Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended May 31, 2009.
OR
|
|
|
o |
|
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
|
|
(I.R.S. Employer |
Incorporation or Organization)
|
|
Identification No.) |
|
|
|
942 South Shady Grove Road, Memphis, Tennessee
|
|
38120 |
(Address of Principal Executive Offices)
|
|
(ZIP Code) |
Registrants 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 |
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 þ No o
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 o No þ
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 þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Date 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 o No o
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
Registrants 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. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
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 Registrants most
recently completed second fiscal quarter, November 28, 2008, was approximately $20.5 billion. The
Registrant has no non-voting stock.
As of July 13, 2009,
312,334,216 shares of the Registrants common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement to be delivered to stockholders in
connection with the 2009 annual meeting of stockholders to be held on September 28, 2009 are
incorporated by reference in response to Part III of this Report.
PART I
ITEM 1. BUSINESS
Overview
FedEx Corporation (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 four reportable
business segments:
|
|
FedEx Express: Federal Express Corporation (FedEx Express) is the worlds largest
express transportation company, offering time-certain delivery within one to three business
days and serving markets that comprise more than 90% of the worlds gross domestic product.
The FedEx Express segment also includes FedEx Trade Networks, Inc., which provides
international trade services, specializing in customs brokerage and global ocean and air cargo
distribution. |
|
|
|
FedEx Ground: FedEx Ground Package System, Inc. (FedEx Ground) is a leading provider of
small-package ground delivery service. FedEx Ground provides low-cost, day-certain service to
every business address in the United States and Canada, as well as residential delivery to
nearly 100% of U.S. residences through FedEx Home Delivery. The FedEx Ground segment also
includes FedEx SmartPost, Inc., which specializes in the consolidation and delivery of high
volumes of low-weight, less time-sensitive business-to-consumer packages using the U.S. Postal
Service or Canada Post Corporation for final delivery to any residential address or PO Box in
the United States and Canada. |
|
|
|
FedEx Freight: FedEx Freight Corporation is a leading U.S. provider of less-than-truckload
(LTL) freight services through its FedEx Freight business (regional LTL freight services)
and its FedEx National LTL business (long-haul LTL freight services). The FedEx Freight
segment also includes FedEx Custom Critical, Inc., North Americas largest time-specific,
critical shipment carrier. |
|
|
|
FedEx Services: FedEx Corporate Services, Inc. (FedEx Services) provides our other
companies with sales, marketing and information technology support, as well as customer
service support through FedEx Customer Information Services, Inc. The FedEx Services segment
also includes FedEx Office and Print Services, Inc. (FedEx Office), a leading provider of
document solutions and business services, and FedEx Global Supply Chain Services, Inc., which
offers a range of supply chain solutions. |
For financial information concerning our reportable business segments, refer to the accompanying
financial section, which includes managements discussion and analysis of results of operations and
financial condition and our consolidated financial statements.
Our Web site is located at fedex.com. Detailed information about our services and our e-commerce
tools and solutions can be found on our Web site. 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 Web site, as soon as reasonably practicable after
they are filed with or furnished to the SEC. These and other SEC filings are available through the
Investor Relations page of our Web site, the address of which is
http://www.fedex.com/us/investorrelations. The information on our Web site, 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.
3
Strategy
FedEx was incorporated in Delaware on October 2, 1997 to serve as the parent holding company of our
operating companies. Through our holding company, we provide strategic direction to, and
coordination of, the FedEx portfolio of companies. We intend to continue leveraging and extending
the FedEx brand and providing our customers with convenient, seamless access to our entire
portfolio of integrated services.
We believe that sales and marketing activities, as well as the information systems that support the
extensive automation of our package delivery services, are functions that are best coordinated
across operating companies. Through the use of advanced information systems that connect the FedEx
companies, we make it convenient for customers to use the full range of FedEx services. We believe
that seamless information integration is critical to obtain business synergies from multiple
operating units. For example, our Web site, fedex.com, provides a single point of contact for our
customers to access FedEx Express, FedEx Ground and FedEx Freight shipment tracking, customer
service and invoicing information, as well as FedEx Office services. Similarly, by making one call
to FedEx Expedited Freight Services, our customers can quickly and easily evaluate surface and air
freight shipping options available from FedEx Express, FedEx Freight and FedEx Custom Critical in
order to select the service best meeting their needs. Through this one point of contact, customers
can select from a broad range of freight services, based on their pickup and delivery requirements,
time sensitivity and the characteristics of the products being shipped.
We manage our business as a portfolio in the long-term best interest of FedEx as a whole, 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 on
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. As an example of our commitment to
managing collaboratively, our management incentive compensation programs are tied to the
performance of FedEx as a whole.
While we have increased our emphasis on competing collectively and managing collaboratively, we
continue to believe that operating independent networks, each focused on its own respective
markets, results in optimal service quality, reliability and profitability from each business unit.
Each FedEx company focuses exclusively on the market sectors in which it has the most expertise.
Each companys operations, cost structure and culture are designed to serve the unique customer
needs of a particular market segment.
Our compete collectively, operate independently, manage collaboratively strategy also provides
flexibility in sizing our various operating companies to align with varying macro-economic
conditions and customer demand for the market segments in which they operate. For example,
although the current global recession has negatively impacted all of our companies, our FedEx
Express, FedEx Freight and FedEx Services segments have been disproportionately affected.
Meanwhile, our FedEx Ground segment continues to grow. Accordingly, although we have implemented
cost-reduction initiatives across the enterprise during 2009, these initiatives have been focused
particularly on our FedEx Express, FedEx Freight and FedEx Services segments. For instance, we
have reduced hours, personnel and network capacity at those segments, but we continue to increase
network capacity at the FedEx Ground segment, albeit at a slower rate.
4
The following four trends have driven world commerce and shaped the global marketplace in the
recent past, and despite the current global recession, we believe they will continue to do so over
the long term:
|
|
Increase in High-Tech and High-Value-Added Businesses: 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. |
|
|
|
Globalization: As the worlds 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. |
|
|
|
Supply Chain Acceleration: As the economy has become increasingly global, it has also
become more fast-paced, and companies of all sizes now depend on the delivery of just-in-time
inventory to help them compete. We have taken advantage of the move toward faster, more
efficient supply chains by helping customers obtain near real-time information to manage
inventory in motion, thereby reducing overhead and obsolescence and speeding time-to-market. |
|
|
|
Growth of E-Commerce: E-commerce acts as a catalyst for the other three trends and is a
vital growth engine for businesses. Through our global transportation and technology
networks, we contribute to and benefit from the growth of e-commerce. |
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 move toward stronger long-term growth, productivity and
profitability. To this end, we are pursuing a number of initiatives to continue to enhance the
FedEx customer experience. For instance, notwithstanding the current global recession, we continue
to invest in long-term strategic projects focused on expanding our global networks to accommodate
future volume growth and increase customer convenience. In addition, we are broadening and more
effectively bundling our portfolio of services in response to the needs and desires of our
customers. For example, in 2009, we:
|
|
Launched FedEx Express Nacional, a domestic next-business-day service in Mexico, in light
of projections of significant growth in Mexicos express shipping market in the next ten
years. The new service provides highly reliable and convenient express shipping solutions
across Mexico with the support of two new centers of operations that we opened in Toluca and
San Luis Potosi. |
|
|
|
Upgraded FedEx Express international next-business-day delivery service, FedEx
International Priority, from Europe to major U.S. East Coast cities. The service enhancements
provide our European customers with overnight access to more ZIP codes in key markets along
the U.S. East Coast, as well as later pick-up times. |
|
|
|
Introduced LTL freight delivery by 10:30 a.m. backed by a money-back guarantee. The new
service, FedEx Freight A.M., provides our customers with greater flexibility and control over
their LTL freight shipments. |
In June 2009, we announced a multi-year agreement with OfficeMax to offer U.S. domestic FedEx
Express and FedEx Ground shipping services at all U.S. OfficeMax retail locations (over 900
locations), beginning later in calendar 2009. These additional staffed drop-off locations are
expected to complement
our existing retail network, including our FedEx Office and Print Centers, and further expand
customer access to our services.
5
In sum, our overall long-term goal is to:
|
|
deliver superior financial returns for our stockholders; |
|
|
expand our portfolio of services to meet our customers needs; and |
|
|
execute our compete collectively, operate independently, manage collaboratively strategy
with both discipline and imagination. |
Reputation and Responsibility
By competing collectively under the FedEx brand, our operating companies benefit from one of the
worlds 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 2009, FedEx ranked seventh in FORTUNE magazines Worlds Most Admired
Companies list the eighth consecutive year we have been ranked in the top ten on the list. In
addition, FedEx continued to rank highest in customer satisfaction in the University of Michigan
Business School National Quality Research Centers American Customer Satisfaction Index in the
express delivery category.
FedEx is well recognized as a leader, not only in the transportation industry and technological
innovation, but also in global citizenship. FedEx understands that a sustainable global business
is tied to our global citizenship. We are committed to sustainably connecting the world and
enhancing the long-term value of the company for our shareowners and for the communities and
businesses that rely on our services. In 2009, we published our first global citizenship report
(available at http://about.fedex.designcdt.com/
citizenship_report), which frames how we think about our responsibilities in the area of global
citizenship and includes 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. In 2009, we were listed among FORTUNEs 100 Best Companies to Work for
in America a list that we have made in 11 of the past 12 years. In June 2009, we were listed
among Black Enterprise magazines 40 Best Companies for Diversity a list that we have made for
five straight years, since its inception. 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 280,000 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.
Our Community
FedEx is committed to causes that help improve the communities where we live and work worldwide.
We leverage our infrastructure, our people and our philanthropic resources to help these
communities achieve their goals. In addition to corporate philanthropy and employee volunteerism,
we maintain
relationships with charitable organizations that enable us to have a strategic impact in key areas,
including disaster relief, pedestrian safety, education and diversity.
6
Disaster Relief. We provide relief and lifesaving aid to victims of disaster. We work with the
following global organizations to assist in relief, recovery and disaster-preparedness planning
efforts:
|
|
American Red Cross: We have provided in-kind shipping, financial support and volunteers to
the American Red Cross for more than a decade. We are the organizations largest
transportation donor and are recognized as the backbone of its U.S. disaster logistics system. |
|
|
Salvation Army: We provide support for Salvation Army Disaster Response Services. We have
provided the Salvation Army with the funding to purchase 13 Emergency Services Response Units
canteen trucks that are deployed during emergencies and disasters and are capable of feeding
thousands of people per day. |
|
|
Heart to Heart International: Through our relationship with Heart to Heart International,
we have moved disaster relief supplies to many countries throughout the world. |
Safety and Health. We use our global reach and expertise to further the capabilities of the
following safety and health organizations, helping to prevent illness and injury:
|
|
Safe Kids Worldwide: Through programs such as Safe Kids Walk This Way, FedEx and Safe
Kids Worldwide have teamed up with local governments to create and improve critical
infrastructure and boost support for child-pedestrian safety. |
|
|
ORBIS International: Our pilots volunteer their time to fly ORBIS Internationals Flying
Eye Hospital a converted DC-10 aircraft equipped with surgical and training facilities to
remote locations around the world. |
Education. We support the following organizations that provide students with high-quality
educational experiences, allowing them to succeed in the global economy, and we provide minority
students access to scholarship funds they need to obtain a higher education.
|
|
Teach for America: We support Teach for Americas efforts to provide students in urban and
rural public schools with a high-quality education and to increase the number and diversity of
the organizations teachers. |
|
|
Junior Achievement: Our support of Junior Achievement has helped millions of children a
year learn the value of free enterprise and gain skills for success in the global market
economy. |
Diversity. We support a number of organizations and programs that promote human rights, equality
and the value of cultural differences, including:
|
|
Minority Scholarship Support: We support minority access to higher education by funding
scholarships, such as the Hispanic Scholarship Fund, the United Negro College Fund and the
Asian and Pacific Islander American Scholarship Fund. |
|
|
National Civil Rights Museum: FedEx is a major sponsor of the National Civil Rights
Museum, which educates the public on lessons of the Civil Rights Movement in the United States
and its impact and influence on the human rights movement worldwide. |
7
United Way of America. We believe the United Way is one of the most effective and efficient ways
of meeting community needs and have supported the annual United Way fundraising campaign since
1975.
The Environment
We are committed to protecting the environment. FedEx evaluates the environmental impacts of our
packaging and copy and print services, and minimizes waste generation through efforts that include
recycling and pollution prevention and the use of copy paper with a high recycled content.
FedEx is actively involved in efforts to promote cleaner air by reducing emissions through
efficient route planning and the use of clean, alternative and renewable energy sources. First in
our industry to introduce hybrid vans in our fleet, we now operate more than 170 hybrid vehicles
around the globe, with more than three million miles in revenue service. Our hybrid electric
vehicles decrease greenhouse gas emissions by approximately 25 percent and increase fuel economy by
over 40 percent compared with conventional vehicles.
Our solar power generation systems represent another step we are taking toward progressive
environmental stewardship and resource sustainability. In calendar 2005, we installed a
solar-electric system atop the FedEx Express regional hub in Oakland. To date, this solar-electric
system has provided more than 3 million kilowatt-hours (KWh) of clean energy. Since then, we have
installed solar-electric systems at two of FedEx Freights facilities in California, and we are
constructing a state-of-the-art, solar-electric sorting-and-handling facility in Cologne, Germany,
which is scheduled to be completed in 2010.
We are also modernizing our aircraft fleet. For example, we are retiring and replacing older
Boeing 727s with more fuel-efficient and quieter Boeing 757s. The use of newer and more fuel
efficient aircraft will reduce our greenhouse gas emissions and airport noise and increase our jet
fuel efficiency. Also, as noted below, we have selected the fuel-efficient Boeing 777 Freighter
(B777F) aircraft to meet future international operational needs.
Governance
FedEx has an independent Board of Directors committed to the highest quality corporate governance.
Reflecting this commitment, we have embraced the spirit of corporate governance reform rather than
merely meeting the minimum compliance standards set forth in the Sarbanes-Oxley Act of 2002 and the
New York Stock Exchanges corporate governance listing standards. We have implemented many
governance enhancements that go well beyond those legal requirements. For example, within the past
few years, we have:
|
|
Added a number of highly qualified, independent directors to the Board, including: Steven
R. Loranger, the CEO of ITT Corporation; Gary W. Loveman, the CEO of Harrahs Entertainment;
and Ambassador Susan C. Schwab, former U.S. Trade Representative. |
|
|
Adopted a majority-voting standard in uncontested director elections and a resignation
requirement for directors who fail to receive the required majority vote. The Board is
prohibited from changing back to a plurality-voting standard without the approval of our
stockholders. |
|
|
Amended our bylaws to require stockholder approval for any future poison pill prior to or
within 12 months after adoption of the poison pill. |
8
Our Board of Directors reviews all aspects of our governance policies and practices, including our
Corporate Governance Guidelines and our Code of Business Conduct and Ethics, at least annually in
light
of best practices and makes whatever changes are necessary to further our longstanding commitment
to the highest standards of corporate governance. The Guidelines and the Code, which applies 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 Web site at http://www.fedex.com/us/investorrelations. We will post in the corporate
governance section of the Investor Relations page of our Web site information regarding any
amendment to, or waiver from, the provisions of the Code to the extent such disclosure is required.
The information on our Web site, however, does not form part of this Report.
Business Segments
The following describes in more detail the operations of each of our reportable segments:
FedEx Express Segment
FedEx Express
Overview
FedEx Express invented express distribution 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 one integrated global network. FedEx Express offers time-certain delivery
within one to three business days, serving markets that generate more than 90% of the worlds gross
domestic product through door-to-door, customs-cleared service, with a money-back guarantee. FedEx
Expresss unmatched air route authorities and extensive transportation infrastructure, combined
with leading-edge information technologies, make it the worlds largest express transportation
company. FedEx Express employs approximately 140,000 employees and has approximately 57,000
drop-off locations (including FedEx Office and Print Centers), 654 aircraft and approximately
51,000 vehicles and trailers in its integrated global network.
Services
FedEx Express offers a wide range of shipping services for delivery of packages and freight.
Overnight package services are backed by money-back guarantees and extend to virtually the entire
United States population. FedEx Express offers three U.S. overnight delivery services: FedEx First
Overnight, FedEx Priority Overnight and FedEx Standard Overnight. FedEx Same Day service is
available for urgent shipments up to 70 pounds to virtually any U.S. destination. FedEx Express
also offers express freight services backed by money-back guarantees to handle the needs of the
time-definite global freight market.
International express 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
Express also offers a comprehensive international freight service, backed by a money-back
guarantee, real-time tracking and advanced customs clearance.
For information regarding FedEx Express e-shipping tools and solutions, see FedEx Services
Technology.
International Expansion
Notwithstanding the current global recession, we remain focused on the long-term expansion of our
international presence, especially in key markets such as China, India and Europe.
9
We began serving China in 1984, and since that time, we have expanded our service to cover more
than 200 cities and counties across the country. We have recently taken several important actions
that increase our presence in China and bolster our leadership in the global air cargo industry:
|
|
In 2009, we began operations at our new Asia-Pacific hub at the Guangzhou Baiyun
International Airport in Southern China. The new hub assumed and expanded the activities of
our previous hub in Subic Bay, Philippines. We believe the new hub will better serve our
global customers doing business in and with the China and Asia-Pacific markets. |
|
|
In 2007, we initiated time-certain domestic delivery service in China. Our China domestic
service is supported by a money-back guarantee and real-time package status tracking. Our
China domestic network relies on a hub-and-spoke system centered at the Hangzhou Xiaoshan
International Airport, located in East Chinas Zhejiang Province. |
|
|
In 2007, we acquired Tianjin Datian W. Group Co., Ltd.s (DTW Group) fifty percent share
of the FedEx-DTW International Priority joint venture and assets relating to DTW Groups
domestic network in China. The acquisition converted our joint venture with DTW Group, formed
in 1999, into a wholly owned subsidiary. The acquisition increased our presence in China in
the international market and established our presence in the domestic market. |
In support of our international operations, we are expanding our European hub at Roissy-Charles de
Gaulle Airport in Paris, France. The expansion project, which is scheduled to be completed in
2010, will substantially increase capacity at the hub. Also, we have agreed, subject to certain
conditions, to purchase 30 B777F aircraft, a new high-capacity, long-range airplane, with
deliveries beginning in 2010. We also hold an option to purchase an additional 15 B777F aircraft.
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
Under an agreement with the U.S. Postal Service that runs through September 2013, FedEx Express
provides domestic air transportation services to the U.S. Postal Service, including for its
First-Class, Priority and Express Mail. FedEx Express also has approximately 5,000 drop boxes at
U.S. Post Offices in approximately 340 metropolitan areas and provides transportation and delivery
for the U.S. Postal Services international delivery service called Global Express Guaranteed
(GXG).
Pricing
FedEx Express periodically publishes list prices in its Service Guides for the majority of its
services. In general, U.S. shipping rates are based on the service selected, destination zone,
weight, size, any ancillary service charge and whether the shipment was picked up by a FedEx
Express courier or dropped off by the customer at a FedEx Express, FedEx Office and Print Center or
FedEx Authorized ShipCenter location. International rates are based on the type of service
provided and vary with size, weight, destination and, whenever applicable, whether the shipment was
picked up by a FedEx Express courier or dropped off by the customer at a FedEx Express, FedEx
Office and Print Center or FedEx Authorized ShipCenter location. FedEx Express offers its
customers discounts generally based on actual or potential average daily revenue produced.
10
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. The surcharge
percentage
is subject to monthly adjustment based on the average spot price for jet fuel. For example, the
fuel surcharge for June 2009 was based on the average spot price for jet fuel published for April
2009. Changes to the FedEx Express fuel surcharge, when calculated according to the average spot
price for jet fuel and FedEx Express trigger points, are applied effective from the first Monday of
the month. These trigger points may change from time to time, but information on the fuel
surcharge for each month is available at fedex.com approximately two weeks before the surcharge is
applicable. 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: 2009 17%; 2008 17%; and 2007 13%. These
percentages reflect certain fuel surcharge reductions that are associated with our annual base rate
increases.
Operations
FedEx Expresss primary sorting facility, located in Memphis, serves as the center of the companys
multiple hub-and-spoke system. A second national hub facility, which we have significantly
expanded recently, is located in Indianapolis. In addition to these national hubs, FedEx Express
operates regional hubs in Newark, Oakland, and Fort Worth and major metropolitan sorting facilities
in Los Angeles and Chicago. In June 2009, FedEx Express began operations at a new regional hub in
Greensboro, North Carolina.
Facilities in Anchorage, Paris and Guangzhou 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 and Paris 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
stations service area. In some international areas, independent agents (Global Service
Participants) have been selected to complete deliveries and to pick up packages. For more
information about our sorting and handling facilities, see Part I, Item 2 of this Annual Report on
Form 10-K under the caption FedEx Express Segment.
FedEx Office offers retail access to FedEx Express shipping services at all of its U.S. locations.
FedEx Express also has alliances with certain other retailers to provide in-store drop-off sites.
Our unmanned FedEx Drop Boxes provide customers the opportunity to drop off packages in office
buildings, shopping centers, corporate or industrial parks and outside some U.S. Post Offices.
11
Fuel Supplies and Costs
During 2009, FedEx Express purchased jet fuel from various suppliers under contracts that vary in
length and which provide for specific amounts of fuel to be delivered. The fuel represented by
these contracts is purchased at market prices that may fluctuate daily. 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 Expresss costs for jet fuel and its percentage of
consolidated revenues for the last five fiscal years:
|
|
|
|
|
|
|
|
|
|
|
Total Cost |
|
|
Percentage of Consolidated |
|
Fiscal Year |
|
(in millions) |
|
|
Revenues |
|
2009 |
|
$ |
2,932 |
|
|
|
8.3 |
% |
2008 |
|
|
3,396 |
|
|
|
8.9 |
|
2007 |
|
|
2,639 |
|
|
|
7.5 |
|
2006 |
|
|
2,497 |
|
|
|
7.7 |
|
2005 |
|
|
1,780 |
|
|
|
6.1 |
|
Approximately 11% of FedEx Expresss requirement for vehicle fuel is purchased in bulk. The
remainder of FedEx Expresss requirement is 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 macro-economic growth. The ability to compete effectively depends upon
price, frequency and capacity of scheduled service, ability to track packages, extent of geographic
coverage, reliability and innovative service offerings.
Competitors within the United States include other package delivery concerns, principally United
Parcel Service, Inc. (UPS), passenger airlines offering express package services, regional
express delivery concerns, airfreight forwarders and the U.S. Postal Service. DHL exited the U.S.
domestic package market during 2009. FedEx Expresss principal international competitors are DHL,
UPS, TNT, other foreign postal authorities, freight forwarders, passenger airlines and all-cargo
airlines. Many of FedEx Expresss 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 J. Bronczek is the President and Chief Executive Officer of FedEx Express, which is
headquartered in Memphis, Tennessee. As of May 31, 2009, FedEx Express employed approximately
93,000 permanent full-time and 47,000 permanent part-time employees, of which approximately 16% are
employed in the Memphis area. FedEx Expresss international employees in the aggregate represent
approximately 26% of all employees. FedEx Express believes its relationship with its employees is
excellent.
The pilots of FedEx Express, who constitute a small percentage of our total employees, are
represented by the Air Line Pilots Association, International (ALPA), and are employed under a
four-year collective bargaining agreement that took effect in October 2006. Attempts by other
labor organizations to organize certain other groups of employees occur from time to time.
Although these organizing attempts have not resulted in any certification of a U.S. domestic
collective bargaining representative (other than ALPA), we cannot predict the outcome of these
labor activities or their effect, if any, on FedEx Express or its employees.
Integration of CTS
Effective June 1, 2009, Caribbean Transportation Services, Inc. (CTS), a provider of airfreight
forwarding services between the United States and Puerto Rico, the Dominican Republic, Costa Rica
and
the Caribbean Islands, was merged with and into FedEx Express. The purpose of the merger was to
leverage synergies between CTS, previously a subsidiary of FedEx Freight Corporation, and FedEx
Express and to gain cost efficiencies by maximizing the use of FedEx Express assets for this
service offering.
12
FedEx Trade Networks
FedEx Trade Networks provides international trade services, specializing in customs brokerage and
global ocean and air cargo distribution. FedEx Trade Networks provides customs clearance services
for FedEx Express at its major hub facilities. Value-added services include Global Trade Data, an
information tool that allows customers to track and manage imports. FedEx Trade Networks provides
international trade advisory services, including assistance with the Customs-Trade Partnership
Against Terrorism (C-TPAT) program, and through its WorldTariff subsidiary, FedEx Trade Networks
publishes customs duty and tax information for over 100 customs areas worldwide. FedEx Trade
Networks has approximately 3,000 employees and 90 offices in 75 service locations throughout North
America and in Asia. Offices are maintained in major European markets and additional Asian
locations through dedicated agents.
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 United States population and overnight service of up
to 400 miles to nearly 100% of the continental United States 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.
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. In addition, FedEx Ground is in the midst of a major network capacity
expansion program, which is expected to increase its daily pick-up capacity to approximately five
million packages by calendar 2012. The multi-phase plan includes the addition of hubs, the
expansion of existing hubs and the expansion or relocation of other existing facilities. Each of
the new hubs will feature the latest automated sorting technology.
In addition to FedEx Grounds business-to-business service, the company offers FedEx Home Delivery,
which reaches nearly 100% of U.S. residences. FedEx Home Delivery is dedicated exclusively 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.
13
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 shipment was picked up by a FedEx Ground
contractor or dropped off by the customer at a FedEx Office and Print Center or FedEx Authorized
ShipCenter.
FedEx Ground has an indexed fuel surcharge, which is subject to a monthly adjustment. The
surcharge percentage is based on a rounded average of the national U.S. on-highway average price
for a gallon of diesel fuel as published monthly by the U.S. Department of Energy. For example,
the fuel surcharge for June 2009 was based on the average diesel fuel price published for April
2009. Changes to the FedEx Ground fuel surcharge, when calculated according to the rounded index
average and FedEx Ground trigger points, are applied effective from the first Monday of the month.
These trigger points may change from time to time, but information on the fuel surcharge for each
month is available at fedex.com approximately two weeks before the surcharge is applicable.
Operations
FedEx Ground operates a multiple hub-and-spoke sorting and distribution system consisting of 520
facilities, including 32 hubs, in the U.S. and Canada. FedEx Ground conducts its operations
primarily with approximately 22,500 owner-operated vehicles and 31,500 company-owned trailers. To
provide FedEx Home Delivery service, FedEx Ground leverages its existing pickup operation and hub
and linehaul network. FedEx Home Deliverys operations are often co-located with existing FedEx
Ground facilities to achieve further cost efficiencies.
Advanced automated sorting technology is used to streamline the handling of over 3.4 million
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 Web site, fedex.com. For
additional information regarding FedEx Ground e-shipping tools and solutions, see FedEx Services
Technology.
FedEx Office offers retail access to FedEx Ground shipping services at all of its U.S. locations.
FedEx Ground is also available as a service option at many FedEx Authorized ShipCenters in the U.S.
As of May 31, 2009, FedEx Ground had approximately 45,000 employees and 12,800 independent
contractors. David F. Rebholz is the President and Chief Executive Officer of FedEx Ground. FedEx
Ground is headquartered in Pittsburgh, Pennsylvania, and its primary competitors are UPS and the
U.S. Postal Service. DHL exited the U.S. domestic package market during 2009.
14
Evolution of Independent Contractor Model
FedEx Ground relies on owner-operators to conduct its line-haul 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. Although FedEx Ground believes its relationship with its employees and
independent contractors is excellent, the company is involved in numerous purported or certified
class-action lawsuits and other proceedings that claim or are examining whether the companys
owner-operators should be treated as employees, rather than independent contractors. For a
description of these proceedings, see Item 1A of this Annual Report on Form 10-K (Risk Factors)
and Note 17 of the accompanying
consolidated financial statements. As a result of this increased regulatory and legal uncertainty,
FedEx Ground has made changes to its relationships with contractors that, among other things,
provide incentives for improved service and enhanced regulatory and other compliance by our
contractors. As an example, FedEx Ground has an ongoing nationwide program to provide greater
incentives to contractors who choose to grow their businesses by adding routes. In addition,
because of state-specific legal and regulatory issues:
|
|
In 2008, FedEx Ground offered special incentives to encourage California-based single-route
contractors to transform their operations into multiple-route businesses or sell their routes
to others; and |
|
|
During 2009, FedEx Ground offered special incentives to encourage each New Hampshire-based
and Maryland-based single-route pickup-and-delivery contractor to assume responsibility for
the pickup-and-delivery operations of an entire geographic service area that includes multiple
routes. |
As of May 31, 2009, approximately 60% of all FedEx Ground service areas nationwide are supported by
multiple-route contractors, which comprise approximately 35% of all FedEx Ground contractors.
FedEx SmartPost
FedEx SmartPost (a subsidiary of FedEx Ground) is a leading national small-parcel consolidator,
which specializes in the consolidation and delivery of high volumes of low-weight, less
time-sensitive business-to-consumer packages, using the U.S. Postal Service for final delivery to
residences. The company picks up shipments from customers (including e-tailers and catalog
companies), provides sorting and linehaul services and then delivers the packages to a U.S. Postal
Service facility for final delivery by a postal carrier. Through its network of 22 distribution
hubs and approximately 3,200 employees, FedEx SmartPost provides delivery Monday through Saturday
to all residential addresses in the U.S., including PO Boxes and military destinations. In 2009,
FedEx SmartPost expanded its service into Canada for U.S. shippers by using the residential
delivery capabilities of the Canada Post Corporation. The new service, FedEx SmartPost
International, is available to all residential addresses, including PO Boxes, in Canada and
includes around-the-clock shipment tracking status updates via fedex.com.
FedEx Freight Segment
FedEx Freight Corporation
FedEx Freight Corporation provides a full range of LTL freight services through its FedEx Freight
(regional LTL freight services), FedEx National LTL (long-haul LTL freight services) and FedEx
Freight Canada businesses, and is known for its exceptional service, reliability and on-time
performance.
Through a comprehensive network of service centers and advanced information systems, FedEx Freight
provides service to virtually all U.S. ZIP Codes (including Alaska and Hawaii) with
industry-leading transit times. In 2009, FedEx Freight reduced its transit times by at least one
day in approximately 2,600 service lanes throughout the United States. FedEx Freights services
are supported by a no-fee money-back guarantee on eligible shipments. Internationally, FedEx
Freight Canada offers freight delivery service throughout Canada, and FedEx Freight serves Mexico,
Puerto Rico, Central and South America, the Caribbean, Europe and Asia via alliances and purchased
transportation.
15
FedEx Freight specializes in fast-cycle distribution and provides tailored shipping solutions to
help shippers meet tight deadlines. Through its many service offerings, FedEx Freight can match
customers time-critical needs with reduced transit times, after-hours pickup or delivery, or
same-day delivery. FedEx Freights fully integrated Web site and other e-tools, including a bill of lading generator
and e-mail delivery notification, make freight shipping easier and bring customers closer to their
own account information. The FedEx Freight Advance Notice service feature uses the companys
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. As noted above, in
2009, we introduced FedEx Freight A.M. service freight delivery by 10:30 a.m. backed by a
money-back guarantee.
Since the acquisition of FedEx National LTL in 2007, we have significantly improved the companys
on-time service reliability by integrating and reengineering its network. FedEx National LTL is
now a leader when it comes to reliability in the long-haul LTL freight market segment (three-day
and more service lanes). FedEx Freight and FedEx National LTL have an indexed fuel surcharge,
which is subject to weekly adjustment based on a rounded average of the national U.S. on-highway
average price for a gallon of diesel fuel.
As of May 31, 2009, FedEx Freight Corporation was operating approximately 59,000 vehicles and
trailers from a network of 480 service centers, and the FedEx Freight segment had approximately
33,000 employees. Douglas G. Duncan is the President and Chief Executive Officer of FedEx Freight
Corporation, which is based in Memphis, Tennessee. FedEx Freights primary multiregional LTL
freight competitors are Con-Way Freight, a subsidiary of Con-way Inc., YRC Regional Transportation,
a division of YRC Worldwide Inc., and UPS Freight. FedEx National LTLs primary long-haul LTL
freight competitors are YRC National Transportation, a division of YRC Worldwide Inc., and ABF
Freight System, Inc.
FedEx Custom Critical
FedEx Custom Critical provides a range of expedited, time-specific freight-shipping services
throughout the United States, Canada and Mexico. Among its divisions are Surface Expedite, for
exclusive-use and network-based transport of critical shipments and expedited LTL shipments; Air
Expedite, which offers an array of 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 is available 24 hours a day, 365 days a year, including weekends and
holidays at no extra cost. FedEx Custom Critical continuously monitors shipments through an
integrated proprietary shipment-control system, including two-way satellite communications on
exclusive-use shipments. Through the companys Shipping Toolkit, customers can quote, ship, track
and map shipments; view and print out copies of a shipments bill of lading, proof of delivery and
invoice; and manage their online accounts. FedEx Custom Critical utilizes approximately 1,300
vehicles, operated by owner-operators and their drivers, which are dispatched out of approximately
140 geographically-based staging areas.
FedEx Services Segment
FedEx Services
FedEx Services provides our other companies with sales, marketing, information technology and
customer service support. Through FedEx Services and its subsidiary FedEx Customer Information
Services, Inc., we provide a convenient single point of access for many customer support functions,
enabling us to more effectively sell the entire portfolio of express and ground services and to
help ensure a consistent and outstanding experience for our customers.
16
T. Michael Glenn is the President and Chief Executive Officer of FedEx Services, which is based in
Memphis, Tennessee. As of May 31, 2009, the FedEx Services segment had approximately 35,500
employees (including 20,400 at FedEx Office).
Technology
FedEx is a world leader in technology, and FedEx founder Frederick W. Smiths 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.
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 Web site, together
with our customer integrated solutions.
The fedex.com Web site was launched fifteen years ago, and during that time, customers have shipped
and tracked billions of packages at fedex.com. The fedex.com Web site 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 My FedEx provides customers with a
consolidated view of inbound, outbound and third-party shipments. FedEx Desktop provides customers
the benefit of working offline and having real-time shipment updates sent directly to their
computer desktop.
FedEx Mobile is a suite of services available on most Web-enabled mobile devices, such as the
BlackBerry, and includes enhanced support for the iPhone, iPhone 3G and iPod Touch. FedEx Mobile
allows customers to track the status of packages, create shipping labels, get account-specific rate
quotes and access drop-off location data for FedEx shipments. FedEx also uses wireless data
collection devices to scan bar codes on shipments, thereby enhancing and accelerating the package
information available to our customers.
We design our e-commerce tools and solutions to be easily integrated into our customers
applications, as well as into third-party software being 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 shipping and associated
processes.
In 2009, we launched new, state-of-the-art tracking technologies to provide customers with
real-time visibility to shipment status via Web, desktop or mobile devices. Available globally in
over 25 languages, the new tracking experience includes a shipment progression graphic enabling
users to get tracking information. Users now have the ability to view tracking results based on
different time zones, order or shipment events and weight conventions. Tracking numbers can also
be saved, eliminating the need to reenter data for subsequent tracks.
17
Marketing
The FedEx brand name is a symbol for high-quality service, reliability and speed. FedEx is one of
the most widely recognized brands in the world. Special emphasis is placed on promoting and
protecting the FedEx brand, one of our most important assets. In addition to traditional print and
broadcast advertising, we promote the FedEx brand through corporate sponsorships and special
events. For example, FedEx sponsors:
|
|
The National Football League (NFL), as its Official Delivery Service Sponsor |
|
|
FedExField, home of the NFLs Washington Redskins |
|
|
FedEx Orange Bowl, host of one of college footballs Bowl Championship Series games |
|
|
The #11 Joe Gibbs Racing Toyota Camry driven by Denny Hamlin in the NASCAR Sprint Cup
Series |
|
|
PGA TOUR and the Champions Tour golf organizations, as the Official Shipping Company |
|
|
FedExCup, a season-long points competition for PGA TOUR players |
|
|
Pebble Beach Golf Resorts, as the official shipping company |
|
|
National Basketball Association (NBA), as its official delivery service sponsor |
|
|
FedExForum, home of the NBAs Memphis Grizzlies |
|
|
Vodafone McLaren Mercedes Formula One team |
|
|
French Open tennis tournament |
Information Security
FedEx Services has a team of highly qualified professionals dedicated to securing information about
our customers shipments and protecting our customers privacy, and we strive to provide a safe,
secure online environment for our customers. We are in full compliance with 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.
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. FedExs 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 United States and Japan, recognize ISO standards.
FedEx Global Supply Chain Services
FedEx Services offers a range of supply chain solutions, including critical inventory logistics,
transportation management, fulfillment and fleet services, through its FedEx Global Supply Chain
Services subsidiary. FedEx Global Supply Chain Services focuses on information
technology-sensitive business to meet the needs of its customers and to drive transportation
business to other FedEx operating companies. FedEx Global Supply Chain Services service offerings
use advanced electronic data interchanges to speed communications between customers and their
suppliers, resulting in more cost-effective solutions and enhanced levels of customer service.
FedEx Office
FedEx Office is a leading provider of document and business services. FedEx Offices global
network of digitally-connected locations offers access to copying and digital printing,
professional finishing, document creation, signs and graphics, direct mail, Web-based printing,
Internet access, computer rentals, videoconferencing and the full range of FedEx day-definite
ground shipping and time-definite global express shipping services.
18
FedEx Office offers the full range of FedEx Express and FedEx Ground services at virtually all U.S.
locations. In addition, FedEx Office offers packing services at virtually all U.S. Office and
Print Centers, and packing supplies and boxes are included in FedEx Offices retail product
assortment. By allowing customers to have unpackaged items professionally packed by specially
trained FedEx Office team members and then shipped using any of the full range of FedEx
day-definite ground shipping and time-definite global express shipping services, FedEx Office
provides a complete pack-and-ship solution.
In response to challenging business conditions, during 2009, FedEx Office initiated an internal
reorganization designed to improve its revenue-generating capabilities and reduce costs. Several
actions were taken during 2009 to reduce the companys cost structure and position the company for
long-term profitability in connection with broader economic recovery. We expect that future
strategies to increase revenue at FedEx Office will focus on the companys core competencies
relating to copying, digital printing and shipping services.
As of May 31, 2009, FedEx Offices operations included approximately 1,800 FedEx Office and Print
Centers in the United States and 135 additional locations in seven other countries, as well as 29
commercial production centers. FedEx Office is headquartered in Dallas, Texas.
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 Global Supply Chain
Services, FedEx Customer Information Services, FedEx National LTL, FedEx Trade Networks, FedEx
SmartPost and FedEx Custom Critical, among others, are trademarks, service marks and trade names of
Federal Express Corporation for which registrations, or applications for registration, are on file.
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, both the U.S. Department of
Transportation (DOT) and the Federal Aviation Administration (FAA) exercise regulatory
authority over FedEx Express.
The FAAs 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.
The DOTs authority relates primarily to economic aspects of air transportation. The DOTs
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.
19
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. In July 2007, the TSA issued to us a Full All-Cargo Aircraft Operator Standard
Security Plan, which contained many new and enhanced security requirements. These requirements are
not static, but will change periodically as the result of regulatory and legislative requirements,
and to respond to evolving threats. Until these requirements are adopted, we cannot determine the
effect that these new rules will have on our cost structure or our operating results. It is
reasonably possible, however, 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 Expresss
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 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, FedEx National LTL 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 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 Expresss 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 United States air carriers abroad. The right of a United States
carrier to serve foreign points is subject to the DOTs approval and generally requires a bilateral
agreement between the United States and the foreign government. 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. Additionally, global air cargo carriers,
such as FedEx Express, are subject to current and potential additional aviation security regulation
by foreign governments.
Our operations within foreign countries, such as FedEx Expresss growing international domestic
operations, are also subject to current and potential regulations that restrict, and sometimes
prohibit, our ability to compete in parts of the transportation and logistics market. As an
example, in 2009, the Chinese government adopted postal regulation that excludes foreign-invested
companies such as FedEx from competing in the China domestic document delivery 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 Expresss activities pertaining to satellite communications.
20
Environmental. Pursuant to the Federal Aviation Act, the FAA, with the assistance of the U.S.
Environmental Protection Agency, is authorized to establish standards governing aircraft noise.
FedEx Expresss 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 Expresss aircraft
operations in some of the localities where they apply but do not have a material effect on any of
FedEx Expresss significant markets. Congresss 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 Expresss 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 greenhouse gas emissions, including
our aircraft and diesel engine emissions. For a description of such efforts and their potential
effect on our cost structure and operating results, see Item 1A
of this Annual Report on Form 10-K
(Risk Factors).
We are subject to federal, state and local environmental laws and regulations relating to, among
other things, contingency planning for spills of petroleum products, the disposal of waste oil and
the disposal of toners and other products used in FedEx Offices 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 to ensure compliance with
these regulations.
Customs. Our activities, including customs brokerage and freight forwarding, are subject to
regulation by the Bureau of 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 (airfreight forwarding). Our offshore operations are
subject to similar regulation by the regulatory authorities of foreign jurisdictions.
Labor. While labor relations within the United States at most of our companies are governed by the
National Labor Relations Act of 1935, as amended (the NLRA), all U.S. employees at FedEx Express
are covered by the Railway Labor Act of 1926, as amended (the RLA). 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.
21
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 national (now 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 is considering adopting changes in labor laws that would make it easier for
unions to organize small units of our employees. For example, there is 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. 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 82 through 86 of this Annual Report on Form
10-K.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
ITEM 2. PROPERTIES
FedEx Express Segment
FedEx Expresss principal owned and leased properties include its aircraft, vehicles, national,
regional and metropolitan sorting facilities, administration buildings, FedEx Drop Boxes and data
processing and telecommunications equipment.
Aircraft and Vehicles
As of May 31, 2009, FedEx Expresss aircraft fleet consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Operational |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Payload |
|
Description |
|
Owned |
|
|
Leased |
|
|
Total |
|
|
(Pounds per Aircraft)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boeing MD11 |
|
|
31 |
|
|
|
26 |
|
|
|
57 |
|
|
|
164,200 |
|
Boeing MD10-30 (2) |
|
|
10 |
|
|
|
2 |
|
|
|
12 |
|
|
|
114,200 |
|
Boeing DC10-30 |
|
|
1 |
|
|
|
5 |
|
|
|
6 |
(3) |
|
|
114,200 |
|
Boeing MD10-10 (2) |
|
|
57 |
|
|
|
|
|
|
|
57 |
|
|
|
108,700 |
|
Boeing DC10-10 |
|
|
1 |
|
|
|
|
|
|
|
1 |
(4) |
|
|
108,700 |
|
Airbus A300-600 |
|
|
35 |
|
|
|
36 |
|
|
|
71 |
(5) |
|
|
85,600 |
|
Airbus A310-200/300 |
|
|
40 |
|
|
|
16 |
|
|
|
56 |
|
|
|
61,900 |
|
Boeing B757-200 |
|
|
24 |
|
|
|
|
|
|
|
24 |
(6) |
|
|
45,800 |
|
Boeing B727-200 |
|
|
77 |
|
|
|
2 |
|
|
|
79 |
|
|
|
38,200 |
|
ATR 72-202/212 |
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
14,660 |
|
ATR 42-300/320 |
|
|
26 |
|
|
|
|
|
|
|
26 |
|
|
|
10,880 |
|
Cessna 208B |
|
|
242 |
|
|
|
|
|
|
|
242 |
|
|
|
2,500 |
|
Cessna 208A |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
567 |
|
|
|
87 |
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Maximum operational revenue payload is the lesser of the net volume-limited payload and the
net maximum structural payload. |
|
(2) |
|
The MD10-30s and MD10-10s are DC10-30s and DC10-10s, respectively, that have been converted
to an MD10 configuration. |
|
(3) |
|
Includes three aircraft not currently in operation and awaiting conversion to MD10
configuration. |
|
(4) |
|
Not currently in operation and awaiting conversion to MD10 configuration. |
|
(5) |
|
Includes two aircraft not currently in operation and awaiting completion of
passenger-to-freighter modification. |
|
(6) |
|
Includes 14 aircraft not currently in operation and awaiting completion of
passenger-to-freighter modification. |
|
|
The MD11s are three-engine, wide-bodied aircraft that have a longer range and larger
capacity than DC10s. |
|
|
The DC10s are three-engine, wide-bodied aircraft that have been specially modified to meet
FedEx Expresss cargo requirements. We operate two models, the DC10-10 and the DC10-30. The
DC10-30 has a longer range and higher weight capacity than the DC10-10. |
|
|
The MD10s are three-engine, wide-bodied DC10 aircraft that have received an Advanced Common
Flightdeck (ACF) modification, which includes a conversion to a two-pilot cockpit, as well as
upgrades of electrical and other systems. |
|
|
The A300s and A310s are two-engine, wide-bodied aircraft that have a longer range and more
capacity than B757s and B727s. |
|
|
The B757s are two-engine aircraft configured for cargo service. |
|
|
The B727s are three-engine aircraft configured for cargo service. |
|
|
The ATR and Cessna 208 turbo-prop aircraft are leased to independent operators to support
FedEx Express operations in areas where demand does not justify use of a larger aircraft. |
23
An inventory of spare engines and parts is maintained for each aircraft type.
In addition, FedEx Express wet leases approximately 40 smaller piston-engine and turbo-prop
aircraft, which feed packages to and from airports primarily outside the U.S. served by FedEx
Expresss larger jet aircraft. The wet lease agreements call for the owner-lessor to provide the
aircraft, flight crews, insurance and maintenance, as well as fuel and other supplies required to
operate the aircraft. FedEx Expresss wet lease agreements are for terms not exceeding one year
and are generally cancelable upon 30 days notice.
At May 31, 2009, FedEx Express operated approximately 51,000 ground transport vehicles, including
pickup and delivery vans, larger trucks called container transport vehicles and over-the-road
tractors 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, 2009, with the year of expected delivery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B757 |
|
|
B777F* |
|
|
MD11 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
12 |
|
|
|
4 |
|
|
|
2 |
|
|
|
18 |
|
2011 |
|
|
16 |
|
|
|
4 |
|
|
|
|
|
|
|
20 |
|
2012 |
|
|
8 |
|
|
|
3 |
|
|
|
|
|
|
|
11 |
|
2013 |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
2014 |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Thereafter |
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
36 |
|
|
|
30 |
|
|
|
2 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Our obligation to purchase 15 of these aircraft is conditioned upon there being no event that
causes FedEx Express or its employees not to be covered by the RLA. |
Deposits and progress payments of $544 million have been made toward aircraft purchases, options to
purchase additional aircraft and other planned aircraft-related transactions. Also see Note 16 of
the accompanying consolidated financial statements for more information about our purchase
commitments.
24
Sorting and Handling Facilities
At May 31, 2009, FedEx Express operated the following sorting and handling facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sorting |
|
|
|
|
Lease |
|
|
|
|
|
|
|
Square |
|
|
Capacity |
|
|
|
|
Expiration |
|
Location |
|
Acres |
|
|
Feet |
|
|
(per hour) (1) |
|
|
Lessor |
|
Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memphis, Tennessee |
|
|
518 |
|
|
|
3,450,000 |
|
|
|
465,000 |
|
|
Memphis-Shelby County Airport Authority |
|
|
2036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indianapolis, Indiana |
|
|
335 |
|
|
|
2,509,000 |
|
|
|
210,000 |
|
|
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 |
|
|
|
154,000 |
|
|
Port Authority of New York and New Jersey |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oakland, California |
|
|
75 |
|
|
|
320,000 |
|
|
|
65,000 |
|
|
City of Oakland |
|
|
2031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metropolitan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicago, Illinois |
|
|
51 |
|
|
|
419,000 |
|
|
|
52,000 |
|
|
City of Chicago |
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles, California |
|
|
34 |
|
|
|
305,000 |
|
|
|
57,000 |
|
|
City of Los Angeles |
|
|
2010/2025 |
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anchorage, Alaska (2) |
|
|
64 |
|
|
|
332,000 |
|
|
|
24,000 |
|
|
Alaska Department of Transportation and Public Facilities |
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paris, France (3) |
|
|
87 |
|
|
|
861,000 |
|
|
|
54,000 |
|
|
Aeroports de Paris |
|
|
2029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou, China (4) |
|
|
155 |
|
|
|
882,000 |
|
|
|
24,000 |
|
|
Guangdong Airport Management Corp. |
|
|
2029 |
|
|
|
|
(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 sorting and handling facility (23
acres) expires in 2010, and lease for ramp expansion (11 acres) expires in 2025. |
25
FedEx Expresss primary sorting facility, which serves as the center of its multiple hub-and-spoke
system, is located at the Memphis International Airport. FedEx Expresss facilities at the Memphis
International Airport also include aircraft hangars, aircraft ramp areas, vehicle parking areas,
flight training and fuel facilities, administrative offices and warehouse space. 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 Expresss rights
thereunder could be affected by, any future lease or agreement between the Authority and the U.S.
Government. As noted above, in June 2009, FedEx Express began operations at a new regional hub in
Greensboro, North Carolina.
FedEx Express has additional international sorting-and-handling facilities located at Narita
Airport in Tokyo, Japan, Stansted Airport outside London, England and Pearson Airport in Toronto,
Canada. FedEx Express also has a substantial presence at airports in Hong Kong; Taiwan; Dubai,
United Arab Emirates; Frankfurt, Germany; and Miami. FedEx Express is constructing a
state-of-the-art, solar-electric sorting-and-handling facility in Germany at the Cologne/Bonn
airport and intends to relocate the Frankfurt operations there, beginning in 2010.
Administrative and Other Properties and Facilities
The World Headquarters of FedEx Express is located in southeastern Shelby County, Tennessee. The
headquarters campus comprises nine separate buildings with approximately 1.3 million square feet of
space. FedEx Express also leases 35 facilities in the Memphis area for administrative offices and
warehouses.
FedEx Express owns or leases approximately 700 facilities for city station operations in the United
States. In addition, approximately 400 city stations are owned or leased throughout FedEx
Expresss 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, 2009, FedEx Express had approximately 46,500 Drop Boxes, including 5,000 Drop Boxes
outside U.S. Post Offices. As of May 31, 2009, FedEx Express also had approximately 11,000 FedEx
Authorized ShipCenters and other types of staffed drop-off locations, such as FedEx Office and
Print Centers. Internationally, FedEx Express had approximately 2,700 drop-off locations.
FedEx Ground Segment
FedEx Grounds corporate offices and information and data centers are located in the Pittsburgh,
Pennsylvania, area in an approximately 500,000 square-foot building owned by FedEx Ground. As of
May 31, 2009, FedEx Ground had approximately 31,500 company-owned trailers and owned or leased 520
facilities, including 32 hubs. In addition, approximately 22,500 owner-operated vehicles support
FedEx Grounds business. Of the approximately 315 facilities that support FedEx Home Delivery,
more than 200 are co-located with existing FedEx Ground facilities. Leased facilities generally
have terms of five years or less. The 32 hub facilities are strategically located to cover the
geographic area served by FedEx Ground. The hub facilities average approximately 265,000 square
feet and range in size from 54,000 to 460,000 square feet.
26
FedEx Freight Segment
FedEx Freight Corporations corporate headquarters are located in Memphis, Tennessee.
Administrative offices for the FedEx Freight business are in Harrison, Arkansas, and for the FedEx
National LTL
business are in Lakeland, Florida. As of May 31, 2009, FedEx Freight Corporation operated
approximately 59,000 vehicles and trailers and 480 service centers, which are strategically located
to provide service to virtually all U.S. ZIP Codes. These facilities range in size from 850 to
221,300 square feet of office and dock space. FedEx Custom Criticals headquarters are located in
Green, Ohio.
FedEx Services Segment
FedEx Services corporate headquarters are located in Memphis, Tennessee. FedEx Services and FedEx
Express lease state-of-the-art technology centers in Collierville, Tennessee, Irving, Texas,
Colorado Springs, Colorado, and Orlando, Florida. These facilities house personnel responsible for
strategic software development and other functions that support FedExs technology and e-commerce
solutions. FedEx Offices corporate headquarters are located in Dallas, Texas in leased
facilities. As of May 31, 2009, FedEx Office operated approximately 1,950 locations, including 135
locations in seven foreign countries, as well as 29 commercial production centers. Substantially
all FedEx Office and Print Centers are leased, generally for terms of five to ten years with
varying renewal options. FedEx Office and Print Centers are generally located in strip malls,
office buildings or stand-alone structures and average approximately 4,000 square feet in size. As
noted above, in June 2009, we announced a multi-year agreement with OfficeMax to offer U.S.
domestic FedEx Express and FedEx Ground shipping services at all U.S. OfficeMax retail locations
(over 900 locations), beginning later in calendar 2009.
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 17 of
the accompanying consolidated financial statements.
As described below, we have received requests for information from various governmental agencies
over the past three years related to possible anti-competitive behavior in several freight
transportation segments. We do not believe that we have engaged in any anti-competitive
activities, and we are cooperating with these investigations.
In June 2006, we received a grand jury subpoena for the production of documents in connection with
a criminal investigation by the Antitrust Division of the U.S. Department of Justice (DOJ) into
possible anti-competitive behavior in the air freight transportation industry. In July 2007, we
received a notice from the Australian Competition and Consumer Commission (ACCC) requesting
certain information and documents in connection with the ACCCs investigation into possible
anti-competitive behavior relating to air cargo transportation services in Australia. In December
2007, we received a grand jury subpoena for the production of documents in connection with a
criminal investigation by the DOJ into possible anti-competitive behavior in the international
freight forwarding industry. In March 2008, we received an additional subpoena from the DOJ
relating to its investigation of the international freight forwarding industry. In July 2008, we
received a notice from the Korea Fair Trade Commission (KFTC) requesting certain information and
documents in connection with the KFTCs investigation into possible anti-competitive behavior
relating to air cargo transportation services in South Korea. In July 2008, we received a formal
request for certain information in connection with an ongoing investigation by the Japan Fair Trade
Commission (JFTC) into possible anti-competitive behavior in the international freight forwarding
industry. In March 2009, the JFTC concluded its investigation and charged several companies with
anti-competitive behavior. We were not among the companies charged. The DOJ, ACCC and KFTC
investigations are ongoing.
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 2009.
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, President and
Chief Executive Officer
|
|
|
64 |
|
|
Chairman, President and Chief Executive Officer
of FedEx since January 1998; Chairman of FedEx
Express since 1975; 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
Executive Officer,
FedEx Express
|
|
|
55 |
|
|
President and Chief Executive Officer of FedEx
Express since January 2000; 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 several sales and operations managerial
positions 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
|
|
|
50 |
|
|
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 Saks Incorporated, a
retailer operating luxury, specialty and
traditional department stores, and as a director
of First Horizon National Corporation, a
financial services holding company. |
28
|
|
|
|
|
|
|
Name and Office |
|
Age |
|
Positions and Offices Held and Business Experience |
|
|
|
|
|
|
|
Douglas G. Duncan
President and Chief
Executive Officer,
FedEx Freight Corporation
|
|
|
58 |
|
|
President and Chief Executive Officer of FedEx
Freight Corporation since February 2001;
President and Chief Executive Officer of Viking
Freight, Inc. (Viking Freight) from November
1998 to February 2001; Senior Vice President
Sales and Marketing of Viking Freight from 1996
to November 1998; Vice President Sales and
Marketing of Caliber System, Inc. (Caliber)
from 1995 to 1996; various positions with Roadway
Express, Inc., including Vice President Sales,
from 1976 to 1995. Mr. Duncan serves as a
director of Benchmark Electronics, Inc., an
electronics manufacturer. |
|
|
|
|
|
|
|
T. Michael Glenn
Executive Vice President
Market Development and
Corporate Communications
|
|
|
53 |
|
|
Executive Vice President Market Development and
Corporate Communications of FedEx since January
1998; Senior Vice President Marketing, Customer
Service and Corporate Communications of FedEx
Express from June 1994 to January 1998; Senior
Vice President Marketing and Corporate
Communications of FedEx Express from December
1993 to June 1994; Senior Vice President
Worldwide Marketing Catalog Services and
Corporate Communications of FedEx Express from
June 1993 to December 1993; Senior Vice President
Catalog and Remail Services of FedEx Express
from September 1992 to June 1993; Vice President
Marketing of FedEx Express from August 1985 to
September 1992; and various management positions
in sales and marketing and senior sales
specialist of FedEx Express from 1981 to 1985.
Mr. Glenn serves as a director of Pentair, Inc.,
a diversified industrial manufacturing company
operating in water and technical products
business segments, and as a director of Renasant
Corporation, a financial services holding
company. |
|
|
|
|
|
|
|
Alan B. Graf, Jr.
Executive Vice President
and Chief Financial
Officer
|
|
|
55 |
|
|
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. |
29
|
|
|
|
|
|
|
Name and Office |
|
Age |
|
Positions and Offices Held and Business Experience |
|
|
|
|
|
|
|
David F. Rebholz
President and Chief
Executive Officer,
FedEx Ground
|
|
|
56 |
|
|
President and Chief Executive Officer of FedEx
Ground since January 2007; President of FedEx
Ground from September 2006 to January 2007;
Executive Vice President Operations & Systems
Support of FedEx Express from December 1999 to
September 2006; Senior Vice President U.S. of
FedEx Express from January 1997 to November 1999;
Senior Vice President Sales & Customer Service
of FedEx Express from June 1993 to December 1996;
Vice President Regional Operations of FedEx
Express from October 1991 to June 1993; Vice
President Customer Services of FedEx Express
from December 1988 to October 1991; and various
other positions with FedEx Express from 1976 to
1988. |
|
|
|
|
|
|
|
Christine P. Richards
Executive Vice
President, General
Counsel and Secretary
|
|
|
54 |
|
|
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. |
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 or of any of its
subsidiaries.
30
PART II
|
|
|
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
FedExs common stock is listed on the New York Stock Exchange under the symbol FDX. As of
July 13, 2009, there were
18,062 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, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
93.69 |
|
|
$ |
71.33 |
|
|
$ |
0.11 |
|
Second Quarter |
|
|
96.65 |
|
|
|
53.90 |
|
|
|
0.11 |
|
Third Quarter |
|
|
76.94 |
|
|
|
42.37 |
|
|
|
0.11 |
|
Fourth Quarter |
|
|
62.16 |
|
|
|
34.02 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
119.10 |
|
|
$ |
99.30 |
|
|
$ |
0.10 |
|
Second Quarter |
|
|
111.29 |
|
|
|
91.10 |
|
|
|
0.10 |
|
Third Quarter |
|
|
101.53 |
|
|
|
80.00 |
|
|
|
0.10 |
|
Fourth Quarter |
|
|
99.46 |
|
|
|
82.50 |
|
|
|
0.10 |
|
FedEx also paid a cash dividend on July 1, 2009 ($0.11 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 intend to 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. FedEx did not repurchase
any of its common stock during the fourth quarter of 2009.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the five years ended May 31, 2009 is presented on page 137 of
this Annual Report on
Form 10-K.
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
Managements discussion and analysis of results of operations and financial condition is presented
on pages 38 through 86 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 136 of this Annual
Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FedExs consolidated financial statements, together with the notes thereto and the report of Ernst
& Young LLP dated July 10, 2009 thereon, are presented on pages 89 through 135 of this Annual
Report on Form 10-K.
31
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Managements 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 Commissions 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, 2009 (the end
of the period covered by this Annual Report on Form 10-K).
Assessment of Internal Control Over Financial Reporting
Managements report on our internal control over financial reporting is presented on page 87 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 88 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During our fiscal quarter ended May 31, 2009, 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.
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, FedExs Code of Business Conduct and Ethics and
certain other aspects of FedExs corporate governance (such as the procedures by which FedExs
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
FedExs definitive proxy statement for its 2009 annual meeting of stockholders, which will be held
on September 28, 2009, 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 FedExs 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.
32
ITEM 11. EXECUTIVE COMPENSATION
Information regarding director and executive compensation will be presented in FedExs definitive
proxy statement for its 2009 annual meeting of stockholders, which will be held on September 28,
2009, 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 FedExs
definitive proxy statement for its 2009 annual meeting of stockholders, which will be held on
September 28, 2009, 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
FedExs policies and procedures for the review and preapproval of related person transactions) and
director independence will be presented in FedExs definitive proxy statement for its 2009 annual
meeting of stockholders, which will be held on September 28, 2009, 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 2009 and 2008 and
the Audit Committees administration of the engagement of Ernst & Young LLP, including the
Committees preapproval policies and procedures (such as FedExs Policy on Engagement of
Independent Auditor), will be presented in FedExs definitive proxy statement for its 2009 annual
meeting of stockholders, which will be held on September 28, 2009, and is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial Statements; Financial Statement Schedules
FedExs consolidated financial statements, together with the notes thereto and the report of Ernst
& Young LLP dated July 10, 2009 thereon, are listed on page 36 and presented on pages 89 through
135 of this Annual Report on Form 10-K. FedExs Schedule II Valuation and Qualifying Accounts,
together with the report of Ernst & Young LLP dated July 10, 2009 thereon, is presented on pages
138 through 139 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 FedExs
consolidated financial statements or the notes thereto.
(a)(3) Exhibits
See the Exhibit Index on pages E-1 through E-6 for a list of the exhibits being filed or furnished
with or incorporated by reference into this Annual Report on Form 10-K.
33
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 15, 2009 |
By: |
/s/ FREDERICK W. SMITH
|
|
|
|
Frederick W. Smith |
|
|
|
Chairman, President and
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has
been signed below by the following persons on behalf of the Registrant in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Capacity |
|
Date |
|
|
|
|
|
/s/ FREDERICK W. SMITH
Frederick W. Smith
|
|
Chairman, President and
Chief Executive Officer
and Director
(Principal Executive Officer)
|
|
July 15, 2009 |
|
|
|
|
|
/s/ ALAN B. GRAF, JR.
Alan B. Graf, Jr.
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
July 15, 2009 |
|
|
|
|
|
/s/ JOHN L. MERINO
John L. Merino
|
|
Corporate Vice President
and Principal Accounting Officer
(Principal Accounting Officer)
|
|
July 15, 2009 |
|
|
|
|
|
/s/ JAMES L. BARKSDALE *
James L. Barksdale
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ JOHN A. EDWARDSON *
John A. Edwardson
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ JUDITH L. ESTRIN *
Judith L. Estrin
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ J. R. HYDE, III *
J. R. Hyde, III
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ SHIRLEY ANN JACKSON *
Shirley Ann Jackson
|
|
Director
|
|
July 15, 2009 |
34
|
|
|
|
|
Signature |
|
Capacity |
|
Date |
|
|
|
|
|
/s/ STEVEN R. LORANGER *
Steven R. Loranger
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ GARY W. LOVEMAN *
Gary W. Loveman
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ SUSAN C. SCHWAB *
Susan C. Schwab
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ JOSHUA I. SMITH *
Joshua I. Smith
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ PAUL S. WALSH *
Paul S. Walsh
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
/s/ PETER S. WILLMOTT *
Peter S. Willmott
|
|
Director
|
|
July 15, 2009 |
|
|
|
|
|
|
|
*By:
|
|
/s/ JOHN L. MERINO
John L. Merino
|
|
|
|
July 15, 2009 |
|
|
Attorney-in-Fact |
|
|
|
|
35
FINANCIAL SECTION TABLE OF CONTENTS
|
|
|
|
|
|
|
PAGE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
86 |
|
Consolidated Financial Statements
36
|
|
|
|
|
|
|
PAGE |
|
Other Financial Information |
|
|
|
|
|
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
|
|
137 |
|
|
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
|
140 |
|
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW OF FINANCIAL SECTION
The financial section of the FedEx Corporation (FedEx) Annual Report on Form 10-K (Annual
Report) consists of the following Managements Discussion and Analysis of Results of Operations
and Financial Condition (MD&A), the Consolidated Financial Statements and the notes to the
Consolidated Financial Statements, and Other Financial Information, all of which include
information about our significant accounting policies, practices and the transactions that underlie
our financial results. The following MD&A describes the principal factors affecting the results of
operations, liquidity, capital resources, contractual cash obligations and the 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 comprised 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 2009 results compared to
2008, and 2008 results compared to 2007. This section also includes a discussion of key
actions and events that impacted our results, as well as a discussion of our outlook for 2010. |
|
|
The overview is followed by a financial summary and analysis (including a discussion of
both historical operating results and our outlook for 2010) for each of our reportable
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 flow
statements and our financial commitments. |
|
|
We conclude with a discussion of the critical accounting estimates that we believe are
important to understanding certain of the material judgments and assumptions incorporated in
our reported financial 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 include Federal Express Corporation (FedEx
Express), the worlds largest express transportation company; FedEx Ground Package System, Inc.
(FedEx Ground), a leading provider of small-package ground delivery services; and FedEx Freight
Corporation, a leading U.S. provider of less-than-truckload (LTL) freight services. Our FedEx
Services segment provides customer-facing sales, marketing, information technology and customer
service support to 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). These companies represent our major service
lines and form the core of our reportable segments. See Reportable Segments for further
discussion and refer to Item 1: Business for a more detailed description of each of our operating
companies.
38
The key indicators necessary to understand our operating results include:
|
|
the overall customer demand for our various services; |
|
|
the volumes of transportation services provided through our networks, primarily measured by
our average daily volume and shipment weight; |
|
|
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 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. |
The majority of our operating expenses are directly impacted by revenue and volume levels.
Accordingly, we expect these operating expenses to fluctuate on a year-over-year basis consistent
with the change in revenues and volume. The following discussion of operating expenses describes
the key drivers impacting expense trends beyond changes in revenues and volume.
Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2009 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, FedEx Ground and FedEx Freight
segments.
39
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following table compares revenues, operating income, operating margin, net income and diluted
earnings per share (dollars in millions, except per share amounts) for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change |
|
|
|
2009 (1) |
|
|
2008 (2) |
|
|
2007 (3) |
|
|
2009/2008 |
|
|
2008/2007 |
|
Revenues |
|
$ |
35,497 |
|
|
$ |
37,953 |
|
|
$ |
35,214 |
|
|
|
(6 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
747 |
|
|
|
2,075 |
|
|
|
3,276 |
|
|
|
(64 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
2.1 |
% |
|
|
5.5 |
% |
|
|
9.3 |
% |
|
(340 |
) bp |
|
(380 |
) bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
98 |
|
|
$ |
1,125 |
|
|
$ |
2,016 |
|
|
|
(91 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.31 |
|
|
$ |
3.60 |
|
|
$ |
6.48 |
|
|
|
(91 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses include a charge of $1.2 billion ($1.1 billion, net of tax, or
$3.45 per diluted share),
primarily related to impairment charges associated with goodwill and aircraft (described
below). |
|
(2) |
|
Operating expenses include a charge of $891 million ($696 million, net of tax, or
$2.23 per diluted share),
predominantly related to impairment charges associated with intangible assets from the
Kinkos
acquisition (described below). |
|
(3) |
|
Operating expenses include a charge of $143 million at FedEx Express associated
with upfront compensation
and benefits under a labor contract with our pilots ratified in October 2006. The impact of
this contract
on second quarter net income was $78 million net of tax, or $0.25 per diluted share. |
40
The following table shows changes in revenues and operating income by reportable segment for 2009
compared to 2008, and 2008 compared to 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
Operating
Income (Loss) |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
|
Change |
|
|
Change |
|
|
Change |
|
|
Change |
|
|
|
2009/ |
|
|
2008/ |
|
|
2009/ |
|
|
2008/ |
|
|
2009/ |
|
|
2008/ |
|
|
2009/ |
|
|
2008/ |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express segment (1) |
|
$ |
(2,057 |
) |
|
$ |
1,740 |
|
|
|
(8 |
) |
|
|
8 |
|
|
$ |
(1,107 |
) |
|
$ |
(90 |
) |
|
|
(58 |
) |
|
|
(5 |
) |
FedEx Ground segment |
|
|
296 |
|
|
|
708 |
|
|
|
4 |
|
|
|
12 |
|
|
|
71 |
|
|
|
(86 |
) |
|
|
10 |
|
|
|
(10 |
) |
FedEx Freight segment (2) |
|
|
(519 |
) |
|
|
348 |
|
|
|
(11 |
) |
|
|
8 |
|
|
|
(373 |
) |
|
|
(134 |
) |
|
|
(113 |
) |
|
|
(29 |
) |
FedEx Services segment (3) |
|
|
(161 |
) |
|
|
2 |
|
|
|
(8 |
) |
|
|
|
|
|
|
81 |
|
|
|
(891 |
) |
|
|
9 |
|
|
NM |
|
Other and Eliminations |
|
|
(15 |
) |
|
|
(59 |
) |
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,456 |
) |
|
$ |
2,739 |
|
|
|
(6 |
) |
|
|
8 |
|
|
$ |
(1,328 |
) |
|
$ |
(1,201 |
) |
|
|
(64 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FedEx Express segment 2009 operating expenses include a charge of $260 million,
primarily related to aircraft-related asset impairments. FedEx
Express segment 2007 operating expenses include a charge of $143 million associated with
upfront compensation and benefits under our pilot
labor contract. |
|
(2) |
|
FedEx Freight segment 2009 operating expenses include a charge of $100 million,
primarily related to impairment charges associated with
goodwill related to the Watkins Motor Lines (now known as FedEx National LTL) acquisition.
FedEx Freight segment results include the
results of FedEx National LTL from the date of its acquisition on September 3, 2006. |
|
(3) |
|
FedEx Services segment 2009 operating expenses include a
charge of $810 million related to impairment charges associated with
goodwill related to the Kinkos acquisition. FedEx Services segment 2008 operating expenses
include a charge of $891 million, predominantly
related to impairment charges associated with intangible assets from the Kinkos acquisition.
The normal, ongoing net operating costs of the
FedEx Services segment are allocated back to the transportation segments. |
The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group, which
comprises the FedEx Freight and FedEx National LTL businesses of FedEx Freight Corporation, show
selected volume statistics (in thousands) for the years ended May 31:
41
The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected
yield statistics for the years ended May 31:
|
|
|
(1) |
|
Package statistics do not include the operations of FedEx SmartPost. |
Overview
Global economic conditions deteriorated significantly during 2009, resulting in lower
revenue and earnings. Our results for 2009 reflect reduced demand for most of our services,
particularly at our FedEx Express and FedEx Freight segments. Business and consumer spending, a
key driver of volumes shipped across our networks, contracted significantly in 2009. Declines in
U.S. domestic volumes at FedEx Express were partially mitigated by the exit of a key competitor
(DHL) from the market, as we gained approximately half of this competitors total U.S. domestic
shipments. While we acquired significant volumes from this competitor, these shipments generally
were at lower weights and yields than our other volumes. We experienced the weakest LTL freight
environment in decades, resulting in an extraordinary decline in demand for our LTL freight
services, although we were able to maintain our market share. FedEx Express package yields and FedEx
Freight LTL Group yields were negatively impacted by a more competitive pricing environment, as
competitors are seeking to protect market share and sustain operations during the current
recession.
42
In response to weak business conditions, we implemented several actions in 2009 to lower our cost
structure, including base salary reductions for U.S. salaried personnel effective January 1, 2009,
a suspension of 401(k) company-matching contributions effective February 1, 2009, elimination of
variable compensation payouts, implementation of a hiring freeze and significant volume-related
reductions in labor hours and line-haul expenses. In addition, we have exercised stringent control
over discretionary spending, such as travel, entertainment and professional fees. Further, we
optimized our networks by adjusting routes and equipment types, temporarily idling equipment,
consolidating facilities and deferring facility expansions and aircraft purchases to better match
current demand levels. These cost-reduction activities partially mitigated the impact of the weak
global economy on our results for 2009. Rapidly declining fuel costs during 2009 and the timing
lag between such declines and adjustments to our fuel surcharges provided a significant benefit to
our results, predominantly at FedEx Express and FedEx Ground.
Our operating results for 2009 were negatively impacted by fourth quarter charges of $1.2 billion
($1.1 billion, net of tax, or $3.45 per diluted share), related primarily to the impairment of
goodwill related to the Kinkos and Watkins Motor Lines acquisitions and certain aircraft-related
assets at FedEx Express (described below).
In addition, at May 31, 2009, in accordance with the provisions of Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, we recorded a decrease to equity through
other comprehensive income (OCI) of $1.2 billion (net of tax) based primarily on
mark-to-market adjustments related to unrealized losses in our pension plan assets during 2009.
In 2008, the combination of record high fuel prices and the weak U.S. economy significantly
impacted our profitability. Persistently higher fuel prices and the related impact on our fuel
surcharges reduced demand for our services, particularly U.S. domestic express package and LTL
freight services, and pressured overall yield growth across our transportation segments. In
addition, our operating results for 2008 included a charge of $891 million, predominantly related
to impairment charges associated with intangible assets from the Kinkos acquisition. Lower
variable incentive compensation, reduced retirement plans costs and cost-containment activities
partially mitigated the impact of higher net fuel costs and the weak U.S. economy on our 2008
overall results.
Revenue
Revenues decreased during 2009 due to significantly lower volumes at FedEx Express and the FedEx
Freight LTL Group as a result of reduced demand and lower yields resulting from an aggressive pricing environment. At FedEx
Express, FedEx International Priority® package (IP) volume declined in every major region of the
world, although the rate of decline began to slow late in 2009. Reductions in U.S. domestic
package and freight volumes at FedEx Express also contributed to the revenue decrease during 2009.
However, declines in U.S. domestic package volumes were partially offset by volumes gained from
DHLs exit from the U.S. market. These volume decreases were partially offset by yield increases
in FedEx Express freight services driven by higher base rates and higher fuel surcharges in the
first half of 2009. FedEx Freight LTL Group volumes decreased as a result of the recession despite
maintaining market share. Within our FedEx Ground segment, volumes increased during 2009 due to
market share gains, including volumes gained from DHL, and FedEx Express customers who chose to use
our more economical ground delivery services in light of the recession.
43
Revenue growth for 2008 was primarily attributable to continued growth in international services at
FedEx Express, increases in FedEx Express U.S. domestic package yields and volume growth at FedEx
Ground. Higher fuel surcharges were the key driver of increased yields in our transportation
segments in 2008. Additionally, FedEx Express international yields benefited from favorable
currency exchange rates. Revenue growth for 2008 also improved due to a full year of operations
for businesses acquired in 2007 at FedEx Express and FedEx Freight. Revenue growth during 2008 was
partially offset by reduced U.S. domestic express volumes as a result of the ongoing weak U.S.
economy. The impact of the weak U.S. economy became progressively worse during the year and drove
U.S. domestic express shipping volumes to pre-2000 levels during the fourth quarter of 2008.
Impairment and Other Charges
During the fourth quarter of 2009, we took actions in addition to those described above to align
the size of our networks to current demand levels by removing equipment and facilities from service
and reducing
personnel. These actions, combined with the impairment of goodwill related
to the Kinkos and Watkins Motor Lines acquisitions, resulted in a charge of $1.2 billion ($1.1
billion, net of tax, or $3.45 per diluted share), which is included in our operating results for
the fourth quarter of 2009.
The components of the fourth quarter charge include the following (in millions):
|
|
|
|
|
Goodwill impairment |
|
$ |
900 |
|
Asset impairment |
|
|
202 |
|
Other charges |
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,204 |
|
|
|
|
|
The goodwill impairment charge includes an $810 million charge related to reduction of the value of
the goodwill recorded as a result of the February 2004 acquisition of Kinkos, Inc. (now known as
FedEx Office) and a $90 million charge related to reduction of the value of the goodwill recorded
as a result of the September 2006 acquisition of the U.S. and Canadian less-than-truckload freight
operations of Watkins Motor Lines and certain affiliates (now known as FedEx National LTL). The
key factor contributing to the goodwill impairment was a decline in FedEx Offices and FedEx
National LTLs recent and forecasted financial performance as a result of weak economic conditions.
The Watkins Motor Lines goodwill impairment charge is included in the results of the FedEx Freight
segment. The Kinkos goodwill impairment charge is included in the results of the FedEx Services
segment and was not allocated to our transportation segments, as the charge was unrelated to the
core performance of those businesses. For additional information concerning these impairment
charges, see Note 4 to the accompanying consolidated financial statements and the Critical
Accounting Estimates section of this MD&A.
We had several property and equipment impairment charges during 2009 resulting from decisions to
remove assets from service due to the impact of the recession on our business, principally during
the fourth quarter. The majority of our asset impairment charges during the fourth quarter of 2009
resulted from our fourth quarter decision to permanently remove from
service 10 Airbus A310-200
aircraft and four Boeing MD10-10 aircraft that we own, along with certain excess aircraft engines,
at FedEx Express. This decision was a result of our ongoing efforts to optimize our express
network in light of continued excess aircraft capacity due to weak economic conditions and the
delivery of newer, more fuel-efficient aircraft. Other charges during the fourth quarter of 2009
were primarily associated with aircraft-related lease and contract termination costs at FedEx
Express and employee severance.
Our operating results for 2008 include a charge of $891 million ($696 million, net of tax, or $2.23
per diluted share) recorded during the fourth quarter, predominantly related to impairment charges
associated with the decision to minimize the use of the Kinkos trade name and goodwill resulting
from the Kinkos acquisition.
44
The impairment of the Kinkos trade name was due to the decision to minimize the use of the Kinkos
trade name and rebrand the company as FedEx Office over the next several years. We believe the
FedEx Office name better describes the wide range of services available at the companys retail
centers and takes full advantage of the FedEx brand. The goodwill impairment charge resulted from
a decline in the fair value of the FedEx Office reporting unit in light of economic conditions, the
units recent and forecasted financial performance and the decision to reduce the rate of network
expansion. These 2008 impairment charges are included in operating expenses in the accompanying
consolidated statements of income. The
charges were included in the results of the FedEx Services segment and were not allocated to our
transportation segments, as the charges were unrelated to the core performance of those businesses.
Operating Income
The following table compares operating expenses as a percent of revenue for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
38.8 |
% |
|
|
37.4 |
% |
|
|
39.0 |
% |
Purchased transportation |
|
|
12.8 |
|
|
|
12.2 |
|
|
|
11.3 |
|
Rentals and landing fees |
|
|
6.8 |
|
|
|
6.4 |
|
|
|
6.7 |
|
Depreciation and amortization |
|
|
5.6 |
|
|
|
5.1 |
|
|
|
5.0 |
|
Fuel |
|
|
10.7 |
|
|
|
11.6 |
|
|
|
9.7 |
|
Maintenance and repairs |
|
|
5.3 |
|
|
|
5.5 |
|
|
|
5.5 |
|
Impairment and other charges |
|
|
3.4 |
|
|
|
2.3 |
|
|
|
|
|
Other |
|
|
14.5 |
|
|
|
14.0 |
|
|
|
13.5 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
97.9 |
|
|
|
94.5 |
|
|
|
90.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
2.1 |
% |
|
|
5.5 |
% |
|
|
9.3 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income and operating margin declined significantly in 2009, as weak economic conditions
drove decreases in volumes at FedEx Express and the FedEx Freight LTL Group and contributed to a
more competitive pricing environment that pressured yields. The impairment and other charges described above also
negatively impacted operating income and margin in 2009. Operating income and margin in 2009 were
also negatively impacted by reduced base copy revenues and expenses associated with organizational
changes at FedEx Office. The cost-reduction initiatives (described above) partially mitigated the
negative impact of these factors.
45
The following graphs for our transportation segments show our average cost of jet and vehicle fuel
per gallon and the year-over-year percentage change in total fuel expense for the years ended May
31:
Fuel expenses decreased 14% during 2009, primarily due to decreases in fuel consumption and the
average price per gallon of fuel. Jet fuel usage decreased 9% during 2009, as we reduced flight
hours in light of lower business levels.
Fuel prices decreased rapidly and significantly during 2009 after peaking during the first quarter,
while changes in fuel surcharges for FedEx Express and FedEx Ground lagged these decreases by
approximately six to eight weeks. We experienced the opposite effect during 2008, as fuel prices
significantly increased. This volatility in fuel prices and fuel surcharges resulted in a net
benefit to income in 2009, based on a static analysis of the impact to operating income of
year-over-year changes in fuel prices compared to changes in fuel surcharges. This analysis
considers the estimated benefits of the
reduction in fuel surcharges included in the base rates charged for FedEx Express services.
However, this analysis does not consider the negative effects that the significantly higher fuel
surcharge levels have on our business, including reduced demand and shifts by our customers to
lower-yielding services. While fluctuations in fuel surcharge rates can be significant from period
to period, fuel surcharges represent one of the many individual components of our pricing structure
that impact our overall revenue and yield. Additional components include the mix of services
purchased, the base price and extra service charges we obtain for these services and the level of
pricing discounts offered. In order to provide information about the impact of fuel surcharges on
the trend in revenue and yield growth, we have included the comparative fuel surcharge rates in
effect for 2009, 2008 and 2007 in the accompanying discussions of each of our transportation
segments.
Operating income and operating margin declined during 2008, as the weak U.S. economy and
substantially higher fuel costs pressured volume growth at FedEx Express and the FedEx Freight LTL
Group. The impairment charges at FedEx Office also negatively affected operating income and margin
in 2008. As described above, fuel volatility negatively affected earnings in 2008.
Operating income and margin in 2008 were also negatively impacted by increased net operating costs
at FedEx Office and costs of expansion of our domestic express services in China. Higher purchased
transportation expenses at FedEx Ground, primarily due to costs associated with independent
contractor incentive programs and higher rates paid to our contractors (including higher fuel
supplement costs), also had a negative impact on 2008 results. Other operating expenses increased
during 2008 primarily due to the full-year inclusion of our 2007 business acquisitions, including
the consolidation of the results of our China joint venture at FedEx Express, and higher legal,
consulting and insurance costs at FedEx Ground. Lower variable incentive compensation and reduced
retirement plans costs, combined with cost-containment activities, partially mitigated the impact
of higher net fuel costs and the weak U.S. economy on our overall results for 2008.
46
Other Income and Expense
Interest expense decreased $13 million during 2009 due to increased capitalized interest
primarily related to progress payments on aircraft purchases, which was partially offset by
interest costs on higher debt balances. Interest income decreased $18 million during 2009,
primarily due to lower interest rates. Net interest expense decreased $1 million during 2008
primarily due to decreased interest expense related to lower debt balances and increased
capitalized interest. The 2008 decrease in interest expense was partially offset by decreased
interest income due to lower cash balances.
Income Taxes
Our effective tax rates of 85.6% for 2009 and 44.2% for 2008 were significantly impacted by the
goodwill impairment charges related to the Kinkos acquisition, which are not deductible for income
tax purposes. Our effective tax rate was 37.3% in 2007, which was favorably impacted by the
conclusion of various state and federal audits and appeals. The 2007 rate reduction was partially
offset by tax charges incurred as a result of a reorganization in Asia associated with our
acquisition in China. For 2010, we expect our effective tax rate to be between 38% and 39%. The
actual rate, however, will depend on a number of factors, including the amount and source of
operating income. Additional information on income taxes, including our effective tax rate
reconciliation and liabilities recorded under FASB Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes, can be found in Note 11 of the accompanying consolidated financial
statements.
Business Acquisitions
During 2007, we made the following acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price |
|
Segment |
|
Business Acquired |
|
Rebranded |
|
Date Acquired |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Freight |
|
Watkins Motor Lines |
|
FedEx National LTL |
|
September 3, 2006 |
|
$ |
787 |
|
FedEx Express |
|
ANC Holdings Ltd. |
|
FedEx U.K. |
|
December 16, 2006 |
|
|
241 |
|
FedEx Express |
|
Tianjin Datian W. Group Co., Ltd. (DTW Group) |
|
N/A |
|
March 1, 2007 |
|
|
427 |
|
These acquisitions expanded our portfolio of services to include long-haul LTL freight services and
domestic express services in the United Kingdom and China. See Note 3 of the accompanying
consolidated financial statements for further information about these acquisitions. We paid the
purchase price for these acquisitions from available cash balances, which included the net proceeds
from our $1 billion senior unsecured debt offering completed during 2007.
During 2009, 2008 and 2007, we also made other immaterial acquisitions that are not presented in
the table above.
Employees Under Collective Bargaining Arrangements
The pilots of FedEx Express, who represent a small percentage of our total employees, are employed
under a collective bargaining agreement. During the second quarter of 2007, the pilots ratified a
new four-year labor contract that included signing bonuses and other upfront compensation of $143 million, as
well as pay increases and other benefit enhancements. These costs were partially mitigated by
reductions in the variable incentive compensation of our other employees. The effect of this new
agreement on second quarter 2007 net income was $78 million net of tax, or $0.25 per
diluted share.
47
Outlook
We expect continued softness in demand for our services in 2010, as shipping volumes are expected to remain
relatively flat as the global recession persists, particularly in the first half of 2010. Our
results for the first half of 2009 included the benefit of significantly stronger economic activity
and rapidly declining fuel costs, creating difficult year-over-year comparisons. The timing and
pace of any economic recovery is difficult to predict, and our outlook for 2010 reflects our
expectations for continued challenges in growing volume and yield in this environment. Revenues in
2010 are expected to be negatively impacted by lower yields resulting from lower fuel surcharges
due to more stable fuel prices and an aggressive pricing environment for our services. We
anticipate volume growth at the FedEx Ground segment due to continued market share gains and flat
volumes at the FedEx Express segment for 2010. Further, we expect LTL shipments to decrease for
2010 due to the continued excess capacity in this market. However, if excess capacity exits the
LTL industry in 2010, we have the network, resources and capabilities to manage any resulting
incremental volumes. Despite the benefit of numerous cost-reduction activities in 2009 (described
above), earnings in 2010 will be negatively impacted by lower revenues as a result of the yield and
volume pressures described above. If economic conditions deteriorate further, additional actions
will be necessary to reduce the size of our networks. However, we will not compromise our
outstanding service levels or take actions that negatively impact the customer experience in
exchange for short-term cost reductions.
Our capital expenditures for 2010 are expected to be approximately $2.6 billion, as we will
continue to balance the need to control spending with the opportunity to make investments with high
returns, such as in substantially more fuel-efficient Boeing 757 (B757) and Boeing 777 Freighter
(B777F) aircraft. Moreover, we will continue to invest in critical long-term strategic projects
focused on enhancing and broadening our service offerings to position us for stronger growth under
improved economic conditions. However, we could reduce 2010 capital expenditures should conditions
worsen. For additional details on key 2010 capital projects, refer to the Liquidity Outlook
section of this MD&A.
All of our businesses operate in a competitive pricing environment, exacerbated by continuing
volatile fuel prices, which impact our fuel surcharge levels. Historically, our fuel surcharges
have largely offset incremental fuel costs; however, volatility in fuel costs may impact earnings
because adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, the
trailing impact of adjustments to our fuel surcharges can significantly affect our earnings either
positively or negatively in the short-term.
As described in Note 17 of the accompanying consolidated financial statements and the Independent
Contractor Matters section of our FedEx Ground segment MD&A, we are involved in a number of
litigation matters and other proceedings that challenge the status of FedEx Grounds
owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its
relationships with its contractors. The nature, timing and amount of any changes are dependent on
the outcome of numerous future events. We cannot reasonably estimate the potential impact of any
such changes or a meaningful range of potential outcomes, although they could be material.
However, we do not believe that any such changes will impair our ability to operate and profitably
grow our FedEx Ground business.
See
Risk Factors for a discussion of these and other potential risks and uncertainties that could
materially affect our future performance.
48
Seasonality of Business
Our businesses are seasonal in nature. Seasonal fluctuations affect volumes, revenues and
earnings. Historically, the U.S. express package business experiences an increase in volumes in
late November and December. International business, particularly in the Asia-to-U.S. market, peaks
in October and November in advance of the U.S. holiday sales season. Our first and third fiscal
quarters, because they are summer vacation and post winter-holiday seasons, have historically
experienced lower volumes relative to other periods. Normally, the fall is the busiest shipping
period for FedEx Ground, while late December, June and July are the slowest periods. For the FedEx
Freight LTL Group, the spring and fall are the busiest periods and the latter part of December,
January and February are the slowest periods. For FedEx Office, the summer months are normally the
slowest periods. Shipment levels, operating costs and earnings for each of our companies can also
be adversely affected by inclement weather, particularly in our third fiscal quarter.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting rules and disclosure requirements can significantly impact our reported results and
the comparability of our financial statements. We believe the following new accounting
pronouncements are relevant to the readers of our financial statements.
On May 31, 2007, we adopted SFAS 158. SFAS 158 requires recognition in the balance sheet of the
funded status of defined benefit pension and other postretirement benefit plans, and the
recognition in OCI of unrecognized gains or losses and prior service costs or credits. The
adoption of SFAS 158
resulted in a $982 million charge to shareholders equity at May 31, 2007 through accumulated other
comprehensive income (AOCI).
Additionally, SFAS 158 requires the measurement date for plan assets and liabilities to coincide
with the plan sponsors year end. On June 1, 2008, we made our transition election for the
measurement date provision of SFAS 158 using the two-measurement approach. Under this approach, we
completed two actuarial measurements, one at February 29, 2008 and the other at June 1, 2008. This
approach required us to record the net periodic benefit cost for the transition period from March
1, 2008 through May 31, 2008 as an adjustment to beginning retained earnings ($44 million, net of
tax) and actuarial gains and losses for the period (a gain of $372 million, net of tax) as an
adjustment to the opening balance of AOCI. These adjustments increased the amount recorded for our
pension assets by $528 million. Our actuarial gains resulted primarily from a 19-basis-point
increase in the discount rate for our primary pension plan and an increase in plan assets at June
1, 2008. For additional information on the adoption of SFAS 158, see Note 12 to
the accompanying consolidated financial statements.
On June 1, 2008, we adopted SFAS 157, Fair Value Measurements, which provides a common definition
of fair value, establishes a uniform framework for measuring fair value and requires expanded
disclosures about fair value measurements. There is a one-year deferral of the adoption of the
standard as it relates to nonfinancial assets and liabilities. Therefore, the adoption of SFAS
157 had no impact on our financial statements at June 1, 2008.
In December 2007, the FASB issued SFAS 141R, Business Combinations, and SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(ARB) No. 51. These new standards significantly change the accounting for and reporting of
business combination transactions, including noncontrolling interests (previously referred to as
minority interests). For example, these standards require the acquiring entity to recognize the
full fair value of assets acquired and liabilities assumed in the transaction and require the
expensing of most transaction and restructuring costs. Both standards are effective for us
beginning June 1, 2009 (fiscal 2010) and are applicable only to transactions occurring after the
effective date.
49
In December 2008, the FASB issued FASB Staff Position (FSP) 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets. This FSP provides guidance on the objectives an
employer should consider when providing detailed disclosures about assets of a defined benefit
pension plan or other postretirement plan. These disclosure objectives include investment policies
and strategies, categories of plan assets, significant concentrations of risk and the inputs and
valuation techniques used to measure the fair value of plan assets. This FSP will be effective for
our fiscal year ending May 31, 2010.
In April 2009, the FASB issued FSP No. 107-1 and Accounting Principles Board Opinion (APB) No.
28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP and APB amends
SFAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the
fair value of financial instruments for interim reporting periods in addition to annual reporting
periods. This FSP and APB will be effective for our first quarter of fiscal year 2010.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards
of accounting for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This standard will require us to
disclose the date through which we have evaluated subsequent events and the basis for that date.
This standard will be effective for our first quarter of fiscal year 2010.
REPORTABLE SEGMENTS
FedEx Express, FedEx Ground and the FedEx Freight LTL Group represent our major service lines and,
along with FedEx Services, form the core of our reportable segments. Our reportable segments as of
May 31, 2009 included the following businesses:
|
|
|
FedEx Express Segment
|
|
FedEx Express (express transportation) |
|
|
FedEx Trade Networks (global trade services) |
|
|
|
FedEx Ground Segment
|
|
FedEx Ground (small-package ground delivery) |
|
|
FedEx SmartPost (small-parcel consolidator) |
|
|
|
FedEx Freight Segment
|
|
FedEx Freight LTL Group: |
|
|
FedEx Freight (regional LTL freight transportation) |
|
|
FedEx National LTL (long-haul LTL freight transportation) |
|
|
FedEx Custom Critical (time-critical transportation) |
|
|
Caribbean Transportation Services (airfreight forwarding) |
|
|
|
FedEx Services Segment
|
|
FedEx Services (sales, marketing and information technology functions)
FedEx Office (document and business services and package acceptance)
FedEx Customer Information Services (FCIS) (customer service,
billings and collections)
FedEx Global Supply Chain Services (logistics services) |
Effective June 1, 2009, Caribbean Transportation Services, Inc. (CTS), a business in the FedEx
Freight segment, was integrated into FedEx Express to leverage synergies between CTS and FedEx
Express and to gain cost efficiencies by maximizing the use of FedEx Express assets for this
service offering.
50
FEDEX SERVICES SEGMENT
The FedEx Services segment includes: FedEx Services, which provides sales, marketing and
information technology support to our other companies; FCIS, which is responsible for customer
service, billings and collections for FedEx Express and FedEx Ground U.S. customers; FedEx Global
Supply Chain Services, which provides a range of logistics services to our customers; and FedEx
Office, which provides retail access to our customers for our package transportation businesses and
an array of document and business services.
The costs of the sales, marketing and information technology support provided by FedEx Services and
the customer service functions of FCIS, together with the normal, ongoing net operating costs of
FedEx Global Supply Chain Services and FedEx Office, are allocated primarily to the FedEx Express
and FedEx Ground segments based on metrics such as relative revenues or estimated services
provided. We believe these allocations approximate the net cost of providing these functions. The
$810 million fourth quarter 2009 impairment charge for the Kinkos goodwill and the $891 million
2008 charge predominantly associated with impairment charges for the Kinkos trade name and
goodwill were not allocated to the FedEx Express or FedEx Ground segments, as the charges were
unrelated to the core performance of those businesses.
FedEx Services segment revenues, which reflect the operations of FedEx Office and FedEx Global
Supply Chain Services, decreased 8% during 2009. Revenue generated from new FedEx Office locations
added in 2008 and 2009 did not offset declines in base copy revenues, incremental operating costs
associated with the new locations and expenses associated with organizational changes. Therefore,
the
allocated net operating costs of FedEx Office increased during 2009 despite ongoing cost management
efforts. In September 2008, FedEx Office began implementation of organizational changes intended
to improve profitability and enhance the customer experience.
The operating expenses line item Intercompany charges on the accompanying unaudited financial
summaries of our transportation segments includes the allocations from the FedEx Services segment
to the respective transportation segments. The Intercompany charges caption also includes
allocations for administrative services provided between operating companies and certain other
costs such as corporate management fees related to services received for general corporate
oversight, including executive officers and certain legal and finance functions. Management
evaluates transportation segment financial performance based on operating income.
OTHER INTERSEGMENT TRANSACTIONS
Certain FedEx operating companies provide transportation and related services for other FedEx
companies outside their reportable segment. Billings for such services are based on negotiated
rates, which we believe approximate fair value, and are reflected as revenues of the billing
segment. These rates are adjusted from time to time based on market conditions. Such intersegment
revenues and expenses are eliminated in the consolidated results and are not separately identified
in the following segment information, as the amounts are not material.
51
FEDEX EXPRESS SEGMENT
The following table compares revenues, operating expenses, operating income and operating margin
(dollars in millions) for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009/2008 |
|
|
2008/2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Package: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box |
|
$ |
6,074 |
|
|
$ |
6,578 |
|
|
$ |
6,485 |
|
|
|
(8 |
) |
|
|
1 |
|
U.S. overnight envelope |
|
|
1,855 |
|
|
|
2,012 |
|
|
|
1,990 |
|
|
|
(8 |
) |
|
|
1 |
|
U.S. deferred |
|
|
2,789 |
|
|
|
2,995 |
|
|
|
2,883 |
|
|
|
(7 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. domestic package revenue |
|
|
10,718 |
|
|
|
11,585 |
|
|
|
11,358 |
|
|
|
(7 |
) |
|
|
2 |
|
International Priority (IP) |
|
|
6,978 |
|
|
|
7,666 |
|
|
|
6,722 |
|
|
|
(9 |
) |
|
|
14 |
|
International domestic (1) |
|
|
565 |
|
|
|
663 |
|
|
|
370 |
|
|
|
(15 |
) |
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total package revenue |
|
|
18,261 |
|
|
|
19,914 |
|
|
|
18,450 |
|
|
|
(8 |
) |
|
|
8 |
|
Freight: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
2,165 |
|
|
|
2,398 |
|
|
|
2,412 |
|
|
|
(10 |
) |
|
|
(1 |
) |
International Priority freight |
|
|
1,104 |
|
|
|
1,243 |
|
|
|
1,045 |
|
|
|
(11 |
) |
|
|
19 |
|
International airfreight |
|
|
369 |
|
|
|
406 |
|
|
|
394 |
|
|
|
(9 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenue |
|
|
3,638 |
|
|
|
4,047 |
|
|
|
3,851 |
|
|
|
(10 |
) |
|
|
5 |
|
Other (2) |
|
|
465 |
|
|
|
460 |
|
|
|
380 |
|
|
|
1 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
22,364 |
|
|
|
24,421 |
|
|
|
22,681 |
|
|
|
(8 |
) |
|
|
8 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
8,217 |
|
|
|
8,451 |
|
|
|
8,234 |
(4) |
|
|
(3 |
) |
|
|
3 |
|
Purchased transportation |
|
|
1,112 |
|
|
|
1,208 |
|
|
|
1,098 |
|
|
|
(8 |
) |
|
|
10 |
|
Rentals and landing fees |
|
|
1,613 |
|
|
|
1,673 |
|
|
|
1,610 |
|
|
|
(4 |
) |
|
|
4 |
|
Depreciation and amortization |
|
|
961 |
|
|
|
944 |
|
|
|
856 |
|
|
|
2 |
|
|
|
10 |
|
Fuel |
|
|
3,281 |
|
|
|
3,785 |
|
|
|
2,946 |
|
|
|
(13 |
) |
|
|
28 |
|
Maintenance and repairs |
|
|
1,351 |
|
|
|
1,512 |
|
|
|
1,444 |
|
|
|
(11 |
) |
|
|
5 |
|
Impairment and other charges |
|
|
260 |
(3) |
|
|
|
|
|
|
|
|
|
NM |
|
|
|
|
|
Intercompany charges |
|
|
2,103 |
|
|
|
2,134 |
|
|
|
2,046 |
|
|
|
(1 |
) |
|
|
4 |
|
Other |
|
|
2,672 |
|
|
|
2,813 |
|
|
|
2,456 |
|
|
|
(5 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
21,570 |
|
|
|
22,520 |
|
|
|
20,690 |
|
|
|
(4 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
794 |
|
|
$ |
1,901 |
|
|
$ |
1,991 |
|
|
|
(58 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
3.6 |
% |
|
|
7.8 |
% |
|
|
8.8 |
% |
|
|
(420 |
)bp |
|
|
(100 |
)bp |
|
|
|
|
(1) |
|
International domestic revenues include our international domestic express
operations, primarily in the United
Kingdom, Canada, China and India. We reclassified the prior period international domestic
revenues previously
included within other revenues to conform to the current period presentation. |
|
(2) |
|
Other revenues includes FedEx Trade Networks. |
|
(3) |
|
Represents charges associated with aircraft-related asset impairments and other
charges primarily associated with
aircraft-related lease and contract termination costs and employee severance. |
|
(4) |
|
Includes a charge of $143 million for signing bonuses and other upfront
compensation associated with a
four-year labor contract with our pilots. |
52
The following table compares selected statistics (in thousands, except yield amounts) for the years
ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009/2008 |
|
|
2008/2007 |
|
Package Statistics (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily package volume (ADV): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box |
|
|
1,127 |
|
|
|
1,151 |
|
|
|
1,174 |
|
|
|
(2 |
) |
|
|
(2 |
) |
U.S. overnight envelope |
|
|
627 |
|
|
|
677 |
|
|
|
706 |
|
|
|
(7 |
) |
|
|
(4 |
) |
U.S. deferred |
|
|
849 |
|
|
|
895 |
|
|
|
898 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. domestic ADV |
|
|
2,603 |
|
|
|
2,723 |
|
|
|
2,778 |
|
|
|
(4 |
) |
|
|
(2 |
) |
IP |
|
|
475 |
|
|
|
517 |
|
|
|
487 |
|
|
|
(8 |
) |
|
|
6 |
|
International domestic (2) |
|
|
298 |
|
|
|
296 |
|
|
|
134 |
|
|
|
1 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADV |
|
|
3,376 |
|
|
|
3,536 |
|
|
|
3,399 |
|
|
|
(5 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per package (yield): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box |
|
$ |
21.21 |
|
|
$ |
22.40 |
|
|
$ |
21.66 |
|
|
|
(5 |
) |
|
|
3 |
|
U.S. overnight envelope |
|
|
11.65 |
|
|
|
11.66 |
|
|
|
11.06 |
|
|
|
|
|
|
|
5 |
|
U.S. deferred |
|
|
12.94 |
|
|
|
13.12 |
|
|
|
12.59 |
|
|
|
(1 |
) |
|
|
4 |
|
U.S. domestic composite |
|
|
16.21 |
|
|
|
16.68 |
|
|
|
16.04 |
|
|
|
(3 |
) |
|
|
4 |
|
IP |
|
|
57.81 |
|
|
|
58.11 |
|
|
|
54.13 |
|
|
|
(1 |
) |
|
|
7 |
|
International domestic (2) |
|
|
7.50 |
|
|
|
8.80 |
|
|
|
10.77 |
|
|
|
(15 |
) |
|
|
(18 |
) |
Composite package yield |
|
|
21.30 |
|
|
|
22.08 |
|
|
|
21.28 |
|
|
|
(4 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Statistics (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily freight pounds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
7,287 |
|
|
|
8,648 |
|
|
|
9,569 |
|
|
|
(16 |
) |
|
|
(10 |
) |
International Priority freight |
|
|
1,959 |
|
|
|
2,220 |
|
|
|
1,878 |
|
|
|
(12 |
) |
|
|
18 |
|
International airfreight |
|
|
1,475 |
|
|
|
1,817 |
|
|
|
1,831 |
|
|
|
(19 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average daily freight pounds |
|
|
10,721 |
|
|
|
12,685 |
|
|
|
13,278 |
|
|
|
(15 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per pound (yield): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
1.17 |
|
|
$ |
1.09 |
|
|
$ |
0.99 |
|
|
|
7 |
|
|
|
10 |
|
International Priority freight |
|
|
2.22 |
|
|
|
2.20 |
|
|
|
2.18 |
|
|
|
1 |
|
|
|
1 |
|
International airfreight |
|
|
0.99 |
|
|
|
0.88 |
|
|
|
0.84 |
|
|
|
13 |
|
|
|
5 |
|
Composite freight yield |
|
|
1.34 |
|
|
|
1.25 |
|
|
|
1.14 |
|
|
|
7 |
|
|
|
10 |
|
|
|
|
(1) |
|
Package and freight statistics include only the operations of FedEx Express. |
|
(2) |
|
International domestic statistics include our international domestic express
operations, primarily in the United
Kingdom, Canada, China and India. |
FedEx Express Segment Revenues
FedEx Express segment revenues decreased 8% in 2009 due to a decrease in volumes in virtually all
services as a result of the significant deterioration in global economic conditions and lower
yields driven by unfavorable exchange rates, lower package weights and a more competitive pricing
environment. IP volume declined in every major region of the world. During 2009, volume gains
resulting from DHLs exit from the U.S. domestic market were not enough to offset the negative
impact of weak global
economic conditions. While we acquired significant volumes from this competitor, these shipments
were generally at lower weights and yields than our other volumes.
53
The decrease in composite package yield in 2009 was driven by decreases in U.S. domestic package,
international domestic and IP yields. U.S. domestic package yield decreased 3% in 2009 due to lower
package weights and a lower rate per pound. International domestic yield decreased 15% during 2009
due to unfavorable exchange rates and a lower rate per pound. IP
yield decreased 1% during 2009 due to unfavorable exchange rates and
lower package weights, partially offset by a higher
rate per pound. Composite freight yield increased in 2009 due to general rate increases and higher
fuel surcharges.
FedEx Express revenues increased in 2008 primarily due to increases in fuel surcharges, growth in
IP volume and the impact of favorable currency exchange rates. Revenue increases during 2008 were
partially offset by decreased volumes in U.S. domestic package and freight services, as the weak
U.S. economy and persistently higher fuel prices and the related impact on our fuel surcharges
restrained demand for these services.
The increase in composite package yield in 2008 was driven by increases in IP and U.S. domestic
yields, partially offset by decreased international domestic yield. IP yield increased in 2008,
primarily due to favorable exchange rates, higher fuel surcharges and increases in package weights.
U.S. domestic package yield increased in 2008 primarily due to higher fuel surcharges and general rate
increases. International domestic yield decreased during 2008 as a result of the inclusion of
lower-yielding services from the companies acquired in 2007. Composite freight yield increased in
2008 due to the impact of changes in service mix, higher fuel surcharges and favorable exchange
rates.
IP volume growth during 2008 resulted from increased demand in Asia, U.S. outbound and Europe.
Increased international domestic volumes during 2008 were driven by business acquisitions in the
second half of 2007. U.S. domestic package and freight volumes decreased during 2008, as the
weak U.S. economy and rising fuel prices negatively impacted demand for these
services.
In January 2009 and 2008, we implemented a 6.9% average list price increase on FedEx Express U.S.
domestic and U.S. outbound package and freight shipments and made various changes to other
surcharges, while we lowered our fuel surcharge index by two percentage points. Our fuel
surcharges are indexed to the spot price for jet fuel. Using this index, the U.S. domestic and
outbound fuel surcharge and the international fuel surcharges ranged as follows, for the years
ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic and Outbound Fuel Surcharge: |
|
|
|
|
|
|
|
|
|
|
|
|
Low |
|
|
|
% |
|
|
13.50 |
% |
|
|
8.50 |
% |
High |
|
|
34.50 |
|
|
|
25.00 |
|
|
|
17.00 |
|
Weighted-Average |
|
|
17.45 |
|
|
|
17.06 |
|
|
|
12.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Fuel Surcharges: |
|
|
|
|
|
|
|
|
|
|
|
|
Low |
|
|
|
|
|
|
12.00 |
|
|
|
8.50 |
|
High |
|
|
34.50 |
|
|
|
25.00 |
|
|
|
17.00 |
|
Weighted-Average |
|
|
16.75 |
|
|
|
16.11 |
|
|
|
12.98 |
|
54
FedEx Express Segment Operating Income
The following table compares operating expenses as a percent of revenue for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
36.7 |
% |
|
|
34.6 |
% |
|
|
36.3 |
%(2) |
Purchased transportation |
|
|
5.0 |
|
|
|
4.9 |
|
|
|
4.8 |
|
Rentals and landing fees |
|
|
7.2 |
|
|
|
6.9 |
|
|
|
7.1 |
|
Depreciation and amortization |
|
|
4.3 |
|
|
|
3.9 |
|
|
|
3.8 |
|
Fuel |
|
|
14.7 |
|
|
|
15.5 |
|
|
|
13.0 |
|
Maintenance and repairs |
|
|
6.0 |
|
|
|
6.2 |
|
|
|
6.4 |
|
Impairment and other charges |
|
|
1.2 |
(1) |
|
|
|
|
|
|
|
|
Intercompany charges |
|
|
9.4 |
|
|
|
8.7 |
|
|
|
9.0 |
|
Other |
|
|
11.9 |
|
|
|
11.5 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
96.4 |
|
|
|
92.2 |
|
|
|
91.2 |
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
3.6 |
% |
|
|
7.8 |
% |
|
|
8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a charge of $260 million related to impairment charges associated with
aircraft-related assets and other charges primarily associated with
aircraft-related
lease and contract termination costs and employee severance. |
|
(2) |
|
Includes a charge of $143 million for signing bonuses and other upfront
compensation
associated with a four-year labor contract with our pilots. |
FedEx Express segment operating income and operating margin declined in 2009 as a result of the
continued weak global economy and high fuel prices in the first half of 2009, both of which limited
demand for our U.S. domestic package and IP services.
During 2009, in response to weak business conditions, we implemented several actions (in addition
to those described above in the Overview section) to lower our cost structure, including significant
volume-related reductions in flight hours. We also lowered fuel consumption and maintenance costs,
as we temporarily grounded a limited number of aircraft due to excess capacity in the current
economic environment. Our cost-containment activities also included deferral of merit-based
pay increases. All of these actions partially mitigated the impact of lower volumes on our
results.
During the fourth quarter of 2009, we took additional actions to align the size of our networks to
current demand levels by removing equipment and facilities from service and reducing personnel. As
a result of these actions, we recorded charges of $199 million for the impairment of certain
aircraft and aircraft engines and $57 million for aircraft-related lease and contract termination
and employee severance costs related to workforce reductions.
Fuel costs decreased 13% in 2009 due to decreases in fuel consumption and the average price per
gallon of fuel. Fuel surcharges were sufficient to offset fuel costs for 2009, based on a static
analysis of the impact to operating income of the year-over-year changes in fuel prices compared to
changes in fuel surcharges. This analysis considers the estimated benefits of the reduction in
fuel surcharges included in the base rates charged for FedEx Express services. However, this
analysis does not consider the negative effects that the significantly higher fuel surcharge levels
have on our business, including reduced demand and shifts to lower-yielding services. Maintenance
and repairs expense decreased 11% primarily due to a volume-related reduction in flight hours and
the permanent and temporary grounding of certain aircraft due to excess capacity in the current
economic environment.
55
Operating results for 2008 were negatively impacted by record high fuel prices, the continued weak
U.S. economy and our continued investment in domestic express services in China. However, revenue
growth in IP services, reduced retirement plan costs, the favorable impact of foreign currency
exchange rates and lower variable incentive compensation partially offset the impact of these
factors on operating income
during 2008.
Fuel costs increased in 2008 due to an increase in the average price per gallon of fuel. The
volatility in fuel prices and fuel surcharges resulted in a net benefit to income in 2008, based on
a static analysis of the year-over-year changes in fuel prices compared to changes in fuel
surcharges. This analysis considers the estimated benefits of the reduction in fuel surcharges
included in the base rates charged for FedEx Express services.
Other operating expenses increased during 2008 principally due to the inclusion of our 2007
business acquisitions, including the full consolidation of the results of our China joint venture.
Purchased transportation costs increased in 2008 primarily due to the inclusion of our 2007
business acquisitions, the impact of higher fuel costs and IP volume growth, which requires a
higher utilization of contract pickup and delivery services. These increases in purchased
transportation costs were partially offset by the elimination of payments by us for pickup and
delivery services provided by our former China joint venture partner, as we acquired this business
in the second half of 2007. The increase in depreciation expense during 2008 was principally due
to aircraft purchases and our 2007 business acquisitions. Intercompany charges increased during
2008 primarily due to increased net operating costs at FedEx Office associated with declines in
copy revenues, as well as higher expenses associated with store expansion, advertising and
promotions, and service improvement activities. This increase was partially offset by lower
allocated fees from FedEx Services due to cost-containment activities.
FedEx Express Segment Outlook
We expect revenues to decline at FedEx Express in 2010 as a result of significantly lower fuel
surcharges and the ongoing global recession. U.S. domestic and IP package volumes are expected to
be flat, and yields are expected to be negatively impacted by a competitive pricing environment and
the ongoing global recession.
FedEx Express segment operating income and operating margin are expected to increase slightly in
2010. We expect the full year impact of actions taken in 2009 to lower our cost structure,
combined with additional cost-containment initiatives in 2010, will be mostly offset by a
significant decline in revenues.
Capital expenditures at FedEx Express are expected to increase in 2010 driven by incremental
investments for the new B777F aircraft, the first of which is expected to enter revenue service in
2010. These aircraft capital expenditures are necessary to achieve significant long-term operating
savings and to support projected long-term international volume growth.
56
FEDEX GROUND SEGMENT
The following table compares revenues, operating expenses, operating income and operating margin
(dollars in millions) and selected package statistics (in thousands, except yield amounts) for the
years
ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009/2008 |
|
|
2008/2007 |
|
Revenues |
|
$ |
7,047 |
|
|
$ |
6,751 |
|
|
$ |
6,043 |
|
|
|
4 |
|
|
|
12 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
1,102 |
|
|
|
1,073 |
|
|
|
1,006 |
|
|
|
3 |
|
|
|
7 |
|
Purchased transportation (1) |
|
|
2,918 |
|
|
|
2,878 |
|
|
|
2,430 |
|
|
|
1 |
|
|
|
18 |
|
Rentals |
|
|
222 |
|
|
|
189 |
|
|
|
166 |
|
|
|
17 |
|
|
|
14 |
|
Depreciation and amortization |
|
|
337 |
|
|
|
305 |
|
|
|
268 |
|
|
|
10 |
|
|
|
14 |
|
Fuel (1) |
|
|
9 |
|
|
|
14 |
|
|
|
13 |
|
|
|
(36 |
) |
|
|
8 |
|
Maintenance and repairs |
|
|
147 |
|
|
|
145 |
|
|
|
134 |
|
|
|
1 |
|
|
|
8 |
|
Intercompany charges |
|
|
710 |
|
|
|
658 |
|
|
|
569 |
|
|
|
8 |
|
|
|
16 |
|
Other |
|
|
795 |
|
|
|
753 |
|
|
|
635 |
|
|
|
6 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,240 |
|
|
|
6,015 |
|
|
|
5,221 |
|
|
|
4 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
807 |
|
|
$ |
736 |
|
|
$ |
822 |
|
|
|
10 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
11.5 |
% |
|
|
10.9 |
% |
|
|
13.6 |
% |
|
|
60 |
bp |
|
|
(270 |
)bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily package volume: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Ground |
|
|
3,404 |
|
|
|
3,365 |
|
|
|
3,126 |
|
|
|
1 |
|
|
|
8 |
|
FedEx SmartPost |
|
|
827 |
|
|
|
618 |
|
|
|
599 |
|
|
|
34 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per package (yield): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Ground |
|
$ |
7.70 |
|
|
$ |
7.48 |
|
|
$ |
7.21 |
|
|
|
3 |
|
|
|
4 |
|
FedEx SmartPost |
|
$ |
1.81 |
|
|
$ |
2.09 |
|
|
$ |
1.88 |
|
|
|
(13 |
) |
|
|
11 |
|
|
|
|
(1) |
|
We reclassified certain fuel supplement costs related to our independent
contractors from fuel expense to purchased
transportation expense to conform to the current period presentation. |
FedEx Ground Segment Revenues
FedEx Ground segment revenues increased 4% in 2009 due to yield improvement at FedEx Ground and
volume growth at both FedEx SmartPost and FedEx Ground. FedEx Ground volume growth during 2009
resulted from market share gains, including volumes gained from DHLs exit from the U.S. market,
and continued growth in the FedEx Home Delivery service. FedEx Ground volumes also benefited from
existing FedEx Express customers opting for lower-cost FedEx Ground offerings. Yield improvement
at FedEx Ground during 2009 was primarily due to higher base rates (partially offset by higher
customer discounts), increased extra service revenue and higher fuel surcharges.
FedEx SmartPost picks up shipments from customers and delivers them to various points within the
United States Postal Service (USPS) network for final delivery. FedEx SmartPost revenue and
yield represent the amount charged to customers net of postage paid to the USPS. FedEx SmartPost
volume growth during 2009 resulted from market share gains, including volumes gained from DHLs
exit from the U.S. market. Yields at FedEx SmartPost decreased 13% during 2009 due to changes in
customer and service mix.
57
FedEx Ground segment revenues increased during 2008 due to volume and yield growth. Volume growth
at FedEx Ground resulted from market share gains and the customer appeal of our cost-effective
alternative to overnight air delivery services. Average daily volumes at FedEx Ground increased
during 2008 due to increased commercial business and the continued growth of our FedEx Home
Delivery service. Yield improvement during 2008 was primarily due to the impact of general rate
increases, higher extra service revenue (primarily through our residential, additional handling and
large package surcharges) and higher fuel surcharges, partially offset by higher customer discounts
and a lower average weight and zone per package.
In January 2009, we implemented a 5.9% average list price increase and made various changes to
other surcharges on FedEx Ground shipments. In January 2008, we implemented a 4.9% average list
price increase and made various changes to other surcharges on FedEx Ground shipments. The FedEx
Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average prices
for a gallon of diesel fuel, as published by the Department of Energy. Our fuel surcharge ranged
as follows for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Low |
|
|
2.25 |
% |
|
|
4.50 |
% |
|
|
3.50 |
% |
High |
|
|
10.50 |
|
|
|
7.75 |
|
|
|
5.25 |
|
Weighted-Average |
|
|
6.61 |
|
|
|
5.47 |
|
|
|
4.18 |
|
FedEx Ground Segment Operating Income
The following table compares operating expenses as a percent of revenue for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
15.6 |
% |
|
|
15.9 |
% |
|
|
16.7 |
% |
Purchased transportation |
|
|
41.4 |
|
|
|
42.6 |
|
|
|
40.2 |
|
Rentals |
|
|
3.1 |
|
|
|
2.8 |
|
|
|
2.8 |
|
Depreciation and amortization |
|
|
4.8 |
|
|
|
4.5 |
|
|
|
4.4 |
|
Fuel |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Maintenance and repairs |
|
|
2.1 |
|
|
|
2.1 |
|
|
|
2.2 |
|
Intercompany charges |
|
|
10.1 |
|
|
|
9.8 |
|
|
|
9.4 |
|
Other |
|
|
11.3 |
|
|
|
11.2 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
88.5 |
|
|
|
89.1 |
|
|
|
86.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
11.5 |
% |
|
|
10.9 |
% |
|
|
13.6 |
% |
|
|
|
|
|
|
|
|
|
|
FedEx Ground segment operating income and operating margin increased during 2009 primarily due to
the timing impact of fuel surcharges and yield growth. Rapidly declining fuel costs and the timing
lag between such declines and adjustments to our fuel surcharges provided a significant benefit to
FedEx Ground results for 2009.
Rent expense increased 17% and depreciation expense increased 10% during 2009 primarily due to
higher spending on material handling equipment and facilities associated with our multi-year
network expansion plan. Purchased transportation costs increased slightly in 2009 as a result of
higher rates paid to our independent contractors and costs associated with our independent
contractor programs (described below), partially offset by a decrease in fuel costs. The increase
in salaries and employee benefits expense during 2009 was partially offset by the base salary
reductions and suspension of 401(k) company matching contributions described in the Overview section. Intercompany
charges increased 8% during 2009 primarily due to allocated telecommunication expenses (formerly a
direct charge), higher general and administrative costs and higher allocated customer service
costs. Other operating expenses increased 6% during 2009 primarily due to higher reserve
requirements for liability insurance. Lower legal costs, including settlements, partially offset
the increase in other operating expenses in 2009.
58
FedEx Ground segment operating income decreased during 2008, as revenue growth was more than offset
by higher independent contractor-related costs, the net impact of increased fuel costs, costs
associated with our multi-year network expansion plan, higher intercompany charges and higher legal
costs (including fees paid to external counsel, settlement costs and loss accruals). However,
lower variable incentive compensation partially offset the net impact of these factors on operating
income during 2008.
Purchased transportation costs increased during 2008 as a result of higher rates paid to our
independent contractors (including the impact of higher fuel costs) and costs associated with our
independent contractor programs (described below). Fuel surcharges were not sufficient to offset
the effect of fuel costs on our year-over-year operating results for 2008, due to the timing lag
that exists between when we purchase fuel and when our indexed fuel surcharges automatically
adjust.
Intercompany charges increased during 2008 primarily due to increased net operating costs at FedEx
Office associated with declines in copy revenues, as well as higher expenses associated with store
expansion, advertising and promotions, and service improvement activities. In addition, higher
allocated sales and marketing and customer service costs from FedEx Services contributed to the
increase in intercompany charges for 2008. Other operating expenses increased during 2008,
primarily due to higher legal, consulting and insurance costs. Depreciation expense and rent
expense increased in 2008 primarily due to higher spending on material handling equipment and
facilities associated with our multi-year capacity expansion plan.
Independent Contractor Matters
FedEx Ground faces increased regulatory and legal uncertainty with respect to its independent
contractors. As part of its operations, FedEx Ground has made changes to its relationships with
contractors that, among other things, provide incentives for improved service and enhanced
regulatory and other compliance by our contractors. During the second quarter of 2008, FedEx
Ground announced an ongoing nationwide program, which provides greater incentives to certain of
its contractors who choose to grow their businesses by adding routes. Also, during the second
quarter of 2008, FedEx Ground offered special incentives to encourage California-based single route
contractors to transform their operations into multiple-route businesses or sell their routes to
others.
During
2009, because of state-specific legal and regulatory issues, FedEx Ground offered special incentives to encourage each New Hampshire-based and
Maryland-based single-route pickup-and-delivery contractor to assume responsibility for the
pickup-and-delivery operations of an entire geographic service area that includes multiple routes.
These programs were well received, and the aggregate amount of these incentives was immaterial.
As of May 31, 2009, approximately 60% of all service areas nationwide are supported by
multiple-route contractors, which comprise approximately 35% of all FedEx Ground
pickup-and-delivery contractors.
FedEx Ground is involved in numerous purported or certified class-action lawsuits, state tax and
other administrative proceedings and Internal Revenue Service audits that claim or are examining whether the companys
owner-operators should be treated as employees, rather than independent contractors. For a
description of these proceedings, see Note 17 of the accompanying consolidated financial
statements.
59
FedEx Ground Segment Outlook
We expect the FedEx Ground segment to have continued revenue growth in 2010, led by increases in
commercial and FedEx Home Delivery average daily volumes due to market share gains. FedEx
SmartPost volumes are also expected to grow due to market share gains and the introduction of new
services. Yield improvement at FedEx Ground is expected to be limited in 2010 as a result of a
competitive pricing environment and decreases in fuel surcharges. Yields at FedEx SmartPost are
expected to decline due to service mix changes.
FedEx Ground segment operating income in 2010 is expected to increase slightly, as revenue growth
will be mostly offset by costs associated with network expansion and ongoing enhancements to our
independent contractor model.
Capital spending is expected to decline slightly in 2010 with the majority of our spending
resulting from our continued network expansion and productivity-enhancing technologies. We are
committed to investing in the FedEx Ground network because of the long-term benefits we will
experience from these investments.
We will continue to vigorously defend various attacks against our independent contractor model and
incur ongoing legal costs as a part of this process. While we believe that FedEx Grounds
owner-operators are properly classified as independent contractors, it is reasonably possible that
we could incur a material loss in connection with one or more of these matters or be required to
make material changes to our contractor model. However, we do not believe that any such changes
will impair our ability to operate and profitably grow our FedEx Ground business.
60
FEDEX FREIGHT SEGMENT
The following table shows revenues, operating expenses, operating (loss)/income and operating
margin (dollars in millions) and selected statistics for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change |
|
|
|
2009 |
|
|
2008 |
|
|
2007 (2) |
|
|
2009/2008 |
|
|
2008/2007 |
|
Revenues |
|
$ |
4,415 |
|
|
$ |
4,934 |
|
|
$ |
4,586 |
|
|
|
(11 |
) |
|
|
8 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
2,247 |
|
|
|
2,381 |
|
|
|
2,250 |
|
|
|
(6 |
) |
|
|
6 |
|
Purchased transportation |
|
|
540 |
|
|
|
582 |
|
|
|
465 |
|
|
|
(7 |
) |
|
|
25 |
|
Rentals |
|
|
139 |
|
|
|
119 |
|
|
|
112 |
|
|
|
17 |
|
|
|
6 |
|
Depreciation and amortization |
|
|
224 |
|
|
|
227 |
|
|
|
195 |
|
|
|
(1 |
) |
|
|
16 |
|
Fuel |
|
|
520 |
|
|
|
608 |
|
|
|
468 |
|
|
|
(14 |
) |
|
|
30 |
|
Maintenance and repairs |
|
|
153 |
|
|
|
175 |
|
|
|
165 |
|
|
|
(13 |
) |
|
|
6 |
|
Impairment and other charges |
|
|
100 |
(1) |
|
|
|
|
|
|
|
|
|
NM |
|
|
|
|
|
Intercompany charges |
|
|
109 |
|
|
|
81 |
|
|
|
61 |
|
|
|
35 |
|
|
|
33 |
|
Other |
|
|
427 |
|
|
|
432 |
|
|
|
407 |
|
|
|
(1 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,459 |
|
|
|
4,605 |
|
|
|
4,123 |
|
|
|
(3 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/income |
|
$ |
(44 |
) |
|
$ |
329 |
|
|
$ |
463 |
|
|
|
(113 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
(1.0 |
)% |
|
|
6.7 |
% |
|
|
10.1 |
% |
|
|
(770 |
) bp |
|
|
(340 |
) bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily LTL shipments (in
thousands) |
|
|
74.4 |
|
|
|
79.7 |
|
|
|
78.2 |
|
|
|
(7 |
) |
|
|
2 |
|
Weight per LTL shipment (lbs) |
|
|
1,126 |
|
|
|
1,136 |
|
|
|
1,130 |
|
|
|
(1 |
) |
|
|
1 |
|
LTL yield (revenue per hundredweight) |
|
$ |
19.07 |
|
|
$ |
19.65 |
|
|
$ |
18.65 |
|
|
|
(3 |
) |
|
|
5 |
|
|
|
|
(1) |
|
Represents impairment charges associated with goodwill related to the Watkins
Motor Lines acquisition and other charges primarily associated with employee severance. |
|
(2) |
|
Includes the results of FedEx National LTL from the date of its acquisition on
September 3, 2006. |
FedEx Freight Segment Revenues
FedEx Freight segment revenues decreased 11% in 2009 primarily due to a decrease in average daily
LTL shipments and lower LTL yield. Average daily LTL shipments decreased 7% during 2009 as a
result of the current economic recession, which has resulted in the weakest LTL environment in
decades. Despite these conditions, we maintained market share. LTL yield decreased 3% during 2009
due to the continuing effects of the competitive pricing environment and lower fuel surcharges.
FedEx Freight segment revenues increased in 2008 primarily due to the full-year inclusion of the
FedEx National LTL acquisition. LTL yield increased during 2008, reflecting higher yields from
longer-haul FedEx National LTL shipments, higher fuel surcharges (despite a fuel surcharge rate
reduction in the first quarter of 2008) and the impact of the January 2008 general rate increase.
Average daily LTL shipments grew slightly in 2008, reflecting the full-year inclusion of FedEx
National LTL.
61
In January 2009, we implemented 5.7% general rate increases for FedEx Freight and FedEx National
LTL shipments. In January 2008, we implemented a 5.48% general rate increase for FedEx Freight and
a commensurate general rate increase for FedEx National LTL. The indexed LTL fuel surcharge is
based on the average of the national U.S. on-highway average prices for a gallon of diesel fuel, as
published by the Department of Energy. The indexed LTL fuel surcharge ranged as follows for the
years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Low |
|
|
8.3 |
% |
|
|
14.5 |
% |
|
|
14.0 |
% |
High |
|
|
23.9 |
|
|
|
23.7 |
|
|
|
21.2 |
|
Weighted-Average |
|
|
15.7 |
|
|
|
17.7 |
|
|
|
17.8 |
|
FedEx Freight Segment Operating (Loss)/Income
The following table compares operating expenses as a percent of revenue for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
50.9 |
% |
|
|
48.3 |
% |
|
|
49.1 |
% |
Purchased transportation |
|
|
12.2 |
|
|
|
11.8 |
|
|
|
10.1 |
|
Rentals |
|
|
3.1 |
|
|
|
2.4 |
|
|
|
2.4 |
|
Depreciation and amortization |
|
|
5.0 |
|
|
|
4.6 |
|
|
|
4.3 |
|
Fuel |
|
|
11.8 |
|
|
|
12.3 |
|
|
|
10.2 |
|
Maintenance and repairs |
|
|
3.5 |
|
|
|
3.5 |
|
|
|
3.6 |
|
Impairment and other charges |
|
|
2.3 |
(1) |
|
|
|
|
|
|
|
|
Intercompany charges |
|
|
2.5 |
|
|
|
1.6 |
|
|
|
1.3 |
|
Other |
|
|
9.7 |
|
|
|
8.8 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
101.0 |
|
|
|
93.3 |
|
|
|
89.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
(1.0 |
)% |
|
|
6.7 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents impairment charges associated with goodwill related to the Watkins
Motor Lines acquisition and other charges primarily associated with employee severance. |
The decrease in average daily LTL shipments and the competitive pricing environment driven by the
U.S. recession and excess capacity in the market had a significant negative impact on operating
income and operating margin in 2009. In addition, we recorded a charge of $90 million related to
the impairment of goodwill related to the Watkins Motor Lines acquisition and a charge of $10
million primarily related to employee severance.
In response to the current economic environment, excess capacity in the LTL market and reduced
shipment volumes, we implemented several actions throughout 2009 to lower our cost structure.
These actions included consolidating FedEx Freight regional offices, removing equipment from
service and reducing hours and personnel to better match current demand levels.
Fuel costs decreased 14% during 2009 due primarily to a lower average price per gallon of diesel
fuel and decreased fuel consumption due to lower volume levels. Based on a static analysis of the
year-over-year changes in fuel costs compared to changes in fuel surcharges, fuel surcharges offset
the impact of fuel costs for 2009. However, this analysis does not consider other effects that
fuel prices and related fuel surcharges levels have on our business, including changes in customer
demand and the impact on base rates and rates paid to our third-party transportation providers.
Purchased transportation costs decreased 7% during 2009 primarily due to lower shipment volumes and
decreased utilization of third-party providers. Maintenance and repairs expense decreased 13% in
2009 primarily due to lower shipment volumes and rebranding costs for FedEx National LTL incurred
in 2008. Rent expense increased 17% during 2009 primarily due to service center expansions related
to strategically investing in key markets for long-term growth. Intercompany charges increased 35%
during 2009 primarily due to allocated telecommunication expenses (formerly a direct charge) and
higher allocated information technology costs from FedEx Services.
62
FedEx Freight segment operating income and operating margin decreased substantially in 2008
primarily due to the net impact of higher fuel costs and a fuel surcharge rate reduction in the
first quarter of 2008, along with higher purchased transportation costs due to increased
utilization of and rates paid to third-party transportation providers. Lower variable incentive
compensation partially offset the net impact of these factors on operating income during 2008.
In 2008, the full-year inclusion of FedEx National LTL in our results impacted the comparability of
all our operating expenses. Fuel costs increased during 2008 due to an increase in the average
price per gallon of diesel fuel, which also increased rates paid to our third-party transportation
providers. Fuel surcharges were not sufficient to offset incremental fuel costs for 2008, based on
a static analysis of the year-over-year changes in fuel prices compared to changes in fuel
surcharges. Purchased transportation costs increased in 2008 primarily due to the inclusion of
FedEx National LTL, which uses a higher proportion of these services, and higher rates paid to our
third-party transportation providers. Including incremental costs from FedEx National LTL,
depreciation expense increased during 2008 due to
investments in information technology and equipment purchased to support ongoing replacement
requirements and long-term volume growth. Intercompany charges increased during 2008 primarily due
to higher allocated marketing and information technology costs from FedEx Services.
FedEx Freight Segment Outlook
We expect
a decline in demand for LTL freight services in 2010 as a result of the continued weak economic
conditions and excess capacity in the LTL industry. Ultimately, we believe it is probable that
excess capacity will be reduced within the LTL industry given the current economic environment.
Industry conditions will result in lower revenues and negatively
impact operating income at the FedEx
Freight LTL Group, particularly in the first half of 2010. However, we expect volume growth in the second
half of 2010. Given the cost-reduction actions taken in 2009, we are well positioned to manage
through the current economic recession. If excess capacity exits the LTL industry in 2010, we have
the network, resources and capabilities to manage resulting incremental volumes. We will continue
to focus on cost-containment activities during 2010, including further productivity improvements
and ongoing integration of information technology platforms across our LTL business.
Capital spending is expected to increase slightly in 2010 with the majority of our spending
resulting from the replacement of transportation and handling equipment and information technology
projects.
63
FINANCIAL CONDITION
LIQUIDITY
Cash and cash equivalents totaled $2.292 billion at May 31, 2009, compared to $1.539 billion at May
31, 2008 and $1.569 billion at May 31, 2007. The following table provides a summary of our cash
flows for the years ended May 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
98 |
|
|
$ |
1,125 |
|
|
$ |
2,016 |
|
Noncash impairment charges |
|
|
1,103 |
|
|
|
882 |
|
|
|
|
|
Other noncash charges and credits |
|
|
2,554 |
|
|
|
2,305 |
|
|
|
1,988 |
|
Changes in assets and liabilities |
|
|
(1,002 |
) |
|
|
(847 |
) |
|
|
(447 |
) |
|
|
|
|
|
|
|
|
| |
|
|
Cash provided by operating activities |
|
|
2,753 |
|
|
|
3,465 |
|
|
|
3,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(1,310 |
) |
Capital expenditures and other |
|
|
(2,380 |
) |
|
|
(2,893 |
) |
|
|
(2,814 |
) |
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(2,383 |
) |
|
|
(2,897 |
) |
|
|
(4,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt issuances |
|
|
1,000 |
|
|
|
|
|
|
|
1,054 |
|
Principal payments on debt |
|
|
(501 |
) |
|
|
(639 |
) |
|
|
(906 |
) |
Dividends paid |
|
|
(137 |
) |
|
|
(124 |
) |
|
|
(110 |
) |
Other |
|
|
38 |
|
|
|
146 |
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
400 |
|
|
|
(617 |
) |
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(17 |
) |
|
|
19 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
753 |
|
|
$ |
(30 |
) |
|
$ |
(368 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Provided by Operating Activities. Cash flows from operating activities decreased $712 million
in 2009 primarily due to reduced income and a $600 million increase in contributions to our
tax-qualified U.S. domestic pension plans (U.S. Retirement Plans), partially offset by a $307
million reduction in income tax payments. Noncash charges and credits
increased in 2009 due to our goodwill and asset impairment charges. Cash flows from operating activities decreased $92
million in 2008 primarily due to higher operating costs, particularly fuel and purchased
transportation, partially offset by year-over-year reductions in income tax payments of $248
million. We made tax-deductible voluntary contributions to our U.S. Retirement Plans of $1.1
billion during 2009, $479 million during 2008 and $482 million during 2007.
Cash Used for Investing Activities. Capital expenditures during 2009 were 17% lower largely due to
decreased spending at FedEx Express and FedEx Services. Capital expenditures during 2008 were 2%
higher largely due to planned expenditures for facility expansion at FedEx Express and FedEx
Ground. During 2007, $1.3 billion of cash was used for the FedEx National LTL, FedEx U.K., DTW
Group and other acquisitions. See Note 3 of the accompanying consolidated financial statements for
further discussion of these acquisitions. See Capital Resources for a discussion of capital
expenditures during 2009 and 2008.
64
Debt Financing Activities. We have a shelf registration statement filed with the Securities 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.
In January 2009, we issued $1 billion of senior unsecured debt under our shelf registration
statement, comprised of fixed-rate notes totaling $250 million due in January 2014 and $750 million
due in January 2019. The fixed-rate notes due in January 2014 bear interest at an annual rate of
7.375%, payable semi-annually, and the fixed-rate notes due in January 2019 bear interest at an
annual rate of 8.00%, payable semi-annually. A portion of the net proceeds were used for repayment
of our $500 million aggregate principal amount of 3.5% notes that matured on April 1, 2009. We
plan to use the remaining net proceeds
for working capital and general corporate purposes, including the repayment upon maturity of all or
a portion of our $500 million aggregate principal amount of 5.50% notes maturing on August 15,
2009.
A $1 billion revolving credit agreement is available to finance our operations and other cash flow
needs and to provide support for the issuance of commercial paper. This revolving credit agreement
expires in July 2010. Our revolving credit agreement contains a financial covenant, which requires
us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of
such debt, plus six times rentals and landing fees) to capital (adjusted debt plus total common
stockholders investment) that does not exceed 0.7 to 1.0. Our leverage ratio of adjusted debt to
capital was 0.6 to 1.0 at May 31, 2009. Under this financial covenant, our additional borrowing
capacity is capped. While our fourth quarter 2009 goodwill impairment charges and our SFAS 158
equity adjustment had a negative impact on our borrowing capacity, we continue to have significant
available borrowing capacity under this covenant. We are in compliance with this and all other
restrictive covenants of our revolving credit agreement and do not expect the covenants to affect
our operations. As of May 31, 2009, no commercial paper was outstanding and the entire $1 billion
under the revolving credit facility was available for future borrowings.
Dividends. We paid cash dividends of $137 million in 2009, $124 million in 2008 and $110 million
in 2007. On June 8, 2009, our Board of Directors declared a dividend of $0.11 per share of common
stock. The dividend was paid on July 1, 2009 to stockholders of record as of the close of business
on June 18, 2009. Each quarterly dividend payment is subject to review and approval by our Board
of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each
fiscal year. In connection with our most recent annual evaluation of the quarterly dividend payment amount,
and in light of current economic conditions, we decided not to increase the amount at that time.
CAPITAL RESOURCES
Our operations are capital intensive, characterized by significant investments in aircraft,
vehicles, 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.
65
The following table compares capital expenditures by asset category and reportable segment for the
years ended May 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009/2008 |
|
|
2008/2007 |
|
Aircraft and related equipment |
|
$ |
925 |
|
|
$ |
998 |
|
|
$ |
1,107 |
|
|
|
(7 |
) |
|
|
(10 |
) |
Facilities and sort equipment |
|
|
742 |
|
|
|
900 |
|
|
|
674 |
|
|
|
(18 |
) |
|
|
34 |
|
Vehicles |
|
|
319 |
|
|
|
404 |
|
|
|
445 |
|
|
|
(21 |
) |
|
|
(9 |
) |
Information and technology
investments |
|
|
298 |
|
|
|
366 |
|
|
|
431 |
|
|
|
(19 |
) |
|
|
(15 |
) |
Other equipment |
|
|
175 |
|
|
|
279 |
|
|
|
225 |
|
|
|
(37 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
2,459 |
|
|
$ |
2,947 |
|
|
$ |
2,882 |
|
|
|
(17 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express segment |
|
$ |
1,348 |
|
|
$ |
1,716 |
|
|
$ |
1,672 |
|
|
|
(21 |
) |
|
|
3 |
|
FedEx Ground segment |
|
|
636 |
|
|
|
509 |
|
|
|
489 |
|
|
|
25 |
|
|
|
4 |
|
FedEx Freight segment |
|
|
240 |
|
|
|
266 |
|
|
|
287 |
|
|
|
(10 |
) |
|
|
(7 |
) |
FedEx Services Segment |
|
|
235 |
|
|
|
455 |
|
|
|
432 |
|
|
|
(48 |
) |
|
|
5 |
|
Other |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
2,459 |
|
|
$ |
2,947 |
|
|
$ |
2,882 |
|
|
|
(17 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures during 2009 were lower than the prior year primarily due to decreased spending
at FedEx Express for facilities and aircraft and aircraft-related equipment. Prior year FedEx
Express capital expenditures included construction of a new regional hub in Greensboro, NC, sort
expansion of the Indianapolis hub, expansion of the Memphis hub and construction of a new office
building in Memphis. FedEx Services capital expenditures decreased in 2009 primarily due to the
planned reduction in FedEx Office network expansion, decreased spending and the postponement of
several information technology projects, along with the substantial completion of information
technology facility expansions in the prior year. Capital spending at FedEx Ground increased in
2009 due to increased spending on facilities and sort equipment associated with its comprehensive
network expansion plan. Capital expenditures increased during 2008 primarily due to increased
spending at FedEx Express for facility expansion and expenditures at FedEx Services for information
technology facility expansions and the addition of new FedEx Office locations.
LIQUIDITY OUTLOOK
We had $2.3 billion in cash and cash equivalents as of May 31, 2009. For 2010, we believe that our
existing cash and cash equivalents, cash flow from operations, and available financing sources will
be adequate to meet our liquidity needs, including working capital, capital expenditure
requirements and debt payment obligations (described above). Although we expect higher capital
expenditures in 2010, we anticipate that our cash flow from operations will exceed our investing
activities, excluding any acquisitions. We are closely managing our capital spending based on
current and anticipated volume levels and will defer or limit capital additions where economically
feasible, while continuing to invest strategically for future growth.
Secured financing may be used to obtain capital assets if we determine that it best suits our
needs. 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, as we experienced in 2009. During 2009,
global credit markets experienced significant liquidity disruptions, and continued uncertainty in
the credit markets has made financing terms for borrowers less attractive and in certain cases
resulted in the unavailability of certain types of debt financing, such as commercial paper.
Although these factors may make it more difficult or expensive for us to access credit markets, we
still have access to credit, as evidenced by our debt issuance in the third quarter of 2009.
66
The American Recovery and Reinvestment Act of 2009 was signed into law in February 2009. Among
other things, this law extends the bonus tax depreciation deductions for qualified assets acquired
and
placed into service during calendar year 2009. As a result of this extension, we estimate that the
net benefit from bonus tax depreciation provisions passed in 2008 and 2009 could be approximately
$50 million in 2010; however, the actual amount is subject to the nature and timing of our capital
expenditures in 2010, which may be impacted by economic conditions.
Our capital expenditures are expected to be $2.6 billion in 2010 and will include spending for
aircraft and related equipment at FedEx Express, network expansion at FedEx Ground and revenue
equipment at FedEx Freight. We also continue to invest in productivity-enhancing technologies. We
expect approximately 61% of capital expenditures in 2010 will be designated for growth initiatives
and 39% for ongoing maintenance activities. Our expected capital expenditures for 2010 include
$1.1 billion in investments for aircraft and aircraft-related equipment at FedEx Express. Aircraft-related
capital outlays include the B757s, the first of which entered revenue service in 2009 and which are
substantially more fuel-efficient per unit than the aircraft type they are replacing, and the new
B777Fs, the first of which is expected to enter revenue service in 2010. These aircraft-related
capital expenditures are necessary to achieve significant long-term operating savings and to
support projected long-term international volume growth. Our ability to delay the timing of these
aircraft-related expenditures is limited without incurring significant costs to modify existing
purchase agreements.
In December 2008, we reached an agreement with Boeing to defer the delivery of certain B777F
aircraft by up to 17 months. In addition, in January 2009, we exercised our option with Boeing to
purchase an additional 15 B777F aircraft and obtained an option to purchase an additional 15 B777F
aircraft. Our obligation to purchase these additional aircraft is conditioned upon there being no
event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of
1926, as amended. Accordingly, we have now agreed, subject to the above contractual condition, to
purchase a total of 30 B777F aircraft and hold an option to purchase an additional 15 B777F
aircraft.
During 2009, we made $1.1 billion in tax-deductible voluntary contributions to our U.S. Retirement
Plans in order to improve their funded status. These contributions included $483 million in
September 2008 and $600 million in May 2009. Our U.S. Retirement Plans have ample funds to meet
benefit payments. However, current market conditions have negatively impacted our plan asset
values, resulting in the 2009 recognition of a $1.2 billion charge to OCI, and increasing our
minimum expected funding requirements for 2010. For 2010, we anticipate making contributions to
our U.S. Retirement Plans totaling approximately $850 million, including approximately $500 million
in voluntary contributions and $350 million in minimum required contributions,
beginning in the second quarter of 2010.
In June 2009, Standard & Poors reaffirmed our senior unsecured debt credit rating of BBB and
commercial paper rating of A-2 and our ratings outlook as stable. During the third quarter of
2009, Moodys Investors Service reaffirmed our senior unsecured debt credit rating of Baa2 and
commercial paper rating of P-2. However, Moodys downgraded our ratings outlook to 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 ratings drop below investment grade, our access to financing may become limited.
In 2010, scheduled debt payments include $664 million of principal payments on unsecured notes and
capitalized leases.
67
CONTRACTUAL CASH OBLIGATIONS
The following table sets forth a summary of our contractual cash obligations as of May 31, 2009.
Certain of these contractual obligations are reflected in our balance sheet, while others are
disclosed as future obligations under accounting principles generally accepted in the United
States. Except for the current
portion of long-term debt and capital lease obligations, this table does not include amounts
already recorded in our balance sheet as current liabilities at May 31, 2009. Accordingly, this
table is not meant to represent a forecast of our total cash expenditures for any of the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year (Undiscounted) |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There- |
|
|
|
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
after |
|
|
Total |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
1,759 |
|
|
$ |
1,612 |
|
|
$ |
1,451 |
|
|
$ |
1,316 |
|
|
$ |
1,166 |
|
|
$ |
7,352 |
|
|
$ |
14,656 |
|
Non-capital purchase obligations and other |
|
|
234 |
|
|
|
137 |
|
|
|
111 |
|
|
|
62 |
|
|
|
11 |
|
|
|
125 |
|
|
|
680 |
|
Interest on long-term debt |
|
|
157 |
|
|
|
144 |
|
|
|
126 |
|
|
|
98 |
|
|
|
97 |
|
|
|
1,815 |
|
|
|
2,437 |
|
Required quarterly contributions to our
U.S. Retirement Plans |
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft and aircraft-related capital commitments |
|
|
964 |
|
|
|
791 |
|
|
|
527 |
|
|
|
425 |
|
|
|
466 |
|
|
|
1,924 |
|
|
|
5,097 |
|
Other capital purchase obligations |
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
500 |
|
|
|
250 |
|
|
|
|
|
|
|
300 |
|
|
|
250 |
|
|
|
989 |
|
|
|
2,289 |
|
Capital lease obligations |
|
|
164 |
|
|
|
20 |
|
|
|
8 |
|
|
|
119 |
|
|
|
2 |
|
|
|
15 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,197 |
|
|
$ |
2,954 |
|
|
$ |
2,223 |
|
|
$ |
2,320 |
|
|
$ |
1,992 |
|
|
$ |
12,220 |
|
|
$ |
25,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have certain contingent liabilities that are not accrued in our balance sheet in accordance with
accounting principles generally accepted in the United States. These contingent liabilities are
not included in the table above. In addition, we have historically made voluntary tax-deductible
contributions to our U.S. Retirement Plans. These amounts have not been legally required and
therefore are not reflected in the table above. However, included in the table above are
anticipated minimum required quarterly contributions totaling $350 million for 2010
that begin in the second quarter.
We have other long-term liabilities reflected in our balance sheet, including deferred income
taxes, qualified and nonqualified pension and postretirement healthcare plan liabilities and other
self-insurance accruals. The payment obligations associated with these liabilities are not
reflected in the table above due to the absence of scheduled maturities. Therefore, the timing of
these payments cannot be determined, except for amounts estimated to
be payable within 12 months, which are included in current liabilities.
68
Operating Activities
In accordance with accounting principles generally accepted in the United States, future
contractual payments under our operating leases are not recorded in our balance sheet. Credit
rating agencies routinely use information concerning minimum lease payments required for our
operating leases to calculate our debt capacity. The amounts reflected in the table above for
operating leases represent future minimum lease payments under noncancelable operating leases
(principally aircraft and facilities) with an
initial or remaining term in excess of one year at May 31, 2009. In the past, we financed a
significant portion of our aircraft needs (and certain other equipment needs) using operating
leases (a type of off-balance sheet financing). At the time that the decision to lease was made,
we determined that these operating leases would provide economic benefits favorable to ownership
with respect to market values, liquidity or after-tax cash flows.
The amounts reflected for purchase obligations represent noncancelable
agreements to purchase goods or services that are not capital related. Such contracts include
those for printing and advertising and promotions contracts. Open purchase orders that are
cancelable are not considered unconditional purchase obligations for financial reporting purposes
and are not included in the table above. Such purchase orders often represent authorizations to
purchase rather than binding agreements. See Note 16 of the accompanying consolidated financial
statements for more information.
Included in the preceding table within the caption entitled Non-capital purchase obligations and
other is our estimate of the current portion of the liability for uncertain tax positions under
FIN 48 of $5 million. We cannot reasonably estimate the timing of the long-term payments or the
amount by which the liability will increase or decrease over time; therefore, the long-term portion
of the liability ($67 million) is excluded from the preceding table. See Note 11 of the
accompanying consolidated financial statements for further information.
The amounts reflected in the table above for interest on long-term debt represent future interest
payments due on our long-term debt, all of which are fixed rate.
Investing Activities
The amounts reflected in the table above for capital purchase obligations represent noncancelable
agreements to purchase capital-related equipment. Such contracts include those for certain
purchases of aircraft, aircraft modifications, vehicles, facilities, computers and other equipment
contracts. In addition, we have committed to modify our DC10 aircraft for two-man cockpit
configuration, which is reflected in the table above. Commitments to purchase aircraft in
passenger configuration do not include the attendant costs to modify these aircraft for cargo
transport unless we have entered into noncancelable commitments to
modify such aircraft. Open purchase orders that are
cancelable are not considered unconditional purchase obligations for financial reporting purposes
and are not included in the table above. Such purchase orders often represent authorizations to
purchase rather than binding agreements. See Note 16 of the accompanying consolidated financial
statements for more information.
Financing Activities
We have certain financial instruments representing potential commitments, not reflected in the
table above, that were incurred in the normal course of business to support our operations,
including surety bonds and standby letters of credit. These instruments are generally required
under certain U.S. self-insurance programs and are also used in the normal course of international
operations. The underlying liabilities insured by these instruments are reflected in our balance
sheets, where applicable. Therefore, no additional liability is reflected for the surety bonds and
letters of credit themselves.
The amounts reflected in the table above for long-term debt represent future scheduled payments on
our long-term debt. In 2010, we have scheduled debt payments of $664 million, which includes $500
million of principal payments on our 5.5% unsecured notes maturing in August 2009 and principal and
interest payments on capital leases.
69
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted
in the 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.
The estimates discussed below include the financial statement elements that are either the most
judgmental or involve the selection or application of alternative accounting policies and are
material to our financial statements. 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.
RETIREMENT PLANS
OVERVIEW. We sponsor programs that provide retirement benefits to most of our employees. These
programs include defined benefit pension plans, defined contribution plans and postretirement
healthcare plans. The accounting for pension and postretirement healthcare plans includes numerous
assumptions, such as: discount rates; expected long-term investment returns on plan assets; future
salary increases; employee turnover; mortality; and retirement ages. These assumptions most
significantly impact our U.S. domestic pension plans.
We made significant changes to our retirement plans during 2008 and 2009. Beginning January 1,
2008, we increased the annual company-matching contribution under the largest of our 401(k) plans
covering most employees from a maximum of $500 to a maximum of 3.5% of eligible compensation.
Employees not participating in the 401(k) plan as of January 1, 2008 were automatically enrolled at
3% of eligible pay with a company match of 2% of eligible pay effective March 1, 2008. As a
temporary cost-control measure, we suspended 401(k) company-matching contributions for a minimum of
one year effective February 1, 2009.
Effective May 31, 2008, benefits previously accrued under our primary pension plans using a
traditional pension benefit formula (based on average earnings and years of service) were capped
for most employees, and those benefits will be payable beginning at retirement. Effective June 1,
2008, future pension benefits for most employees began to be accrued under a cash balance formula
we call the Portable Pension Account. These changes did not affect the benefits of previously
retired and terminated vested participants. In addition, these pension plans were modified to
accelerate vesting from five years to three years for most participants.
Under the Portable Pension Account, the retirement benefit is expressed as a dollar amount in a
notional account that grows with annual credits based on pay, age and years of credited service,
and interest on the notional account balance. Under the tax-qualified plans, the pension benefit
is payable as a lump sum or an annuity at retirement at the election of the employee. An
employees pay credits are determined each year under a graded formula that combines age with years
of service for points. The plan interest credit rate will vary from year to year based on the
selected U.S. Treasury index, with an interest rate equal to
the greater of 4% or the one-year Treasury Constant Maturities rate plus 1%, but not greater than a
rate based on the larger of the average 30-year Treasury note or the applicable provisions of the
Internal Revenue Code.
70
RETIREMENT PLANS COSTS. Retirement plans cost is included in the Salaries and Employee Benefits
caption in our consolidated income statements. A summary of our retirement plans costs over the
past three years is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
U.S. domestic and international pension plans |
|
$ |
177 |
|
|
$ |
323 |
|
|
$ |
467 |
|
U.S. domestic and international defined
contribution plans |
|
|
237 |
|
|
|
216 |
|
|
|
176 |
|
Postretirement healthcare plans |
|
|
57 |
|
|
|
77 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
471 |
|
|
$ |
616 |
|
|
$ |
698 |
|
|
|
|
|
|
|
|
|
|
|
The determination of our annual retirement plans cost is highly sensitive to changes in the
assumptions related to these plans because we have a large active workforce, a significant amount
of assets in the pension plans, and the payout of benefits will occur over an extended period in
the future. Total retirement plans cost decreased $145 million in 2009, primarily due to a higher
discount rate.
Retirement plans cost in 2010 is expected to be approximately $500 million, an increase of
approximately $29 million from 2009. This increase is attributable to increased pension plan
expense as a result of the negative impact of current market conditions on our pension plan assets,
which will be substantially offset by lower expenses on our 401(k) plans due to the temporary
suspension of the company-matching contribution.
PENSION COST. The components of pension cost for all pension plans are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
499 |
|
|
$ |
518 |
|
|
$ |
540 |
|
Interest cost |
|
|
798 |
|
|
|
720 |
|
|
|
707 |
|
Expected return on plan assets |
|
|
(1,059 |
) |
|
|
(985 |
) |
|
|
(930 |
) |
Recognized
actuarial (gains) losses and other |
|
|
(61 |
) |
|
|
70 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
177 |
|
|
$ |
323 |
|
|
$ |
467 |
|
|
|
|
|
|
|
|
|
|
|
Pension cost for our primary domestic pension plan was favorably affected in 2009 by approximately
$210 million due to an increase in the discount rate driven by higher interest rates in the bond
market year over year. Pension cost will be higher in 2010 by approximately $125 million due to
significant declines in the value of our plan assets due to current market conditions, partially
offset by a higher discount rate.
71
Following is a discussion of the key estimates we consider in determining our pension cost:
DISCOUNT RATE. This is the interest rate used to discount the estimated future benefit payments
that have been accrued to date (the projected benefit obligation, or PBO) to their net present
value and to
determine the succeeding years pension expense. The discount rate is determined each year at the
plan measurement date. An increase in the discount rate decreases pension expense. The discount
rate affects the PBO and pension expense based on the measurement dates, as described below.
|
|
|
|
|
|
|
|
|
Discount |
|
|
Amounts Determined by Measurement Date and |
Measurement Date (1) |
|
Rate |
|
|
Discount Rate |
5/31/2009 |
|
|
7.68 |
% |
|
2009 PBO and 2010 expense |
6/01/2008 |
|
|
7.15 |
|
|
2009 expense |
2/29/2008 |
|
|
6.96 |
|
|
2008 PBO |
2/28/2007 |
|
|
6.01 |
|
|
2007 PBO and 2008 expense |
2/28/2006 |
|
|
5.91 |
|
|
2006 PBO and 2007 expense |
|
|
|
(1) |
|
SFAS 158 required us to change our measurement date to May 31, beginning in 2009. |
We determine the discount rate (which is required to be the rate at which the projected benefit
obligation could be effectively settled as of the measurement date) with the assistance of
actuaries, who calculate the yield on a theoretical portfolio of high-grade corporate bonds (rated
Aa or better) with cash flows that generally match our expected benefit payments in future years.
In selecting bonds for this theoretical portfolio, we focus on bonds that match cash flows to
benefit payments and limit our concentration of bonds by industry and issuer. This bond modeling
technique allows for the use of non-callable and make-whole bonds that meet certain screening
criteria to ensure that the selected bonds with a call feature have a low probability of being
called. To the extent scheduled bond proceeds exceed the estimated benefit payments in a given
period, the yield calculation assumes those excess proceeds are reinvested at the one-year forward
rates implied by the Citigroup Pension Discount Curve.
The increase in the discount rate for 2010 was driven by current conditions in the market for
high-grade corporate bonds, in which yields have strengthened significantly since May 31, 2008.
The discount rate assumption is highly sensitive, as the following table illustrates with our
largest tax-qualified U.S. domestic pension plan:
|
|
|
|
|
|
|
|
|
|
|
Sensitivity (in millions) |
|
|
|
Effect on 2010 |
|
|
May 31, 2009 |
|
|
|
Pension Expense |
|
|
Effect on PBO |
|
One basis point change in discount rate |
|
$ |
1.5 |
|
|
$ |
13.9 |
|
One basis point change in expected return on assets |
|
|
1.2 |
|
|
|
|
|
At the February 29, 2008 and June 1, 2008 measurement dates, respectively, a one-basis-point change
in the discount rate would have impacted the 2008 PBO by $16 million and 2009 expense by $1.7
million.
PLAN ASSETS. The estimated average rate of return on plan assets
is a long-term, forward-looking assumption that also materially affects our pension cost. It is
required to be the expected future long-term rate of earnings on plan
assets. Our pension plan assets are invested primarily in listed
securities, and our pension plans hold only a minimal investment in
FedEx common stock that is entirely at the discretion of third-party
pension fund investment managers.
Establishing the expected future rate of investment return on our pension assets is a judgmental
matter. Management considers the following factors in determining this assumption:
|
|
the duration of our pension plan liabilities, which drives the investment strategy we can
employ with our pension plan assets; |
|
|
|
the types of investment classes in which we invest our pension plan assets and the expected
compound geometric return we can reasonably expect those investment classes to earn over the
next 10- to 15-year time period (or such other time period that may be appropriate); and |
|
|
|
the investment returns we can reasonably expect our investment management program to
achieve in excess of the returns we could expect if investments were made strictly in indexed
funds. |
72
We review the expected long-term rate of return on an annual basis and revise it as appropriate.
As part of our strategy to manage future pension costs and net funded status volatility, we are
transitioning to a more liability-driven investment strategy, which will better align our plan
assets and liabilities. This strategy will ultimately result in a greater concentration of
fixed-income investments.
To support our conclusions, we periodically commission asset/liability studies performed by
third-party professional investment advisors and actuaries to assist us in our reviews. These
studies project our estimated future pension payments and evaluate the efficiency of the allocation
of our pension plan assets into various investment categories. These studies also generate
probability-adjusted expected future returns on those assets. The following table summarizes our
current asset allocation strategy (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at Measurement Date |
|
|
|
2009 |
|
|
2008 |
|
Asset Class |
|
Actual |
|
|
Actual % |
|
|
Target % |
|
|
Actual |
|
|
Actual % |
|
|
Target % |
|
Domestic equities |
|
$ |
4,129 |
|
|
|
39 |
% |
|
|
30 |
% |
|
$ |
5,694 |
|
|
|
49 |
% |
|
|
53 |
% |
International equities |
|
|
1,724 |
|
|
|
16 |
|
|
|
15 |
|
|
|
2,481 |
|
|
|
21 |
|
|
|
17 |
|
Private equities |
|
|
357 |
|
|
|
3 |
|
|
|
5 |
|
|
|
406 |
|
|
|
4 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equities |
|
|
6,210 |
|
|
|
58 |
|
|
|
50 |
|
|
|
8,581 |
|
|
|
74 |
|
|
|
75 |
|
Long-duration fixed-income
securities |
|
|
2,535 |
|
|
|
24 |
|
|
|
45 |
|
|
|
1,778 |
|
|
|
15 |
|
|
|
15 |
|
Other fixed-income securities |
|
|
1,861 |
|
|
|
18 |
|
|
|
5 |
|
|
|
1,302 |
|
|
|
11 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,606 |
|
|
|
100 |
% |
|
|
100 |
% |
|
$ |
11,661 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The target asset allocations in the table above for 2009 reflect targets established in connection
with our liability-driven investment strategy described above. Our actual asset allocations will
continue to transition to the target levels over time as we continue to implement this strategy.
We have assumed an 8.0% compound geometric long-term rate of return on our U.S. domestic pension
plan assets for 2010, a decrease from 8.5% in 2009 and 2008 and 9.1% in 2007, as described in Note
12 of the accompanying consolidated financial statements. This decrease was driven by lower
expectations for future returns in light of recent losses in the equity markets and our shift in
investment strategy, which will yield lower returns due to a heavier percentage of fixed-income
securities.
The actual historical return on our U.S. pension plan assets, calculated on a compound geometric
basis, was approximately 7.5%, net of investment manager fees, for the 15-year period ended May 31,
2009 and 9.4%, net of investment manager fees, for the 15-year period ended February 29, 2008.
Pension expense is also affected by the accounting policy used to determine the value of plan
assets at the measurement date. We use a calculated-value method to determine the value of plan
assets, which helps mitigate short-term volatility in market performance (both increases and
decreases) by amortizing the actuarial gains or losses over four years. Another method used in
practice applies the market value of plan assets at the measurement date. In determining our 2010
pension expense, the calculated-value method significantly mitigated the impact of asset value
declines in the determination of our pension expense, reducing our expected 2010 expense by $135
million.
73
SALARY INCREASES. The assumed future increase in salaries and wages is also a key estimate in
determining pension cost. Generally, we correlate changes in estimated future salary increases to
changes in the discount rate (since that is an indicator of general inflation and cost of living
adjustments) and general estimated levels of profitability (since most incentive compensation is a
component of pensionable wages). In the future, based on the plan design changes discussed above,
a one-basis-point across-the-board change in the rate of estimated future salary increases will
have an immaterial impact on our pension costs. Our assumed average future salary increases based
on age and years of service are below.
|
|
|
|
|
|
|
Assumed Average |
|
|
|
Future Salary |
|
|
|
Increases |
|
|
|
|
|
|
2010 Projected |
|
|
4.42 |
% |
2009 |
|
|
4.49 |
% |
2008 |
|
|
4.47 |
% |
2007 |
|
|
3.46 |
% |
FUNDED STATUS. Following is information concerning the funded status under SFAS 158 of our pension
plans as of May 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Funded Status of Plans: |
|
|
|
|
|
|
|
|
Projected benefit obligation (PBO) |
|
$ |
11,050 |
|
|
$ |
11,617 |
|
Fair value of plan assets |
|
|
10,812 |
|
|
|
11,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plans |
|
|
(238 |
) |
|
|
262 |
|
Employer contributions after measurement date |
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
Net funded status |
|
$ |
(238 |
) |
|
$ |
277 |
|
|
|
|
|
|
|
|
|
Components of Funded Status by Plans: |
|
|
|
|
|
|
|
|
Qualified plans |
|
$ |
278 |
|
|
$ |
827 |
|
Nonqualified plans |
|
|
(318 |
) |
|
|
(331 |
) |
International plans |
|
|
(198 |
) |
|
|
(219 |
) |
|
|
|
|
|
|
|
Net funded status |
|
$ |
(238 |
) |
|
$ |
277 |
|
|
|
|
|
|
|
|
|
Components of Amounts Included in Balance Sheets: |
|
|
|
|
|
|
|
|
Noncurrent pension assets |
|
$ |
311 |
|
|
$ |
827 |
|
Current pension and other benefit obligations |
|
|
(31 |
) |
|
|
(32 |
) |
Noncurrent pension and other benefit obligations |
|
|
(518 |
) |
|
|
(518 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(238 |
) |
|
$ |
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Amounts: |
|
|
|
|
|
|
|
|
Cash contributions during the year |
|
$ |
1,146 |
|
|
$ |
548 |
|
Benefit payments during the year |
|
$ |
351 |
|
|
$ |
318 |
|
The amounts recognized in the balance sheet under SFAS 158 reflect a snapshot of the state of our
long-term pension liabilities at the plan measurement date and the effect of mark-to-market
accounting on plan assets. At May 31, 2009, in accordance with the provisions of SFAS 158, we
recorded a decrease to equity through OCI of $1.2 billion (net of tax) to reflect
unrealized market losses during 2009. Those losses are subject to amortization over future years
and may be reflected in future income statements unless they are recovered.
74
The funding requirements for our tax-qualified U.S. domestic pension plans are governed by the
Pension Protection Act of 2006, which has aggressive funding requirements in order to avoid benefit
payment restrictions that become effective if the funded status under IRS rules falls below 80% at
the beginning of a plan year. All of our qualified U.S. domestic pension plans had funded status
levels in excess of 80% for 2007, 2008 and 2009, and are expected to for 2010 as well. Despite
mark-to-market adjustments required under SFAS 158, our plans remain adequately funded to provide
benefits to our employees as they come due, and current benefit payments are nominal compared to
our total plan assets (benefit payments for 2009 were approximately 3% of plan assets).
In September 2008, we made $483 million in voluntary contributions to our U.S. tax-qualified plans.
We made additional voluntary contributions of $600 million during the fourth quarter of 2009 in
order to improve the funded status of our principal pension plans. While our U.S. tax-qualified
plans have ample funds to meet benefit payments, current market conditions have negatively impacted
asset values and could significantly impact funding considerations in 2010. We anticipate making
contributions to the U.S. tax-qualified plans totaling approximately $850 million in 2010, including
$350 million in required minimum quarterly payments.
Cumulative unrecognized actuarial losses for pension plans expense determination were $3.7 billion through May 31, 2009, compared to $2.5 billion at February 29, 2008. These
unrecognized losses reflect changes in the discount rates and differences between expected and
actual asset returns, which are being amortized over future periods. These unrecognized losses may
be recovered in future periods through actuarial gains. However, unless they are below a corridor
amount, these unrecognized actuarial losses are required to be amortized and recognized in future
periods. For example, projected U.S. domestic pension plan expense for 2010 includes $125 million
of amortization of these actuarial losses versus $44 million in 2009, $162 million in 2008 and $136
million in 2007.
SELF-INSURANCE ACCRUALS
We are self-insured up to certain limits for costs associated with workers compensation claims,
vehicle accidents and general business liabilities, and benefits paid under employee healthcare and
long-term disability programs. At May 31, 2009, there were $1.5 billion of
self-insurance accruals reflected in our balance sheet ($1.4 billion at May 31, 2008).
Approximately 40% of these accruals were classified as current liabilities in 2009 and 2008.
The measurement of these costs requires the consideration of historical cost experience, judgments
about the present and expected levels of cost per claim and self-insurance retention levels.
Accruals are primarily based on the actuarially estimated, undiscounted cost of claims, which
includes incurred-but-not-reported claims. Cost trends on material accruals are updated each
quarter. These methods provide estimates of future ultimate claim costs based on claims incurred
as of the balance sheet date. These estimates include consideration of factors such as severity
of claims, frequency of claims and future healthcare costs. We self-insure up to certain limits that vary by operating company and type of
risk. Periodically, we evaluate the level of insurance coverage and adjust insurance levels based
on risk tolerance and premium expense. Historically, it has been infrequent that incurred claims
exceeded our self-insured limits. Other acceptable methods of accounting for these accruals
include measurement of claims outstanding and projected payments based on historical development
factors.
We believe the use of actuarial methods to account for these liabilities provides a consistent and
effective way to measure these highly judgmental accruals. However, the use of any estimation
technique in this area is inherently sensitive given the magnitude of claims involved and the
length of time until the ultimate cost is known. We believe our recorded obligations for these
expenses are consistently measured on a conservative basis. Nevertheless, changes in healthcare
costs, accident frequency and severity, insurance retention levels and other factors can materially
affect the estimates for these liabilities. For example, during 2009, FedEx Ground
recorded $70 million in incremental self-insurance reserves for liability insurance based on
adverse experience on bodily injury claims.
75
LONG-LIVED ASSETS
PROPERTY AND EQUIPMENT. Our key businesses are capital intensive, with approximately 55% of our
total assets invested in our transportation and information systems infrastructures. We capitalize
only those costs that meet the definition of capital assets under accounting standards.
Accordingly, repair and maintenance costs that do not extend the useful life of an asset or are not
part of the cost of acquiring the asset are expensed as incurred. However, consistent with
industry practice, we capitalize certain aircraft-related major maintenance costs on one of our
aircraft fleet types and amortize these costs over their estimated service lives.
The depreciation or amortization of our capital assets over their estimated useful lives, and the
determination of any salvage values, requires management to make judgments about future events.
Because we utilize many of our capital assets over relatively long periods (the majority of
aircraft costs are depreciated over 15 to 18 years), we periodically evaluate whether adjustments
to our estimated service lives or salvage values are necessary to ensure these estimates properly
match the economic use of the asset. This evaluation may result in changes in the estimated lives
and residual values used to depreciate our aircraft and other equipment. These estimates affect
the amount of depreciation expense recognized in a period and, ultimately, the gain or loss on the
disposal of the asset. Changes in the estimated lives of assets will result in an increase or
decrease in the amount of depreciation recognized in future periods and could have a material
impact on our results of operations. Historically, gains and losses on operating equipment have
not been material (typically aggregating less than $10 million annually). However, such amounts
may differ materially in the future due to changes in business levels, technological obsolescence,
accident frequency, regulatory changes and other factors beyond our control.
Because of the lengthy lead times for aircraft manufacture and modifications, we must anticipate
volume levels and plan our fleet requirements years in advance, and make commitments for aircraft
based on those projections. Furthermore, the timing and availability of certain used aircraft
types (particularly those with better fuel efficiency) may create limited opportunities to acquire
these aircraft at favorable prices in advance of our capacity needs. These activities create risks
that asset capacity may exceed demand and that an impairment of our assets may occur. Aircraft
purchases (primarily aircraft in passenger configuration) that have not been placed in service
totaled $130 million at May 31, 2009 and $127 million at May 31, 2008. We plan to modify these
assets in the future and place them into operations.
The accounting test for whether an asset held for use is impaired involves first comparing the
carrying value of the asset with its estimated future undiscounted cash flows. If the cash flows
do not exceed the carrying value, the asset must be adjusted to its current fair value. We operate
integrated transportation networks and, accordingly, cash flows for most of our operating assets
are assessed at a network level, not at an individual asset level for our analysis of impairment.
Further, decisions about capital investments are evaluated based on the impact to the overall
network rather than the return on an individual asset. We make decisions to remove certain
long-lived assets from service based on projections of reduced capacity needs or lower operating
costs of newer aircraft types, and those decisions may result in an impairment charge. Assets held
for disposal must be adjusted to their estimated fair values when the decision is made to dispose
of the asset and certain other criteria are met. The fair value determinations for such aircraft
may require management estimates, as there may not be active markets for some of these aircraft.
Such estimates are subject to revision from period to period.
76
During the fourth quarter of 2009, we recorded $202 million in property and equipment
impairment charges. These charges are primarily related to our April 2009 decision to permanently
remove from service 10 Airbus A310-200 aircraft and four Boeing MD10-10 aircraft owned by the
company, along with certain excess aircraft engines at FedEx Express. This decision resulted in an impairment charge
of $191 million, which was recorded in the fourth quarter of 2009. A limited amount
of our total aircraft capacity remains temporarily grounded because of network overcapacity due to
the current economic environment. There were no material property and equipment impairment charges
recognized in 2008 or 2007.
LEASES. We utilize operating leases to finance certain of our aircraft, facilities and equipment.
Such arrangements typically shift the risk of loss on the residual value of the assets at the end
of the lease period to the lessor. As disclosed in Contractual Cash Obligations and Note 7 to
the accompanying consolidated financial statements, at May 31, 2009 we had approximately $15
billion (on an undiscounted basis) of future commitments for payments under operating leases. The
weighted-average remaining lease term of all operating leases outstanding at May 31, 2009 was
approximately six years.
The future commitments for operating leases are not reflected as a liability in our balance sheet
under U.S. accounting rules. The determination of
whether a lease is accounted for as a capital lease or an operating lease requires management to
make estimates primarily about the fair value of the asset and its estimated economic useful life.
In addition, our evaluation includes ensuring we properly account for build-to-suit lease
arrangements and making judgments about whether various forms of lessee involvement during the
construction period make the lessee an agent for the owner-lessor or, in substance, the owner of
the asset during the construction period. We believe we have well-defined and controlled processes
for making these evaluations, including obtaining third-party appraisals for material transactions
to assist us in making these evaluations.
GOODWILL. We have $2.2 billion of goodwill in our balance sheet from our acquisitions,
representing the excess of cost over the fair value of the net assets we have acquired. Several
factors give rise to
goodwill in our acquisitions, such as the expected benefit from synergies of the combination and
the existing workforce of the acquired entity.
In accordance with SFAS 142, Goodwill and Other Intangible Assets, a two-step impairment test is
performed on goodwill. In the first step, a comparison is made of the estimated fair value of a
reporting unit to its carrying value. If the carrying value of a reporting unit exceeds the
estimated fair value, the second step of the impairment test is required. In the second step, an
estimate of the current fair values of all assets and liabilities is made to determine the amount
of implied goodwill and consequently the amount of any goodwill impairment.
Our annual evaluation of goodwill impairment requires management judgment and the use of estimates
and assumptions to determine the fair value of our reporting units. Fair value is estimated using
standard valuation methodologies (principally the income or market approach) incorporating market
participant considerations and managements assumptions on revenue growth rates, operating margins,
discount rates and expected capital expenditures. Estimates used by management can significantly
affect the outcome of the impairment test. Each year, independent of our goodwill impairment test,
we update the calculation of our weighted-average cost of capital
(WACC) and perform a long-range
planning analysis to project expected results of operations. Using this data, we complete a
separate fair value analysis for each of our reporting units. Changes in forecasted operating
results and other assumptions could materially affect these estimates. We perform our annual
impairment test in the fourth quarter unless circumstances indicate
the need to accelerate the timing of the test.
In connection with our annual impairment testing of goodwill and other intangible assets conducted
in the fourth quarter of 2009 in accordance with SFAS 142, we recorded a charge of $900 million for impairment of the value of goodwill. This charge included an $810 million charge
related to reduction of the value of the goodwill recorded as a result of the February 2004
acquisition of Kinkos, Inc. (now known as FedEx Office) and a $90 million charge related to
reduction of the value of the goodwill recorded as a result of the September 2006 acquisition of
the U.S. and Canadian less-than-truckload freight operations of Watkins Motor Lines and certain
affiliates (now known as FedEx National LTL).
77
FEDEX OFFICE GOODWILL. In 2008, despite several management changes and strategic actions focused
on growing revenues and profitability at FedEx Office, we recorded a charge of $891 million in
connection with our annual impairment testing. The charge predominantly related to a $515 million
impairment of the Kinkos trade name and a $367 million impairment of goodwill. This charge was a
result of the decision to phase out the use of the Kinkos trade name and reduced profitability at
FedEx Office over the forecast period. Additional discussion of the key assumptions related to
these charges is included in Note 4 to our consolidated financial statements.
During 2009, the U.S. recession had a significant negative impact on demand for FedEx Office
services, resulting in lower revenues and continued operating losses at this reporting unit. In
response to these conditions, FedEx Office initiated an internal reorganization
designed to improve revenue-generating capabilities and reduce costs. Several actions were taken
during 2009 to reduce FedEx Offices cost structure and position it for long-term growth under
better economic conditions. These actions included headcount reductions, domestic store closures
and the termination of operations in some international locations. In addition, we substantially
curtailed future network expansion in light of current economic conditions.
The valuation methodology to estimate the fair value of the FedEx Office reporting unit was based
primarily on an income approach. We believe use of the income approach is an appropriate
methodology for the FedEx Office reporting unit because it is the most direct method of measuring
enterprise value for this reporting unit. Because of the nature of the service offerings at FedEx
Office, it exhibits
characteristics of a retailer, a business services provider and a printing provider. Accordingly,
it is difficult to find directly comparable companies for use under the market approach. However,
market approach information was incorporated into our test to ensure the reasonableness of our conclusions on estimated
value under the income approach. Key assumptions considered were the revenue, operating income and
capital expenditure forecasts, the assessed growth rate in the periods beyond the detailed forecast
period, and the discount rate.
For 2009, we used a discount rate of 12.0%, versus a discount rate of 12.5% in 2008. Our discount
rate of 12.0% for 2009 represents our WACC of the FedEx Office reporting unit adjusted for
company-specific risk premium to account for the estimated uncertainty associated with our future
cash flows. The development of the WACC used in our estimate of fair value considered the
following key factors:
|
|
|
current market conditions for the equity-risk premium and risk-free interest rate; |
|
|
|
|
benchmark capital structures for guideline companies with characteristics similar to the
FedEx Office reporting unit; |
|
|
|
|
the size and industry of the FedEx Office reporting unit; and |
|
|
|
|
risks related to the forecast of future revenues and profitability of the FedEx Office
reporting unit. |
The discount rate incorporates current market participant considerations, as indicated above, and
decreased year over year, as increases in the WACC (due to general economic conditions) were offset
by reductions in the company-specific risk premium. The company-specific risk premium was reduced
primarily due to lower long-term growth and profitability assumptions associated with the 2009
forecast. The WACC used in the estimate of fair value in future periods may be impacted by changes
in market conditions (including those of market participants), as well as the specific future
performance of the FedEx Office reporting unit and are subject to change, based on changes in
specific facts and circumstances.
78
The key drivers of enterprise value for FedEx Office in 2008 were significant improvements in
long-term revenue and profitability growth, as well as continued network expansion activities.
Despite the benefits of the internal reorganization described above, the current and projected
impact of the recession and the elimination of future network expansion significantly reduced the
value of the FedEx Office reporting unit for 2009. The valuation of the FedEx Office reporting
unit was sensitive to both the underlying forecast assumptions and the discount rate assumptions.
For example, a 50-basis-point increase or decrease in the discount rate impacted the estimate of
fair value by $40 million. Further, a 100-basis-point improvement or deterioration in the
operating margin in each year of the forecast period impacted the fair value by $220 million.
Upon completion of the impairment test, we concluded that the recorded goodwill was impaired and
recorded an impairment charge of $810 million during the fourth quarter of 2009. The remaining
goodwill attributable to the FedEx Office reporting unit is $362 million as of May 31, 2009. The
goodwill impairment charge is included in operating expenses in the accompanying consolidated
statements of income. This charge is included in the results of the FedEx Services segment and was
not allocated to our transportation segments, as the charge was unrelated to the core performance
of those businesses.
FEDEX NATIONAL LTL GOODWILL. During 2009, the U.S. recession had a significant negative impact on
the LTL industry, resulting in steep volume declines, intense yield pressure and the exit of
numerous small to medium competitors from the market.
The outlook for the LTL market is uncertain due to the
recession and the negative impact of aggressive pricing resulting from continued excess capacity
in the market. The
results for the FedEx National LTL reporting unit in 2009 reflect the impact of the recession, with
reduced revenues and increased operating losses.
The valuation methodology to estimate the fair value of the FedEx National LTL reporting unit was
based primarily on a market approach (revenue multiples and/or earnings multiples) that considered
market participant assumptions. We believe use of the market approach for FedEx National LTL is
appropriate due to the forecast risk associated with the projections used under the income
approach, particularly in the outer years of the forecast period (as described below). Further,
there are directly comparable companies to the FedEx National LTL reporting unit for consideration
under the market approach. The income approach also was incorporated into the impairment test to
ensure the reasonableness of our conclusions under the market approach. Key assumptions considered
were the revenue, operating income and capital expenditure forecasts and market participant
assumptions on multiples related to revenue and earnings forecasts.
The forecast used in the valuation assumes operating losses will continue in the
near-term due to the current economic conditions and excess capacity in the industry. However, the
long-term outlook assumes that this excess capacity exits the market. This assumption drives
significant volume and yield improvement into the FedEx National LTL reporting unit in future
periods. The decision to include an assumption related to the elimination of excess capacity from
the market and the associated cash flows is significant to the valuation and reflects managements
outlook on the industry for future periods as of the valuation date.
79
In 2008, the estimated value of the FedEx National LTL reporting unit was attributable to its
long-term cash-generating capabilities, and the forecasts used to value the reporting unit were
prepared prior to the severe impact of the U.S. recession on its business. Although the forecast
used in the valuation assumes long-term profitability resulting from the elimination of excess
capacity from the market, recent operating losses combined with projected near-term operating
losses for the FedEx National LTL reporting unit, resulted in a significant reduction in the value
of this business from 2008. Accordingly, we recorded an impairment charge of $90 million during
the fourth quarter of 2009. This charge represented substantially all of the goodwill resulting
from this acquisition. The goodwill impairment charge is included in operating expenses in the
accompanying consolidated statements of income and is included in the results of the FedEx Freight
segment.
OTHER REPORTING UNITS GOODWILL. Our remaining reporting units with significant recorded goodwill
(excluding FedEx Office and FedEx National LTL) include our FedEx Express reporting unit and our
FedEx Freight reporting unit. We evaluated our remaining reporting units during the fourth quarter
of 2009, and while the estimated fair value of these reporting units declined from 2008, the
estimated fair value of each of our other reporting units significantly exceeded their carrying
values in 2009. As a result, no additional testing or impairment charges were necessary.
CONTINGENCIES
We are subject to various loss contingencies, including tax proceedings and litigation, in
connection with our operations. Contingent liabilities are difficult to measure, as their
measurement is subject to multiple factors that are not easily predicted or projected. Further,
additional complexity in measuring these liabilities arises due to the various jurisdictions in
which these matters occur, which makes our ability to predict their outcome highly uncertain.
Moreover, different accounting rules must be employed to account for these items based on the
nature of the contingency. Accordingly, significant management judgment is required to assess
these matters and to make determinations about the measurement of a
liability, if any. Our material pending loss contingencies are described in Note 17 to our
consolidated financial statements. In the opinion of management, the aggregate liability, if any,
of individual matters or groups of matters not specifically described in Note 17 is not expected to
be material to our financial position, results of operations or cash flows. The following
describes our method and associated processes for evaluating these matters.
TAX CONTINGENCIES. We are subject to income and operating tax rules of the U.S., and its states
and municipalities, and of the foreign jurisdictions in which we operate. Significant judgment is
required in determining income tax provisions, as well as deferred tax asset and liability
balances, due to the complexity of these rules and their interaction with one another. We account
for income taxes under SFAS 109, Accounting for Income Taxes, by recording both current taxes
payable and deferred tax assets and liabilities. Our provision for income taxes is based on
domestic and international statutory income tax rates in the jurisdictions in which we operate,
applied to taxable income, reduced by applicable tax credits.
We account for operating taxes based on multi-state, local and foreign taxing jurisdiction rules in
those areas in which we operate. Provisions for operating taxes are estimated based upon these
rules, asset acquisitions and disposals, historical spend and other variables. These provisions
are consistently evaluated for reasonableness against compliance and risk factors.
Tax contingencies arise from uncertainty in the application of tax rules throughout the many
jurisdictions in which we operate. These tax contingencies are impacted by several factors,
including tax audits, appeals, litigation, changes in tax laws and other rules, and their
interpretations, and changes in our business, among other things, in the various federal, state,
local and foreign tax jurisdictions in which we operate. We regularly assess the potential impact
of these factors for the current and prior years to determine the adequacy of our tax provisions.
We continually evaluate the likelihood and amount of potential adjustments and adjust our tax
positions, including the current and deferred tax liabilities, in the period in which the facts
that give rise to a revision become known. In addition, management considers the advice of third
parties in making conclusions regarding tax consequences.
80
Effective June 1, 2007, we began to measure and record income tax contingency accruals in
accordance with FIN 48. The cumulative effect of adopting FIN 48 was immaterial.
Under FIN 48, we recognize liabilities for uncertain income tax positions based on a two-step
process. The first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step requires us to estimate and measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective
to estimate such amounts, as we must determine the probability of various possible outcomes. We
reevaluate these uncertain tax positions on a quarterly basis or when new information becomes
available to management. These reevaluations are based on factors including, but not limited to,
changes in facts or circumstances, changes in tax law, successfully settled issues under audit and
new audit activity. Such a change in recognition or measurement could result in the recognition of
a tax benefit or an increase to the related provision.
We classify interest related to income tax liabilities as interest expense, and if applicable,
penalties are recognized as a component of income tax expense. The income tax liabilities and
accrued interest and penalties that are due within one year of the balance sheet date are presented
as current liabilities. The remaining portion of our income tax liabilities and accrued interest
and penalties are presented as noncurrent liabilities. These noncurrent income tax liabilities are
recorded in the caption Other liabilities in our consolidated balance sheets.
We measure and record operating tax contingency accruals in accordance with SFAS 5, Accounting for
Contingencies. As discussed below, SFAS 5 requires an accrual of estimated loss from a
contingency, such as a tax or other legal proceeding or claim, when it is probable that a loss will
be incurred and the amount of the loss can be reasonably estimated.
OTHER CONTINGENCIES. Because of the complex environment in which we operate, we are subject to
other legal proceedings and claims, including those relating to general commercial matters,
employment-related claims and FedEx Grounds owner-operators. We account for these contingencies
in accordance with SFAS 5, which requires an accrual of estimated loss from a contingency, such as
a tax or other legal proceeding or claim, when it is probable (i.e., the future event or events are
likely to occur) that a loss will be incurred and the amount of the loss can be reasonably
estimated. SFAS 5 requires disclosure of a loss contingency matter when, in managements judgment,
a material loss is reasonably possible or probable of occurring.
Our legal department maintains thorough processes to identify, evaluate and monitor the status of
litigation and other loss contingencies as they arise and develop. Management has regular,
comprehensive litigation and contingency reviews, including updates from internal and external
counsel, to assess the need for accounting recognition of a loss or disclosure of these
contingencies. In determining whether a loss should be accrued or a loss contingency disclosed, we
evaluate, among other factors, the degree of probability of an unfavorable outcome or settlement
and the ability to make a reasonable estimate of the amount of loss. Events may arise that were
not anticipated and the outcome of a contingency may result in a loss to us that differs materially
from our previously estimated liability.
81
RISK FACTORS
Our financial and operating results are subject to many risks and uncertainties, as described
below.
Our businesses depend on our strong reputation and the value of the FedEx brand. The FedEx brand
name symbolizes high-quality service, reliability and speed. FedEx is one of the most widely
recognized, trusted and respected brands in the world, and the FedEx brand is one of our most
important and valuable assets. In addition, we have a strong reputation among customers and the
general public for high standards of social and environmental responsibility and corporate
governance and ethics. The FedEx brand name and our corporate reputation are powerful sales and
marketing tools, and we devote significant resources to promoting and protecting them. Adverse
publicity (whether or not justified) relating to activities by our employees, contractors or agents
could tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss
of brand equity could reduce demand for our services and thus have an adverse effect on our
financial condition, liquidity and results of operations, as well as require additional resources
to rebuild our reputation and restore the value of our brand.
Labor organizations attempt to organize groups of our employees from time to time, and potential
changes in labor laws could make it easier for them to do so. If we are unable to continue to
maintain good relationships with our employees and prevent labor organizations from organizing
groups of our employees, our operating costs could significantly increase and our operational
flexibility could be significantly reduced. Despite continual organizing attempts by labor unions,
besides the pilots of FedEx Express, all of our U.S. employees have thus far chosen not to
unionize. The U.S. Congress is considering adopting changes in labor laws, however, that would
make it easier for unions to organize small units of our employees. For example, in May 2009, the
U.S. House of Representatives passed the FAA Reauthorization Act, which includes a provision that
would remove most FedEx Express employees from the purview of the Railway Labor Act of 1926, as
amended (the RLA). For additional discussion of the RLA, see Part I, Item 1 of this Annual
Report on Form 10-K under the caption Regulation. Should the House version of the FAA
Reauthorization Act (or a similar bill removing FedEx Express
from RLA jurisdiction) be passed by the entire Congress and signed into law by the President, it
could expose our customers to the type of service disruptions that the RLA was designed to prevent
local work stoppages in key areas that interrupt the timely flow of shipments of time-sensitive,
high-value goods throughout our global network. Such disruptions could threaten our ability to
provide competitively priced shipping options and ready access to global markets. There is also
the possibility that the U.S. Congress could pass other labor legislation, such as the currently
proposed Employee Free Choice Act (the EFCA) (also called card-check legislation), that could
adversely affect our companies, such as FedEx Ground and FedEx Freight, whose employees are
governed by the National Labor Relations Act of 1935, as amended (the NLRA). The EFCA would
amend the NLRA to substantially liberalize the procedures for union organization for example, by
eliminating employees absolute right to a secret ballot vote in union elections. The EFCA could
also require imposition of an arbitrated initial contract that could include pay, benefit and work
rules that could adversely impact employers.
We rely heavily on technology to operate our transportation and business networks, and any
disruption to our technology infrastructure or the Internet could harm our operations and our
reputation among customers. Our ability to attract and retain customers and to compete effectively
depends in part upon the sophistication and reliability of our technology network, including our
ability to provide features of service that are important to our customers. Any disruption to the
Internet or our technology infrastructure, including those impacting our computer systems and Web
site, could adversely impact our customer service and our volumes and revenues and result in
increased costs. While we have invested and continue to invest in technology security initiatives
and disaster recovery plans, these measures cannot fully insulate us from technology disruptions
and the resulting adverse effect on our operations and financial results.
82
Our transportation businesses may be impacted by the price and availability of fuel. We must
purchase large quantities of fuel to operate our aircraft and vehicles, and the price and
availability of fuel can be unpredictable and beyond our control. To date, we have been mostly
successful in mitigating the expense impact of higher fuel costs through our indexed fuel
surcharges, as the amount of the surcharges is closely linked to the market prices for fuel. If we
are unable to maintain or increase our fuel surcharges because of competitive pricing pressures or
some other reason, fuel costs could adversely impact our operating results. Even if we are able to
offset the cost of fuel with our surcharges, high fuel surcharges could move our customers,
especially in the U.S. domestic market, away from our higher-yielding express services to our
lower-yielding ground services or even reduce customer demand for our services altogether. These
effects were evident in the first quarter of 2009, as fuel prices reached all-time highs. In
addition, disruptions in the supply of fuel could have a negative impact on our ability to operate
our transportation networks.
Our businesses are capital intensive, and we must make capital expenditures based upon projected
volume levels. We make significant investments in aircraft, vehicles, technology, package handling
facilities, sort equipment, copy equipment and other assets to support our transportation and
business networks. We also make significant investments to rebrand, integrate and grow the
companies that we acquire. The amount and timing of capital investments depend on various factors,
including our anticipated volume growth. For example, we must make commitments to purchase or
modify aircraft years before the aircraft are actually needed. We must predict volume levels and
fleet requirements and make commitments for aircraft based on those projections. Missing our
projections could result in too much or too little capacity relative to our shipping volumes.
Overcapacity could lead to asset dispositions or write-downs and undercapacity could negatively
impact service levels. For example, recent and current weak economic conditions and the delivery
of newer, more fuel-efficient aircraft have led to excess aircraft capacity at FedEx Express. As a
result, during the fourth quarter of 2009, we decided to permanently remove 14 aircraft and certain
excess aircraft engines from service and thus recorded a
charge of $191 million. A limited number of other aircraft remain temporarily
grounded because of network overcapacity, and any future decisions to further alter our networks by
eliminating additional aircraft or other assets may lead to additional asset impairment charges.
We face intense competition, especially during the current global recession. The transportation
and business services markets are both highly competitive and sensitive to price and service,
especially in periods of little or no macro-economic growth. Some of our competitors have more
financial resources than we do, or they are controlled or subsidized by foreign governments, which
enables them to raise capital more easily. We believe we compete effectively with these companies
for example, by providing more reliable service at compensatory prices. However, our competitors
determine the charges for their services, and the current global recession has led to a very
competitive pricing environment within our industries. If the pricing environment becomes
irrational, it could limit our ability to maintain or increase our prices (including our fuel
surcharges in response to rising fuel costs) or to maintain or grow our market share. In addition,
maintaining a broad portfolio of services is important to keeping and attracting customers. While
we believe we compete effectively through our current service offerings, if our competitors offer a
broader range of services or more effectively bundle their services, it could impede our ability to
maintain or grow our market share.
83
If we do not effectively operate, integrate, leverage and grow acquired businesses, our financial
results and reputation may suffer. Our strategy for long-term growth, productivity and
profitability depends in part on our ability to make prudent strategic acquisitions and to realize
the benefits we expect when we make those acquisitions. In furtherance of this strategy, during
2007 we acquired the LTL freight operations of Watkins Motor Lines (renamed FedEx National LTL) and
made strategic acquisitions in China, the United Kingdom and India. During 2004, we acquired
Kinkos, Inc. (now known as FedEx Office). While we expect our past and future acquisitions to
enhance our value proposition to customers and improve our long-term profitability, there can be no
assurance that we will realize our expectations within the time frame we have established, if at
all, or that we can continue to support the value we allocate to these acquired businesses,
including their goodwill or other intangible assets. As an example, during 2008 and 2009, we
recorded aggregate charges of $1.8 billion for impairment of the value of the Kinkos
trade name and portions of the goodwill recorded as a result of the Kinkos and Watkins Motor Lines
acquisitions. These charges were necessary, among other reasons, because the recent and forecasted
financial performance of those companies did not meet our original expectations as a result of weak
economic conditions.
FedEx Ground relies on owner-operators to conduct its line-haul and pickup-and-delivery operations,
and the status of these owner-operators as independent contractors, rather than employees, is being
challenged. FedEx Grounds use of independent contractors is well suited to the needs of the
ground delivery business and its customers, as evidenced by the strong growth of this business
segment. We are involved in numerous class-action lawsuits (including many that have been
certified as class actions), several individual lawsuits and numerous tax and other administrative
proceedings that claim that the companys owner-operators or their drivers should be treated as our
employees, rather than independent contractors. We expect to incur certain costs, including legal
fees, in defending the status of FedEx Grounds owner-operators as independent contractors. We
believe that FedEx Grounds owner-operators are properly classified as independent contractors and
that FedEx Ground is not an employer of the drivers of the companys independent contractors.
However, adverse determinations in these matters could, among other things, entitle certain of our
contractors and their drivers to the reimbursement of certain expenses and to the benefit of
wage-and-hour laws and result in employment and withholding tax and benefit liability for FedEx
Ground, and could result in changes to the independent contractor status of FedEx Grounds
owner-operators. If FedEx Ground is compelled to convert its independent contractors to employees,
labor organizations could more easily organize these individuals, our operating costs could
increase materially and we could incur significant capital outlays.
Increased security requirements could impose substantial costs on us, especially at FedEx Express.
As a result of concerns about global terrorism and homeland security, governments around the world
are adopting or are considering adopting stricter security requirements that will increase
operating costs for businesses, including those in the transportation industry. For example, in
July 2007, the U.S. Transportation Security Administration issued to us a Full All-Cargo Aircraft
Operator Standard Security Plan, which contained many new and enhanced security requirements.
These requirements are not static, but will change periodically as the result of regulatory and
legislative requirements, and to respond to evolving threats. Until these requirements are
adopted, we cannot determine the effect that these new rules will have on our cost structure or our
operating results. It is reasonably possible, however, that these rules or other future security
requirements could impose material costs on us.
The regulatory environment for global aviation rights may impact our air operations. Our extensive
air network is critical to our success. Our right to serve foreign points is subject to the
approval of the Department of Transportation and generally requires a bilateral agreement between
the United States and foreign governments. In addition, we must obtain the permission of foreign
governments to provide specific flights and services. Regulatory actions affecting global aviation
rights or a failure to obtain or maintain aviation rights in important international markets could
impair our ability to operate our air network.
84
We may be affected by global climate change or by legal, regulatory or market responses to such
change. Concern over climate change, including the impact of global warming, has led to
significant U.S. and international legislative and regulatory efforts
to limit greenhouse gas (GHG)
emissions. For example, during 2009, the European Commission approved the extension of the
European Union Emissions Trading Scheme (ETS) for GHG emissions, to the airline industry. We
believe this decision violates international treaties and air services agreements and is likely to
be challenged by the U.S. Government. If the decision stands, however, then all FedEx Express
flights to and from any airport in any member state of the European Union would be covered by the
ETS requirements beginning in 2012, and each year we would be required to submit emission
allowances in an amount equal to the carbon dioxide emissions from such flights. In addition, the
U.S. House of Representatives has passed and the Senate is currently considering a bill that would
regulate GHG emissions, and some form of federal climate change legislation is possible in the
relatively near future. Increased regulation regarding GHG emissions, especially aircraft or
diesel engine emissions, could impose substantial costs on us, especially at FedEx Express. These
costs include an increase in the cost of the fuel and other energy we purchase and capital costs
associated with updating or replacing our aircraft or trucks prematurely. Until the timing, scope
and extent of such regulation becomes known, we cannot predict its effect on our cost structure or
our operating results. It is reasonably possible, however, that it could impose material costs on
us. Moreover, even without such regulation, increased awareness and any adverse publicity in the
global marketplace about the GHGs emitted by companies in the airline and transportation industries
could harm our reputation and reduce customer demand for our services, especially our air express
services.
We are also subject to risks and uncertainties that affect many other businesses, including:
|
|
the impact of any international conflicts or terrorist activities on the United States and
global economies in general, the transportation industry or us in particular, and what effects
these events will have on our costs or the demand for our services; |
|
|
|
any impacts on our businesses resulting from new domestic or international government laws
and regulation, including tax, accounting, trade (such as protectionist measures enacted in
response to the current weak economic conditions), labor (such as
card-check legislation),
environmental (such
as climate change legislation) or postal rules; |
|
|
|
our ability to manage our cost structure for capital expenditures and operating expenses,
and match it to shifting and future customer volume levels; |
|
|
|
changes in foreign currency exchange rates, especially in the euro, Chinese yuan, Canadian
dollar, British pound and Japanese yen, which can affect our sales levels and foreign currency
sales prices; |
|
|
|
increasing costs, the volatility of costs and legal mandates for employee benefits,
especially pension and healthcare benefits; |
|
|
|
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; |
|
|
|
market acceptance of our new service and growth initiatives; |
|
|
|
any liability resulting from and the costs of defending against class-action litigation,
such as wage-and-hour and discrimination and retaliation claims, patent litigation, and any
other legal proceedings; |
|
|
|
the impact of technology developments on our operations and on demand for our services; |
85
|
|
adverse weather conditions or natural disasters, such as earthquakes and hurricanes, which
can disrupt electrical service, damage our property, disrupt our operations, increase fuel
costs and adversely affect shipment levels; |
|
|
|
widespread outbreak of an illness or any other communicable disease, or any other public
health crisis; |
|
|
|
availability of financing on terms acceptable to us and our ability to maintain our current
credit ratings, especially given the capital intensity of our operations and the current
volatility of credit markets; and |
|
|
|
credit losses from our customers inability or unwillingness to pay for previously provided
services as a result of, among other things, weak economic conditions and tight credit
markets. |
We are directly affected by the state of the economy. While the global, or macro-economic, risks
listed above apply to most companies, we are particularly vulnerable. The transportation industry
is highly cyclical and especially susceptible to trends in economic activity, such as the current
global recession. Our primary business is to transport goods, so our business levels are directly
tied to the purchase and production of goods key macro-economic measurements. When individuals
and companies purchase and produce fewer goods, we transport fewer goods. In addition, we have a
relatively high fixed-cost structure, which is difficult to quickly adjust to match shifting volume
levels. Moreover, as we grow our international business, we are increasingly affected by the
health of the global economy. As a result, the current global recession has had a
disproportionately negative impact on us and our recent financial results.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including (but not limited to) those contained in Outlook
(including segment outlooks), Liquidity, Capital Resources, Liquidity Outlook, Contractual
Cash Obligations and Critical Accounting Estimates, and the Retirement Plans and
Contingencies notes to the consolidated financial statements, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our
financial condition, results of operations, cash flows, plans, objectives, future performance and
business. Forward-looking statements include those preceded by, followed by or that include the
words may, could, would, should, believes, expects, anticipates, plans,
estimates, targets, projects, intends or similar expressions. These forward-looking
statements involve risks and uncertainties. Actual results may differ materially from those
contemplated (expressed or implied) by such forward-looking statements, because of, among other
things, the risk factors identified above and the other risks and uncertainties you can find in our
press releases and other SEC filings.
As a result of these and other factors, no assurance can be given as to our future results and
achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of
future events or circumstances and those future events or circumstances may not occur. You should
not place undue reliance on the forward-looking statements, which speak only as of the date of this
report. We are under no obligation, and we expressly disclaim any obligation, to update or alter
any forward-looking statements, whether as a result of new information, future events or otherwise.
86
MANAGEMENTS REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended). Our internal control over financial reporting includes, among other things,
defined policies and procedures for conducting and governing our business, sophisticated
information systems for processing transactions and a properly staffed, professional internal audit
department. Mechanisms are in place to monitor the effectiveness of our internal control over
financial reporting and actions are taken to correct deficiencies identified. Our procedures for
financial reporting include the active involvement of senior management, our Audit Committee and
our staff of highly qualified financial and legal professionals.
Management, with the participation of our principal executive and financial officers, assessed our
internal control over financial reporting as of May 31, 2009, the end of our fiscal year.
Management based its assessment on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Based on this assessment, management has concluded that our internal control over financial
reporting was effective as of May 31, 2009.
The effectiveness of our internal control over financial reporting as of May 31, 2009, has been
audited by Ernst & Young LLP, the independent registered public accounting firm who also audited
the Companys consolidated financial statements included in this Annual Report on Form 10-K. Ernst
& Young LLPs report on the Companys internal control over financial reporting is included in this
Annual Report on Form 10-K.
87
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have audited FedEx Corporations internal control over financial reporting as of May 31, 2009,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). FedEx Corporations
management is responsible for maintaining effective internal control
over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, FedEx Corporation maintained, in all material respects, effective internal control
over financial reporting as of May 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of FedEx Corporation as of May 31, 2009 and
2008, and the related consolidated statements of income, changes in stockholders investment and
comprehensive income, and cash flows for each of the three years in the period ended May 31, 2009
of FedEx Corporation and our report dated July 10, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Memphis, Tennessee
July 10, 2009
88
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have audited the accompanying consolidated balance sheets of FedEx Corporation as of May 31,
2009 and 2008, and the related consolidated statements of income, changes in stockholders
investment and comprehensive income, and cash flows for each of the three years in the period ended
May 31, 2009. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of FedEx Corporation at May 31, 2009 and 2008, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended May 31, 2009, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective May 31, 2007 the Company
adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Benefit PlansAn Amendment of FASB Statements No. 87, 88, 106 and 132(R).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), FedEx Corporations internal control over financial reporting as of May 31,
2009, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 10, 2009
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Memphis, Tennessee
July 10, 2009
89
FEDEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,292 |
|
|
$ |
1,539 |
|
Receivables, less allowances of $196 and $158 |
|
|
3,391 |
|
|
|
4,359 |
|
Spare parts, supplies and fuel, less
allowances of $175 and $163 |
|
|
367 |
|
|
|
435 |
|
Deferred income taxes |
|
|
511 |
|
|
|
544 |
|
Prepaid expenses and other |
|
|
555 |
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
7,116 |
|
|
|
7,244 |
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, AT COST |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft and related equipment |
|
|
10,118 |
|
|
|
10,165 |
|
Package handling and ground support
equipment |
|
|
4,960 |
|
|
|
4,817 |
|
Computer and electronic equipment |
|
|
4,280 |
|
|
|
5,040 |
|
Vehicles |
|
|
3,078 |
|
|
|
2,754 |
|
Facilities and other |
|
|
6,824 |
|
|
|
6,529 |
|
|
|
|
|
|
|
|
|
|
|
29,260 |
|
|
|
29,305 |
|
Less accumulated depreciation and amortization |
|
|
15,843 |
|
|
|
15,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
13,417 |
|
|
|
13,478 |
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
2,229 |
|
|
|
3,165 |
|
Pension assets |
|
|
311 |
|
|
|
827 |
|
Intangible and other assets |
|
|
1,171 |
|
|
|
919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets |
|
|
3,711 |
|
|
|
4,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,244 |
|
|
$ |
25,633 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
90
FEDEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
|
2009 |
|
|
2008 |
|
LIABILITIES AND STOCKHOLDERS INVESTMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
653 |
|
|
$ |
502 |
|
Accrued salaries and employee benefits |
|
|
861 |
|
|
|
1,118 |
|
Accounts payable |
|
|
1,372 |
|
|
|
2,195 |
|
Accrued expenses |
|
|
1,638 |
|
|
|
1,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
4,524 |
|
|
|
5,368 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, LESS CURRENT PORTION |
|
|
1,930 |
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
1,071 |
|
|
|
1,264 |
|
Pension, postretirement healthcare
and other benefit obligations |
|
|
934 |
|
|
|
989 |
|
Self-insurance accruals |
|
|
904 |
|
|
|
804 |
|
Deferred lease obligations |
|
|
802 |
|
|
|
671 |
|
Deferred gains, principally related to
aircraft transactions |
|
|
289 |
|
|
|
315 |
|
Other liabilities |
|
|
164 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities |
|
|
4,164 |
|
|
|
4,233 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCKHOLDERS INVESTMENT |
|
|
|
|
|
|
|
|
Common stock, $0.10 par value; 800 million shares
authorized; 312 million shares issued for 2009 and
311 million shares issued for 2008 |
|
|
31 |
|
|
|
31 |
|
Additional paid-in capital |
|
|
2,053 |
|
|
|
1,922 |
|
Retained earnings |
|
|
12,919 |
|
|
|
13,002 |
|
Accumulated other comprehensive loss |
|
|
(1,373 |
) |
|
|
(425 |
) |
Treasury stock, at cost |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stockholders investment |
|
|
13,626 |
|
|
|
14,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,244 |
|
|
$ |
25,633 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
91
FEDEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
$ |
35,497 |
|
|
$ |
37,953 |
|
|
$ |
35,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
13,767 |
|
|
|
14,202 |
|
|
|
13,740 |
|
Purchased transportation |
|
|
4,534 |
|
|
|
4,634 |
|
|
|
3,978 |
|
Rentals and landing fees |
|
|
2,429 |
|
|
|
2,441 |
|
|
|
2,343 |
|
Depreciation and amortization |
|
|
1,975 |
|
|
|
1,946 |
|
|
|
1,742 |
|
Fuel |
|
|
3,811 |
|
|
|
4,409 |
|
|
|
3,428 |
|
Maintenance and repairs |
|
|
1,898 |
|
|
|
2,068 |
|
|
|
1,952 |
|
Impairment and other charges |
|
|
1,204 |
|
|
|
882 |
|
|
|
|
|
Other |
|
|
5,132 |
|
|
|
5,296 |
|
|
|
4,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,750 |
|
|
|
35,878 |
|
|
|
31,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
747 |
|
|
|
2,075 |
|
|
|
3,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(85 |
) |
|
|
(98 |
) |
|
|
(136 |
) |
Interest income |
|
|
26 |
|
|
|
44 |
|
|
|
83 |
|
Other, net |
|
|
(11 |
) |
|
|
(5 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(70 |
) |
|
|
(59 |
) |
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES |
|
|
677 |
|
|
|
2,016 |
|
|
|
3,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES |
|
|
579 |
|
|
|
891 |
|
|
|
1,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
98 |
|
|
$ |
1,125 |
|
|
$ |
2,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER COMMON SHARE |
|
$ |
0.31 |
|
|
$ |
3.64 |
|
|
$ |
6.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER COMMON SHARE |
|
$ |
0.31 |
|
|
$ |
3.60 |
|
|
$ |
6.48 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
92
FEDEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
98 |
|
|
$ |
1,125 |
|
|
$ |
2,016 |
|
Adjustments to reconcile net income
to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,975 |
|
|
|
1,946 |
|
|
|
1,742 |
|
Provision for uncollectible accounts |
|
|
181 |
|
|
|
134 |
|
|
|
106 |
|
Deferred income taxes and other noncash items |
|
|
299 |
|
|
|
124 |
|
|
|
37 |
|
Noncash impairment charges |
|
|
1,103 |
|
|
|
882 |
|
|
|
|
|
Stock-based compensation |
|
|
99 |
|
|
|
101 |
|
|
|
103 |
|
Changes in operating assets and liabilities, net of the
effects of businesses acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
762 |
|
|
|
(447 |
) |
|
|
(323 |
) |
Other assets |
|
|
(196 |
) |
|
|
(237 |
) |
|
|
(85 |
) |
Pension assets and liabilities, net |
|
|
(913 |
) |
|
|
(273 |
) |
|
|
(69 |
) |
Accounts payable and other liabilities |
|
|
(628 |
) |
|
|
190 |
|
|
|
66 |
|
Other, net |
|
|
(27 |
) |
|
|
(80 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
2,753 |
|
|
|
3,465 |
|
|
|
3,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(2,459 |
) |
|
|
(2,947 |
) |
|
|
(2,882 |
) |
Business acquisitions, net of cash acquired |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(1,310 |
) |
Proceeds from asset dispositions and other |
|
|
79 |
|
|
|
54 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(2,383 |
) |
|
|
(2,897 |
) |
|
|
(4,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt |
|
|
(501 |
) |
|
|
(639 |
) |
|
|
(906 |
) |
Proceeds from debt issuances |
|
|
1,000 |
|
|
|
|
|
|
|
1,054 |
|
Proceeds from stock issuances |
|
|
41 |
|
|
|
108 |
|
|
|
115 |
|
Excess tax benefits on the exercise of stock options |
|
|
4 |
|
|
|
38 |
|
|
|
45 |
|
Dividends paid |
|
|
(137 |
) |
|
|
(124 |
) |
|
|
(110 |
) |
Other, net |
|
|
(7 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
400 |
|
|
|
(617 |
) |
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(17 |
) |
|
|
19 |
|
|
|
6 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
753 |
|
|
|
(30 |
) |
|
|
(368 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,539 |
|
|
|
1,569 |
|
|
|
1,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,292 |
|
|
$ |
1,539 |
|
|
$ |
1,569 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
93
FEDEX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
INVESTMENT AND COMPREHENSIVE INCOME
(IN MILLIONS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
Balance at May 31, 2006 |
|
$ |
31 |
|
|
$ |
1,438 |
|
|
$ |
10,068 |
|
|
$ |
(24 |
) |
|
$ |
(2 |
) |
|
$ |
11,511 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
2,016 |
|
|
|
|
|
|
|
|
|
|
|
2,016 |
|
Foreign currency translation adjustment,
net of tax of $8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
Minimum pension liability adjustment,
net of tax of $24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plans adjustment in connection
with the adoption of SFAS 158, net of
tax of $582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(982 |
) |
|
|
|
|
|
|
(982 |
) |
Cash dividends declared ($0.37 per share) |
|
|
|
|
|
|
|
|
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
(114 |
) |
Employee incentive plans and other
(2,508,850 shares issued) |
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2007 |
|
|
31 |
|
|
|
1,689 |
|
|
|
11,970 |
|
|
|
(1,030 |
) |
|
|
(4 |
) |
|
|
12,656 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
1,125 |
|
|
|
|
|
|
|
|
|
|
|
1,125 |
|
Foreign currency translation adjustment,
net of tax of $15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
99 |
|
Retirement plans adjustment,
net of tax of $296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
506 |
|
|
|
|
|
|
|
506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.30 per share) |
|
|
|
|
|
|
|
|
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
(93 |
) |
Employee incentive plans and other
(2,556,318 shares issued) |
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2008 |
|
|
31 |
|
|
|
1,922 |
|
|
|
13,002 |
|
|
|
(425 |
) |
|
|
(4 |
) |
|
|
14,526 |
|
Adjustment to opening balances for SFAS 158
measurement date transition, net of
deferred tax benefit of $26 and deferred
tax expense of $220, respectively |
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
369 |
|
|
|
|
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 1, 2008 |
|
|
31 |
|
|
|
1,922 |
|
|
|
12,958 |
|
|
|
(56 |
) |
|
|
(4 |
) |
|
|
14,851 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
98 |
|
Foreign currency translation adjustment,
net of tax of $28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112 |
) |
|
|
|
|
|
|
(112 |
) |
Retirement plans adjustment,
net of tax of $718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,205 |
) |
|
|
|
|
|
|
(1,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.44 per share) |
|
|
|
|
|
|
|
|
|
|
(137 |
) |
|
|
|
|
|
|
|
|
|
|
(137 |
) |
Employee incentive plans and other
(995,271 shares issued) |
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2009 |
|
$ |
31 |
|
|
$ |
2,053 |
|
|
$ |
12,919 |
|
|
$ |
(1,373 |
) |
|
$ |
(4 |
) |
|
$ |
13,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
94
FEDEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. FedEx Corporation (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. Our primary operating companies
include Federal Express Corporation (FedEx Express), the worlds largest express transportation
company; FedEx Ground Package System, Inc. (FedEx Ground), a leading provider of small-package
ground delivery services; and FedEx Freight Corporation, a leading U.S. provider of
less-than-truckload (LTL) freight services. Our FedEx Services segment provides customer-facing
sales, marketing, information technology and customer service support to 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). These companies represent our major service lines and form the core of our reportable
segments.
FISCAL YEARS. Except as otherwise specified, references to years indicate our fiscal year ended
May 31, 2009 or ended May 31 of the year referenced.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of FedEx
and its subsidiaries, substantially all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.
RECLASSIFICATIONS. Certain reclassifications have been made to prior year financial statements to
conform to the current year presentation. For example, at FedEx Ground certain fuel supplement
costs related to our independent contractors were reclassified from fuel expense to purchased
transportation to conform to the current period presentation.
REVENUE RECOGNITION. We recognize revenue upon delivery of shipments for our transportation
businesses and upon completion of services for our business services, logistics and trade services
businesses. Certain of our transportation services are provided with the use of independent
contractors. FedEx is the principal to the transaction in most instances and in those cases
revenue from these transactions is recognized on a gross basis. Costs associated with independent
contractor settlements are recognized as incurred and included in the caption Purchased
transportation in the accompanying consolidated statements of income. For shipments in transit,
revenue is recorded based on the percentage of service completed at the balance sheet date.
Estimates for future billing adjustments to revenue and accounts receivable are recognized at the
time of shipment for money-back service guarantees and billing corrections. Delivery costs are
accrued as incurred.
Our contract logistics, global trade services and certain transportation businesses engage in some
transactions wherein they act as agents. Revenue from these transactions is recorded on a net
basis. Net revenue includes billings to customers less third-party charges, including
transportation or handling costs, fees, commissions, and taxes and duties. These amounts are not
material.
Certain of our revenue-producing transactions are subject to taxes assessed by governmental
authorities, such as sales tax. We present these revenues net of tax.
CREDIT RISK. We routinely grant credit to many of our customers for transportation and business
services without collateral. The risk of credit loss in our trade receivables is substantially
mitigated by our credit evaluation process, short collection terms and sales to a large number of
customers, as well as the low revenue per transaction for most of our services. Allowances for
potential credit losses are
determined based on historical experience and current evaluation of the composition of accounts
receivable. Historically, credit losses have been within managements expectations.
95
ADVERTISING. Advertising and promotion costs are expensed as incurred and are classified in other
operating expenses. Advertising and promotion expenses were $379 million in 2009, $445 million in
2008 and $406 million in 2007.
CASH EQUIVALENTS. Cash in excess of current operating requirements is invested in short-term,
interest-bearing instruments with maturities of three months or less at the date of purchase and is
stated at cost, which approximates market value.
SPARE PARTS, SUPPLIES AND FUEL. Spare parts (principally aircraft related) are reported at
weighted-average cost. Supplies and fuel are reported at average cost, which approximates actual
cost on a first-in, first-out basis. Allowances for obsolescence are provided for spare parts
expected to be on hand at the date the aircraft are retired from service. These allowances are
provided over the estimated useful life of the related aircraft and engines. Additionally,
allowances for obsolescence are provided for spare parts currently identified as excess or
obsolete. These allowances are based on management estimates, which are subject to change.
PROPERTY AND EQUIPMENT. Expenditures for major additions, improvements, flight equipment
modifications and certain equipment overhaul costs are capitalized when such costs are determined
to extend the useful life of the asset or are part of the cost of acquiring the asset. Maintenance
and repairs are charged to expense as incurred, except for certain aircraft-related major
maintenance costs on one of our aircraft fleet types, which are capitalized as incurred and
amortized over their estimated service lives. We capitalize certain direct internal and external
costs associated with the development of internal-use software. Gains and losses on sales of
property used in operations are classified within operating expenses.
For financial reporting purposes, we record depreciation and amortization of property and equipment
on a straight-line basis over the assets service life or related lease term, if shorter. For
income tax purposes, depreciation is computed using accelerated methods when applicable. The
depreciable lives and net book value of our property and equipment are as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value at May 31, |
|
|
|
Range |
|
|
2009 |
|
|
2008 |
|
Wide-body aircraft and related equipment |
|
|
15 to 25 years |
|
|
$ |
5,139 |
|
|
$ |
5,550 |
|
Narrow-body and feeder aircraft and related equipment |
|
|
5 to 15 years |
|
|
|
709 |
|
|
|
452 |
|
Package handling and ground support equipment |
|
|
2 to 30 years |
|
|
|
1,928 |
|
|
|
1,897 |
|
Computer and electronic equipment |
|
|
2 to 10 years |
|
|
|
782 |
|
|
|
943 |
|
Vehicles |
|
|
3 to 15 years |
|
|
|
1,107 |
|
|
|
1,007 |
|
Facilities and other |
|
|
2 to 40 years |
|
|
|
3,752 |
|
|
|
3,629 |
|
Substantially all property and equipment have no material residual values. The majority of
aircraft costs are depreciated on a straight-line basis over 15 to 18 years. We periodically
evaluate the estimated service lives and residual values used to depreciate our property and
equipment. This evaluation may result in changes in the estimated lives and residual values. Such
changes did not materially affect depreciation expense in any period presented. Depreciation
expense, excluding gains and losses on sales of property and equipment used in operations, was $1.8
billion in 2009, $1.8 billion in 2008 and $1.7
billion in 2007. Depreciation and amortization expense includes amortization of assets under
capital lease.
96
CAPITALIZED INTEREST. Interest on funds used to finance the acquisition and modification of
aircraft, including purchase deposits, construction of certain facilities, and development of
certain software up to the date the asset is ready for its intended use is capitalized and included
in the cost of the asset if the asset is actively under construction. Capitalized interest was $71
million in 2009, $50 million in 2008 and $34 million in 2007.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets are reviewed for impairment when circumstances
indicate the carrying value of an asset may not be recoverable. For assets that are to be held and
used, an impairment is recognized when the estimated undiscounted cash flows associated with the
asset or group of assets is less than their carrying value. If impairment exists, an adjustment is
made to write the asset down to its fair value, and a loss is recorded as the difference between
the carrying value and fair value. Fair values are determined based on quoted market values,
discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of
are carried at the lower of carrying value or estimated net realizable value. We operate
integrated transportation networks, and accordingly, cash flows for most of our operating assets
are assessed at a network level, not at an individual asset level, for our analysis of impairment.
During the fourth quarter of 2009, we recorded $202 million in property and equipment impairment
charges. These charges are primarily related to our April 2009 decision to permanently remove from
service 10 Airbus A310-200 aircraft and four Boeing MD10-10 aircraft owned by the company, along
with certain excess aircraft engines at FedEx Express. This decision resulted in an impairment charge of $191
million, which was recorded in the fourth quarter of 2009. A limited amount of our total aircraft
capacity remains temporarily grounded because of network overcapacity due to the current economic
environment. There were no material property and equipment impairment charges recognized in 2008
or 2007.
GOODWILL. Goodwill is recognized for the excess of the purchase price over the fair value of
tangible and identifiable intangible net assets of businesses acquired. Several factors give rise
to goodwill in our acquisitions, such as the expected benefit from synergies of the combination and
the existing workforce of the acquired entity. Goodwill is reviewed at least annually for
impairment by comparing the fair value of each reporting unit with its carrying value (including
attributable goodwill). Fair value for our reporting units is determined using an income or market
approach incorporating market participant considerations and managements assumptions on revenue
growth rates, operating margins, discount rates and expected capital expenditures. Fair value
determinations may include both internal and third-party valuations. Unless circumstances
otherwise dictate, we perform our annual impairment testing in the fourth quarter.
INTANGIBLE ASSETS. Intangible assets include customer relationships, trade names, technology
assets and contract-based intangibles acquired in business combinations. Intangible assets are
amortized over periods ranging from 2 to 15 years, either on a straight-line basis or an
accelerated basis depending upon the pattern in which the economic benefits are realized.
PENSION AND POSTRETIREMENT HEALTHCARE PLANS. On May 31, 2007, we adopted Statement of Financial
Accounting Standards (SFAS) 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans. SFAS 158 requires recognition in the balance sheet of the funded status of
defined benefit pension and other postretirement benefit plans, and the recognition in other
comprehensive income (OCI) of unrecognized gains or losses and prior service costs or credits.
The adoption of SFAS 158 resulted in a $982 million charge to shareholders equity at May 31, 2007
through accumulated other comprehensive income (AOCI).
97
Additionally, SFAS 158 requires the measurement date for plan assets and liabilities to coincide
with the plan sponsors year end. On June 1, 2008, we made our transition election for the
measurement date provision of SFAS 158 using the two-measurement approach. Under this approach, we
completed two actuarial measurements, one at February 29, 2008 and the other at June 1, 2008. This
approach required us to record the net periodic benefit cost for the transition period from March
1, 2008 through May 31, 2008 as an adjustment to beginning retained earnings ($44 million, net of
tax) and actuarial gains and losses for the period (a gain of $372 million, net of tax) as an
adjustment to the opening balance of AOCI. These adjustments increased the amount recorded for our
pension assets by $528 million. Our actuarial gains resulted primarily from a 19-basis-point
increase in the discount rate for our primary pension plan and an increase in plan assets at June
1, 2008.
Our defined benefit plans are measured using actuarial techniques that reflect managements
assumptions for discount rate, expected long-term investment returns on plan assets, salary
increases, expected retirement, mortality, employee turnover and future increases in healthcare
costs. We determine the discount rate (which is required to be the rate at which the projected
benefit obligation could be effectively settled as of the measurement date) with the assistance of
actuaries, who calculate the yield on a theoretical portfolio of high-grade corporate bonds (rated
Aa or better) with cash flows that generally match our expected benefit payments in future years.
A calculated-value method is employed for purposes of determining the expected return on the plan
asset component of net periodic pension cost for our qualified U.S. pension plans. We generally do
not fund defined benefit plans when such funding provides no current tax deduction or when such
funding would be deemed current compensation to plan participants.
At May 31, 2009, in accordance with the provisions of SFAS 158, we recorded a decrease to equity
through OCI of $1.2 billion (net of tax) based primarily on mark-to-market
adjustments related to unrealized losses in our pension plan assets during 2009.
INCOME TAXES. Deferred income taxes are provided for the tax effect of temporary differences
between the tax basis of assets and liabilities and their reported amounts in the financial
statements. The liability method is used to account for income taxes, which requires deferred
taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid.
On June 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income Taxes. The cumulative effect of adoption was
immaterial. We follow FIN 48 guidance to record uncertainties and make judgments in the
application of complex tax regulations.
We recognize liabilities for uncertain income tax positions based on a two-step process. The first
step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step requires
us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. It is inherently difficult and subjective to estimate such
amounts, as we must determine the probability of various possible outcomes. We reevaluate these
uncertain tax positions on a quarterly basis or when new information becomes available to
management. These reevaluations are based on factors including, but not limited to, changes in
facts or circumstances, changes in tax law, successfully settled issues under audit, and new audit
activity. Such a change in recognition or measurement could result in the recognition of a tax
benefit or an increase to the tax accrual.
We classify interest related to income tax liabilities as interest expense, and if applicable,
penalties are recognized as a component of income tax expense. The income tax liabilities and
accrued interest and penalties that are due within one year of the balance sheet date are presented
as current liabilities. The remaining portion of our income tax liabilities and accrued interest
and penalties are presented as noncurrent liabilities because payment of cash is not anticipated
within one year of the balance sheet date.
These noncurrent income tax liabilities are recorded in the caption Other liabilities in our
consolidated balance sheets.
98
SELF-INSURANCE ACCRUALS. We are primarily self-insured for workers compensation claims, vehicle
accidents and general liabilities, benefits paid under employee healthcare programs and long-term
disability benefits. Accruals are primarily based on the actuarially estimated, undiscounted cost
of claims, which includes incurred-but-not-reported claims. Current workers compensation claims,
vehicle and general liability, employee healthcare claims and long-term disability are included in
accrued expenses. We self-insure up to certain limits that vary by operating company and type of
risk. Periodically, we evaluate the level of insurance coverage and adjust insurance levels based
on risk tolerance and premium expense.
LEASES. We lease certain aircraft, facilities, equipment and vehicles under capital and operating
leases. The commencement date of all leases is the earlier of the date we become legally obligated
to make rent payments or the date we may exercise control over the use of the property. In
addition to minimum rental payments, certain leases provide for contingent rentals based on
equipment usage principally related to aircraft leases at FedEx Express and copier usage at FedEx
Office. Rent expense associated with contingent rentals is recorded as incurred. Certain of our
leases contain fluctuating or escalating payments and rent holiday periods. The related rent
expense is recorded on a straight-line basis over the lease term. The cumulative excess of rent
payments over rent expense is accounted for as a deferred lease asset and recorded in Intangible
and 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 assets useful life or the lease term.
DEFERRED GAINS. Gains on the sale and leaseback of aircraft and other property and equipment are
deferred and amortized ratably over the life of the lease as a reduction of rent expense.
Substantially all of these deferred gains are related to aircraft transactions.
FOREIGN CURRENCY TRANSLATION. Translation gains and losses of foreign operations that use local
currencies as the functional currency are accumulated and reported, net of applicable deferred
income taxes, as a component of accumulated other comprehensive loss within common stockholders
investment. Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the local currency are included in the caption
Other, net in the accompanying consolidated statements of income and were immaterial for each
period presented. Cumulative net foreign currency translation gains in accumulated other
comprehensive loss were $56 million at May 31, 2009, $167 million at May 31, 2008 and $69 million
at May 31, 2007.
EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of FedEx Express, who represent a
small percentage of our total employees, are employed under a collective bargaining agreement.
During the second quarter of 2007, the pilots ratified a new four-year labor contract that included
signing bonuses and other upfront compensation of $143 million, as well as pay increases and other
benefit enhancements. These costs were partially mitigated by reductions in the variable incentive
compensation of our other employees. The effect of this new agreement on second quarter 2007 net
income was $78 million net of tax, or $0.25 per diluted share.
STOCK-BASED COMPENSATION. We recognize compensation expense for stock-based awards under the
provisions of SFAS 123R, Share-Based Payment, and related interpretations. SFAS 123R requires
recognition of compensation expense for stock-based awards using a fair value method. We adopted
SFAS 123R in 2007 using the modified prospective method, which resulted in prospective recognition
of compensation expense for all outstanding unvested share-based payments based on the fair value
on the original grant date.
DIVIDENDS DECLARED PER COMMON SHARE. On June 8, 2009, our Board of Directors declared a dividend
of $0.11 per share of common stock. The dividend was paid on July 1, 2009 to stockholders of
record as of the close of business on June 18, 2009. Each quarterly dividend payment is subject to
review and approval by our Board of Directors, and we evaluate our dividend payment amount on an
annual basis at the end of each fiscal year.
99
USE OF ESTIMATES. The preparation of our consolidated financial statements requires the use of
estimates and assumptions that affect the reported amounts of assets and liabilities, the reported
amounts of revenues and expenses and the disclosure of contingent liabilities. Management makes
its best estimate of the ultimate outcome for these items based on historical trends and other
information available when the financial statements are prepared. Changes in estimates are
recognized in accordance with the accounting rules for the estimate, which is typically in the
period when new information becomes available to management. Areas where the nature of the
estimate makes it reasonably possible that actual results could materially differ from amounts
estimated include: self-insurance accruals; retirement plan obligations; long-term incentive
accruals; tax liabilities; accounts receivable allowances; obsolescence of spare parts; contingent liabilities; loss contingencies,
such as litigation and other claims; and impairment assessments on long-lived assets (including
goodwill).
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
New accounting rules and disclosure requirements can significantly impact our reported results and
the comparability of our financial statements. We believe the following new accounting
pronouncements, in addition to FIN 48 and SFAS 158, are relevant to the readers of our financial
statements.
On June 1, 2008, we adopted SFAS 157, Fair Value Measurements, which provides a common definition
of fair value, establishes a uniform framework for measuring fair value and requires expanded
disclosures about fair value measurements. There is a one-year deferral of the adoption of the
standard as it relates to nonfinancial assets and liabilities. Therefore, the adoption of SFAS
157 had no impact on our financial statements at June 1, 2008.
In December 2007, the FASB issued SFAS 141R, Business
Combinations, and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of Accounting Research Bulletin (ARB) No. 51. These new standards significantly
change the accounting for and reporting of business combination transactions, including
noncontrolling interests (previously referred to as minority interests). For example, these
standards require the acquiring entity to recognize the full fair value of assets acquired and
liabilities assumed in the transaction and require the expensing of most transaction and
restructuring costs. Both standards are effective for us beginning
June 1, 2009 (fiscal 2010) and are applicable only to
transactions occurring after the effective date.
In December 2008, the FASB issued FASB Staff Position (FSP) 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets. This FSP provides guidance on the objectives an
employer should consider when providing detailed disclosures about assets of a defined benefit
pension plan or other postretirement plan. These disclosure objectives include investment policies
and strategies, categories of plan assets, significant concentrations of risk and the inputs and
valuation techniques used to measure the fair value of plan assets. This FSP will be effective for
our fiscal year ending May 31, 2010.
In April 2009, the FASB issued FSP No. 107-1 and Accounting Principles Board Opinion (APB) No.
28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP and APB amends
SFAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the
fair value of financial instruments for interim reporting periods in addition to annual reporting
periods. This FSP and APB will be effective for our first quarter of fiscal year 2010.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards
of accounting for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This standard will require us to
disclose the date through which we have evaluated subsequent events and the basis for that date.
This standard will be effective for our first quarter of fiscal year 2010.
100
NOTE 3: BUSINESS COMBINATIONS
During 2007, we made the following acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price |
|
Segment |
|
Business Acquired |
|
Rebranded |
|
Date Acquired |
|
(in millions) |
|
FedEx Freight |
|
Watkins Motor Lines |
|
FedEx National LTL |
|
September 3, 2006 |
|
$ |
787 |
|
FedEx Express |
|
ANC Holdings Ltd. |
|
FedEx U.K. |
|
December 16, 2006 |
|
|
241 |
|
FedEx Express |
|
Tianjin Datian W. Group Co., Ltd.
(DTW Group) |
|
N/A |
|
March 1, 2007 |
|
|
427 |
|
These acquisitions expanded our portfolio of services to include long-haul LTL freight
services and domestic express services in the United Kingdom and China. These acquisitions
were not material to our results of operations or financial condition. The portion of the purchase
price allocated to goodwill and other identified intangible assets for the FedEx National LTL,
FedEx U.K. and DTW Group acquisitions will be deductible for U.S. tax purposes over 15 years.
During 2009, 2008 and 2007, we also made other immaterial acquisitions that are not presented in
the table above.
Pro forma results of these acquisitions, individually or in the aggregate, would not differ
materially from reported results in any of the periods presented. The purchase prices were
allocated as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx |
|
|
|
|
|
|
|
|
|
National LTL |
|
|
FedEx U.K. |
|
|
DTW Group |
|
Current assets |
|
$ |
121 |
|
|
$ |
68 |
|
|
$ |
54 |
|
Property and equipment |
|
|
525 |
|
|
|
20 |
|
|
|
16 |
|
Intangible assets |
|
|
77 |
|
|
|
49 |
|
|
|
17 |
|
Goodwill |
|
|
121 |
|
|
|
168 |
|
|
|
348 |
|
Other assets |
|
|
3 |
|
|
|
2 |
|
|
|
10 |
|
Current liabilities |
|
|
(60 |
) |
|
|
(56 |
) |
|
|
(18 |
) |
Long-term liabilities |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
787 |
|
|
$ |
241 |
|
|
$ |
427 |
|
|
|
|
|
|
|
|
|
|
|
The intangible assets acquired in the FedEx National LTL and FedEx U.K. acquisitions consist
primarily of customer-related intangible assets, which will be amortized on an accelerated basis
over their average estimated useful lives of seven years for FedEx National LTL and up to 12 years
for FedEx U.K., with the majority of the amortization recognized during the first four years. The
intangible assets acquired in the DTW Group acquisition relate to the reacquired rights for the use
of certain FedEx technology and service marks. These intangible assets will be amortized over
their estimated useful lives of approximately two years.
We paid the purchase price for these acquisitions from available cash balances, which included the
net proceeds from our $1 billion senior unsecured debt offering completed during 2007.
101
NOTE 4: GOODWILL AND INTANGIBLES
GOODWILL. The carrying amount of goodwill attributable to each reportable operating segment and
changes therein follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase |
|
|
|
|
|
|
|
|
|
|
Purchase |
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
Adjustments |
|
|
|
|
|
|
Impairment |
|
|
Adjustments |
|
|
|
|
|
|
May 31, 2007 |
|
|
Charge |
|
|
and Other (1) |
|
|
May 31, 2008 |
|
|
Charge |
|
|
and Other (1) |
|
|
May 31, 2009 |
|
|
FedEx Express segment |
|
$ |
1,088 |
|
|
$ |
|
|
|
$ |
35 |
|
|
$ |
1,123 |
|
|
$ |
|
|
|
$ |
(33 |
) |
|
$ |
1,090 |
|
FedEx Ground segment |
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
90 |
|
FedEx Freight segment |
|
|
777 |
|
|
|
|
|
|
|
|
|
|
|
777 |
|
|
|
(90 |
) |
|
|
|
|
|
|
687 |
|
FedEx Services segment |
|
|
1,542 |
|
|
|
(367 |
) |
|
|
|
|
|
|
1,175 |
|
|
|
(810 |
) |
|
|
(3 |
) |
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,497 |
|
|
$ |
(367 |
) |
|
$ |
35 |
|
|
$ |
3,165 |
|
|
$ |
(900 |
) |
|
$ |
(36 |
) |
|
$ |
2,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily currency translation adjustments. |
In accordance with SFAS 142, Goodwill and Other Intangible Assets, a two-step impairment test is
performed on goodwill. In the first step, a comparison is made of the estimated fair value of a
reporting unit to its carrying value. If the carrying value of a reporting unit exceeds the
estimated fair value, the second step of the impairment test is required. In the second step, an
estimate of the current fair values of all assets and liabilities is
made to determine the
amount of implied goodwill and consequently the amount of any goodwill impairment.
In connection with our annual impairment testing of goodwill and other intangible assets conducted
in the fourth quarter of 2009 in accordance with SFAS 142, we recorded a charge of $900 million for
impairment of the value of goodwill. This charge included an $810 million charge related to
reduction of the value of the goodwill recorded as a result of the February 2004 acquisition of
Kinkos, Inc. (now known as FedEx Office) and a $90 million charge related to reduction of the
value of the goodwill recorded as a result of the September 2006 acquisition of the U.S. and
Canadian less-than-truckload freight operations of Watkins Motor Lines and certain affiliates (now
known as FedEx National LTL).
FedEx Office Goodwill
During 2009, the U.S. recession had a significant negative impact on demand for FedEx Office
services, resulting in lower revenues and continued operating losses at this reporting unit. In
response to these conditions, FedEx Office initiated an internal reorganization
designed to improve revenue-generating capabilities and reduce costs. Several actions were taken
during 2009 to reduce FedEx Offices cost structure and position it for long-term growth under
better economic conditions. These actions included headcount reductions, domestic store closures
and the termination of operations in some international locations. In addition, we substantially
curtailed future network expansion in light of current economic conditions.
The valuation methodology to estimate the fair value of the FedEx Office reporting unit was based
primarily on an income approach. We believe use of the income approach is an appropriate
methodology for the FedEx Office reporting unit because it is the most direct method of measuring
enterprise value for this reporting unit. Because of the nature of the service offerings at FedEx
Office, it exhibits characteristics of a retailer, a business services provider and a printing
provider. Accordingly, it is difficult to find directly comparable companies for use under the
market approach. However, market approach information was
incorporated into our test to ensure the reasonableness of our
conclusions on estimated value under the income approach. Key assumptions considered were the
revenue, operating income and capital expenditure forecasts, the assessed growth rate in the
periods beyond the detailed forecast period, and the discount rate.
102
For 2009, we used a discount rate of 12.0%, versus a discount rate of 12.5% in 2008. Our discount
rate of 12.0% for 2009 represents our estimated weighted-average cost of capital (WACC) of the
FedEx Office reporting unit adjusted for company-specific risk premium to account for the estimated
uncertainty associated with our future cash flows. The development of the WACC used in our
estimate of fair value considered the following key factors:
|
|
|
current market conditions for the equity-risk premium and risk-free interest rate; |
|
|
|
|
benchmark capital structures for guideline companies with characteristics similar to the
FedEx Office reporting unit; |
|
|
|
|
the size and industry of the FedEx Office reporting unit; and |
|
|
|
|
risks related to the forecast of future revenues and profitability of the FedEx Office
reporting unit. |
The discount rate incorporates current market participant considerations, as indicated above, and
decreased year over year, as increases in the WACC (due to general economic conditions) were offset
by reductions in the company-specific risk premium. The company-specific risk premium was reduced
primarily due to lower long-term growth and profitability assumptions associated with the 2009
forecast. The WACC used in the estimate of fair value in future periods may be impacted by changes
in market conditions (including those of market participants), as well as the specific future
performance of the FedEx Office reporting unit and are subject to change, based on changes in
specific facts and circumstances.
Upon completion of the impairment test, we concluded that the recorded goodwill was impaired and
recorded an impairment charge of $810 million during the fourth quarter of 2009. The remaining
goodwill attributable to the FedEx Office reporting unit is $362 million as of May 31, 2009. The
goodwill impairment charge is included in operating expenses in the accompanying consolidated
statements of income. This charge is included in the results of the FedEx Services segment and was
not allocated to our transportation segments, as the charge was unrelated to the core performance
of those businesses.
FedEx National LTL Goodwill
During 2009, the U.S. recession had a significant negative impact on the LTL industry, resulting in
steep volume declines, intense yield pressure and the exit of numerous small to medium competitors
from the market. The outlook for the LTL market is uncertain due to the recession and the negative
impact of aggressive pricing resulting from continued excess capacity in the market. The
results for the FedEx National LTL reporting unit in 2009 reflect the impact of the recession, with
reduced revenues and increased operating losses.
The valuation methodology to estimate the fair value of the FedEx National LTL reporting unit was
based primarily on a market approach (revenue multiples and/or earnings multiples) that considered
market participant assumptions. We believe use of the market approach for FedEx National LTL is
appropriate due to the forecast risk associated with the projections used under the income
approach, particularly in the outer years of the forecast period (as described below). Further,
there are directly comparable companies to the FedEx National LTL reporting unit for consideration
under the market approach. The income approach also was incorporated into the impairment test to
ensure the reasonableness of our conclusions under the market approach. Key assumptions considered
were the revenue, operating income and capital expenditure forecasts and market participant
assumptions on multiples related to revenue and earnings forecasts.
The forecast used in the valuation assumes operating losses will continue in the
near-term due to the current economic conditions and excess capacity in the industry. However, the
long-term outlook assumes that
this excess capacity exits the market. This assumption drives significant volume and yield
improvement into the FedEx National LTL reporting unit in future periods. The decision to include
an assumption related to the elimination of excess capacity from the market and the associated cash
flows is significant to the valuation and reflects managements outlook on the industry for future
periods as of the valuation date.
103
We recorded an impairment charge of $90 million during the fourth quarter of 2009. This charge
represented substantially all of the goodwill resulting from this acquisition. The goodwill
impairment charge is included in operating expenses in the accompanying consolidated statements of
income and is included in the results of the FedEx Freight segment.
Other Reporting Units Goodwill
Our remaining reporting units with significant recorded goodwill (excluding FedEx Office and FedEx
National LTL) include our FedEx Express reporting unit and our FedEx Freight reporting unit. We
evaluated our remaining reporting units during the fourth quarter of 2009, and while the estimated
fair value of these reporting units declined from 2008, the estimated fair value of each of our
other reporting units significantly exceeded their carrying values in 2009. As a result, no
additional testing or impairment charges were necessary.
FedEx Office Goodwill 2008
During 2008, several developments and strategic decisions occurred at FedEx Office, including:
|
|
|
FedEx Office was reorganized as a part of the FedEx Services segment. FedEx Office
provides retail access to our customers for our package transportation businesses and an
array of document and business services. Under FedEx Services, FedEx Office benefits from
the full range of resources and expertise of FedEx Services to continue to enhance the
customer experience, provide greater, more convenient access to the portfolio of services
at FedEx, and increase revenues through our retail network. |
|
|
|
Senior management at FedEx Office was reorganized with several positions terminated and
numerous reporting realignments, including naming a new president and CEO. |
|
|
|
We determined that we would minimize the use of the Kinkos trade name over the next
several years. |
|
|
|
We began implementing revenue growth and cost management plans to improve financial
performance. |
|
|
|
We began pursuing a more disciplined approach to the long-term expansion of the retail
network, reducing the overall level of expansion. |
In connection with our annual impairment testing in the fourth quarter of 2008, the valuation
methodology to estimate the fair value of the FedEx Office reporting unit was based primarily on an
income approach that considered market participant assumptions to estimate fair value. Key
assumptions considered were the revenue and operating income forecast, the assessed growth rate in
the periods beyond the detailed forecast period, and the discount rate.
In performing our annual impairment test, the most significant assumption used to estimate the fair
value of the FedEx Office reporting unit was the discount rate. We used a discount rate of 12.5%,
representing the estimated WACC of the FedEx Office reporting unit. The development of the WACC
used in our estimate of fair value considered the following key factors:
|
|
|
benchmark capital structures for guideline companies with characteristics similar to the
FedEx Office reporting unit; |
|
|
|
current market conditions for the risk free interest rate; |
|
|
|
the size and industry of the FedEx Office reporting unit; and |
|
|
|
risks related to the forecast of future revenues and profitability of the FedEx Office
reporting unit. |
104
Upon completion of the impairment test, we concluded that the recorded goodwill was impaired and
recorded an impairment charge of $367 million during the fourth quarter of 2008. The goodwill
impairment charge is included in 2008 operating expenses in the accompanying consolidated
statements of income. This charge was included in the results of the FedEx Services segment and
was not allocated to our transportation segments, as the charge was unrelated to the core
performance of those businesses.
INTANGIBLE ASSETS. The components of our identifiable intangible assets were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
207 |
|
|
$ |
(133 |
) |
|
$ |
74 |
|
|
$ |
205 |
|
|
$ |
(95 |
) |
|
$ |
110 |
|
Contract related |
|
|
79 |
|
|
|
(72 |
) |
|
|
7 |
|
|
|
79 |
|
|
|
(67 |
) |
|
|
12 |
|
Technology related and other |
|
|
74 |
|
|
|
(62 |
) |
|
|
12 |
|
|
|
74 |
|
|
|
(51 |
) |
|
|
23 |
|
Kinkos trade name |
|
|
52 |
|
|
|
(27 |
) |
|
|
25 |
|
|
|
52 |
|
|
|
(8 |
) |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
412 |
|
|
$ |
(294 |
) |
|
$ |
118 |
|
|
$ |
410 |
|
|
$ |
(221 |
) |
|
$ |
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to 2008, the intangible asset associated with the Kinkos trade name was not amortized
because it had an indefinite remaining useful life and our intent was to use it indefinitely.
During the fourth quarter of 2008, we made the decision to change the name of FedEx Kinkos to
FedEx Office and rebrand our retail locations over the next several years. We believe the FedEx
Office name better describes the wide range of services available at our retail centers and takes
full advantage of the FedEx brand. This change converted this asset to a finite life asset and
resulted in an impairment charge of $515 million. We estimated the fair value of this intangible
asset based on an income approach using the relief-from-royalty method. This approach is dependent
on a number of factors, including estimates of future growth and trends, royalty rates in the
category of intellectual property, discount rates and other variables. We base our fair value
estimates on assumptions we believe to be reasonable, but which are inherently uncertain.
The $515 million impairment charge recorded during the fourth quarter of 2008 resulted in a
remaining trade name balance of $52 million, which we began amortizing in the fourth quarter of
2008 on an accelerated basis, which will be fully amortized by May 2011. The trade name impairment
charge is included in operating expenses in the accompanying consolidated statements of income.
The charge was included in the results of the FedEx Services segment and was not allocated to our
transportation segments, as the charge was unrelated to the core performance of those businesses.
Amortization expense for intangible assets was $73 million in 2009, $60 million in 2008 and $42
million in 2007. Estimated amortization expense for the next five years is as follows (in
millions):
|
|
|
|
|
2010 |
|
$ |
47 |
|
2011 |
|
|
34 |
|
2012 |
|
|
11 |
|
2013 |
|
|
9 |
|
2014 |
|
|
10 |
|
105
NOTE 5: SELECTED CURRENT LIABILITIES
The components of selected current liability captions were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
|
2009 |
|
|
2008 |
|
Accrued Salaries and Employee Benefits |
|
|
|
|
|
|
|
|
Salaries |
|
$ |
201 |
|
|
$ |
193 |
|
Employee benefits, including
variable compensation |
|
|
143 |
|
|
|
404 |
|
Compensated absences |
|
|
517 |
|
|
|
521 |
|
|
|
|
|
|
|
|
|
|
$ |
861 |
|
|
$ |
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses |
|
|
|
|
|
|
|
|
Self-insurance accruals |
|
$ |
626 |
|
|
$ |
577 |
|
Taxes other than income taxes |
|
|
338 |
|
|
|
339 |
|
Other |
|
|
674 |
|
|
|
637 |
|
|
|
|
|
|
|
|
|
|
$ |
1,638 |
|
|
$ |
1,553 |
|
|
|
|
|
|
|
|
NOTE 6: LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
The components of long-term debt (net of discounts) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
|
2009 |
|
|
2008 |
|
Senior unsecured debt |
|
|
|
|
|
|
|
|
Interest rate of 3.50%, due in 2009 |
|
$ |
|
|
|
$ |
500 |
|
Interest rate of 5.50%, due in 2010 |
|
|
500 |
|
|
|
499 |
|
Interest rate of 7.25%, due in 2011 |
|
|
250 |
|
|
|
250 |
|
Interest rate of 9.65%, due in 2013 |
|
|
300 |
|
|
|
300 |
|
Interest rate of 7.38%, due in 2014 |
|
|
250 |
|
|
|
|
|
Interest rate of 8.00%, due in 2019 |
|
|
750 |
|
|
|
|
|
Interest rate of 7.60%, due in 2098 |
|
|
239 |
|
|
|
239 |
|
|
|
|
|
|
|
|
|
|
|
2,289 |
|
|
|
1,788 |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
294 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
2,583 |
|
|
|
2,008 |
|
Less current portion |
|
|
653 |
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,930 |
|
|
$ |
1,506 |
|
|
|
|
|
|
|
|
106
Scheduled annual principal maturities of debt, exclusive of capital leases, for the five years
subsequent to May 31, 2009, are as follows (in millions):
|
|
|
|
|
2010 |
|
$ |
500 |
|
2011 |
|
|
250 |
|
2012 |
|
|
|
|
2013 |
|
|
300 |
|
2014 |
|
|
250 |
|
Interest on our fixed-rate notes is paid semi-annually. Long-term debt, exclusive of capital
leases, had carrying values of $2.3 billion compared with an estimated fair value
of $2.4 billion at May 31, 2009, and $1.8 billion compared with an estimated fair value of $1.9
billion at May 31, 2008. The estimated fair values were determined based on quoted market prices or
on the current rates offered for debt with similar terms and maturities.
We have a shelf registration statement filed with the Securities and Exchange Commission
that allows us to sell, in one or more future offerings, any combination of our unsecured debt
securities and common stock.
In January 2009, we issued $1 billion of senior unsecured debt under our shelf registration
statement, comprised of fixed-rate notes totaling $250 million due in January 2014 and $750 million
due in January 2019. The fixed-rate notes due in January 2014 bear interest at an annual rate of
7.375%, payable semi-annually, and the fixed-rate notes due in January 2019 bear interest at an
annual rate of 8.00%, payable semi-annually. A portion of the net proceeds were used for repayment
of our $500 million aggregate principal amount of 3.5% notes that matured on April 1, 2009. We
plan to use the remaining net proceeds for working capital and general corporate purposes,
including the repayment upon maturity of all or a portion of our $500 million aggregate principal
amount of 5.50% notes maturing on August 15, 2009.
A $1 billion revolving credit agreement is available to finance our operations and other cash flow
needs and to provide support for the issuance of commercial paper. This revolving credit agreement
expires in July 2010. Our revolving credit agreement contains a financial covenant, which requires
us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of
such debt, plus six times rentals and landing fees) to capital (adjusted debt plus total common
stockholders investment) that does not exceed 0.7 to 1.0. Our leverage ratio of adjusted debt to
capital was 0.6 to 1.0 at May 31, 2009. As of May 31, 2009, no commercial paper was outstanding
and the entire $1 billion under the revolving credit facility was available for future borrowings.
We issue other financial instruments in the normal course of business to support our operations.
Letters of credit at May 31, 2009 were $606 million. The amount unused under our primary $500
million letter of credit facility totaled $45 million at May 31, 2009. This facility
expires in July 2010. These instruments are required under certain U.S. self-insurance programs
and are also used in the normal course of international operations. The underlying liabilities insured
by these instruments are reflected in our balance sheets, where applicable. Therefore, no
additional liability is reflected for the letters of credit.
Our capital lease obligations include leases for aircraft and facilities. Our facility leases
include leases that guarantee the repayment of certain special facility revenue bonds that have
been issued by municipalities primarily to finance the acquisition and construction of various
airport facilities and equipment. These bonds require interest payments at least annually, with
principal payments due at the end of the related lease agreement.
107
NOTE 7: LEASES
We utilize certain aircraft, land, facilities, retail locations and equipment under capital and
operating leases that expire at various dates through 2040. We leased 13% of our
total aircraft fleet under capital or operating leases as of May 31, 2009, compared with 14% as of
May 31, 2008. In addition, supplemental aircraft are leased by us under agreements that provide
for cancellation upon 30 days notice. Our leased facilities include national, regional and
metropolitan sorting facilities, retail facilities and administrative buildings.
The components of property and equipment recorded under capital leases were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
|
2009 |
|
|
2008 |
|
Aircraft |
|
$ |
50 |
|
|
$ |
|
|
Package handling and ground support
equipment |
|
|
165 |
|
|
|
165 |
|
Vehicles |
|
|
17 |
|
|
|
20 |
|
Other, principally facilities |
|
|
147 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
379 |
|
|
|
335 |
|
Less accumulated amortization |
|
|
300 |
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
$ |
79 |
|
|
$ |
45 |
|
|
|
|
|
|
|
|
Rent expense under operating leases was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For years ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rentals |
|
$ |
2,047 |
|
|
$ |
1,990 |
|
|
$ |
1,916 |
|
Contingent rentals (1) |
|
|
181 |
|
|
|
228 |
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,228 |
|
|
$ |
2,218 |
|
|
$ |
2,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contingent rentals are based on equipment usage. |
A summary of future minimum lease payments under capital leases and noncancelable operating leases
with an initial or remaining term in excess of one year at May 31, 2009 is as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
|
|
Capital |
|
|
Aircraft and Related |
|
|
Facilities and |
|
|
Total Operating |
|
|
|
Leases |
|
|
Equipment |
|
|
Other |
|
|
Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
164 |
|
|
$ |
512 |
|
|
$ |
1,247 |
|
|
$ |
1,759 |
|
2011 |
|
|
20 |
|
|
|
526 |
|
|
|
1,086 |
|
|
|
1,612 |
|
2012 |
|
|
8 |
|
|
|
504 |
|
|
|
947 |
|
|
|
1,451 |
|
2013 |
|
|
119 |
|
|
|
499 |
|
|
|
817 |
|
|
|
1,316 |
|
2014 |
|
|
2 |
|
|
|
472 |
|
|
|
694 |
|
|
|
1,166 |
|
Thereafter |
|
|
15 |
|
|
|
2,458 |
|
|
|
4,894 |
|
|
|
7,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
328 |
|
|
$ |
4,971 |
|
|
$ |
9,685 |
|
|
$ |
14,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments |
|
$ |
294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
The weighted-average remaining lease term of all operating leases outstanding at May 31, 2009 was
approximately six years. While certain of our lease agreements contain covenants governing the use
of the leased assets or require us to maintain certain levels of insurance, none of our lease
agreements include material financial covenants or limitations.
FedEx Express makes payments under certain leveraged operating leases that are sufficient to pay
principal and interest on certain pass-through certificates. The pass-through certificates are not
direct obligations of, or guaranteed by, FedEx or FedEx Express.
NOTE 8: PREFERRED STOCK
Our Certificate of Incorporation authorizes the Board of Directors, at its discretion, to issue up
to 4,000,000 shares of preferred stock. The stock is issuable in series, which may vary as to
certain rights and preferences, and has no par value. As of May 31, 2009, none of these shares had
been issued.
NOTE 9: STOCK-BASED COMPENSATION
Our total stock-based compensation expense for the years ended May 31 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Stock-based compensation
expense |
|
$ |
99 |
|
|
$ |
101 |
|
|
$ |
103 |
|
We have two types of equity-based compensation: stock options and restricted stock.
STOCK OPTIONS. Under the provisions of our incentive stock plans, key employees and non-employee
directors may be granted options to purchase shares of our common stock at a price not less than
its fair market value on the date of grant. Options granted have a maximum term of 10 years.
Vesting requirements are determined at the discretion of the Compensation Committee of our Board of
Directors. Option-vesting periods range from one to four years, with 82% of our
options vesting ratably over four years.
RESTRICTED STOCK. Under the terms of our incentive stock plans, restricted shares of our common
stock are awarded to key employees. All restrictions on the shares expire ratably over a four-year
period. Shares are valued at the market price on the date of award. Compensation related to these
awards is recognized as expense over the requisite service period.
For unvested stock options granted prior to June 1, 2006 and all restricted stock awards, the terms
of these awards provide for continued vesting subsequent to the employees retirement.
Compensation expense associated with these awards is recognized on a straight-line basis over the
shorter of the remaining service or vesting period. This postretirement vesting provision was
removed from all stock option awards granted subsequent to May 31, 2006.
VALUATION AND ASSUMPTIONS. We use the Black-Scholes option pricing model to calculate the fair
value of stock options. The value of restricted stock awards is based on the stock price of the
award on the grant date. We recognize stock-based compensation expense on a straight-line basis
over the requisite service period of the award in the Salaries and employee benefits caption in
the accompanying consolidated statements of income.
109
The key assumptions for the Black-Scholes valuation method include the expected life of the option,
stock price volatility, a risk-free interest rate, and dividend yield. Many of these assumptions
are judgmental and highly sensitive. Following is a table of the weighted-average Black-Scholes
value of our stock option grants, the intrinsic value of options exercised (in millions), and the
key weighted-average assumptions used in the valuation calculations for the options granted during
the years ended May 31, and then a discussion of our methodology for developing each of the
assumptions used in the valuation model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Weighted-average Black-Scholes value |
|
$ |
23.66 |
|
|
$ |
29.88 |
|
|
$ |
31.60 |
|
Intrinsic value of options exercised |
|
$ |
7 |
|
|
$ |
126 |
|
|
$ |
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected lives |
|
5.5 years |
|
|
5 years |
|
|
5 years |
|
Expected volatility |
|
|
23 |
% |
|
|
19 |
% |
|
|
22 |
% |
Risk-free interest rate |
|
|
3.284 |
% |
|
|
4.763 |
% |
|
|
4.879 |
% |
Dividend yield |
|
|
0.492 |
% |
|
|
0.337 |
% |
|
|
0.302 |
% |
Expected Lives. This is the period of time over which the options granted are expected to remain
outstanding. Generally, options granted have a maximum term of 10 years. We examine actual stock
option exercises to determine the expected life of the options. An increase in the expected term
will increase compensation expense.
Expected Volatility. Actual changes in the market value of our stock are used to calculate the
volatility assumption. We calculate daily market value changes from the date of grant over a past
period equal to the expected life of the options to determine volatility. An increase in the
expected volatility will increase compensation expense.
Risk-Free Interest Rate. This is the U.S. Treasury Strip rate posted at the date of grant having a
term equal to the expected life of the option. An increase in the risk-free interest rate will
increase compensation expense.
Dividend Yield. This is the annual rate of dividends per share over the exercise price of the
option. An increase in the dividend yield will decrease compensation expense.
110
The following table summarizes information about stock option activity for the year ended May 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
(in millions) (1) |
|
Outstanding at June 1, 2008 |
|
|
16,677,806 |
|
|
$ |
78.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,209,919 |
|
|
|
86.78 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(788,091 |
) |
|
|
55.25 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(456,545 |
) |
|
|
95.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2009 |
|
|
17,643,089 |
|
|
$ |
79.90 |
|
|
|
5.6 years |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
12,149,247 |
|
|
$ |
71.15 |
|
|
|
4.5 years |
|
|
$ |
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to Vest |
|
|
5,054,335 |
|
|
$ |
99.25 |
|
|
|
8.1 years |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grants |
|
|
11,914,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Only presented for options with market value at May 31, 2009 in excess of the
exercise price of the option. |
The options granted during the year ended May 31, 2009 are primarily related to our principal
annual stock option grant in June 2008.
The following table summarizes information about vested and unvested restricted stock for the year
ended May 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Unvested at June 1, 2008 |
|
|
424,985 |
|
|
$ |
103.97 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
197,180 |
|
|
|
90.57 |
|
Vested |
|
|
(177,494 |
) |
|
|
98.05 |
|
Forfeited |
|
|
(1,930 |
) |
|
|
100.35 |
|
|
|
|
|
|
|
|
|
Unvested at May 31, 2009 |
|
|
442,741 |
|
|
$ |
100.40 |
|
|
|
|
|
|
|
|
|
During the year ended May 31, 2008, there were 174,418 shares of restricted stock granted with a
weighted-average fair value of $114.40. During the year ended May 31, 2007, there were 175,005
shares of restricted stock granted with a weighted-average fair value of $109.90.
The following table summarizes information about stock option vesting during the years ended May
31:
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
Vested during |
|
|
Fair value |
|
|
|
the year |
|
|
(in millions) |
|
2007 |
|
|
3,147,642 |
|
|
$ |
65 |
|
2008 |
|
|
2,694,602 |
|
|
$ |
64 |
|
2009 |
|
|
2,414,815 |
|
|
$ |
64 |
|
As of May 31, 2009, there was $110 million of total unrecognized compensation cost, net of
estimated forfeitures, related to unvested share-based compensation arrangements. This
compensation expense is expected to be recognized on a straight-line basis over the remaining
weighted-average vesting period of approximately two years.
111
Total shares outstanding or available for grant related to equity compensation at May 31, 2009
represented 9% of the total outstanding common and equity compensation shares and equity
compensation shares available for grant.
NOTE 10: COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per common share for the years ended May 31 was as
follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
98 |
|
|
$ |
1,125 |
|
|
$ |
2,016 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock
outstanding |
|
|
311 |
|
|
|
309 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equivalent shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Incremental effect of shares from exercise
of stock options and
vesting of
restricted
stock |
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common and common
equivalent shares outstanding |
|
|
312 |
|
|
|
312 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.31 |
|
|
$ |
3.64 |
|
|
$ |
6.57 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.31 |
|
|
$ |
3.60 |
|
|
$ |
6.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive options excluded from diluted
earnings per common share |
|
|
12.6 |
|
|
|
4.8 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 11: INCOME TAXES
The components of the provision for income taxes for the years ended May 31 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current provision (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(35 |
) |
|
$ |
514 |
|
|
$ |
829 |
|
State and local |
|
|
18 |
|
|
|
74 |
|
|
|
72 |
|
Foreign |
|
|
214 |
|
|
|
242 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197 |
|
|
|
830 |
|
|
|
1,075 |
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
327 |
|
|
|
31 |
|
|
|
62 |
|
State and local |
|
|
48 |
|
|
|
(2 |
) |
|
|
27 |
|
Foreign |
|
|
7 |
|
|
|
32 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382 |
|
|
|
61 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
579 |
|
|
$ |
891 |
|
|
$ |
1,199 |
|
|
|
|
|
|
|
|
|
|
|
112
Pretax earnings of foreign operations for 2009, 2008 and 2007 were $106 million, $803 million and
$648 million, respectively, which represents only a portion of total results associated with
international shipments.
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the
years ended May 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory U.S. income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
48.0 |
|
|
|
6.8 |
|
|
|
|
|
State and local income taxes,
net of federal benefit |
|
|
1.9 |
|
|
|
2.1 |
|
|
|
2.0 |
|
Other, net |
|
|
0.7 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
85.6 |
% |
|
|
44.2 |
% |
|
|
37.3 |
% |
|
|
|
|
|
|
|
|
|
|
Our 2009 and 2008 effective tax rates were significantly impacted by goodwill impairment charges
related to the Kinkos acquisition, which are not deductible for income tax purposes. Our 2007 tax
rate was favorably impacted by the conclusion of various state and federal tax audits and appeals.
The 2007 rate reduction was partially offset by tax charges incurred as a result of a
reorganization in Asia associated with our acquisition in China, as described in Note 3.
The significant components of deferred tax assets and liabilities as of May 31 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Deferred |
|
|
Deferred |
|
|
Deferred |
|
|
Deferred |
|
|
|
Tax Assets |
|
|
Tax Liabilities |
|
|
Tax Assets |
|
|
Tax Liabilities |
|
Property, equipment,
leases and intangibles |
|
$ |
406 |
|
|
$ |
1,862 |
|
|
$ |
321 |
|
|
$ |
1,650 |
|
Employee benefits |
|
|
384 |
|
|
|
143 |
|
|
|
401 |
|
|
|
364 |
|
Self-insurance accruals |
|
|
392 |
|
|
|
|
|
|
|
359 |
|
|
|
|
|
Other |
|
|
491 |
|
|
|
222 |
|
|
|
426 |
|
|
|
224 |
|
Net operating loss/credit
carryforwards |
|
|
131 |
|
|
|
|
|
|
|
135 |
|
|
|
|
|
Valuation allowances |
|
|
(137 |
) |
|
|
|
|
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,667 |
|
|
$ |
2,227 |
|
|
$ |
1,518 |
|
|
$ |
2,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax liabilities as of May 31 have been classified in the balance sheets as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset |
|
$ |
511 |
|
|
$ |
544 |
|
Noncurrent deferred tax liability |
|
|
(1,071 |
) |
|
|
(1,264 |
) |
|
|
|
|
|
|
|
|
|
$ |
(560 |
) |
|
$ |
(720 |
) |
|
|
|
|
|
|
|
113
We have $385 million of net operating loss carryovers in various foreign jurisdictions and $450
million of state operating loss carryovers. The valuation allowances primarily represent amounts
reserved for operating loss and tax credit carryforwards, which expire over varying periods
starting in 2010. As a result of this and other factors, we believe that a substantial portion of
these deferred tax assets may not be realized.
Unremitted earnings of our foreign subsidiaries amounted to $191 million in 2009 and $147 million
in 2008. We have not recognized deferred taxes for U.S. federal income tax purposes on the
unremitted earnings of our foreign subsidiaries that are deemed to be permanently reinvested. Upon
distribution, in the form of dividends or otherwise, these unremitted earnings would be subject to
U.S. federal income tax. Unrecognized foreign tax credits would be available to reduce a portion,
if not all, of the U.S. tax liability. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable.
Our
liabilities recorded under FIN 48 totaled $72 million at May 31, 2009 and
$88 million at May 31, 2008, including $59 million at May 31, 2009 and $68 million at May 31, 2008
associated with positions that if favorably resolved would provide a benefit to our effective tax
rate. The change from the prior year relates primarily to the resolution of an immaterial state
income tax matter during the second quarter of 2009. We classify interest related to income tax
liabilities as interest expense, and if applicable, penalties are recognized as a component of
income tax expense. The balance of accrued interest and penalties was $19 million on May 31, 2009
and $25 million on May 31, 2008. Total interest and penalties included in our statement of
operations is immaterial.
We file income tax returns in the U.S., various U.S. states, and various foreign jurisdictions.
During 2009, the Internal Revenue Service (IRS) completed its audit of our consolidated U.S. income tax
returns for the 2004 through 2006 tax years. The completion of the audit did not have a material effect on our
consolidated financial statements. We are no longer subject to U.S. federal income tax examination
for years through 2006 except for specific U.S. federal income tax positions that are in various
stages of appeal and/or litigation. No resolution date can be reasonably estimated at this time
for these appeals and litigation, but their resolution is not expected to have a material effect on
our consolidated financial statements. We are also subject to ongoing audits in state, local and
foreign tax jurisdictions throughout the world.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
millions):
|
|
|
|
|
Balance at June 1, 2007 |
|
$ |
72 |
|
Increases for tax positions taken in the current year |
|
|
16 |
|
Increases for tax positions taken in prior years |
|
|
12 |
|
Decreases for tax positions taken in prior years |
|
|
(9 |
) |
Settlements |
|
|
(3 |
) |
|
|
|
|
Balance at May 31, 2008 |
|
$ |
88 |
|
|
|
|
|
Increases for tax positions taken in the current year |
|
$ |
7 |
|
Increases for tax positions taken in prior years |
|
|
10 |
|
Decreases for tax positions taken in prior years |
|
|
(30 |
) |
Settlements |
|
|
(3 |
) |
|
|
|
|
Balance at May 31, 2009 |
|
$ |
72 |
|
|
|
|
|
Included in the May 31, 2009 and May 31, 2008 balances are $7 million and $8 million, respectively,
of tax positions for which the ultimate deductibility or income inclusion is certain but for which
there may be uncertainty about the timing of such deductibility or income inclusion. It is
difficult to predict the ultimate outcome or the timing of resolution for tax positions under FIN
48. Changes may result from the conclusion of ongoing audits, appeals or litigation in state,
local, federal and foreign tax jurisdictions, or from the resolution of various proceedings between
the U.S. and foreign tax authorities. Our liability for tax positions under FIN 48 includes no
matters that are individually material to us. It is reasonably possible that the amount of the
benefit with respect to certain of our unrecognized tax positions will increase or decrease within
the next 12 months, but an estimate of the range of the reasonably possible changes cannot be made.
However, we do not expect that the resolution of any of our tax positions under FIN 48 will be
material.
114
NOTE 12: RETIREMENT PLANS
We sponsor programs that provide retirement benefits to most of our employees. These programs
include defined benefit pension plans, defined contribution plans and postretirement healthcare
plans. The accounting for pension and postretirement healthcare plans includes numerous
assumptions, such as: discount rates; expected long-term investment returns on plan assets; future
salary increases; employee turnover; mortality; and retirement ages. These assumptions most
significantly impact our U.S. domestic pension plans.
We made significant changes to our retirement plans during 2008 and 2009. Beginning January 1,
2008, we increased the annual company-matching contribution under the largest of our 401(k) plans
covering most employees from a maximum of $500 to a maximum of 3.5% of eligible compensation.
Employees not participating in the 401(k) plan as of January 1, 2008 were automatically enrolled at
3% of eligible pay with a company match of 2% of eligible pay effective March 1, 2008. As a
temporary cost-control measure, we suspended 401(k) company-matching contributions for a minimum of
one year effective February 1, 2009.
Effective May 31, 2008, benefits previously accrued under our primary pension plans using a
traditional pension benefit formula (based on average earnings and years of service) were capped
for most employees, and those benefits will be payable beginning at retirement. Effective June 1,
2008, future pension benefits for most employees began to be accrued under a cash balance formula
we call the Portable Pension Account. These changes did not affect the benefits of previously
retired and terminated vested participants. In addition, these pension plans were modified to
accelerate vesting from five years to three years for most participants.
Under the Portable Pension Account, the retirement benefit is expressed as a dollar amount in a
notional account that grows with annual credits based on pay, age and years of credited service,
and interest on the notional account balance. Under the tax-qualified plans, the pension benefit
is payable as a lump sum or an annuity at retirement at the election of the employee. An
employees pay credits are determined each year under a graded formula that combines age with years
of service for points. The plan interest credit rate will vary from year to year based on the
selected U.S. Treasury index, with an interest rate equal to the greater of 4% or the one-year
Treasury Constant Maturities rate plus 1%, but not greater than a rate based on the larger of the
average 30-year Treasury note or the applicable provisions of the Internal Revenue Code.
A summary of our retirement plans costs over the past three years is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. domestic and international pension plans |
|
$ |
177 |
|
|
$ |
323 |
|
|
$ |
467 |
|
U.S. domestic and international defined contribution plans |
|
|
237 |
|
|
|
216 |
|
|
|
176 |
|
Postretirement healthcare plans |
|
|
57 |
|
|
|
77 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
471 |
|
|
$ |
616 |
|
|
$ |
698 |
|
|
|
|
|
|
|
|
|
|
|
PENSION PLANS. Our largest pension plan covers certain U.S. employees age 21 and over, with at
least one year of service. We also sponsor or participate in nonqualified benefit plans covering
certain of our U.S. employee groups and other pension plans covering certain of our international
employees. The international defined benefit pension plans provide benefits primarily based on
final earnings and years of service and are funded in compliance with local laws and practices.
115
POSTRETIREMENT HEALTHCARE PLANS. Certain of our subsidiaries offer medical, dental and vision
coverage to eligible U.S. retirees and their eligible dependents. U.S. employees covered by the
principal plan become eligible for these benefits at age 55 and older, if they have permanent,
continuous service of at least 10 years after attainment of age 45 if hired prior to January 1,
1988, or at least 20 years after attainment of age 35 if hired on or after January 1, 1988.
Postretirement healthcare benefits are capped at 150% of the 1993 per capita projected employer
cost, which has been reached and, therefore, these benefits are not subject to additional future
inflation.
RECENT ACCOUNTING PRONOUNCEMENT. As discussed in Note 1, we adopted the recognition and disclosure
provisions of SFAS 158 on May 31, 2007. The adoption of SFAS 158 required recognition in the
balance sheet of the funded status of defined benefit pension and other postretirement benefit
plans, and the recognition in AOCI of unrecognized gains or losses and prior service costs or
credits. The funded status is measured as the difference between the fair value of the plans
assets and the projected benefit obligation (PBO) of the plan. The adoption of SFAS 158 resulted
in a $982 million charge to shareholders equity at May 31, 2007 through AOCI. At May 31, 2009,
under the provisions of SFAS 158, we recorded a decrease to equity of $1.2 billion (net of tax)
based on a $462 million decrease in the funded status of our retirement plans since May 31, 2008.
At May 31, 2008, we recorded an increase to equity of $469 million (net of tax) based on a $1
billion improvement in the funded status of our retirement plans since May 31, 2007.
Additionally, SFAS 158 requires the measurement date for plan assets and liabilities to coincide
with the plan sponsors year end. On June 1, 2008, we made our transition election for the
measurement date provision of SFAS 158 using the two-measurement approach. Under this approach, we
completed two actuarial measurements, one at February 29, 2008 and the other at June 1, 2008. This
approach required us to record the net periodic benefit cost for the transition period from March
1, 2008 through May 31, 2008 as an adjustment to beginning retained earnings ($44 million, net of
tax) and actuarial gains and losses for the period (a gain of $372 million, net of tax) as an
adjustment to the opening balance of AOCI. These adjustments increased the amount recorded for our
pension assets by $528 million. Our actuarial gains resulted primarily from a 19-basis-point
increase in the discount rate for our primary pension plan and an increase in plan assets at June
1, 2008.
PENSION PLAN ASSUMPTIONS. Our pension cost is materially affected by the discount rate used to
measure pension obligations, the level of plan assets available to fund those obligations and the
expected long-term rate of return on plan assets.
Beginning in 2009, we use a measurement date of May 31 for our pension and postretirement
healthcare plans. Prior to 2009, our measurement date was February 28 (February 29 in 2008).
Management reviews the assumptions used to measure pension costs on an annual basis. Economic and
market conditions at the measurement date impact these assumptions from year to year and it is
reasonably possible that material changes in pension cost may be experienced in the future.
Additional information about our pension plans can be found in the Critical Accounting Estimates
section of Managements Discussion and Analysis in this Annual Report.
Actuarial gains or losses are generated for changes in assumptions and to the extent that actual
results differ from those assumed. These actuarial gains and losses are amortized over the
remaining average service lives of our active employees if they exceed a corridor amount in the
aggregate.
Predominantly all of our plan assets are actively managed. The investment strategy for pension
plan assets is to utilize a diversified mix of global public and private equity portfolios,
together with public and private fixed-income portfolios, to earn a long-term investment return
that meets our pension plan obligations. Active management strategies are utilized within the plan
in an effort to realize investment returns in excess of market indices.
116
The weighted-average asset allocations for our domestic pension plans at the measurement date were
as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at Measurement Date |
|
|
|
2009 |
|
|
2008 |
|
Asset Class |
|
Actual |
|
|
Actual % |
|
|
Target % |
|
|
Actual |
|
|
Actual % |
|
|
Target % |
|
Domestic equities |
|
$ |
4,129 |
|
|
|
39 |
% |
|
|
30 |
% |
|
$ |
5,694 |
|
|
|
49 |
% |
|
|
53 |
% |
International equities |
|
|
1,724 |
|
|
|
16 |
|
|
|
15 |
|
|
|
2,481 |
|
|
|
21 |
|
|
|
17 |
|
Private equities |
|
|
357 |
|
|
|
3 |
|
|
|
5 |
|
|
|
406 |
|
|
|
4 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equities |
|
|
6,210 |
|
|
|
58 |
|
|
|
50 |
|