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Analysis of Operating Leases

Difficulty: Advanced


Operating Leases Accounting Policy

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

Source: FedEx Corp., Annual Report

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Present Value of Future Operating Lease Payments

FedEx Corp., future operating lease payments

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
Total undiscounted future operating lease payments1 (USD $ in millions)
Discount rate2 % % % % % %
Total present value of future operating lease payments (USD $ in millions)

1 Source: FedEx Corp. Annual Reports

2 Weighted-average interest rate for FedEx Corp.'s debt

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2018 2018
2019 2019
2020 2020
2021 2021
2022 2022
2023 and thereafter 2023
2024
2025
2026
2027
2028
Total:

1 Source: FedEx Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2017 2017
2018 2018
2019 2019
2020 2020
2021 2021
2022 and thereafter 2022
2023
2024
2025
2026
2027
Total:

1 Source: FedEx Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2016 2016
2017 2017
2018 2018
2019 2019
2020 2020
2021 and thereafter 2021
2022
2023
2024
2025
2026
Total:

1 Source: FedEx Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2015 2015
2016 2016
2017 2017
2018 2018
2019 2019
2020 and thereafter 2020
2021
2022
2023
2024
2025
Total:

1 Source: FedEx Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2014 2014
2015 2015
2016 2016
2017 2017
2018 2018
2019 and thereafter 2019
2020
2021
2022
2023
2024
Total:

1 Source: FedEx Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2013 2013
2014 2014
2015 2015
2016 2016
2017 2017
2018 and thereafter 2018
2019
2020
2021
2022
Total:

1 Source: FedEx Corp. Annual Reports

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Analyst Adjustments for Operating Leases

FedEx Corp., adjustments to financial data

USD $ in millions

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
Adjustment to Total Assets
Total assets (as reported)
Add: Operating leased assets1
Total assets (adjusted)
Adjustment to Total Debt
Total debt (as reported)
Add: Operating lease obligations2
Total debt (adjusted)
Adjustment to Earnings before Interest and Tax (EBIT)
EBIT3 (as reported)
Add-back: Rent expense under operating leases4
Less: Depreciation expense, operating leased assets5
EBIT (adjusted)
Adjustment to Interest Expense
Interest expense (as reported)
Add: Interest expense, operating lease obligations6
Interest expense (adjusted)

1, 2 Equal to total present value of future operating lease payments. See Details »

3 See Details »

4 Source: FedEx Corp. Annual Reports

5 See Details »

6 See Details »

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Adjusted Ratios for Operating Leases (Summary)

FedEx Corp., adjusted ratios

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
Total Asset Turnover1
Reported total asset turnover
Adjusted total asset turnover
Debt to Equity2
Reported debt to equity
Adjusted debt to equity
Return on Assets3 (ROA)
Reported ROA % % % % % %
Adjusted ROA % % % % % %
Interest Coverage4
Reported interest coverage
Adjusted interest coverage
Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. FedEx Corp.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. FedEx Corp.'s adjusted debt-to-equity deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. FedEx Corp.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017.
Adjusted interest coverage A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. FedEx Corp.'s adjusted interest coverage improved from 2015 to 2016 and from 2016 to 2017.

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Adjusted Total Asset Turnover

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
As Reported
Revenues (USD $ in millions)
Total assets (USD $ in millions)
Total asset turnover1
Adjusted for Operating Leases
Revenues (USD $ in millions)
Adjusted total assets (USD $ in millions)
Adjusted total asset turnover2

2017 Calculations

1 Total asset turnover = Revenues ÷ Total assets
= ÷ =

2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= ÷ =

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. FedEx Corp.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Debt to Equity

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
As Reported
Total debt (USD $ in millions)
Common stockholders' investment (USD $ in millions)
Debt to equity1
Adjusted for Operating Leases
Adjusted total debt (USD $ in millions)
Common stockholders' investment (USD $ in millions)
Adjusted debt to equity2

2017 Calculations

1 Debt to equity = Total debt ÷ Common stockholders' investment
= ÷ =

2 Adjusted debt to equity = Adjusted total debt ÷ Common stockholders' investment
= ÷ =

Ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. FedEx Corp.'s adjusted debt-to-equity deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

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Adjusted Return on Assets (ROA)

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
As Reported
Net income (USD $ in millions)
Total assets (USD $ in millions)
ROA1 % % % % % %
Adjusted for Operating Leases
Net income (USD $ in millions)
Adjusted total assets (USD $ in millions)
Adjusted ROA2 % % % % % %

2017 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × ÷ = %

2 Adjusted ROA = 100 × Net income ÷ Adjusted total assets
= 100 × ÷ = %

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. FedEx Corp.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017.

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Adjusted Interest Coverage

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
As Reported
Earnings before interest and tax1 (EBIT) (USD $ in millions)
Interest expense (USD $ in millions)
Interest coverage2
Adjusted for Operating Leases
Adjusted EBIT (USD $ in millions)
Adjusted interest expense (USD $ in millions)
Adjusted interest coverage3

1 See Details »

2017 Calculations

2 Interest coverage = EBIT ÷ Interest expense
= ÷ =

3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= ÷ =

Ratio Description The company
Adjusted interest coverage ratio A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. FedEx Corp.'s adjusted interest coverage ratio improved from 2015 to 2016 and from 2016 to 2017.

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Estimation of Depreciation Expense, Operating Leased Assets

USD $ in millions

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
Rent expense under operating leases1
Less: Estimated interest expense, operating lease obligations2
Estimated depreciation expense, operating leased assets

1 Source: FedEx Corp., Annual Reports

2 See Details »

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Estimation of Interest Expense, Operating Lease Obligations

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
Operating leased assets, at beginning of year1 (USD $ in millions)
Discount rate2 % % % % % %
Estimated interest expense, operating lease obligations3 (USD $ in millions)

1 See Details »

2 Weighted-average interest rate for FedEx Corp.'s debt

2017 Calculations

3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= × =

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Present Value of Operating Lease Payments, at Beginning of Year

 
May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012
Total present value of future operating lease payments1 (USD $ in millions)
Rent expense under operating leases2 (USD $ in millions)
Discount rate3 % % % % % %
Total present value of operating lease payments, at beginning of year4 (USD $ in millions)

1 Equal to total present value of future operating lease payments. See Details »

2 Source: FedEx Corp., Annual Reports

3 Weighted-average interest rate for FedEx Corp.'s debt

2017 Calculations

4 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Rent expense under operating leases) ÷ (1 + Discount rate)
= ( + ) ÷ (1 + %) =

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