Fed Ex 2009 Annual Reportl
Fed Ex 2009 Annual Reportl
Fed Ex 2009 Annual Reportl
Billions of people all over the world need fast access to ideas, goods, opportunities and to each other. That’s why FedEx is
investing strategically to match emerging trade patterns and business models. Our new hub in Guangzhou, China, puts us
in the heart of Asia’s fastest-growing production and trade center. Because of Mexico’s growth as a manufacturing center,
we’ve launched domestic express service there. And we’re constantly opening and expanding FedEx Ground hubs to match
trade patterns within the United States. Seeing the long future means having the ability to deliver exactly what the world
needs next.
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“I’m working smarter and
more efficiently than ever.”
FedEx is committed to connecting people around the world with each other and what they need. We’re equally
committed to getting the job done with fewer resources. That’s why we’ve launched our “20 by 20” initiative, aiming to
reduce our aircraft’s carbon emissions by 20 percent and increase our delivery vehicles’ fuel efficiency by 20 percent, all
by 2020. We’re adding zero-emission, all-electric trucks and converting conventional trucks to hybrid-electric technology.
And our new hub in Cologne, Germany, with its 1.4-megawatt solar power system, will be the latest in a growing list of
on-site renewable energy investments. Seeing the long future means doing more with less.
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“They know what I’m
bringing before I get there.”
Markets — and what businesses must create to participate in those markets — change at lightning speed. That’s why FedEx
is investing in technologies that increase the visibility of everything in motion, that translate data into knowledge, that make
it easy for businesses to understand and alter their supply chains and delivery patterns on the fly. FedEx has always believed
the information about the package is just as important as the package itself. Hundreds of thousands of businesses have
created supply chains that depend on FedEx’s ability to move goods and information for them. Seeing the long future means
giving businesses the ability to see and understand — in real time — how they should respond to changing markets.
4
The Long Future Requires Good People
No matter how fast global commerce changes, our team members’ commitment to each other — and to serve our
customers — never changes. Every day, our team keeps our Purple Promise: to make every FedEx experience outstanding.
We consistently place at the top of customer service rankings, and we stay near the top of the most-admired and best-
places-to-work lists. Our philosophy is simple: Because FedEx is a great place to work, our people serve our customers very
well, and our business succeeds as a result. Seeing the long future means understanding that our team members are the
very heart of our business.
5
MESSAGE FROM THE CHAIRMAN
To Our Shareowners:
In times like these, it’s easy for companies to let the IMPROVED EFFICIENCY
economy manage them. It’s easy to get swept up in To conserve energy and improve profitability, we need to
putting out the next fire. It’s easy to think short-term. move more things with fewer resources. That’s why we
continue to invest in efficient equipment and processes.
But FedEx has always been focused on the future, and We have three solar facilities already running in California,
we believe tough times only punctuate the need to and we have broken ground this past fiscal year on what
think long-term. will be our largest solar plant and our first outside the U.S.,
in Cologne, Germany. We are investing in alternative fuels
Accordingly, we continue to look at what the world as well as more fuel-efficient aircraft that lower emissions
of commerce needs for the long haul, even when the and use significantly less fuel per pound transported. With
economy is in a recession. a goal of making our vehicles 20 percent more efficient by
2020, we continue to invest in our hybrid-electric vehicle
SO WHAT DO WE SEE? fleet and in all-electric prototypes. Furthermore, we are
• A growing need for access, as the world’s people and cutting transit times and fuel use through smarter routing
economies become more interconnected. based on new proprietary software.
• An expectation, shared between FedEx and our
customers, that we’ll provide our services in responsible We are also streamlining our processes. Through Quality
and resourceful ways. Driven Management (QDM) we’ve taken a whole new
• A demand for new levels of understanding — not just approach to standardizing quality across the entire
information — about supply chains and everything in them. company. We aim to make sure every FedEx experience
is not only outstanding but also consistent — for
These are three critical areas in which FedEx continues to every customer, every time. We’re also realigning our
invest — access, efficiency, and understanding — to stay organization and resources to concentrate on those
competitive in good times and bad. things that matter most — how to improve the customer
experience and be easier to do business with. QDM
A WIDER NET simultaneously lowers costs and improves efficiency.
Billions of people the world over need fast access
to ideas, goods, and opportunities. We continue to NEW TECHNOLOGIES
strategically expand our networks to provide more access To keep pace with a fast-changing marketplace,
points to more customers. For example, in the past year, companies need to develop a greater understanding of
we opened our new Guangzhou, China, hub, our largest market tools and customer needs. As a consequence,
outside the United States. It will help us better serve we’re providing new technologies that anticipate and
customers doing business in China and the broader respond to rapid changes in global supply chains. These
Asia-Pacific markets. In addition, we added domestic aren’t just bells and whistles, but changes that really
express service within Mexico, expanded next-day count. For instance, we are exploring ways to expand our
service from Europe to the U.S. East Coast, and initiated frozen-shipping capabilities for the life sciences industry,
ocean-ground distribution on the West Coast through so that products can remain frozen for extended periods,
FedEx Trade Networks. In Canada, we launched FedEx unlike dry-ice shipping, which often requires re-icing
SmartPost service. Despite the weak economy, we during transit. We’ve refreshed our online tracking tools
continue to expand our service portfolio — putting the to increase the visibility of shipments via the Web through
right capabilities in the right places and expanding access desktop or mobile devices. We pioneered a new aircraft
to the global economy for our customers. avionics system that will dramatically improve efficiency
6
during takeoff and landing of our aircraft. FedEx Freight with exports alone supporting more than 12 million jobs.
initiated a 10:30 a.m. delivery commitment option, a first We will continue to take a strong stand in favor of trade
for the less-than-truckload freight industry. FedEx Trade equality in the marketplace and healthy competition that
Networks introduced a service to help customers meet benefits consumers the world over. The post World War II
new U.S. Customs filing requirements. record is clear: Opening markets creates new wealth and
new employment. That’s what access is all about.
PURPLE CULTURE
As we invest in the future, we continue to stay true to LOOKING LONG
our core values and to our team members. Our Purple Despite the strong economic headwinds, we are building
Promise — to make every FedEx experience outstanding on our strengths to produce outstanding results when the
— is the foundation of our business. And that promise recovery occurs.
begins with our FedEx culture. Even in difficult times, we • We’ve built shock absorbers into our networks — that is,
are focused on our talented team members. They are the the ability to flex up or down as economic conditions and
face of FedEx in the marketplace, and they’re the ones who volumes shift. It gives us the resiliency to power through
continually improve our customer experience. Through hard times like the present.
their extraordinary efforts, we have weathered the stormy • We are rich in committed people. Our team members
economy better than most. are the best in the industry, always ready to serve our
customers and communities. In fact, we have continued
Even during a recession, our people make the great FedEx to improve service levels during this tough economy. Our
reputation shine. They helped us net several awards such leadership team is more focused and collaborative than at
as FORTUNE’s “Top 10 World’s Most Admired” and “100 any time in our history.
Best Companies to Work for” as well as a No. 1 ranking • Our Board of Directors shares a firm commitment to
in customer service on the Harris Interactive Reputation the highest standards of corporate governance, and we
Quotient™ survey. We have also been cited as one of the welcome Ambassador Susan C. Schwab, former U.S.
best places to work in more than 27 countries around Trade Representative, who joined our board in June.
the world. We are proud of this recognition and always She is an expert on international trade policy and will
remember it is the FedEx team that earned this! serve on our Compensation Committee.
• We have a very strong balance sheet. In the last five
MANAGING CHALLENGE AND CHANGE years, we have reduced our debt by a billion dollars, while
Looking ahead means looking out for issues that can shareowner equity has risen from $8 billion to
undermine our long-term success. $13.6 billion.
We have faced challenges to our independent business- From the day this company was created, we’ve tried to
owner model at FedEx Ground, but are pleased by two envision, then build, what the commerce of the future
recent court victories. Both a Washington Superior Court will require. As a result, we’ve given millions of people
decision and the D.C. Circuit Court of Appeals affirmed new access to one another’s products and ideas. We’ve
that FedEx Ground contractors are not employees. These changed what’s possible for our customers and allowed
decisions validate our long-standing position that FedEx them to improve their businesses. With global economies
Ground contractors are independent, small-business owners in turmoil, we are not blind to reality. But we will not forget
who are dedicated to managing their own companies. what has guided our company from the start: foresight.
For more than 35 years we’ve been confident about a
Another major issue is the attempt by UPS and its allies more prosperous future because we’ve been a big part of
to disrupt the operation of our express company by creating it.
changing the Railway Labor Act (RLA) under which it has
been classified since it began operations in 1973. The RLA, In this respect, nothing has changed.
passed in 1926, is designed to keep large, capital-intensive
transport networks operating for the public good without Sincerely,
exposure to local labor disputes. The status of FedEx
Express as an RLA carrier has been upheld by the courts
for many years, and we will vigorously oppose this clearly
anti-competitive, self-serving legislation, given its potential
injury to FedEx Express and our millions of customers.
Frederick W. Smith
FedEx also continues to press for access to open Chairman, President and Chief Executive Officer
markets and open skies. Ninety-five percent of the
world’s consumers live outside the United States, so
we reject any protectionist measures in the U.S. or in
other countries that penalize the goods and services of
another country. International trade represents over a
quarter of United States gross domestic product (GDP),
7
Financial Highlights
(1) (2)
In millions, except earnings per share 2009 2008 Percent Change
Operating Results
Revenues $35,497 $37,953 (6 )
Operating income 747 2,075 (64 )
Operating margin 2.1 % 5.5 %
Net income 98 1,125 (91 )
Diluted earnings per share 0.31 3.60 (91 )
Average common and common equivalent shares 312 312 0
Capital expenditures 2,459 2,947 (17 )
Financial Position
Total assets $24,244 $25,633 (5 )
Long-term debt, including current portion 2,583 2,008 29
Common stockholders’ investment 13,626 14,526 (6 )
$29.4 $32.3 $35.2 $38.0 $35.5 8.4% 9.3% 9.3% 5.5% 2.1% $4.72 $5.83 $6.48 $3.60 $0.31
2005 2006 2007 2008 2009 2005 2006 2007 2008 (2) 2009 (1) 2005 2006 2007 2008 (2) 2009 (1)
RETURN ON AVERAGE EQUITY DEBT TO TOTAL CAPITALIZATION STOCK PRICE (MAY 31 CLOSE)
16.4% 17.1% 16.7% 8.3% 0.7% 22.6% 17.5% 17.3% 12.1% 15.9% $89.42 $109.27 $111.62 $91.71 $55.43
2005 2006 2007 2008 (2) 2009 (1) 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
(1) Results for 2009 include a charge of $1.2 billion ($1.1 billion, net of tax, or $3.45 per diluted share) primarily related to impairment charges associated with
goodwill and aircraft.
(2) Results for 2008 include a charge of $891 million ($696 million, net of tax, or $2.23 per diluted share) predominately related to impairment charges associated
with intangible assets from the Kinko’s acquisition.
(3) Shows the value, at the end of each of the last five fiscal years, of $100 invested in FedEx Corporation common stock or the relevant index on May 31, 2004,
and assumes reinvestment of dividends. Fiscal year ended May 31.
8
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DESCRIPTION OF BUSINESS
Overview of Financial Section We provide a broad portfolio of transportation, e-commerce and
business services through companies competing collectively,
The financial section of the FedEx Corporation (“FedEx”) Annual
operating independently and managed collaboratively, under
Report (“Annual Report”) consists of the following Management’s
the respected FedEx brand. Our primary operating companies
Discussion and Analysis of Results of Operations and Financial
include Federal Express Corporation (“FedEx Express”), the
Condition (“MD&A”), the Consolidated Financial Statements and
world’s largest express transportation company; FedEx Ground
the notes to the Consolidated Financial Statements, and Other
Package System, Inc. (“FedEx Ground”), a leading provider of
Financial Information, all of which include information about our
small-package ground delivery services; and FedEx Freight
significant accounting policies, practices and the transactions
Corporation, a leading U.S. provider of less-than-truckload (“LTL”)
that underlie our financial results. The following MD&A describes
freight services. Our FedEx Services segment provides customer-
the principal factors affecting the results of operations, liquidity,
facing sales, marketing, information technology and customer
capital resources, contractual cash obligations and the critical
service support to our transportation segments. In addition, the
accounting estimates of FedEx. The discussion in the financial
FedEx Services segment provides customers with retail access
section should be read in conjunction with the other sections
to FedEx Express and FedEx Ground shipping services through
of this Annual Report and our detailed discussion of risk factors
FedEx Office and Print Services, Inc. (“FedEx Office”). These
included in this MD&A.
companies represent our major service lines and form the core
of our reportable segments. See “Reportable Segments” for fur-
ORGANIZATION OF INFORMATION
ther discussion.
Our MD&A is comprised of three major sections: Results
of Operations, Financial Condition and Critical Accounting The key indicators necessary to understand our operating results
Estimates. These sections include the following information: include:
• Results of Operations includes an overview of our consolidated • the overall customer demand for our various services;
2009 results compared to 2008, and 2008 results compared to
• the volumes of transportation services provided through our
2007. This section also includes a discussion of key actions and
networks, primarily measured by our average daily volume and
events that impacted our results, as well as a discussion of our
shipment weight;
outlook for 2010.
• the mix of services purchased by our customers;
• The overview is followed by a financial summary and analysis
(including a discussion of both historical operating results and • the prices we obtain for our services, primarily measured by
our outlook for 2010) for each of our reportable transportation yield (revenue per package or pound or revenue per hundred-
segments. weight for LTL freight shipments);
• Our financial condition is reviewed through an analysis of key • our ability to manage our cost structure (capital expenditures
elements of our liquidity, capital resources and contractual cash and operating expenses) to match shifting volume levels; and
obligations, including a discussion of our cash flow statements
• the timing and amount of fluctuations in fuel prices and our
and our financial commitments.
ability to recover incremental fuel costs through our fuel
• We conclude with a discussion of the critical accounting esti- surcharges.
mates that we believe are important to understanding certain
The majority of our operating expenses are directly impacted by
of the material judgments and assumptions incorporated in our
revenue and volume levels. Accordingly, we expect these operat-
reported financial results.
ing expenses to fluctuate on a year-over-year basis consistent
with the change in revenues and volume. The following discus-
sion of operating expenses describes the key drivers impacting
expense trends beyond changes in revenues and volume.
Except as otherwise specified, references to years indicate our
fiscal year ended May 31, 2009 or ended May 31 of the year ref-
erenced and comparisons are to the prior year. References to our
transportation segments include, collectively, our FedEx Express,
FedEx Ground and FedEx Freight segments.
9
FEDEX CORPORATION
Results of Operations
CONSOLIDATED RESULTS
The following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in
millions, except per share amounts) for the years ended May 31:
Percent Change
2009 (1) 2008 (2) 2007 (3) 2009/2008 2008/2007
The following table shows changes in revenues and operating income by reportable segment for 2009 compared to 2008, and 2008
compared to 2007 (in millions):
Revenues Operating Income (Loss)
Dollar Change Percent Change Dollar Change Percent Change
2009/2008 2008/2007 2009/2008 2008/2007 2009/2008 2008/2007 2009/2008 2008/2007
FedEx Express segment (1) $ (2,057) $ 1,740 (8) 8 $ (1,107) $ (90) (58) (5)
FedEx Ground segment 296 708 4 12 71 (86) 10 (10)
FedEx Freight segment (2) (519) 348 (11) 8 (373) (134) (113) (29)
FedEx Services segment (3) (161) 2 (8) – 81 (891) 9 NM
Other and Eliminations (15) (59) NM NM – – – –
$ (2,456) $ 2,739 (6) 8 $ (1,328) $ (1,201) (64) (37)
(1) FedEx Express segment 2009 operating expenses include a charge of $260 million, primarily related to aircraft-related asset impairments. FedEx Express segment 2007 operating expenses include a
charge of $143 million associated with upfront compensation and benefits under our pilot labor contract.
(2) FedEx Freight segment 2009 operating expenses include a charge of $100 million, primarily related to impairment charges associated with goodwill related to the Watkins Motor Lines (now known as
FedEx National LTL) acquisition. FedEx Freight segment results include the results of FedEx National LTL from the date of its acquisition on September 3, 2006.
(3) FedEx Services segment 2009 operating expenses include a charge of $810 million, related to impairment charges associated with goodwill related to the Kinko’s acquisition. FedEx Services segment
2008 operating expenses include a charge of $891 million, predominantly related to impairment charges associated with intangible assets from the Kinko’s acquisition. The normal, ongoing net operating
costs of the FedEx Services segment are allocated back to the transportation segments.
The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group, which comprises the FedEx Freight and FedEx
National LTL businesses of FedEx Freight Corporation, show selected volume statistics (in thousands) for the years ended May 31:
10
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected yield statistics for the years
ended May 31:
$19.00 $6.75
2006 2007 2008 2009 2006 2007 2008 2009
$20.00 $19.65
$19.07
$19.00 $18.65
$18.00
$17.00 $16.84
$16.00
$15.00
2006 2007 2008 2009
11
FEDEX CORPORATION
In addition, at May 31, 2009, in accordance with the provisions Impairment and Other Charges
of Financial Accounting Standards Board (“FASB”) Statement During the fourth quarter of 2009, we took actions in addition
of Financial Accounting Standards (“SFAS”) 158, “Employers’ to those described above to align the size of our networks to
Accounting for Defined Benefit Pension and Other Postretirement current demand levels by removing equipment and facilities
Plans,” we recorded a decrease to equity through other compre- from service and reducing personnel. These actions, com-
hensive income (“OCI”) of $1.2 billion (net of tax) based primarily bined with the impairment of goodwill related to the Kinko’s
on mark-to-market adjustments related to unrealized losses in and Watkins Motor Lines acquisitions, resulted in a charge of
our pension plan assets during 2009. $1.2 billion ($1.1 billion, net of tax, or $3.45 per diluted share), which
is included in our operating results for the fourth quarter of 2009.
In 2008, the combination of record high fuel prices and the weak
U.S. economy significantly impacted our profitability. Persistently The components of the fourth quarter charge include the follow-
higher fuel prices and the related impact on our fuel surcharges ing (in millions):
reduced demand for our services, particularly U.S. domestic
Goodwill impairment $ 900
express package and LTL freight services, and pressured over-
Asset impairment 202
all yield growth across our transportation segments. In addition,
Other charges 102
our operating results for 2008 included a charge of $891 million,
$ 1,204
predominantly related to impairment charges associated with
intangible assets from the Kinko’s acquisition. Lower variable
The goodwill impairment charge includes an $810 million charge
incentive compensation, reduced retirement plans costs and
related to reduction of the value of the goodwill recorded as a
cost-containment activities partially mitigated the impact of
result of the February 2004 acquisition of Kinko’s, Inc. (now known
higher net fuel costs and the weak U.S. economy on our 2008
as FedEx Office) and a $90 million charge related to reduction of
overall results.
the value of the goodwill recorded as a result of the September
2006 acquisition of the U.S. and Canadian less-than-truckload
Revenue
freight operations of Watkins Motor Lines and certain affiliates
Revenues decreased during 2009 due to significantly lower
(now known as FedEx National LTL). The key factor contributing
volumes at FedEx Express and the FedEx Freight LTL Group as
to the goodwill impairment was a decline in FedEx Office’s and
a result of reduced demand and lower yields resulting from
FedEx National LTL’s recent and forecasted financial performance
an aggressive pricing environment. At FedEx Express, FedEx
as a result of weak economic conditions.
International Priority® package (“IP”) volume declined in every
major region of the world, although the rate of decline began The Watkins Motor Lines goodwill impairment charge is included
to slow late in 2009. Reductions in U.S. domestic package and in the results of the FedEx Freight segment. The Kinko’s good-
freight volumes at FedEx Express also contributed to the revenue will impairment charge is included in the results of the FedEx
decrease during 2009. However, declines in U.S. domestic pack- Services segment and was not allocated to our transportation
age volumes were partially offset by volumes gained from DHL’s segments, as the charge was unrelated to the core performance
exit from the U.S. market. These volume decreases were partially of those businesses. For additional information concerning these
offset by yield increases in FedEx Express freight services driven impairment charges, see Note 4 to the accompanying consoli-
by higher base rates and higher fuel surcharges in the first half dated financial statements and the Critical Accounting Estimates
of 2009. FedEx Freight LTL Group volumes decreased as a result section of this MD&A.
of the recession despite maintaining market share. Within our
We had several property and equipment impairment charges dur-
FedEx Ground segment, volumes increased during 2009 due to
ing 2009 resulting from decisions to remove assets from service
market share gains, including volumes gained from DHL, and
due to the impact of the recession on our business, principally
FedEx Express customers who chose to use our more economi-
during the fourth quarter. The majority of our asset impairment
cal ground delivery services in light of the recession.
charges during the fourth quarter of 2009 resulted from our fourth
Revenue growth for 2008 was primarily attributable to continued quarter decision to permanently remove from service 10 Airbus
growth in international services at FedEx Express, increases A310-200 aircraft and four Boeing MD10-10 aircraft that we own,
in FedEx Express U.S. domestic package yields and volume along with certain excess aircraft engines, at FedEx Express.
growth at FedEx Ground. Higher fuel surcharges were the key This decision was a result of our ongoing efforts to optimize our
driver of increased yields in our transportation segments in 2008. express network in light of continued excess aircraft capacity
Additionally, FedEx Express international yields benefited from due to weak economic conditions and the delivery of newer,
favorable currency exchange rates. Revenue growth for 2008 more fuel-efficient aircraft. Other charges during the fourth
also improved due to a full year of operations for businesses quarter of 2009 were primarily associated with aircraft-related
acquired in 2007 at FedEx Express and FedEx Freight. Revenue lease and contract termination costs at FedEx Express and
growth during 2008 was partially offset by reduced U.S. domestic employee severance.
express volumes as a result of the ongoing weak U.S. economy.
Our operating results for 2008 include a charge of $891 million
The impact of the weak U.S. economy became progressively
($696 million, net of tax, or $2.23 per diluted share) recorded
worse during the year and drove U.S. domestic express shipping
during the fourth quarter, predominantly related to impairment
volumes to pre-2000 levels during the fourth quarter of 2008.
charges associated with the decision to minimize the use of
the Kinko’s trade name and goodwill resulting from the Kinko’s
acquisition.
12
MANAGEMENT’S DISCUSSION AND ANALYSIS
The impairment of the Kinko’s trade name was due to the deci- The following graphs for our transportation segments show our
sion to minimize the use of the Kinko’s trade name and rebrand average cost of jet and vehicle fuel per gallon and the year-over-
the company as FedEx OfficeOffice over the next several years. We year percentage change in total fuel expense for the years ended
believe the FedEx Office
Office name better describes the wide range of May 31:
services available at the company’s retail centers and takes full
Average Fuel Cost
advantage of the FedEx brand. The goodwill impairment charge per Gallon
resulted from a decline in the fair value of the FedEx Office $3.75
reporting unit in light of economic conditions, the unit’s recent $3.31
and forecasted financial
financial performance and the decision to reduce $3.25 $3.04
the rate of network expansion. These 2008 impairment charges $2.77
$2.75 $2.56 $2.65 $2.62
are included in operating expenses in the accompanying consoli-
dated statements of income. The charges were included in the $2.25 $2.04 $2.12
results of the FedEx Services segment and were not allocated to
our transportation segments, as the charges were unrelated to $1.75
the core performance of those businesses.
$1.25
2006 2007 2008 2009
Operating Income
Vehicle Jet
The following table compares operating expenses as a percent
of revenue for the years ended May 31:
Percent of Revenue
2009 2008 2007 Year-Over-Year Percentage Change in
Total Fuel Expense
Operating expenses: 45%
Salaries and employee benefits
benefits 38.8% 37.4% 39.0% 29%
Purchased transportation 12.8 12.2 11.3 30%
Rentals and landing fees 6.8 6.4 6.7
15% 8%
Depreciation and amortization 5.6 5.1 5.0
Fuel 10.7 11.6 9.7 0%
Maintenance and repairs 5.3 5.5 5.5 -14%
Impairment and other charges 3.4 2.3 – -15%
Other 14.5 14.0 13.5
-30%
Total operating expenses 97.9 94.5 90.7 2006/2007 2007/2008 2008/2009
Operating margin 2.1% 5.5% 9.3%
Fuel Expense
13
FEDEX CORPORATION
Fuel prices decreased rapidly and significantly during 2009 after Other Income and Expense
peaking during the first quarter, while changes in fuel surcharges Interest expense decreased $13 million during 2009 due to
for FedEx Express and FedEx Ground lagged these decreases by increased capitalized interest primarily related to progress
approximately six to eight weeks. We experienced the opposite payments on aircraft purchases, which was partially offset
effect during 2008, as fuel prices significantly increased. This by interest costs on higher debt balances. Interest income
volatility in fuel prices and fuel surcharges resulted in a net ben- decreased $18 million during 2009, primarily due to lower inter-
efit to income in 2009, based on a static analysis of the impact to est rates. Net interest expense decreased $1 million during 2008
operating income of year-over-year changes in fuel prices com- primarily due to decreased interest expense related to lower debt
pared to changes in fuel surcharges. This analysis considers the balances and increased capitalized interest. The 2008 decrease
estimated benefits of the reduction in fuel surcharges included in interest expense was partially offset by decreased interest
in the base rates charged for FedEx Express services. However, income due to lower cash balances.
this analysis does not consider the negative effects that the
significantly higher fuel surcharge levels have on our business, Income Taxes
including reduced demand and shifts by our customers to lower- Our effective tax rates of 85.6% for 2009 and 44.2% for 2008
yielding services. While fluctuations in fuel surcharge rates can were significantly impacted by the goodwill impairment charges
be significant from period to period, fuel surcharges represent related to the Kinko’s acquisition, which are not deductible for
one of the many individual components of our pricing structure income tax purposes. Our effective tax rate was 37.3% in 2007,
that impact our overall revenue and yield. Additional components which was favorably impacted by the conclusion of various
include the mix of services purchased, the base price and extra state and federal audits and appeals. The 2007 rate reduction
service charges we obtain for these services and the level of was partially offset by tax charges incurred as a result of a
pricing discounts offered. In order to provide information about reorganization in Asia associated with our acquisition in China.
the impact of fuel surcharges on the trend in revenue and yield For 2010, we expect our effective tax rate to be between 38%
growth, we have included the comparative fuel surcharge rates and 39%. The actual rate, however, will depend on a number of
in effect for 2009, 2008 and 2007 in the accompanying discussions factors, including the amount and source of operating income.
of each of our transportation segments. Additional information on income taxes, including our effec-
tive tax rate reconciliation and liabilities recorded under FASB
Operating income and operating margin declined during 2008, as
Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in
the weak U.S. economy and substantially higher fuel costs pres-
Income Taxes,” can be found in Note 11 of the accompanying
sured volume growth at FedEx Express and the FedEx Freight LTL
consolidated financial statements.
Group. The impairment charges at FedEx Office also negatively
affected operating income and margin in 2008. As described
above, fuel volatility negatively affected earnings in 2008.
Operating income and margin in 2008 were also negatively
impacted by increased net operating costs at FedEx Office and
costs of expansion of our domestic express services in China.
Higher purchased transportation expenses at FedEx Ground,
primarily due to costs associated with independent contractor
incentive programs and higher rates paid to our contractors
(including higher fuel supplement costs), also had a negative
impact on 2008 results. Other operating expenses increased
during 2008 primarily due to the full-year inclusion of our 2007
business acquisitions, including the consolidation of the results
of our China joint venture at FedEx Express, and higher legal,
consulting and insurance costs at FedEx Ground. Lower variable
incentive compensation and reduced retirement plans costs,
combined with cost-containment activities, partially mitigated
the impact of higher net fuel costs and the weak U.S. economy
on our overall results for 2008.
14
MANAGEMENT’S DISCUSSION AND ANALYSIS
Business Acquisitions
During 2007, we made the following acquisitions:
Purchase Price
Segment Business Acquired Rebranded Date Acquired (in millions)
FedEx Freight Watkins Motor Lines FedEx National LTL September 3, 2006 $787
FedEx Express ANC Holdings Ltd. FedEx U.K. December 16, 2006 241
FedEx Express Tianjin Datian W. Group Co., Ltd. (“DTW Group”) N/A March 1, 2007 427
These acquisitions expanded our portfolio of services to include Our capital expenditures for 2010 are expected to be approxi-
long-haul LTL freight services and domestic express services mately $2.6 billion, as we will continue to balance the need to
in the United Kingdom and China. See Note 3 of the accompa- control spending with the opportunity to make investments
nying consolidated financial statements for further information with high returns, such as in substantially more fuel-efficient
about these acquisitions. We paid the purchase price for these Boeing 757 (“B757”) and Boeing 777 Freighter (“B777F”) aircraft.
acquisitions from available cash balances, which included the Moreover, we will continue to invest in critical long-term strategic
net proceeds from our $1 billion senior unsecured debt offer- projects focused on enhancing and broadening our service offer-
ing completed during 2007. During 2009, 2008 and 2007, we also ings to position us for stronger growth under improved economic
made other immaterial acquisitions that are not presented in the conditions. However, we could reduce 2010 capital expenditures
table above. should conditions worsen. For additional details on key 2010 capi-
tal projects, refer to the Liquidity Outlook section of this MD&A.
Employees Under Collective Bargaining Arrangements
All of our businesses operate in a competitive pricing environ-
The pilots of FedEx Express, who represent a small percent-
ment, exacerbated by continuing volatile fuel prices, which
age of our total employees, are employed under a collective
impact our fuel surcharge levels. Historically, our fuel surcharges
bargaining agreement. During the second quarter of 2007, the
have largely offset incremental fuel costs; however, volatility in
pilots ratified a new four-year labor contract that included signing
fuel costs may impact earnings because adjustments to our fuel
bonuses and other upfront compensation of $143 million, as well
surcharges lag changes in actual fuel prices paid. Therefore,
as pay increases and other benefit enhancements. These costs
the trailing impact of adjustments to our fuel surcharges can
were partially mitigated by reductions in the variable incentive
significantly affect our earnings either positively or negatively
compensation of our other employees. The effect of this new
in the short-term.
agreement on second quarter 2007 net income was $78 million
net of tax, or $0.25 per diluted share. As described in Note 17 of the accompanying consolidated
financial statements and the “Independent Contractor Matters”
Outlook section of our FedEx Ground segment MD&A, we are involved
We expect continued softness in demand for our services in 2010, in a number of litigation matters and other proceedings that
as shipping volumes are expected to remain relatively flat as the challenge the status of FedEx Ground’s owner-operators as
global recession persists, particularly in the first half of 2010. Our independent contractors. FedEx Ground anticipates continuing
results for the first half of 2009 included the benefit of signifi- changes to its relationships with its contractors. The nature, tim-
cantly stronger economic activity and rapidly declining fuel costs, ing and amount of any changes are dependent on the outcome
creating difficult year-over-year comparisons. The timing and of numerous future events. We cannot reasonably estimate the
pace of any economic recovery is difficult to predict, and our potential impact of any such changes or a meaningful range of
outlook for 2010 reflects our expectations for continued chal- potential outcomes, although they could be material. However,
lenges in growing volume and yield in this environment. Revenues we do not believe that any such changes will impair our ability to
in 2010 are expected to be negatively impacted by lower yields operate and profitably grow our FedEx Ground business.
resulting from lower fuel surcharges due to more stable fuel
See “Risk Factors” for a discussion of these and other poten-
prices and an aggressive pricing environment for our services.
tial risks and uncertainties that could materially affect our
We anticipate volume growth at the FedEx Ground segment due
future performance.
to continued market share gains and flat volumes at the FedEx
Express segment for 2010. Further, we expect LTL shipments
to decrease for 2010 due to the continued excess capacity in
this market. However, if excess capacity exits the LTL industry
in 2010, we have the network, resources and capabilities to
manage any resulting incremental volumes. Despite the benefit
of numerous cost-reduction activities in 2009 (described above),
earnings in 2010 will be negatively impacted by lower revenues
as a result of the yield and volume pressures described above.
If economic conditions deteriorate further, additional actions will be
necessary to reduce the size of our networks. However, we will
not compromise our outstanding service levels or take actions
that negatively impact the customer experience in exchange for
short-term cost reductions.
15
FEDEX CORPORATION
16
MANAGEMENT’S DISCUSSION AND ANALYSIS
REPORTABLE SEGMENTS The costs of the sales, marketing and information technology
FedEx Express, FedEx Ground and the FedEx Freight LTL Group support provided by FedEx Services and the customer service
represent our major service lines and, along with FedEx Services, functions of FCIS, together with the normal, ongoing net oper-
form the core of our reportable segments. Our reportable seg- ating costs of FedEx Global Supply Chain Services and FedEx
ments as of May 31, 2009 included the following businesses: Office, are allocated primarily to the FedEx Express and FedEx
Ground segments based on metrics such as relative revenues
FedEx Express Segment FedEx Express or estimated services provided. We believe these allocations
(express transportation) approximate the net cost of providing these functions. The
FedEx Trade Networks $810 million fourth quarter 2009 impairment charge for the
(global trade services) Kinko’s goodwill and the $891 million 2008 charge predominantly
associated with impairment charges for the Kinko’s trade name
FedEx Ground Segment FedEx Ground and goodwill were not allocated to the FedEx Express or FedEx
(small-package ground delivery) Ground segments, as the charges were unrelated to the core
FedEx SmartPost performance of those businesses.
(small-parcel consolidator)
FedEx Services segment revenues, which reflect the opera-
tions of FedEx Office and FedEx Global Supply Chain Services,
FedEx Freight Segment FedEx Freight LTL Group:
decreased 8% during 2009. Revenue generated from new FedEx
FedEx Freight (regional LTL
Office locations added in 2008 and 2009 did not offset declines in
freight transportation)
base copy revenues, incremental operating costs associated with
FedEx National LTL
the new locations and expenses associated with organizational
(long-haul LTL freight
changes. Therefore, the allocated net operating costs of FedEx
transportation)
Office increased during 2009 despite ongoing cost management
FedEx Custom Critical
efforts. In September 2008, FedEx Office began implementation
(time-critical transportation)
of organizational changes intended to improve profitability and
Caribbean Transportation Services
enhance the customer experience.
(airfreight forwarding)
The operating expenses line item “Intercompany charges” on
FedEx Services Segment FedEx Services (sales, the accompanying unaudited financial summaries of our trans-
marketing and information portation segments includes the allocations from the FedEx
technology functions) Services segment to the respective transportation segments.
FedEx Office (document and The “Intercompany charges” caption also includes allocations
business services and package for administrative services provided between operating com-
acceptance) panies and certain other costs such as corporate management
FedEx Customer Information fees related to services received for general corporate oversight,
Services (“FCIS”) (customer including executive officers and certain legal and finance func-
service, billings and collections) tions. Management evaluates transportation segment financial
FedEx Global Supply Chain Services performance based on operating income.
(logistics services)
OTHER INTERSEGMENT TRANSACTIONS
Effective June 1, 2009, Caribbean Transportation Services, Inc. Certain FedEx operating companies provide transportation and
(“CTS”), a business in the FedEx Freight segment, was integrated related services for other FedEx companies outside their report-
into FedEx Express to leverage synergies between CTS and FedEx able segment. Billings for such services are based on negotiated
Express and to gain cost efficiencies by maximizing the use of rates, which we believe approximate fair value, and are reflected
FedEx Express assets for this service offering. as revenues of the billing segment. These rates are adjusted from
time to time based on market conditions. Such intersegment rev-
FEDEX SERVICES SEGMENT enues and expenses are eliminated in the consolidated results
The FedEx Services segment includes: FedEx Services, which pro- and are not separately identified in the following segment infor-
vides sales, marketing and information technology support to our mation, as the amounts are not material.
other companies; FCIS, which is responsible for customer service,
billings and collections for FedEx Express and FedEx Ground U.S.
customers; FedEx Global Supply Chain Services, which provides
a range of logistics services to our customers; and FedEx Office,
which provides retail access to our customers for our package
transportation businesses and an array of document and busi-
ness services.
17
FEDEX CORPORATION
FEDEX EXPRESS SEGMENT The following table compares selected statistics (in thousands,
The following table compares revenues, operating expenses, except yield amounts) for the years ended May 31:
operating income and operating margin (dollars in millions) for Percent Change
the years ended May 31: 2009/ 2008/
Percent Change 2009 2008 2007 2008 2007
2009/ 2008/ (1)
(1)
2009 2008 2007 2008 2007 Package Statistics
Average daily package volume (ADV):
Revenues:
U.S. overnight box 1,127 1,151 1,174 (2) (2)
Package:
U.S. overnight
U.S. overnight box $ 6,074 $ 6,578 $ 6,485 (8) 1
envelope 627 677 706 (7) (4)
U.S. overnight
U.S. deferred 849 895 898 (5) –
envelope 1,855 2,012 1,990 (8) 1
Total U.S.
U.S. deferred 2,789 2,995 2,883 (7) 4
domestic ADV 2,603 2,723 2,778 (4) (2)
Total U.S. domestic
IP 475 517 487 (8) 6
package revenue 10,718 11,585 11,358 (7) 2
International
International
domestic (2) 298 296 134 1 121
Priority (IP) 6,978 7,666 6,722 (9) 14
Total ADV 3,376 3,536 3,399 (5) 4
International
domestic (1) 565 663 370 (15) 79 Revenue per package (yield):
Total package U.S. overnight box $ 21.21 $ 22.40 $ 21.66 (5) 3
revenue 18,261 19,914 18,450 (8) 8 U.S. overnight
Freight: envelope 11.65 11.66 11.06 – 5
U.S. 2,165 2,398 2,412 (10) (1) U.S. deferred 12.94 13.12 12.59 (1) 4
International U.S. domestic
Priority Freight 1,104 1,243 1,045 (11) 19 composite 16.21 16.68 16.04 (3) 4
International IP 57.81 58.11 54.13 (1) 7
airfreight 369 406 394 (9) 3 International
Total freight domestic (2) 7.50 8.80 10.77 (15) (18)
revenue 3,638 4,047 3,851 (10) 5 Composite
Other (2) 465 460 380 1 21 package yield 21.30 22.08 21.28 (4) 4
Total revenues 22,364 24,421 22,681 (8) 8
Freight Statistics (1)(1)
Operating expenses: Average daily freight pounds:
Salaries and U.S. 7,287 8,648 9,569 (16) (10)
benefits
employee benefi ts 8,217 8,451 8,234(4) (3) 3 International
Purchased Priority Freight 1,959 2,220 1,878 (12) 18
transportation 1,112 1,208 1,098 (8) 10 International
Rentals and airfreight 1,475 1,817 1,831 (19) (1)
landing fees 1,613 1,673 1,610 (4) 4 Total average
Depreciation and daily freight
amortization 961 944 856 2 10 pounds 10,721 12,685 13,278 (15) (4)
Fuel 3,281 3,785 2,946 (13) 28
Revenue per pound (yield):
Maintenance and
U.S. $ 1.17 $ 1.09 $ 0.99 7 10
repairs 1,351 1,512 1,444 (11) 5
International
Impairment and
Priority Freight 2.22 2.20 2.18 1 1
other charges 260 (3) – – NM –
International
Intercompany charges 2,103 2,134 2,046 (1) 4
airfreight 0.99 0.88 0.84 13 5
Other 2,672 2,813 2,456 (5) 15
Composite
Total operating
freight yield 1.34 1.25 1.14 7 10
expenses 21,570 22,520 20,690 (4) 9
Operating income
income $ 794 $ 1,901 $ 1,991 (58) (5) (1) Package and freight statistics include only the operations of FedEx Express.
(2) International domestic statistics include our international domestic express operations,
Operating margin
margin 3.6% 7.8% 8.8% (420)bp (100)bp primarily in the United Kingdom, Canada, China and India.
(1) International domestic revenues include our international domestic express operations,
primarily in the United Kingdom, Canada, China and India. We reclassifi ed the prior period
reclassified
international domestic revenues previously included within other revenues to conform to the
current period presentation.
(2) Other revenues includes FedEx Trade Networks.
(3) Represents charges associated with aircraft-related asset impairments and other charges
primarily associated with aircraft-related lease and contract termination costs and employee
severance.
(4) Includes a charge of $143 million for signing bonuses and other upfront compensation
associated with a four-year labor contract with our pilots.
18
MANAGEMENT’S DISCUSSION AND ANALYSIS
19
FEDEX CORPORATION
Fuel costs decreased 13% in 2009 due to decreases in fuel FedEx Express Segment Outlook
consumption and the average price per gallon of fuel. Fuel sur- We expect revenues to decline at FedEx Express in 2010 as a
charges were sufficient to offset fuel costs for 2009, based on result of significantly lower fuel surcharges and the ongoing
a static analysis of the impact to operating income of the year- global recession. U.S. domestic and IP package volumes are
over-year changes in fuel prices compared to changes in fuel expected to be flat, and yields are expected to be negatively
surcharges. This analysis considers the estimated benefits impacted by a competitive pricing environment and the ongoing
of the reduction in fuel surcharges included in the base rates global recession.
charged for FedEx Express services. However, this analysis does
FedEx Express segment operating income and operating margin
not consider the negative effects that the significantly higher
are expected to increase slightly in 2010. We expect the full year
fuel surcharge levels have on our business, including reduced
impact of actions taken in 2009 to lower our cost structure, com-
demand and shifts to lower-yielding services. Maintenance and
bined with additional cost-containment initiatives in 2010, will be
repairs expense decreased 11% primarily due to a volume-related
mostly offset by a significant decline in revenues.
reduction in flight hours and the permanent and temporary
grounding of certain aircraft due to excess capacity in the Capital expenditures at FedEx Express are expected to increase
current economic environment. in 2010 driven by incremental investments for the new B777F
aircraft, the first of which is expected to enter revenue service
Operating results for 2008 were negatively impacted by record
in 2010. These aircraft capital expenditures are necessary to
high fuel prices, the continued weak U.S. economy and our
achieve significant long-term operating savings and to support
continued investment in domestic express services in China.
projected long-term international volume growth.
However, revenue growth in IP services, reduced retirement plan
costs, the favorable impact of foreign currency exchange rates
FEDEX GROUND SEGMENT
and lower variable incentive compensation partially offset the
The following table compares revenues, operating expenses,
impact of these factors on operating income during 2008.
operating income and operating margin (dollars in millions) and
Fuel costs increased in 2008 due to an increase in the average selected package statistics (in thousands, except yield amounts)
price per gallon of fuel. The volatility in fuel prices and fuel sur- for the years ended May 31:
charges resulted in a net benefit to income in 2008, based on a Percent Change
2009/ 2008/
static analysis of the year-over-year changes in fuel prices com- 2009 2008 2007 2008 2007
pared to changes in fuel surcharges. This analysis considers the
estimated benefits of the reduction in fuel surcharges included in Revenues $ 7,047 $ 6,751 $ 6,043 4 12
the base rates charged for FedEx Express services. Operating expenses:
Salaries and
Other operating expenses increased during 2008 principally employee benefits 1,102 1,073 1,006 3 7
due to the inclusion of our 2007 business acquisitions, including Purchased
the full consolidation of the results of our China joint venture. transportation (1) 2,918 2,878 2,430 1 18
Purchased transportation costs increased in 2008 primarily due Rentals 222 189 166 17 14
to the inclusion of our 2007 business acquisitions, the impact Depreciation and
of higher fuel costs and IP volume growth, which requires a amortization 337 305 268 10 14
higher utilization of contract pickup and delivery services. These Fuel (1) 9 14 13 (36) 8
increases in purchased transportation costs were partially offset Maintenance
by the elimination of payments by us for pickup and delivery ser- and repairs 147 145 134 1 8
vices provided by our former China joint venture partner, as we Intercompany charges 710 658 569 8 16
acquired this business in the second half of 2007. The increase in Other 795 753 635 6 19
depreciation expense during 2008 was principally due to aircraft Total operating
purchases and our 2007 business acquisitions. Intercompany expenses 6,240 6,015 5,221 4 15
charges increased during 2008 primarily due to increased net Operating income $ 807 $ 736 $ 822 10 (10)
operating costs at FedEx Office associated with declines in copy Operating margin 11.5% 10.9% 13.6% 60bp (270)bp
revenues, as well as higher expenses associated with store Average daily package volume:
expansion, advertising and promotions, and service improvement FedEx Ground 3,404 3,365 3,126 1 8
activities. This increase was partially offset by lower allocated FedEx SmartPost 827 618 599 34 3
fees from FedEx Services due to cost-containment activities. Revenue per package (yield):
FedEx Ground $ 7.70 $ 7.48 $ 7.21 3 4
FedEx SmartPost $ 1.81 $ 2.09 $ 1.88 (13) 11
(1) We reclassified certain fuel supplement costs related to our independent contractors
from fuel expense to purchased transportation expense to conform to the current period
presentation.
20
MANAGEMENT’S DISCUSSION AND ANALYSIS
21
FEDEX CORPORATION
Purchased transportation costs increased during 2008 as a result FedEx Ground Segment Outlook
of higher rates paid to our independent contractors (including We expect the FedEx Ground segment to have continued revenue
the impact of higher fuel costs) and costs associated with our growth in 2010, led by increases in commercial and FedEx Home
independent contractor programs (described below). Fuel sur- Delivery average daily volumes due to market share gains. FedEx
charges were not sufficient to offset the effect of fuel costs on SmartPost volumes are also expected to grow due to market
our year-over-year operating results for 2008, due to the timing share gains and the introduction of new services. Yield improve-
lag that exists between when we purchase fuel and when our ment at FedEx Ground is expected to be limited in 2010 as a result
indexed fuel surcharges automatically adjust. of a competitive pricing environment and decreases in fuel sur-
charges. Yields at FedEx SmartPost are expected to decline due
Intercompany charges increased during 2008 primarily due to
to service mix changes.
increased net operating costs at FedEx Office associated with
declines in copy revenues, as well as higher expenses asso- FedEx Ground segment operating income in 2010 is expected to
ciated with store expansion, advertising and promotions, and increase slightly, as revenue growth will be mostly offset by costs
service improvement activities. In addition, higher allocated sales associated with network expansion and ongoing enhancements
and marketing and customer service costs from FedEx Services to our independent contractor model.
contributed to the increase in intercompany charges for 2008.
Capital spending is expected to decline slightly in 2010 with the
Other operating expenses increased during 2008, primarily due
majority of our spending resulting from our continued network
to higher legal, consulting and insurance costs. Depreciation
expansion and productivity-enhancing technologies. We are com-
expense and rent expense increased in 2008 primarily due to
mitted to investing in the FedEx Ground network because of the
higher spending on material handling equipment and facilities
long-term benefits we will experience from these investments.
associated with our multi-year capacity expansion plan.
We will continue to vigorously defend various attacks against
Independent Contractor Matters our independent contractor model and incur ongoing legal costs
FedEx Ground faces increased regulatory and legal uncertainty as a part of this process. While we believe that FedEx Ground’s
with respect to its independent contractors. As part of its opera- owner-operators are properly classified as independent contrac-
tions, FedEx Ground has made changes to its relationships with tors, it is reasonably possible that we could incur a material loss
contractors that, among other things, provide incentives for in connection with one or more of these matters or be required
improved service and enhanced regulatory and other compli- to make material changes to our contractor model. However, we
ance by our contractors. During the second quarter of 2008, do not believe that any such changes will impair our ability to
FedEx Ground announced an ongoing nationwide program, operate and profitably grow our FedEx Ground business.
which provides greater incentives to certain of its contractors
who choose to grow their businesses by adding routes. Also,
during the second quarter of 2008, FedEx Ground offered special
incentives to encourage California-based single route contrac-
tors to transform their operations into multiple-route businesses
or sell their routes to others.
During 2009, because of state-specific legal and regulatory
issues, FedEx Ground offered special incentives to encourage
each New Hampshire-based and Maryland-based single-route
pickup-and-delivery contractor to assume responsibility for the
pickup-and-delivery operations of an entire geographic service
area that includes multiple routes. These programs were well
received, and the aggregate amount of these incentives was
immaterial.
As of May 31, 2009, approximately 60% of all service areas
nationwide are supported by multiple-route contractors, which
comprise approximately 35% of all FedEx Ground pickup-and-
delivery contractors.
FedEx Ground is involved in numerous purported or certified
class-action lawsuits, state tax and other administrative pro-
ceedings and Internal Revenue Service audits that claim or are
examining whether the company’s owner-operators should be
treated as employees, rather than independent contractors. For a
description of these proceedings, see Note 17 of the accompany-
ing consolidated financial statements.
22
MANAGEMENT’S DISCUSSION AND ANALYSIS
FEDEX FREIGHT SEGMENT In January 2009, we implemented 5.7% general rate increases for
The following table shows revenues, operating expenses, operat- FedEx Freight and FedEx National LTL shipments. In January 2008,
ing (loss)/income and operating margin (dollars in millions) and we implemented a 5.48% general rate increase for FedEx Freight
selected statistics for the years ended May 31: and a commensurate general rate increase for FedEx National
Percent Change LTL. The indexed LTL fuel surcharge is based on the average of
2009/ 2008/
2009 2008 2007 (2) 2008 2007
the national U.S. on-highway average prices for a gallon of diesel
fuel, as published by the Department of Energy. The indexed LTL
Revenues $ 4,415 $4,934 $4,586 (11) 8 fuel surcharge ranged as follows for the years ended May 31:
Operating expenses:
2009 2008 2007
Salaries and
employee benefits 2,247 2,381 2,250 (6) 6 Low 8.3% 14.5% 14.0%
Purchased High 23.9 23.7 21.2
transportation 540 582 465 (7) 25 Weighted-Average 15.7 17.7 17.8
Rentals 139 119 112 17 6
Depreciation and FedEx Freight Segment Operating (Loss)/Income
amortization 224 227 195 (1) 16 The following table compares operating expenses as a percent
Fuel 520 608 468 (14) 30 of revenue for the years ended May 31:
Maintenance Percent of Revenue
2009 2008 2007
and repairs 153 175 165 (13) 6
Impairment and Operating expenses:
other charges 100 (1) – – Salaries and employee benefits
NM – 50.9% 48.3% 49.1%
Intercompany Purchased transportation 12.2 11.8 10.1
charges 109 81 61 35 33 Rentals 3.1 2.4 2.4
Other 427 432 407 (1) 6 Depreciation and amortization 5.0 4.6 4.3
Total operating Fuel 11.8 12.3 10.2
expenses 4,459 4,605 4,123 (3) 12 Maintenance and repairs 3.5 3.5 3.6
Operating (loss)/income $ (44) $ 329 $ 463 (113) (29) Impairment and
Operating margin (1.0)% 6.7% 10.1% (770)bp (340)bp other charges 2.3 (1) – –
Average daily LTL Intercompany charges 2.5 1.6 1.3
shipments Other 9.7 8.8 8.9
(in thousands) 74.4 79.7 78.2 (7) 2 Total operating expenses 101.0 93.3 89.9
Weight per LTL Operating margin (1.0)% 6.7% 10.1%
shipment (lbs) 1,126 1,136 1,130 (1) 1 (1) Represents impairment charges associated with goodwill related to the Watkins Motor Lines
LTL yield (revenue acquisition and other charges primarily associated with employee severance.
23
FEDEX CORPORATION
FedEx Freight segment operating income and operating margin Operating activities:
decreased substantially in 2008 primarily due to the net impact Net income $ 98 $ 1,125 $ 2,016
of higher fuel costs and a fuel surcharge rate reduction in the Noncash impairment charges 1,103 882 –
first quarter of 2008, along with higher purchased transportation Other noncash charges and credits 2,554 2,305 1,988
costs due to increased utilization of and rates paid to third-party Changes in assets and liabilities (1,002) (847) (447)
transportation providers. Lower variable incentive compensa- Cash provided by
tion partially offset the net impact of these factors on operating operating activities 2,753 3,465 3,557
income during 2008. Investing activities:
Business acquisitions,
In 2008, the full-year inclusion of FedEx National LTL in our results net of cash acquired (3) (4) (1,310)
impacted the comparability of all our operating expenses. Fuel Capital expenditures and other (2,380) (2,893) (2,814)
costs increased during 2008 due to an increase in the average Cash used in
price per gallon of diesel fuel, which also increased rates paid investing activities (2,383) (2,897) (4,124)
to our third-party transportation providers. Fuel surcharges were Financing activities:
not sufficient to offset incremental fuel costs for 2008, based on Proceeds from debt
a static analysis of the year-over-year changes in fuel prices issuances 1,000 – 1,054
compared to changes in fuel surcharges. Purchased transpor- Principal payments on debt (501) (639) (906)
tation costs increased in 2008 primarily due to the inclusion of Dividends paid (137) (124) (110)
FedEx National LTL, which uses a higher proportion of these Other 38 146 155
services, and higher rates paid to our third-party transportation Cash provided by (used in)
providers. Including incremental costs from FedEx National LTL, financing activities 400 (617) 193
depreciation expense increased during 2008 due to investments Effect of exchange rate changes
in information technology and equipment purchased to sup- on cash (17) 19 6
port ongoing replacement requirements and long-term volume Net increase (decrease) in cash
growth. Intercompany charges increased during 2008 primarily and cash equivalents $ 753 $ (30) $ (368)
due to higher allocated marketing and information technology
costs from FedEx Services. Cash Provided by Operating Activities. Cash flows from oper-
ating activities decreased $712 million in 2009 primarily due to
FedEx Freight Segment Outlook reduced income and a $600 million increase in contributions to
We expect a decline in demand for LTL freight services in 2010 as our tax-qualified U.S. domestic pension plans (“U.S. Retirement
a result of the continued weak economic conditions and excess Plans”), partially offset by a $307 million reduction in income tax
capacity in the LTL industry. Ultimately, we believe it is prob- payments. Noncash charges and credits increased in 2009 due
able that excess capacity will be reduced within the LTL industry to our goodwill and asset impairment charges. Cash flows from
given the current economic environment. Industry conditions will operating activities decreased $92 million in 2008 primarily due
result in lower revenues and negatively impact operating income to higher operating costs, particularly fuel and purchased trans-
at the FedEx Freight LTL Group, particularly in the first half of portation, partially offset by year-over-year reductions in income
2010. However, we expect volume growth in the second half of tax payments of $248 million. We made tax-deductible voluntary
2010. Given the cost-reduction actions taken in 2009, we are well contributions to our U.S. Retirement Plans of $1.1 billion during
positioned to manage through the current economic recession. If 2009, $479 million during 2008 and $482 million during 2007.
excess capacity exits the LTL industry in 2010, we have the net-
work, resources and capabilities to manage resulting incremental
volumes. We will continue to focus on cost-containment activi-
ties during 2010, including further productivity improvements and
ongoing integration of information technology platforms across
our LTL business.
Capital spending is expected to increase slightly in 2010 with
the majority of our spending resulting from the replacement
of transportation and handling equipment and information
technology projects.
24
MANAGEMENT’S DISCUSSION AND ANALYSIS
Cash Used for Investing Activities. Capital expenditures dur- CAPITAL RESOURCES
ing 2009 were 17% lower largely due to decreased spending at Our operations are capital intensive, characterized by signifi-
FedEx Express and FedEx Services. Capital expenditures during cant investments in aircraft, vehicles, technology, facilities and
2008 were 2% higher largely due to planned expenditures for package-handling and sort equipment. The amount and timing of
facility expansion at FedEx Express and FedEx Ground. During capital additions depend on various factors, including pre-existing
2007, $1.3 billion of cash was used for the FedEx National LTL, contractual commitments, anticipated volume growth, domes-
FedEx U.K., DTW Group and other acquisitions. See Note 3 of tic and international economic conditions, new or enhanced
the accompanying consolidated financial statements for further services, geographical expansion of services, availability of
discussion of these acquisitions. See “Capital Resources” for a satisfactory financing and actions of regulatory authorities.
discussion of capital expenditures during 2009 and 2008.
The following table compares capital expenditures by asset
Debt Financing Activities. We have a shelf registration statement category and reportable segment for the years ended May 31
filed with the Securities and Exchange Commission (“SEC”) that (in millions):
allows us to sell, in one or more future offerings, any combination Percent Change
2009/ 2008/
of our unsecured debt securities and common stock. 2009 2008 2007 2008 2007
In January 2009, we issued $1 billion of senior unsecured debt Aircraft and related
under our shelf registration statement, comprised of fixed-rate equipment $ 925 $ 998 $ 1,107 (7) (10)
notes totaling $250 million due in January 2014 and $750 million Facilities and sort
due in January 2019. The fixed-rate notes due in January 2014 equipment 742 900 674 (18) 34
bear interest at an annual rate of 7.375%, payable semi-annually, Vehicles 319 404 445 (21) (9)
and the fixed-rate notes due in January 2019 bear interest at an Information and
annual rate of 8.00%, payable semi-annually. A portion of the net technology investments 298 366 431 (19) (15)
proceeds were used for repayment of our $500 million aggre- Other equipment 175 279 225 (37) 24
gate principal amount of 3.5% notes that matured on April 1, 2009. Total capital
We plan to use the remaining net proceeds for working capital expenditures $ 2,459 $ 2,947 $ 2,882 (17) 2
and general corporate purposes, including the repayment upon FedEx Express segment $ 1,348 $ 1,716 $ 1,672 (21) 3
maturity of all or a portion of our $500 million aggregate principal FedEx Ground segment 636 509 489 25 4
amount of 5.50% notes maturing on August 15, 2009. FedEx Freight segment 240 266 287 (10) (7)
A $1 billion revolving credit agreement is available to finance FedEx Services segment 235 455 432 (48) 5
our operations and other cash flow needs and to provide sup- Other – 1 2 NM NM
port for the issuance of commercial paper. This revolving credit Total capital
agreement expires in July 2010. Our revolving credit agreement expenditures $ 2,459 $ 2,947 $ 2,882 (17) 2
contains a financial covenant, which requires us to maintain a
leverage ratio of adjusted debt (long-term debt, including the Capital expenditures during 2009 were lower than the prior
current portion of such debt, plus six times rentals and landing year primarily due to decreased spending at FedEx Express for
fees) to capital (adjusted debt plus total common stockholders’ facilities and aircraft and aircraft-related equipment. Prior year
investment) that does not exceed 0.7 to 1.0. Our leverage ratio of FedEx Express capital expenditures included construction of
adjusted debt to capital was 0.6 to 1.0 at May 31, 2009. Under this a new regional hub in Greensboro, N.C., sort expansion of the
financial covenant, our additional borrowing capacity is capped. Indianapolis hub, expansion of the Memphis hub and construc-
While our fourth quarter 2009 goodwill impairment charges and tion of a new office building in Memphis. FedEx Services capital
our SFAS 158 equity adjustment had a negative impact on our expenditures decreased in 2009 primarily due to the planned
borrowing capacity, we continue to have significant available reduction in FedEx Office network expansion, decreased spend-
borrowing capacity under this covenant. We are in compliance ing and the postponement of several information technology
with this and all other restrictive covenants of our revolving credit projects, along with the substantial completion of information
agreement and do not expect the covenants to affect our opera- technology facility expansions in the prior year. Capital spending
tions. As of May 31, 2009, no commercial paper was outstanding at FedEx Ground increased in 2009 due to increased spending on
and the entire $1 billion under the revolving credit facility was facilities and sort equipment associated with its comprehensive
available for future borrowings. network expansion plan. Capital expenditures increased during
2008 primarily due to increased spending at FedEx Express for
Dividends. We paid cash dividends of $137 million in 2009, facility expansion and expenditures at FedEx Services for infor-
$124 million in 2008 and $110 million in 2007. On June 8, 2009, our mation technology facility expansions and the addition of new
Board of Directors declared a dividend of $0.11 per share of com- FedEx Office locations.
mon stock. The dividend was paid on July 1, 2009 to stockholders
of record as of the close of business on June 18, 2009. Each
quarterly dividend payment is subject to review and approval by
our Board of Directors, and we evaluate our dividend payment
amount on an annual basis at the end of each fiscal year. In con-
nection with our most recent annual evaluation of the quarterly
dividend payment amount, and in light of current economic condi-
tions, we decided not to increase the amount at that time.
25
FEDEX CORPORATION
26
MANAGEMENT’S DISCUSSION AND ANALYSIS
Operating activities:
Operating leases $1,759 $1,612 $1,451 $1,316 $1,166 $ 7,352 $14,656
Non-capital purchase obligations and other 234 137 111 62 11 125 680
Interest on long-term debt 157 144 126 98 97 1,815 2,437
Required quarterly contributions to our
U.S. Retirement Plans 350 – – – – – 350
Investing activities:
Aircraft and aircraft-related capital commitments 964 791 527 425 466 1,924 5,097
Other capital purchase obligations 69 – – – – – 69
Financing activities:
Debt 500 250 – 300 250 989 2,289
Capital lease obligations 164 20 8 119 2 15 328
Total $4,197 $2,954 $2,223 $2,320 $1,992 $12,220 $25,906
We have certain contingent liabilities that are not accrued in our The amounts reflected for purchase obligations represent
balance sheet in accordance with accounting principles generally noncancelable agreements to purchase goods or services that
accepted in the United States. These contingent liabilities are not are not capital related. Such contracts include those for printing
included in the table above. In addition, we have historically made and advertising and promotions contracts. Open purchase orders
voluntary tax-deductible contributions to our U.S. Retirement that are cancelable are not considered unconditional purchase
Plans. These amounts have not been legally required and obligations for financial reporting purposes and are not included
therefore are not reflected in the table above. However, included in the table above. Such purchase orders often represent autho-
in the table above are anticipated minimum required quarterly rizations to purchase rather than binding agreements. See Note
contributions totaling $350 million for 2010 that begin in the 16 of the accompanying consolidated financial statements for
second quarter. more information.
We have other long-term liabilities reflected in our balance Included in the preceding table within the caption entitled “Non-
sheet, including deferred income taxes, qualified and nonquali- capital purchase obligations and other” is our estimate of the
fied pension and postretirement healthcare plan liabilities and current portion of the liability for uncertain tax positions under
other self-insurance accruals. The payment obligations associ- FIN 48 of $5 million. We cannot reasonably estimate the timing of
ated with these liabilities are not reflected in the table above due the long-term payments or the amount by which the liability will
to the absence of scheduled maturities. Therefore, the timing increase or decrease over time; therefore, the long-term portion
of these payments cannot be determined, except for amounts of the liability ($67 million) is excluded from the preceding table.
estimated to be payable within 12 months, which are included See Note 11 of the accompanying consolidated financial state-
in current liabilities. ments for further information.
The amounts reflected in the table above for interest on long-term
Operating Activities
debt represent future interest payments due on our long-term
In accordance with accounting principles generally accepted in
debt, all of which are fixed rate.
the United States, future contractual payments under our operat-
ing leases are not recorded in our balance sheet. Credit rating
Investing Activities
agencies routinely use information concerning minimum lease
The amounts reflected in the table above for capital purchase
payments required for our operating leases to calculate our debt
obligations represent noncancelable agreements to purchase
capacity. The amounts reflected in the table above for operating
capital-related equipment. Such contracts include those for
leases represent future minimum lease payments under noncan-
certain purchases of aircraft, aircraft modifications, vehicles,
celable operating leases (principally aircraft and facilities) with
facilities, computers and other equipment contracts. In addition,
an initial or remaining term in excess of one year at May 31, 2009.
we have committed to modify our DC10 aircraft for two-man
In the past, we financed a significant portion of our aircraft needs
cockpit configuration, which is reflected in the table above.
(and certain other equipment needs) using operating leases (a
Commitments to purchase aircraft in passenger configuration
type of “off-balance sheet financing”). At the time that the deci-
do not include the attendant costs to modify these aircraft for
sion to lease was made, we determined that these operating
cargo transport unless we have entered into noncancelable
leases would provide economic benefits favorable to ownership
commitments to modify such aircraft. Open purchase orders
with respect to market values, liquidity or after-tax cash flows.
that are cancelable are not considered unconditional purchase
27
FEDEX CORPORATION
obligations for financial reporting purposes and are not included We made significant changes to our retirement plans during 2008
in the table above. Such purchase orders often represent autho- and 2009. Beginning January 1, 2008, we increased the annual
rizations to purchase rather than binding agreements. See Note company-matching contribution under the largest of our 401(k)
16 of the accompanying consolidated financial statements for plans covering most employees from a maximum of $500 to a
more information. maximum of 3.5% of eligible compensation. Employees not partic-
ipating in the 401(k) plan as of January 1, 2008 were automatically
Financing Activities enrolled at 3% of eligible pay with a company match of 2% of
We have certain financial instruments representing potential eligible pay effective March 1, 2008. As a temporary cost-control
commitments, not reflected in the table above, that were incurred measure, we suspended 401(k) company-matching contributions
in the normal course of business to support our operations, for a minimum of one year effective February 1, 2009.
including surety bonds and standby letters of credit. These instru-
Effective May 31, 2008, benefits previously accrued under our
ments are generally required under certain U.S. self-insurance
primary pension plans using a traditional pension benefit formula
programs and are also used in the normal course of international
(based on average earnings and years of service) were capped
operations. The underlying liabilities insured by these instruments
for most employees, and those benefits will be payable begin-
are reflected in our balance sheets, where applicable. Therefore,
ning at retirement. Effective June 1, 2008, future pension benefits
no additional liability is reflected for the surety bonds and letters
for most employees began to be accrued under a cash balance
of credit themselves.
formula we call the Portable Pension Account. These changes
The amounts reflected in the table above for long-term debt rep- did not affect the benefits of previously retired and terminated
resent future scheduled payments on our long-term debt. In 2010, vested participants. In addition, these pension plans were modi-
we have scheduled debt payments of $664 million, which includes fied to accelerate vesting from five years to three years for most
$500 million of principal payments on our 5.5% unsecured notes participants.
maturing in August 2009 and principal and interest payments on
Under the Portable Pension Account, the retirement benefit is
capital leases.
expressed as a dollar amount in a notional account that grows
with annual credits based on pay, age and years of credited ser-
vice, and interest on the notional account balance. Under the
Critical Accounting Estimates tax-qualified plans, the pension benefit is payable as a lump sum
or an annuity at retirement at the election of the employee. An
The preparation of financial statements in accordance with employee’s pay credits are determined each year under a graded
accounting principles generally accepted in the United States formula that combines age with years of service for points.
requires management to make significant judgments and esti- The plan interest credit rate will vary from year to year based on
mates to develop amounts reflected and disclosed in the financial the selected U.S. Treasury index, with an interest rate equal to the
statements. In many cases, there are alternative policies or esti- greater of 4% or the one-year Treasury Constant Maturities rate
mation techniques that could be used. We maintain a thorough plus 1%, but not greater than a rate based on the larger of the
process to review the application of our accounting policies average 30-year Treasury note or the applicable provisions of
and to evaluate the appropriateness of the many estimates that the Internal Revenue Code.
are required to prepare the financial statements of a complex,
Retirement Plans Costs. Retirement plans cost is included in the
global corporation. However, even under optimal circumstances,
“Salaries and Employee Benefits” caption in our consolidated
estimates routinely require adjustment based on changing cir-
income statements. A summary of our retirement plans costs
cumstances and new or better information.
over the past three years is as follows (in millions):
The estimates discussed below include the financial statement 2009 2008 2007
elements that are either the most judgmental or involve the selec-
U.S. domestic and international
tion or application of alternative accounting policies and are
pension plans $ 177 $ 323 $ 467
material to our financial statements. Management has discussed
U.S. domestic and international
the development and selection of these critical accounting esti-
defined contribution plans 237 216 176
mates with the Audit Committee of our Board of Directors and
Postretirement healthcare plans 57 77 55
with our independent registered public accounting firm.
$ 471 $ 616 $ 698
RETIREMENT PLANS
The determination of our annual retirement plans cost is highly
Overview. We sponsor programs that provide retirement benefits
sensitive to changes in the assumptions related to these plans
to most of our employees. These programs include defined ben-
because we have a large active workforce, a significant amount
efit pension plans, defined contribution plans and postretirement
of assets in the pension plans, and the payout of benefits will
healthcare plans. The accounting for pension and postretirement
occur over an extended period in the future. Total retirement
healthcare plans includes numerous assumptions, such as: dis-
plans cost decreased $145 million in 2009, primarily due to a
count rates; expected long-term investment returns on plan
higher discount rate.
assets; future salary increases; employee turnover; mortality; and
retirement ages. These assumptions most significantly impact our
U.S. domestic pension plans.
28
MANAGEMENT’S DISCUSSION AND ANALYSIS
Retirement plans cost in 2010 is expected to be approximately estimated benefit payments in a given period, the yield calculation
$500 million, an increase of approximately $29 million from 2009. assumes those excess proceeds are reinvested at the one-year
This increase is attributable to increased pension plan expense forward rates implied by the Citigroup Pension Discount Curve.
as a result of the negative impact of current market conditions
The increase in the discount rate for 2010 was driven by cur-
on our pension plan assets, which will be substantially offset by
rent conditions in the market for high-grade corporate bonds, in
lower expenses on our 401(k) plans due to the temporary suspen-
which yields have strengthened significantly since May 31, 2008.
sion of the company-matching contribution.
The discount rate assumption is highly sensitive, as the follow-
Pension Cost. The components of pension cost for all pension ing table illustrates with our largest tax-qualified U.S. domestic
plans are as follows (in millions): pension plan:
2009 2008 2007 Sensitivity (in millions)
Effect on 2010 May 31, 2009
Service cost $ 499 $ 518 $ 540 Pension Expense Effect on PBO
Interest cost 798 720 707
Expected return on plan assets (1,059) (985) (930) One-basis-point change in discount rate $1.5 $13.9
Recognized actuarial (gains) losses One-basis-point change in expected
and other (61) 70 150 return on assets 1.2 –
Net periodic benefit cost $ 177 $ 323 $ 467
At the February 29, 2008 and June 1, 2008 measurement dates,
Pension cost for our primary domestic pension plan was favor- respectively, a one-basis-point change in the discount rate would
ably affected in 2009 by approximately $210 million due to an have impacted the 2008 PBO by $16 million and 2009 expense by
increase in the discount rate driven by higher interest rates in $1.7 million.
the bond market year over year. Pension cost will be higher in Plan Assets. The estimated average rate of return on plan assets
2010 by approximately $125 million due to significant declines in is a long-term, forward-looking assumption that also materi-
the value of our plan assets due to current market conditions, ally affects our pension cost. It is required to be the expected
partially offset by a higher discount rate. future long-term rate of earnings on plan assets. Our pension
Following is a discussion of the key estimates we consider in plan assets are invested primarily in listed securities, and our
determining our pension cost: pension plans hold only a minimal investment in FedEx common
stock that is entirely at the discretion of third-party pension fund
Discount Rate. This is the interest rate used to discount the esti- investment managers.
mated future benefit payments that have been accrued to date
(the projected benefit obligation, or PBO) to their net present Establishing the expected future rate of investment return on our
value and to determine the succeeding year’s pension expense. pension assets is a judgmental matter. Management considers
The discount rate is determined each year at the plan measure- the following factors in determining this assumption:
ment date. An increase in the discount rate decreases pension • the duration of our pension plan liabilities, which drives
expense. The discount rate affects the PBO and pension expense the investment strategy we can employ with our pension
based on the measurement dates, as described below. plan assets;
Discount Amounts Determined by Measurement • the types of investment classes in which we invest our pension
Measurement Date (1) Rate Date and Discount Rate
plan assets and the expected compound geometric return we
5/31/2009 7.68% 2009 PBO and 2010 expense can reasonably expect those investment classes to earn over
6/01/2008 7.15 2009 expense the next 10- to 15-year time period (or such other time period
2/29/2008 6.96 2008 PBO that may be appropriate); and
2/28/2007 6.01 2007 PBO and 2008 expense
2/28/2006 5.91 2006 PBO and 2007 expense • the investment returns we can reasonably expect our
investment management program to achieve in excess of the
(1) SFAS 158 required us to change our measurement date to May 31, beginning in 2009.
returns we could expect if investments were made strictly in
indexed funds.
We determine the discount rate (which is required to be the
rate at which the projected benefit obligation could be effec- We review the expected long-term rate of return on an annual
tively settled as of the measurement date) with the assistance basis and revise it as appropriate. As part of our strategy to
of actuaries, who calculate the yield on a theoretical portfolio manage future pension costs and net funded status volatility,
of high-grade corporate bonds (rated Aa or better) with cash we are transitioning to a more liability-driven investment
flows that generally match our expected benefit payments in strategy, which will better align our plan assets and liabilities. This
future years. In selecting bonds for this theoretical portfolio, we strategy will ultimately result in a greater concentration of fixed-
focus on bonds that match cash flows to benefit payments and income investments.
limit our concentration of bonds by industry and issuer. This bond
modeling technique allows for the use of non-callable and make-
whole bonds that meet certain screening criteria to ensure that
the selected bonds with a call feature have a low probability of
being called. To the extent scheduled bond proceeds exceed the
29
FEDEX CORPORATION
To support our conclusions, we periodically commission asset/liability studies performed by third-party professional investment advisors
and actuaries to assist us in our reviews. These studies project our estimated future pension payments and evaluate the efficiency of
the allocation of our pension plan assets into various investment categories. These studies also generate probability-adjusted expected
future returns on those assets. The following table summarizes our current asset allocation strategy (dollars in millions):
Plan Assets at Measurement Date
2009 2008
Asset Class Actual Actual% Target% Actual Actual% Target%
The target asset allocations in the table above for 2009 reflect tar- Our assumed average future salary increases based on age and
gets established in connection with our liability-driven investment years of service are below.
strategy described above. Our actual asset allocations will con- Assumed Average Future
Salary Increases
tinue to transition to the target levels over time as we continue
to implement this strategy. We have assumed an 8.0% compound 2010 Projected 4.42%
geometric long-term rate of return on our U.S. domestic pen- 2009 4.49%
sion plan assets for 2010, a decrease from 8.5% in 2009 and 2008 2008 4.47%
and 9.1% in 2007, as described in Note 12 of the accompanying 2007 3.46%
consolidated financial statements. This decrease was driven by
lower expectations for future returns in light of recent losses in Funded Status. Following is information concerning the funded sta-
the equity markets and our shift in investment strategy, which will tus under SFAS 158 of our pension plans as of May 31 (in millions):
yield lower returns due to a heavier percentage of fixed-income 2009 2008
securities. Funded Status of Plans:
The actual historical return on our U.S. pension plan assets, Projected benefit obligation (PBO) $11,050 $11,617
calculated on a compound geometric basis, was approximately Fair value of plan assets 10,812 11,879
7.5%, net of investment manager fees, for the 15-year period Funded status of the plans (238) 262
ended May 31, 2009 and 9.4%, net of investment manager fees, Employer contributions after measurement date – 15
for the 15-year period ended February 29, 2008. Net funded status $ (238) $ 277
Components of Funded Status by Plans:
Pension expense is also affected by the accounting policy used Qualified plans $ 278 $ 827
to determine the value of plan assets at the measurement date. Nonqualified plans (318) (331)
We use a calculated-value method to determine the value of International plans (198) (219)
plan assets, which helps mitigate short-term volatility in mar- Net funded status $ (238) $ 277
ket performance (both increases and decreases) by amortizing Components of Amounts Included in Balance Sheets:
the actuarial gains or losses over four years. Another method Noncurrent pension assets $ 311 $ 827
used in practice applies the market value of plan assets at the Current pension and other benefit obligations (31) (32)
measurement date. In determining our 2010 pension expense, Noncurrent pension and other benefit obligations (518) (518)
the calculated-value method significantly mitigated the impact of Net amount recognized $ (238) $ 277
asset value declines in the determination of our pension expense, Cash Amounts:
reducing our expected 2010 expense by $135 million. Cash contributions during the year $ 1,146 $ 548
Salary Increases. The assumed future increase in salaries Benefit payments during the year $ 351 $ 318
and wages is also a key estimate in determining pension cost.
Generally, we correlate changes in estimated future salary The amounts recognized in the balance sheet under SFAS 158
increases to changes in the discount rate (since that is an indica- reflect a snapshot of the state of our long-term pension liabilities
tor of general inflation and cost of living adjustments) and general at the plan measurement date and the effect of mark-to-market
estimated levels of profitability (since most incentive compensa- accounting on plan assets. At May 31, 2009, in accordance with
tion is a component of pensionable wages). In the future, based the provisions of SFAS 158, we recorded a decrease to equity
on the plan design changes discussed above, a one-basis-point through OCI of $1.2 billion (net of tax) to reflect unrealized market
across-the-board change in the rate of estimated future salary losses during 2009. Those losses are subject to amortization over
increases will have an immaterial impact on our pension costs. future years and may be reflected in future income statements
unless they are recovered.
30
MANAGEMENT’S DISCUSSION AND ANALYSIS
The funding requirements for our tax-qualified U.S. domestic tolerance and premium expense. Historically, it has been infre-
pension plans are governed by the Pension Protection Act of quent that incurred claims exceeded our self-insured limits. Other
2006, which has aggressive funding requirements in order to acceptable methods of accounting for these accruals include
avoid benefit payment restrictions that become effective if the measurement of claims outstanding and projected payments
funded status under IRS rules falls below 80% at the beginning of based on historical development factors.
a plan year. All of our qualified U.S. domestic pension plans had
We believe the use of actuarial methods to account for these lia-
funded status levels in excess of 80% for 2007, 2008 and 2009, and
bilities provides a consistent and effective way to measure these
are expected to for 2010 as well. Despite mark-to-market adjust-
highly judgmental accruals. However, the use of any estimation
ments required under SFAS 158, our plans remain adequately
technique in this area is inherently sensitive given the magni-
funded to provide benefits to our employees as they come due,
tude of claims involved and the length of time until the ultimate
and current benefit payments are nominal compared to our total
cost is known. We believe our recorded obligations for these
plan assets (benefit payments for 2009 were approximately 3%
expenses are consistently measured on a conservative basis.
of plan assets).
Nevertheless, changes in healthcare costs, accident frequency
In September 2008, we made $483 million in voluntary contri- and severity, insurance retention levels and other factors can
butions to our U.S. tax-qualified plans. We made additional materially affect the estimates for these liabilities. For example,
voluntary contributions of $600 million during the fourth quarter during 2009, FedEx Ground recorded $70 million in incremental
of 2009 in order to improve the funded status of our principal self-insurance reserves for liability insurance based on adverse
pension plans. While our U.S. tax-qualified plans have ample experience on bodily injury claims.
funds to meet benefit payments, current market conditions have
negatively impacted asset values and could significantly impact LONG-LIVED ASSETS
funding considerations in 2010. We anticipate making contribu- Property and Equipment. Our key businesses are capital inten-
tions to the U.S. tax-qualified plans totaling approximately $850 sive, with approximately 55% of our total assets invested in our
million in 2010, including $350 million in minimum required quar- transportation and information systems infrastructures. We
terly payments. capitalize only those costs that meet the definition of capital
assets under accounting standards. Accordingly, repair and
Cumulative unrecognized actuarial losses for pension plans
maintenance costs that do not extend the useful life of an asset
expense determination were $3.7 billion through May 31, 2009,
or are not part of the cost of acquiring the asset are expensed
compared to $2.5 billion at February 29, 2008. These unrecog-
as incurred. However, consistent with industry practice, we capi-
nized losses reflect changes in the discount rates and differences
talize certain aircraft-related major maintenance costs on one
between expected and actual asset returns, which are being
of our aircraft fleet types and amortize these costs over their
amortized over future periods. These unrecognized losses may
estimated service lives.
be recovered in future periods through actuarial gains. However,
unless they are below a corridor amount, these unrecognized The depreciation or amortization of our capital assets over their
actuarial losses are required to be amortized and recognized in estimated useful lives, and the determination of any salvage
future periods. For example, projected U.S. domestic pension plan values, requires management to make judgments about future
expense for 2010 includes $125 million of amortization of these events. Because we utilize many of our capital assets over
actuarial losses versus $44 million in 2009, $162 million in 2008 relatively long periods (the majority of aircraft costs are depre-
and $136 million in 2007. ciated over 15 to 18 years), we periodically evaluate whether
adjustments to our estimated service lives or salvage values are
SELF-INSURANCE ACCRUALS necessary to ensure these estimates properly match the eco-
We are self-insured up to certain limits for costs associated with nomic use of the asset. This evaluation may result in changes in
workers’ compensation claims, vehicle accidents and general the estimated lives and residual values used to depreciate our
business liabilities, and benefits paid under employee healthcare aircraft and other equipment. These estimates affect the amount
and long-term disability programs. At May 31, 2009, there were of depreciation expense recognized in a period and, ultimately,
$1.5 billion of self-insurance accruals reflected in our balance the gain or loss on the disposal of the asset. Changes in the esti-
sheet ($1.4 billion at May 31, 2008). Approximately 40% of these mated lives of assets will result in an increase or decrease in the
accruals were classified as current liabilities in 2009 and 2008. amount of depreciation recognized in future periods and could
have a material impact on our results of operations. Historically,
The measurement of these costs requires the consideration of
gains and losses on operating equipment have not been material
historical cost experience, judgments about the present and
(typically aggregating less than $10 million annually). However,
expected levels of cost per claim and self-insurance retention
such amounts may differ materially in the future due to changes in
levels. Accruals are primarily based on the actuarially estimated,
business levels, technological obsolescence, accident frequency,
undiscounted cost of claims, which includes incurred-but-not-
regulatory changes and other factors beyond our control.
reported claims. Cost trends on material accruals are updated
each quarter. These methods provide estimates of future ultimate Because of the lengthy lead times for aircraft manufacture
claim costs based on claims incurred as of the balance sheet and modifications, we must anticipate volume levels and plan
date. These estimates include consideration of factors such as our fleet requirements years in advance, and make commit-
severity of claims, frequency of claims and future healthcare ments for aircraft based on those projections. Furthermore,
costs. We self-insure up to certain limits that vary by operating the timing and availability of certain used aircraft types (par-
company and type of risk. Periodically, we evaluate the level of ticularly those with better fuel efficiency) may create limited
insurance coverage and adjust insurance levels based on risk opportunities to acquire these aircraft at favorable prices in
31
FEDEX CORPORATION
advance of our capacity needs. These activities create risks during the construction period. We believe we have well-defined
that asset capacity may exceed demand and that an impair- and controlled processes for making these evaluations, including
ment of our assets may occur. Aircraft purchases (primarily obtaining third-party appraisals for material transactions to assist
aircraft in passenger configuration) that have not been placed us in making these evaluations.
in service totaled $130 million at May 31, 2009 and $127 million
Goodwill. We have $2.2 billion of goodwill in our balance sheet
at May 31, 2008. We plan to modify these assets in the future and
from our acquisitions, representing the excess of cost over the
place them into operations.
fair value of the net assets we have acquired. Several factors
The accounting test for whether an asset held for use is impaired give rise to goodwill in our acquisitions, such as the expected
involves first comparing the carrying value of the asset with its benefit from synergies of the combination and the existing work-
estimated future undiscounted cash flows. If the cash flows do force of the acquired entity.
not exceed the carrying value, the asset must be adjusted to its
In accordance with SFAS 142, “Goodwill and Other Intangible
current fair value. We operate integrated transportation networks
Assets,” a two-step impairment test is performed on goodwill. In
and, accordingly, cash flows for most of our operating assets are
the first step, a comparison is made of the estimated fair value
assessed at a network level, not at an individual asset level for
of a reporting unit to its carrying value. If the carrying value of a
our analysis of impairment. Further, decisions about capital invest-
reporting unit exceeds the estimated fair value, the second step
ments are evaluated based on the impact to the overall network
of the impairment test is required. In the second step, an estimate
rather than the return on an individual asset. We make decisions
of the current fair values of all assets and liabilities is made to
to remove certain long-lived assets from service based on pro-
determine the amount of implied goodwill and consequently the
jections of reduced capacity needs or lower operating costs of
amount of any goodwill impairment.
newer aircraft types, and those decisions may result in an impair-
ment charge. Assets held for disposal must be adjusted to their Our annual evaluation of goodwill impairment requires man-
estimated fair values when the decision is made to dispose of the agement judgment and the use of estimates and assumptions
asset and certain other criteria are met. The fair value determi- to determine the fair value of our reporting units. Fair value is
nations for such aircraft may require management estimates, as estimated using standard valuation methodologies (principally
there may not be active markets for some of these aircraft. Such the income or market approach) incorporating market partici-
estimates are subject to revision from period to period. pant considerations and management’s assumptions on revenue
growth rates, operating margins, discount rates and expected
During the fourth quarter of 2009, we recorded $202 million in
capital expenditures. Estimates used by management can sig-
property and equipment impairment charges. These charges
nificantly affect the outcome of the impairment test. Each year,
are primarily related to our April 2009 decision to permanently
independent of our goodwill impairment test, we update the
remove from service 10 Airbus A310-200 aircraft and four Boeing
calculation of our weighted-average cost of capital (“WACC”)
MD10-10 aircraft owned by the company, along with certain
and perform a long-range planning analysis to project expected
excess aircraft engines at FedEx Express. This decision resulted
results of operations. Using this data, we complete a separate
in an impairment charge of $191 million, which was recorded in
fair value analysis for each of our reporting units. Changes in
the fourth quarter of 2009. A limited amount of our total aircraft
forecasted operating results and other assumptions could materi-
capacity remains temporarily grounded because of network
ally affect these estimates. We perform our annual impairment
overcapacity due to the current economic environment. There
test in the fourth quarter unless circumstances indicate the need
were no material property and equipment impairment charges
to accelerate the timing of the test.
recognized in 2008 or 2007.
In connection with our annual impairment testing of goodwill and
Leases. We utilize operating leases to finance certain of our
other intangible assets conducted in the fourth quarter of 2009
aircraft, facilities and equipment. Such arrangements typically
in accordance with SFAS 142, we recorded a charge of $900 mil-
shift the risk of loss on the residual value of the assets at the end
lion for impairment of the value of goodwill. This charge included
of the lease period to the lessor. As disclosed in “Contractual
an $810 million charge related to reduction of the value of the
Cash Obligations” and Note 7 to the accompanying consolidated
goodwill recorded as a result of the February 2004 acquisition of
financial statements, at May 31, 2009 we had approximately
Kinko’s, Inc. (now known as FedEx Office) and a $90 million charge
$15 billion (on an undiscounted basis) of future commitments for
related to reduction of the value of the goodwill recorded as a
payments under operating leases. The weighted-average remain-
result of the September 2006 acquisition of the U.S. and Canadian
ing lease term of all operating leases outstanding at May 31, 2009
less-than-truckload freight operations of Watkins Motor Lines
was approximately six years.
and certain affiliates (now known as FedEx National LTL).
The future commitments for operating leases are not reflected as
FedEx Office Goodwill. In 2008, despite several management
a liability in our balance sheet under U.S. accounting rules. The
changes and strategic actions focused on growing revenues
determination of whether a lease is accounted for as a capital
and profitability at FedEx Office, we recorded a charge of $891
lease or an operating lease requires management to make esti-
million in connection with our annual impairment testing. The
mates primarily about the fair value of the asset and its estimated
charge predominantly related to a $515 million impairment of
economic useful life. In addition, our evaluation includes ensuring
the Kinko’s trade name and a $367 million impairment of good-
we properly account for build-to-suit lease arrangements and
will. This charge was a result of the decision to phase out the
making judgments about whether various forms of lessee involve-
use of the Kinko’s trade name and reduced profitability at FedEx
ment during the construction period make the lessee an agent
Office over the forecast period. Additional discussion of the key
for the owner-lessor or, in substance, the owner of the asset
32
MANAGEMENT’S DISCUSSION AND ANALYSIS
assumptions related to these charges is included in Note 4 to our The key drivers of enterprise value for FedEx Office in 2008 were
consolidated financial statements. significant improvements in long-term revenue and profitabil-
ity growth, as well as continued network expansion activities.
During 2009, the U.S. recession had a significant negative impact
Despite the benefits of the internal reorganization described
on demand for FedEx Office services, resulting in lower revenues
above, the current and projected impact of the recession and
and continued operating losses at this reporting unit. In response
the elimination of future network expansion significantly reduced
to these conditions, FedEx Office initiated an internal reorganiza-
the value of the FedEx Office reporting unit for 2009. The valua-
tion designed to improve revenue-generating capabilities and
tion of the FedEx Office reporting unit was sensitive to both the
reduce costs. Several actions were taken during 2009 to reduce
underlying forecast assumptions and the discount rate assump-
FedEx Office’s cost structure and position it for long-term growth
tions. For example, a 50-basis-point increase or decrease in the
under better economic conditions. These actions included head-
discount rate impacted the estimate of fair value by $40 million.
count reductions, domestic store closures and the termination of
Further, a 100-basis-point improvement or deterioration in the
operations in some international locations. In addition, we sub-
operating margin in each year of the forecast period impacted
stantially curtailed future network expansion in light of current
the fair value by $220 million.
economic conditions.
Upon completion of the impairment test, we concluded that the
The valuation methodology to estimate the fair value of the
recorded goodwill was impaired and recorded an impairment
FedEx Office reporting unit was based primarily on an income
charge of $810 million during the fourth quarter of 2009. The
approach. We believe use of the income approach is an appro-
remaining goodwill attributable to the FedEx Office reporting
priate methodology for the FedEx Office reporting unit because it
unit is $362 million as of May 31, 2009. The goodwill impairment
is the most direct method of measuring enterprise value for this
charge is included in operating expenses in the accompanying
reporting unit. Because of the nature of the service offerings at
consolidated statements of income. This charge is included in the
FedEx Office, it exhibits characteristics of a retailer, a business
results of the FedEx Services segment and was not allocated to
services provider and a printing provider. Accordingly, it is dif-
our transportation segments, as the charge was unrelated to the
ficult to find directly comparable companies for use under the
core performance of those businesses.
market approach. However, market approach information was
incorporated into our test to ensure the reasonableness of our FedEx National LTL Goodwill. During 2009, the U.S. recession
conclusions on estimated value under the income approach. Key had a significant negative impact on the LTL industry, resulting
assumptions considered were the revenue, operating income in steep volume declines, intense yield pressure and the exit of
and capital expenditure forecasts, the assessed growth rate numerous small to medium competitors from the market. The out-
in the periods beyond the detailed forecast period, and the look for the LTL market is uncertain due to the recession and the
discount rate. negative impact of aggressive pricing resulting from continued
excess capacity in the market. The results for the FedEx National
For 2009, we used a discount rate of 12.0%, versus a discount
LTL reporting unit in 2009 reflect the impact of the recession, with
rate of 12.5% in 2008. Our discount rate of 12.0% for 2009 rep-
reduced revenues and increased operating losses.
resents our WACC of the FedEx Office reporting unit adjusted
for company-specific risk premium to account for the estimated The valuation methodology to estimate the fair value of the
uncertainty associated with our future cash flows. The develop- FedEx National LTL reporting unit was based primarily on a mar-
ment of the WACC used in our estimate of fair value considered ket approach (revenue multiples and/or earnings multiples) that
the following key factors: considered market participant assumptions. We believe use of
the market approach for FedEx National LTL is appropriate due to
• current market conditions for the equity-risk premium and risk-
the forecast risk associated with the projections used under the
free interest rate;
income approach, particularly in the outer years of the forecast
• benchmark capital structures for guideline companies with period (as described below). Further, there are directly com-
characteristics similar to the FedEx Office reporting unit; parable companies to the FedEx National LTL reporting unit for
consideration under the market approach. The income approach
• the size and industry of the FedEx Office reporting unit; and
also was incorporated into the impairment test to ensure the rea-
• risks related to the forecast of future revenues and profitability sonableness of our conclusions under the market approach. Key
of the FedEx Office reporting unit. assumptions considered were the revenue, operating income and
capital expenditure forecasts and market participant assump-
The discount rate incorporates current market participant con-
tions on multiples related to revenue and earnings forecasts.
siderations, as indicated above, and decreased year over year,
as increases in the WACC (due to general economic conditions) The forecast used in the valuation assumes operating losses will
were offset by reductions in the company-specific risk premium. continue in the near-term due to the current economic condi-
The company-specific risk premium was reduced primarily due to tions and excess capacity in the industry. However, the long-term
lower long-term growth and profitability assumptions associated outlook assumes that this excess capacity exits the market. This
with the 2009 forecast. The WACC used in the estimate of fair assumption drives significant volume and yield improvement
value in future periods may be impacted by changes in market into the FedEx National LTL reporting unit in future periods. The
conditions (including those of market participants), as well as the decision to include an assumption related to the elimination of
specific future performance of the FedEx Office reporting unit excess capacity from the market and the associated cash flows
and are subject to change, based on changes in specific facts is significant to the valuation and reflects management’s outlook
and circumstances. on the industry for future periods as of the valuation date.
33
FEDEX CORPORATION
In 2008, the estimated value of the FedEx National LTL reporting We account for operating taxes based on multi-state, local and
unit was attributable to its long-term cash-generating capa- foreign taxing jurisdiction rules in those areas in which we oper-
bilities, and the forecasts used to value the reporting unit were ate. Provisions for operating taxes are estimated based upon
prepared prior to the severe impact of the U.S. recession on its these rules, asset acquisitions and disposals, historical spend
business. Although the forecast used in the valuation assumes and other variables. These provisions are consistently evaluated
long-term profitability resulting from the elimination of excess for reasonableness against compliance and risk factors.
capacity from the market, recent operating losses combined with
Tax contingencies arise from uncertainty in the application of
projected near-term operating losses for the FedEx National LTL
tax rules throughout the many jurisdictions in which we operate.
reporting unit, resulted in a significant reduction in the value of
These tax contingencies are impacted by several factors, includ-
this business from 2008. Accordingly, we recorded an impair-
ing tax audits, appeals, litigation, changes in tax laws and other
ment charge of $90 million during the fourth quarter of 2009. This
rules, and their interpretations, and changes in our business,
charge represented substantially all of the goodwill resulting
among other things, in the various federal, state, local and foreign
from this acquisition. The goodwill impairment charge is included
tax jurisdictions in which we operate. We regularly assess the
in operating expenses in the accompanying consolidated state-
potential impact of these factors for the current and prior years
ments of income and is included in the results of the FedEx
to determine the adequacy of our tax provisions. We continu-
Freight segment.
ally evaluate the likelihood and amount of potential adjustments
Other Reporting Units Goodwill. Our remaining reporting units and adjust our tax positions, including the current and deferred
with significant recorded goodwill (excluding FedEx Office and tax liabilities, in the period in which the facts that give rise to
FedEx National LTL) include our FedEx Express reporting unit a revision become known. In addition, management considers
and our FedEx Freight reporting unit. We evaluated our remain- the advice of third parties in making conclusions regarding
ing reporting units during the fourth quarter of 2009, and while tax consequences.
the estimated fair value of these reporting units declined from
Effective June 1, 2007, we began to measure and record income
2008, the estimated fair value of each of our other reporting units
tax contingency accruals in accordance with FIN 48. The cumula-
significantly exceeded their carrying values in 2009. As a result,
tive effect of adopting FIN 48 was immaterial.
no additional testing or impairment charges were necessary.
Under FIN 48, we recognize liabilities for uncertain income tax
CONTINGENCIES positions based on a two-step process. The first step is to evalu-
We are subject to various loss contingencies, including tax ate the tax position for recognition by determining if the weight
proceedings and litigation, in connection with our operations. of available evidence indicates that it is more likely than not that
Contingent liabilities are difficult to measure, as their measure- the position will be sustained on audit, including resolution of
ment is subject to multiple factors that are not easily predicted related appeals or litigation processes, if any. The second step
or projected. Further, additional complexity in measuring these requires us to estimate and measure the tax benefit as the largest
liabilities arises due to the various jurisdictions in which these amount that is more than 50% likely to be realized upon ultimate
matters occur, which makes our ability to predict their outcome settlement. It is inherently difficult and subjective to estimate
highly uncertain. Moreover, different accounting rules must be such amounts, as we must determine the probability of various
employed to account for these items based on the nature of the possible outcomes. We reevaluate these uncertain tax positions
contingency. Accordingly, significant management judgment is on a quarterly basis or when new information becomes avail-
required to assess these matters and to make determinations able to management. These reevaluations are based on factors
about the measurement of a liability, if any. Our material pending including, but not limited to, changes in facts or circumstances,
loss contingencies are described in Note 17 to our consolidated changes in tax law, successfully settled issues under audit and
financial statements. In the opinion of management, the aggre- new audit activity. Such a change in recognition or measurement
gate liability, if any, of individual matters or groups of matters not could result in the recognition of a tax benefit or an increase to
specifically described in Note 17 is not expected to be material the related provision.
to our financial position, results of operations or cash flows. The
We classify interest related to income tax liabilities as interest
following describes our method and associated processes for
expense, and if applicable, penalties are recognized as a com-
evaluating these matters.
ponent of income tax expense. The income tax liabilities and
Tax Contingencies. We are subject to income and operating tax accrued interest and penalties that are due within one year of
rules of the U.S., and its states and municipalities, and of the the balance sheet date are presented as current liabilities. The
foreign jurisdictions in which we operate. Significant judgment is remaining portion of our income tax liabilities and accrued inter-
required in determining income tax provisions, as well as deferred est and penalties are presented as noncurrent liabilities. These
tax asset and liability balances, due to the complexity of these noncurrent income tax liabilities are recorded in the caption
rules and their interaction with one another. We account for “Other liabilities” in our consolidated balance sheets.
income taxes under SFAS 109, “Accounting for Income Taxes,” by
We measure and record operating tax contingency accruals in
recording both current taxes payable and deferred tax assets and
accordance with SFAS 5, “Accounting for Contingencies.” As
liabilities. Our provision for income taxes is based on domestic
discussed below, SFAS 5 requires an accrual of estimated loss
and international statutory income tax rates in the jurisdictions in
from a contingency, such as a tax or other legal proceeding or
which we operate, applied to taxable income, reduced by appli-
claim, when it is probable that a loss will be incurred and the
cable tax credits.
amount of the loss can be reasonably estimated.
34
MANAGEMENT’S DISCUSSION AND ANALYSIS
Other Contingencies. Because of the complex environment in denominated in U.S. dollars, such as aircraft and fuel expenses.
which we operate, we are subject to other legal proceedings and During 2009, operating income was negatively impacted due
claims, including those relating to general commercial matters, to foreign currency fluctuations. During 2008, foreign currency
employment-related claims and FedEx Ground’s owner-operators. fluctuations positively impacted operating income. However,
We account for these contingencies in accordance with SFAS 5, favorable foreign currency fluctuations also may have had an
which requires an accrual of estimated loss from a contingency, offsetting impact on the price we obtained or the demand for our
such as a tax or other legal proceeding or claim, when it is prob- services, which is not quantifiable. At May 31, 2009, the result of
able (i.e., the future event or events are likely to occur) that a a uniform 10% strengthening in the value of the dollar relative
loss will be incurred and the amount of the loss can be reason- to the currencies in which our transactions are denominated
ably estimated. SFAS 5 requires disclosure of a loss contingency would result in a decrease in operating income of $2 million for
matter when, in management’s judgment, a material loss is rea- 2010 (the comparable amount in the prior year was a decrease of
sonably possible or probable of occurring. $77 million, reflecting higher international revenue in 2008). This
theoretical calculation assumes that each exchange rate would
Our legal department maintains thorough processes to identify,
change in the same direction relative to the U.S. dollar.
evaluate and monitor the status of litigation and other loss con-
tingencies as they arise and develop. Management has regular, In practice, our experience has been that exchange rates in
comprehensive litigation and contingency reviews, including the principal foreign markets where we have foreign currency
updates from internal and external counsel, to assess the need denominated transactions tend to have offsetting fluctuations.
for accounting recognition of a loss or disclosure of these con- Therefore, the calculation above is not indicative of our actual
tingencies. In determining whether a loss should be accrued or experience in foreign currency transactions. In addition to the
a loss contingency disclosed, we evaluate, among other factors, direct effects of changes in exchange rates, fluctuations in
the degree of probability of an unfavorable outcome or settlement exchange rates also affect the volume of sales or the foreign
and the ability to make a reasonable estimate of the amount of currency sales price as competitors’ services become more or
loss. Events may arise that were not anticipated and the outcome less attractive. The sensitivity analysis of the effects of changes
of a contingency may result in a loss to us that differs materially in foreign currency exchange rates does not factor in a potential
from our previously estimated liability. change in sales levels or local currency prices.
COMMODITY
While we have market risk for changes in the price of jet and
Market Risk Sensitive vehicle fuel, this risk is largely mitigated by our fuel surcharges
Instruments and Positions because our fuel surcharges are closely linked to market prices
for fuel. Therefore, a hypothetical 10% change in the price of fuel
would not be expected to materially affect our earnings.
INTEREST RATES
While we currently have market risk sensitive instruments related However, our fuel surcharges have a timing lag (approximately
to interest rates, we have no significant exposure to changing six to eight weeks for FedEx Express and FedEx Ground) before
interest rates on our long-term debt because the interest rates they are adjusted for changes in fuel prices. Our fuel surcharge
are fixed on all of our long-term debt. As disclosed in Note 6 to index also allows fuel prices to fluctuate approximately 2% for
the accompanying consolidated financial statements, we had out- FedEx Express and approximately 3% for FedEx Ground before an
standing fixed-rate, long-term debt (exclusive of capital leases) adjustment to the fuel surcharge occurs. Accordingly, our oper-
with an estimated fair value of $2.4 billion at May 31, 2009 and ating income in a specific period may be significantly affected
$1.9 billion at May 31, 2008. Market risk for fixed-rate, long-term should the spot price of fuel suddenly change by a substantial
debt is estimated as the potential decrease in fair value resulting amount or change by amounts that do not result in an adjustment
from a hypothetical 10% increase in interest rates and amounts to in our fuel surcharges.
$35 million as of May 31, 2009 and $27 million as of May 31, 2008.
The underlying fair values of our long-term debt were estimated OTHER
based on quoted market prices or on the current rates offered We do not purchase or hold any derivative financial instruments
for debt with similar terms and maturities. for trading purposes.
FOREIGN CURRENCY
While we are a global provider of transportation, e-commerce
and business services, the substantial majority of our transac-
Risk Factors
tions are denominated in U.S. dollars. The distribution of our Our financial and operating results are subject to many risks and
foreign currency denominated transactions is such that foreign uncertainties, as described below.
currency declines in some areas of the world are often offset by
foreign currency gains in other areas of the world. The principal Our businesses depend on our strong reputation and the value of
foreign currency exchange rate risks to which we are exposed the FedEx brand. The FedEx brand name symbolizes high-quality
are in the euro, Chinese yuan, Canadian dollar, British pound and service, reliability and speed. FedEx is one of the most widely
Japanese yen. Historically, our exposure to foreign currency recognized, trusted and respected brands in the world, and the
fluctuations is more significant with respect to our revenues FedEx brand is one of our most important and valuable assets. In
than our expenses, as a significant portion of our expenses are addition, we have a strong reputation among customers and the
35
FEDEX CORPORATION
general public for high standards of social and environmental we have invested and continue to invest in technology security
responsibility and corporate governance and ethics. The FedEx initiatives and disaster recovery plans, these measures cannot
brand name and our corporate reputation are powerful sales fully insulate us from technology disruptions and the resulting
and marketing tools, and we devote significant resources to pro- adverse effect on our operations and financial results.
moting and protecting them. Adverse publicity (whether or not
Our transportation businesses may be impacted by the price and
justified) relating to activities by our employees, contractors or
availability of fuel. We must purchase large quantities of fuel to
agents could tarnish our reputation and reduce the value of our
operate our aircraft and vehicles, and the price and availability
brand. Damage to our reputation and loss of brand equity could
of fuel can be unpredictable and beyond our control. To date, we
reduce demand for our services and thus have an adverse effect
have been mostly successful in mitigating the expense impact
on our financial condition, liquidity and results of operations, as
of higher fuel costs through our indexed fuel surcharges, as the
well as require additional resources to rebuild our reputation and
amount of the surcharges is closely linked to the market prices for
restore the value of our brand.
fuel. If we are unable to maintain or increase our fuel surcharges
Labor organizations attempt to organize groups of our employees because of competitive pricing pressures or some other reason,
from time to time, and potential changes in labor laws could make fuel costs could adversely impact our operating results. Even if
it easier for them to do so. If we are unable to continue to maintain we are able to offset the cost of fuel with our surcharges, high
good relationships with our employees and prevent labor organi- fuel surcharges could move our customers, especially in the U.S.
zations from organizing groups of our employees, our operating domestic market, away from our higher-yielding express services
costs could significantly increase and our operational flexibil- to our lower-yielding ground services or even reduce customer
ity could be significantly reduced. Despite continual organizing demand for our services altogether. These effects were evident
attempts by labor unions, besides the pilots of FedEx Express, in the first quarter of 2009, as fuel prices reached all-time highs.
all of our U.S. employees have thus far chosen not to unionize. In addition, disruptions in the supply of fuel could have a negative
The U.S. Congress is considering adopting changes in labor laws, impact on our ability to operate our transportation networks.
however, that would make it easier for unions to organize small
Our businesses are capital intensive, and we must make capi-
units of our employees. For example, in May 2009, the U.S. House
tal expenditures based upon projected volume levels. We make
of Representatives passed the FAA Reauthorization Act, which
significant investments in aircraft, vehicles, technology, package
includes a provision that would remove most FedEx Express
handling facilities, sort equipment, copy equipment and other
employees from the purview of the Railway Labor Act of 1926,
assets to support our transportation and business networks. We
as amended (the “RLA”). Should the House version of the FAA
also make significant investments to rebrand, integrate and grow
Reauthorization Act (or a similar bill removing FedEx Express from
the companies that we acquire. The amount and timing of capital
RLA jurisdiction) be passed by the entire Congress and signed
investments depend on various factors, including our anticipated
into law by the President, it could expose our customers to the
volume growth. For example, we must make commitments to
type of service disruptions that the RLA was designed to prevent
purchase or modify aircraft years before the aircraft are actually
— local work stoppages in key areas that interrupt the timely flow
needed. We must predict volume levels and fleet requirements
of shipments of time-sensitive, high-value goods throughout our
and make commitments for aircraft based on those projections.
global network. Such disruptions could threaten our ability to pro-
Missing our projections could result in too much or too little capac-
vide competitively priced shipping options and ready access to
ity relative to our shipping volumes. Overcapacity could lead to
global markets. There is also the possibility that the U.S. Congress
asset dispositions or write-downs and undercapacity could nega-
could pass other labor legislation, such as the currently proposed
tively impact service levels. For example, recent and current weak
Employee Free Choice Act (the “EFCA”) (also called “card-check
economic conditions and the delivery of newer, more fuel-efficient
legislation”), that could adversely affect our companies, such
aircraft have led to excess aircraft capacity at FedEx Express.
as FedEx Ground and FedEx Freight, whose employees are gov-
As a result, during the fourth quarter of 2009, we decided to per-
erned by the National Labor Relations Act of 1935, as amended
manently remove 14 aircraft and certain excess aircraft engines
(the “NLRA”). The EFCA would amend the NLRA to substantially
from service and thus recorded a charge of $191 million. A limited
liberalize the procedures for union organization — for example,
number of other aircraft remain temporarily grounded because
by eliminating employees’ absolute right to a secret ballot vote
of network overcapacity, and any future decisions to further alter
in union elections. The EFCA could also require imposition of an
our networks by eliminating additional aircraft or other assets may
arbitrated initial contract that could include pay, benefit and work
lead to additional asset impairment charges.
rules that could adversely impact employers.
We face intense competition, especially during the current global
We rely heavily on technology to operate our transportation
recession. The transportation and business services markets are
and business networks, and any disruption to our technology
both highly competitive and sensitive to price and service, espe-
infrastructure or the Internet could harm our operations and our
cially in periods of little or no macro-economic growth. Some of
reputation among customers. Our ability to attract and retain
our competitors have more financial resources than we do, or
customers and to compete effectively depends in part upon the
they are controlled or subsidized by foreign governments, which
sophistication and reliability of our technology network, includ-
enables them to raise capital more easily. We believe we compete
ing our ability to provide features of service that are important to
effectively with these companies — for example, by providing
our customers. Any disruption to the Internet or our technology
more reliable service at compensatory prices. However, our com-
infrastructure, including those impacting our computer systems
petitors determine the charges for their services, and the current
and Web site, could adversely impact our customer service and
global recession has led to a very competitive pricing environ-
our volumes and revenues and result in increased costs. While
ment within our industries. If the pricing environment becomes
36
FEDEX CORPORATION
irrational, it could limit our ability to maintain or increase our operating costs could increase materially and we could incur
prices (including our fuel surcharges in response to rising fuel significant capital outlays.
costs) or to maintain or grow our market share. In addition, main-
Increased security requirements could impose substantial costs
taining a broad portfolio of services is important to keeping and
on us, especially at FedEx Express. As a result of concerns about
attracting customers. While we believe we compete effectively
global terrorism and homeland security, governments around the
through our current service offerings, if our competitors offer a
world are adopting or are considering adopting stricter security
broader range of services or more effectively bundle their ser-
requirements that will increase operating costs for businesses,
vices, it could impede our ability to maintain or grow our market
including those in the transportation industry. For example, in July
share.
2007, the U.S. Transportation Security Administration issued to us
If we do not effectively operate, integrate, leverage and grow a Full All-Cargo Aircraft Operator Standard Security Plan, which
acquired businesses, our financial results and reputation may contained many new and enhanced security requirements. These
suffer. Our strategy for long-term growth, productivity and profit- requirements are not static, but will change periodically as the
ability depends in part on our ability to make prudent strategic result of regulatory and legislative requirements, and to respond
acquisitions and to realize the benefits we expect when we make to evolving threats. Until these requirements are adopted, we
those acquisitions. In furtherance of this strategy, during 2007 cannot determine the effect that these new rules will have on our
we acquired the LTL freight operations of Watkins Motor Lines cost structure or our operating results. It is reasonably possible,
(renamed FedEx National LTL) and made strategic acquisitions in however, that these rules or other future security requirements
China, the United Kingdom and India. During 2004, we acquired could impose material costs on us.
Kinko’s, Inc. (now known as FedEx Office). While we expect our
The regulatory environment for global aviation rights may impact
past and future acquisitions to enhance our value proposition
our air operations. Our extensive air network is critical to our suc-
to customers and improve our long-term profitability, there can
cess. Our right to serve foreign points is subject to the approval
be no assurance that we will realize our expectations within the
of the Department of Transportation and generally requires a
time frame we have established, if at all, or that we can continue
bilateral agreement between the United States and foreign gov-
to support the value we allocate to these acquired businesses,
ernments. In addition, we must obtain the permission of foreign
including their goodwill or other intangible assets. As an exam-
governments to provide specific flights and services. Regulatory
ple, during 2008 and 2009, we recorded aggregate charges of
actions affecting global aviation rights or a failure to obtain or
$1.8 billion for impairment of the value of the Kinko’s trade name
maintain aviation rights in important international markets could
and portions of the goodwill recorded as a result of the Kinko’s
impair our ability to operate our air network.
and Watkins Motor Lines acquisitions. These charges were nec-
essary, among other reasons, because the recent and forecasted We may be affected by global climate change or by legal, regula-
financial performance of those companies did not meet our origi- tory or market responses to such change. Concern over climate
nal expectations as a result of weak economic conditions. change, including the impact of global warming, has led to sig-
nificant U.S. and international legislative and regulatory efforts
FedEx Ground relies on owner-operators to conduct its line-
to limit greenhouse gas (“GHG”) emissions. For example, dur-
haul and pickup-and-delivery operations, and the status of
ing 2009, the European Commission approved the extension of
these owner-operators as independent contractors, rather than
the European Union Emissions Trading Scheme (“ETS”) for GHG
employees, is being challenged. FedEx Ground’s use of inde-
emissions, to the airline industry. We believe this decision vio-
pendent contractors is well suited to the needs of the ground
lates international treaties and air services agreements and is
delivery business and its customers, as evidenced by the strong
likely to be challenged by the U.S. Government. If the decision
growth of this business segment. We are involved in numerous
stands, however, then all FedEx Express flights to and from any
class-action lawsuits (including many that have been certified
airport in any member state of the European Union would be
as class actions), several individual lawsuits and numerous tax
covered by the ETS requirements beginning in 2012, and each
and other administrative proceedings that claim that the com-
year we would be required to submit emission allowances in an
pany’s owner-operators or their drivers should be treated as our
amount equal to the carbon dioxide emissions from such flights.
employees, rather than independent contractors. We expect to
In addition, the U.S. House of Representatives has passed and
incur certain costs, including legal fees, in defending the status
the Senate is currently considering a bill that would regulate GHG
of FedEx Ground’s owner-operators as independent contractors.
emissions, and some form of federal climate change legislation
We believe that FedEx Ground’s owner-operators are properly
is possible in the relatively near future. Increased regulation
classified as independent contractors and that FedEx Ground
regarding GHG emissions, especially aircraft or diesel engine
is not an employer of the drivers of the company’s independent
emissions, could impose substantial costs on us, especially at
contractors. However, adverse determinations in these matters
FedEx Express. These costs include an increase in the cost of
could, among other things, entitle certain of our contractors and
the fuel and other energy we purchase and capital costs associ-
their drivers to the reimbursement of certain expenses and to
ated with updating or replacing our aircraft or trucks prematurely.
the benefit of wage-and-hour laws and result in employment
Until the timing, scope and extent of such regulation becomes
and withholding tax and benefit liability for FedEx Ground, and
known, we cannot predict its effect on our cost structure or
could result in changes to the independent contractor status of
our operating results. It is reasonably possible, however, that it
FedEx Ground’s owner-operators. If FedEx Ground is compelled
could impose material costs on us. Moreover, even without such
to convert its independent contractors to employees, labor
regulation, increased awareness and any adverse publicity in the
organizations could more easily organize these individuals, our
global marketplace about the GHGs emitted by companies in the
37
FEDEX CORPORATION
airline and transportation industries could harm our reputation industry is highly cyclical and especially susceptible to trends
and reduce customer demand for our services, especially our in economic activity, such as the current global recession. Our
air express services. primary business is to transport goods, so our business levels
are directly tied to the purchase and production of goods — key
We are also subject to risks and uncertainties that affect many
macro-economic measurements. When individuals and compa-
other businesses, including:
nies purchase and produce fewer goods, we transport fewer
• the impact of any international conflicts or terrorist activities on goods. In addition, we have a relatively high fixed-cost struc-
the United States and global economies in general, the trans- ture, which is difficult to quickly adjust to match shifting volume
portation industry or us in particular, and what effects these levels. Moreover, as we grow our international business, we are
events will have on our costs or the demand for our services; increasingly affected by the health of the global economy. As a
result, the current global recession has had a disproportionately
• any impacts on our businesses resulting from new domestic or
negative impact on us and our recent financial results.
international government laws and regulation, including tax,
accounting, trade (such as protectionist measures enacted
in response to the current weak economic conditions), labor
(such as card-check legislation), environmental (such as cli- Forward-Looking Statements
mate change legislation) or postal rules;
Certain statements in this report, including (but not limited to)
• our ability to manage our cost structure for capital expenditures
those contained in “Outlook (including segment outlooks),”
and operating expenses, and match it to shifting and future cus-
“Liquidity,” “Capital Resources,” “Liquidity Outlook,” “Contractual
tomer volume levels;
Cash Obligations” and “Critical Accounting Estimates,” and the
• changes in foreign currency exchange rates, especially in “Retirement Plans” and “Contingencies” notes to the consoli-
the euro, Chinese yuan, Canadian dollar, British pound and dated financial statements, are “forward-looking” statements
Japanese yen, which can affect our sales levels and foreign within the meaning of the Private Securities Litigation Reform
currency sales prices; Act of 1995 with respect to our financial condition, results of
operations, cash flows, plans, objectives, future performance and
• increasing costs, the volatility of costs and legal mandates
business. Forward-looking statements include those preceded by,
for employee benefits, especially pension and healthcare
followed by or that include the words “may,” “could,” “would,”
benefits;
“should,” “believes,” “expects,” “anticipates,” “plans,” “esti-
• significant changes in the volumes of shipments transported mates,” “targets,” “projects,” “intends” or similar expressions.
through our networks, customer demand for our various ser- These forward-looking statements involve risks and uncertain-
vices or the prices we obtain for our services; ties. Actual results may differ materially from those contemplated
(expressed or implied) by such forward-looking statements,
• market acceptance of our new service and growth initiatives;
because of, among other things, the risk factors identified above
• any liability resulting from and the costs of defending against and the other risks and uncertainties you can find in our press
class-action litigation, such as wage-and-hour and discrimina- releases and SEC filings.
tion and retaliation claims, patent litigation, and any other legal
As a result of these and other factors, no assurance can be
proceedings;
given as to our future results and achievements. Accordingly, a
• the impact of technology developments on our operations and forward-looking statement is neither a prediction nor a guarantee
on demand for our services; of future events or circumstances and those future events or cir-
cumstances may not occur. You should not place undue reliance
• adverse weather conditions or natural disasters, such as earth-
on the forward-looking statements, which speak only as of the
quakes and hurricanes, which can disrupt electrical service,
date of this report. We are under no obligation, and we expressly
damage our property, disrupt our operations, increase fuel
disclaim any obligation, to update or alter any forward-looking
costs and adversely affect shipment levels;
statements, whether as a result of new information, future events
• widespread outbreak of an illness or any other communicable or otherwise.
disease, or any other public health crisis;
• availability of financing on terms acceptable to us and our abil-
ity to maintain our current credit ratings, especially given the
capital intensity of our operations and the current volatility of
credit markets; and
• credit losses from our customers’ inability or unwillingness to
pay for previously provided services as a result of, among other
things, weak economic conditions and tight credit markets.
We are directly affected by the state of the economy. While the
global, or macro-economic, risks listed above apply to most
companies, we are particularly vulnerable. The transportation
38
FEDEX CORPORATION
39
FEDEX CORPORATION
Memphis, Tennessee
July 10, 2009
40
FEDEX CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
41
FEDEX CORPORATION
ASSETS
Current Assets
Cash and cash equivalents $ 2,292 $ 1,539
Receivables, less allowances of $196 and $158 3,391 4,359
Spare parts, supplies and fuel, less allowances of $175 and $163 367 435
Deferred income taxes 511 544
Prepaid expenses and other 555 367
Total current assets 7,116 7,244
The accompanying notes are an integral part of these consolidated financial statements.
42
FEDEX CORPORATION
OPERATING ACTIVITIES
Net income $ 98 $1,125 $ 2,016
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 1,975 1,946 1,742
Provision for uncollectible accounts 181 134 106
Deferred income taxes and other noncash items 299 124 37
Noncash impairment charges 1,103 882 –
Stock-based compensation 99 101 103
Changes in operating assets and liabilities,
net of the effects of businesses acquired:
Receivables 762 (447) (323)
Other assets (196) (237) (85)
Pension assets and liabilities, net (913) (273) (69)
Accounts payable and other liabilities (628) 190 66
Other, net (27) (80) (36)
Cash provided by operating activities 2,753 3,465 3,557
INVESTING ACTIVITIES
Capital expenditures (2,459) (2,947) (2,882)
Business acquisitions, net of cash acquired (3) (4) (1,310)
Proceeds from asset dispositions and other 79 54 68
Cash used in investing activities (2,383) (2,897) (4,124)
FINANCING ACTIVITIES
Principal payments on debt (501) (639) (906)
Proceeds from debt issuances 1,000 – 1,054
Proceeds from stock issuances 41 108 115
Excess tax benefits on the exercise of stock options 4 38 45
Dividends paid (137) (124) (110)
Other, net (7) – (5)
Cash provided by (used in) financing activities 400 (617) 193
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes on cash (17) 19 6
Net increase (decrease) in cash and cash equivalents 753 (30) (368)
Cash and cash equivalents at beginning of period 1,539 1,569 1,937
Cash and cash equivalents at end of period $ 2,292 $1,539 $1,569
The accompanying notes are an integral part of these consolidated financial statements.
43
FEDEX CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
45
FEDEX CORPORATION
over the asset’s service life or related lease term, if shorter. For from service 10 Airbus A310-200 aircraft and four Boeing MD10-10
income tax purposes, depreciation is computed using acceler- aircraft owned by the company, along with certain excess aircraft
ated methods when applicable. The depreciable lives and net engines at FedEx Express. This decision resulted in an impairment
book value of our property and equipment are as follows (dollars charge of $191 million, which was recorded in the fourth quarter
in millions): of 2009. A limited amount of our total aircraft capacity remains
Net Book Value at May 31, temporarily grounded because of network overcapacity due to the
Range 2009 2008
current economic environment. There were no material property
Wide-body aircraft and and equipment impairment charges recognized in 2008 or 2007.
related equipment 15 to 25 years $5,139 $ 5,550
Narrow-body and feeder GOODWILL
aircraft and related equipment 5 to 15 years 709 452 Goodwill is recognized for the excess of the purchase price over
Package handling and the fair value of tangible and identifiable intangible net assets of
ground support equipment 2 to 30 years 1,928 1,897 businesses acquired. Several factors give rise to goodwill in our
Computer and electronic acquisitions, such as the expected benefit from synergies of the
equipment 2 to 10 years 782 943 combination and the existing workforce of the acquired entity.
Vehicles 3 to 15 years 1,107 1,007 Goodwill is reviewed at least annually for impairment by compar-
Facilities and other 2 to 40 years 3,752 3,629 ing the fair value of each reporting unit with its carrying value
(including attributable goodwill). Fair value for our reporting units
Substantially all property and equipment have no material resid- is determined using an income or market approach incorporating
ual values. The majority of aircraft costs are depreciated on a market participant considerations and management’s assump-
straight-line basis over 15 to 18 years. We periodically evaluate tions on revenue growth rates, operating margins, discount rates
the estimated service lives and residual values used to depre- and expected capital expenditures. Fair value determinations
ciate our property and equipment. This evaluation may result may include both internal and third-party valuations. Unless cir-
in changes in the estimated lives and residual values. Such cumstances otherwise dictate, we perform our annual impairment
changes did not materially affect depreciation expense in any testing in the fourth quarter.
period presented. Depreciation expense, excluding gains and
losses on sales of property and equipment used in operations, INTANGIBLE ASSETS
was $1.8 billion in 2009, $1.8 billion in 2008 and $1.7 billion in 2007. Intangible assets include customer relationships, trade names,
Depreciation and amortization expense includes amortization of technology assets and contract-based intangibles acquired in
assets under capital lease. business combinations. Intangible assets are amortized over
periods ranging from 2 to 15 years, either on a straight-line basis
CAPITALIZED INTEREST or an accelerated basis depending upon the pattern in which the
Interest on funds used to finance the acquisition and modification economic benefits are realized.
of aircraft, including purchase deposits, construction of certain
facilities, and development of certain software up to the date the PENSION AND POSTRETIREMENT
asset is ready for its intended use is capitalized and included in HEALTHCARE PLANS
the cost of the asset if the asset is actively under construction. On May 31, 2007, we adopted Statement of Financial Accounting
Capitalized interest was $71 million in 2009, $50 million in 2008 Standards (“SFAS”) 158, “Employers’ Accounting for Defined
and $34 million in 2007. Benefit Pension and Other Postretirement Plans.” SFAS 158
requires recognition in the balance sheet of the funded status of
IMPAIRMENT OF LONG-LIVED ASSETS defined benefit pension and other postretirement benefit plans,
Long-lived assets are reviewed for impairment when circum- and the recognition in other comprehensive income (“OCI”) of
stances indicate the carrying value of an asset may not be unrecognized gains or losses and prior service costs or credits.
recoverable. For assets that are to be held and used, an impair- The adoption of SFAS 158 resulted in a $982 million charge to
ment is recognized when the estimated undiscounted cash flows shareholders’ equity at May 31, 2007 through accumulated other
associated with the asset or group of assets is less than their comprehensive income (“AOCI”).
carrying value. If impairment exists, an adjustment is made to
write the asset down to its fair value, and a loss is recorded as Additionally, SFAS 158 requires the measurement date for
the difference between the carrying value and fair value. Fair val- plan assets and liabilities to coincide with the plan sponsor’s
ues are determined based on quoted market values, discounted year end. On June 1, 2008, we made our transition election for
cash flows or internal and external appraisals, as applicable. the measurement date provision of SFAS 158 using the two-
Assets to be disposed of are carried at the lower of carrying measurement approach. Under this approach, we completed
value or estimated net realizable value. We operate integrated two actuarial measurements, one at February 29, 2008 and the
transportation networks, and accordingly, cash flows for most of other at June 1, 2008. This approach required us to record the
our operating assets are assessed at a network level, not at an net periodic benefit cost for the transition period from March 1,
individual asset level, for our analysis of impairment. 2008 through May 31, 2008 as an adjustment to beginning retained
earnings ($44 million, net of tax) and actuarial gains and losses
During the fourth quarter of 2009, we recorded $202 million in for the period (a gain of $372 million, net of tax) as an adjustment
property and equipment impairment charges. These charges are to the opening balance of AOCI. These adjustments increased
primarily related to our April 2009 decision to permanently remove the amount recorded for our pension assets by $528 million. Our
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
actuarial gains resulted primarily from a 19-basis-point increase and accrued interest and penalties that are due within one year
in the discount rate for our primary pension plan and an increase of the balance sheet date are presented as current liabilities.
in plan assets at June 1, 2008. The remaining portion of our income tax liabilities and accrued
interest and penalties are presented as noncurrent liabilities
Our defined benefit plans are measured using actuarial tech-
because payment of cash is not anticipated within one year of
niques that reflect management’s assumptions for discount rate,
the balance sheet date. These noncurrent income tax liabilities
expected long-term investment returns on plan assets, salary
are recorded in the caption “Other liabilities” in our consolidated
increases, expected retirement, mortality, employee turnover and
balance sheets.
future increases in healthcare costs. We determine the discount
rate (which is required to be the rate at which the projected ben-
SELF-INSURANCE ACCRUALS
efit obligation could be effectively settled as of the measurement
We are primarily self-insured for workers’ compensation claims,
date) with the assistance of actuaries, who calculate the yield
vehicle accidents and general liabilities, benefits paid under
on a theoretical portfolio of high-grade corporate bonds (rated
employee healthcare programs and long-term disability benefits.
Aa or better) with cash flows that generally match our expected
Accruals are primarily based on the actuarially estimated, undis-
benefit payments in future years. A calculated-value method is
counted cost of claims, which includes incurred-but-not-reported
employed for purposes of determining the expected return on the
claims. Current workers’ compensation claims, vehicle and gen-
plan asset component of net periodic pension cost for our quali-
eral liability, employee healthcare claims and long-term disability
fied U.S. pension plans. We generally do not fund defined benefit
are included in accrued expenses. We self-insure up to certain
plans when such funding provides no current tax deduction or
limits that vary by operating company and type of risk. Periodically,
when such funding would be deemed current compensation to
we evaluate the level of insurance coverage and adjust insurance
plan participants.
levels based on risk tolerance and premium expense.
At May 31, 2009, in accordance with the provisions of SFAS 158,
we recorded a decrease to equity through OCI of $1.2 billion (net LEASES
of tax) based primarily on mark-to-market adjustments related to We lease certain aircraft, facilities, equipment and vehicles
unrealized losses in our pension plan assets during 2009. under capital and operating leases. The commencement date of
all leases is the earlier of the date we become legally obligated
INCOME TAXES to make rent payments or the date we may exercise control over
Deferred income taxes are provided for the tax effect of tempo- the use of the property. In addition to minimum rental payments,
rary differences between the tax basis of assets and liabilities certain leases provide for contingent rentals based on equip-
and their reported amounts in the financial statements. The liabil- ment usage principally related to aircraft leases at FedEx Express
ity method is used to account for income taxes, which requires and copier usage at FedEx Office. Rent expense associated with
deferred taxes to be recorded at the statutory rate expected to contingent rentals is recorded as incurred. Certain of our leases
be in effect when the taxes are paid. contain fluctuating or escalating payments and rent holiday peri-
ods. The related rent expense is recorded on a straight-line basis
On June 1, 2007, we adopted Financial Accounting Standards
over the lease term. The cumulative excess of rent payments
Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for
over rent expense is accounted for as a deferred lease asset
Uncertainty in Income Taxes.” The cumulative effect of adop-
and recorded in “Intangible and other assets” in the accompa-
tion was immaterial. We follow FIN 48 guidance to record
nying consolidated balance sheets. The cumulative excess of
uncertainties and make judgments in the application of complex
rent expense over rent payments is accounted for as a deferred
tax regulations.
lease obligation. Leasehold improvements associated with assets
We recognize liabilities for uncertain income tax positions based utilized under capital or operating leases are amortized over the
on a two-step process. The first step is to evaluate the tax posi- shorter of the asset’s useful life or the lease term.
tion for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position DEFERRED GAINS
will be sustained on audit, including resolution of related appeals Gains on the sale and leaseback of aircraft and other property
or litigation processes, if any. The second step requires us to and equipment are deferred and amortized ratably over the life of
estimate and measure the tax benefit as the largest amount that the lease as a reduction of rent expense. Substantially all of these
is more than 50% likely to be realized upon ultimate settlement. deferred gains are related to aircraft transactions.
It is inherently difficult and subjective to estimate such amounts,
as we must determine the probability of various possible out- FOREIGN CURRENCY TRANSLATION
comes. We reevaluate these uncertain tax positions on a quarterly Translation gains and losses of foreign operations that use local
basis or when new information becomes available to manage- currencies as the functional currency are accumulated and
ment. These reevaluations are based on factors including, but not reported, net of applicable deferred income taxes, as a compo-
limited to, changes in facts or circumstances, changes in tax law, nent of accumulated other comprehensive loss within common
successfully settled issues under audit, and new audit activity. stockholders’ investment. Transaction gains and losses that arise
Such a change in recognition or measurement could result in the from exchange rate fluctuations on transactions denominated
recognition of a tax benefit or an increase to the tax accrual. in a currency other than the local currency are included in the
caption “Other, net” in the accompanying consolidated state-
We classify interest related to income tax liabilities as inter-
ments of income and were immaterial for each period presented.
est expense, and if applicable, penalties are recognized as a
Cumulative net foreign currency translation gains in accumulated
component of income tax expense. The income tax liabilities
47
FEDEX CORPORATION
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These acquisitions expanded our portfolio of services to include any of the periods presented. The purchase prices were allocated
long-haul LTL freight services and domestic express services as follows (in millions):
in the United Kingdom and China. These acquisitions were not FedEx
National LTL FedEx U.K. DTW Group
material to our results of operations or financial condition. The
portion of the purchase price allocated to goodwill and other Current assets $ 121 $ 68 $ 54
identified intangible assets for the FedEx National LTL, FedEx Property and equipment 525 20 16
U.K. and DTW Group acquisitions will be deductible for U.S. tax Intangible assets 77 49 17
purposes over 15 years. During 2009, 2008 and 2007, we also Goodwill 121 168 348
made other immaterial acquisitions that are not presented in the Other assets 3 2 10
table above. Current liabilities (60) (56) (18)
Long-term liabilities – (10) –
Pro forma results of these acquisitions, individually or in the Total purchase price $ 787 $ 241 $ 427
aggregate, would not differ materially from reported results in
The intangible assets acquired in the FedEx National LTL and FedEx U.K. acquisitions consist primarily of customer-related intangible
assets, which will be amortized on an accelerated basis over their average estimated useful lives of seven years for FedEx National
LTL and up to 12 years for FedEx U.K., with the majority of the amortization recognized during the first four years. The intangible assets
acquired in the DTW Group acquisition relate to the reacquired rights for the use of certain FedEx technology and service marks.
These intangible assets will be amortized over their estimated useful lives of approximately two years.
We paid the purchase price for these acquisitions from available cash balances, which included the net proceeds from our $1 billion
senior unsecured debt offering completed during 2007.
49
FEDEX CORPORATION
In accordance with SFAS 142, “Goodwill and Other Intangible • current market conditions for the equity-risk premium and risk-
Assets,” a two-step impairment test is performed on goodwill. In free interest rate;
the first step, a comparison is made of the estimated fair value
• benchmark capital structures for guideline companies with
of a reporting unit to its carrying value. If the carrying value of a
characteristics similar to the FedEx Office reporting unit;
reporting unit exceeds the estimated fair value, the second step
of the impairment test is required. In the second step, an estimate • the size and industry of the FedEx Office reporting unit; and
of the current fair values of all assets and liabilities is made to
• risks related to the forecast of future revenues and profitability
determine the amount of implied goodwill and consequently the
of the FedEx Office reporting unit.
amount of any goodwill impairment.
The discount rate incorporates current market participant con-
In connection with our annual impairment testing of goodwill and
siderations, as indicated above, and decreased year over year,
other intangible assets conducted in the fourth quarter of 2009 in
as increases in the WACC (due to general economic conditions)
accordance with SFAS 142, we recorded a charge of $900 million
were offset by reductions in the company-specific risk premium.
for impairment of the value of goodwill. This charge included an
The company-specific risk premium was reduced primarily due to
$810 million charge related to reduction of the value of the
lower long-term growth and profitability assumptions associated
goodwill recorded as a result of the February 2004 acquisition
with the 2009 forecast. The WACC used in the estimate of fair
of Kinko’s, Inc. (now known as FedEx Office), and a $90 million
value in future periods may be impacted by changes in market
charge related to reduction of the value of the goodwill recorded
conditions (including those of market participants), as well as the
as a result of the September 2006 acquisition of the U.S. and
specific future performance of the FedEx Office reporting unit
Canadian less-than-truckload freight operations of Watkins Motor
and are subject to change, based on changes in specific facts
Lines and certain affiliates (now known as FedEx National LTL).
and circumstances.
FedEx Office Goodwill Upon completion of the impairment test, we concluded that the
During 2009, the U.S. recession had a significant negative impact recorded goodwill was impaired and recorded an impairment
on demand for FedEx Office services, resulting in lower revenues charge of $810 million during the fourth quarter of 2009. The
and continued operating losses at this reporting unit. In response remaining goodwill attributable to the FedEx Office reporting
to these conditions, FedEx Office initiated an internal reorganiza- unit is $362 million as of May 31, 2009. The goodwill impairment
tion designed to improve revenue-generating capabilities and charge is included in operating expenses in the accompanying
reduce costs. Several actions were taken during 2009 to reduce consolidated statements of income. This charge is included in the
FedEx Office’s cost structure and position it for long-term growth results of the FedEx Services segment and was not allocated to
under better economic conditions. These actions included head- our transportation segments, as the charge was unrelated to the
count reductions, domestic store closures and the termination of core performance of those businesses.
operations in some international locations. In addition, we sub-
stantially curtailed future network expansion in light of current FedEx National LTL Goodwill
economic conditions. During 2009, the U.S. recession had a significant negative impact
on the LTL industry, resulting in steep volume declines, intense
The valuation methodology to estimate the fair value of the
yield pressure and the exit of numerous small to medium competi-
FedEx Office reporting unit was based primarily on an income
tors from the market. The outlook for the LTL market is uncertain
approach. We believe use of the income approach is an appro-
due to the recession and the negative impact of aggressive pric-
priate methodology for the FedEx Office reporting unit because it
ing resulting from continued excess capacity in the market. The
is the most direct method of measuring enterprise value for this
results for the FedEx National LTL reporting unit in 2009 reflect the
reporting unit. Because of the nature of the service offerings at
impact of the recession, with reduced revenues and increased
FedEx Office, it exhibits characteristics of a retailer, a business
operating losses.
services provider and a printing provider. Accordingly, it is dif-
ficult to find directly comparable companies for use under the The valuation methodology to estimate the fair value of the
market approach. However, market approach information was FedEx National LTL reporting unit was based primarily on a mar-
incorporated into our test to ensure the reasonableness of our ket approach (revenue multiples and/or earnings multiples) that
conclusions on estimated value under the income approach. Key considered market participant assumptions. We believe use of
assumptions considered were the revenue, operating income the market approach for FedEx National LTL is appropriate due to
and capital expenditure forecasts, the assessed growth rate the forecast risk associated with the projections used under the
in the periods beyond the detailed forecast period, and the dis- income approach, particularly in the outer years of the forecast
count rate. period (as described below). Further, there are directly com-
parable companies to the FedEx National LTL reporting unit for
For 2009, we used a discount rate of 12.0%, versus a discount rate
consideration under the market approach. The income approach
of 12.5% in 2008. Our discount rate of 12.0% for 2009 represents
also was incorporated into the impairment test to ensure the rea-
our estimated weighted-average cost of capital (“WACC”) of the
sonableness of our conclusions under the market approach. Key
FedEx Office reporting unit adjusted for company-specific risk
assumptions considered were the revenue, operating income and
premium to account for the estimated uncertainty associated
capital expenditure forecasts and market participant assump-
with our future cash flows. The development of the WACC used in
tions on multiples related to revenue and earnings forecasts.
our estimate of fair value considered the following key factors:
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The forecast used in the valuation assumes operating losses will • We determined that we would minimize the use of the Kinko’s
continue in the near-term due to the current economic condi- trade name over the next several years.
tions and excess capacity in the industry. However, the long-term
• We began implementing revenue growth and cost management
outlook assumes that this excess capacity exits the market. This
plans to improve financial performance.
assumption drives significant volume and yield improvement
into the FedEx National LTL reporting unit in future periods. The • We began pursuing a more disciplined approach to the long-
decision to include an assumption related to the elimination of term expansion of the retail network, reducing the overall level
excess capacity from the market and the associated cash flows of expansion.
is significant to the valuation and reflects management’s outlook
In connection with our annual impairment testing in the fourth
on the industry for future periods as of the valuation date.
quarter of 2008, the valuation methodology to estimate the fair
We recorded an impairment charge of $90 million during the fourth value of the FedEx Office reporting unit was based primarily on
quarter of 2009. This charge represented substantially all of the an income approach that considered market participant assump-
goodwill resulting from this acquisition. The goodwill impairment tions to estimate fair value. Key assumptions considered were
charge is included in operating expenses in the accompanying the revenue and operating income forecast, the assessed growth
consolidated statements of income and is included in the results rate in the periods beyond the detailed forecast period, and the
of the FedEx Freight segment. discount rate.
In performing our annual impairment test, the most significant
Other Reporting Units Goodwill
assumption used to estimate the fair value of the FedEx Office
Our remaining reporting units with significant recorded good-
reporting unit was the discount rate. We used a discount rate
will (excluding FedEx Office and FedEx National LTL) include our
of 12.5%, representing the estimated WACC of the FedEx Office
FedEx Express reporting unit and our FedEx Freight reporting unit.
reporting unit. The development of the WACC used in our esti-
We evaluated our remaining reporting units during the fourth
mate of fair value considered the following key factors:
quarter of 2009, and while the estimated fair value of these report-
ing units declined from 2008, the estimated fair value of each of • benchmark capital structures for guideline companies with
our other reporting units significantly exceeded their carrying characteristics similar to the FedEx Office reporting unit;
values in 2009. As a result, no additional testing or impairment
• current market conditions for the risk-free interest rate;
charges were necessary.
• the size and industry of the FedEx Office reporting unit; and
FedEx Office Goodwill – 2008
• risks related to the forecast of future revenues and profitability
During 2008, several developments and strategic decisions
of the FedEx Office reporting unit.
occurred at FedEx Office, including:
Upon completion of the impairment test, we concluded that the
• FedEx Office was reorganized as a part of the FedEx Services
recorded goodwill was impaired and recorded an impairment
segment. FedEx Office provides retail access to our customers
charge of $367 million during the fourth quarter of 2008. The good-
for our package transportation businesses and an array of docu-
will impairment charge is included in 2008 operating expenses
ment and business services. Under FedEx Services, FedEx Office
in the accompanying consolidated statements of income. This
benefits from the full range of resources and expertise of FedEx
charge was included in the results of the FedEx Services seg-
Services to continue to enhance the customer experience, pro-
ment and was not allocated to our transportation segments,
vide greater, more convenient access to the portfolio of services
as the charge was unrelated to the core performance of those
at FedEx, and increase revenues through our retail network.
businesses.
• Senior management at FedEx Office was reorganized with sev-
eral positions terminated and numerous reporting realignments,
including naming a new president and CEO.
INTANGIBLE ASSETS
The components of our identifiable intangible assets were as follows (in millions):
May 31, 2009 May 31, 2008
Gross Carrying Accumulated Net Book Gross Carrying Accumulated Net Book
Amount Amortization Value Amount Amortization Value
Customer relationships $ 207 $ (133) $ 74 $ 205 $ (95) $ 110
Contract related 79 (72) 7 79 (67) 12
Technology related and other 74 (62) 12 74 (51) 23
Kinko’s trade name 52 (27) 25 52 (8) 44
Total $ 412 $ (294) $ 118 $ 410 $ (221) $ 189
51
FEDEX CORPORATION
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A $1 billion revolving credit agreement is available to finance Rent expense under operating leases was as follows (in millions):
our operations and other cash flow needs and to provide sup- For years ended May 31,
port for the issuance of commercial paper. This revolving credit 2009 2008 2007
agreement expires in July 2010. Our revolving credit agreement Minimum rentals $ 2,047 $ 1,990 $ 1,916
contains a financial covenant, which requires us to maintain a Contingent rentals (1) 181 228 241
leverage ratio of adjusted debt (long-term debt, including the $ 2,228 $ 2,218 $ 2,157
current portion of such debt, plus six times rentals and landing
(1) Contingent rentals are based on equipment usage.
fees) to capital (adjusted debt plus total common stockholders’
investment) that does not exceed 0.7 to 1.0. Our leverage ratio
of adjusted debt to capital was 0.6 to 1.0 at May 31, 2009. As of A summary of future minimum lease payments under capital
May 31, 2009, no commercial paper was outstanding and the leases and noncancelable operating leases with an initial or
entire $1 billion under the revolving credit facility was available remaining term in excess of one year at May 31, 2009 is as fol-
for future borrowings. lows (in millions):
Operating Leases
We issue other financial instruments in the normal course Aircraft
Capital and Related Facilities and Total Operating
of business to support our operations. Letters of credit at Leases Equipment Other Leases
May 31, 2009 were $606 million. The amount unused under
2010 $ 164 $ 512 $ 1,247 $ 1,759
our primary $500 million letter of credit facility totaled
2011 20 526 1,086 1,612
$45 million at May 31, 2009. This facility expires in July 2010. These
2012 8 504 947 1,451
instruments are required under certain U.S. self-insurance pro-
2013 119 499 817 1,316
grams and are also used in the normal course of international
2014 2 472 694 1,166
operations. The underlying liabilities insured by these instruments
Thereafter 15 2,458 4,894 7,352
are reflected in our balance sheets, where applicable. Therefore,
Total 328 $ 4,971 $ 9,685 $14,656
no additional liability is reflected for the letters of credit.
Less amount
Our capital lease obligations include leases for aircraft and representing interest 34
facilities. Our facility leases include leases that guarantee the Present value of net
repayment of certain special facility revenue bonds that have minimum lease
been issued by municipalities primarily to finance the acquisition payments $ 294
and construction of various airport facilities and equipment. These
bonds require interest payments at least annually, with principal The weighted-average remaining lease term of all operating
payments due at the end of the related lease agreement. leases outstanding at May 31, 2009 was approximately six years.
While certain of our lease agreements contain covenants gov-
erning the use of the leased assets or require us to maintain
certain levels of insurance, none of our lease agreements include
Note 7: Leases material financial covenants or limitations.
We utilize certain aircraft, land, facilities, retail locations and FedEx Express makes payments under certain leveraged operating
equipment under capital and operating leases that expire at vari- leases that are sufficient to pay principal and interest on certain
ous dates through 2040. We leased 13% of our total aircraft fleet pass-through certificates. The pass-through certificates are not
under capital or operating leases as of May 31, 2009, compared direct obligations of, or guaranteed by, FedEx or FedEx Express.
with 14% as of May 31, 2008. In addition, supplemental aircraft
are leased by us under agreements that provide for cancella-
tion upon 30 days’ notice. Our leased facilities include national,
regional and metropolitan sorting facilities, retail facilities and
Note 8: Preferred Stock
administrative buildings.
Our Certificate of Incorporation authorizes the Board of Directors,
at its discretion, to issue up to 4,000,000 shares of preferred stock.
The components of property and equipment recorded under capi-
The stock is issuable in series, which may vary as to certain rights
tal leases were as follows (in millions):
and preferences, and has no par value. As of May 31, 2009, none
May 31,
of these shares had been issued.
2009 2008
Aircraft $ 50 $ –
Package handling and
ground support equipment 165 165
Vehicles 17 20
Other, principally facilities 147 150
379 335
Less accumulated amortization 300 290
$ 79 $ 45
53
FEDEX CORPORATION
line basis over the requisite service period of the award in the
Note 9: Stock-Based “Salaries and employee benefits” caption in the accompanying
Compensation consolidated statements of income.
The key assumptions for the Black-Scholes valuation method
Our total stock-based compensation expense for the years ended include the expected life of the option, stock price volatility, a
May 31 was as follows (in millions): risk-free interest rate, and dividend yield. Many of these assump-
2009 2008 2007 tions are judgmental and highly sensitive. Following is a table of
Stock-based compensation expense $ 99 $101 $103 the weighted-average Black-Scholes value of our stock option
grants, the intrinsic value of options exercised (in millions), and
We have two types of equity-based compensation: stock options the key weighted-average assumptions used in the valuation cal-
and restricted stock. culations for the options granted during the years ended May 31,
and then a discussion of our methodology for developing each of
STOCK OPTIONS the assumptions used in the valuation model:
Under the provisions of our incentive stock plans, key employees 2009 2008 2007
and non-employee directors may be granted options to purchase Weighted-average
shares of our common stock at a price not less than its fair market Black-Scholes value $ 23.66 $ 29.88 $ 31.60
value on the date of grant. Options granted have a maximum term Intrinsic value of options exercised $ 7 $ 126 $ 145
of 10 years. Vesting requirements are determined at the discre- Black-Scholes Assumptions:
tion of the Compensation Committee of our Board of Directors. Expected lives 5.5 years 5 years 5 years
Option-vesting periods range from one to four years, with 82% of Expected volatility 23% 19% 22%
our options vesting ratably over four years. Risk-free interest rate 3.284% 4.763% 4.879%
Dividend yield 0.492% 0.337% 0.302%
RESTRICTED STOCK
Under the terms of our incentive stock plans, restricted shares of Expected Lives. This is the period of time over which the options
our common stock are awarded to key employees. All restrictions granted are expected to remain outstanding. Generally, options
on the shares expire ratably over a four-year period. Shares are granted have a maximum term of 10 years. We examine actual
valued at the market price on the date of award. Compensation stock option exercises to determine the expected life of the
related to these awards is recognized as expense over the req- options. An increase in the expected term will increase com-
uisite service period. pensation expense.
For unvested stock options granted prior to June 1, 2006 and Expected Volatility. Actual changes in the market value of our
all restricted stock awards, the terms of these awards provide stock are used to calculate the volatility assumption. We cal-
for continued vesting subsequent to the employee’s retirement. culate daily market value changes from the date of grant over a
Compensation expense associated with these awards is recog- past period equal to the expected life of the options to determine
nized on a straight-line basis over the shorter of the remaining volatility. An increase in the expected volatility will increase com-
service or vesting period. This postretirement vesting provision pensation expense.
was removed from all stock option awards granted subsequent
to May 31, 2006. Risk-Free Interest Rate. This is the U.S. Treasury Strip rate posted
at the date of grant having a term equal to the expected life of
VALUATION AND ASSUMPTIONS the option. An increase in the risk-free interest rate will increase
We use the Black-Scholes option pricing model to calculate the compensation expense.
fair value of stock options. The value of restricted stock awards Dividend Yield. This is the annual rate of dividends per share over
is based on the stock price of the award on the grant date. We the exercise price of the option. An increase in the dividend yield
recognize stock-based compensation expense on a straight- will decrease compensation expense.
The following table summarizes information about stock option activity for the year ended May 31, 2009:
Stock Options
Weighted- Weighted-Average Aggregate
Average Remaining Intrinsic Value
Shares Exercise Price Contractual Term (in millions) (1)
Outstanding at June 1, 2008 16,677,806 $ 78.09
Granted 2,209,919 86.78
Exercised (788,091) 55.25
Forfeited (456,545) 95.30
Outstanding at May 31, 2009 17,643,089 $ 79.90 5.6 years $ 85
Exercisable 12,149,247 $ 71.15 4.5 years $ 83
Expected to vest 5,054,335 $ 99.25 8.1 years $ 2
Available for future grants 11,914,914
(1) Only presented for options with market value at May 31, 2009 in excess of the exercise price of the option.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The options granted during the year ended May 31, 2009 are
primarily related to our principal annual stock option grant in
Note 10: Computation of
June 2008. Earnings Per Share
The following table summarizes information about vested and
unvested restricted stock for the year ended May 31, 2009: The calculation of basic and diluted earnings per common share
for the years ended May 31 was as follows (in millions, except
Restricted Stock
Weighted-
per share amounts):
Average Grant 2009 2008 2007
Shares Date Fair Value Net income $ 98 $1,125 $ 2,016
Unvested at June 1, 2008 424,985 $ 103.97 Weighted-average shares of
Granted 197,180 90.57 common stock outstanding 311 309 307
Vested (177,494) 98.05 Common equivalent shares:
Forfeited (1,930) 100.35 Incremental effect of shares from
Unvested at May 31, 2009 442,741 $ 100.40 exercise of stock options and
vesting of restricted stock 1 3 4
During the year ended May 31, 2008, there were 174,418 shares Weighted-average common and common
of restricted stock granted with a weighted-average fair value of equivalent shares outstanding 312 312 311
$114.40. During the year ended May 31, 2007, there were 175,005 Basic earnings per common share $ 0.31 $ 3.64 $ 6.57
shares of restricted stock granted with a weighted-average fair Diluted earnings per common share $ 0.31 $ 3.60 $ 6.48
value of $109.90. Antidilutive options excluded from
diluted earnings per common share 12.6 4.8 0.4
The following table summarizes information about stock option
vesting during the years ended May 31:
Stock Options
Vested During
the Year
Fair Value
(in millions) Note 11: Income Taxes
2007 3,147,642 $ 65
The components of the provision for income taxes for the years
2008 2,694,602 64
ended May 31 were as follows (in millions):
2009 2,414,815 64
2009 2008 2007
As of May 31, 2009, there was $110 million of total unrecog- Current provision (benefit)
nized compensation cost, net of estimated forfeitures, related to Domestic:
unvested share-based compensation arrangements. This com- Federal $ (35) $ 514 $ 829
pensation expense is expected to be recognized on a straight-line State and local 18 74 72
basis over the remaining weighted-average vesting period of Foreign 214 242 174
approximately two years. 197 830 1,075
Total shares outstanding or available for grant related to equity Deferred provision (benefit)
compensation at May 31, 2009 represented 9% of the total out- Domestic:
standing common and equity compensation shares and equity Federal 327 31 62
compensation shares available for grant. State and local 48 (2) 27
Foreign 7 32 35
382 61 124
$ 579 $ 891 $1,199
55
FEDEX CORPORATION
A reconciliation of the statutory federal income tax rate to Our liabilities recorded under FIN 48 totaled $72 million at May 31,
the effective income tax rate for the years ended May 31 was 2009 and $88 million at May 31, 2008, including $59 million at May
as follows: 31, 2009 and $68 million at May 31, 2008 associated with positions
2009 2008 2007 that if favorably resolved would provide a benefit to our effective
Statutory U.S. income tax rate 35.0% 35.0% 35.0% tax rate. The change from the prior year relates primarily to the
Increase resulting from: resolution of an immaterial state income tax matter during the
Goodwill impairment 48.0 6.8 – second quarter of 2009. We classify interest related to income
State and local income taxes, tax liabilities as interest expense, and if applicable, penalties are
net of federal benefit 1.9 2.1 2.0 recognized as a component of income tax expense. The balance
Other, net 0.7 0.3 0.3 of accrued interest and penalties was $19 million on May 31,
Effective tax rate 85.6% 44.2% 37.3% 2009 and $25 million on May 31, 2008. Total interest and penalties
included in our statement of operations is immaterial.
Our 2009 and 2008 effective tax rates were significantly impacted
by goodwill impairment charges related to the Kinko’s acquisi- We file income tax returns in the U.S., various U.S. states, and
tion, which are not deductible for income tax purposes. Our 2007 various foreign jurisdictions. During 2009, the Internal Revenue
tax rate was favorably impacted by the conclusion of various Service (“IRS”) completed its audit of our consolidated U.S.
state and federal tax audits and appeals. The 2007 rate reduc- income tax returns for the 2004 through 2006 tax years. The
tion was partially offset by tax charges incurred as a result of a completion of the audit did not have a material effect on our con-
reorganization in Asia associated with our acquisition in China, solidated financial statements. We are no longer subject to U.S.
as described in Note 3. federal income tax examination for years through 2006 except
for specific U.S. federal income tax positions that are in various
The significant components of deferred tax assets and liabilities stages of appeal and/or litigation. No resolution date can be rea-
as of May 31 were as follows (in millions): sonably estimated at this time for these appeals and litigation, but
2009 2008 their resolution is not expected to have a material effect on our
Deferred Deferred Deferred Deferred consolidated financial statements. We are also subject to ongo-
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
ing audits in state, local and foreign tax jurisdictions throughout
Property, equipment, the world.
leases and intangibles $ 406 $ 1,862 $ 321 $ 1,650
Employee benefits 384 143 401 364 A reconciliation of the beginning and ending amount of unrecog-
Self-insurance accruals 392 – 359 – nized tax benefits is as follows (in millions):
Other 491 222 426 224 Balance at June 1, 2007 $ 72
Net operating loss/credit Increases for tax positions taken in the current year 16
carryforwards 131 – 135 – Increases for tax positions taken in prior years 12
Valuation allowances (137) – (124) – Decreases for tax positions taken in prior years (9)
$ 1,667 $ 2,227 $1,518 $ 2,238 Settlements (3)
Balance at May 31, 2008 $ 88
The net deferred tax liabilities as of May 31 have been classified Increases for tax positions taken in the current year 7
in the balance sheets as follows (in millions): Increases for tax positions taken in prior years 10
2009 2008 Decreases for tax positions taken in prior years (30)
Settlements (3)
Current deferred tax asset $ 511 $ 544
Balance at May 31, 2009 $ 72
Noncurrent deferred tax liability (1,071) (1,264)
$ (560) $ (720)
Included in the May 31, 2009 and May 31, 2008 balances are $7
million and $8 million, respectively, of tax positions for which the
We have $385 million of net operating loss carryovers in vari-
ultimate deductibility or income inclusion is certain but for which
ous foreign jurisdictions and $450 million of state operating loss
there may be uncertainty about the timing of such deductibility or
carryovers. The valuation allowances primarily represent amounts
income inclusion. It is difficult to predict the ultimate outcome or
reserved for operating loss and tax credit carryforwards, which
the timing of resolution for tax positions under FIN 48. Changes
expire over varying periods starting in 2010. As a result of this
may result from the conclusion of ongoing audits, appeals or
and other factors, we believe that a substantial portion of these
litigation in state, local, federal and foreign tax jurisdictions, or
deferred tax assets may not be realized.
from the resolution of various proceedings between the U.S. and
Unremitted earnings of our foreign subsidiaries amounted to foreign tax authorities. Our liability for tax positions under FIN
$191 million in 2009 and $147 million in 2008. We have not recog- 48 includes no matters that are individually material to us. It is
nized deferred taxes for U.S. federal income tax purposes on the reasonably possible that the amount of the benefit with respect
unremitted earnings of our foreign subsidiaries that are deemed to certain of our unrecognized tax positions will increase or
to be permanently reinvested. Upon distribution, in the form of decrease within the next 12 months, but an estimate of the range
dividends or otherwise, these unremitted earnings would be sub- of the reasonably possible changes cannot be made. However,
ject to U.S. federal income tax. Unrecognized foreign tax credits we do not expect that the resolution of any of our tax positions
would be available to reduce a portion, if not all, of the U.S. tax under FIN 48 will be material.
liability. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENSION PLANS
Note 12: Retirement Plans Our largest pension plan covers certain U.S. employees age 21
and over, with at least one year of service. We also sponsor or
We sponsor programs that provide retirement benefits to most of
participate in nonqualified benefit plans covering certain of our
our employees. These programs include defined benefit pension
U.S. employee groups and other pension plans covering certain
plans, defined contribution plans and postretirement healthcare
of our international employees. The international defined benefit
plans. The accounting for pension and postretirement healthcare
pension plans provide benefits primarily based on final earnings
plans includes numerous assumptions, such as: discount rates;
and years of service and are funded in compliance with local
expected long-term investment returns on plan assets; future
laws and practices.
salary increases; employee turnover; mortality; and retirement
ages. These assumptions most significantly impact our U.S.
POSTRETIREMENT HEALTHCARE PLANS
domestic pension plans.
Certain of our subsidiaries offer medical, dental and vision cov-
We made significant changes to our retirement plans during 2008 erage to eligible U.S. retirees and their eligible dependents.
and 2009. Beginning January 1, 2008, we increased the annual U.S. employees covered by the principal plan become eligible
company-matching contribution under the largest of our 401(k) for these benefits at age 55 and older, if they have permanent,
plans covering most employees from a maximum of $500 to a continuous service of at least 10 years after attainment of age 45
maximum of 3.5% of eligible compensation. Employees not partic- if hired prior to January 1, 1988, or at least 20 years after attain-
ipating in the 401(k) plan as of January 1, 2008 were automatically ment of age 35 if hired on or after January 1, 1988. Postretirement
enrolled at 3% of eligible pay with a company match of 2% of healthcare benefits are capped at 150% of the 1993 per capita
eligible pay effective March 1, 2008. As a temporary cost-control projected employer cost, which has been reached and, therefore,
measure, we suspended 401(k) company-matching contributions these benefits are not subject to additional future inflation.
for a minimum of one year effective February 1, 2009.
RECENT ACCOUNTING PRONOUNCEMENT
Effective May 31, 2008, benefits previously accrued under our
As discussed in Note 1, we adopted the recognition and disclo-
primary pension plans using a traditional pension benefit formula
sure provisions of SFAS 158 on May 31, 2007. The adoption of
(based on average earnings and years of service) were capped
SFAS 158 required recognition in the balance sheet of the funded
for most employees, and those benefits will be payable beginning
status of defined benefit pension and other postretirement ben-
at retirement. Effective June 1, 2008, future pension benefits for
efit plans, and the recognition in AOCI of unrecognized gains or
most employees began to be accrued under a cash balance for-
losses and prior service costs or credits. The funded status is
mula we call the Portable Pension Account. These changes did
measured as the difference between the fair value of the plan’s
not affect the benefits of previously retired and terminated vested
assets and the projected benefit obligation (“PBO”) of the plan.
participants. In addition, these pension plans were modified
The adoption of SFAS 158 resulted in a $982 million charge to
to accelerate vesting from five years to three years for
shareholders’ equity at May 31, 2007 through AOCI. At May 31,
most participants.
2009, under the provisions of SFAS 158, we recorded a decrease to
Under the Portable Pension Account, the retirement benefit is equity of $1.2 billion (net of tax) based on a $462 million decrease
expressed as a dollar amount in a notional account that grows in the funded status of our retirement plans since May 31, 2008.
with annual credits based on pay, age and years of credited ser- At May 31, 2008, we recorded an increase to equity of $469 million
vice, and interest on the notional account balance. Under the (net of tax) based on a $1 billion improvement in the funded status
tax-qualified plans, the pension benefit is payable as a lump sum of our retirement plans since May 31, 2007.
or an annuity at retirement at the election of the employee. An
Additionally, SFAS 158 requires the measurement date for plan
employee’s pay credits are determined each year under a graded
assets and liabilities to coincide with the plan sponsor’s year
formula that combines age with years of service for points. The
end. On June 1, 2008, we made our transition election for the
plan interest credit rate will vary from year to year based on the
measurement date provision of SFAS 158 using the two-mea-
selected U.S. Treasury index, with an interest rate equal to the
surement approach. Under this approach, we completed two
greater of 4% or the one-year Treasury Constant Maturities rate
actuarial measurements, one at February 29, 2008 and the other
plus 1%, but not greater than a rate based on the larger of the
at June 1, 2008. This approach required us to record the net
average 30-year Treasury note or the applicable provisions of
periodic benefit cost for the transition period from March 1, 2008
the Internal Revenue Code.
through May 31, 2008 as an adjustment to beginning retained
A summary of our retirement plans costs over the past three earnings ($44 million, net of tax) and actuarial gains and losses
years is as follows (in millions): for the period (a gain of $372 million, net of tax) as an adjustment
2009 2008 2007 to the opening balance of AOCI. These adjustments increased
U.S. domestic and international the amount recorded for our pension assets by $528 million. Our
pension plans $ 177 $ 323 $ 467 actuarial gains resulted primarily from a 19-basis-point increase
U.S. domestic and international in the discount rate for our primary pension plan and an increase
defined contribution plans 237 216 176 in plan assets at June 1, 2008.
Postretirement healthcare plans 57 77 55
$ 471 $ 616 $ 698
57
FEDEX CORPORATION
Establishing the expected future rate of investment return on our will better align our plan assets and liabilities. This strategy will
pension assets is a judgmental matter. Management considers ultimately result in a greater concentration of fixed-income
the following factors in determining this assumption: investments.
• the duration of our pension plan liabilities, which drives To support our conclusions, we periodically commission asset/
the investment strategy we can employ with our pension liability studies performed by third-party professional investment
plan assets; advisors and actuaries to assist us in our reviews. These stud-
ies project our estimated future pension payments and evaluate
• the types of investment classes in which we invest our pension
the efficiency of the allocation of our pension plan assets into
plan assets and the expected compound geometric return we
various investment categories. These studies also generate
can reasonably expect those investment classes to earn over
probability-adjusted expected future returns on those assets. The
the next 10- to 15-year time period (or such other time period
studies performed or updated supported the reasonableness of
that may be appropriate); and
our expected rate of return of 8.5% for 2009 and 2008 and 9.1%
• the investment returns we can reasonably expect our for 2007. Based on conditions in global equity markets, we will
investment management program to achieve in excess of the reduce our estimated long-term rate of return on plan assets from
returns we could expect if investments were made strictly in 8.5% to 8.0% for 2010. For the 15-year period ended May 31, 2009,
indexed funds. our actual returns were 7.5%.
We review the expected long-term rate of return on an annual
basis and revise it as appropriate. As part of our strategy to man-
age future pension costs and net funded status volatility, we are
transitioning to a more liability-driven investment strategy, which
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of the changes in the pension and postretirement healthcare plans’ benefit obligations
and fair value of assets over the two-year period ended May 31, 2009 and a statement of the funded status as of May 31, 2009 and
2008 (in millions): (1) (1)
Pension Plans Postretirement Healthcare Plans
2009 2008 2009 2008
Accumulated Benefit Obligation (“ABO”) $ 10,745 $ 11,212
Changes in Projected Benefit Obligation (“PBO”) and
Accumulated Postretirement Benefit Obligation (“APBO”)
PBO/APBO at the beginning of year $ 11,617 $ 12,209 $ 492 $ 525
Adjustments due to change in measurement date
Service cost plus interest cost during gap period 309 – 16 –
Additional experience during gap period (302) – (19) –
Changes due to gap period cash flow (83) – (5) –
Service cost 499 518 31 35
Interest cost 798 720 33 31
Actuarial (gain) loss (1,420) (1,531) (94) (56)
Benefits paid (351) (318) (42) (40)
Amendments (1) 1 – –
Other (16) 18 21 (3)
PBO/APBO at the end of year $ 11,050 $ 11,617 $ 433 $ 492
Change in Plan Assets
Fair value of plan assets at beginning of year $ 11,879 $ 11,506 $ – $ –
Adjustments due to change in measurement date
Additional experience during gap period 522 – – –
Changes due to gap period cash flow (76) – – –
Actual return on plan assets (2,306) 141 – –
Company contributions 1,146 548 21 64
Benefits paid (351) (318) (42) (40)
Other (2) 2 21 (24)
Fair value of plan assets at end of year $ 10,812 $ 11,879 $ – $ –
Funded Status of the Plans $ (238) $ 262 $ (433) $ (492)
Employer contributions after measurement date – 15 – 5
Net amount recognized $ (238) $ 277 $ (433) $ (487)
Amount Recognized in the Balance Sheet at May 31:
Noncurrent pension assets $ 311 $ 827 $ – $ –
Current pension, postretirement healthcare
and other benefit obligations (31) (32) (26) (30)
Noncurrent pension, postretirement healthcare
and other benefit obligations (518) (518) (407) (457)
Net amount recognized $ (238) $ 277 $ (433) $ (487)
Amounts Recognized in AOCI and not yet reflected in
Net Periodic Benefit Cost:
Net actuarial loss (gain) $ 3,731 $ 2,455 $ (248) $ (144)
Prior service (credit) cost and other (1,220) (1,362) 2 2
Total $ 2,511 $ 1,093 $ (246) $ (142)
Amounts Recognized in AOCI and not yet reflected in
Net Periodic Benefit Cost expected to be amortized
in next year’s Net Periodic Benefit Cost:
Net actuarial loss (gain) $ 130 $ 51 $ (12) $ (7)
Prior service credit and other (113) (114) – –
Total $ 17 $ (63) $ (12) $ (7)
(1) The measurement date for 2009 is May 31, 2009, and the measurement date for 2008 is February 29, 2008.
59
FEDEX CORPORATION
Our pension plans included the following components at May 31, 2009 and 2008 (in millions):
Fair Value of Funded Net Amount
ABO PBO Plan Assets Status Other (1) Recognized
2009
Qualified $10,113 $10,328 $10,606 $ 278 $– $ 278
Nonqualified 317 318 – (318) – (318)
International Plans 315 404 206 (198) – (198)
Total $10,745 $11,050 $10,812 $ (238) $– $ (238)
2008
Qualified $ 10,530 $ 10,834 $ 11,661 $ 827 $– $ 827
Nonqualified 333 338 – (338) 7 (331)
International Plans 349 445 218 (227) 8 (219)
Total $ 11,212 $ 11,617 $ 11,879 $ 262 $15 $ 277
(1) Amounts in “Other” represent employer contributions after measurement date.
The table above provides the ABO, PBO, fair value of plan assets and funded status of our plans on an aggregated basis. The following
table, provided under the requirements of SFAS 158, presents our plans on a disaggregated basis to show those plans (as a group)
whose assets did not exceed their liabilities. These plans are primarily comprised of our unfunded nonqualified plans and certain
international plans, but do not include our principal U.S. domestic plan. At May 31, 2009 and 2008, the fair value of plan assets for pen-
sion plans with a PBO or ABO in excess of plan assets were as follows (in millions):
PBO Exceeds the Fair Value The APBO exceeds plan assets for each of our postretirement
of Plan Assets
2009 2008
healthcare plans.
Pension Benefits In September 2008, we made $483 million in voluntary contribu-
Fair Value of Plan Assets $ 375 $ 218 tions to our U.S. tax-qualified plans. We made additional voluntary
PBO (923) (783) contributions of $600 million during the fourth quarter of 2009 in
Net funded status $ (548) $ (565) order to improve the funded status of our principal pension plans.
During 2008, we made voluntary contributions of $479 million to
ABO Exceeds the Fair Value our U.S. tax-qualified plans. While our U.S. tax-qualified plans
of Plan Assets
2009 2008
have ample funds to meet benefit payments, current market con-
ditions have negatively impacted asset values over the near term.
Pension Benefits We anticipate making contributions to the U.S. tax-qualified plans
ABO (1) $(778) $ (682) totaling approximately $850 million in 2010, including $350 million
Fair Value of Plan Assets 325 217 in required minimum quarterly payments.
PBO (869) (782)
Net funded status $ (544) $ (565)
(1) ABO not used in determination of funded status.
Net periodic benefit cost for the three years ended May 31 were as follows (in millions):
Pension Plans Postretirement Healthcare Plans
2009 2008 2007 2009 2008 2007
The reduction in pension costs from 2008 to 2009 was attributable to the significantly higher discount rate that was used to determine
our 2009 expense. Decreases in pension costs from 2007 to 2008 are primarily the result of the plan changes discussed above and
in Note 1.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in OCI for all plans were as follows (in millions):
2009 2008
Postretirement Postretirement
Pension Plans Healthcare Plans Pension Plans Healthcare Plans
Gross Net of tax Gross Net of tax Gross Net of tax Gross Net of tax
amount amount amount amount amount amount amount amount
Net gain (loss) and other, arising during period $ 1,944 $ 1,220 $ (94) $ (61) $ (685) $ (430) $ (56) $ (38)
Gain (loss) from settlements and curtailments 2 1 – – (17) (10) 6 4
Amortizations:
Prior service credit 113 71 – – 113 70 – –
Actuarial (losses) gains and other (49) (30) 7 4 (166) (104) 3 2
Total recognized in OCI $ 2,010 $ 1,262 $ (87) $ (57) $ (755) $ (474) $ (47) $ (32)
Weighted-average actuarial assumptions for our primary U.S. pension plans, which represent substantially all of our PBO, are
as follows:
Pension Plans Postretirement Healthcare Plans
2009 2008 2007 2009 2008 2007
Discount rate used to determine benefit obligation (1) 7.68% 6.96% 6.01% 7.27% 6.81% 6.08%
Discount rate used to determine net periodic benefit cost 7.15 6.01 5.91 7.13 6.08 6.08
Rate of increase in future compensation levels
used to determine benefit obligation 4.42 4.51 4.47 – – –
Rate of increase in future compensation levels
used to determine net periodic benefit cost (2) 4.49 4.47 3.46 – – –
Expected long-term rate of return on assets 8.50 8.50 9.10 – – –
(1) The assumed interest rate used to discount the estimated future benefit payments that have been accrued to date (the PBO) to their net present value.
(2) Average future salary increases based on age and years of service.
Benefit payments, which reflect expected future service, are FedEx Express Segment FedEx Express
expected to be paid as follows for the years ending May 31 (in (express transportation)
millions): FedEx Trade Networks
Postretirement (global trade services)
Pension Plans Healthcare Plans
2010 $ 432 $ 27 FedEx Ground Segment FedEx Ground
2011 455 29 (small-package ground delivery)
2012 507 30 FedEx SmartPost
2013 584 31 (small-parcel consolidator)
2014 654 32
2015–2019 4,654 188 FedEx Freight Segment FedEx Freight LTL Group:
FedEx Freight (regional
These estimates are based on assumptions about future LTL freight transportation)
events. Actual benefit payments may vary significantly from FedEx National LTL
these estimates. (long-haul LTL freight
Future medical benefit claims costs are estimated to increase at transportation)
an annual rate of 9% during 2010, decreasing to an annual growth FedEx Custom Critical
rate of 4.5% in 2029 and thereafter. Future dental benefit costs (time-critical transportation)
are estimated to increase at an annual rate of 7% during 2010, Caribbean Transportation Services
decreasing to an annual growth rate of 4.5% in 2029 and there- (airfreight forwarding)
after. A 1% change in these annual trend rates would not have a
significant impact on the APBO at May 31, 2009 or 2009 benefit FedEx Services Segment FedEx Services (sales,
expense because the level of these benefits is capped. marketing and information
technology functions)
FedEx Office (document
and business services and
Note 13: Business Segment package acceptance)
FedEx Customer Information
Information Services (“FCIS”)
(customer service,
FedEx Express, FedEx Ground and the FedEx Freight LTL Group billings and collections)
represent our major service lines and, along with FedEx Services, FedEx Global Supply Chain
form the core of our reportable segments. Our reportable seg- Services (logistics services)
ments as of May 31, 2009 included the following businesses:
61
FEDEX CORPORATION
Effective June 1, 2009, Caribbean Transportation Services, Inc. (“CTS”), a business in the FedEx Freight segment, was integrated into
FedEx Express to leverage synergies between CTS and FedEx Express and to gain cost efficiencies by maximizing the use of FedEx
Express assets for this service offering.
Revenues
2009 $ 22,364 $ 7,047 $ 4,415 $ 1,977 $ (306) $ 35,497
2008 24,421 6,751 4,934 2,138 (291) 37,953
2007 22,681 6,043 4,586 2,136 (232) 35,214
Depreciation and amortization
2009 $ 961 $ 337 $ 224 $ 451 $ 2 $ 1,975
2008 944 305 227 469 1 1,946
2007 856 268 195 420 3 1,742
Operating income (loss)
2009 $ 794 $ 807 $ (44) $ (810) $ – $ 747
2008 1,901 736 329 (891) – 2,075
2007 1,991 822 463 – – 3,276
Segment assets (4)
2009 $13,483 $ 3,291 $ 3,044 $ 3,240 $ 1,186 $ 24,244
2008 13,416 2,770 3,276 4,651 1,520 25,633
2007 15,650 3,937 3,150 5,384 (4,121) 24,000
(1) FedEx Express segment 2009 operating expenses include a charge of $260 million primarily related to aircraft-related asset impairments. FedEx Express segment 2007 operating expenses include
a charge of $143 million associated with upfront compensation and benefits under our pilot labor contract.
(2) FedEx Freight segment 2009 operating expenses include a charge of $100 million primarily related to impairment charges associated with goodwill related to the Watkins Motor Lines (now known
as FedEx National LTL) acquisition. FedEx Freight segment results include the results of FedEx National LTL from the date of its acquisition on September 3, 2006.
(3) FedEx Services segment 2009 operating expenses include a charge of $810 million related to impairment of goodwill resulting from the Kinko’s acquisition. FedEx Services segment 2008 operating
expenses include a charge of $891 million predominantly related to impairment charges associated with the decision to minimize the use of the Kinko’s trade name and goodwill resulting from the
Kinko’s acquisition. The normal, ongoing net operating costs of the FedEx Services segment are allocated back to the transportation segments.
(4) Segment assets include intercompany receivables.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of reportable segment capital expenditures to consolidated totals for the years ended
May 31 (in millions):
FedEx FedEx FedEx FedEx
Express Ground Freight Services Consolidated
Segment Segment Segment Segment Other Total
2009 $ 1,348 $ 636 $ 240 $ 235 $– $ 2,459
2008 1,716 509 266 455 1 2,947
2007 1,672 489 287 432 2 2,882
63
FEDEX CORPORATION
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
among other things, that they were forced to work “off the clock” Adverse determinations in these matters could, among other
and were not provided with required meal breaks or split-shift things, entitle certain of our contractors and their drivers to the
premiums. We have asked the U.S. Court of Appeals for the Ninth reimbursement of certain expenses and to the benefit of wage-
Circuit to accept an appeal of the class certification ruling. and-hour laws and result in employment and withholding tax and
benefit liability for FedEx Ground, and could result in changes
These class certification rulings do not address whether we will
to the independent contractor status of FedEx Ground’s owner-
ultimately be held liable. We have denied any liability and intend
operators. We believe that FedEx Ground’s owner-operators
to vigorously defend ourselves in these wage-and-hour lawsuits.
are properly classified as independent contractors and that
We do not believe that any loss is probable in these lawsuits.
FedEx Ground is not an employer of the drivers of the company’s
Independent Contractor — Lawsuits and State Administrative independent contractors. Given the nature and status of these
Proceedings. FedEx Ground is involved in approximately 50 class- lawsuits, we cannot yet determine the amount or a reasonable
action lawsuits (including 21 that have been certified as class range of potential loss, if any, but it is reasonably possible that
actions), several individual lawsuits and approximately 40 state such potential loss or such changes to the independent contrac-
tax and other administrative proceedings that claim that the com- tor status of FedEx Ground’s owner-operators could be material.
pany’s owner-operators should be treated as employees, rather However, we do not believe that a material loss is probable in
than independent contractors. any of these matters.
Most of the class-action lawsuits have been consolidated for Independent Contractor — IRS Audit. In October 2008, the IRS
administration of the pre-trial proceedings by a single federal withdrew its tentative assessment of tax and penalties for the
court, the U.S. District Court for the Northern District of Indiana. 2002 calendar year ($319 million plus interest) against FedEx
With the exception of recently filed cases that have been or will Ground relating to the classification of FedEx Ground’s owner-
be transferred to the multidistrict litigation, discovery on class operators for federal employment tax purposes. The IRS is
certification and classification issues and class certification continuing its employment tax audit of FedEx Ground for the 2002
briefing are now complete. In October 2007, we received a deci- calendar year. We are engaged in discussions with the IRS audit
sion from the court granting class certification in a Kansas action team regarding this matter. We continue to believe that FedEx
alleging state law claims on behalf of a statewide class and fed- Ground’s owner-operators are independent contractors and that
eral law claims under the Employee Retirement Income Security no loss is probable in this matter.
Act of 1974 on behalf of a nationwide class. In January 2008,
Independent Contractor — Shareholder Derivative Lawsuits. The
the U.S. Court of Appeals for the Seventh Circuit declined our
Plumbers and Pipefitters Local 51 Pension Fund and the Western
request for appellate review of the class certification decision.
Pennsylvania Bricklayers Pension Fund each filed shareholder
In March 2008, the court granted class certification in 19 addi-
derivative lawsuits (which have now been consolidated) in
tional cases and denied it in nine cases. The court has not yet
Tennessee federal court naming FedEx Corporation as a nominal
ruled on class certification in the other cases that are pending in
defendant and the members of the Board of Directors of FedEx
the multidistrict litigation. Motions for summary judgment on the
Corporation as defendants (the Plumbers and Pipefitters suit was
classification issue (i.e., independent contractor vs. employee)
filed in May 2008 and the Bricklayers suit was filed in June 2008).
are pending in all 20 of the multidistrict litigation cases that have
The derivative lawsuits, which are purportedly brought to assert
been certified as class actions.
the rights of FedEx Corporation, assert claims against the Board
In January 2008, one of the contractor-model lawsuits that is members for breach of fiduciary duty, abuse of control, gross
not part of the multidistrict litigation, Anfinson v. FedEx Ground, mismanagement, waste of corporate assets and unjust enrich-
was certified as a class action by a Washington state court. The ment in connection with the management of FedEx Ground — in
plaintiffs in Anfinson represent a class of FedEx Ground single- particular, the classification of FedEx Ground’s owner-operators
route, pickup-and-delivery owner-operators in Washington from as independent contractors. Given the preliminary status of these
December 21, 2001 through December 31, 2005 and allege that the matters, we cannot yet determine the amount or a reasonable
class members should be reimbursed as employees for their uni- range of potential loss. However, we do not believe that any loss
form expenses and should receive overtime pay. In March 2009, is probable.
a jury trial in the Anfinson case was held, and the jury returned a
Other. FedEx and its subsidiaries are subject to other legal pro-
verdict in favor of FedEx Ground, finding that all 320 class mem-
ceedings that arise in the ordinary course of their business. In the
bers were independent contractors, not employees. The plaintiffs
opinion of management, the aggregate liability, if any, with respect
have appealed the verdict. The other contractor-model lawsuits
to these other actions will not have a material adverse effect on
that are not part of the multidistrict litigation are not as far along
our financial position, results of operations or cash flows.
procedurally as Anfinson and are all currently stayed pending
further developments in the multidistrict litigation. Additional information about our contingencies can be found
in the Critical Accounting Estimates section of Management’s
FedEx Ground is also involved in several lawsuits, including one
Discussion and Analysis.
purported class action, brought by drivers of the company’s inde-
pendent contractors who claim that they were jointly employed
by the contractor and FedEx Ground.
65
FEDEX CORPORATION
2009 (1)
Revenues $ 9,970 $ 9,538 $ 8,137 $ 7,852
Operating income (loss) 630 784 182 (849)
Net income (loss) 384 493 97 (876)
Basic earnings (loss) per common share 1.23 1.59 0.31 (2.82)
Diluted earnings (loss) per common share (2) 1.23 1.58 0.31 (2.82)
2008 (3)
Revenues $ 9,199 $ 9,451 $ 9,437 $ 9,866
Operating income (loss) 814 783 641 (163)
Net income (loss) 494 479 393 (241)
Basic earnings (loss) per common share 1.60 1.55 1.27 (0.78)
Diluted earnings (loss) per common share 1.58 1.54 1.26 (0.78)
(1) Operating expenses for the fourth quarter of 2009 include a charge of $1.2 billion ($1.1 billion, net of tax, or $3.46 per diluted share) primarily related to noncash impairment charges associated
with goodwill and aircraft-related asset impairments.
(2) The sum of the quarterly diluted earnings per share may not equal annual amounts due to differences in the weighted-average number of shares outstanding during the respective period.
(3) Results for the fourth quarter of 2008 include a charge of $891 million ($696 million, net of tax, or $2.22 per diluted share), predominantly related to noncash impairment charges associated with the
decision to minimize the use of the Kinko’s trade name and goodwill resulting from the Kinko’s acquisition. The earnings-per-share impact of the impairment charge differs for the fourth quarter and
full year due to differences in the weighted-average number of shares outstanding.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
67
FEDEX CORPORATION
ASSETS
Current Assets
Cash and cash equivalents $ 1,101 $ 166 $ 272 $ – $ 1,539
Receivables, less allowances 4 3,310 1,083 (38) 4,359
Spare parts, supplies and fuel, prepaid expenses
and other, less allowances 10 710 82 – 802
Deferred income taxes – 512 32 – 544
Total current assets 1,115 4,698 1,469 (38) 7,244
Property and Equipment, at Cost 24 26,658 2,623 – 29,305
Less accumulated depreciation and amortization 16 14,578 1,233 – 15,827
Net property and equipment 8 12,080 1,390 – 13,478
Intercompany Receivable 1,902 – 333 (2,235) –
Goodwill – 2,299 866 – 3,165
Investment in Subsidiaries 11,913 2,678 – (14,591) –
Pension Assets 813 1 13 – 827
Other Assets 381 744 153 (359) 919
$ 16,132 $ 22,500 $ 4,224 $ (17,223) $ 25,633
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
69
FEDEX CORPORATION
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (44) $ 3,070 $ 439 $– $ 3,465
INVESTING ACTIVITIES
Capital expenditures (1) (2,683) (263) – (2,947)
Business acquisitions, net of cash acquired – – (4) – (4)
Collection on (payment of) loan to Parent (5,971) 5,971 – – –
Proceeds from asset dispositions and other – 34 20 – 54
CASH USED IN INVESTING ACTIVITIES (5,972) 3,322 (247) – (2,897)
FINANCING ACTIVITIES
Net transfers (to) from Parent 463 (296) (167) – –
Dividend paid (to) from Parent 5,971 (5,971) – – –
Principal payments on debt (551) (85) (3) – (639)
Proceeds from stock issuances 108 – – – 108
Excess tax benefits on the exercise of stock options 38 – – – 38
Dividends paid (124) – – – (124)
Other, net – – – – –
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 5,905 (6,352) (170) – (617)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes on cash – 2 17 – 19
Net (decrease) increase in cash and cash equivalents (111) 42 39 – (30)
Cash and cash equivalents at beginning of period 1,212 124 233 – 1,569
Cash and cash equivalents at end of period $ 1,101 $ 166 $ 272 $– $ 1,539
71
FEDEX CORPORATION
Memphis, Tennessee
July 10, 2009
72
FEDEX CORPORATION
Operating Results
Revenues $ 35,497 $ 37,953 $ 35,214 $ 32,294 $ 29,363
Operating income 747 2,075 3,276 3,014 2,471
Income before income taxes 677 2,016 3,215 2,899 2,313
Net income 98 1,125 2,016 1,806 1,449
Per Share Data
Earnings per share:
Basic $ 0.31 $ 3.64 $ 6.57 $ 5.94 $ 4.81
Diluted $ 0.31 $ 3.60 $ 6.48 $ 5.83 $ 4.72
Average shares of common stock outstanding 311 309 307 304 301
Average common and common equivalent
shares outstanding 312 312 311 310 307
Cash dividends declared $ 0.44 $ 0.30 $ 0.37 $ 0.33 $ 0.29
Financial Position
Property and equipment, net $ 13,417 $ 13,478 $ 12,636 $ 10,770 $ 9,643
Total assets 24,244 25,633 24,000 22,690 20,404
Long-term debt, less current portion 1,930 1,506 2,007 1,592 2,427
Common stockholders’ investment 13,626 14,526 12,656 11,511 9,588
Other Operating Data
FedEx Express aircraft fleet 654 677 669 671 670
Average full-time equivalent employees and contractors 247,908 254,142 241,903 221,677 215,838
(1) Operating expenses include a charge of $1.2 billion ($1.1 billion, net of tax, or $3.45 per diluted share) primarily related to impairment charges associated with goodwill and aircraft. Additionally,
common stockholders’ investment includes an other comprehensive income charge of $1.2 billion, net of tax, related to the funded status of our retirement plans at May 31, 2009.
(2) Results for 2008 include a charge of $891 million ($696 million, net of tax, or $2.23 per diluted share) recorded during the fourth quarter, predominantly related to impairment charges associated
with intangible assets from the Kinko’s acquisition. See Note 4 to the accompanying consolidated financial statements. Additionally, results for 2008 and 2007 include several 2007 acquisitions, as
described in Note 3 to the accompanying financial statements.
(3) Results for 2007 include a charge of $143 million at FedEx Express associated with upfront compensation and benefits under our labor contract with our pilots. See Note 1 to the accompanying
consolidated financial statements.
(4) Results for 2006 include a 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.
(5) Results for 2005 include a charge of $48 million ($31 million, net of tax, or $0.10 per diluted share) at FedEx Express related to the Airline Stabilization Act and a $12 million, or $0.04 per diluted
share, benefit from an income-tax adjustment.
73
FEDEX CORPORATION
Board of Directors
(3) (4) (1) (3)
James L. Barksdale Gary W. Loveman
Chairman and President Chairman, President and
Barksdale Management Corporation Chief Executive Officer
Investment management company Harrah’s Entertainment, Inc.
Casino entertainment company
(1*)
John A. Edwardson
(2)
Chairman and Chief Executive Officer Susan C. Schwab
CDW Corporation Professor
Technology products and services company University of Maryland
School of Public Policy
(3*) (4)
Judith L. Estrin Former U.S. Trade Representative
Chief Executive Officer
JLABS, LLC Frederick W. Smith
Technology company Chairman, President and
Chief Executive Officer
(3)
J.R. Hyde III FedEx Corporation
Chairman
(1)
GTx, Inc. Joshua I. Smith
Biopharmaceutical company Chairman and Managing Partner
Coaching Group, LLC
(2) (4)
Shirley A. Jackson Management consulting firm
President
(2)
Rensselaer Polytechnic Institute Paul S. Walsh
Technological research university Chief Executive Officer
Diageo plc
(2)
Steven R. Loranger Beverage company
Chairman, President and (1) (4*)
Chief Executive Officer Peter S. Willmott
ITT Corporation Chairman and Chief Executive Officer
Engineering and manufacturing company Willmott Services, Inc.
Retail and consulting firm
74
FEDEX CORPORATION
G. Edmond Clark
President and Chief Executive Officer
FedEx Trade Networks
75
FEDEX CORPORATION
Corporate Information
FedEx Corporation: 942 South Shady Grove Road, Memphis, Customer Service: Call 1-800-Go-FedEx or visit fedex.com.
Tennessee 38120, (901) 818-7500, fedex.com
Media Inquiries: Global Communications, FedEx Corporation,
Annual Meeting of Shareowners: Monday, September 28, 2009, 942 South Shady Grove Road, Memphis, Tennessee 38120,
10:00 a.m. local time, The Peabody Hotel, Grand Ballroom, (901) 434-8100, e-mail: mediarelations@fedex.com
149 Union Avenue, Memphis, Tennessee 38103.
Shareowner Account Services: Computershare Investor
Stock Listing: FedEx Corporation’s common stock is listed on Services, P.O. Box 43069, Providence, Rhode Island 02940-3069,
the New York Stock Exchange under the ticker symbol FDX. (800) 446-2617, www.computershare.com
Shareowners: As of July 13, 2009, there were 18,062 shareowners Direct Stock Purchase and Dividend Reinvestment:
of record. For information on the direct stock purchase and dividend
reinvestment plan for FedEx Corporation common stock, call
Market Information: Following are high and low sale prices and Computershare at (800) 446-2617 or visit their direct stock
cash dividends paid, by quarter, for FedEx Corporation’s common purchase plan Web site at www.computershare.com. This plan
stock in 2009 and 2008: provides an alternative to traditional retail brokerage methods of
purchasing, holding and selling FedEx common stock. This plan
First Quarter Second Quarter Third Quarter Fourth Quarter also permits shareowners to automatically reinvest their divi-
dends to purchase additional shares of FedEx common stock.
FY 2009
High $ 93.69 $ 96.65 $ 76.94 $ 62.16
Investor Relations: Mickey Foster, Vice President, Investor
Low 71.33 53.90 42.37 34.02
Relations, FedEx Corporation, 942 South Shady Grove Road,
Dividend 0.11 0.11 0.11 0.11
Memphis, Tennessee 38120, (901) 818-7200, e-mail: ir@ fedex.com
FY 2008 Equal Employment Opportunity: Our greatest asset is our
High $ 119.10 $ 111.29 $101.53 $ 99.46 people. We are committed to providing a workplace where
Low 99.30 91.10 80.00 82.50 our employees and contractors feel respected, satisfied and
Strategy + Design by Unboundary, Inc., Atlanta, GA | Printing by Cenveo/ColorGraphics | Cover Photograph by Gregory Miller
Dividend 0.10 0.10 0.10 0.10 appreciated. Our policies are designed to promote fairness
and respect for everyone. We hire, evaluate and promote
Financial Information: Copies of FedEx Corporation’s Annual employees, and engage contractors, based on their skills and
Report on Form 10-K, other documents filed with the Securities performance. With this in mind, we will not tolerate certain
and Exchange Commission (SEC) and other financial and statis- behaviors. These include harassment, violence, intimidation
tical information are available through our Web site at fedex.com. and discrimination of any kind involving race, color, religion,
Company documents filed electronically with the SEC can national origin, gender, sexual orientation, gender identity, age,
also be found at the SEC’s Web site at www.sec.gov. You will disability, veteran status or, where applicable, marital status.
be mailed a copy of the Form 10-K upon request to: FedEx
Corporation Investor Relations, 942 South Shady Grove Road, Service Marks: The following are registered service marks of
Memphis, Tennessee 38120, (901) 818-7200, e-mail: Federal Express Corporation, registered with the U.S. Patent
ir@fedex.com. & Trademark Office and in other countries: FedEx®, FedEx
Express®, FedEx Ground®, FedEx Freight®, FedEx Custom
SEC and NYSE Certifications: The most recent certifications Critical®, FedEx International Priority®, FedEx International
by our principal executive and financial officers pursuant to Priority® Freight, FedEx SmartPost®, FedEx Home Delivery®,
Section 302 of the Sarbanes-Oxley Act of 2002 are filed as FedEx Trade Networks® and FedEx National LTL®. Caribbean
exhibits to our Form 10-K. We have also filed with the New York Transportation ServicesSM, FedEx OfficeSM, and FedEx Global
Stock Exchange the most recent Annual CEO Certification as Supply Chain ServicesSM are service marks of Federal Express
required by section 303A.12(a) of the NYSE Listed Company Corporation.
Manual.
This entire annual report is printed on paper certified by the Forest Stewardship Council,
which promotes environmentally appropriate, socially beneficial and economically viable
management of the world’s forests. The paper contains a mix of pulp derived from
FSC-certified well-managed forests and FSC-certified recycled paper fibers.
76
“The global economy flows
through my hands every day.”
FedEx’s network of operating companies provides the access the world needs today — and tomorrow. FedEx Express is
the world’s largest express transportation company, providing fast and reliable delivery to more than 220 countries and
territories. FedEx Ground provides low-cost, small-package shipping in the United States and Canada. FedEx Freight is a
leading North American provider of less-than-truckload (LTL) freight services. FedEx Services provides support services
for our transportation businesses, while its FedEx Office unit offers shipping and business services at more than 1,900
retail locations in eight countries.
2
FedEx Corporation Annual Report 2009
The Long Future
FedEx Corporation
942 South Shady Grove Road
Memphis, Tennessee 38120
fedex.com