FEDEX Corporation
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended May
31, 2007.
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission file number 1-15829
FEDEX CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
(State or Other
Jurisdiction of
Incorporation or Organization)
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62-1721435
(I.R.S. Employer
Identification No.)
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942 South Shady Grove Road,
Memphis, Tennessee
(Address of Principal
Executive Offices)
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38120
(ZIP
Code)
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Registrants telephone number, including area code:
(901) 818-7500
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.10
per share
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New York Stock Exchange
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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 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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ
Accelerated
filer o Non-accelerated
filer o
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 30, 2006, was approximately $33.1 billion.
The Registrant has no non-voting stock.
As of July 9, 2007, 308,769,004 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 2007 annual
meeting of stockholders to be held on September 24, 2007
are incorporated by reference in response to Part III of
this Report.
PART I
Overview
FedEx Corporation (FedEx) provides a broad portfolio
of transportation,
e-commerce
and business services through companies that compete
collectively, operate independently and manage collaboratively,
under the respected FedEx brand. These companies are included in
four reportable business segments:
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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 cargo distribution.
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FedEx Ground: FedEx Ground Package
System, Inc. (FedEx Ground) is a leading provider of
small-package ground delivery service. FedEx Ground provides
low-cost service to every business address in the United States,
Canada and Puerto Rico, 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 for final delivery
to residences.
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FedEx Freight: FedEx Freight
Corporation is a leading U.S. provider of
less-than-truckload (LTL) freight services through
its FedEx Freight business (regional
next-day and
second-day
and interregional 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,
and Caribbean Transportation Services, Inc., a leading provider
of airfreight forwarding services between the United States and
Puerto Rico.
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FedEx Kinkos: FedEx Kinkos
Office and Print Services, Inc. (FedEx Kinkos)
is a leading provider of document solutions and business
services. FedEx Kinkos global network of
digitally-connected locations offers access to technology for
copying and printing, professional finishing, document creation,
Internet access, computer rentals, videoconferencing, signs and
graphics, direct mail,
Web-based
printing and the full range of FedEx day-definite ground
shipping and time-definite global express shipping services, and
a variety of other retail services and products, including
office supplies.
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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.
Strategy
FedEx was incorporated in Delaware on October 2, 1997 to
serve as the parent holding company of FedEx Express and each of
our other operating companies. Through our holding company and
FedEx Corporate Services, Inc. (FedEx Services), we
provide strategic direction to, and coordination of, the FedEx
portfolio
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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 business
solutions.
We are pursuing a number of initiatives to continue to enhance
the FedEx customer experience. For instance, we are expanding
our transportation and retail networks (as described below) 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, such as through our recent
acquisitions in the long-haul LTL freight and international
domestic express transportation markets (as described below) and
our new and improved service offerings for example,
FedEx Kinkos Print Online (see FedEx Kinkos
Segment below).
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 and FedEx
Kinkos office and print services. Similarly, by making one
call to the new 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 best service 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 earnings performance and cash flow. As
an example of our commitment to managing collaboratively, most
of 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:
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To accommodate international growth at FedEx Express, we are
adding flights, purchasing aircraft, increasing capacity and
improving services to and from Europe and Asia based on the
growth prospects of these regions.
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We are expanding network capacity at our growing FedEx Ground
and FedEx Freight companies. For instance, we expect to increase
FedEx Grounds daily package
pick-up
capacity to approximately five million packages by 2012.
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We are expanding the FedEx Kinkos retail network, which
will further increase customer access to FedEx shipping services
and offer growth opportunities in
e-commerce
and other business services.
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We believe the following four trends continue to drive world
commerce and shape the global marketplace:
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Globalization: As the worlds economy
becomes more fully integrated, and as barriers to trade continue
to decrease, companies are sourcing and selling globally. With
customers in more than 220 countries and
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territories, we facilitate this supply chain through our global
reach, delivery services and information capabilities.
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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.
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Increase in High-Tech and High-Value-Added
Businesses: High-tech and high-value-added goods
continue to increase as a percentage of total economic output.
Our various operating companies offer a unique menu of services
to fit virtually all shipping needs of high-tech and
high-value-added industries.
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Growth of
E-Commerce: E-commerce
acts as a catalyst for the other three trends and is a vital
growth engine for businesses today. Through our global
transportation and technology networks, we contribute to and
benefit from the growth of
e-commerce.
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These trends have produced an unprecedented expansion of
customer access to goods, services and information.
This access is fueling a remarkable transformation of the
worlds economy, helping businesses and nations flourish,
and empowering individuals with greater choices and
opportunities. 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 even stronger
long-term growth, productivity and profitability by:
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Optimizing and expanding our worldwide FedEx Express network,
particularly in key markets such as China and India.
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Increasing the capacity, speed and reliability of our FedEx
Ground and FedEx Freight networks and expanding the FedEx
Kinkos retail network.
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Emphasizing the compete collectively part of our
core strategy through service improvements and focusing our
employees and contractors on delivering the best customer
experience in the industry, resulting in better alignment across
the entire FedEx network.
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During 2007, we made several strategic acquisitions, each of
which is expected to provide important contributions to our
long-term growth, productivity and profitability.
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In September 2006, we acquired the U.S. and Canadian LTL
freight operations of Watkins Motor Lines, a leading provider of
long-haul LTL freight services, and certain affiliates for
$787 million in cash.
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Watkins U.S. long-haul LTL freight business, which
has been renamed FedEx National LTL, operates within the FedEx
Freight segment. The addition of Watkins
three-day or
more long-haul service to FedEx Freights industry-leading
next-day and
second-day
regional LTL freight service meaningfully extends our leadership
position in the heavyweight freight market.
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Watkins Canadian business, formerly known as Watkins
Canada Express, has been renamed FedEx Freight Canada and will
extend our reach and create opportunities for growth in the
Canadian LTL market.
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In December 2006, we acquired all of the outstanding capital
stock of ANC Holdings Ltd. (ANC), a United Kingdom
domestic express transportation company, for $241 million,
predominantly in cash. The acquisition of ANC, included in the
FedEx Express segment, allows us to better serve the United
Kingdom domestic market, which we previously served primarily
through independent agents.
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In January 2007, we acquired all of the outstanding capital
stock of Prakash Air Freight Pvt. Ltd. (PAFEX), our
primary service provider in India, for $32 million in cash.
The acquisition of PAFEX, included in the FedEx Express segment,
extends our operations in the global express industry with a
wholly owned company in one of the worlds fastest growing
markets.
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In March 2007, we acquired Tianjin Datian W. Group Co.,
Ltd.s (DTW Group) fifty percent share of the
FedEx-DTW International Priority express joint venture and
assets relating to DTW Groups domestic
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express network in China for $427 million in cash. The
acquisition converted our joint venture with DTW Group, formed
in 1999, into a wholly owned subsidiary of FedEx Express and
increases our presence in China in the international and
domestic express businesses.
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In sum, our overall long-term goal is to continue to:
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deliver superior financial returns for our stockholders;
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expand our portfolio of services to meet our customers
needs; and
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execute our compete collectively, operate independently,
manage collaboratively strategy with both discipline and
imagination.
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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 brands in
the world, and the FedEx brand name is a powerful sales and
marketing tool. Among the many reputation awards we received
during 2007:
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FedEx ranked sixth in FORTUNE magazines
Americas Most Admired Companies list and
seventh in its Worlds Most Admired Companies
list the sixth consecutive year we have been ranked
in the top ten on both lists.
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For the fourth consecutive year, FedEx ranked in the top 15 in
corporate reputation in The Wall Street
Journals Harris Interactive/Reputation Institute RQ
Survey.
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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.
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FedEx ranked in the top 25 of InformationWeek
magazines InformationWeek 500 list of the
most innovative users of information technology.
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FedEx is well recognized as a leader, not only in the
transportation industry and technological innovation, but also
in social and environmental responsibility and corporate
governance. Along with a strong reputation among customers and
the general public, FedEx is widely acknowledged as a great
place to work. 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 employees and contractors 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.
Community
We are committed to causes that help improve the communities
where we live and work, all around the world. As an example, we
routinely donate our transportation capabilities and services to
deliver aid to disaster sites and to support charitable causes.
We support and promote diversity and ethnic outreach by, among
other things, making contributions to various non-profit
organizations that serve the
African-American
and Hispanic communities, such as the Hispanic Scholarship Fund,
the National Council of La Raza, the National Association
for the Advancement of Colored People (NAACP), INROADS, the
Trumpet Awards and the Little Rock Nine Foundation. In addition
to corporate philanthropy and employee volunteerism, we develop
strategic relationships with certain charitable organizations
that share our values, including:
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United Way of America: We believe the United
Way is one of the most effective and efficient ways of meeting
community needs. FedEx supports a yearly fundraising campaign
company-wide, and during our annual FedEx Cares
week, FedEx employee volunteers donate thousands of hours to
support United Way community efforts.
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American Red Cross: FedEx works with the Red
Cross to provide a quick response to disasters around the world.
FedEx uses its logistics and transportation expertise to provide
complimentary shipping of emergency supplies and assists with
financial support.
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Safe Kids Worldwide: Reflecting the fact that
safety is one of our top priorities, FedEx is the sole corporate
sponsor of Safe Kids Walk This Way, a global program
that advocates child pedestrian safety and teaches children,
parents and communities how to prevent pedestrian accidents.
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ORBIS International: FedEx helps ORBIS
International provide eye care and treatment to people in
developing countries. FedEx provides free aircraft maintenance
and our pilots volunteer their time for ORBISs
Flying Eye Hospital a converted DC-10
aircraft equipped with surgical and training facilities.
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Salvation Army: FedEx recently donated five
mobile canteen vehicles to the Salvation Army disaster response
units. FedEx also supports the Salvation Armys training of
emergency response personnel worldwide through an initiative
called Prepare to Respond to Emergencies Planning
and Readiness Education (PREPARE).
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National Civil Rights Museum: FedEx serves as
a major corporate sponsor of the National Civil Rights Museum,
which educates the public on the lessons of the civil rights
movement in the United States and its impact and influence on
the human rights movement worldwide.
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March of Dimes: FedEx is a national sponsor of
March of Dimes WalkAmerica, and thousands of FedEx
employees participate in it and other events that raise funds to
help improve the health of babies by preventing birth defects
and infant mortality.
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Heart to Heart International: FedEx helps
Heart to Heart International deliver food, medicine and
emergency supplies to areas in need throughout the world.
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Environment
We are committed to protecting the environment. FedEx evaluates
the environmental impacts of FedEx packaging and minimizes waste
generation through efforts that include recycling and pollution
prevention. FedEx Kinkos history also includes a
longstanding dedication to protecting the environment, such as
through 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. For example,
the FedEx Express OptiFleet E700 hybrid electric vehicle
decreases particulate emissions by over 90 percent and
greenhouse gas emissions by over 25 percent and increases
fuel economy by over 40 percent. FedEx Express operates
93 hybrid vehicles in North America, with more than
1 million miles in revenue service. In August 2005, we
opened Californias then largest corporate solar electric
rooftop system atop the FedEx Express regional hub in Oakland.
To date, this solar electric system has provided approximately
2 billion watt hours of renewable energy generated by
sunlight. 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 have the effect of
reducing greenhouse gas emissions and airport noise and
increasing our jet fuel efficiency.
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, in March
2007, our Board of Directors 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.
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In addition, we have made compliance with the reporting
requirements of Section 404 of the
Sarbanes-Oxley
Act of 2002 one of our highest priorities, and we have leveraged
this expensive and
time-consuming
effort to further improve our already rigorous disclosure
controls and procedures and effective internal control over
financial reporting. Our goal has been not only to comply with
the law, but also to build upon a process that will further
enhance a strong controls mindset across FedEx today and in the
future.
Our Board of Directors reviews all aspects of our governance
policies and practices, including our Corporate Governance
Guidelines and our Code of Business Conduct & 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 business segments, as well as FedEx Services:
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. 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
more than 143,000 employees and has approximately 53,500
drop-off locations (including at FedEx Kinkos centers),
669 aircraft and 53,000 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
SameDay 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. During 2007, FedEx
Express significantly increased the reach of its FedEx
International Priority Freight service to cover more than 130
countries.
For information regarding FedEx Express
e-shipping
tools and solutions, see FedEx Services
Technology.
International
Expansion
FedEx Express is focused on further expanding its international
presence, especially in key markets such as China and India.
China and India are the two fastest growing major economies in
the world, consistently
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recording gross domestic product growth rates of over 7% a year.
China is already the third largest trading country in the world,
behind the United States and Germany, with total foreign trade
exceeding $1.7 trillion in calendar 2006.
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 with plans to add 100
additional cities and counties over the next few years. We now
employ approximately 6,000 workers in China. We have recently
taken several important actions that increase our presence in
China and India and bolster our leadership in the global air
cargo industry. For example, during 2007, we completed the DTW
Group and PAFEX acquisitions (see Strategy) and
initiated a next-business-day, time-definite domestic express
delivery service in China, which is available to more than
30 cities and counties throughout the country. The new
China domestic express service is supported by a money-back
guarantee and real-time package status tracking. Our China
domestic express network relies on a
hub-and-spoke
system centered at the Hangzhou Xiaoshan International Airport,
located in East Chinas Zhejiang Province. Other recent
actions in China and India include:
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In 2005, we launched the express air cargo industrys first
direct flight from mainland China to Europe (a daily direct
flight from Shanghai to Frankfurt, Germany) as part of a new
westbound around-the-world route that originates and terminates
in Memphis and provides connections via the FedEx AsiaOne
network to and from northern and eastern China.
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In 2006, we launched the first overnight express link between
India and China as part of our new eastbound around-the-world
route, which connects Europe, India, China and Japan with the
FedEx Express U.S. hub in Memphis.
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In 2006, we expanded our service in India. We increased our
flight frequencies in and out of India and improved connectivity
between key export centers and regional hubs, resulting in
improved service, especially for customers in Delhi and northern
India.
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In 2006, we broke ground on a new Asia-Pacific hub at the
Guangzhou Baiyun International Airport in Southern China. The
new Asia-Pacific hub is expected to assume and expand the
current activities of our existing hub in Subic Bay,
Philippines, beginning in 2009. We believe the new hub will
better serve our global customers doing business in and with the
fast-growing China and Asia-Pacific markets.
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In 2007, we began using four new flight frequencies into China.
We now have authority to operate a total of 30 weekly
flights into China, the most of any
U.S.-based
cargo carrier.
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In support of our international expansion, we have agreed to
purchase 15 Boeing 777 Freighter (B777F) aircraft, a
new high-capacity, long-range airplane, with deliveries
beginning in calendar 2009. We also hold an option to purchase
an additional 15 B777F aircraft. To facilitate the use of our
growing international network, we offer strong 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 a July 2006 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, during
2007, U.S. shipping rates were 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
Kinkos or FedEx Authorized ShipCenter location.
International rates are based on the type of service provided
and vary with size, weight, destination and,
9
whenever applicable, whether the shipment was picked up by a
FedEx Express courier or dropped off by the customer at a FedEx
Express, FedEx Kinkos or FedEx Authorized ShipCenter
location. FedEx Express offers its customers discounts generally
based on actual or potential average daily revenue produced.
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 spot price for jet fuel. For
example, the fuel surcharge for June 2007 was based on the
spot price for jet fuel published for April 2007. Changes to the
FedEx Express fuel surcharge, when calculated according to the
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.
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 are
significantly expanding, 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. FedEx Express is
building a new regional hub in Greensboro, North Carolina, which
is scheduled to begin operations in calendar 2009.
Facilities in Anchorage, Paris and Subic Bay, Philippines, 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 Subic Bay 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. In 2006, we broke ground on a
new Asia-Pacific hub at the Guangzhou Baiyun International
Airport in Southern China. The new Asia-Pacific hub is expected
to assume and expand the current activities of our existing hub
in Subic Bay, Philippines, beginning in 2009.
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. 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. In some
international areas, independent agents (Global Service
Participants) have been selected to complete deliveries and to
pick up packages.
FedEx Kinkos offers retail access to FedEx Express
shipping services at all of its U.S. locations and is
adding FedEx Express shipping services at its international
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 U.S. Post Offices.
Fuel
Supplies and Costs
During 2007, 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.
10
The following table sets forth FedEx Expresss costs for
jet fuel and its percentage of total revenues for the last five
fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Total Cost
|
|
|
of Total
|
|
Fiscal Year
|
|
(in millions)
|
|
|
Revenues
|
|
|
2007
|
|
$
|
2,639
|
|
|
|
7.5
|
%
|
2006
|
|
|
2,497
|
|
|
|
7.7
|
|
2005
|
|
|
1,780
|
|
|
|
6.1
|
|
2004
|
|
|
1,160
|
|
|
|
4.7
|
|
2003
|
|
|
1,058
|
|
|
|
4.7
|
|
Approximately 10% 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
The express package and freight markets are both highly
competitive and sensitive to price and service. 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 in these markets include other package
delivery concerns, principally United Parcel Service, Inc.
(UPS), DHL, passenger airlines offering express
package services, regional express delivery concerns, airfreight
forwarders and the U.S. Postal Service.
FedEx Expresss principal competitors in the international
market are DHL, UPS, foreign postal authorities such as Deutsche
Post and TNT N.V., freight forwarders, passenger airlines and
all-cargo airlines. Many of FedEx Expresss competitors in
the international market 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, 2007, FedEx Express employed approximately
93,000 permanent
full-time
and 50,000 permanent part-time employees, of which approximately
16% are employed in the Memphis area. FedEx Expresss
international employees in the aggregate represent approximately
25% of all employees. FedEx Express believes its relationship
with its employees is excellent.
The pilots of FedEx Express are represented by the Air Line
Pilots Association, International (ALPA), and are
employed under a four-year collective bargaining agreement that
took effect on October 30, 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.
FedEx
Trade Networks
FedEx Trade Networks is a leading provider of international
trade services, specializing in customs brokerage and global
cargo distribution. Its 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
3,500 employees and 100 offices in 70 service locations
throughout North America. Offices are also maintained in major
Asian and European markets through dedicated agents.
11
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 primarily on business and
residential delivery of packages weighing up to 150 pounds.
Ground service is provided to 100% of the United States
population and overnight service up to 400 miles to nearly
100% of the United States population. Service is also provided
to nearly 100% of the Canadian population. In addition, FedEx
Ground offers service to Puerto Rico, 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, to meet growing
customer demand for its services, 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 2012. The
multi-phase plan includes the addition of nine new 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 the continuing success of FedEx Grounds
business-to-business service, the increasing popularity of FedEx
Home Delivery, which reaches nearly 100% of
U.S. residences, has driven growth in the companys
package volumes and financial results. 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 also
offers a money-back guarantee.
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 20 distribution hubs and approximately
1,680 employees, FedEx SmartPost provides delivery Monday
through Saturday to all residential addresses in the U.S.,
including P.O. Boxes and military destinations.
Pricing
FedEx Ground periodically publishes list prices for the majority
of its services in its Service Guide. In general, during 2007,
U.S. shipping rates were 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 Kinkos or FedEx
Authorized ShipCenter.
FedEx Ground has an indexed fuel surcharge, which applies to all
shipments. The surcharge percentage is subject to monthly
adjustment 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 2007 was based on the
average diesel fuel price published for April 2007. 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.
12
Operations
FedEx Ground operates a multiple
hub-and-spoke
sorting and distribution system consisting of approximately 500
facilities, including 29 hubs, in the U.S. and Canada.
FedEx Ground conducts its operations primarily with
approximately 20,600 owner-operated vehicles and
25,800 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 3.1 million packages daily. Using overhead
laser and six-sided charge-coupled device (CCD) scan
technologies, 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 Kinkos 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, 2007, FedEx Ground had approximately
44,000 employees and 13,800 independent contractors.
Although FedEx Ground believes its relationship with its
employees and independent contractors is excellent, the company
is involved in numerous purported
class-action
lawsuits and other proceedings that claim that 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.
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, DHL and the
U.S. Postal Service.
FedEx
Freight Segment
FedEx
Freight Corporation
FedEx Freight Corporation provides a full range of LTL freight
services through its FedEx Freight business (regional
next-day and
second-day
and interregional LTL freight services), its FedEx National LTL
business (long-haul LTL freight services) and its FedEx Freight
Canada business, 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. FedEx Freights regional and interregional
LTL freight services are supported by a no-fee money-back
guarantee on eligible shipments. Internationally, FedEx Freight
serves Mexico, Puerto Rico, Central and South America, the
Caribbean, Europe and Asia via alliances and purchased
transportation. 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.
We are focused on expanding the FedEx Freight
network opening new service centers and increasing
capacity at a number of key locations to better meet
customer demand. For example, in 2007, FedEx Freight opened
seven new service centers and expanded eight others. In 2007,
FedEx Freight Corporation also added a long-haul LTL freight
business and Canadian operations by acquiring the U.S. and
Canadian LTL freight operations of Watkins Motor Lines and
certain affiliates, now known as FedEx National LTL and FedEx
Freight Canada. See Strategy.
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
13
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 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.
FedEx Freight Corporation has leveraged its relationships with
other FedEx operating companies to meet the increasingly global
needs of customers. For example, the FedEx Freight Corporation
sales force sells FedEx Express freight services, and FedEx
Services sales representatives share LTL leads with their
counterparts at FedEx Freight Corporation. The sales effort is
one phase of a broad initiative aimed at leveraging FedExs
competitive advantage in U.S. domestic freight services.
FedEx Freight Corporation subsidiary Caribbean Transportation
Services, Inc. (CTS) is the leading provider of
airfreight forwarding services between the United States and
Puerto Rico, specializing in arranging the shipment of
heavyweight and oversized cargo. CTS, which also serves the
Dominican Republic, Costa Rica and the Caribbean Islands,
provides several delivery options for door-to-door or
airport-to-airport airfreight forwarder services, principally to
the medical, pharmaceutical and technology sectors.
As of May 31, 2007, FedEx Freight Corporation had
approximately 37,000 employees operating approximately
59,000 vehicles and trailers from a network of approximately 470
service centers. 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 (which
comprises the USF regional companies), a division of YRC
Worldwide Inc., and UPS Freight. FedEx National LTLs
primary long-haul LTL freight competitors are YRC National
Transportation (which comprises Yellow Transportation and
Roadway), 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 FedEx Freight 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 Shipping
Toolkit, located at customcritical.fedex.com, 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 1,400 vehicles, operated by
owner-operators and their drivers, which are dispatched out of
approximately 150 geographically-based staging areas. FedEx
Custom Critical also provides door-to-door vehicle transport
through its Passport Auto Transport subsidiary.
FedEx
Kinkos Segment
FedEx Kinkos is a leader in the document and business
services market, offering a wide array of innovative solutions,
including retail access to the full range of FedEx day-definite
ground shipping and
time-definite
global express shipping services. We are focused on expanding
the FedEx Kinkos retail network, which will substantially
increase customer access to FedEx Express and FedEx Ground
services and provide growth opportunities in
e-commerce
and other business services. FedEx Kinkos opened 226 new
centers in 2007 and plans to open approximately 300 new centers
in 2008. The new lower-cost centers, which are approximately
one-third the size of a traditional center, are based on a new
format designed to enhance customer service and convenience. As
an example, the new centers include enhanced
pack-and-ship
stations and offer twice as many office products as traditional
centers.
14
As of May 31, 2007, FedEx Kinkos operations included
approximately 1,500 FedEx Kinkos Office & Print
Centers and Ship Centers in the United States and approximately
160 additional locations in 10 other countries, as well as 35
commercial production centers. These locations create an
unmatched global network of state-of-the-art printing and
copying technology, which FedEx Kinkos leverages to
provide highly differentiated, innovative solutions to its
customers. FedEx Kinkos World Production Center, which is
located near the FedEx Express hub in Memphis, is a
28,500 square foot facility featuring state-of-the-art,
commercial-grade printing equipment. The World Production Center
allows FedEx Kinkos to easily handle complex, large-scale
orders from commercial customers and quickly distribute the
resulting documents anywhere in the world.
FedEx Kinkos specifically focuses on key customer segments
that are important to the other FedEx companies. To small- and
medium-sized business customers, FedEx Kinkos provides
complete document management services and meets basic office
needs. To the rapidly growing mobile professional
market segment, which includes business travelers and mobile
salespeople, FedEx Kinkos provides a comprehensive
office on the road, including Internet access,
videoconferencing and presentation support.
During 2007, we launched FedEx Kinkos Direct Mail
Services, a new offering designed to help small- and
medium-sized businesses easily communicate to target audiences,
and FedEx Kinkos Print Online, a new Web-based,
print-on-demand
application. Services available through FedEx Kinkos
Direct Mail Services include design, production, professional
finishing, address cleansing and verification and mail
processing. Print Online enables customers to digitally send
documents to FedEx Kinkos Office and Print Centers for
printing. With the new Print Online application, customers may
select from extensive printing and finishing options, track
order status, reuse saved print jobs and review order history.
In June 2007, we extended the application to users of the
popular Adobe Reader and Adobe Acrobat software applications,
both of which will now feature a FedEx Kinkos Print Online
connection for sending documents directly to a FedEx
Kinkos Office and Print Center for printing.
FedEx Kinkos offers a full range of
black-and-white,
color and custom printing, copying and binding services and an
increasingly broad array of other business services, including,
among others, high-speed Internet access and computer rental,
videoconferencing, signs and graphics production services and
direct mail services. FedEx Kinkos has capitalized on the
trend toward
e-business,
offering many Web-based services, including Print Online
(described above); File, Print FedEx Kinkos, a free
software tool that works over the Web to connect Microsoft
Windows desktop users to copying and printing services at FedEx
Kinkos Office and Print Centers; and DocStore, an online
ordering solution for digital
print-on-demand.
FedEx Kinkos also offers retail products, such as
specialty papers, greeting cards, printer cartridges, stationery
and office supplies.
FedEx Kinkos offers the full range of FedEx Express and
FedEx Ground services at virtually all U.S. locations and
is adding FedEx shipping services at its international
locations. In addition, FedEx Kinkos offers packing
services at virtually all U.S. Office and Print Centers,
and packing supplies and boxes are included in FedEx
Kinkos retail product assortment. By allowing customers to
have unpackaged items professionally packed by specially trained
FedEx Kinkos 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
Kinkos provides a complete
pack-and-ship
solution.
FedEx Kinkos is headquartered in Dallas, Texas. Kenneth A.
May is the President and Chief Executive Officer of FedEx
Kinkos, which has approximately 22,600 employees.
FedEx Kinkos competitors include locally owned or
franchised quick printers, office-supply superstores, such as
Staples, Inc., OfficeMax Incorporated and Office Depot, Inc.,
pack and ship chains, such as The UPS Store, and small local and
regional copy and pack and ship shops.
FedEx
Services
FedEx Services provides sales, marketing, information technology
and customer service support for FedEx Express, FedEx Ground and
FedEx Kinkos. Through FedEx Services and its subsidiary
FedEx Customer Information Services, Inc., we provide a
convenient single point of access for many customer support
15
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.
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.
T. Michael Glenn is the President and Chief Executive
Officer of FedEx Services, which is based in Memphis, Tennessee.
As of May 31, 2007, FedEx Services had approximately
15,000 employees.
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 over ten 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 Kinkos office and printing services. Our FedEx
Insight application provides customers with visibility and
package status of their inbound and outbound express, ground and
freight shipments. Our FedEx Global Trade Manager resource
enables customers to more easily navigate the complexities of
international commerce by helping them identify the documents
they need in order to ship to and from specific countries. FedEx
Global Trade Manager also offers a currency converter, profiles
of regulatory information by country, a customs regulation guide
and, through its Estimate Duties and Taxes features,
customers can estimate applicable governmental charges, duties
and fees. FedEx Billing Online provides customers real-time
access to their accounts, invoices and paid shipment details.
We have extended the reach of the fedex.com Web site to
be accessible from most wireless devices, making it faster and
easier for U.S. and Canadian customers to access real-time
package status tracking information, rates and drop-off location
data for FedEx Express and FedEx Ground shipments. Our wireless
service is available through Web-enabled devices, such as mobile
telephones, personal digital assistants and Research In Motion
(RIM) devices (such as the BlackBerry). FedEx also uses wireless
data collection devices to scan bar codes on shipments. Our data
collection device, the FedEx PowerPad, uses Bluetooth wireless
technology to give our couriers wireless access to the FedEx
network, 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.
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
16
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 Chevrolet driven by Denny Hamlin
in the NASCAR NEXTEL 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
|
|
|
FedEx Kinkos Classic, a PGA Champions Tour event
|
|
|
Pebble Beach Golf Resorts, as the official shipping company
|
|
|
National Basketball Association (NBA), as its official delivery
service sponsor
|
|
|
FedExForum, the home of the NBAs Memphis Grizzlies
|
|
|
Vodafone McLaren Mercedes Formula One team
|
|
|
French Open tennis tournament
|
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.
Trademarks
The FedEx trademark, service mark and trade name is
essential to our worldwide business. FedEx, FedEx Express, FedEx
Ground, FedEx Freight, FedEx Kinkos, 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, maintenance and corrosion control, as well as
personnel and ground facilities, which may from time to time
affect the ability of FedEx Express to operate its aircraft in
the most efficient manner. FedEx Express holds an air carrier
certificate granted by the FAA pursuant to Part 119 of the
federal aviation regulations. This certificate is of unlimited
duration and remains in effect so long as FedEx Express
maintains its standards of safety and meets the operational
requirements of the regulations.
17
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. 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.
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 May 2006,
the TSA adopted new rules enhancing many of the security
requirements for air cargo on both passenger and all-cargo
aircraft, and in May 2007, the TSA issued a revised model
all-cargo aircraft security program for implementing the new
rules. Together with other all-cargo aircraft operators, we have
filed comments with the TSA requesting clarification regarding
several provisions in the revised model program. Until the
requirements for our security program under the new rules are
finalized, 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 for air cargo carriers 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.
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.
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. FedEx
Expresss aircraft are also subject to, and are in
compliance with, the regulations governing engine emissions. In
addition to federal
18
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.
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
Kinkos copy machines and photo film developing operations.
Additionally, we are subject to numerous regulations dealing
with underground fuel storage tanks, hazardous waste handling,
vehicle and equipment emissions 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.
We present information about our risk factors on pages 62
through 65 of this Annual Report on
Form 10-K.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
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.
19
Aircraft
and Vehicles
As of May 31, 2007, FedEx Expresss aircraft fleet
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Payload
|
|
Description
|
|
Owned
|
|
|
Leased
|
|
|
Total
|
|
|
(Pounds per
Aircraft)(1)
|
|
|
Boeing MD11
|
|
|
30
|
|
|
|
28
|
|
|
|
58
|
|
|
|
164,200
|
|
Boeing
MD10-30(2)
|
|
|
5
|
|
|
|
2
|
|
|
|
7
|
|
|
|
114,200
|
|
Boeing DC10-30
|
|
|
6
|
|
|
|
7
|
|
|
|
13
|
|
|
|
114,200
|
|
Boeing
MD10-10(2)
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
|
|
113,100
|
|
Boeing DC10-10
|
|
|
12
|
|
|
|
2
|
|
|
|
14
|
(3)
|
|
|
113,100
|
|
Airbus A300-600
|
|
|
24
|
|
|
|
36
|
|
|
|
60
|
(4)
|
|
|
85,600
|
|
Airbus A310-200/300
|
|
|
50
|
|
|
|
16
|
|
|
|
66
|
|
|
|
61,900
|
|
Boeing B757-200
|
|
|
4
|
|
|
|
|
|
|
|
4
|
(5)
|
|
|
45,800
|
|
Boeing B727-200
|
|
|
85
|
|
|
|
9
|
|
|
|
94
|
|
|
|
38,200
|
|
Boeing B727-100
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
27,700
|
|
ATR
72-202
|
|
|
13
|
|
|
|
|
|
|
|
13
|
(6)
|
|
|
18,000
|
|
ATR 42-300/320
|
|
|
29
|
|
|
|
|
|
|
|
29
|
|
|
|
12,000
|
|
Fokker F27-500
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
13,500
|
|
Fokker F27-600
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
13,800
|
|
Cessna 208B
|
|
|
243
|
|
|
|
|
|
|
|
243
|
|
|
|
3,400
|
|
Cessna 208A
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
569
|
|
|
|
100
|
|
|
|
669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 7 aircraft not currently
in operation and awaiting conversion to MD10 configuration.
|
|
(4)
|
|
Includes 5 aircraft not currently
in operation and awaiting completion of passenger-to-freighter
modification.
|
|
(5)
|
|
Includes 4 aircraft not currently
in operation 1 awaiting completion of
passenger-to-freighter modification and 3 in storage.
|
|
(6)
|
|
Includes 3 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. The DC10s come in 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 Fokker F27, Cessna 208 and ATR 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.
|
20
An inventory of spare engines and parts is maintained for each
aircraft type.
In addition, FedEx Express wet leases approximately
45 smaller piston-engine and turbo-prop aircraft, which feed
packages to and from airports 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, 2007, FedEx Express operated approximately
53,000 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, 2007,
with the year of expected delivery:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A300
|
|
|
A310
|
|
|
B757
|
|
|
B777F
|
|
|
Total
|
|
|
2008
|
|
|
9
|
|
|
|
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
18
|
|
2009
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
16
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
6
|
|
|
|
10
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
9
|
|
|
|
12
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12
|
|
|
|
|
|
|
|
2
|
|
|
|
30
|
|
|
|
15
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and progress payments of $109 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.
21
Sorting
and Handling Facilities
At May 31, 2007, 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
|
|
|
|
3,367,000
|
|
|
|
465,000
|
|
|
Memphis-Shelby County Airport
Authority
|
|
2036
|
Indianapolis, Indiana
|
|
|
215
|
|
|
|
1,895,000
|
|
|
|
192,000
|
|
|
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
|
|
|
74
|
|
|
|
320,000
|
|
|
|
54,000
|
|
|
City of Oakland
|
|
2011
|
Metropolitan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicago, Illinois
|
|
|
51
|
|
|
|
419,000
|
|
|
|
52,000
|
|
|
City of Chicago
|
|
2018
|
Los Angeles, California
|
|
|
23
|
|
|
|
305,000
|
|
|
|
57,000
|
|
|
City of Los Angeles
|
|
2009
|
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
|
Subic Bay,
Philippines(4)
|
|
|
18
|
|
|
|
316,000
|
|
|
|
22,000
|
|
|
Subic Bay Metropolitan Authority
|
|
2010
|
|
|
|
(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.
|
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.
FedEx Express has international sorting and freight 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.
Administrative
and Other Properties and Facilities
The World Headquarters of FedEx Express is located in
southeastern Shelby County, Tennessee. The headquarters campus,
which comprises eight separate buildings with approximately
1.1 million square feet of
22
space, houses approximately 1,800 employees. FedEx Express
also leases approximately 30 facilities in the Memphis area for
administrative offices and warehouses. FedEx Express and FedEx
Services 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 Express owns or leases approximately 665 facilities for
city station operations in the United States. In addition,
approximately 740 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, 2007, FedEx Express had approximately 42,500
Drop Boxes, including 5,000 Drop Boxes outside U.S. Post
Offices. As of May 31, 2007, FedEx Express also had
approximately 10,500 FedEx Authorized ShipCenters and FedEx
ShipSites, which are drop-off locations situated within certain
retailers, such as FedEx Kinkos, OfficeMax and Staples.
Internationally, FedEx Express has approximately 2,000
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, 2007, FedEx Ground had approximately
25,800 company-owned trailers and owned or leased
approximately 500 facilities, including 29 hubs. In addition,
approximately 20,600 owner-operated vehicles support FedEx
Grounds business. Of the approximately 300 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 29 hub facilities are
strategically located to cover the geographic area served by
FedEx Ground. The hub facilities average 252,000 square
feet and range in size from 31,000 to 488,000 square feet.
FedEx
Freight Segment
FedEx Freight Corporations corporate headquarters are
located in Memphis, Tennessee. FedEx Freight Corporation also
has administrative offices located in Harrison, Arkansas,
San Jose, California and Lakeland, Florida. As of
May 31, 2007, FedEx Freight Corporation operated
approximately 59,000 vehicles and trailers and 470 service
centers, which are strategically located to provide service to
virtually all U.S. ZIP Codes. These facilities range in
size from 950 to 220,400 square feet of office and dock
space. CTSs headquarters are located in Greensboro, North
Carolina, and FedEx Custom Criticals headquarters are
located in Green, Ohio.
FedEx
Kinkos Segment
FedEx Kinkos corporate headquarters are located in Dallas,
Texas in leased facilities. As of May 31, 2007, FedEx
Kinkos operated approximately 1,700 locations, including
approximately 160 locations in ten foreign countries and 35
commercial production centers. Substantially all FedEx
Kinkos Office and Print Centers and Ship Centers are
leased, generally for terms of five to ten years with varying
renewal options. FedEx Kinkos Office and Print Centers and
Ship Centers are generally located in strip malls, office
buildings or stand-alone structures and average approximately
5,500 square feet in size.
|
|
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.
In June 2006, we received a grand jury subpoena for the
production of documents in connection with an ongoing criminal
investigation by the Antitrust Division of the
U.S. Department of Justice (DOJ) into
23
possible anti-competitive behavior in the air freight
transportation industry. In December 2006, we received a formal
request for certain information and documents in connection with
an ongoing civil investigation by the Directorate General for
Competition of the European Commission (EC) into
possible anti-competitive behavior relating to air freight
transportation services in Europe. In July 2007, we received a
notice from the Australian Competition and Consumer Commission
(ACCC) requiring us to provide certain information
and documents in connection with the ACCCs investigation
into possible anti-competitive behavior relating to air cargo
transportation services in Australia. We do not believe that we
have engaged in any anti-competitive activities, and we are
cooperating with these investigations.
|
|
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 2007.
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
|
|
|
62
|
|
|
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
|
|
|
53
|
|
|
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
|
|
|
48
|
|
|
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.
|
24
|
|
|
|
|
|
|
Name and Office
|
|
Age
|
|
Positions and Offices Held and Business Experience
|
|
Douglas G.
Duncan
President and Chief
Executive Officer, FedEx Freight Corporation
|
|
|
56
|
|
|
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
|
|
|
51
|
|
|
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.
|
Alan B. Graf,
Jr.
Executive Vice President
and Chief Financial Officer
|
|
|
53
|
|
|
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.
|
25
|
|
|
|
|
|
|
Name and Office
|
|
Age
|
|
Positions and Offices Held and Business Experience
|
|
Kenneth A.
May
President and Chief
Executive Officer,
FedEx Kinkos
|
|
|
46
|
|
|
President and Chief Executive
Officer of FedEx Kinkos since February 2006; Executive
Vice President and Chief Operating Officer of FedEx Kinkos
from August 2004 to February 2006; Senior Vice
President U.S. of FedEx Express from October 1999 to
August 2004; Senior Vice President Air, Ground,
Terminal and Transportation (AGT&T) of FedEx Express from
January 1998 to October 1999; Vice President Global
Operations and Control of FedEx Express from February 1996 to
January 1998; and various other positions with FedEx Express
from 1982 to 1996. Mr. May serves as a director of P.F.
Changs China Bistro, Inc., an owner and operator of Asian
restaurants.
|
David F.
Rebholz
President and Chief
Executive Officer,
FedEx Ground
|
|
|
54
|
|
|
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
|
|
|
52
|
|
|
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.
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 9,
2007, there were 20,165 holders of record of our common
stock. The following table sets forth, for the periods
26
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, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
91.43
|
|
|
$
|
79.55
|
|
|
$
|
0.08
|
|
Second Quarter
|
|
|
98.81
|
|
|
|
76.81
|
|
|
|
0.08
|
|
Third Quarter
|
|
|
108.83
|
|
|
|
95.79
|
|
|
|
0.08
|
|
Fourth Quarter
|
|
|
120.01
|
|
|
|
106.00
|
|
|
|
0.08
|
|
Fiscal Year Ended May 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
118.74
|
|
|
$
|
97.79
|
|
|
$
|
0.09
|
|
Second Quarter
|
|
|
119.21
|
|
|
|
99.34
|
|
|
|
0.09
|
|
Third Quarter
|
|
|
121.42
|
|
|
|
106.63
|
|
|
|
0.09
|
|
Fourth Quarter
|
|
|
116.76
|
|
|
|
104.01
|
|
|
|
0.09
|
|
FedEx also paid a cash dividend on July 2, 2007 ($0.10 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 2007.
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
Selected financial data as of and for the five years ended
May 31, 2007 is presented on page 113 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 33
through 65 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 112 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 9, 2007 thereon, are presented on pages 68
through 111 of this Annual Report on
Form 10-K.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
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,
27
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, 2007 (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 66 of this Annual Report on
Form 10-K.
The report of Ernst & Young LLP with respect to
managements assessment of internal control over financial
reporting is presented on page 67 of this Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
During our fiscal quarter ended May 31, 2007, 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 & 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 2007 annual meeting of stockholders, which
will be held on September 24, 2007, 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 & Ethics is included above in Part I, Item 1
of this Annual Report on
Form 10-K
under the caption Reputation and
Responsibility Governance.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information regarding director and executive compensation will
be presented in FedExs definitive proxy statement for its
2007 annual meeting of stockholders, which will be held on
September 24, 2007, 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 2007 annual
meeting of stockholders, which will be held on
September 24, 2007, and is incorporated herein by reference.
28
|
|
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 2007 annual
meeting of stockholders, which will be held on
September 24, 2007, 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 2007 and 2006 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 2007 annual
meeting of stockholders, which will be held on
September 24, 2007, 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 9, 2007 thereon, are listed on page 32 and
presented on pages 68 through 111 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 9, 2007 thereon, is
presented on pages 114 through 115 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-4 for a
list of the exhibits being filed or furnished with or
incorporated by reference into this Annual Report on
Form 10-K.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FEDEX CORPORATION
Dated: July 12, 2007
|
|
|
|
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 12, 2007
|
|
|
|
|
|
/s/ ALAN
B. GRAF, JR.
Alan
B. Graf, Jr.
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
July 12, 2007
|
|
|
|
|
|
/s/ JOHN
L. MERINO
John
L. Merino
|
|
Corporate Vice President
and Principal Accounting Officer
(Principal Accounting Officer)
|
|
July 12, 2007
|
|
|
|
|
|
/s/ JAMES
L. BARKSDALE*
James
L. Barksdale
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ AUGUST
A. BUSCH IV*
August
A. Busch IV
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ JOHN
A. EDWARDSON*
John
A. Edwardson
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ JUDITH
L. ESTRIN*
Judith
L. Estrin
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ J.
KENNETH GLASS*
J.
Kenneth Glass
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ PHILIP
GREER*
Philip
Greer
|
|
Director
|
|
July 12, 2007
|
30
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
/s/ J.
R. HYDE, III*
J.
R. Hyde, III
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ SHIRLEY
ANN JACKSON*
Shirley
Ann Jackson
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ STEVEN
R. LORANGER*
Steven
R. Loranger
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ CHARLES
T. MANATT*
Charles
T. Manatt
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ JOSHUA
I. SMITH*
Joshua
I. Smith
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ PAUL
S. WALSH*
Paul
S. Walsh
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
/s/ PETER
S. WILLMOTT*
Peter
S. Willmott
|
|
Director
|
|
July 12, 2007
|
|
|
|
|
|
*By: /s/ JOHN
L. MERINO
John
L. Merino
Attorney-in-Fact
|
|
|
|
July 12, 2007
|
31
FINANCIAL
SECTION TABLE OF CONTENTS
|
|
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|
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|
|
PAGE
|
|
Managements Discussion
and Analysis
|
|
|
|
|
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33
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|
|
|
|
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34
|
|
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|
38
|
|
|
|
|
|
|
|
|
|
40
|
|
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|
|
|
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|
41
|
|
|
|
|
45
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|
|
|
|
47
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|
|
|
|
48
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|
|
|
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|
|
50
|
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|
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|
51
|
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52
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|
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54
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|
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|
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54
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|
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59
|
|
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|
|
59
|
|
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|
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61
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
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67
|
|
|
|
|
|
|
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|
69
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|
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|
|
|
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71
|
|
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|
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|
72
|
|
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|
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|
|
73
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
Other Financial
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
116
|
|
32
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
2007 results compared to 2006, and 2006 results compared to
2005. This section also includes a discussion of key actions and
events that impacted our results, as well as a discussion of our
outlook for 2008.
|
|
|
The overview is followed by a financial summary and analysis
(including a discussion of both historical operating results and
our outlook for 2008) for each of our four reportable
business 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
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 operating companies are primarily
represented by FedEx Express, the worlds largest express
transportation company; FedEx Ground, a leading provider of
small-package ground delivery services; FedEx Freight
Corporation, a leading U.S. provider of less-than-truckload
(LTL) freight services; and FedEx Kinkos, a
leading provider of document solutions and business services.
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.
The key indicators necessary to understand our operating results
include:
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the overall customer demand for our various services;
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|
the volumes of transportation and business services provided
through our networks, primarily measured by our average daily
volume and shipment weight;
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the mix of services purchased by our customers;
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|
the prices we obtain for our services, primarily measured by
yield (average price per shipment or pound) or average price per
hundredweight for FedEx Freight LTL Group shipments;
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|
our ability to manage our cost structure for capital
expenditures and operating expenses and to match our cost
structure to shifting volume levels; and
|
33
|
|
|
the timing and amount of fluctuations in fuel prices and our
ability to recover incremental fuel costs through our fuel
surcharges.
|
Except as otherwise specified, references to years indicate our
fiscal year ended May 31, 2007 or ended May 31 of the year
referenced and comparisons are to the prior year. References to
our transportation segments mean, collectively, our FedEx
Express, FedEx Ground and FedEx Freight segments.
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:
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|
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|
|
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|
|
|
|
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|
|
|
|
|
Percent Change
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|
|
2007(1)
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2006(2)
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|
2005(3)
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|
2007/2006
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|
|
2006/2005
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|
|
Revenues
|
|
$
|
35,214
|
|
|
$
|
32,294
|
|
|
$
|
29,363
|
|
|
|
9
|
|
|
|
10
|
|
Operating income
|
|
|
3,276
|
|
|
|
3,014
|
|
|
|
2,471
|
|
|
|
9
|
|
|
|
22
|
|
Operating margin
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|
|
9.3
|
%
|
|
|
9.3
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%
|
|
|
8.4
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%
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|
|
|
bp
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|
|
90
|
bp
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Net income
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$
|
2,016
|
|
|
$
|
1,806
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|
|
$
|
1,449
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|
|
|
12
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|
|
|
25
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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|
|
|
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Diluted earnings per share
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$
|
6.48
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|
|
$
|
5.83
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|
|
$
|
4.72
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|
|
|
11
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
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Operating expenses include a
$143 million charge at FedEx Express associated with
upfront compensation and benefits under the new labor contract
with our pilots, which was ratified in October 2006. The impact
of this new contract on second quarter net income was
approximately $78 million net of tax, or $0.25 per diluted
share.
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|
(2) |
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Operating expenses include a
$79 million ($49 million, net of tax, or $0.16 per
diluted share) charge to adjust the accounting for certain
facility leases, predominantly at FedEx Express.
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|
(3) |
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Results include a $48 million
($31 million, net of tax, or $0.10 per diluted share)
Airline Stabilization Act charge at FedEx Express and a
$12 million, or $0.04 per diluted share, benefit from an
income tax adjustment.
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The following table shows changes in revenues and operating
income by reportable segment for 2007 compared to 2006, and 2006
compared to 2005 (in millions):
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|
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|
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|
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Revenues
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Operating Income
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Dollar
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|
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Percent
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Dollar
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|
|
Percent
|
|
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|
Change
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|
Change
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Change
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Change
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|
2007/
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2006/
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2007/
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2006/
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2007/
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2006/
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2007/
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2006/
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|
2006
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|
|
2005
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|
|
2006
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|
|
2005
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|
|
2006
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|
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2005
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|
|
2006
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|
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2005
|
|
|
FedEx Express
segment(1)
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$
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1,235
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|
$
|
1,961
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|
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6
|
|
|
|
10
|
|
|
$
|
188
|
|
|
$
|
353
|
|
|
|
11
|
|
|
|
25
|
|
FedEx Ground segment
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|
|
737
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|
|
|
626
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|
|
|
14
|
|
|
|
13
|
|
|
|
108
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|
|
101
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|
|
|
15
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|
|
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17
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|
FedEx Freight segment
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|
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941
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|
|
428
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|
26
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|
|
|
13
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|
(22
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)
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|
131
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|
|
|
(5
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)
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|
|
37
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|
FedEx Kinkos segment
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(48
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)
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|
22
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|
|
|
(2
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)
|
|
|
1
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|
|
|
(12
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)
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|
|
(43
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)
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|
|
(21
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)
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|
|
(43
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)
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Other and Eliminations
|
|
|
55
|
|
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(106
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)
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NM
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NM
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|
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|
1
|
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|
NM
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|
NM
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|
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|
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|
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|
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$
|
2,920
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|
|
$
|
2,931
|
|
|
|
9
|
|
|
|
10
|
|
|
$
|
262
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|
|
$
|
543
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|
|
|
9
|
|
|
|
22
|
|
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|
(1) |
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FedEx Express 2007 operating
expenses include a $143 million charge associated with
upfront compensation and benefits under the new pilot labor
contract, 2006 operating expenses include a $75 million
charge to adjust the accounting for certain facility leases, and
2005 operating expenses include a $48 million charge
related to the Airline Stabilization Act.
|
34
The following graphs for FedEx Express, FedEx Ground and the
FedEx Freight LTL Group show selected operating statistics (in
thousands, except yield amounts) for the years ended May 31:
Overall results for 2007 were solid in spite of several
challenges, as we continued to execute our business strategy
during a time of slower economic growth and expanded our service
offerings through key acquisitions. Operating results moderated
during 2007, reflecting the impact of weaker volumes in the
second half of our fiscal year in our FedEx Express and FedEx
Freight segments due to the slowing economic environment. The
year-over-year negative impact from the timing lag in our fuel
surcharges and a $143 million charge associated with
upfront compensation and benefits under the new contract with
our pilots also negatively impacted 2007 operating results.
Revenue growth in 2007 was due to strong FedEx Ground package
volume growth and continued growth in FedEx Express
International Priority (IP) services, as we
continued to focus on expanding these service offerings. Our
2007 revenues also reflected the acquisition of FedEx National
LTL (formerly known as Watkins Motor Lines), which added
approximately $760 million to 2007 revenue. Revenue growth
in 2007 was slightly offset by declines in copy product revenues
at FedEx Kinkos.
Operating income increased in 2007, as revenue growth at FedEx
Express and FedEx Ground more than offset reduced profitability
at the FedEx Freight segment and FedEx Kinkos. Operating
margin was flat in 2007 due to slower economic growth, the
negative impact of higher salaries and benefits primarily as a
result of the new labor contract with our pilots and the timing
of adjustments to our fuel surcharges at FedEx Express
(described below), as well as operating losses at FedEx National
LTL. Softening volumes in the LTL sector and ongoing expenses to
integrate the FedEx National LTL network negatively impacted the
performance of the FedEx Freight segment in 2007.
35
Salaries and employee benefits increased in 2007 as a result of
the new labor contract for the pilots of FedEx Express and the
FedEx National LTL acquisition. The impacts of expensing stock
options commencing in 2007 and higher retirement plan costs were
largely offset by lower incentive compensation accruals.
Purchased transportation costs increased in 2007 due to FedEx
Ground volume growth, the FedEx National LTL acquisition and IP
package volume growth.
The pilots of FedEx Express, who represent a small number of our
total employees, are employed under a collective bargaining
agreement. In October 2006, the pilots ratified a new four-year
labor contract that included signing bonuses and other upfront
compensation of approximately $143 million, as well as pay
increases and other benefit enhancements. These costs were
partially mitigated by reductions in variable incentive
compensation. The effect of this new agreement on second quarter
2007 net income was approximately $78 million net of
tax, or $0.25 per diluted share.
The timing and amount of fluctuations in fuel prices and our
ability to recover incremental fuel costs through our various
fuel surcharges continue to impact our results. Fuel costs
increased during 2007 due to an increase in the average price
per gallon of fuel and an increase in gallons consumed. Because
of the timing lag that exists between when we purchase fuel and
when our fuel surcharges are automatically adjusted at FedEx
Express, fuel surcharges were not sufficient to offset the
effect of changes in fuel costs on our operating results for
2007. Though 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 other
extra service fees 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 2007, 2006 and 2005 in the accompanying discussions
of each of our transportation segments.
Our 2006 results benefited from strong growth in the global
economy. During 2006, revenue growth was primarily attributable
to yield improvement across our transportation segments, package
volume growth in our IP services at FedEx Express and volume
growth at FedEx Ground and FedEx Freight. Yields improved
principally due to incremental fuel surcharges and base rate
increases.
Operating income increased during 2006 primarily due to revenue
growth and improved margins across all our transportation
segments. Yield and cost management activities, combined with
productivity gains across all transportation segments,
contributed to our margin growth. Operating income improvement
was partially offset by higher costs at FedEx Express to support
international volume growth, expansion costs at FedEx Ground and
reduced operating profit at FedEx Kinkos.
While fuel costs increased substantially in 2006, fuel
surcharges more than offset the effect of these higher fuel
costs. Salaries and employee benefits increased in 2006 due
largely to increases in wage rates, pension and medical
expenses. Pension expense increased $64 million in 2006 due
primarily to a reduction in the discount rate. Purchased
transportation increased in 2006 due primarily to the continued
increase in the use of contract carriers to support increasing
volumes at FedEx Ground, increased IP volumes at FedEx Express
and higher fuel surcharges from third-party transportation
providers, including our independent contractors.
Other
Income and Expense
Net interest expense decreased $51 million during 2007
primarily due to increased interest income earned on higher cash
balances. Net interest expense decreased $35 million during
2006 due primarily to the reduction in the level of outstanding
debt and capital leases as a result of scheduled payments,
increased interest income due to higher cash balances and
interest rates, and higher capitalized interest related to
modification of certain aircraft at FedEx Express.
Income
Taxes
Our effective tax rate was 37.3% in 2007, 37.7% in 2006 and
37.4% in 2005. Our 2007 tax rate was favorably impacted by the
conclusion of various state and federal tax audits and appeals.
This favorable impact was
36
partially offset by tax charges incurred as a result of a
reorganization in Asia associated with our acquisition in China
(described below). The 37.4% effective tax rate in 2005 was
favorably impacted by the reduction of a valuation allowance on
foreign tax credits arising from certain of our international
operations as a result of the passage of the American Jobs
Creation Act of 2004 and by a lower effective state tax rate.
For 2008, we expect our effective tax rate to be between 37.5%
and 38%. The actual rate, however, will depend on a number of
factors, including the amount and source of operating income.
Business
Acquisitions
On September 3, 2006, we acquired the assets and assumed
certain obligations of the LTL operations of Watkins Motor
Lines, a privately held company, and certain affiliates for
$787 million in cash. Watkins, a leading provider of
long-haul LTL services, was renamed FedEx National LTL and
meaningfully extends our leadership position in the heavyweight
LTL freight sector. The financial results of FedEx National LTL
are included in the FedEx Freight segment from the date of
acquisition.
On December 16, 2006, we acquired all of the outstanding
capital stock of ANC Holdings Ltd. (ANC), a United
Kingdom domestic express transportation company, for
$241 million, predominantly in cash. This acquisition
allows FedEx Express to better serve the United Kingdom domestic
market, which we previously served primarily through independent
agents.
On March 1, 2007, FedEx Express acquired Tianjin Datian W.
Group Co., Ltd.s (DTW Group) 50% share of the
FedEx-DTW International Priority express joint venture and
assets relating to DTW Groups domestic express network in
China for $427 million in cash. This acquisition converts
our joint venture with DTW Group into a wholly owned subsidiary
and increases our presence in China in the international and
domestic express businesses. Prior to the fourth quarter of
2007, we accounted for our investment in the joint venture under
the equity method.
The financial results of the ANC and DTW Group acquisitions, as
well as other immaterial business acquisitions during 2007, are
included in the FedEx Express segment from the date of
acquisition. These acquisitions were not material to our results
of operations or financial condition.
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. See Note 6 of the accompanying consolidated financial
statements for further discussion of this debt offering.
See Note 3 of the accompanying consolidated financial
statements for further information about these acquisitions.
Lease
Accounting Charge
Our results for 2006 included a noncash charge of
$79 million ($49 million net of tax, or $0.16 per
diluted share) to adjust the accounting for certain facility
leases, predominantly at FedEx Express. The charge, which
included the impact on prior years, related primarily to rent
escalations in on-airport facility leases that were not being
recognized appropriately.
Airline
Stabilization Act Charge
In 2005, the United States Department of Transportation
(DOT) issued a final order in its administrative
review of the FedEx Express claim for compensation under the Air
Transportation Safety and System Stabilization Act. As a result,
we recorded a charge of $48 million in 2005
($31 million net of tax, or $0.10 per diluted share),
representing the DOTs repayment demand of $29 million
and the write-off of a $19 million receivable.
Outlook
Our outlook for 2008 reflects continued investment in several
major, long-term initiatives in a soft but stable
U.S. economy. Outside the United States, economic activity
is expected to continue to expand, but at a more
37
moderate pace than in 2007. As a result, we expect our revenue
trends to moderate in 2008, with growth driven by increased
shipments at FedEx Ground, the full-year benefit of the FedEx
National LTL business and expansion of international business at
FedEx Express (both IP and international domestic services).
We expect our earnings in 2008 to be below our long-term goal of
10% to 15% annual earnings growth due to the softening
U.S. economy and planned investments in our businesses,
which are critical to our
long-term
strategy. We remain optimistic about the long-term prospects for
all of our business segments.
We expect to make significant investments to expand our global
networks, in part through the continued integration and
expansion of the businesses we acquired in 2007. Our planned
investments for 2008 are focused on the following three key
opportunities:
|
|
|
support for long-term volume growth, such as additional or
expanded facilities across all segments, new aircraft (such as
the Boeing 757 and 777 Freighter) and expansion of our
international domestic express businesses;
|
|
|
improvements in service levels, including expanded delivery
areas for the FedEx Priority Overnight and FedEx First Overnight
services at FedEx Express and reduced transit times at FedEx
Ground; and
|
|
|
improvements to productivity, including updates and enhancements
to our technology capabilities.
|
FedEx Kinkos will continue to focus on key strategies
related to adding new locations, improving customer service and
increasing investments in employee development and training. We
expect these strategies to continue to adversely affect
profitability in 2008. FedEx Kinkos plans to open
approximately 300 new centers in the coming year, which will
bring the total number of centers to approximately 2,000 by the
end of 2008.
All of our transportation businesses operate in a competitive
pricing environment, exacerbated by continuing volatile fuel
prices. Historically, our fuel surcharges have generally been
sufficient to 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 affect our earnings.
See Risk Factors for a discussion of these and other
potential risks and uncertainties that could materially affect
our future performance.
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 Kinkos, 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. In addition, the transportation and
business services industries are directly affected by the state
of the overall global economy.
NEW
ACCOUNTING PRONOUNCEMENTS
New accounting rules and disclosure requirements can
significantly impact the comparability of our financial
statements. We believe the following new accounting
pronouncements, which were issued or became effective for us
during 2007, are relevant to the readers of our financial
statements.
On June 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards (SFAS) 123R,
Share-Based Payment, which requires recognition of
compensation expense for stock-based awards using a fair value
method. The adoption of SFAS 123R reduced earnings for 2007
by $0.17 per diluted share. For
38
additional information on the impact of the adoption of
SFAS 123R, refer to Note 1 to the accompanying
consolidated financial statements.
On May 31, 2007, we adopted SFAS 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, which requires recognition in
the balance sheet of the funded status of defined benefit
pension and other postretirement benefit plans, and the
recognition in accumulated other comprehensive income of
unrecognized gains or losses, prior service costs or credits and
transition assets or obligations existing at the time of
adoption. Additionally, SFAS 158 requires the measurement
date for plan assets and liabilities to coincide with the
sponsors year-end. We currently use a February 28
measurement date for our plans; therefore, this standard will
require us to change our measurement date to May 31 (beginning
in 2009).
The funded status recognition and disclosure provisions of
SFAS 158 were effective for FedEx as of May 31, 2007.
The requirement to measure plan assets and benefit obligations
as of our fiscal year-end is effective for FedEx no later than
2009.
The adoption of SFAS 158 resulted in a $982 million
charge to shareholders equity at May 31, 2007 through
accumulated other comprehensive income. Under SFAS 158, we
were required to write off our prepaid pension asset of
$1.4 billion and increase our pension and other
postretirement benefit liabilities by $120 million. These
adjustments, net of deferred taxes of $582 million, were
required to recognize the unfunded projected benefit obligation
in our balance sheet. SFAS 158 has no impact on the
determination of expense for our pension or other postretirement
benefit plans.
In February 2007, we announced changes to modernize certain of
our retirement programs over the next two fiscal years.
Effective January 1, 2008, we will increase the annual
company matching contribution under the largest of our 401(k)
plans covering most employees from $500 to a maximum of 3.5% of
eligible compensation. Effective May 31, 2008, benefits
previously accrued under our primary pension plans using a
traditional pension benefit formula will be capped for most
employees, and those benefits will be payable beginning at
retirement. Beginning June 1, 2008, future pension benefits
for most employees will be accrued under a cash balance formula
we call the Portable Pension Account. These changes will not
affect the benefits of current retirees. For additional
information on the adoption of SFAS 158 and these changes,
see Note 12 to the accompanying audited financial
statements and the Critical Accounting Estimates section of this
MD&A.
In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
Taxes. This interpretation establishes new standards for
the financial statement recognition, measurement and disclosure
of uncertain tax positions taken or expected to be taken in
income tax returns. The new rules will be effective for FedEx in
the first quarter of 2008. The adoption of this interpretation
will not have a material effect on our financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, which eliminates the diversity
in practice surrounding the quantification and evaluation of
financial statement errors. The guidance outlined in
SAB 108 was effective for FedEx in the fourth quarter of
2007 and is consistent with our historical practices for
assessing such matters when circumstances have required such an
evaluation.
39
REPORTABLE
SEGMENTS
FedEx Express, FedEx Ground, FedEx Freight and FedEx
Kinkos represent our major service lines and form the core
of our reportable segments. (For further discussion of our
operating companies, refer to Item 1:
Business.) As of May 31, 2007, our reportable
segments included the following businesses:
FedEx Express (express transportation)
FedEx Trade Networks (global trade services)
FedEx Ground (small-package ground delivery)
FedEx SmartPost (small-parcel consolidator)
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 Kinkos (document solutions and business services)
FEDEX
SERVICES & OTHER INTERSEGMENT
TRANSACTIONS
FedEx Services provides customer-facing sales, marketing and
information technology support, primarily for FedEx Express and
FedEx Ground. The costs for these activities are allocated based
on metrics such as relative revenues or estimated services
provided. We believe these allocations approximate the cost of
providing these functions.
The operating expenses line item Intercompany
charges on the accompanying unaudited financial summaries
of our reportable segments includes the allocations from FedEx
Services to the respective 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 segment financial performance based on
operating income.
Effective June 1, 2006, we moved the credit, collections
and customer service functions with responsibility for FedEx
Express U.S. and FedEx Ground customer information from
FedEx Express into a new subsidiary of FedEx Services named
FedEx Customer Information Services, Inc. (FCIS).
Also, effective June 1, 2006, we moved FedEx Supply Chain
Services, Inc., the results of which were previously reported in
the FedEx Ground segment, into a new subsidiary of FedEx
Services named FedEx Global Supply Chain Services, Inc. The
costs of providing these customer service functions and the net
operating costs of FedEx Global Supply Chain Services are
allocated back to the FedEx Express and FedEx Ground segments.
Prior year amounts have not been reclassified to conform to the
current year segment presentation, as the financial results are
materially comparable.
Certain FedEx operating companies provide transportation and
related services for other FedEx companies outside their
reportable segment. Billings for such services are based on
negotiated rates that we believe approximate fair value and are
reflected as revenues of the billing segment. These rates are
adjusted from time to time based on market conditions. FedEx
Kinkos segment revenues include package acceptance
revenue, which represents the fee received by FedEx Kinkos
from FedEx Express and FedEx Ground for accepting and handling
packages at FedEx Kinkos locations on behalf of these
operating companies. Package acceptance
40
revenue does not include the external revenue associated with
the actual shipments. 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.
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
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007/2006
|
|
|
2006/2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Package:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
$
|
6,485
|
|
|
$
|
6,422
|
|
|
$
|
5,969
|
|
|
|
1
|
|
|
|
8
|
|
U.S. overnight envelope
|
|
|
1,990
|
|
|
|
1,974
|
|
|
|
1,798
|
|
|
|
1
|
|
|
|
10
|
|
U.S. deferred
|
|
|
2,883
|
|
|
|
2,853
|
|
|
|
2,799
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. domestic package revenue
|
|
|
11,358
|
|
|
|
11,249
|
|
|
|
10,566
|
|
|
|
1
|
|
|
|
6
|
|
International Priority
(IP)(1)
|
|
|
6,722
|
|
|
|
6,139
|
|
|
|
5,464
|
|
|
|
9
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total package revenue
|
|
|
18,080
|
|
|
|
17,388
|
|
|
|
16,030
|
|
|
|
4
|
|
|
|
8
|
|
Freight:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
2,412
|
|
|
|
2,218
|
|
|
|
1,854
|
|
|
|
9
|
|
|
|
20
|
|
International priority
freight(1)
|
|
|
1,045
|
|
|
|
840
|
|
|
|
670
|
|
|
|
24
|
|
|
|
25
|
|
International airfreight
|
|
|
394
|
|
|
|
434
|
|
|
|
381
|
|
|
|
(9
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenue
|
|
|
3,851
|
|
|
|
3,492
|
|
|
|
2,905
|
|
|
|
10
|
|
|
|
20
|
|
Other(2)
|
|
|
750
|
|
|
|
566
|
|
|
|
550
|
|
|
|
33
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
22,681
|
|
|
|
21,446
|
|
|
|
19,485
|
|
|
|
6
|
|
|
|
10
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
8,234
|
(3)
|
|
|
8,033
|
|
|
|
7,704
|
|
|
|
3
|
|
|
|
4
|
|
Purchased transportation
|
|
|
1,098
|
|
|
|
971
|
|
|
|
843
|
|
|
|
13
|
|
|
|
15
|
|
Rentals and landing fees
|
|
|
1,610
|
|
|
|
1,696
|
(4)
|
|
|
1,608
|
|
|
|
(5
|
)
|
|
|
5
|
|
Depreciation and amortization
|
|
|
856
|
|
|
|
805
|
|
|
|
798
|
|
|
|
6
|
|
|
|
1
|
|
Fuel
|
|
|
2,946
|
|
|
|
2,786
|
|
|
|
2,012
|
|
|
|
6
|
|
|
|
38
|
|
Maintenance and repairs
|
|
|
1,444
|
|
|
|
1,344
|
|
|
|
1,276
|
|
|
|
7
|
|
|
|
5
|
|
Airline Stabilization Act charge
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
NM
|
|
|
|
NM
|
|
Intercompany charges
|
|
|
2,082
|
|
|
|
1,542
|
|
|
|
1,509
|
|
|
|
35
|
|
|
|
2
|
|
Other
|
|
|
2,456
|
|
|
|
2,502
|
|
|
|
2,273
|
|
|
|
(2
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,726
|
|
|
|
19,679
|
|
|
|
18,071
|
|
|
|
5
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,955
|
|
|
$
|
1,767
|
|
|
$
|
1,414
|
|
|
|
11
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
8.6
|
%
|
|
|
8.2
|
%
|
|
|
7.3
|
%
|
|
|
40
|
bp
|
|
|
90
|
bp
|
|
|
|
(1) |
|
We reclassified certain prior
period international priority freight service revenues
previously included within IP package revenues to international
priority freight revenues to conform to the current period
presentation and more precisely present the nature of the
services provided.
|
|
(2) |
|
Other revenues includes FedEx Trade
Networks and our international domestic express businesses, such
as ANC, DTW Group and our Canadian domestic express operations.
|
|
(3) |
|
Includes a $143 million charge
for signing bonuses and other upfront compensation associated
with a new four-year labor contract with our pilots.
|
|
(4) |
|
Includes a $75 million
one-time, noncash charge to adjust the accounting for certain
facility leases.
|
41
The following table compares selected statistics (in thousands,
except yield amounts) for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007/2006
|
|
|
2006/2005
|
|
|
Package
Statistics(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily package volume (ADV):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
|
1,174
|
|
|
|
1,203
|
|
|
|
1,184
|
|
|
|
(2
|
)
|
|
|
2
|
|
U.S. overnight envelope
|
|
|
706
|
|
|
|
713
|
|
|
|
680
|
|
|
|
(1
|
)
|
|
|
5
|
|
U.S. deferred
|
|
|
898
|
|
|
|
901
|
|
|
|
958
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. domestic ADV
|
|
|
2,778
|
|
|
|
2,817
|
|
|
|
2,822
|
|
|
|
(1
|
)
|
|
|
|
|
IP(2)
|
|
|
487
|
|
|
|
466
|
|
|
|
433
|
|
|
|
5
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADV
|
|
|
3,265
|
|
|
|
3,283
|
|
|
|
3,255
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per package (yield):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
$
|
21.66
|
|
|
$
|
20.94
|
|
|
$
|
19.77
|
|
|
|
3
|
|
|
|
6
|
|
U.S. overnight envelope
|
|
|
11.06
|
|
|
|
10.86
|
|
|
|
10.37
|
|
|
|
2
|
|
|
|
5
|
|
U.S. deferred
|
|
|
12.59
|
|
|
|
12.42
|
|
|
|
11.46
|
|
|
|
1
|
|
|
|
8
|
|
U.S. domestic composite
|
|
|
16.04
|
|
|
|
15.66
|
|
|
|
14.69
|
|
|
|
2
|
|
|
|
7
|
|
IP(2)
|
|
|
54.13
|
|
|
|
51.64
|
|
|
|
49.47
|
|
|
|
5
|
|
|
|
4
|
|
Composite package yield
|
|
|
21.72
|
|
|
|
20.77
|
|
|
|
19.31
|
|
|
|
5
|
|
|
|
8
|
|
Freight
Statistics(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily freight pounds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
9,569
|
|
|
|
9,374
|
|
|
|
8,885
|
|
|
|
2
|
|
|
|
6
|
|
International priority
freight(2)
|
|
|
1,878
|
|
|
|
1,634
|
|
|
|
1,395
|
|
|
|
15
|
|
|
|
17
|
|
International airfreight
|
|
|
1,831
|
|
|
|
2,126
|
|
|
|
1,914
|
|
|
|
(14
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average daily freight pounds
|
|
|
13,278
|
|
|
|
13,134
|
|
|
|
12,194
|
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per pound (yield):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
0.99
|
|
|
$
|
0.93
|
|
|
$
|
0.82
|
|
|
|
6
|
|
|
|
13
|
|
International priority
freight(2)
|
|
|
2.18
|
|
|
|
2.02
|
|
|
|
1.88
|
|
|
|
8
|
|
|
|
7
|
|
International airfreight
|
|
|
0.84
|
|
|
|
0.80
|
|
|
|
0.78
|
|
|
|
5
|
|
|
|
3
|
|
Composite freight yield
|
|
|
1.14
|
|
|
|
1.04
|
|
|
|
0.93
|
|
|
|
10
|
|
|
|
12
|
|
|
|
|
(1) |
|
Package and freight statistics
include only the operations of FedEx Express.
|
|
(2) |
|
We reclassified certain prior
period international priority freight service statistics
previously included within the IP package statistics to
international priority freight statistics to conform to the
current period presentation and more precisely present the
nature of the services provided.
|
FedEx
Express Segment Revenues
Solid yield growth primarily due to pricing discipline
contributed to revenue growth in 2007, despite flat package
volume growth. Package revenue growth in 2007 was driven by IP
revenues, which grew 9% on yield growth of 5% as a result of
yield improvements across all regions and a 5% increase in
volumes due to IP volume growth in U.S. outbound, Asia and
Europe, as we continued to focus on expanding this service. Also
contributing to revenue growth in 2007 were increases in other
revenues primarily due to our acquisition of ANC and increases
in freight revenues due to higher U.S. and international
priority freight volumes. U.S. domestic package revenues
increased 1% as a result of yield improvements, partially offset
by a decrease in volumes.
IP yield increased during 2007 as a result of favorable exchange
rates, higher package weights and an increase in the average
rate per pound. U.S. domestic composite yield increases in
2007 were due to an increase in the
42
average rate per pound, partially offset by changes in product
mix and lower package weights. U.S. freight yield increased
in 2007 due to an increase in the average rate per pound and
higher fuel surcharges.
IP volume growth in 2007 was primarily due to increased demand
in the U.S. outbound, Asia and Europe markets.
U.S. domestic package volumes decreased during 2007
primarily due to the moderating growth rate of the
U.S. economy.
FedEx Express segment revenues increased in 2006 due to yield
improvements and volume growth in IP services (particularly in
Asia, U.S. outbound and Europe). U.S. domestic package
and U.S. freight revenue growth also contributed to the
revenue increase for 2006. U.S. volumes were flat compared
to the prior year, as growth in our U.S. domestic overnight
services was offset by declines in deferred volumes that
resulted from yield management actions.
IP yield increased during 2006 due to higher fuel surcharges and
increases in international average weight per package and
average rate per pound. U.S. domestic composite yield
increases were due to higher fuel surcharges and improved yields
on U.S. domestic deferred packages. Improvements in
U.S. domestic deferred yield resulted from our continued
efforts to improve the profitability of this service.
U.S. freight yield increases were due to an increase in
average rate per pound and higher fuel surcharges.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. Domestic and Outbound Fuel
Surcharge:
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
8.50
|
%
|
|
|
10.50
|
%
|
|
|
6.00
|
%
|
High
|
|
|
17.00
|
|
|
|
20.00
|
|
|
|
13.00
|
|
Weighted-average
|
|
|
12.91
|
|
|
|
13.69
|
|
|
|
9.05
|
|
International Fuel Surcharges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
8.50
|
|
|
|
10.00
|
|
|
|
3.00
|
|
High
|
|
|
17.00
|
|
|
|
20.00
|
|
|
|
13.00
|
|
Weighted-average
|
|
|
12.98
|
|
|
|
12.73
|
|
|
|
8.45
|
|
FedEx
Express Segment Operating Income
Despite slower overall revenue growth, operating income and
operating margin increased in 2007. Increases in operating
income and margin in 2007 resulted from growth in IP services
and were partially offset by costs associated with the
ratification of a new labor contract with our pilots in October
2006. These costs included signing bonuses and other upfront
compensation of $143 million, as well as pay increases and
other benefit enhancements, which were mitigated by reductions
in variable incentive compensation. Year-over-year results in
2007 were positively affected by a $75 million charge in
2006 to adjust the accounting for certain facility leases.
Fuel costs increased during 2007 due to an increase in the
average price per gallon of fuel. Fuel surcharges did not offset
the effect of higher fuel costs on our year-over-year operating
results for 2007, due to the timing lag that exists between when
we purchase fuel and when our fuel surcharges are adjusted,
based on a static analysis of the year-over-year changes in fuel
prices compared to changes in fuel surcharges.
Salaries and employee benefits increased in 2007 primarily as a
result of the new labor contract with our pilots. Purchased
transportation costs increased 13% in 2007 due to IP volume
growth, which required a higher utilization of contract pickup
and delivery services and an increase in the cost of purchased
transportation. We use purchased transportation in markets where
we do not have a direct presence or to meet short-term capacity
needs. Maintenance and repairs increased 7% in 2007 primarily
due to higher aircraft maintenance expenses for various
airframes and Airbus A300 engines. The 5% decrease in rentals
and landing fees in 2007 was attributable to the one-time
adjustment for leases in 2006 described above. Intercompany
charges increased 35% in 2007 due to allocations as a result of
moving the FCIS organization from FedEx
43
Express to FedEx Services in 2007. The costs associated with the
FCIS organization in 2006 were of a comparable amount but were
reported in individual operating expense captions.
During 2007, we terminated our agreement with Airbus for the
purchase of A380 aircraft and in March 2007 entered into a
separate settlement agreement with Airbus that, among other
things, provides us with credit memoranda applicable to the
purchase of goods and services in the future. The net impact of
this settlement was immaterial to our 2007 results and was
recorded as an operating gain during the fourth quarter of 2007.
Operating income grew significantly in 2006 as a result of
strong revenue growth and improved operating margin. Volume
growth in higher margin U.S. domestic overnight and IP
services contributed to yield improvements. Improved yields,
combined with productivity gains and cost containment, allowed
FedEx Express to improve operating margin in 2006. Revenue and
margin growth for 2006 more than offset the
one-time
adjustment for leases and costs associated with two new
around-the-world flights.
In 2006, salaries and benefits increased primarily due to higher
pension costs and wage rates. Fuel costs were higher in 2006
primarily due to an increase in the average price per gallon of
jet fuel, while gallons consumed increased slightly, primarily
related to the two new around-the-world flights. However, our
fuel surcharges substantially mitigated the impact of higher jet
fuel prices. Purchased transportation costs increased in 2006,
though at a slower rate than in 2005, driven by IP volume
growth, which required a higher utilization of contract pickup
and delivery services. Rentals and landing fees increased in
2006, primarily due to the one-time adjustment for leases of
$75 million.
FedEx
Express Segment Outlook
We expect moderate revenue growth at FedEx Express in 2008, as
growth in both IP and domestic package services will continue to
slow as a result of the softening U.S. economy and
declining growth outside the U.S. The majority of the
revenue increase in 2008 will be provided by IP services, as we
continue to focus on growing our service offerings in
international markets, particularly China and Europe. Our
international domestic revenue is projected to increase in 2008
due to the full-year benefit of 2007 acquisitions such as ANC
and DTW Group and the expansion of our China domestic service.
Operating income and operating margin are expected to improve in
2008 despite the soft U.S. economy due to continued cost
containment and productivity improvements. Capital expenditures
at FedEx Express are expected to be higher in 2008 due to
investments in equipment and facilities necessary to support
projected long-term volume growth, as well as continued
investments in China. In March 2006, we broke ground on a new
$150 million Asia-Pacific hub in the southern China city of
Guangzhou. This hub is planned to be operational in 2009.
Aircraft-related capital and expense outlays, including support
of our Boeing 757 program and the new Boeing 777 Freighter
fleet, are expected to approximate 2007 spending levels. We will
continue to make strategic investments despite short-term
economic softness.
44
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
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007/2006
|
|
|
2006/2005
|
|
|
Revenues
|
|
$
|
6,043
|
|
|
$
|
5,306
|
|
|
$
|
4,680
|
|
|
|
14
|
|
|
|
13
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,006
|
|
|
|
929
|
|
|
|
845
|
|
|
|
8
|
|
|
|
10
|
|
Purchased transportation
|
|
|
2,326
|
|
|
|
2,019
|
|
|
|
1,791
|
|
|
|
15
|
|
|
|
13
|
|
Rentals
|
|
|
166
|
|
|
|
133
|
|
|
|
122
|
|
|
|
25
|
|
|
|
9
|
|
Depreciation and amortization
|
|
|
268
|
|
|
|
224
|
|
|
|
176
|
|
|
|
20
|
|
|
|
27
|
|
Fuel
|
|
|
117
|
|
|
|
93
|
|
|
|
48
|
|
|
|
26
|
|
|
|
94
|
|
Maintenance and repairs
|
|
|
134
|
|
|
|
118
|
|
|
|
110
|
|
|
|
14
|
|
|
|
7
|
|
Intercompany charges
|
|
|
578
|
|
|
|
526
|
|
|
|
482
|
|
|
|
10
|
|
|
|
9
|
|
Other
|
|
|
635
|
|
|
|
559
|
|
|
|
502
|
|
|
|
14
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,230
|
|
|
|
4,601
|
|
|
|
4,076
|
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
813
|
|
|
$
|
705
|
|
|
$
|
604
|
|
|
|
15
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
13.5
|
%
|
|
|
13.3
|
%
|
|
|
12.9
|
%
|
|
|
20
|
bp
|
|
|
40
|
bp
|
FedEx Ground:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily package volume
|
|
|
3,126
|
|
|
|
2,815
|
|
|
|
2,609
|
|
|
|
11
|
|
|
|
8
|
|
Revenue per package (yield)
|
|
$
|
7.21
|
|
|
$
|
7.02
|
|
|
$
|
6.68
|
|
|
|
3
|
|
|
|
5
|
|
FedEx
Ground Segment Revenues
Strong volume growth fueled a 14% increase in revenue during
2007. Average daily volumes at FedEx Ground rose 11% because of
increased commercial business and the continued growth of our
FedEx Home Delivery service. Yield improvement during 2007 was
primarily due to the impact of general rate increases and higher
extra service revenues, primarily on our residential services.
This yield increase was partially offset by higher customer
discounts and a lower average weight and zone per package.
Additionally, revenue at FedEx SmartPost increased significantly
in 2007 due to increased market share, as a major competitor
exited this market in 2006, enabling significant growth in the
customer base and related volumes.
Revenues increased during 2006 due to volume increases and yield
improvement. Average daily volumes increased across all of our
services, led by the continued growth of our FedEx Home Delivery
service. Yield improvement during 2006 was primarily due to
increased fuel surcharges, higher extra service revenue and the
impact of general rate increases. These increases were partially
offset by higher customer discounts and a lower average weight
per package.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Low
|
|
|
3.50
|
%
|
|
|
2.50
|
%
|
|
|
1.80
|
%
|
High
|
|
|
5.25
|
|
|
|
5.25
|
|
|
|
2.50
|
|
Weighted-average
|
|
|
4.18
|
|
|
|
3.54
|
|
|
|
2.04
|
|
No fuel surcharge was in effect from January 2004 to January
2005.
45
FedEx
Ground Segment Operating Income
FedEx Ground segment operating income increased 15% during 2007
principally due to revenue growth and improved results at FedEx
SmartPost. Operating margin increased only slightly in 2007, as
revenue growth was partially offset by increased purchased
transportation costs, increased legal costs and higher
depreciation and rent expense associated with network expansion.
Purchased transportation increased 15% in 2007 primarily due to
volume growth and higher rates paid to our independent
contractors, including fuel supplements. Our fuel surcharge was
sufficient to offset the effect of higher fuel costs on our
operating results, based on a static analysis of the
year-over-year changes in fuel prices compared to changes in the
fuel surcharge. Other operating expenses increased 14% in 2007
primarily due to increased legal costs. Depreciation expense
increased 20% and rent expense increased 25% principally due to
higher spending on material handling and scanning equipment and
facilities associated with our
multi-year
network expansion.
Effective June 1, 2006, we moved FedEx Supply Chain
Services, Inc., the results of which were previously reported in
the FedEx Ground segment, into a new subsidiary of FedEx
Services named FedEx Global Supply Chain Services, Inc. The net
operating costs of this entity are allocated to FedEx Express
and FedEx Ground. Prior year amounts have not been reclassified
to conform to the current year segment presentation, as
financial results are materially comparable.
FedEx Ground segment operating income increased in 2006,
resulting principally from revenue growth and yield improvement.
Operating margin for the segment improved in 2006 due to fuel
surcharges, general rate increases, improved productivity and
the inclusion in 2005 of a $10 million charge at FedEx
Supply Chain Services related to the termination of a vendor
agreement. A portion of the operating margin improvement was
offset by higher year-over-year expenses related to investments
in new technology and the opening of additional FedEx Ground
facilities.
Salaries and employee benefits increased in 2006 principally due
to wage rate increases and increases in staffing and facilities
to support volume growth. Depreciation expense in 2006 increased
at a higher rate than revenue due to increased spending
associated with material handling and scanning equipment. In
2006, purchased transportation increased due to increased
volumes and an increase in the cost of purchased transportation
due to higher fuel surcharges from third-party transportation
providers, including our independent contractors.
FedEx
Ground Segment Outlook
We expect the FedEx Ground segment to have revenue growth in
2008 consistent with 2007, led by continued strong volume growth
at FedEx Ground and FedEx SmartPost. FedEx Grounds average
daily volume is expected to increase in 2008 due to increased
base business and FedEx Home Delivery volumes. FedEx SmartPost
volumes are also expected to grow, because of increased market
share and improved service levels. Yields for all services at
FedEx Ground are expected to increase in 2008 from increases in
list prices and residential and commercial delivery area
surcharges.
FedEx Grounds operating margin in 2008 is expected to
improve from continued cost controls, productivity gains and
yield improvements, partially offset by the impact of our
network expansion and increased purchased transportation costs.
Capital spending is expected to grow, as we continue with
comprehensive network expansion and productivity-enhancing
technologies within the FedEx Ground segment. During 2008, the
multi-phase expansion plan includes one new hub, 14 expanded
hubs and two relocated facilities. We are committed to investing
in the FedEx Ground network because of the long-term benefits we
will experience from these investments.
46
FEDEX
FREIGHT SEGMENT
The following table shows revenues, operating expenses,
operating income and operating margin (dollars in millions) and
selected statistics for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007/2006
|
|
|
2006/2005
|
|
|
Revenues
|
|
$
|
4,586
|
|
|
$
|
3,645
|
|
|
$
|
3,217
|
|
|
|
26
|
|
|
|
13
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,250
|
|
|
|
1,801
|
|
|
|
1,650
|
|
|
|
25
|
|
|
|
9
|
|
Purchased transportation
|
|
|
465
|
|
|
|
298
|
|
|
|
315
|
|
|
|
56
|
|
|
|
(5
|
)
|
Rentals and landing fees
|
|
|
112
|
|
|
|
94
|
|
|
|
99
|
|
|
|
19
|
|
|
|
(5
|
)
|
Depreciation and amortization
|
|
|
195
|
|
|
|
120
|
|
|
|
102
|
|
|
|
63
|
|
|
|
18
|
|
Fuel
|
|
|
468
|
|
|
|
377
|
|
|
|
257
|
|
|
|
24
|
|
|
|
47
|
|
Maintenance and repairs
|
|
|
165
|
|
|
|
120
|
|
|
|
128
|
|
|
|
38
|
|
|
|
(6
|
)
|
Intercompany charges
|
|
|
61
|
|
|
|
37
|
|
|
|
26
|
|
|
|
65
|
|
|
|
42
|
|
Other
|
|
|
407
|
|
|
|
313
|
|
|
|
286
|
|
|
|
30
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,123
|
|
|
|
3,160
|
|
|
|
2,863
|
|
|
|
30
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
463
|
|
|
$
|
485
|
|
|
$
|
354
|
|
|
|
(5
|
)
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
10.1
|
%
|
|
|
13.3
|
%
|
|
|
11.0
|
%
|
|
|
(320
|
) bp
|
|
|
230
|
bp
|
Average daily LTL shipments (in
thousands)
|
|
|
78
|
|
|
|
67
|
|
|
|
63
|
|
|
|
16
|
|
|
|
6
|
|
Weight per LTL shipment (lbs)
|
|
|
1,130
|
|
|
|
1,143
|
|
|
|
1,132
|
|
|
|
(1
|
)
|
|
|
1
|
|
LTL yield (revenue per
hundredweight)
|
|
$
|
18.65
|
|
|
$
|
16.84
|
|
|
$
|
15.48
|
|
|
|
11
|
|
|
|
9
|
|
The results of operations of FedEx National LTL are included in
FedEx Freight segment results from the date of acquisition on
September 3, 2006.
FedEx
Freight Segment Revenues
FedEx Freight segment revenues increased 26% in 2007 primarily
as a result of the acquisition of FedEx National LTL, which
contributed significantly to an increase in average daily LTL
shipments of 16% and LTL yield of 11%. Average daily LTL
shipments excluding FedEx National LTL grew slightly in 2007 due
to increased demand for our regional and interregional services.
This growth rate moderated throughout the year, however, with
year-over-year declines in the second half of 2007. LTL yield
growth was due to higher yields from longer-haul FedEx National
LTL shipments, higher rates and favorable contract renewals.
FedEx Freight segment revenues increased 13% in 2006 due to
growth in LTL yield and average daily LTL shipments. LTL yield
grew during 2006, reflecting incremental fuel surcharges
resulting from higher fuel prices and higher rates. Average
daily LTL shipment growth in 2006 was driven in part by features
such as our no-fee money-back guarantee and our Advance Notice
service, which continue to differentiate us in the LTL market.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Low
|
|
|
14.0
|
%
|
|
|
12.5
|
%
|
|
|
7.6
|
%
|
High
|
|
|
21.2
|
|
|
|
20.1
|
|
|
|
14.0
|
|
Weighted-average
|
|
|
17.8
|
|
|
|
16.3
|
|
|
|
11.0
|
|
47
FedEx
Freight Segment Operating Income
FedEx Freight segment operating income decreased 5% during 2007
due to operating losses at FedEx National LTL, which resulted
from softening volumes and ongoing expenses to integrate its
network. The inclusion of FedEx National LTL in our results has
impacted the year-over-year comparability of all of our
operating expenses. Along with incremental costs from FedEx
National LTL (including amortization of acquired intangible
assets), depreciation expense increased due to prior-year
purchases of vehicles and other operating equipment to support
volume growth. Purchased transportation increased due to higher
rates paid to our third-party transportation providers and the
utilization of third-party providers at FedEx National LTL.
While fuel costs increased in 2007, our fuel surcharge was more
than sufficient to offset the effect of higher fuel costs, based
on a static analysis of the year-over-year changes in fuel
prices compared to changes in the fuel surcharge.
FedEx Freight segment operating income increased in 2006
primarily due to LTL revenue growth, as well as our ability to
control costs in line with volume growth. Increased staffing to
support volume growth and higher incentive compensation expense
increased salaries and employee benefits in 2006. While fuel
costs increased substantially in 2006, fuel surcharges more than
offset the effect of higher fuel costs. Depreciation costs
increased in 2006 primarily due to investments in operating
equipment, which in some cases replaced leased equipment.
Maintenance and repairs decreased in 2006 due to the presence of
rebranding costs in 2005, as well as an increase in the purchase
of new fleet vehicles. Purchased transportation costs decreased,
due to increased utilization of company equipment in our
interregional freight services.
FedEx
Freight Segment Outlook
We expect FedEx Freight segment revenue to increase in 2008 due
to continued growth in our LTL business and the inclusion of
FedEx National LTL for the full year. LTL yield is expected to
increase due to our continued focus on pricing discipline, as
well as the impact of higher yields on longer-haul FedEx
National LTL shipments. Ongoing costs to integrate information
technology systems and to increase sales resources to support
long-term growth opportunities, as well as incremental costs
associated with facility expansions, are expected to restrain
operating income and operating margin growth in 2008. Continued
investments in facilities and equipment to support revenue
growth and in technology to improve productivity and to meet our
customers needs account for the majority of the total
incremental capital spending anticipated for 2008. We expect our
rebranding efforts at FedEx National LTL to continue in 2008.
FEDEX
KINKOS SEGMENT
The following table shows revenues, operating expenses,
operating income and operating margin (dollars in millions) for
the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007/2006
|
|
|
2006/2005
|
|
|
Revenues
|
|
$
|
2,040
|
|
|
$
|
2,088
|
|
|
$
|
2,066
|
|
|
|
(2
|
)
|
|
|
1
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
781
|
|
|
|
752
|
|
|
|
742
|
|
|
|
4
|
|
|
|
1
|
|
Rentals
|
|
|
375
|
|
|
|
394
|
|
|
|
412
|
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Depreciation and amortization
|
|
|
139
|
|
|
|
148
|
|
|
|
138
|
|
|
|
(6
|
)
|
|
|
7
|
|
Maintenance and repairs
|
|
|
66
|
|
|
|
73
|
|
|
|
70
|
|
|
|
(10
|
)
|
|
|
4
|
|
Intercompany charges
|
|
|
57
|
|
|
|
26
|
|
|
|
6
|
|
|
|
NM
|
|
|
|
NM
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies, including paper and toner
|
|
|
263
|
|
|
|
274
|
|
|
|
278
|
|
|
|
(4
|
)
|
|
|
(1
|
)
|
Other
|
|
|
314
|
|
|
|
364
|
|
|
|
320
|
|
|
|
(14
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,995
|
|
|
|
2,031
|
|
|
|
1,966
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
45
|
|
|
$
|
57
|
|
|
$
|
100
|
|
|
|
(21
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
2.2
|
%
|
|
|
2.7
|
%
|
|
|
4.8
|
%
|
|
|
(50
|
) bp
|
|
|
(210
|
) bp
|
48
FedEx
Kinkos Segment Revenues
Revenues decreased slightly during 2007 due to decreased demand
for copy products and the discontinuation of unprofitable
service offerings, which more than offset higher package
acceptance fees from FedEx Express and FedEx Ground. During
2007, FedEx Kinkos announced a multi-year network
expansion plan, including the model for new centers, which will
be approximately one-third the size of a traditional center and
will include enhanced
pack-and-ship
stations and a doubling of the number of retail office products
offered. While revenues from new centers were not significant in
2007, this multi-year expansion of the FedEx Kinkos
network is a key strategy relating to FedEx Kinkos future
revenue growth. In addition, this expansion will provide FedEx
Express and FedEx Ground customers with more retail access
points. FedEx Kinkos opened 226 new centers during 2007.
In 2006, a year-over-year increase in package acceptance revenue
led to modest revenue growth. Package acceptance revenue
benefited year over year from the April 2005 conversion of FedEx
World Service Centers to FedEx Kinkos Ship Centers. FedEx
Kinkos experienced declines in copy product line revenues
in 2006 due to decreased demand for these services and a
competitive pricing environment.
FedEx
Kinkos Segment Operating Income
Operating income decreased $12 million during 2007
primarily due to the decrease in copy product revenues, as well
as the impact of increased salaries and employee benefit costs
incurred in connection with expansion activities and significant
investments in employee training and development programs.
Rentals decreased during 2007 due to declines in copier rental
expenses, which are variable based on usage. The increase in
intercompany charges was primarily due to increased allocations
of sales and marketing and IT support functions in 2007.
Operating income decreased in 2006, as the increase in package
acceptance revenues was more than offset by a decline in copy
product line revenues. In 2006, salaries and employee benefits
increased due to the addition of FedEx Kinkos Ship
Centers, higher group health insurance costs and increased costs
associated with employee training and development programs.
Increased depreciation in 2006 was driven by center rebranding
and investments in new technology to replace legacy systems. The
increase for 2006 in other operating expenses was primarily due
to increased costs related to technology, strategic and product
offering initiatives.
FedEx
Kinkos Segment Outlook
We expect increased revenue at FedEx Kinkos in 2008
primarily due to the new store openings associated with the
multi-year network expansion, together with a sales force
realignment and marketing and service initiatives. The network
expansion program, combined with employee training and retention
programs, is expected to negatively impact operating income and
operating margin in 2008. These investments, however, are
focused on long-term profit and margin growth. Initiatives in
e-commerce
technology such as Print Online and new service offerings,
including our direct mail service, are expected to support
additional growth opportunities for 2008 and beyond. Capital
spending is expected to increase at FedEx Kinkos in 2008
primarily due to the multi-year network expansion and technology
investments. FedEx Kinkos plans to open approximately 300
new centers in 2008, which will bring the total number of
centers to approximately 2,000 by the end of the year.
49
FINANCIAL
CONDITION
LIQUIDITY
Cash and cash equivalents totaled $1.569 billion at
May 31, 2007, compared to $1.937 billion at
May 31, 2006 and $1.039 billion at May 31, 2005.
The following table provides a summary of our cash flows for the
years ended May 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,016
|
|
|
$
|
1,806
|
|
|
$
|
1,449
|
|
Noncash charges and credits
|
|
|
1,988
|
|
|
|
2,006
|
|
|
|
1,671
|
|
Changes in operating assets and
liabilities
|
|
|
(441
|
)
|
|
|
(136
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
|
3,563
|
|
|
|
3,676
|
|
|
|
3,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash
acquired
|
|
|
(1,310
|
)
|
|
|
|
|
|
|
(122
|
)
|
Capital expenditures and other
investing activities
|
|
|
(2,814
|
)
|
|
|
(2,454
|
)
|
|
|
(2,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(4,124
|
)
|
|
|
(2,454
|
)
|
|
|
(2,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt issuances
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(906
|
)
|
|
|
(369
|
)
|
|
|
(791
|
)
|
Dividends paid
|
|
|
(110
|
)
|
|
|
(97
|
)
|
|
|
(84
|
)
|
Other financing activities
|
|
|
155
|
|
|
|
142
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
193
|
|
|
|
(324
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
$
|
(368
|
)
|
|
$
|
898
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe that our existing cash and cash equivalents, cash
flow from operations, our commercial paper program, revolving
bank credit facility and shelf registration statement with the
SEC are adequate to meet our current and foreseeable future
working capital and capital expenditure needs. In addition,
other forms of secured financing may be used to obtain capital
assets if we determine that they best suit our needs for the
foreseeable future. We have been successful in obtaining
investment capital, both domestic and international, although
the marketplace for such capital can become restricted depending
on a variety of economic factors. We believe the capital
resources available to us provide flexibility to access the most
efficient markets for financing capital acquisitions, including
aircraft, and are adequate for our future capital needs.
Cash Provided by Operating Activities. Cash
flows from operating activities decreased $113 million in
2007 primarily due to an increase in income tax payments of
$184 million, partially offset by increased earnings. The
$559 million increase in cash flows from operating
activities in 2006 was principally due to increased earnings.
During 2007, we made tax-deductible voluntary contributions to
our principal U.S. domestic pension plans of
$482 million, compared to $456 million during 2006 and
$460 million during 2005.
Cash Used in Investing Activities. During
2007, $1.3 billion of cash was used for the FedEx National
LTL, ANC, DTW Group and other immaterial acquisitions. See
Note 3 of the accompanying audited financial statements for
further discussion of these acquisitions. See Capital
Resources for a discussion of capital expenditures during
2007 and 2006.
Financing Activities. On August 2, 2006,
we filed an updated shelf registration statement with the SEC.
The new registration statement does not limit the amount of any
future offering. By using this shelf registration statement, we
may sell, in one or more future offerings, any combination of
our unsecured debt securities and common stock.
50
On August 8, 2006, under the new shelf registration
statement, we issued $1 billion of senior unsecured debt,
comprised of floating-rate notes totaling $500 million due
in August 2007 and fixed-rate notes totaling $500 million
due in August 2009. The floating-rate notes bear interest at the
three-month London Interbank Offered Rate (LIBOR)
plus 0.08%, reset on a quarterly basis. As of May 31, 2007,
the floating interest rate was 5.44%. The fixed-rate notes bear
interest at an annual rate of 5.5%, payable semi-annually. The
net proceeds were used for working capital and general corporate
purposes, including the funding of the acquisitions referenced
above.
During 2007, $700 million of senior unsecured notes and
$18 million of medium-term notes matured and were repaid.
During 2006, $250 million of senior unsecured notes matured
and were repaid. In addition, other debt was reduced by
$118 million as a result of the purchase by FedEx Express
of two MD11 aircraft in March 2007. In 2001, FedEx Express
entered into a lease for the two MD11 aircraft from a separate
entity, which we were required to consolidate under FIN 46.
The purchase of these aircraft extinguished this liability.
A $1.0 billion revolving credit facility is available to
finance our operations and other cash flow needs and to provide
support for the issuance of commercial paper. 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.
Our leverage ratio of adjusted debt to capital was 0.6 at
May 31, 2007. 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, 2007, no commercial paper was outstanding and the
entire $1.0 billion under the revolving credit facility was
available for future borrowings.
The $500 million of floating rate notes issued in 2007 will
become due in August 2007. The timing of cash requirements in
the first half of 2008 may dictate that we refinance a
portion of this debt through our commercial paper program. As
discussed in Note 1 of the accompanying consolidated
financial statements, we adopted SFAS 158 on May 31,
2007. Our adoption of this standard did not impact our
compliance with any current loan covenants or affect our debt
ratings, pension funding requirements or our overall liquidity.
Dividends. Dividends paid were
$110 million in 2007, $97 million in 2006 and
$84 million in 2005. On May 25, 2007, our Board of
Directors declared a dividend of $0.10 per share of common
stock, an increase of $0.01 per share. The dividend was paid on
July 2, 2007 to stockholders of record as of the close of
business on June 11, 2007. Each quarterly dividend payment
is subject to review and approval by our Board of Directors, and
we intend to evaluate our dividend payment amount on an annual
basis at the end of each fiscal year.
Other Liquidity Information. We have a senior
unsecured debt credit rating from Standard &
Poors of BBB and a commercial paper rating of
A-2.
Moodys Investors Service has assigned us a senior
unsecured debt credit rating of Baa2 and a commercial paper
rating of
P-2.
Moodys characterizes our ratings outlook as
stable, while Standard & Poors
characterizes our ratings outlook as positive. 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 more limited.
CAPITAL
RESOURCES
Our operations are capital intensive, characterized by
significant investments in aircraft, vehicles, technology,
package handling facilities 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.
51
The following table compares capital expenditures by asset
category and reportable segment for the years ended May 31 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007/2006
|
|
|
2006/2005
|
|
|
Aircraft and related equipment
|
|
$
|
1,107
|
|
|
$
|
1,033
|
|
|
$
|
990
|
|
|
|
7
|
|
|
|
4
|
|
Facilities and sort equipment
|
|
|
674
|
|
|
|
507
|
|
|
|
496
|
|
|
|
33
|
|
|
|
2
|
|
Vehicles
|
|
|
445
|
|
|
|
413
|
|
|
|
261
|
|
|
|
8
|
|
|
|
58
|
|
Information and technology
investments
|
|
|
431
|
|
|
|
394
|
|
|
|
331
|
|
|
|
9
|
|
|
|
19
|
|
Other equipment
|
|
|
225
|
|
|
|
171
|
|
|
|
158
|
|
|
|
32
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
2,882
|
|
|
$
|
2,518
|
|
|
$
|
2,236
|
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express segment
|
|
$
|
1,672
|
|
|
$
|
1,408
|
|
|
$
|
1,195
|
|
|
|
19
|
|
|
|
18
|
|
FedEx Ground segment
|
|
|
489
|
|
|
|
487
|
|
|
|
456
|
|
|
|
|
|
|
|
7
|
|
FedEx Freight segment
|
|
|
287
|
|
|
|
274
|
|
|
|
217
|
|
|
|
5
|
|
|
|
26
|
|
FedEx Kinkos segment
|
|
|
157
|
|
|
|
94
|
|
|
|
152
|
|
|
|
67
|
|
|
|
(38
|
)
|
Other, principally FedEx Services
|
|
|
277
|
|
|
|
255
|
|
|
|
216
|
|
|
|
9
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
2,882
|
|
|
$
|
2,518
|
|
|
$
|
2,236
|
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures increased during 2007 primarily due to
increased spending at FedEx Express for facility expansion and
aircraft and related equipment and expenditures at FedEx
Kinkos associated with its multi-year expansion program.
Capital expenditures during 2006 were higher than the prior year
primarily due to the purchase of vehicles at FedEx Express and
FedEx Freight and information technology investments at FedEx
Services. In addition, investments were made in the FedEx Ground
and FedEx Freight networks in 2006 to support growth in customer
demand.
While we pursue market opportunities to purchase aircraft when
they become available, we must make commitments regarding our
airlift requirements years before aircraft are actually needed
because of substantial lead times associated with the
manufacture and modification of aircraft. 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
in growing service lines.
During 2007, FedEx Express announced two aircraft acquisition
programs designed to meet future capacity needs. The first is a
$2.6 billion multi-year program to acquire and modify
approximately 90 Boeing
757-200
aircraft to replace our narrowbody fleet of Boeing
727-200
aircraft. The second is an agreement to acquire 15 new Boeing
777F (B777F) aircraft and an option to purchase an
additional 15 B777F aircraft. The B777F aircraft will provide us
with non-stop, point-to-point transoceanic routes with shorter
flight times. See Note 16 of the accompanying consolidated
financial statements for further discussion of our aircraft
purchase commitments.
Our capital expenditures are expected to be approximately
$3.5 billion in 2008, with much of the year-over-year
increase due to spending for facilities and sort equipment at
FedEx Express and FedEx Ground and network expansion at FedEx
Kinkos. We also continue to invest in
productivity-enhancing technologies. Aircraft-related capital
and expense outlays, including support of the narrowbody
aircraft replacement program and the B777F fleet, are expected
to approximate 2007 aircraft spending levels. We currently
expect to fund our 2008 capital requirements with cash from
operations.
CONTRACTUAL
CASH OBLIGATIONS
The following table sets forth a summary of our contractual cash
obligations as of May 31, 2007. 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
52
sheet as current liabilities at May 31, 2007. 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
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
after
|
|
|
Total
|
|
|
Amounts reflected in Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
521
|
|
|
$
|
530
|
|
|
$
|
500
|
|
|
$
|
250
|
|
|
$
|
|
|
|
$
|
539
|
|
|
$
|
2,340
|
|
Capital lease
obligations(1)
|
|
|
103
|
|
|
|
13
|
|
|
|
97
|
|
|
|
8
|
|
|
|
8
|
|
|
|
137
|
|
|
|
366
|
|
Other cash obligations not
reflected in Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase
obligations(2)
|
|
|
1,282
|
|
|
|
1,111
|
|
|
|
1,150
|
|
|
|
704
|
|
|
|
86
|
|
|
|
164
|
|
|
|
4,497
|
|
Interest on long-term debt
|
|
|
118
|
|
|
|
111
|
|
|
|
79
|
|
|
|
65
|
|
|
|
47
|
|
|
|
1,553
|
|
|
|
1,973
|
|
Operating leases
|
|
|
1,680
|
|
|
|
1,481
|
|
|
|
1,297
|
|
|
|
1,143
|
|
|
|
1,010
|
|
|
|
6,752
|
|
|
|
13,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,704
|
|
|
$
|
3,246
|
|
|
$
|
3,123
|
|
|
$
|
2,170
|
|
|
$
|
1,151
|
|
|
$
|
9,145
|
|
|
$
|
22,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Capital lease obligations represent
principal and interest payments.
|
|
(2) |
|
See Note 16 to the
accompanying consolidated financial statements.
|
We have certain contingent liabilities that are not accrued in
our balance sheets in accordance with accounting principles
generally accepted in the United States. These contingent
liabilities are not included in the table above.
Amounts
Reflected in Balance Sheet
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.
We have other long-term liabilities reflected in our balance
sheet, including deferred income taxes, qualified and
non-qualified pension and postretirement healthcare 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 twelve months that are
included in current liabilities.
Other
Cash Obligations Not Reflected in Balance Sheet
The amounts reflected in the table above for purchase
commitments represent non-cancelable agreements to purchase
goods or services. Such contracts include those for certain
purchases of aircraft, aircraft modifications, vehicles,
facilities, computers, printing and other equipment and
advertising and promotions contracts. In addition, we have
committed to modify our DC10 aircraft for two-man cockpit
configurations, 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 a
non-cancelable
commitment. 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.
The amounts reflected in the table above for interest on
long-term debt represent future interest payments due on our
long-term debt, which are primarily fixed rate.
53
The amounts reflected in the table above for operating leases
represent future minimum lease payments under non-cancelable
operating leases (principally aircraft and facilities) with an
initial or remaining term in excess of one year at May 31,
2007. 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.
In accordance with accounting principles generally accepted in
the United States, 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. In addition, we have
guarantees under certain operating leases, amounting to
$17 million as of May 31, 2007, for the residual
values of vehicles and facilities at the end of the respective
operating lease periods. Although some of these leased assets
may have a residual value at the end of the lease term that is
less than the value specified in the related operating lease
agreement, we do not believe it is probable that we will be
required to fund material amounts under the terms of these
guarantee arrangements. Accordingly, no material accruals have
been recognized for these guarantees.
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.
As discussed in the notes to our financial statements and
previously in this MD&A, we are required to adopt new
accounting rules for income taxes under FIN 48, commencing
in 2008. While the adoption of FIN 48 will not have a
material effect on our financial statements, its application
substantially increases the sensitivities of the estimation
process used in the accounting and reporting for tax
contingencies. Therefore, we will add a Contingencies,
including Income Taxes category to our critical
accounting estimates in the first quarter of 2008.
Over the past several years, we have substantially improved and
automated the rating and billing processes for our package
businesses. As a result, our experience with invoice corrections
and bad debts has improved markedly, as has the accuracy of our
revenue estimates for shipments not yet billed at period end.
Therefore, substantially less judgment is required in the
reporting of revenue and we have concluded that revenue
recognition will no longer be considered a critical accounting
estimate commencing in 2008.
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 retiree healthcare plans. The accounting for pension
and 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 plan.
54
A summary of our retirement plans costs over the past three
years is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. domestic pension plans
|
|
$
|
442
|
|
|
$
|
400
|
|
|
$
|
337
|
|
International pension and defined
contribution plans
|
|
|
49
|
|
|
|
45
|
|
|
|
41
|
|
U.S. domestic defined contribution
plans
|
|
|
152
|
|
|
|
147
|
|
|
|
136
|
|
Retiree healthcare plans
|
|
|
55
|
|
|
|
73
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
698
|
|
|
$
|
665
|
|
|
$
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The determination of our annual retirement plans cost is highly
sensitive to changes in the assumptions discussed above 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
increased approximately $33 million in 2007,
$83 million in 2006 and $37 million in 2005, primarily
due to changes to these assumptions.
In February 2007, we announced changes to modernize certain of
our retirement programs over the next two fiscal years.
Effective January 1, 2008, we will increase the annual
company matching contribution under the largest of our 401(k)
plans covering most employees from $500 to a maximum of 3.5% of
eligible compensation. Employees not participating in the 401(k)
plan as of January 1, 2008 will be automatically enrolled
at 3% of eligible pay with a company match of 2% of eligible
pay. Effective May 31, 2008, benefits previously accrued
under our primary pension plans using a traditional pension
benefit formula will be capped for most employees, and those
benefits will be payable beginning at retirement. Beginning
June 1, 2008, future pension benefits for most employees
will be accrued under a cash balance formula we call the
Portable Pension Account. These changes will not affect the
benefits of current retirees.
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. 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 a
minimum rate of 4% or the one-year Treasury Constant Maturities
rate and a maximum rate based on the average
30-year
Treasury rate.
Under the new programs, we expect the long-term costs and
funding for our retirement plans will approximate those under
the current design. However, we expect that the costs of our
retirement plans will become more predictable, as we reduce
highly volatile pension costs in favor of more predictable
401(k) costs associated with our matching contributions. These
retirement plan changes were contemplated in our
February 28, 2007 actuarial measurement and reduced the
impact on shareholders equity of adopting SFAS 158 by
$1 billion. Because it will take several years to fully
implement the increases to our 401(k) plan contributions, we
will realize a net retirement plans cost reduction in the near
term from these changes.
Retirement plans cost in 2008 is expected to be approximately
$615 million, a decrease of $83 million from 2007.
This expected decrease in cost is due to the retirement plan
design changes described above, which will be partially offset
by changes in assumptions related to plan asset rate of return,
mortality, benefit age for deferred vested participants and
pilot-specific benefit formula and salary increases. Retirement
plans cost is included in the Salaries and Employee
Benefits caption in our consolidated income statements.
As part of our strategy to manage future pension costs and net
funded status volatility, we are also in the process of
re-evaluating our pension investment strategy. We have decided
to move certain equity investments out of actively managed funds
and into index funds. Also, we are currently evaluating the mix
of investments between equities and fixed income securities,
whose cash flows will more closely align with the cash flows of
our pension obligations. Based on these considerations, we have
reduced our estimated long-term rate of return on plan assets
from 9.1% to 8.5% for 2008.
55
Pension Cost. Of all of our retirement plans,
our largest qualified U.S. domestic pension plan is the
most significant and subjective. The components of pension cost
for all pension plans recognized in our income statements are as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
540
|
|
|
$
|
473
|
|
|
$
|
417
|
|
Interest cost
|
|
|
707
|
|
|
|
642
|
|
|
|
579
|
|
Expected return on plan assets
|
|
|
(930
|
)
|
|
|
(811
|
)
|
|
|
(707
|
)
|
Recognized actuarial losses and
other
|
|
|
150
|
|
|
|
121
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
467
|
|
|
$
|
425
|
|
|
$
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a discussion of the key estimates we consider in
determining our pension costs:
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. The discount rate is determined each
year at the plan measurement date (February 28) and affects
the succeeding years pension cost. A decrease in the
discount rate increases pension expense.
This assumption is highly sensitive, as the following table
illustrates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
|
|
|
Sensitivity (in
millions)(2)
|
|
|
|
Rate(1)
|
|
|
Expense
|
|
|
PBO
|
|
|
2008
|
|
|
n/a
|
|
|
$
|
2.1
|
|
|
|
n/a
|
|
2007
|
|
|
6.012
|
%
|
|
|
2.5
|
|
|
$
|
19
|
|
2006
|
|
|
5.912
|
%
|
|
|
2.1
|
|
|
|
21
|
|
2005
|
|
|
6.285
|
%
|
|
|
1.8
|
|
|
|
16
|
|
|
|
|
(1) |
|
The discount rate in effect at the
end of a given fiscal year affects the current years
projected benefit obligation (PBO) and the succeeding
years pension expense.
|
|
(2) |
|
Sensitivities show the impact on
expense and the PBO of a one-basis-point change in the discount
rate.
|
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. 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 trend of declines in the
discount rate negatively affected our primary domestic pension
plan expense by $89 million in 2007, $101 million in
2006 and $32 million in 2005. Pension costs will be
favorably affected in 2008 by approximately $27 million due
to the slight increase in the discount rate.
Plan Assets. Pension plan assets are invested
primarily in listed securities. 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. 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. At February 28, 2007, with
approximately $11.3 billion of plan assets, a
one-basis-point change in this assumption for our domestic
pension plans affects pension cost by approximately
$1.1 million. We have assumed an 8.5% compound geometric
long-term rate of return on our principal U.S. domestic
pension plan assets for 2008, down from 9.1% in 2007, as
discussed above.
56
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 active
investment management program to achieve in excess of the
returns we could expect if investments were made strictly in
indexed funds.
|
As noted above, we have refined our investment strategy and
lowered the long-term rate of return for 2008. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Plan Assets at Measurement Date
|
|
|
|
2007
|
|
|
2006
|
|
Asset Class
|
|
Actual
|
|
|
Target
|
|
|
Actual
|
|
|
Target
|
|
|
Domestic equities
|
|
|
52
|
%
|
|
|
53
|
%
|
|
|
54
|
%
|
|
|
53
|
%
|
International equities
|
|
|
21
|
|
|
|
17
|
|
|
|
20
|
|
|
|
17
|
|
Private equities
|
|
|
3
|
|
|
|
5
|
|
|
|
3
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equities
|
|
|
76
|
|
|
|
75
|
|
|
|
77
|
|
|
|
75
|
|
Long duration fixed income
securities
|
|
|
15
|
|
|
|
15
|
|
|
|
14
|
|
|
|
15
|
|
Other fixed income securities
|
|
|
9
|
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actual historical return on our U.S. pension plan
assets, calculated on a compound geometric basis, was 9.8%, net
of investment manager fees, for the
15-year
period ended February 28, 2007. In addition, our actual
return on plan assets exceeded the estimated return in each of
the past four fiscal years.
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). Another method used
in practice applies the market value of plan assets at the
measurement date. The application of the calculated-value method
equaled the result from applying the market-value method for
2005 through 2007.
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). Our average future salary increases based on age and
years of service were 3.46% for 2007 and 3.15% for 2006 and
2005. Future salary increases are estimated to be 4.47% for our
2008 pension costs, reflecting the impact of the modernization
of our retirement plans (discussed above). In the future, 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.
57
Following is information concerning the funded status of our
pension plans as of May 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007(1)
|
|
|
2006
|
|
|
Funded Status of
Plans:
|
|
|
|
|
|
|
|
|
Projected benefit obligation (PBO)
|
|
$
|
12,209
|
|
|
$
|
12,153
|
|
Fair value of plan assets
|
|
|
11,506
|
|
|
|
10,130
|
|
|
|
|
|
|
|
|
|
|
PBO in excess of plan assets
|
|
|
(703
|
)
|
|
|
(2,023
|
)
|
Unrecognized actuarial losses and
other
|
|
|
22
|
(2)
|
|
|
3,119
|
(3)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(681
|
)
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
Components of Amounts Included
in Balance Sheets:
|
|
|
|
|
|
|
|
|
Prepaid pension cost
|
|
$
|
|
(4)
|
|
$
|
1,349
|
|
Noncurrent pension assets
|
|
|
1
|
|
|
|
|
|
Current pension, postretirement
healthcare and other benefit obligations
|
|
|
(24
|
)
|
|
|
|
|
Accrued pension liability
|
|
|
|
(4)
|
|
|
(253
|
)
|
Minimum pension liability
|
|
|
|
(4)
|
|
|
(122
|
)
|
Noncurrent pension, postretirement
healthcare and other benefit obligations
|
|
|
(658
|
)
|
|
|
|
|
Accumulated other comprehensive
income
|
|
|
|
(4)
|
|
|
112
|
|
Intangible asset and other
|
|
|
|
(4)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(681
|
)
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
Cash
Amounts:
|
|
|
|
|
|
|
|
|
Cash contributions during the year
|
|
$
|
524
|
|
|
$
|
492
|
|
Benefit payments during the year
|
|
$
|
261
|
|
|
$
|
228
|
|
|
|
|
(1) |
|
Incorporates the provisions of
SFAS 158 adopted on May 31, 2007.
|
|
(2) |
|
Amounts for 2007 represent only
employer contributions after measurement date, as unrecognized
net actuarial loss, unamortized prior service cost and
unrecognized net transition amount were not applicable in 2007
due to adoption of SFAS 158.
|
|
(3) |
|
Amounts for 2006 consist of
unrecognized net actuarial loss, unamortized prior service cost,
unrecognized net transition amount and employer contributions
after measurement date.
|
|
(4) |
|
Not applicable for 2007 due to
adoption of SFAS 158.
|
The funded status of the plans reflects a snapshot of the state
of our long-term pension liabilities at the plan measurement
date. 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
2007 were approximately 2% of plan assets). As described
previously in this MD&A, the adoption of SFAS 158
resulted in a $982 million charge to shareholders
equity in accumulated other comprehensive income from the
elimination of our prepaid pension asset of $1.4 billion
and an increase in other postretirement benefit liabilities of
$120 million, net of tax. Under SFAS 158 we are
required to recognize the funded status of the PBO and cannot
defer actuarial gains and losses even though such items continue
to be deferred for the determination of pension expense.
We made tax-deductible voluntary contributions of
$482 million in 2007 and $456 million in 2006 to our
qualified U.S. domestic pension plans. We expect
approximately $10 million of contributions to such plans to
be legally required in 2008, and we currently expect to make
tax-deductible voluntary contributions to our qualified plans in
2008 at levels approximating those in 2007.
Cumulative unrecognized actuarial losses for pension plans
expense determination were approximately $3.3 billion
through February 28, 2007, compared to $3.0 billion at
February 28, 2006. These unrecognized losses primarily
reflect the declining discount rate from 2002 through 2006 and
other changes in assumptions. A portion is also attributable to
the differences between expected and actual asset returns, which
are being
58
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 plan
pension expense for 2008 includes $162 million of
amortization of these actuarial losses versus $136 million
in 2007, $107 million in 2006 and $60 million in 2005.
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,
2007 there were approximately $1.3 billion of
self-insurance accruals reflected in our balance sheet
($1.2 billion at May 31, 2006). In 2007 approximately
41% of these accruals were classified as current liabilities and
in 2006 approximately 43% of self-insurance accruals were
classified as current liabilities.
The measurement of these costs requires the consideration of
historical cost experience, judgments about the present and
expected levels of cost per claim and retention levels. We
account for these costs primarily through actuarial methods,
which develop estimates of the undiscounted liability for claims
incurred, including those claims incurred but not reported, on a
quarterly basis for material accruals. These methods provide
estimates of future ultimate claim costs based on claims
incurred as of the balance sheet date. 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.
LONG-LIVED
ASSETS
Property and Equipment. Our key businesses are
capital intensive, with more than 53% 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.
Historically, gains and losses on operating equipment have not
been material (typically less than $15 million annually).
However, such amounts may differ materially in the future due to
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. These activities create
risks that asset capacity may exceed demand and that an
impairment of our
59
assets may occur. In addition, aircraft purchases (primarily
aircraft in passenger configuration) that have not been placed
in service totaled $71 million at May 31, 2007 and
$208 million at May 31, 2006. We plan to modify these
assets in the future to place them into operation.
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. Because the cash flows of
our transportation networks cannot be identified to individual
assets, and based on the ongoing profitability of our
operations, we have not experienced any significant impairment
of assets to be held and used. However, from time to time we
make decisions to remove certain long-lived assets from service
based on projections of reduced capacity needs 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. There were no material asset impairment
charges recognized in 2007, 2006 or 2005.
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, 2007 we had approximately
$13 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, 2007 was approximately seven years.
The future commitments for operating leases are not reflected as
a liability in our balance sheet because these leases do not
meet the accounting definition of capital leases. 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. We believe we have well-defined
and controlled processes for making this evaluation, including
obtaining third-party appraisals for material transactions to
assist us in making these evaluations.
Goodwill. We have approximately
$3.5 billion of goodwill in our balance sheet resulting
from business acquisitions. Our business acquisitions in 2007
contributed approximately $670 million in goodwill, as
follows:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Segment
|
|
Acquisition
|
|
(in millions)
|
|
|
FedEx Express
|
|
DTW Group
|
|
$
|
348
|
|
FedEx Express
|
|
ANC
|
|
|
168
|
|
FedEx Freight
|
|
FedEx National LTL
|
|
|
121
|
|
FedEx Express
|
|
Other
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
670
|
|
|
|
|
|
|
|
|
The annual evaluation of goodwill impairment requires the use of
estimates and assumptions to determine the fair value of our
reporting units using a discounted cash flow methodology, such
as: 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 our
weighted-average cost of capital calculation 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
operations and other assumptions could materially affect these
estimates. We compare the fair value of our reporting units to
the carrying value, including goodwill, of each of those units.
We performed our annual impairment tests in the fourth quarter
of 2007. Because the fair value of each of our reporting units
exceeded its carrying value, including goodwill, no additional
testing or impairment charge was necessary.
Intangible Asset with an Indefinite Life. We
have an intangible asset of $567 million associated with
the Kinkos trade name. This intangible asset is not
amortized because it has an indefinite remaining useful life. We
must review this asset for impairment on at least an annual
basis. This annual evaluation requires the use of estimates
about the future cash flows attributable to the Kinkos
trade name to determine the estimated fair
60
value of the trade name. Changes in forecasted operations and
changes in discount rates can materially affect this estimate.
However, once an impairment of this intangible asset has been
recorded, it cannot be reversed. We performed our annual
impairment test in the fourth quarter of 2007. Because the fair
value of the trade name exceeded its carrying value, no
impairment charge was necessary.
While FedEx Kinkos experienced a slight revenue decline in
2007 and decreased profitability in 2007 and 2006, we believe
that our long-term growth and expansion strategies support our
fair value conclusions. For both goodwill and recorded
intangible assets at FedEx Kinkos, the recoverability of
these amounts is dependent on execution of key initiatives
related to revenue growth, location expansion and improved
profitability.
REVENUE
RECOGNITION
Historically, the policies adopted to recognize revenue have
been deemed critical because an understanding of the accounting
applied in this area is fundamental to assessing our overall
financial performance and because revenue and revenue growth are
key measures of financial performance in the marketplace.
Revenue recognition will no longer be considered a critical
accounting estimate category for 2008 due to the improvements we
have made in our rating and billing processes, which have
significantly reduced the level of management judgment applied
in these areas.
Our businesses are primarily involved in the direct pickup and
delivery of commercial package and freight shipments, as well as
providing document solutions and business services. Our
employees, independent contractors and agents are involved
throughout the process and our operational, billing and
accounting systems directly capture and control all relevant
information necessary to record revenue, bill customers and
collect amounts due to us. Certain of our transportation
services are provided through independent contractors. FedEx is
the principal to the transaction in most instances and in these
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 purchased
transportation caption in the accompanying income statements.
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.
Transportation industry practice includes four acceptable
methods for revenue recognition for shipments in process at the
end of an accounting period, two of which are predominant:
(1) recognize all revenue and the related delivery costs
when shipments are delivered or (2) recognize a portion of
the revenue earned for shipments that have been picked up but
not yet delivered at period end and accrue delivery costs as
incurred. We use the second method and recognize the portion of
revenue earned at the balance sheet date for shipments in
transit and accrue all delivery costs as incurred. We believe
this accounting policy effectively and consistently matches
revenue with expenses and recognizes liabilities 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, taxes and duties. These amounts are not
material.
There are three key estimates that are included in the
recognition and measurement of our revenue and related accounts
receivable under the policies described above:
(1) estimates for unbilled revenue on shipments that have
been delivered; (2) estimates for revenue associated with
shipments in transit; and (3) estimates for future
adjustments to revenue or accounts receivable for billing
adjustments and bad debts.
Unbilled Revenue. There is a time lag between
the completion of a shipment and the generation of an invoice
that varies by customer and operating company. Accordingly,
unbilled revenue is recognized through estimates using actual
shipment volumes and historical trends of shipment size and
length of haul. These estimates are adjusted in subsequent
months to the actual amounts invoiced. Due to strong system
controls and shipment visibility, there is a low level of
subjectivity inherent in these accrual processes and the
estimates have historically not varied significantly from actual
amounts subsequently invoiced.
61
Shipments in Process. Because the majority of
our shipments have short cycle times, less than 5% of a total
months revenue is typically in transit at the end of a
period. We periodically perform studies to measure the
percentage of completion for shipments in process. At month end,
we estimate the amount of revenue earned on shipments in process
based on actual shipments picked up, the scheduled day of
delivery, the day of the week on which the month ends (which
affects the percentage of completion) and current trends in our
average price for the respective services. We believe these
estimates provide a reasonable approximation of the actual
revenue earned at the end of a period.
Future Adjustments to Revenue and Accounts
Receivable. In the transportation industry,
pricing that is put in place may be subsequently adjusted due to
continued negotiation of contract terms, earned discounts
triggered by certain shipment volume thresholds,
and/or
no-fee money-back guarantee refunds caused by on-time service
failures. We account for estimated future revenue adjustments
through a reserve against accounts receivable that takes into
consideration historical experience and current trends. For
2007, 2006 and 2005, revenue adjustments as a percentage of
total revenue averaged approximately 1%. Due to our reliable
on-time service, close communication with customers, strong
revenue systems and minimal volume discounts in place, we have
maintained a consistently low revenue adjustment percentage. A
one-basis-point change in the revenue adjustment percentage
would increase or decrease revenue adjustments by approximately
$2 million. While write-offs related to bad debts do occur
from time to time, they are small compared to our total revenue
and accounts receivable balances due to the small value of
individual shipping transactions spread over a large customer
base, our short credit terms and our strong credit and
collection practices. Bad debt expense associated with credit
losses has averaged approximately 0.3% in 2007, 0.4% in 2006 and
0.3% in 2005 of total revenue and reflects our strong credit
management processes.
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.
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.
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 capital 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
62
needed. We must predict volume levels and fleet requirements and
make commitments for aircraft based on those projections. If we
miss our projections, we could end up with too much or too
little capacity relative to our shipping volumes.
We face intense competition. The
transportation and business services markets are both highly
competitive and sensitive to price and service. 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. 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.
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. While we expect these 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. We acquired FedEx Kinkos in
February 2004 to expand our portfolio of business services and
enhance our ability to provide package-shipping services to
small- and medium-sized business customers through its network
of retail locations. However, FedEx Kinkos financial
performance has not yet met our expectations. Accordingly, we
have undertaken key initiatives at FedEx Kinkos relating
to revenue growth, network expansion and improved profitability.
There can be no assurance that our acquisitions will be
successful or that we can continue to support the value we
allocate to these acquired businesses, including their goodwill
or other intangible assets.
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 successful in
mitigating the 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. In addition, disruptions
in the supply of fuel could have a negative impact on our
ability to operate our transportation networks.
FedEx Ground relies on owner-operators to conduct its
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. We are involved in
numerous purported
class-action
lawsuits and other proceedings, however, that claim that these
owner-operators should be treated as employees and not
independent contractors. We expect to incur certain costs,
including legal fees, in defending the status of FedEx
Grounds owner-operators as independent contractors. We
strongly believe that the owner-operators are properly
classified as independent contractors and that we will prevail
in our defense. However, adverse determinations in these matters
could, among other things, entitle some of our contractors to
the reimbursement of certain expenses and to the benefit of
wage-and-hour
laws and result in employment and withholding tax liability for
FedEx Ground. Moreover, if FedEx Ground is compelled to convert
its independent contractors to employees, our operating costs
could increase 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 May 2006, the
U.S. Transportation Security
63
Administration (TSA) adopted new rules enhancing
many of the security requirements for air cargo on both
passenger and all-cargo aircraft, and in May 2007, the TSA
issued a revised model all-cargo aircraft security program for
implementing the new rules. Together with other all-cargo
aircraft operators, we have filed comments with the TSA
requesting clarification regarding several provisions in the
revised model program. Until the requirements for our security
program under the new rules are finalized, 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 for air
cargo carriers 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.
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, labor or environmental rules;
|
|
|
our ability to manage our cost structure for capital
expenditures and operating expenses and match them to shifting
customer volume levels;
|
|
|
changes in foreign currency exchange rates, especially in the
euro, Chinese yuan, Canadian dollar, Great Britain pound and
Japanese yen, which can affect our sales levels and foreign
currency sales prices;
|
|
|
our ability to maintain good relationships with our employees
and prevent attempts by labor organizations to organize groups
of our employees, which could significantly increase our
operating costs;
|
|
|
a shortage of qualified labor and our ability to mitigate this
shortage through recruiting and retention efforts and
productivity gains;
|
|
|
increasing costs 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
claims, and any other legal proceedings;
|
|
|
the impact of technology developments on our operations and on
demand for our services (for example, the impact that low-cost
home copiers and printers are having on demand for FedEx
Kinkos copy services);
|
|
|
adverse weather conditions or natural disasters, such as
earthquakes and hurricanes, which can 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; and
|
|
|
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.
|
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. Our
primary business is to transport goods, so our
64
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 adjust to match
shifting volume levels. Moreover, as we grow our international
business, we are increasingly affected by the health of the
global economy.
FORWARD-LOOKING
STATEMENTS
Certain statements in this report, including (but not limited
to) those contained in Outlook (including segment
outlooks), Liquidity, Capital
Resources, Contractual Cash Obligations and
Critical Accounting Estimates, and the
Retirement Plans note 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.
65
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, 2007, 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, 2007.
Our independent registered public accounting firm,
Ernst & Young LLP, audited managements
assessment and the effectiveness of our internal control over
financial reporting. Ernst & Young LLP has issued
their report concurring with managements assessment, which
is included in this Annual Report on
Form 10-K.
66
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that FedEx Corporation maintained effective
internal control over financial reporting as of May 31,
2007, based on criteria established in Internal
Control Integrated 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. Our responsibility is
to express an opinion on managements assessment and an
opinion on the effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, 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, managements assessment that FedEx
Corporation maintained effective internal control over financial
reporting as of May 31, 2007, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, FedEx Corporation maintained, in all material respects,
effective internal control over financial reporting as of
May 31, 2007, 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, 2007 and 2006, and 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, 2007 of FedEx Corporation and
our report dated July 9, 2007 expressed an unqualified
opinion thereon.
Memphis, Tennessee
July 9, 2007
67
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, 2007 and 2006, 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, 2007. 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, 2007 and
2006, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
May 31, 2007, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, effective June 1, 2006, the Company adopted
Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment,
and effective May 31, 2007 the Company adopted
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Benefit
Plans An 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), the
effectiveness of FedEx Corporations internal control over
financial reporting as of May 31, 2007, 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 9, 2007
expressed an unqualified opinion thereon.
Memphis, Tennessee
July 9, 2007
68
FEDEX
CORPORATION
(IN
MILLIONS)
ASSETS
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May 31,
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2007
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2006
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CURRENT ASSETS
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|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,569
|
|
|
$
|
1,937
|
|
Receivables, less allowances of
$136 and $144
|
|
|
3,942
|
|
|
|
3,516
|
|
Spare parts, supplies and fuel,
less allowances of $156 and $150
|
|
|
338
|
|
|
|
308
|
|
Deferred income taxes
|
|
|
536
|
|
|
|
539
|
|
Prepaid expenses and other
|
|
|
244
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,629
|
|
|
|
6,464
|
|
PROPERTY AND EQUIPMENT, AT COST
|
|
|
|
|
|
|
|
|
Aircraft and related equipment
|
|
|
9,593
|
|
|
|
8,611
|
|
Package handling and ground
support equipment
|
|
|
3,889
|
|
|
|
3,558
|
|
Computer and electronic equipment
|
|
|
4,685
|
|
|
|
4,331
|
|
Vehicles
|
|
|
2,561
|
|
|
|
2,203
|
|
Facilities and other
|
|
|
6,362
|
|
|
|
5,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,090
|
|
|
|
24,074
|
|
Less accumulated depreciation and
amortization
|
|
|
14,454
|
|
|
|
13,304
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
12,636
|
|
|
|
10,770
|
|
OTHER LONG-TERM ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,497
|
|
|
|
2,825
|
|
Prepaid pension cost
|
|
|
|
|
|
|
1,349
|
|
Intangible and other assets
|
|
|
1,238
|
|
|
|
1,282
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets
|
|
|
4,735
|
|
|
|
5,456
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,000
|
|
|
$
|
22,690
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
69
FEDEX
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(IN
MILLIONS, EXCEPT SHARE DATA)
LIABILITIES
AND STOCKHOLDERS INVESTMENT
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
639
|
|
|
$
|
850
|
|
Accrued salaries and employee
benefits
|
|
|
1,354
|
|
|
|
1,325
|
|
Accounts payable
|
|
|
2,016
|
|
|
|
1,908
|
|
Accrued expenses
|
|
|
1,419
|
|
|
|
1,390
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,428
|
|
|
|
5,473
|
|
LONG-TERM DEBT, LESS CURRENT
PORTION
|
|
|
2,007
|
|
|
|
1,592
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
897
|
|
|
|
1,367
|
|
Pension, postretirement healthcare
and other benefit obligations
|
|
|
1,164
|
|
|
|
944
|
|
Self-insurance accruals
|
|
|
759
|
|
|
|
692
|
|
Deferred lease obligations
|
|
|
655
|
|
|
|
658
|
|
Deferred gains, principally
related to aircraft transactions
|
|
|
343
|
|
|
|
373
|
|
Other liabilities
|
|
|
91
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
|
3,909
|
|
|
|
4,114
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
COMMON STOCKHOLDERS
INVESTMENT
|
|
|
|
|
|
|
|
|
Common stock, $0.10 par
value; 800 million shares authorized; 308 million
shares issued for 2007 and 306 million shares issued for
2006
|
|
|
31
|
|
|
|
31
|
|
Additional paid-in capital
|
|
|
1,689
|
|
|
|
1,438
|
|
Retained earnings
|
|
|
11,970
|
|
|
|
10,068
|
|
Accumulated other comprehensive
loss
|
|
|
(1,030
|
)
|
|
|
(24
|
)
|
Treasury stock
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Total common stockholders
investment
|
|
|
12,656
|
|
|
|
11,511
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,000
|
|
|
$
|
22,690
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
70
FEDEX
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended May 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
REVENUES
|
|
$
|
35,214
|
|
|
$
|
32,294
|
|
|
$
|
29,363
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
13,740
|
|
|
|
12,571
|
|
|
|
11,963
|
|
Purchased transportation
|
|
|
3,873
|
|
|
|
3,251
|
|
|
|
2,935
|
|
Rentals and landing fees
|
|
|
2,343
|
|
|
|
2,390
|
|
|
|
2,299
|
|
Depreciation and amortization
|
|
|
1,742
|
|
|
|
1,550
|
|
|
|
1,462
|
|
Fuel
|
|
|
3,533
|
|
|
|
3,256
|
|
|
|
2,317
|
|
Maintenance and repairs
|
|
|
1,952
|
|
|
|
1,777
|
|
|
|
1,695
|
|
Other
|
|
|
4,755
|
|
|
|
4,485
|
|
|
|
4,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,938
|
|
|
|
29,280
|
|
|
|
26,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
3,276
|
|
|
|
3,014
|
|
|
|
2,471
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(136
|
)
|
|
|
(142
|
)
|
|
|
(160
|
)
|
Interest income
|
|
|
83
|
|
|
|
38
|
|
|
|
21
|
|
Other, net
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
|
|
(115
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
3,215
|
|
|
|
2,899
|
|
|
|
2,313
|
|
PROVISION FOR INCOME TAXES
|
|
|
1,199
|
|
|
|
1,093
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
2,016
|
|
|
$
|
1,806
|
|
|
$
|
1,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER COMMON SHARE
|
|
$
|
6.57
|
|
|
$
|
5.94
|
|
|
$
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER COMMON SHARE
|
|
$
|
6.48
|
|
|
$
|
5.83
|
|
|
$
|
4.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
71
FEDEX
CORPORATION
(IN MILLIONS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended May 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,016
|
|
|
$
|
1,806
|
|
|
$
|
1,449
|
|
Adjustments to reconcile net
income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,742
|
|
|
|
1,548
|
|
|
|
1,462
|
|
Provision for uncollectible
accounts
|
|
|
106
|
|
|
|
121
|
|
|
|
101
|
|
Deferred income taxes and other
noncash items
|
|
|
37
|
|
|
|
159
|
|
|
|
40
|
|
Lease accounting charge
|
|
|
|
|
|
|
79
|
|
|
|
|
|
Excess tax benefits on the
exercise of stock options
|
|
|
|
|
|
|
62
|
|
|
|
36
|
|
Stock-based compensation
|
|
|
103
|
|
|
|
37
|
|
|
|
32
|
|
Changes in operating assets and
liabilities, net of the effects of businesses acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(323
|
)
|
|
|
(319
|
)
|
|
|
(235
|
)
|
Other current assets
|
|
|
(85
|
)
|
|
|
(38
|
)
|
|
|
(26
|
)
|
Pension assets and liabilities, net
|
|
|
(69
|
)
|
|
|
(71
|
)
|
|
|
(118
|
)
|
Accounts payable and other
operating liabilities
|
|
|
66
|
|
|
|
346
|
|
|
|
365
|
|
Other, net
|
|
|
(30
|
)
|
|
|
(54
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
|
3,563
|
|
|
|
3,676
|
|
|
|
3,117
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,882
|
)
|
|
|
(2,518
|
)
|
|
|
(2,236
|
)
|
Business acquisitions, net of cash
acquired
|
|
|
(1,310
|
)
|
|
|
|
|
|
|
(122
|
)
|
Proceeds from asset dispositions
|
|
|
68
|
|
|
|
64
|
|
|
|
12
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(4,124
|
)
|
|
|
(2,454
|
)
|
|
|
(2,348
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(906
|
)
|
|
|
(369
|
)
|
|
|
(791
|
)
|
Proceeds from debt issuances
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
Proceeds from stock issuances
|
|
|
115
|
|
|
|
144
|
|
|
|
99
|
|
Excess tax benefits on the
exercise of stock options
|
|
|
45
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(110
|
)
|
|
|
(97
|
)
|
|
|
(84
|
)
|
Other, net
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
193
|
|
|
|
(324
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(368
|
)
|
|
|
898
|
|
|
|
(7
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
1,937
|
|
|
|
1,039
|
|
|
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
1,569
|
|
|
$
|
1,937
|
|
|
$
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
72
FEDEX
CORPORATION
INVESTMENT AND COMPREHENSIVE INCOME
(IN MILLIONS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
|
Balance at May 31,
2004
|
|
$
|
30
|
|
|
$
|
1,051
|
|
|
$
|
7,001
|
|
|
$
|
(46
|
)
|
|
$
|
|
|
|
$
|
8,036
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,449
|
|
|
|
|
|
|
|
|
|
|
|
1,449
|
|
Foreign currency translation
adjustment, net of deferred taxes of $5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
27
|
|
Minimum pension liability
adjustment, net of deferred taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.29 per
share)
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
Employee incentive plans and other
(2,767,257 shares issued)
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31,
2005
|
|
|
30
|
|
|
|
1,213
|
|
|
|
8,363
|
|
|
|
(17
|
)
|
|
|
(1
|
)
|
|
|
9,588
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,806
|
|
|
|
|
|
|
|
|
|
|
|
1,806
|
|
Foreign currency translation
adjustment, net of deferred taxes of $3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
29
|
|
Minimum pension liability
adjustment, net of deferred taxes of $24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.33 per
share)
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
Employee incentive plans and other
(3,579,766 shares issued)
|
|
|
1
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 deferred taxes of $8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
Minimum pension liability
adjustment, net of deferred taxes of $24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plans adjustment in
connection with the adoption of SFAS 158, net of deferred
taxes 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
73
FEDEX
CORPORATION
|
|
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. These operating companies are primarily
represented by 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; FedEx Freight Corporation, a leading
U.S. provider of less-than-truckload (LTL)
freight services; and FedEx Kinkos Office and Print
Services, Inc. (FedEx Kinkos), a leading
provider of document solutions and business services. These
companies represent our major service lines and form the core of
our reportable segments.
Other business units in the FedEx portfolio are FedEx Trade
Networks, Inc. (FedEx Trade Networks), a global
trade services company; FedEx SmartPost, Inc. (FedEx
SmartPost), a small-parcel consolidator; FedEx Global
Supply Chain Services, Inc. (FedEx Supply Chain
Services), a contract logistics provider; FedEx Custom
Critical, Inc. (FedEx Custom Critical), a
critical-shipment carrier; Caribbean Transportation Services,
Inc. (Caribbean Transportation Services), a provider
of airfreight forwarding services, and FedEx Corporate Services,
Inc. (FedEx Services), a provider of customer-facing
sales, marketing and information technology functions, primarily
for FedEx Express and FedEx Ground.
FISCAL YEARS. Except as otherwise specified,
references to years indicate our fiscal year ended May 31,
2007 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.
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 taxes on a net basis.
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.
74
FEDEX
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ADVERTISING. Advertising and promotion costs
are expensed as incurred and are classified in other operating
expenses. Advertising and promotion expenses were
$406 million in 2007, $376 million in 2006 and
$326 million in 2005.
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 standard 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 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 the estimated remaining useful lives of the aircraft. 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 with
depreciation and amortization.
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. For
income tax purposes, depreciation is generally computed using
accelerated methods. 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
|
|
|
2007
|
|
|
2006
|
|
|
Wide-body aircraft and related
equipment
|
|
|
15 to 25 years
|
|
|
$
|
5,391
|
|
|
$
|
4,669
|
|
Narrow-body and feeder aircraft
and related equipment
|
|
|
5 to 15 years
|
|
|
|
352
|
|
|
|
369
|
|
Package handling and ground
support equipment
|
|
|
2 to 30 years
|
|
|
|
1,420
|
|
|
|
1,255
|
|
Computer and electronic equipment
|
|
|
2 to 10 years
|
|
|
|
1,021
|
|
|
|
928
|
|
Vehicles
|
|
|
3 to 15 years
|
|
|
|
957
|
|
|
|
743
|
|
Facilities and other
|
|
|
2 to 40 years
|
|
|
|
3,495
|
|
|
|
2,806
|
|
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 $1.7 billion in 2007,
$1.5 billion in 2006 and $1.4 billion in 2005.
Depreciation and amortization expense includes amortization of
assets under capital lease.
CAPITALIZED INTEREST. Interest on funds used
to finance the acquisition and modification of aircraft,
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
$34 million in 2007, $33 million in 2006 and
$22 million in 2005.
75
FEDEX
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived
assets are reviewed for impairment when circumstances indicate
the carrying value of an asset may not be recoverable. For
assets that are to be held and used, an impairment is recognized
when the estimated undiscounted cash flows associated with the
asset or group of assets is less than their carrying value. If
impairment exists, an adjustment is made to write the asset down
to its fair value, and a loss is recorded as the difference
between the carrying value and fair value. Fair values are
determined based on quoted market values, discounted cash flows
or internal and external appraisals, as applicable. Assets to be
disposed of are carried at the lower of carrying value or
estimated net realizable value. We operate integrated
transportation networks, and accordingly, cash flows cannot be
associated with an individual asset for our analysis of
impairment.
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.
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 is
determined using a discounted cash flow methodology and includes
managements assumptions on revenue growth rates, operating
margins, discount rates and expected capital expenditures.
Unless circumstances otherwise dictate, we perform our annual
impairment testing in the fourth quarter.
INTANGIBLE ASSETS. Amortizable intangible
assets include customer relationships, technology assets and
contract-based intangibles acquired in business combinations.
Amortizable 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. Our only
non-amortizing
intangible asset is the Kinkos trade name.
Non-amortizing
intangibles are reviewed at least annually for impairment.
Unless circumstances otherwise dictate, we perform our annual
impairment testing in the fourth quarter.
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, which amended several other
Financial Accounting Standards Board (FASB)
Statements. 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 accumulated
other comprehensive income (AOCI) of unrecognized
gains or losses and prior service costs or credits existing at
the time of adoption. Additionally, SFAS 158 requires the
measurement date for plan assets and liabilities to coincide
with the sponsors year end. We currently use a February 28
measurement date for our plans; therefore, this standard will
require us to change our measurement date to May 31 (beginning
in 2009). The impact of adopting the measurement date provision
on our financial statements will depend on the funded status of
the plans at the date of adoption.
The adoption of SFAS 158 resulted in a $982 million
charge to shareholders equity at May 31, 2007 through
AOCI. Under SFAS 158, we were required to write off our
prepaid pension asset of $1.4 billion and increase our
pension and other post-retirement benefit liabilities by
$120 million. These adjustments, net of deferred taxes of
$582 million, were required to recognize the unfunded
projected benefit obligation in our balance sheet. SFAS 158
has no impact on the determination of expense for our pension
and other postretirement benefit plans.
In February 2007, we announced changes to modernize certain of
our retirement programs over the next two fiscal years.
Effective May 31, 2008, all benefits previously accrued
under our primary pension plans using a traditional pension
benefit formula will be capped for most employees, and those
benefits will be payable beginning at retirement. Beginning
June 1, 2008, future pension benefits for most employees
will be accrued under a cash balance formula we call the
Portable Pension Account (as described in Note 12). These
retirement plan changes were contemplated in our
February 28, 2007 actuarial measurement. These changes will
not affect the benefits of current retirees.
Currently, our defined benefit plans are measured using
actuarial techniques that reflect managements assumptions
for discount rate, rate of return, salary increases, expected
retirement, mortality, employee
76