driven by timing of aircraft spend and acceleration of FedEx Ground capacity investments. Total capital expenditures will include aircraft modernization atFedEx Express and strategic investments to improve productivity and safety. We invested$1.8 billion in aircraft and related equipment in the nine months of 2021 and expect to invest an additional$460 million for aircraft and related equipment during the fourth quarter of 2021. In addition, we are making investments over multiple years of approximately$1.5 billion to significantly expand theFedEx Express Indianapolis hub and approximately$1.5 billion to modernize theFedEx Express Memphis World Hub. We expect these investments in hubs will provide productivity gains. We anticipate that our cash flow from operations will be sufficient to fund our capital expenditures for the remainder of 2021. Historically, we have been successful in obtaining unsecured financing from both domestic and international sources, although the marketplace for such investment capital can become restricted depending on a variety of economic factors. During the first quarter of 2021,FedEx Express executed a contract amendment rescheduling Boeing 767-300 Freighter aircraft deliveries as follows: 2021 - 18 aircraft; 2022 - 11 aircraft; 2023 - 13 aircraft; and 2024 - 4 aircraft. We have a shelf registration statement filed with theSecurities and Exchange Commission ("SEC") that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock and allows pass through trusts formed byFedEx Express to sell, in one or more future offerings, pass through certificates. A key aspect of our capital allocation strategy moving forward will be strengthening our balance sheet and repayment of outstanding debt. Given our strong cash flows and liquidity position, we are evaluating potential transactions to reduce and refinance existing debt. The timing of and our ability to complete any such transactions will depend on a variety of factors, including economic and market conditions, and we would incur costs related to these transactions, which may be material. The Five-Year Credit Agreement expires inMarch 2026 and includes a$250 million letter of credit sublimit. The 364-Day Credit Agreement expires inMarch 2022 . The Credit Agreements are available to finance our operations and other cash flow needs. See Note 1 and Note 4 of the accompanying unaudited condensed consolidated financial statements, as well as Part II, Item 5 ("Other Information"), for a description of the terms and significant covenants of the Credit Agreements. During the nine months of 2021, we made voluntary contributions totaling$300 million to ourU.S. Pension Plans. We do not expect to make any additional contributions to ourU.S. Pension Plans during the fourth quarter of 2021. OurU.S. Pension Plans have ample funds to meet expected benefit payments.Standard & Poor's has assigned us a senior unsecured debt credit rating of BBB, a commercial paper rating of A-2 and a ratings outlook of "negative." Moody's Investors Service has assigned us an unsecured debt credit rating of Baa2, a commercial paper rating of P-2 and a ratings outlook of "negative." If our credit ratings drop, our interest expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt credit ratings drop below investment grade, our access to financing may become limited.
CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to the contractual commitments described in Part II, Item 7 in our Annual Report.
We do not have any guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on our financial condition or liquidity. - 42 - --------------------------------------------------------------------------------
See Note 9 of the accompanying unaudited condensed consolidated financial statements for additional information on our purchase commitments.
OTHER BUSINESS MATTERS
On
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States requires management to make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.GOODWILL .Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that the fair value of a reporting unit has fallen below its carrying value. We do not believe there has been any other change of events or circumstances that would indicate that a reevaluation of the goodwill of our reporting units is required as ofFebruary 28, 2021 , nor do we believe the goodwill of our reporting units is at risk of failing impairment testing. For additional details on goodwill impairment testing, refer to Note 1 to the financial statements included in our Annual Report.
Information regarding our critical accounting estimates can be found in our Annual Report, including Note 1 to the financial statements therein. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including (but not limited to) those contained in "Business Realignment Costs," "Income Taxes," "Outlook" and "Liquidity Outlook" and the "General," "Financing Arrangements," "Income Taxes," "Retirement Plans," "Commitments" and "Contingencies" notes to our unaudited condensed consolidated financial statements, are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and business and the assumptions underlying such statements. Forward-looking statements include those preceded by, followed by or that include the words "will," "may," "could," "would," "should," "believes," "expects," "anticipates," "plans," "estimates," "targets," "projects," "intends" or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements because of, among other things, potential risks and uncertainties, such as:
• the negative impacts of the COVID-19 pandemic;
• economic conditions in the global markets in which we operate;
• significant changes in the volumes of shipments transported through our
networks, customer demand for our various services or the prices we obtain for
our services;
• anti-trade measures and additional changes in international trade policies and
relations;
• a significant data breach or other disruption to our technology
infrastructure;
• our ability to successfully integrate the businesses and operations of FedEx
Express and TNT Express in the expected time frame and at the expected cost
and to achieve the expected benefits from the combined businesses;
• our ability to successfully implement our workforce reduction plan in
• our ability to continue to transform and optimize the
international business, particularly inEurope ;
• our ability to successfully implement our business strategy, effectively
respond to changes in market dynamics and achieve the anticipated benefits and
associated cost savings of such strategies and actions; - 43 -
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• damage to our reputation or loss of brand equity;
• our ability to retain and attract employee talent and maintain our company
culture;
• the impact of the
terms of their future trading relationship;
• the price and availability of jet and vehicle fuel;
• our ability to manage our network capacity and cost structure for capital
expenditures and operating expenses, and match it to shifting and future customer volume levels;
• the impact of intense competition on our ability to maintain or increase our
prices (including our fuel surcharges in response to rising fuel costs) or to
maintain or grow our revenue and market share;
• any impacts on our businesses resulting from evolving or new
international government regulations, laws, policies and actions, which could
be unfavorable to our business, including regulatory or other actions
affecting data privacy and sovereignty, global aviation or other
transportation rights, increased air cargo, pilot flight and duty time and
other security or safety requirements, export controls, the use of new
technology and accounting, trade (such as protectionist measures or
restrictions on free trade), foreign exchange intervention in response to
currency volatility, labor (such as joint employment standards, changes to the
Railway Labor Act of 1926, as amended, affecting
increased minimum wage requirements), environmental (such as global climate
change legislation) or postal rules;
• future changes in tax laws and regulations, interpretations, challenges or
judicial decisions related to our tax positions;
• our ability to execute and effectively operate, integrate, leverage and grow
acquired businesses such as
acquired businesses into FedEx's operations, including with respect to the
collection and storage of certain personal data of merchants, buyers, and
others; and to continue to support the value we allocate to these acquired
businesses, including their goodwill and other intangible assets; as well as
additional costs incurred in connection with the integration of acquired businesses;
• our ability to maintain good relationships with our employees and avoid
attempts by labor organizations to organize groups of our employees, which
could significantly increase our operating costs and reduce our operational
flexibility;
• the impact of costs related to lawsuits in which it is alleged that FedEx
Ground should be treated as an employer of drivers employed by service providers engaged by FedEx Ground;
• increased insurance and claims expenses related to vehicle accidents, workers'
compensation claims and general business liabilities;
• any impact on our business from disruptions or modifications in service by, or
changes in the business or financial soundness of, the
which is a significant customer of FedEx; • the impact of any international conflicts or terrorist activities on the
us in particular, and what effects these events will have on our costs or the
demand for our services;
• our ability to quickly and effectively restore operations following adverse
weather or a localized disaster or disturbance in a key geography, which have
become more prevalent in recent years;
• our ability to achieve our goal of carbon-neutral operations by 2040;
• increasing costs, the volatility of costs and funding requirements and other
legal mandates for employee benefits, especially pension and healthcare benefits;
• our ability to successfully mitigate unique technological, operational and
regulatory risks related to our autonomous delivery strategy; - 44 -
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• constraints, volatility or disruption in the capital markets and our ability
to obtain financing and maintain our current credit ratings, commercial paper
ratings, senior unsecured debt credit ratings and Credit Agreement financial
covenants;
• widespread outbreak of an illness or any other communicable disease, or any
other public health crisis;
• human resource management risks, including changes in our ability to attract
and retain drivers, package and freight handlers, commercial pilots and other
employees, as well as health and safety issues;
• the increasing costs of compliance with federal, state and foreign
governmental agency mandates (including the Foreign Corrupt Practices Act and
theU.K. Bribery Act) and defending against inappropriate or unjustified enforcement or other actions by such agencies;
• changes in foreign currency exchange rates, especially in the euro, Chinese
yuan, British pound, Canadian dollar, Australian dollar and Mexican peso,
which can affect our sales levels and foreign currency sales prices;
• any liability resulting from and the costs of defending against class-action,
derivative and other litigation, such as wage-and-hour, joint employment,
securities and discrimination and retaliation claims, and any other legal or
governmental proceedings, including the matters discussed in Note 10 of the
accompanying unaudited condensed consolidated financial statements;
• the outcome of future negotiations to reach new collective bargaining
agreements - including with the union that represents the pilots of FedEx
Express (the current pilot agreement is scheduled to become amendable in
FedEx Freight, Inc. facility in theU.S. ;
• the impact of technology developments on our operations and on demand for our
services, and our ability to continue to identify and eliminate unnecessary
information-technology redundancy and complexity throughout the organization;
• the alternative interest rates we are able to negotiate with counterparties
pursuant to the relevant provisions of our Credit Agreements following
cessation of the publication of the London Interbank Offered Rate in the event
the euro interbank offered rate also ceases to exist and we make borrowings
under the agreements; and • other risks and uncertainties you can find in our press releases andSEC
filings, including the risk factors identified under the heading "Risk
Factors" in "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in our Annual Report, as updated by our quarterly reports
on Form 10-Q.
As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. - 45 -
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