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FedEx Corporation
942 south shady Grove Road
Memphis, Tennessee 38120
fedex.com
bali, indonesia JUne 24, 2008 5:13 PM
SAFE KIDS
in eMeRGinG coUnTRies a GRowinG Middle class is driving something more than an economy
— it’s driving new cars and lots of them. but many communities are unprepared for the shift from two
wheels to four. Roads often lack crosswalks and stop signs, and children grow up without learning
the basics of pedestrian safety. safe Kids worldwide is helping communities address this need
through Safe Kids Walk This Way, a program created with Fedex in 2000. at Fedex, we understand
the value of pedestrian safety, and our drivers are among the most skilled in the industry. with our
extensive networks already in place in countries like the United states, Philippines, south Korea, india,
canada and brazil, safe Kids and Fedex are working with governments to create and improve critical
infrastructure and foster behavioral changes. our volunteers are assessing environmental needs and
educating children and caregivers. Together, we helped establish the first school zone in china, and
through projects such as international walk to school day and Global Road safety week, we’re boosting
support for child pedestrian safety. There’s also an unexpected benefit: as more and more Fedex
employees give their time to safe Kids initiatives, they’re contributing to a global culture of volunteerism.
these hands do more than make jewelry.
PB
1
1
with the help of fedex,
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3
john hardy’s workshop in bali touches lives
all over the world.
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3
the skills of 800 artisans support
an international network of suppliers
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5
and thousands of retailers on three continents.
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5
when a shipment leaves hong kong
to become someone’s favorite piece of jewelry,
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artisans can provide a better future
for their families and drive an entire economy.
6
7
fedex is the link, connecting one to another
and one to many.
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financial highlights
In millions, except earnings per share
2008(1)
2007(2)
Operating Results
Revenue
Operating income
Operating margin
Net income
Diluted earnings per share
Average common and common equivalent shares
Capital expenditures
Financial Position
Total assets
Long-term debt, including current portion
Common stockholders’ investment
$37,953
2,075
5.5 %
1,125
3.60
312
2,947
$25,633
2,008
14,526
$35,214
3,276
9.3 %
2,016
6.48
311
2,882
$24,000
2,646
12,656
Percent
Change
8
(37)
(44)
(44)
0
2
7
(24)
15
ReveNue (iN biLLiONs)
OPeRATiNg mARgiN
DiLuTeD eARNiNgs PeR shARe
2004
2005
2006
2007
2008
2004
2005
2006
2007(2) 2008(1)
2004
2005
2006
2007(2) 2008(1)
$24.7 $29.4 $32.3 $35.2 $38.0
5.8% 8.4%
9.3% 9.3% 5.5%
$2.76 $4.72 $5.83 $6.48 $3.60
ReTuRN ON AveRAge equiTy
DebT TO TOTAL CAPiTALizATiON
sTOCk PRiCe (mAy 31 CLOse)
2004
2005
2006
2007(2) 2008(1)
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
10.9% 16.4% 17.1% 16.7% 8.3%
30.9% 22.6% 17.5% 17.3% 12.1%
$73.58 $89.42 $109.27 $111.62 $91.71
(1) Results for 2008 include a charge of approximately $891 million ($696 million, net of tax, or $2.23 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.
(2) Results for 2007 include a $143 million charge associated with upfront compensation and benefits under the new pilot labor contract.
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messAge FROm The ChAiRmAN
to our shareowners:
At its core, Fedex is an extraordinary collection of
unprecedented networks. These networks connect
individuals and businesses to new ideas, customers
and markets around the world. As the reach and
influence of our networks expand, people’s lives
improve, communities grow and the global
marketplace thrives.
And the more we connect, the better they do.
simply put, Fedex networks make new opportunities
possible. Let’s take a closer look at our powerful
Fedex networks.
Fedex express has built, by far, the largest intercontinental
air express network. it connects, door-to-door, more
than 90 percent of the world’s economic activity in one
to three business days. it augments the highest service
levels in the industry with a broad array of complementary
services, including Fedex Trade Networks and new
domestic express networks within the u.k., China and
india. Through the Fedex express network, we give
customers around the world more choices, more flexibility
and more access than ever before.
The Fedex ground network now offers the fastest
origin-to-destination lanes in the ground parcel business
nationally, in both the commercial and home delivery
sectors. in fact, in the last five years, Fedex ground
has reduced its transit times by at least a day in more
than half of its lanes. And Fedex smartPost is now the
industry leader for low-weight packages delivered by
the u.s. Postal service.
The Fedex Freight network offers compelling value in
its service levels, information capabilities, and delivery
options in the regional and long-haul sectors of the less-
than-truckload freight market. Fedex Custom Critical
expands the freight capabilities we offer our customers
through its expedited and special-handling services.
capabilities. We are leading the way in tracking
deliveries, pinpointing packages, and communicating
key information to our customers. Likewise, our Fedex
Office retail network and Fedex global supply Chain
services offerings complement our core transportation
networks with an array of business services for everyone
from the occasional package shipper to the most
sophisticated global corporate customer.
With these networks, no one is better positioned to
offer more services to more people locally, nationally
and globally. No one.
Coming off a record fiscal 2007, we planned an aggressive
fiscal 2008 despite the challenges of high fuel prices.
We initiated new domestic express services in China,
re-engineered the Watkins acquisition into Fedex
National LTL, built new “smaller footprint” Fedex Office
centers, added Fedex ground hub capacity, and initiated
additional expressfreighter intercontinental routes.
We managed various challenges to Fedex ground’s
independent contractor business model while continuing
to improve service levels and the customer experience
in every respect. At the same time, we converted the
California owner-operator system to multiple-route
contractors. We also offered new incentives throughout
the united states to our Fedex ground contractors
to encourage them to expand their businesses and to
reinforce the outstanding entrepreneurial spirit of these
important members of our Fedex ground team.
We did all this with the expectation of meeting our
earnings growth target of 10 to 15 percent. During
Fy08, however, the headwinds of rapidly rising oil
prices (which nearly doubled over the 12 months) and
economic problems in the financial services, housing
and automotive sectors put our earnings goal out of
reach for Fy08. Despite these multiple challenges, we
ended the fiscal year with substantial cash flow, well-
funded pension plans and a very strong balance sheet.
in our Fedex services group, our advanced technology
capabilities have no peer. Over the past 30 years, we have
revolutionized the entire logistics industry’s information
Our strategic planning has put us in a strong position
moving forward. As we closed out the fiscal year,
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messAge FROm The ChAiRmAN
Fedex National LTL was rapidly gaining market share;
our new China domestic express service had grown by
leaps and bounds; and the customer experience at our
retail locations had improved greatly. Our competitive
positions across the board had grown stronger.
With the decision to rebrand to Fedex Office and
prudently reduce the ramp-up of new locations, given
challenges in the u.s. economy, we took a noncash
charge in the fourth fiscal quarter at Fedex services for
the kinko’s trade name and lower goodwill valuation.
entering Fy09, we are initiating several major cost-
savings measures in light of the challenging economic
environment. We are also redoubling our sales and
marketing efforts to produce acceptable returns and
cash flows, as we adjust for the new realities of high fuel
prices and modest u.s. economic growth. Our plan is
to execute on these tough measures in the current fiscal
year in order to resume our earnings growth trajectory in
Fy10. After all, we know how to do this — we’ve survived
three previous oil crises. The first, in 1973, almost
smothered Fedex in its infancy. We went through it again
in 1979 and 1990–91. in addition, we weathered other
“meltdowns” in 1987, post dot-com and after 9/11.
Also in Fy09, we are initiating a corporate-wide
re-invigoration of the renowned Fedex quality manage-
ment system. Combining the best practices of all of
our operating companies’ systems and state-of-the-art
methodologies adopted from other high-performance
organizations, our new quality Driven management
initiative will further solidify our relationship with
our customers.
Our biggest advantage is our team of Fedex people —
290,000 strong worldwide. They are completely
committed to keeping our Purple Promise — “i will make
every Fedex experience outstanding!” in turn, Fedex is
committed to our team members. i want to express my
great appreciation to our team members. you play an
essential role in the success of our company.
The connection between how we treat our customers
and how we treat our team members is unshakable. it’s
why we are consistently regarded as one of the best
places to work. For example, in the past fiscal year, we’ve
made FORTUNE’s “most Admired” and “best Places
to Work” lists. We’ve ranked number one in customer
service in our industry on the university of michigan’s
customer service index. And we took first place in
our industry on Institutional Investor’s list of “most
shareholder-Friendly Companies.” These accolades are
not only a source of pride for all of us but essential to
achieving our corporate mission of producing superior
shareowner returns.
Furthermore, we continue to support our communities
and our environment. Respect for people motivates us
to continue delivering supplies to disaster-torn countries
and to continue supporting programs such as safe kids
Worldwide. Respect for the planet — our commitment
to a cleaner, healthier world — drives us toward the
energy-efficiency programs you’ll find described later
in this report.
As we have in the past, we will effectively manage
through these turbulent economic times and emerge
“on the other side” as a stronger company and one that is
positioned to take full advantage of future opportunities.
if past is prologue, our future is limitless.
sincerely,
Frederick W. smith
Chairman, President and Chief executive Officer
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john hardy company
WheN bALiNese ARTisANs CRAFT a John hardy bracelet, they celebrate a culture, protect
an environment and, with the support of Fedex, reach halfway around the world to create
meaningful connections. From early sketches to final gem work, handcrafted pieces often take
up to two years to reach consumers. yet with the help of Fedex express and Fedex ground,
John hardy Company owners Damien Dernoncourt and guy bedarida are able to tap into the
individual strengths of each country in which they operate. Artisans and designers collaborate in
bali and bangkok. Distribution headquarters in hong kong align with sales and marketing in New
york. And major retailers enable thousands of customers around the world to fall in love with
wearable works of art. As a result, John hardy runs a global business that incorporates balinese
culture into everyday practices and replenishes local resources with its own sustainable bamboo
reforestation program. And the more than 800 people employed by John hardy in bali have the
means to build better futures for their families and communities.
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neiman marcus
WheN A NeimAN mARCus CusTOmeR ReCeives a handcrafted necklace made halfway around
the world, something greater than a transaction occurs. A global connection is made. The ability
of Neiman marcus to bring new markets right to people’s homes is, in part, the result of a 20-year
relationship with Fedex. by increasing speed and efficiency, Fedex customized services save
Neiman marcus significant time and cost, while also ensuring the highest level of service for
its customers. As its primary freight provider, Fedex Freight has been able to cut an entire day
out of Neiman marcus’ less-than-truckload supply chain. Fedex has also contributed to Neiman
marcus Direct’s first entry into Canada by providing greater transparency for online and catalog
customers. by revealing unexpected costs due to tariffs and customs, Fedex Trade Networks has
alleviated customer concerns about international purchases and paved the way for future Neiman
marcus expansion.
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cree
WhO kNeW FLiPPiNg A sWiTCh could illuminate a whole new world? With the help of Fedex,
Cree is leading a revolution with LeD lighting technology. From the tiniest applications, like cell
phone backlighting, to the 440,000 LeDs in the beijing National Aquatics Center, Cree’s technology
can be found almost anywhere. With products that use less energy and produce less heat than
traditional technologies — and can last an average of 20 years — Cree is working to bring energy-
efficient lighting to the world. An effort this big relies on a speedy and precise delivery system
that threads together multiple operations in multiple countries. From North America to Asia, Fedex
team members across our operating companies collaborate to provide flexible logistics solutions.
And by helping Cree bring groundbreaking technology to the world, Fedex is playing a role in
implementing sustainable practices for the future.
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amo
NeW TeChNOLOgies ThAT heLP ADDRess visiON issues require a logistics provider that not
only offers speed but also maintains the integrity of the technology. This is why Advanced medical
Optics (AmO) relies on the efficiency and flexibility of Fedex. helping people at every stage of life,
AmO’s products, including eye care, cataract and LAsik equipment, are in greater demand every
year. but with this comes a need for a more robust supply chain, and when AmO realized its logistics
operation in southern California was struggling to meet increasing demand, they relocated it to
the Fedex global Distribution Center in memphis. This move shortened inbound logistics from
manufacturing divisions in europe and Puerto Rico and placed products significantly closer to
surgical customers, enabling AmO to extend the deadline for orders by four hours.
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energy efficiency
CONNeCTiNg gOODs AND seRviCes ON A gLObAL sCALe is an energy-intensive operation. but
to improve our costs and lower our environmental impact, Fedex is constantly seeking to maximize
fuel efficiency across our networks. Focused on this challenge, we embraced hybrid technology in
2004 and quickly became operators of the largest hybrid commercial vehicle fleet in North America.
Recently logging more than 2 million miles of service, our fleet provides us with 42 percent better
fuel economy than conventional diesel vehicles and emits 30 percent fewer greenhouse gases.
We recognize that this is a continuing challenge and advocate for greater government incentives
to offset the high costs of developing and adopting alternative energy technologies. We are also
minimizing emissions from aircraft through the use of cost-effective operations and innovations,
and upgrading our fleet with more fuel-efficient planes. And we’re harnessing renewable solar and
geothermal energy sources in our buildings and operations.
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redoctane
OPeN A PACkAge FROm ReDOCTANe and what appears to be a toy guitar and software is in
reality a cultural phenomenon. in just over three years, RedOctane’s video game guitar hero has
gone from a niche at-home experience to a wildly popular social outlet. From guitar hero nights
at pubs to competitions held at international music festivals, the game is harnessing the global
power of rock ’n’ roll. The company took a risk in creating a game requiring special hardware,
which most video game companies avoid because of the logistical complexity of aligning design
and manufacturing. but by using Fedex international Priority shipping, RedOctane has been able
to bridge the distances among its multiple hardware and software divisions in California and
China, creating a seamless flow of ideas, designs and prototypes. The result is that RedOctane
can produce a new version of guitar hero every year, instead of every two or three, and continue
to captivate the legions of fans that camp out at midnight on the eve of global release dates.
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messAge FROm The ChieF FiNANCiAL OFFiCeR
to our shareowners:
Fiscal year 2008 results clearly reflect the pressure of
rapidly rising fuel prices and a weakening economy.
Despite these challenges, the strength of the Fedex
portfolio and our global reach allowed us to achieve
solid earnings and cash flow from operations. volume
growth at Fedex ground, together with advances in
Fedex international Priority service, mitigated some of
the negative economic factors and provided tangible
evidence that our global strategy remains sound.
The headwinds of Fy08 are continuing into Fy09. even so,
Fedex has the flexibility, networks and leadership to manage
through difficult business cycles. in Fy08, we reduced capital
expenditures as a percentage of revenue and will reduce
that measure again this year. We also announced changes
at Fedex Freight and Fedex Office that will streamline their
structures, improve the customer experience and lower
costs. Across our portfolio, we are taking measures to
reduce our expenses to align with revenue and volume
expectations. history bears out that proactive companies
and management teams will weather difficult economic
times and come out on the other side stronger and better
positioned for long-term growth and profitability. At Fedex,
we are committed to remaining focused and proactive.
it from a position of strength. Fedex is truly a leader on
the global business stage. We are, and intend to remain,
cash-flow positive. Our balance sheet remains strong
and our primary pension plans are well funded. i joined
Fedex 28 years ago and today Fedex is stronger and
better positioned than in any prior period. Our executive
team shares this experience and the commitment to
you that i have outlined. First and foremost, we will
continue to do what is right for our customers every
day, a commitment from which high oil prices or
weakened economies cannot and must not sway us.
Thank you for your continued commitment as a Fedex
shareowner. We remain committed to you and to achieving
our long-term financial goals of earnings growth and
improved margins, cash flows and returns on capital.
One point that i ask you to keep in mind — even though
Fy09 is expected to be a most challenging year, we enter
Alan b. graf, Jr.
executive vice President and Chief Financial Officer
comparison of five-year cumulative total return*
$225 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$200 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$175 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$150 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$125 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$100 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2003
2004
2005
2006
2007
2008
Fedex Corporation
Dow Jones Transportation Average
s&P 500
* 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, 2003, and assumes reinvestment of dividends. Fiscal year ended may 31.
24
PB
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OvERvIEw OF FINANCIAL SECTION
The financial section of the FedEx Corporation (“FedEx”) Annual
Report consists of the following Management’s Discussion
and Analysis of Results of Operations and Financial Condition
(“MD&A”), the Consolidated Financial Statements and the notes
to the Consolidated Financial Statements, and Other Financial
Information, all of which include information about our signifi-
cant accounting policies, practices and the transactions that
underlie our financial results. The following MD&A describes
the principal factors affecting the results of operations, liquidity,
capital resources, contractual cash obligations and the critical
accounting estimates of FedEx. The discussion in the financial
section should be read in conjunction with the other sections
of this Annual Report and our detailed discussion of risk factors
included in this MD&A.
ORGANIZATION OF INFORMATION
Our MD&A is comprised of three major sections: Results of
Operations, Financial Condition and Critical Accounting Estimates.
These sections include the following information:
• Results of Operations includes an overview of our consolidated
2008 results compared to 2007, and 2007 results compared to
2006. This section also includes a discussion of key actions and
events that impacted our results, as well as a discussion of our
outlook for 2009.
• The overview is followed by a financial summary and analysis
(including a discussion of both historical operating results and
our outlook for 2009) for each of our reportable transportation
segments.
• Our financial condition is reviewed through an analysis of key
elements of our liquidity, capital resources and contractual cash
obligations, including a discussion of our cash flow statements
and our financial commitments.
• We conclude with a discussion of the critical accounting esti-
mates that we believe are important to understanding certain
of the material judgments and assumptions incorporated in our
reported financial results.
DESCRIPTION OF BUSINESS
We provide a broad portfolio of transportation, e-commerce and
business services through companies competing collectively,
operating independently and managed collaboratively, under the
respected FedEx brand. Our primary operating companies include
Federal Express Corporation (“FedEx Express”), the world’s largest
express transportation company; FedEx Ground Package System,
Inc. (“FedEx Ground”), a leading provider of small-package ground
delivery services; and FedEx Freight Corporation, a leading U.S.
provider of less-than-truckload (“LTL”) freight services. Our FedEx
Services segment provides customer-facing sales, marketing
and information technology support, as well as retail access for
customers through FedEx Office and Print Services, Inc. (“FedEx
Office”), formerly FedEx Kinko’s, primarily for the benefit of FedEx
Express and FedEx Ground. These companies represent our major
service lines and form the core of our reportable segments. See
“Reportable Segments” for further discussion.
The key indicators necessary to understand our operating results
include:
• the overall customer demand for our various services;
• the volumes of transportation services provided through our
networks, primarily measured by our average daily volume and
shipment weight;
• the mix of services purchased by our customers;
• the prices we obtain for our services, primarily measured by
yield (average price per shipment or pound or average price
per hundredweight for FedEx Freight LTL Group shipments);
• our ability to manage our cost structure (capital expenditures
and operating expenses) to match shifting volume levels; and
• the timing and amount of fluctuations in fuel prices and our
ability to recover incremental fuel costs through our fuel
surcharges.
The majority of our operating expenses are directly impacted by
revenue and volume levels. Accordingly, we expect these operat-
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, 2008 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.
25
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:
Revenues
Operating income
Operating margin
Net income
Diluted earnings per share
2008 (1)
2007 (2)
2006 (3)
2008/2007
2007/2006
Percent Change
$ 37,953
2,075
5.5%
$ 1,125
$ 3.60
$ 35,214
3,276
9.3%
$ 2,016
6.48
$
$ 32,294
3,014
9.3%
$ 1,806
$ 5.83
8
(37)
(380)bp
(44)
(44)
9
9
–bp
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11
(1) Operating expenses include a charge of approximately $891 million ($696 million, net of tax, or $2.23 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 (described below).
(2) Operating expenses include a $143 million charge at FedEx Express associated with upfront compensation and benefits under the new labor contract with our pilots, which was ratified in October
2006. The impact of this new contract on second quarter net income was approximately $78 million net of tax, or $0.25 per diluted share.
(3) Operating expenses include a $79 million ($49 million, net of tax, or $0.16 per diluted share) charge to adjust the accounting for certain facility leases, predominantly at FedEx Express.
The following table shows changes in revenues and operating income by reportable segment for 2008 compared to 2007, and 2007
compared to 2006 (in millions):
FedEx Express segment (1)
FedEx Ground segment
FedEx Freight segment (2)
FedEx Services segment (3)
Other and Eliminations
Revenues
Operating Income
Dollar Change
Percent Change
Dollar Change
Percent Change
2008/2007
2007/2006
2008/2007
2007/2006
2008/2007
2007/2006
2008/2007
2007/2006
$ 1,740
708
348
2
(59)
$ 2,739
$ 1,235
737
941
48
(41)
$ 2,920
8
12
8
–
NM
8
6
14
26
2
NM
9
$
(90)
(86)
(134)
(891)
–
$ (1,201)
$ 178
106
(22)
–
–
$ 262
(5)
(10)
(29)
NM
–
(37)
10
15
(5)
–
–
9
(1) FedEx Express 2007 operating expenses include a $143 million charge associated with upfront compensation and benefits under the new pilot labor contract and 2006 operating expenses include
a $75 million charge to adjust the accounting for certain facility leases.
(2) 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 operating expenses include a charge of approximately $891 million, 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 (described below).
The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected volume statistics (in thousands)
for the years ended May 31:
Average Daily Package Volume
FedEx Express and FedEx Ground
(1)
Average Daily LTL Shipments
FedEx Freight LTL Group
3,800
3,600
3,400
3,200
3,000
2,800
2,600
2,400
3,255
3,329
3,536
3,365
3,399
3,126
2,815
2,609
2005
2006
2007
2008
85.0
80.0
75.0
70.0
65.0
60.0
78.2
79.7
66.7
63.4
2005
2006
2007
2008
FedEx Express
FedEx Ground
FedEx Freight LTL Group
(1) Package statistics do not include the operations of FedEx SmartPost.
26
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:
FedEx Express
Revenue per Package – Yield
$22.08
$21.28
$20.72
$19.31
2005
2006
2007
2008
$23.00
$22.00
$21.00
$20.00
$19.00
FedEx Ground
Revenue per Package – Yield
(1)
$7.48
$7.21
$7.02
$6.68
2005
2006
2007
2008
$7.75
$7.50
$7.25
$7.00
$6.75
$6.50
FedEx Express
FedEx Ground
$21.00
$20.00
$19.00
$18.00
$17.00
$16.00
$15.00
FedEx Freight LTL Group
LTL Revenue per Hundredweight – Yield
$19.65
$18.65
$16.84
$15.48
2005
2006
2007
2008
FedEx Freight LTL Group
(1) Package statistics do not include the operations of FedEx SmartPost.
The following graphs for our transportation segments show our average cost of jet and vehicle fuel per gallon and the year-over-year
percentage increase in total fuel expense for the years ended May 31:
Average Fuel Cost
per Gallon
$2.56
$2.04
$2.65
$2.12
$3.31
$2.77
$1.97
$1.52
2005
2006
2007
2008
$3.75
$3.25
$2.75
$2.25
$1.75
$1.25
Year-Over-Year Percentage Increase in
Total Fuel Expense
41%
30%
9%
2005/2006
2006/2007
2007/2008
45%
30%
15%
0%
Vehicle
Jet
Fuel Expense
27
FEDEX CORPORATION
Overview
Our results for 2008 reflect a difficult year, as the combination of
record high fuel prices and the weak U.S. economy significantly
impacted our profitability. We believe persistently higher fuel
prices and the related impact on our fuel surcharges are reduc-
ing demand for our services, particularly U.S. domestic express
package and LTL freight services, and are pressuring overall yield
growth across our transportation segments. Also, these factors
are affecting our ability to cover inflation in our overall operating
costs and contributing to a customer shift to lower-yielding ser-
vices. Increased net operating costs at FedEx Office associated
with reduced copy and print revenue and higher expenses for
store expansion and service improvement activities also con-
tributed to the decline in operating results for 2008. Significantly
lower variable incentive compensation (lower by approximately
$220 million) and reduced retirement plans costs (reduced by
$82 million) combined with cost containment initiatives, partially
mitigated the impact of higher net fuel costs and the weak U.S.
economy on our 2008 overall results.
In addition, our operating results for 2008 include a fourth quarter
charge of approximately $891 million ($696 million, net of tax, or
$2.23 per diluted share), predominantly related to noncash impair-
ment charges associated with the decision to minimize the use
of the Kinko’s trade name and goodwill resulting from the Kinko’s
acquisition (described below).
Revenue
Revenue growth for 2008 was primarily attributable to continued
growth in international services at FedEx Express, increases in
FedEx Express U.S. domestic package yields and volume growth
at FedEx Ground. Higher fuel surcharges continue to be the
key driver of increased yields in our transportation segments.
Additionally, FedEx Express international yields benefited from
favorable currency exchange rates. Revenue growth for 2008
also improved due to a full year of operations for businesses
acquired in 2007 at FedEx Express and FedEx Freight. Revenue
growth during 2008 was partially offset by reduced U.S. domestic
express volumes as a result of the ongoing weak U.S. economy.
The impact of the weak U.S. economy became progressively
worse during the year and drove U.S. domestic express shipping
volumes to pre-2000 levels during the fourth quarter of 2008.
Revenue growth in 2007 was due to FedEx Ground package vol-
ume growth and growth in FedEx Express International Priority
(“IP”) services. Our 2007 revenues also reflected the acquisi-
tion of FedEx National LTL (formerly known as Watkins Motor
Lines), which added approximately $760 million to 2007 revenue.
Revenue growth in 2007 was slightly offset by declines in copy
revenues at FedEx Office.
Operating Income
The following table compares operating expenses and operating
income as a percent of revenue for the years ended May 31:
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Impairment charges
Other
Total operating expenses
Operating income (margin)
Percent of Revenue
2007
2008
2006
37.4%
11.7
6.4
5.1
12.1
5.5
2.3
14.0
94.5
5.5%
39.0%
11.0
6.7
5.0
10.0
5.5
–
13.5
90.7
9.3%
38.9%
10.1
7.4
4.8
10.1
5.5
–
13.9
90.7
9.3%
Operating income and operating margin declined during 2008,
as the weak U.S. economy and substantially higher fuel costs
pressured volume growth at FedEx Express and FedEx Freight.
The noncash impairment charges at FedEx Office also negatively
affected operating margins in 2008. Fuel expenses increased
approximately 30% during 2008, primarily due to an increase
in the average price per gallon of fuel. Fuel surcharges were
not sufficient to offset incremental fuel costs for 2008, based
on a static analysis of the impact to operating income of year-
over-year changes in fuel prices compared to changes in fuel
surcharges. This analysis considers the estimated benefits of the
reduction in fuel surcharges included in the base rates charged
for FedEx Express services. However, this analysis does not con-
sider several other factors including the sensitivity of demand to
changes in price and shifts by our customers to lower-yielding
services. Though fluctuations in fuel surcharge rates can be
significant from period to period, fuel surcharges represent one
of the many individual components of our pricing structure that
impact our overall revenue and yield. Additional components
include the mix of services purchased, the base price and other
extra service charges we obtain for these services and the level
of pricing discounts offered. In order to provide information about
the impact of fuel surcharges on the trend in revenue and yield
growth, we have included the comparative fuel surcharge rates
in effect for 2008, 2007 and 2006 in the accompanying discussions
of each of our transportation segments.
Operating income in 2008 was also negatively impacted by
increased net operating costs at FedEx Office and 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, includ-
ing 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.
28
MANAGEMENT’S DISCUSSION AND ANALYSIS
Operating income increased in 2007, as revenue growth at FedEx
Express and FedEx Ground more than offset reduced profitability
at the FedEx Freight segment and increased net operating costs
at FedEx Office. Operating margin was flat in 2007 due to slower
economic growth, the negative impact of higher salaries and
benefits (primarily as a result of the new labor contract with our
pilots) and the timing of adjustments to our fuel surcharges at
FedEx Express, as well as operating losses at FedEx National
LTL. Soft volumes in the LTL sector and expenses to integrate
the FedEx National LTL network negatively impacted the perfor-
mance of the FedEx Freight segment in 2007.
Salaries and employee benefits increased in 2007 as a result of
the new labor contract for the pilots of FedEx Express and the
FedEx National LTL acquisition. The impacts of expensing stock
options commencing in 2007 and higher retirement plan costs
were largely offset by lower incentive compensation. Purchased
transportation costs increased in 2007 due to FedEx Ground vol-
ume growth, the FedEx National LTL acquisition and IP package
volume growth.
Impairment Charges
Our operating results for 2008 include a charge of approximately
$891 million ($696 million, net of tax, or $2.23 per diluted share)
recorded during the fourth quarter, predominantly related to
noncash impairment charges associated with the decision to
minimize the use of the Kinko’s trade name and goodwill result-
ing from the Kinko’s acquisition.
The components of the charge include the following (in millions):
Trade name
Goodwill
Other
$ 515
367
9
$ 891
During the fourth quarter we decided to change the name of
FedEx Kinko’s to FedEx Office. The impairment of the Kinko’s trade
name was due to the decision to minimize the use of the Kinko’s
trade name and rebrand our centers over the next several years.
Business Acquisitions
During 2007, we made the following business acquisitions:
We believe the FedEx Office name better describes the wide
range of services available at our retail centers and takes full
advantage of the FedEx brand. The goodwill impairment charge
was related to the impairment of our recorded goodwill, reflecting
a decline in its current fair value in light of economic conditions,
the unit’s recent and forecasted financial performance and the
decision to reduce the rate of store expansion. These impairment
charges are included in operating expenses in the accompanying
consolidated statements of income. The charges are included in
the results of the FedEx Services segment and were not allocated
to our transportation segments, as the charges were unrelated
to the core performance of these businesses.
For additional information concerning the trade name and
goodwill impairment charges, see Note 4 to the accompanying
consolidated financial statements and the Critical Accounting
Estimates section of this MD&A.
Other Income and Expense
Net interest expense decreased $1 million during 2008 primarily
due to decreased interest expense related to lower debt balances
and increased capitalized interest. The decrease in interest
expense was partially offset by decreased interest income due to
lower cash balances. Net interest expense decreased $51 million
during 2007 primarily due to increased interest income earned on
higher cash balances.
Income Taxes
Our effective tax rate was 44.2% in 2008, 37.3% in 2007 and 37.7%
in 2006. Our 2008 tax rate increased primarily as a result of the
goodwill impairment charge, which is not deductible for income
tax purposes. Our 2007 tax rate was favorably impacted by the
conclusion of various state and federal tax audits and appeals.
This favorable impact was partially offset by tax charges incurred
as a result of a reorganization in Asia associated with our acquisi-
tion in China (described below). For 2009, we expect our effective
tax rate to be approximately 38%. The actual rate, however, will
depend on a number of factors, including the amount and source
of operating income.
Segment
Business Acquired
Rebranded
Date Acquired
Total Purchase Price
(in millions)
FedEx Freight
FedEx Express
FedEx Express
Watkins Motor Lines
ANC Holdings Ltd.
Tianjin Datian W. Group Co., Ltd. (“DTW Group”)
FedEx National LTL
FedEx U.K.
N/A
September 3, 2006
December 16, 2006
March 1, 2007
$787
241
427
Our acquisition of FedEx National LTL extended our service offerings to the long-haul LTL freight sector. The acquisition of FedEx U.K.
has allowed us to establish a domestic service in the United Kingdom and better serve the U.K. international market, while the DTW
Group acquisition converted our joint venture with DTW Group into a wholly owned subsidiary and has increased our presence in
China in the international market and established our presence in the domestic market. During 2007, we also made other immaterial
acquisitions that are not presented in the table above.
We paid the purchase price for these acquisitions from available cash balances, which included the net proceeds from our $1 billion
senior unsecured debt offering completed during 2007. See Note 6 of the accompanying consolidated financial statements for further
discussion of this debt offering.
See Note 3 of the accompanying consolidated financial statements for further information about these acquisitions.
29
FEDEX CORPORATION
Employees Under Collective Bargaining Arrangements
The pilots of FedEx Express, who represent a small percentage of
our total employees, are employed under a collective bargaining
agreement. During the second quarter of 2007, the pilots ratified a
new four-year labor contract that included signing bonuses and
other upfront compensation of approximately $143 million, as well
as pay increases and other benefit enhancements. These costs
were partially mitigated by reductions in the variable incentive
compensation of our other employees. The effect of this new
agreement on second quarter 2007 net income was approxi-
mately $78 million net of tax, or $0.25 per diluted share.
Lease Accounting Charge
Our results for 2006 included a noncash charge of $79 million
($49 million net of tax, or $0.16 per diluted share) to adjust the
accounting for certain facility leases, predominantly at FedEx
Express. This charge, which included the impact on prior years,
related primarily to rent escalations in on-airport facility leases
that were not being recognized appropriately.
Outlook
Our comparisons to 2008 and expectations for 2009 below exclude
the impact of the noncash impairment charges described above.
We anticipate the difficult economic environment that impacted
our profitability in 2008 will continue in 2009, as we expect no
significant improvement in the U.S. economy, at least for the near
term. In fact, the negative consequences of record oil prices on
global growth will likely amplify in coming quarters. Therefore,
we expect nominal base revenue growth in 2009, as these factors
will continue to pressure yields and volumes in both package and
freight services, especially in our U.S. domestic services at FedEx
Express. Persistently high energy costs will continue to dampen
our growth potential throughout 2009 despite our continued
cost containment initiatives and reductions in variable incentive
compensation. These factors, combined with higher purchased
transportation costs at FedEx Ground, are expected to result in
reduced earnings in 2009. We will continue to have cost contain-
ment initiatives in place across all segments in 2009, including
controlling discretionary spending and limiting staffing additions.
If the economic downturn becomes even more pronounced, addi-
tional actions will be taken to control costs. 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.
In light of current economic conditions, we significantly reduced
our capital expenditures for 2008 from an initial budget of
$3.5 billion to $2.9 billion in actual expenditures. Our capital
expenditures for 2009 are expected to approximate 2008 levels,
as we balance the need to control spending with the opportunity
to make investments with high returns, such as in substantially
more fuel-efficient Boeing 757 and Boeing 777 aircraft. Moreover,
we will continue to invest in critical long-term strategic projects
focused on expanding our global networks and broadening our
service offerings to position us for stronger growth in better eco-
nomic times. However, we could significantly reduce 2009 capital
expenditures should conditions worsen. For additional details on
key 2009 capital projects, refer to the Liquidity Outlook section
of this MD&A.
All of our businesses operate in a competitive pricing environment,
exacerbated by continuing volatile fuel prices. Historically, our
fuel surcharges have largely been sufficient to offset incremental
fuel costs; however, volatility in fuel costs, as seen in the rapidly
rising price of oil in 2008, may impact earnings because adjust-
ments to our fuel surcharges lag changes in actual fuel prices
paid. Therefore, the trailing impact of adjustments to our fuel sur-
charges can significantly affect our earnings in the short-term.
As described in Note 17 of the accompanying consolidated
financial statements and the “Independent Contractor Matters”
section of our FedEx Ground segment MD&A, we are involved
in a number of litigation matters and other proceedings that
challenge the status of FedEx Ground’s owner-operators as
independent contractors. FedEx Ground anticipates continuing
changes to its relationships with its contractors. The nature, tim-
ing and amount of any changes are dependent on the outcome
of numerous future events. We cannot reasonably estimate the
potential impact of any such changes or a meaningful range of
potential outcomes, although they could be material. However,
we do not believe that any such changes will impair our ability to
operate and profitably grow our FedEx Ground business.
See “Risk Factors” for a discussion of these and other poten-
tial risks and uncertainties that could materially affect our
future performance.
Seasonality of Business
Our businesses are seasonal in nature. Seasonal fluctuations
affect volumes, revenues and earnings. Historically, the U.S.
express package business experiences an increase in volumes
in late November and December. International business, particu-
larly in the Asia-to-U.S. market, peaks in October and November
in advance of the U.S. holiday sales season. Our first and third
fiscal quarters, because they are summer vacation and post
winter-holiday seasons, have historically experienced lower vol-
umes relative to other periods. Normally, the fall is the busiest
shipping period for FedEx Ground, while late December, June
and July are the slowest periods. For the FedEx Freight LTL Group,
the spring and fall are the busiest periods and the latter part
of December, January and February are the slowest periods.
For FedEx Office, the summer months are normally the slowest
periods. Shipment levels, operating costs and earnings for each
of our companies can also be adversely affected by inclement
weather, particularly in our third fiscal quarter.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting rules and disclosure requirements can sig-
nificantly impact our reported results and the comparability
of our financial statements. We believe the following new
accounting pronouncements are relevant to the readers of our
financial statements.
On June 1, 2007, we adopted Financial Accounting Standards
Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes.” This interpretation establishes new
standards for the financial statement recognition, measurement
and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. The cumulative effect of adopting
30
MANAGEMENT’S DISCUSSION AND ANALYSIS
FIN 48 was immaterial. For additional information on the impact
of adoption of FIN 48, refer to Note 11 to the accompanying con-
solidated financial statements.
On May 31, 2007, we adopted Statement of Financial Accounting
Standards (“SFAS”) 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.” SFAS 158
requires recognition in the balance sheet of the funded status of
defined benefit pension and other postretirement benefit plans,
and the recognition in accumulated other comprehensive income
(“AOCI”) of unrecognized gains or losses and prior service costs
or credits. The funded status is measured as the difference
between the fair value of the plan’s assets and the projected
benefit obligation (“PBO”) of the plan. The adoption of SFAS 158
resulted in a $982 million charge to shareholders’ equity at May
31, 2007 through AOCI. At May 31, 2008, under the provisions of
SFAS 158, we recorded an increase to equity of $469 million (net
of tax) based on a $1 billion improvement in the funded status of
our retirement plans since May 31, 2007.
Additionally, SFAS 158 requires the measurement date for plan
assets and liabilities to coincide with the sponsor’s year end.
We currently use a February 28 (February 29 in 2008) measure-
ment date for our plans; therefore, this standard will require us
to change our measurement date to May 31 (beginning in 2009).
We are required to make our transition election in the first quar-
ter of 2009 and plan to elect the two-measurement approach as
our transition method. Under the two-measurement approach,
we complete two actuarial measurements, one at February 29,
2008 and the other at June 1, 2008. For the transition period from
February 29, 2008 through June 1, 2008, we will record the net
periodic benefit cost, net of tax, as an adjustment to beginning
retained earnings and the actuarial gains and losses, net of tax,
as an adjustment to AOCI in the first quarter of 2009. The impact
of adopting the measurement date provision on our financial
statements is not expected to be material to our financial posi-
tion or results of operations, but will reduce our 2009 pension and
retiree medical expense by approximately $87 million under the
two-measurement approach due to an increase in the discount
rate and higher plan assets.
For additional information on the adoption of SFAS 158 and these
changes, see Note 12 to the accompanying consolidated finan-
cial statements and the Critical Accounting Estimates section of
this MD&A.
In September 2006, the FASB issued SFAS 157, “Fair Value
Measurements,” which provides a common definition of fair
value, establishes a uniform framework for measuring fair
value and requires expanded disclosures about fair value mea-
surements. The requirements of SFAS 157 are to be applied
prospectively, and we anticipate that the primary impact of the
standard to us will be related to the measurement of fair value
in our recurring impairment test calculations (such as mea-
surements of our recorded goodwill). SFAS 157 is effective for
us beginning on June 1, 2008; however, the FASB approved a
one-year deferral of the adoption of the standard as it relates to
non-financial assets and liabilities with the issuance in February
2008 of FASB Staff Position FAS 157-2, “Effective Date of FASB
Statement No. 157.” We do not presently hold any financial assets
or liabilities that would require recognition under SFAS 157 other
than investments held by our pension plans. In addition, the FASB
has excluded leases from the scope of SFAS 157. We anticipate
that this standard will not have a material impact on our financial
condition or results of operations upon adoption.
In December 2007, the FASB issued SFAS 141R, “Business
Combinations,” and SFAS 160, “Accounting and Reporting
Noncontrolling Interest in Consolidated Financial Statements,
an amendment of ARB No. 51.” These new standards significantly
change the accounting for and reporting of business combination
transactions and noncontrolling interests (previously referred
to as minority interests) in consolidated financial statements.
The key aspects of SFAS 141R and SFAS 160 include requiring
the acquiring entity in a business combination to recognize the
full fair value of assets acquired and liabilities assumed in
the transaction; establishing the acquisition-date fair value as
the measurement objective for all assets acquired and liabilities
assumed; and requiring the expensing of most transaction and
restructuring costs. Both standards are effective for us beginning
June 1, 2009 (fiscal 2010) and are applicable only to transactions
occurring after the effective date.
REPORTABlE SEGMENTS
FedEx Express, FedEx Ground and FedEx Freight represent our
major service lines and, along with FedEx Services, form the core
of our reportable segments. Our reportable segments include the
following businesses:
FedEx Express Segment
FedEx Express
(express transportation)
FedEx Trade Networks
(global trade services)
FedEx Ground Segment
FedEx Ground
(small-package ground delivery)
FedEx SmartPost
(small-parcel consolidator)
FedEx Freight Segment
FedEx Freight LTL Group:
FedEx Services Segment
FedEx Freight (regional LTL
freight transportation)
FedEx National LTL
(long-haul LTL freight
transportation)
FedEx Custom Critical
(time-critical transportation)
Caribbean Transportation Services
(airfreight forwarding)
FedEx Services (sales,
marketing and information
technology functions)
FedEx Office (document and
business services and package
acceptance)
FedEx Customer Information
Services (“FCIS”) (customer
service, billings and collections)
FedEx Global Supply Chain Services
(logistics services)
31
FEDEX CORPORATION
service improvement activities. Increased capital expenditures
for the FedEx Services segment are primarily associated with
information technology facility expansion at FedEx Services and
store expansion activities at FedEx Office. FedEx Office opened
318 new centers during 2008.
OTHER INTERSEGMENT TRANSACTIONS
Certain FedEx operating companies provide transportation and
related services for other FedEx companies outside their report-
able segment. Billings for such services are based on negotiated
rates, which we believe approximate fair value, and are reflected
as revenues of the billing segment. These rates are adjusted from
time to time based on market conditions. Such intersegment rev-
enues and expenses are eliminated in the consolidated results
and are not separately identified in the following segment infor-
mation, as the amounts are not material.
The operating expenses line item “Intercompany charges” on
the accompanying unaudited financial summaries of our trans-
portation segments includes the allocations from the FedEx
Services segment to the respective transportation segments.
The “Intercompany charges” caption also includes allocations
for administrative services provided between operating com-
panies and certain other costs such as corporate management
fees related to services received for general corporate oversight,
including executive officers and certain legal and finance func-
tions. Management evaluates transportation segment financial
performance based on operating income.
FEDEX SERVICES SEGMENT
The FedEx Services segment includes: FedEx Services, which
provides sales, marketing and information technology support;
FCIS, which is responsible for customer service, billings and
collections for FedEx Express and FedEx Ground; FedEx Global
Supply Chain Services, which provides a range of logistics ser-
vices to our customers; and FedEx Office.
During the fourth quarter of 2008, we decided to change the name
of FedEx Kinko’s to FedEx Office. We believe the FedEx Office
name better describes the wide range of services available at
our retail centers and takes full advantage of the FedEx brand.
During the first quarter of 2008, FedEx Office was reorganized
as a part of the FedEx Services segment. FedEx Office provides
retail access to our customers for our package transportation
businesses and an array of document and business services.
FedEx Services provides access to customers through digital
channels such as fedex.com. Under FedEx Services, FedEx Office
benefits from the full range of resources and expertise of FedEx
Services to continue to enhance the customer experience, pro-
vide greater, more convenient access to the portfolio of services
at FedEx, and increase revenues through our retail network. As
part of this reorganization, we are pursuing synergies in sales,
marketing, information technology and administrative areas.
With this reorganization, the FedEx Services segment became
a reportable segment. Prior year amounts have been revised to
conform to the current year segment presentation. FedEx Office
continues to be treated as a reporting unit for purposes of good-
will impairment testing.
Effective June 1, 2006, we moved FedEx Supply Chain Services,
Inc., the results of which were previously reported in the FedEx
Ground segment, into a new subsidiary of FedEx Services named
FedEx Global Supply Chain Services, Inc. The net operating
costs of this entity are allocated to FedEx Express and FedEx
Ground. Prior year amounts were not reclassified to conform
to the 2007 segment presentation, as financial results were
materially comparable.
The costs of the sales, marketing and information technology
support provided by FedEx Services and the customer service
functions of FCIS, together with the normal, ongoing net operating
costs of FedEx Global Supply Chain Services and FedEx Office, are
allocated primarily to the FedEx Express and FedEx Ground seg-
ments based on metrics such as relative revenues or estimated
services provided. We believe these allocations approximate
the net cost of providing these functions. The $891 million fourth
quarter charge predominantly associated with the noncash
impairment charges for the Kinko’s trade name and goodwill was
not allocated to the FedEx Express or FedEx Ground segments, as
it was unrelated to the core performance of those businesses.
FedEx Services segment revenues, which reflect the opera-
tions of FedEx Office and FedEx Global Supply Chain Services,
increased slightly during 2008. Revenue generated from new
locations and higher package acceptance fees more than offset
declines in copy revenues at FedEx Office for 2008. The allocated
net operating costs of FedEx Office increased during 2008 due
to declines in copy revenues, as well as higher expenses asso-
ciated with store expansion, advertising and promotions, and
32
MANAGEMENT’S DISCUSSION AND ANALYSIS
FEDEX EXPRESS SEGMENT
The following table compares revenues, operating expenses,
operating income and operating margin (dollars in millions) for
the years ended May 31:
2008
2007
2006
Percent Change
2007/
2006
2008/
2007
Revenues:
Package:
U.S. overnight box
U.S. overnight
envelope
U.S. deferred
Total U.S. domestic
$ 6,578
$ 6,485 $ 6,422
2,012
2,995
1,990
2,883
1,974
2,853
package revenue 11,585
11,358
11,249
1
1
4
2
14
79
8
7,666
6,722
6,139
663
370
199
19,914
18,450
17,587
5
9
2,398
2,412
2,218
(1)
1,243
1,045
840
19
24
406
394
434
4,047
460
24,421
3,851
380
22,681
3,492
367
21,446
3
5
21
8
(9)
10
4
6
International
Priority (IP)
International
domestic (1)
Total package
revenue
Freight:
U.S.
International
Priority Freight
International
airfreight
Total freight
revenue
Other (2)
Total revenues
Operating expenses:
Salaries and
Rentals and
landing fees
Depreciation and
amortization
Fuel
Maintenance and
employee benefits
8,451
8,234(3) 8,033
3
3
Purchased
transportation
1,208
1,098
971
10
13
1,673
1,610
1,696(4)
4
(5)
944
3,785
856
2,946
805
2,786
10
28
5
4
15
6
6
7
37
(2)
repairs
1,512
Intercompany charges 2,134
2,813
Other
1,444
2,046
2,456
1,344
1,496
2,502
Total operating
expenses
Operating income
Operating margin
22,520
$ 1,901
7.8%
20,690
19,633
$ 1,991 $ 1,813
8.8%
9
(5)
8.5% (100)bp 30bp
5
10
(1) International domestic revenues include our international domestic express operations,
primarily in the United Kingdom, Canada, India and China. We reclassified the prior period
international domestic revenues previously included within other revenues to conform to the
current period presentation.
(2) Other revenues includes FedEx Trade Networks.
(3) Includes a $143 million charge for signing bonuses and other upfront compensation
associated with the new four-year labor contract with our pilots.
(4) Includes a $75 million one-time, noncash charge to adjust the accounting for certain
facility leases.
The following table compares selected statistics (in thousands,
except yield amounts) for the years ended May 31:
2008
2007
2006
Percent Change
2007/
2006
2008/
2007
Package Statistics (1)
Average daily package volume (ADV):
U.S. overnight box
U.S. overnight
envelope
U.S. deferred
Total U.S.
domestic ADV
IP
International
domestic (2)
Total ADV
1,151
1,174
1,203
677
895
706
898
713
901
2,723
517
2,778
487
2,817
466
(2)
(4)
–
(2)
6
(2)
(1)
–
(1)
5
296
3,536
134
3,399
46
3,329
121
4
191
2
1
1
1
1
9
86
Revenue per package (yield):
U.S. overnight box
U.S. overnight
envelope
U.S. deferred
U.S. domestic
composite
IP
International
domestic (2)
Composite
$ 22.40
$ 21.66 $ 20.94
11.66
13.12
11.06
12.59
10.86
12.42
16.68
58.11
16.04
54.13
15.66
51.64
3
5
4
4
7
3
2
1
2
5
8.80
10.77
16.69
(18)
(35)
package yield
22.08
21.28
20.72
4
3
Freight Statistics (1)
Average daily freight pounds:
U.S.
8,648
9,569
9,374
(10)
2
2,220
1,878
1,634
18
15
1,817
1,831
2,126
(1)
(14)
International
Priority Freight
International
airfreight
Total average
daily freight
pounds
12,685
13,278
13,134
(4)
Revenue per pound (yield):
U.S.
$ 1.09
$ 0.99 $ 0.93
10
International
Priority Freight
International
airfreight
Composite
2.20
2.18
2.02
0.88
0.84
0.80
1
5
1
6
8
5
freight yield
1.25
1.14
1.04
10
10
(1) Package and freight statistics include only the operations of FedEx Express.
(2) International domestic revenues include our international domestic express operations,
primarily in the United Kingdom, Canada, India and China.
33
FEDEX CORPORATION
FedEx Express Segment Revenues
FedEx Express revenues increased 8% in 2008, primarily due to
increases in fuel surcharges, growth in IP volume and the impact
of favorable currency exchange rates. Revenue increases during
2008 were partially offset by decreased volumes in U.S. domestic
package and freight services, as the weak U.S. economy and
persistently higher fuel prices and the related impact on our fuel
surcharges have restrained demand for these services. These
factors drove U.S. domestic shipping levels to pre-2000 volumes
during the fourth quarter of 2008.
The increase in composite package yield in 2008 was driven
by increases in IP and U.S. domestic yields, partially offset by
decreased international domestic yield. IP yield increased 7% in
2008, primarily due to favorable exchange rates, higher fuel sur-
charges and increases in package weights. U.S. domestic yield
increased 4% in 2008 primarily due to higher fuel surcharges and
general rate increases. International domestic yield decreased
18% during 2008 as a result of the inclusion of lower-yielding
services from the companies acquired in 2007. Composite freight
yield increased in 2008 due to the impact of changes in service
mix, higher fuel surcharges and favorable exchange rates.
IP volume growth during 2008 resulted from increased demand in
Asia, U.S. outbound and Europe. Increased international domes-
tic volumes during 2008 were driven by business acquisitions in
the second half of 2007. U.S. domestic package and freight vol-
umes decreased during 2008, as the ongoing weak U.S. economy
and rising fuel prices continued to negatively impact demand for
these services.
Revenue growth in 2007 was driven by IP revenues as a result of
yield improvements across all regions and volume growth result-
ing from increased demand in U.S. outbound, Asia and Europe.
Also contributing to revenue growth in 2007 were increases in
international domestic revenues (primarily due to our acquisition
of FedEx U.K.) and increases in freight revenues due to higher
U.S. and international priority freight volumes. U.S. domestic
package revenues increased as a result of yield improvements,
partially offset by a decrease in volumes resulting from the mod-
erating growth rate of the U.S. economy.
IP yield increased during 2007 as a result of favorable exchange
rates, higher package weights and an increase in the average
rate per pound. U.S. domestic composite yield increases in 2007
were due to an increase in the average rate per pound, partially
offset by changes in product mix and lower package weights.
U.S. freight yield increased in 2007 due to an increase in the aver-
age rate per pound and higher fuel surcharges.
34
Our fuel surcharges are indexed to the spot price for jet fuel.
Using this index, the U.S. domestic and outbound fuel surcharge
and the international fuel surcharges ranged as follows, for the
years ended May 31:
2008
2007
2006
U.S. Domestic and Outbound Fuel Surcharge:
Low
High
Weighted-Average
International Fuel Surcharges:
Low
High
Weighted-Average
12.00
25.00
16.11
13.50%
25.00
17.06
8.50%
17.00
12.91
10.50%
20.00
13.69
8.50
17.00
12.98
10.00
20.00
12.73
FedEx Express Segment Operating Income
The following table compares operating expenses and operating
income as a percent of revenue for the years ended May 31:
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Intercompany charges
Other
Total operating expenses
Operating income (margin)
Percent of Revenue
2007
2006
2008
34.6%
4.9
6.9
3.9
15.5
6.2
8.7
11.5
92.2
7.8%
36.3% (1) 37.4%
4.8
7.1
3.8
13.0
6.4
9.0
10.8
91.2
4.5
7.9 (2)
3.7
13.0
6.3
7.0
11.7
91.5
8.8%
8.5%
(1) Includes a $143 million charge for signing bonuses and other upfront compensation
associated with the new four-year labor contract with our pilots (0.6% of revenue).
(2) Includes a $75 million one-time, noncash charge to adjust the accounting for certain facility
leases (0.4% of revenue).
Operating results for 2008 were negatively impacted by record
high fuel prices, the continued weak U.S. economy and our
continued investment in domestic express services in China.
However, revenue growth in IP services, reduced retirement plan
costs, the favorable impact of foreign currency exchange rates
and lower variable incentive compensation partially offset the
impact of these factors on operating income during 2008.
Fuel costs increased 28% in 2008 due to an increase in the
average price per gallon of fuel. Although fuel costs increased
significantly during 2008, fuel surcharges were sufficient to offset
incremental fuel costs, based on a static analysis of the year-
over-year changes in fuel prices compared to changes in fuel
surcharges. This analysis considers the estimated benefits of the
reduction in fuel surcharges included in the base rates charged
for FedEx Express services. However, we believe persistently
higher fuel prices and the related impact on our fuel surcharges
are reducing demand for our services and pressuring overall
yield growth. These factors are also affecting our ability to cover
inflation in our operating costs and contributing to a customer
shift to lower-yielding services.
MANAGEMENT’S DISCUSSION AND ANALYSIS
During 2007, we terminated our agreement with Airbus for the
purchase of A380 aircraft and in March 2007 entered into a sepa-
rate settlement agreement with Airbus that, among other things,
provides us with credit memoranda applicable to the purchase
of goods and services in the future. The net impact of this settle-
ment was immaterial to our 2007 results and was recorded as an
operating gain during the fourth quarter of 2007.
FedEx Express Segment Outlook
We expect limited base revenue growth at FedEx Express in 2009,
as we expect no significant improvement in the U.S. economy
with continued high oil prices. These factors will continue to
pressure yields and volumes in both U.S. domestic package and
freight services. We expect U.S. domestic shipping volumes to
remain at the pre-2000 levels experienced in the fourth quarter
of 2008. We expect that the majority of the revenue increase in
2009 will be led by IP services, as we continue to focus on grow-
ing our service offerings, particularly in China and Europe, and
benefit from increased demand for U.S. goods due to a weaker
U.S. dollar. Our international domestic revenue is projected to
increase in 2009 due to the continued expansion of our China
domestic service as well as increases in our Canadian domestic
package services.
FedEx Express segment operating income and operating mar-
gin are expected to decline in 2009, primarily due to lower U.S.
domestic package and freight volumes, as high energy costs will
dampen our growth potential throughout 2009 despite our contin-
ued cost containment initiatives. Capital expenditures at FedEx
Express are expected to be relatively flat in 2009, as we balance
the need to control spending with the opportunity to make invest-
ments with high returns, such as substantially more fuel-efficient
aircraft. Our aircraft-related capital outlays include the more fuel-
efficient Boeing 757s, the first of which enter revenue service in
2009, and the new Boeing 777s, the first of which enter revenue
service in 2010. These aircraft capital expenditures are necessary
to achieve significant long-term operating savings and to support
projected long-term international volume growth. However, we
may temporarily ground certain aircraft due to excess capacity
in the current economic environment. The new Asia-Pacific hub
in Guangzhou, China is planned to be operational in 2009.
Other operating expenses increased 15% during 2008 principally
due to the inclusion of our 2007 business acquisitions, including
the full consolidation of the results of our China joint venture.
Also contributing to the increase in other operating expenses
in 2008 was the inclusion of an operating gain in 2007 related
to the Airbus contract settlement agreement described below.
Purchased transportation costs increased 10% in 2008 primarily
due to the inclusion of our 2007 business acquisitions, the impact
of higher fuel costs and IP volume growth, which requires a
higher utilization of contract pickup and delivery services. These
increases in purchased transportation costs were partially off-
set by the elimination of payments by us for pickup and delivery
services provided by our former China joint venture partner, as
we acquired this business in the second half of 2007. The 10%
increase in depreciation expense during 2008 was principally
due to aircraft purchases and our 2007 business acquisitions.
Intercompany charges increased 4% during 2008 primarily due
to increased net operating costs at FedEx Office associated
with declines in copy revenues, as well as higher expenses
associated with store expansion, advertising and promotions,
and service improvement activities. This increase was partially
offset by lower allocated fees from FedEx Services due to cost
containment activities.
Operating income and operating margin increased in 2007, despite
slower overall revenue growth. Increases in operating income and
margin in 2007 resulted from growth in IP services and were par-
tially offset by costs associated with the ratification of a new labor
contract with our pilots in October 2006. These costs included
signing bonuses and other upfront compensation of $143 million,
as well as pay increases and other benefit enhancements, which
were mitigated by reductions in the variable incentive compensa-
tion for our other employees. Year-over-year results in 2007 were
positively affected by a $75 million charge in 2006 to adjust the
accounting for certain facility leases.
Fuel costs increased during 2007 due to an increase in the aver-
age price per gallon of fuel. Fuel surcharges did not offset the
effect of higher fuel costs on our year-over-year operating results
for 2007, due to the timing lag that exists between when we pur-
chase fuel and when our fuel surcharges are adjusted, based
on a static analysis of the year-over-year changes in fuel prices
compared to changes in fuel surcharges.
Salaries and employee benefits increased in 2007 primarily as
a result of the new labor contract with our pilots. Purchased
transportation costs increased 13% in 2007 due to IP volume
growth, which requires a higher utilization of contract pickup
and delivery services and an increase in the cost of purchased
transportation. Maintenance and repairs increased 7% in 2007
primarily due to higher aircraft maintenance expenses for various
airframes and Airbus A300 engines. The 5% decrease in rentals
and landing fees in 2007 was attributable to the one-time adjust-
ment for leases in 2006 described above. Intercompany charges
increased 37% in 2007 due to allocations as a result of moving the
FCIS organization from FedEx Express to FedEx Services in 2007.
The costs associated with the FCIS organization in 2006 were of
a comparable amount but were reported in individual operating
expense captions.
35
FEDEX CORPORATION
FEDEX GROUND SEGMENT
The following table compares revenues, operating expenses,
operating income and operating margin (dollars in millions) and
selected package statistics (in thousands, except yield amounts)
for the years ended May 31:
and a lower average weight and zone per package. Additionally,
revenue at FedEx SmartPost increased significantly in 2007 due to
increased market share, as a major competitor exited this market
in 2006, enabling significant growth in the customer base and
related volumes.
2008
2007
2006
Percent Change
2007/
2008/
2006
2007
$ 6,751
$ 6,043
$ 5,306
12
14
The FedEx Ground fuel surcharge is based on a rounded average
of the national U.S. on-highway average prices for a gallon of
diesel fuel, as published by the Department of Energy. Our fuel
surcharge ranged as follows for the years ended May 31:
employee benefits
1,073
1,006
929
Revenues
Operating expenses:
Salaries and
Purchased
transportation
Rentals
Depreciation and
amortization
Fuel
Maintenance
and repairs
Intercompany charges
Other
Total operating
expenses
2,691
189
2,326
166
2,019
133
305
201
145
658
753
268
117
134
569
635
224
93
118
515
559
7
16
14
14
72
8
16
19
8
15
25
20
26
14
10
14
14
15
6,015
$ 736
5,221
$ 822
4,590
$ 716
15
(10)
10.9%
13.6% 13.5% (270)bp 10bp
Operating income
Operating margin
Average daily package volume:
FedEx Ground
FedEx SmartPost
Revenue per package (yield):
FedEx Ground
FedEx SmartPost
3,365
618
$ 7.48
$ 2.09
3,126
599
2,815
377
$ 7.21
$ 1.88
$ 7.02
$ 1.55
8
3
4
11
11
59
3
21
FedEx Ground Segment Revenues
FedEx Ground segment revenues increased 12% during 2008
due to volume and yield growth. Volume growth at FedEx Ground
resulted from market share gains and the customer appeal of
our cost-effective alternative to overnight air delivery services.
Average daily volumes at FedEx Ground increased 8% during 2008
due to increased commercial business and the continued growth
of our FedEx Home Delivery service. Yield improvement during
2008 was primarily due to the impact of general rate increases,
higher extra service revenue (primarily through our residential,
additional handling and large package surcharges) and higher
fuel surcharges partially offset by higher customer discounts and
a lower average weight and zone per package.
FedEx SmartPost picks up shipments from customers and deliv-
ers them to various points within the United States Postal Service
(“USPS”) network for final delivery. FedEx SmartPost revenue
and yield represent the amount charged to customers net of post-
age paid to the USPS.
Revenues increased during 2007 due to strong volume growth.
Average daily volumes at FedEx Ground rose 11% because of
increased commercial business and the continued growth of our
FedEx Home Delivery service. Yield improvement during 2007 was
primarily due to the impact of general rate increases and higher
extra service revenues, primarily on our residential services. This
yield increase was partially offset by higher customer discounts
36
Low
High
Weighted-Average
2008
2007
2006
4.50%
7.75
5.47
3.50%
5.25
4.18
2.50%
5.25
3.54
FedEx Ground Segment Operating Income
The following table compares operating expenses and operating
income as a percent of revenue for the years ended May 31:
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals
Depreciation and amortization
Fuel
Maintenance and repairs
Intercompany charges
Other
Total operating expenses
Operating income (margin)
Percent of Revenue
2007
2006
2008
15.9%
39.9
2.8
4.5
3.0
2.1
9.7
11.2
89.1
10.9%
16.7%
38.5
2.8
4.4
1.9
2.2
9.4
10.5
86.4
13.6%
17.5%
38.1
2.5
4.2
1.8
2.2
9.7
10.5
86.5
13.5%
FedEx Ground segment operating income decreased 10% during
2008, as revenue growth was more than offset by higher inde-
pendent contractor-related costs, the net impact of increased
fuel costs, costs associated with our multi-year capacity expan-
sion plan, higher intercompany charges and higher legal costs
(including fees paid to external counsel, settlement costs and
loss accruals). However, lower variable incentive compensa-
tion partially offset the net impact of these factors on operating
income during 2008.
Fuel costs increased 72% during 2008 primarily due to a sig-
nificant increase in the average price per gallon of fuel. Fuel
surcharges were not sufficient to offset the effect of fuel costs
on our year-over-year operating results for 2008, due to the timing
lag that exists between when we purchase fuel and when our
indexed fuel surcharges automatically adjust. Purchased trans-
portation costs increased 16% in 2008 as a result of higher rates
paid to our independent contractors, increased fuel expenses
and costs associated with our independent contractor programs
(described below).
Intercompany charges increased 16% during 2008 primarily due
to increased net operating costs at FedEx Office associated with
declines in copy revenues, as well as higher expenses associ-
ated with store expansion, advertising and promotions, and
service improvement activities. In addition, higher allocated sales
and marketing and customer service costs from FedEx Services
MANAGEMENT’S DISCUSSION AND ANALYSIS
contributed to the increase in intercompany charges for 2008.
Other operating expenses increased 19% during 2008, primarily
due to higher legal, consulting and insurance costs. Depreciation
expense and rent expense increased 14% in 2008 primarily due
to higher spending on material handling equipment and facilities
associated with our multi-year capacity expansion plan.
The increase in FedEx Ground segment operating income during
2007 was principally due to revenue growth and improved results at
FedEx SmartPost. Operating margin increased only slightly in 2007,
as revenue growth was partially offset by increased purchased
transportation costs, increased legal costs and higher depreciation
and rent expense associated with network expansion.
Purchased transportation increased in 2007 primarily due to vol-
ume growth and higher rates paid to our independent contractors,
including fuel supplements. Our fuel surcharge was sufficient to
offset the effect of higher fuel costs on our 2007 operating results,
based on a static analysis of the year-over-year changes in fuel
prices compared to changes in the fuel surcharge. Other operat-
ing expenses increased in 2007 primarily due to increased legal
costs. Depreciation expense increased 20% and rent expense
increased 25% principally due to higher spending on material
handling and scanning equipment and facilities associated with
our multi-year network expansion.
Independent Contractor Matters
FedEx Ground faces increased regulatory and legal uncertainty
with respect to its independent contractors. As part of its opera-
tions, FedEx Ground has made changes to its relationships with
contractors that, among other things, provide incentives for
improved service and enhanced regulatory and other compliance
by our contractors. During the second quarter of 2008, FedEx
Ground announced a nationwide program, which provides greater
incentives to certain of its contractors who choose to grow their
businesses by adding routes. In addition, FedEx Ground offered
special incentives to encourage California-based single-route
contractors to transform their operations into multiple-route busi-
nesses or sell their routes to others. Virtually all California-based
single-route contractors accepted the incentives and completed
the required actions by May 31, 2008. Furthermore, as of May 31,
2008 nearly 60% of all service areas nationwide are supported by
multiple-route 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 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 accompanying consolidated
financial statements.
FedEx Ground Segment Outlook
We expect the FedEx Ground segment to have continued rev-
enue growth in 2009, led by increased commercial business and
the continued growth of our FedEx Home Delivery service. FedEx
SmartPost volumes are also expected to grow, due to market
share gains and improved service levels. Yields for all services
at FedEx Ground are expected to improve in 2009 as a result of
increases in list prices and fuel surcharges.
FedEx Ground segment operating margin in 2009 is expected to
decrease slightly due to rising fuel prices and increased pur-
chased transportation costs, despite continued cost containment
initiatives. Purchased transportation costs are expected to
increase in 2009 due to ongoing enhancements to our indepen-
dent contractor model, and higher incentives and rates paid to
our independent contractors. Capital spending is expected to
remain relatively flat in 2009, with the majority of our spending
resulting from our continued comprehensive network expansion
and productivity-enhancing technologies. We are committed to
investing in the FedEx Ground network because of the long-term
benefits we will experience from these investments.
We will continue to vigorously defend various attacks against our
independent contractor model and incur ongoing legal costs as a
part of this process. While we believe that FedEx Ground’s owner
operators are properly classified as independent contractors, it
is reasonably possible that we could incur a material loss in con-
nection with one or more of these matters or be required to make
additional changes to our contractor model. However, we do not
believe that any such charges will impair our ability to operate
and profitably grow our FedEx Ground business.
FEDEX FREIGHT SEGMENT
The following table shows revenues, operating expenses, operat-
ing income and operating margin (dollars in millions) and selected
statistics for the years ended May 31:
2008
2007 (1)
2006
Percent Change
2007/
2008/
2006
2007
$ 4,934
$ 4,586
$ 3,645
8
26
Revenues
Operating expenses:
Salaries and
employee benefits
2,381
2,250
1,801
6
Purchased
transportation
582
465
298
25
Rentals and
landing fees
Depreciation and
amortization
Fuel
Maintenance
and repairs
Intercompany
charges
Other
Total operating
expenses
Operating income
Operating margin
Average daily LTL
shipments
(in thousands)
Weight per LTL
shipment (lbs)
LTL yield (revenue
per hundredweight)
119
112
94
6
227
608
195
468
120
377
16
30
175
165
120
6
81
432
61
407
37
313
33
6
4,605
$ 329
4,123
$ 463
3,160
$ 485
12
(29)
6.7%
10.1% 13.3% (340)bp
30
(5)
(320)bp
79.7
78.2
66.7
1,136
1,130
1,143
$ 19.65
$ 18.65
$ 16.84
2
1
5
17
(1)
11
(1) Includes the results of FedEx National LTL from the date of its acquisition on September 3, 2006.
37
25
56
19
63
24
38
65
30
FEDEX CORPORATION
The full-year inclusion of FedEx National LTL in our results
impacted the 2008 comparability of all our operating expenses.
Fuel costs increased 30% during 2008 due to an increase in the
average price per gallon of diesel fuel, which also increased
rates paid to our third-party transportation providers. Fuel sur-
charges were not sufficient to offset incremental fuel costs for
2008, based on a static analysis of the year-over-year changes in
fuel prices compared to changes in fuel surcharges. Purchased
transportation costs increased 25% in 2008 primarily due to the
inclusion of FedEx National LTL, which uses a higher propor-
tion of these services, and higher rates paid to our third-party
transportation providers. Including incremental costs from FedEx
National LTL, depreciation expense increased 16% during 2008
due to investments in information technology and equipment
purchased to support ongoing replacement requirements and
long-term volume growth. Intercompany charges increased 33%
during 2008 primarily due to higher allocated marketing and infor-
mation technology costs from FedEx Services.
FedEx Freight segment operating income decreased during 2007
due to operating losses at FedEx National LTL, which resulted
from softening volumes and ongoing expenses to integrate its
network. Along with incremental costs from FedEx National LTL
(including amortization of acquired intangible assets), deprecia-
tion expense increased due to prior-year purchases of vehicles
and other operating equipment to support volume growth.
Purchased transportation increased due to higher rates paid
to our third-party transportation providers and the utilization
of third-party providers at FedEx National LTL. While fuel costs
increased in 2007, our fuel surcharge was more than sufficient to
offset the effect of higher fuel costs, based on a static analysis of
the year-over-year changes in fuel prices compared to changes
in the fuel surcharge.
FedEx Freight Segment Outlook
We expect the FedEx Freight segment to have revenue growth
resulting from market share gains in 2009, despite the contin-
ued contraction of the LTL industry resulting from the weak
U.S. economy and high oil prices. Our revenue growth in 2009
is expected to approximate revenue growth levels in 2008. We
expect operating income and operating margin growth to be con-
strained in 2009 due to the continued weak U.S. economy and
the increasingly competitive LTL pricing environment. We plan to
continue to integrate our LTL businesses in 2009, which will lead
to improved synergies and cost savings. As part of that process,
we plan to close the San Jose, California, office in calendar 2009,
after which the administrative office for FedEx Freight’s regional
LTL freight operations will be located in Harrison, Arkansas.
No material costs are anticipated in connection with this action.
Capital spending is expected to remain relatively flat in 2009, with
the majority of our spending resulting from investments in rev-
enue equipment and our continued investment in technology to
improve productivity and to meet our customers’ needs.
FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 8% during 2008 pri-
marily due to the full-year inclusion of the FedEx National LTL
acquisition. LTL yield increased 5% during 2008, reflecting higher
yields from longer-haul FedEx National LTL shipments, higher fuel
surcharges (despite the rate reduction described below) and the
impact of the January 2008 general rate increase. Average daily
LTL shipments grew 2% in 2008, reflecting the full-year inclusion
of FedEx National LTL. During the second half of 2008, average
daily LTL shipments improved sequentially despite the weak U.S.
economy and rising fuel costs that limited demand throughout the
entire LTL industry.
FedEx Freight segment revenues increased in 2007 primarily as a
result of the acquisition of FedEx National LTL. Average daily LTL
shipments (excluding FedEx National LTL) grew slightly in 2007
due to increased demand for our regional and interregional ser-
vices. This growth rate moderated throughout the year, however,
with year-over-year declines in the second half of 2007. LTL yield
growth was due to higher yields from longer-haul FedEx National
LTL shipments, higher rates and favorable contract renewals.
During the first quarter of 2008, FedEx Freight reduced its stan-
dard regional LTL fuel surcharge by 25% and FedEx National LTL
reduced its standard LTL fuel surcharge to levels commensurate
with FedEx Freight. The indexed LTL fuel surcharge is based on
the average of the national U.S. on-highway average prices for
a gallon of diesel fuel, as published by the Department of Energy.
The indexed LTL fuel surcharge ranged as follows for the years
ended May 31:
Low
High
Weighted-Average
2008
2007
2006
14.5%
23.7
17.7
14.0%
21.2
17.8
12.5%
20.1
16.3
FedEx Freight Segment Operating Income
The following table compares operating expenses and operating
income as a percent of revenue for the years ended May 31:
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Intercompany charges
Other
Total operating expenses
Operating income (margin)
Percent of Revenue
2007
2006
2008
48.3%
11.8
2.4
4.6
12.3
3.5
1.6
8.8
93.3
6.7%
49.1%
10.1
2.4
4.3
10.2
3.6
1.3
8.9
89.9
10.1%
49.4%
8.2
2.6
3.3
10.3
3.3
1.0
8.6
86.7
13.3%
FedEx Freight segment operating income and operating margin
decreased substantially in 2008 primarily due to the net impact of
higher fuel costs and the fuel surcharge rate reduction described
above, along with higher purchased transportation costs due to
increased utilization of and rates paid to third-party transportation
providers. Lower variable incentive compensation partially offset
the net impact of these factors on operating income during 2008.
38
MANAGEMENT’S DISCUSSION AND ANALYSIS
2006, we issued $1 billion of senior unsecured debt under our
shelf registration statement, comprised of floating-rate notes
totaling $500 million and fixed-rate notes totaling $500 million. The
$500 million in floating-rate notes were repaid in August 2007. The
fixed-rate notes bear interest at an annual rate of 5.5%, payable
semi-annually, and are due in August 2009. The net proceeds were
used for working capital and general corporate purposes, includ-
ing the funding of several business acquisitions during 2007.
A $1 billion revolving credit agreement is available to finance
our operations and other cash flow needs and to provide sup-
port for the issuance of commercial paper. Our revolving credit
agreement contains a financial covenant, which requires us to
maintain a leverage ratio of adjusted debt (long-term debt, includ-
ing the current portion of such debt, plus six times rentals and
landing fees) to capital (adjusted debt plus total common stock-
holders’ investment) that does not exceed 0.7 to 1.0. Our leverage
ratio of adjusted debt to capital was 0.5 at May 31, 2008. We are
in compliance with this and all other restrictive covenants of our
revolving credit agreement and do not expect the covenants to
affect our operations. As of May 31, 2008, no commercial paper
was outstanding and the entire $1 billion under the revolving
credit facility was available for future borrowings.
Dividends. Dividends paid were $124 million in 2008, $110 mil-
lion in 2007 and $97 million in 2006. On June 2, 2008, our Board
of Directors declared a dividend of $0.11 per share of common
stock, an increase of $0.01 per share. The dividend was paid on
July 1, 2008 to stockholders of record as of the close of business
on June 13, 2008. 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.
CAPITAl RESOURCES
Our operations are capital intensive, characterized by significant
investments in aircraft, vehicles, technology, facilities, package
handling and sort equipment. The amount and timing of capital
additions depend on various factors, including pre-existing con-
tractual commitments, anticipated volume growth, domestic and
international economic conditions, new or enhanced services,
geographical expansion of services, availability of satisfactory
financing and actions of regulatory authorities.
FINANCIAL CONDITION
lIQUIDITY
Cash and cash equivalents totaled $1.539 billion at May 31, 2008,
compared to $1.569 billion at May 31, 2007 and $1.937 billion at
May 31, 2006. The following table provides a summary of our cash
flows for the years ended May 31 (in millions):
Operating activities:
Net income
Noncash charges and credits
Changes in operating assets
and liabilities
Cash provided by
operating activities
Investing activities:
Business acquisitions,
net of cash acquired
Capital expenditures and
2008
2007
2006
$ 1,125
3,187
$ 2,016
1,988
$ 1,806
2,006
(828)
(441)
(136)
3,484
3,563
3,676
(4)
(1,310)
–
other investing activities
(2,893)
(2,814)
(2,454)
Cash used in
investing activities
Financing activities:
Proceeds from debt
issuances
Principal payments on debt
Dividends paid
Other financing activities
Cash (used in) provided by
financing activities
Net (decrease) increase in cash
(2,897)
(4,124)
(2,454)
–
(639)
(124)
146
1,054
(906)
(110)
155
–
(369)
(97)
142
(617)
193
(324)
and cash equivalents
$
(30)
$ (368)
$ 898
Cash Provided by Operating Activities. Cash flows from operating
activities decreased $79 million in 2008 primarily due to higher
operating costs, particularly fuel and purchased transportation,
partially offset by year-over-year reductions in income tax pay-
ments. Noncash charges and credits increased in 2008 due to the
impairment charges discussed above. Cash flows from operat-
ing activities decreased $113 million in 2007 primarily due to an
increase in income tax payments of $184 million, partially offset
by increased earnings. During 2008, we made tax-deductible vol-
untary contributions to our principal U.S. domestic pension plans
of $479 million, compared to $482 million during 2007 and $456
million during 2006.
Cash Used in Investing Activities. Capital expenditures during
2008 were 2% higher largely due to planned expenditures for
facility expansion at FedEx Express and FedEx Ground. During
2007, $1.3 billion of cash was used for the FedEx National LTL,
FedEx U.K., DTW Group and other immaterial acquisitions. See
Note 3 of the accompanying consolidated financial statements for
further discussion of these acquisitions. See “Capital Resources”
for a discussion of capital expenditures during 2008 and 2007.
Debt Financing Activities. We have a shelf registration statement
filed with the Securities and Exchange Commission (“SEC”) that
allows us to sell, in one or more future offerings, any combination
of our unsecured debt securities and common stock. In August
39
FEDEX CORPORATION
The following table compares capital expenditures by asset
category and reportable segment for the years ended May 31
(in millions):
2008
2007
2006
Percent Change
2007/
2008/
2006
2007
Aircraft and related
equipment
Facilities and sort
equipment
Vehicles
Information and
technology investments
Other equipment
Total capital
expenditures
FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Services segment
Other
Total capital
$ 998
$ 1,107
$ 1,033
(10)
900
404
366
279
674
445
507
413
431
225
394
171
34
(9)
(15)
24
$ 2,947
$ 1,716
509
266
455
1
$ 2,882
$ 1,672
489
287
432
2
$ 2,518
$ 1,408
487
274
345
2
3
4
(7)
5
4 NM
7
33
8
9
32
14
19
–
5
25
NM
expenditures
$ 2,947
$ 2,882
$ 2,518
2
14
Capital expenditures during 2008 were slightly higher than the
prior year primarily due to increased spending for facility expan-
sions. FedEx Express capital expenditures increased in 2008
primarily as a result of increased spending on air operations
and sorting facilities, including the construction of our new
regional hub in Greensboro, North Carolina, and the expansion
of our primary sorting facility in Memphis. FedEx Services capital
expenditures increased in 2008 primarily due to increased spend-
ing associated with information technology facility expansions
and the addition of new FedEx Office locations. Capital spending
at FedEx Ground increased in 2008 due to increased spending on
facilities and sort equipment associated with its comprehensive
network expansion plan. Other equipment capital expenditures
increased at FedEx Express during 2008, primarily due to expen-
ditures for ground support equipment replacement, as well
as sort equipment at our new Asia-Pacific hub in Guangzhou,
China. Capital expenditures increased during 2007 primarily due
to increased spending at FedEx Express for facility expansion and
aircraft and related equipment, and expenditures at FedEx Office
associated with its expansion program.
lIQUIDITY OUTlOOk
We believe that our existing cash and cash equivalents, cash
flow from operations, our commercial paper program, revolving
bank credit facility and shelf registration statement with the SEC
are adequate to meet our current and foreseeable future working
capital and capital expenditure needs. In addition, other forms
of secured financing may be used to obtain capital assets if we
determine that they best suit our needs for the foreseeable future.
We have been successful in obtaining investment capital, both
domestic and international, although the marketplace for such
capital can become restricted depending on a variety of eco-
nomic factors. We believe the capital resources available to us
provide flexibility to access the most efficient markets for financ-
ing capital acquisitions, including aircraft, and are adequate for
our future capital needs.
40
In February 2008, the Economic Stimulus Act of 2008 (“Act”) was
signed into law. Among other things, this Act provides a 50%
bonus tax depreciation deduction for qualified property acquired
or constructed and placed in service in 2008. We anticipate that
the Act will provide us with a federal income tax deferral in 2009,
reversing in later years. We estimate this deferral will reduce our
2009 federal income tax payments by $50 million to $100 million;
however, the actual amount is subject to the nature and timing
of our capital expenditures in 2009, which may be impacted by
ongoing weak economic conditions.
Our capital expenditures are expected to be less than $3 billion in
2009 and will include spending for aircraft and related equipment
at FedEx Express, facility expansion at FedEx Ground and revenue
equipment at FedEx Freight. We also continue to invest in pro-
ductivity-enhancing technologies. Aircraft-related capital outlays
include the Boeing 757s, the first of which enter revenue service
in 2009 and are 40% more fuel efficient per unit than the aircraft
type they will replace, and the new Boeing 777s, the first of which
enter revenue service in 2010. These aircraft capital expendi-
tures are necessary to achieve significant long-term operating
savings and to support projected long-term international volume
growth. However, we may temporarily ground certain aircraft due
to excess capacity in the current economic environment.
Due to the weak U.S. economy, during 2008 management took
actions to reduce future capital commitments by slowing the rate
of expansion for new FedEx Office locations in 2009. We expect
to open approximately 60 new FedEx Office locations in 2009.
This will allow FedEx Office management to continue to focus on
improving core services and the overall customer experience at
existing stores.
We are closely managing our capital spending based on cur-
rent and anticipated volume levels and will defer or limit capital
additions where economically feasible, while continuing to invest
strategically in growing service lines. We currently expect to fund
our 2009 capital requirements with cash from operations.
We have not repurchased any shares in recent years. However,
we currently have the liquidity to repurchase shares and may do
so in the future. A total of 5.75 million shares remain under exist-
ing share repurchase authorizations.
We have a senior unsecured debt credit rating from Standard
& Poor’s of BBB and a commercial paper rating of A-2. Moody’s
Investors Service has assigned us a senior unsecured debt credit
rating of Baa2 and a commercial paper rating of P-2. Moody’s and
Standard & Poor’s characterize our ratings outlook as “stable.”
If our credit ratings drop, our interest expense may increase. If
our commercial paper ratings drop below current levels, we may
have difficulty utilizing the commercial paper market. If our senior
unsecured debt ratings drop below investment grade, our access
to financing may become limited.
In 2009, scheduled debt payments include $502 million of principal
payments on unsecured notes and capitalized leases.
MANAGEMENT’S DISCUSSION AND ANALYSIS
CONTRACTUAL CASH OBLIGATIONS
The following table sets forth a summary of our contractual cash obligations as of May 31, 2008. Certain of these contractual obligations
are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in
the United States. Except for the current portion of long-term debt and capital lease obligations, this table does not include amounts
already recorded in our balance sheet as current liabilities at May 31, 2008. Accordingly, this table is not meant to represent a forecast
of our total cash expenditures for any of the periods presented.
(in millions)
2009
2010
Payments Due by Fiscal Year
2012
2011
2013
Thereafter
Total
Operating activities:
Operating leases
Non-capital purchase obligations and other (1)
Interest on long-term debt
Investing activities:
Aircraft and aircraft-related capital commitments (1)
Other capital purchase obligations (1)
Financing activities:
Debt
Capital lease obligations (2)
Total
(1) See Note 16 to the accompanying consolidated financial statements.
(2) Capital lease obligations represent principal and interest payments.
$ 1,803
342
110
1,143
219
500
13
$ 4,130
$ 1,647
127
79
$ 1,482
61
65
$ 1,332
56
47
$ 1,208
33
20
$ 8,338
134
1,534
1,051
–
674
–
31
–
–
–
–
–
499
97
$ 3,500
250
8
$ 2,540
–
8
$ 1,474
300
119
$ 1,680
239
18
$ 10,263
$ 15,810
753
1,855
2,899
219
1,788
263
$ 23,587
We have certain contingent liabilities that are not accrued in our
balance sheet in accordance with accounting principles generally
accepted in the United States. These contingent liabilities are not
included in the table above. In addition, we have historically made
voluntary tax-deductible contributions to our principal U.S. domes-
tic pension plans; however, such amounts have not been legally
required and therefore are not reflected in the table above.
We have other long-term liabilities reflected in our balance
sheet, including deferred income taxes, qualified and nonquali-
fied pension and postretirement healthcare liabilities and other
self-insurance accruals. The payment obligations associated
with these liabilities are not reflected in the table above due to
the absence of scheduled maturities. Therefore, the timing of
these payments cannot be determined, except for amounts esti-
mated to be payable within twelve months that are included in
current liabilities.
Operating Activities
In accordance with accounting principles generally accepted in
the United States, our operating leases are not recorded in our
balance sheet. Credit rating agencies routinely use information
concerning minimum lease payments required for our operating
leases to calculate our debt capacity. The amounts reflected in
the table above for operating leases represent future minimum
lease payments under noncancelable operating leases (princi-
pally aircraft and facilities) with an initial or remaining term in
excess of one year at May 31, 2008. In the past, we financed a
significant portion of our aircraft needs (and certain other equip-
ment needs) using operating leases (a type of “off-balance sheet
financing”). At the time the decision to lease was made, we
determined that these operating leases would provide economic
benefits favorable to ownership with respect to market values,
liquidity or after-tax cash flows.
The amounts reflected in the table above for purchase obliga-
tions represent noncancelable agreements to purchase goods
or services that are not capital related. Such contracts include
those for printing and advertising and promotions contracts.
Open purchase orders that are cancelable are not considered
unconditional purchase obligations for financial reporting pur-
poses and are not included in the table above. Such purchase
orders often represent authorizations to purchase rather than
binding agreements.
Included in the preceding table within the caption entitled “Non-
capital purchase obligations and other” is our estimate of the
current portion of the liability for uncertain tax positions under
FIN 48. We cannot reasonably estimate the timing of the long-
term payments or the amount by which the liability will increase
or decrease over time; therefore, the long-term portion of the
liability ($80 million) is excluded from the preceding table. See
Note 11 of the accompanying consolidated financial statements
for further information.
The amounts reflected in the table above for interest on long-term
debt represent future interest payments due on our long-term
debt, all of which are fixed rate.
Investing Activities
The amounts reflected in the table above for capital purchase
obligations represent noncancelable agreements to purchase
capital-related equipment. Such contracts include those for
certain purchases of aircraft, aircraft modifications, vehicles,
facilities, computers and other equipment contracts. In addition,
we have committed to modify our DC10 aircraft for two-man
cockpit configuration, which is reflected in the table above.
Commitments to purchase aircraft in passenger configuration
do not include the attendant costs to modify these aircraft for
41
FEDEX CORPORATION
cargo transport unless we have entered into a noncancelable
commitment. Open purchase orders that are cancelable are
not considered unconditional purchase obligations for finan-
cial reporting purposes and are not included in the table above.
Such purchase orders often represent authorizations to purchase
rather than binding agreements.
Financing Activities
We have certain financial instruments representing potential
commitments, not reflected in the table above, that were incurred
in the normal course of business to support our operations,
including surety bonds and standby letters of credit. These instru-
ments are generally required under certain U.S. self-insurance
programs and are also used in the normal course of international
operations. The underlying liabilities insured by these instruments
are reflected in our balance sheets, where applicable. Therefore,
no additional liability is reflected for the surety bonds and letters
of credit themselves.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires management to make significant judgments and esti-
mates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or esti-
mation techniques that could be used. We maintain a thorough
process to review the application of our accounting policies
and to evaluate the appropriateness of the many estimates that
are required to prepare the financial statements of a complex,
global corporation. However, even under optimal circumstances,
estimates routinely require adjustment based on changing cir-
cumstances and new or better information.
The estimates discussed below include the financial statement
elements that are either the most judgmental or involve the selec-
tion or application of alternative accounting policies and are
material to our financial statements. Management has discussed
the development and selection of these critical accounting esti-
mates with the Audit Committee of our Board of Directors and
with our independent registered public accounting firm.
RETIREMENT PlANS
Overview. We sponsor programs that provide retirement ben-
efits to most of our employees. These programs include defined
benefit pension plans, defined contribution plans and retiree
healthcare plans. The accounting for pension and healthcare
plans includes numerous assumptions, such as: discount rates;
expected long-term investment returns on plan assets; future sal-
ary increases; employee turnover; mortality; and retirement ages.
These assumptions most significantly impact our U.S. domestic
pension plans.
A summary of our retirement plans costs over the past three
years is as follows (in millions):
U.S. domestic and international
pension plans
U.S. domestic and international
defined contribution plans
Postretirement healthcare plans
2008
2007
2006
$ 323
$ 467
$ 425
216
77
$ 616
176
55
$ 698
167
73
$ 665
The determination of our annual retirement plans cost is highly
sensitive to changes in the assumptions discussed above
because we have a large active workforce, a significant amount
of assets in the pension plans, and the payout of benefits will
occur over an extended period in the future. Total retirement
plans cost decreased $82 million in 2008, and increased $33 mil-
lion in 2007 and $83 million in 2006, primarily due to plan changes
in 2008 and changes to these assumptions in 2007 and 2006.
In 2007, we announced changes to significantly redesign cer-
tain of our retirement programs. Effective January 1, 2008, we
increased the annual company matching contribution under the
largest of our 401(k) plans covering most employees from $500
to a maximum of 3.5% of eligible compensation. Employees not
participating in the 401(k) plan as of January 1, 2008 were auto-
matically enrolled at 3% of eligible pay with a company match
of 2% of eligible pay effective March 1, 2008. The full cost of
this benefit improvement will accelerate over the next few years.
Effective May 31, 2008, benefits previously accrued under our
primary pension plans using a traditional pension benefit formula
were capped for most employees, and those benefits will be
payable beginning at retirement. Beginning June 1, 2008, future
pension benefits for most employees will be accrued under a
cash balance formula we call the Portable Pension Account.
These changes will not affect the benefits of current retirees
and terminated vested participants. In addition, these pension
plans were modified to accelerate vesting from five years to
three years effective June 1, 2008 for most participants.
Under the Portable Pension Account, the retirement benefit is
expressed as a dollar amount in a notional account that grows
with annual credits based on pay, age and years of credited ser-
vice, and interest on the notional account balance. An employee’s
pay credits are determined each year under a graded formula
that combines age with years of service for points. The plan inter-
est credit rate will vary from year to year based on the selected
U.S. Treasury index, with a minimum rate of 4% or the one-year
Treasury Constant Maturities rate plus 1% and a maximum rate
based on the average 30-year Treasury rate.
Retirement plans cost in 2009 is expected to be approximately
$567 million, a decrease from 2008. We anticipate that the full-
year impact of the enhanced 401(k) match described above will
be offset by a decline in pension and retiree medical expense due
to a significantly higher discount rate. We continue to expect the
long-term costs of our retirement plans to approximate those prior
to the recent plan changes. However, we expect that the costs of
our retirement plans will become more predictable as we reduce
highly volatile pension costs in favor of more predictable 401(k)
42
MANAGEMENT’S DISCUSSION AND ANALYSIS
costs associated with our matching contributions. Retirement
plans cost is included in the “Salaries and Employee Benefits”
caption in our consolidated income statements.
Pension Cost. Of all of our retirement plans, our largest qualified
U.S. domestic pension plan is the most significant and subjec-
tive. The components of pension cost for all pension plans are
as follows (in millions):
Service cost
Interest cost
Expected return on plan assets
Recognized actuarial losses
and other
Net periodic benefit cost
2008
$ 518
720
(985)
70
$ 323
2007
$ 540
707
(930)
150
$ 467
2006
$ 473
642
(811)
121
$ 425
Following is a discussion of the key estimates we consider in
determining our pension costs:
Discount Rate. This is the interest rate used to discount the esti-
mated future benefit payments that have been accrued to date
(the projected benefit obligation, or PBO) to their net present
value and to determine the succeeding year’s pension expense.
The discount rate is determined each year at the plan measure-
ment date. For 2008, our measurement date for determination of
our PBO was February 29, 2008, and our assumptions incorpo-
rated a discount rate of 6.96%. As described previously in this
MD&A, due to our measurement date transition under SFAS 158,
our measurement date for 2009 expense was June 1, 2008, and our
assumptions incorporated a discount rate of 7.15%. An increase in
the discount rate decreases pension expense. This assumption is
highly sensitive, as the following table illustrates with our largest
qualified U.S. domestic pension plan:
2009 (expense)
2008
2007
2006
Discount
Rate (1)
7.15%
6.96%
6.01%
5.91%
Sensitivity (in millions) (2)
Expense
PBO
$ 1.7
2.1
2.5
2.1
n/a
$ 16
19
21
(1) The discount rate in effect at the end of a given fiscal year affects the current year’s PBO
and the succeeding year’s pension expense, except for 2009 which was affected by our
measurement date transition. The 2009 expense sensitivity is driven by the 7.15% discount
rate determined at the June 1, 2008 measurement date.
(2) Sensitivities show the impact on expense and the PBO of a one-basis-point change in the
discount rate.
We determine the discount rate (which is required to be the
rate at which the projected benefit obligation could be effec-
tively settled as of the measurement date) with the assistance
of actuaries, who calculate the yield on a theoretical portfolio
of high-grade corporate bonds (rated Aa or better) with cash
flows that generally match our expected benefit payments in
future years. This bond modeling technique allows for the use of
non-callable and make-whole bonds that meet certain screen-
ing criteria to ensure that the selected bonds with a call feature
have a low probability of being called. To the extent scheduled
bond proceeds exceed the estimated benefit payments in a given
period, the yield calculation assumes those excess proceeds are
reinvested at the one-year forward rates implied by the Citigroup
Pension Discount Curve. Pension costs for our primary domestic
pension plan were favorably affected in 2008 by approximately
$27 million due to the slight increase in the discount rate. The
previous trend of declines in the discount rate negatively affected
our primary domestic pension plan expense by $89 million in 2007
and $101 million in 2006. Pension costs will be favorably affected
in 2009 by approximately $225 million due to the increase in the
discount rate driven by higher interest rates in the bond market
year over year.
Plan Assets. Pension plan assets are invested primarily in listed
securities. Our pension plans hold only a minimal investment in
FedEx common stock that is entirely at the discretion of third-
party pension fund investment managers. The estimated average
rate of return on plan assets is a long-term, forward-looking
assumption that also materially affects our pension cost. It is
required to be the expected future long-term rate of earnings on
plan assets. At February 29, 2008, with approximately $11.7 billion
of plan assets in our domestic plans, a one-basis-point change in
this assumption for our domestic pension plans affects pension
cost by approximately $1.2 million. We have assumed an 8.5%
compound geometric long-term rate of return on our principal
U.S. domestic pension plan assets for 2009, unchanged from 2008
as discussed above.
Establishing the expected future rate of investment return on our
pension assets is a judgmental matter. Management considers
the following factors in determining this assumption:
• the duration of our pension plan liabilities, which drives the
investment strategy we can employ with our pension plan
assets;
• the types of investment classes in which we invest our pension
plan assets and the expected compound geometric return we
can reasonably expect those investment classes to earn over
the next 10- to 15-year time period (or such other time period
that may be appropriate); and
• the investment returns we can reasonably expect our active
investment management program to achieve in excess of the
returns we could expect if investments were made strictly in
indexed funds.
We review the expected long-term rate of return on an annual
basis and revise it as appropriate. As part of our strategy to
manage future pension costs and net funded status volatility, we
are also in the process of reevaluating our pension investment
strategy. We are currently evaluating the mix of investments
between equities and fixed income securities, the cash flows of
which will more closely align with the cash flows of our pension
obligations.
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):
43
FEDEX CORPORATION
Asset Class
Domestic equities
International equities
Private equities
Total equities
Long duration fixed income securities
Other fixed income securities
Plan Assets at Measurement Date
Actual
$ 5,694
2,481
406
8,581
1,778
1,302
$ 11,661
2008
Actual
49%
21
4
74
15
11
100%
Target
53%
17
5
75
15
10
100%
Actual
$ 5,897
2,413
314
8,624
1,627
1,049
$ 11,300
2007
Actual
52%
21
3
76
15
9
100%
Target
53%
17
5
75
15
10
100%
The actual historical return on our U.S. pension plan assets, calcu-
lated on a compound geometric basis, was 9.4%, net of investment
manager fees, for the 15-year period ended February 29, 2008.
Pension expense is also affected by the accounting policy used
to determine the value of plan assets at the measurement date.
We use a calculated-value method to determine the value of plan
assets, which helps mitigate short-term volatility in market per-
formance (both increases and decreases). Another method used
in practice applies the market value of plan assets at the mea-
surement date. The application of the calculated-value method
equaled the result from applying the market-value method for
2006 through 2008.
Salary Increases. The assumed future increase in salaries
and wages is also a key estimate in determining pension cost.
Generally, we correlate changes in estimated future salary
increases to changes in the discount rate (since that is an indica-
tor of general inflation and cost of living adjustments) and general
estimated levels of profitability (since most incentive compen-
sation is a component of pensionable wages). Our average
future salary increases based on age and years of service were
4.47% for 2008, 3.46% for 2007 and 3.15% for 2006. Future salary
increases are estimated to be 4.49% for our 2009 pension costs.
In the future, a one-basis-point across-the-board change in the
rate of estimated future salary increases will have an immaterial
impact on our pension costs.
Following is information concerning the funded status of our
pension plans as of May 31 (in millions):
2008
2007
$ 11,617
11,879
262
15
277
Funded Status of Plans:
Projected benefit obligation (PBO)
Fair value of plan assets
Funded status of the plans
Employer contributions after measurement date
Net amount recognized
Components of Amounts Included in Balance Sheets:
Noncurrent pension assets
Current pension and other benefit obligations
Noncurrent pension and other benefit obligations
Net amount recognized
$
Cash Amounts:
Cash contributions during the year
Benefit payments during the year
$
$
$
$
827
(32)
(518)
277
548
318
$ 12,209
11,506
(703)
22
(681)
$
$
$
$
$
1
(24)
(658)
(681)
524
261
The funded status of the plans reflects a snapshot of the state of
our long-term pension liabilities at the plan measurement date.
Our plans remain adequately funded to provide benefits to our
employees as they come due and current benefit payments are
nominal compared to our total plan assets (benefit payments for
2008 were approximately 2.7% of plan assets). As described pre-
viously in this MD&A, the adoption of SFAS 158 in 2007 resulted
in a $982 million charge to shareholders’ equity in accumulated
other comprehensive income to recognize the funded status of
the PBO. SFAS 158 also requires immediate recognition of actu-
arial gains and losses in accumulated other comprehensive
income even though such items continue to be deferred for the
determination of pension expense. The funded status of our plans
improved substantially in 2008 due primarily to an increase in the
discount rate used to measure plan liabilities and to voluntary
funding of those plans.
We made tax-deductible voluntary contributions of $479 million in
2008 and $482 million in 2007 to our qualified U.S. domestic pen-
sion plans. We currently expect to make tax-deductible voluntary
contributions to our qualified plans in 2009 at levels approximat-
ing those in 2008.
Cumulative unrecognized actuarial losses for pension plans
expense determination were approximately $2.5 billion through
February 29, 2008, compared to $3.3 billion at February 28,
2007. These unrecognized losses primarily reflect the declin-
ing discount rate from 2002 through 2006 and other changes in
assumptions. A portion is also attributable to the differences
between expected and actual asset returns, which are being
amortized over future periods. These unrecognized losses may
be recovered in future periods through actuarial gains. However,
unless they are below a corridor amount, these unrecognized
actuarial losses are required to be amortized and recognized in
future periods. For example, projected U.S. domestic plan pen-
sion expense for 2009 includes $44 million of amortization of these
actuarial losses versus $162 million in 2008, $136 million in 2007
and $107 million in 2006.
SElF-INSURANCE ACCRUAlS
We are self-insured up to certain limits for costs associated with
workers’ compensation claims, vehicle accidents and general
business liabilities, and benefits paid under employee healthcare
and long-term disability programs. At May 31, 2008, there were
approximately $1.4 billion of self-insurance accruals reflected in
our balance sheet ($1.3 billion at May 31, 2007). Approximately
41% of these accruals were classified as current liabilities in
both 2008 and 2007.
44
MANAGEMENT’S DISCUSSION AND ANALYSIS
The measurement of these costs requires the consideration of
historical cost experience, judgments about the present and
expected levels of cost per claim and retention levels. We
account for these costs primarily through actuarial methods,
which develop estimates of the undiscounted liability for claims
incurred, including those claims incurred but not reported, on
a quarterly basis for material accruals. These methods provide
estimates of future ultimate claim costs based on claims incurred
as of the balance sheet date. These estimates include consider-
ation of factors such as severity of claim, frequency of claims,
and costs associated with claims, such as projecting future
healthcare costs. We self-insure up to certain limits that vary
by operating company and type of risk. Periodically, we evalu-
ate the level of insurance coverage and adjust insurance levels
based on risk tolerance and premium expense. Historically, it has
been infrequent that incurred claims exceeded our self-insured
limits. Other acceptable methods of accounting for these accru-
als include measurement of claims outstanding and projected
payments based on historical development factors.
We believe the use of actuarial methods to account for these lia-
bilities provides a consistent and effective way to measure these
highly judgmental accruals. However, the use of any estimation
technique in this area is inherently sensitive given the magni-
tude of claims involved and the length of time until the ultimate
cost is known. We believe our recorded obligations for these
expenses are consistently measured on a conservative basis.
Nevertheless, changes in healthcare costs, accident frequency
and severity, insurance retention levels and other factors can
materially affect the estimates for these liabilities.
lONG-lIVED ASSETS
Property and Equipment. Our key businesses are capital inten-
sive, with approximately 53% of our total assets invested in our
transportation and information systems infrastructures. We
capitalize only those costs that meet the definition of capital
assets under accounting standards. Accordingly, repair and
maintenance costs that do not extend the useful life of an asset
or are not part of the cost of acquiring the asset are expensed
as incurred. However, consistent with industry practice, we capi-
talize certain aircraft-related major maintenance costs on one
of our aircraft fleet types and amortize these costs over their
estimated service lives.
The depreciation or amortization of our capital assets over their
estimated useful lives, and the determination of any salvage
values, requires management to make judgments about future
events. Because we utilize many of our capital assets over
relatively long periods (the majority of aircraft costs are depre-
ciated over 15 to 18 years), we periodically evaluate whether
adjustments to our estimated service lives or salvage values are
necessary to ensure these estimates properly match the eco-
nomic use of the asset. This evaluation may result in changes in
the estimated lives and residual values used to depreciate our
aircraft and other equipment. These estimates affect the amount
of depreciation expense recognized in a period and, ultimately,
the gain or loss on the disposal of the asset. Changes in the esti-
mated lives of assets will result in an increase or decrease in the
amount of depreciation recognized in future periods and could
have a material impact on our results of operations. Historically,
gains and losses on operating equipment have not been material
(typically less than $15 million annually). However, such amounts
may differ materially in the future due to changes in business lev-
els, technological obsolescence, accident frequency, regulatory
changes and other factors beyond our control.
Because of the lengthy lead times for aircraft manufacture and
modifications, we must anticipate volume levels and plan our
fleet requirements years in advance, and make commitments for
aircraft based on those projections. Furthermore, the timing and
availability of certain used aircraft types (particularly those with
better fuel efficiency) may create limited opportunities to acquire
these aircraft at favorable prices in advance of our capacity
needs. These activities create risks that asset capacity may
exceed demand and that an impairment of our assets may occur.
In addition, the soft U.S. economy will result in our temporarily
grounding certain aircraft in 2009, although we intend to continue
to use these aircraft in our network. Aircraft purchases (primarily
aircraft in passenger configuration) that have not been placed in
service totaled approximately $150 million at May 31, 2008 and
$71 million at May 31, 2007. We plan to modify these assets in the
future to place them into operation.
The accounting test for whether an asset held for use is impaired
involves first comparing the carrying value of the asset with its
estimated future undiscounted cash flows. If the cash flows do
not exceed the carrying value, the asset must be adjusted to its
current fair value. Because the cash flows of our transportation
networks cannot be identified to individual assets, and based on
the ongoing profitability of our operations, we have not experi-
enced any significant impairment of assets to be held and used.
However, from time to time we make decisions to remove certain
long-lived assets from service based on projections of reduced
capacity needs or lower operating costs of newer aircraft types,
and those decisions may result in an impairment charge. Assets
held for disposal must be adjusted to their estimated fair values
when the decision is made to dispose of the asset and certain
other criteria are met. The fair value determinations for such air-
craft may require management estimates, as there may not be
active markets for some of these aircraft. Such estimates are
subject to changes from period to period. There were no mate-
rial property and equipment impairment charges recognized in
2008, 2007 or 2006.
Leases. We utilize operating leases to finance certain of our
aircraft, facilities and equipment. Such arrangements typically
shift the risk of loss on the residual value of the assets at the end
of the lease period to the lessor. As disclosed in “Contractual
Cash Obligations” and Note 7 to the accompanying consolidated
financial statements, at May 31, 2008 we had approximately
$16 billion (on an undiscounted basis) of future commitments for
payments under operating leases. The weighted-average remain-
ing lease term of all operating leases outstanding at May 31, 2008
was approximately seven years.
The future commitments for operating leases are not reflected
as a liability in our balance sheet because these leases do not
meet the accounting definition of capital leases. The determi-
nation of whether a lease is accounted for as a capital lease
45
FEDEX CORPORATION
or an operating lease requires management to make estimates
primarily about the fair value of the asset and its estimated eco-
nomic useful life. In addition, our evaluation includes ensuring
we properly account for build-to-suit lease arrangements and
making judgments about whether various forms of lessee involve-
ment during the construction period make the lessee an agent
for the owner-lessor or, in substance, the owner of the asset
during the construction period. We believe we have well-defined
and controlled processes for making these evaluations, including
obtaining third-party appraisals for material transactions to assist
us in making these evaluations.
Goodwill. We have approximately $3.2 billion of goodwill in our
balance sheet from our acquisitions, representing the excess
of cost over the fair value of the net assets we have acquired.
Several factors give rise to goodwill in our acquisitions, such as
the expected benefit from synergies of the combination and the
existing workforce of the acquired entity.
FedEx Office Goodwill. During 2008, we made several strate-
gic decisions regarding FedEx Office. During the first quarter
of 2008, FedEx Office was reorganized as a part of the FedEx
Services segment. FedEx Office provides retail access to our
customers for our package transportation businesses and an
array of document and business services. FedEx Services pro-
vides access to customers through digital channels such as
fedex.com. Under FedEx Services, FedEx Office benefits from
the full range of resources and expertise of FedEx Services to
continue to enhance the customer experience, provide greater,
more convenient access to the portfolio of services at FedEx,
and increase revenues through our retail network. This reorga-
nization resulted in our ceasing to treat FedEx Office as a core
operating company; however, FedEx Office remains a reporting
unit for goodwill impairment testing purposes.
During the fourth quarter of 2008, several developments and stra-
tegic decisions occurred at FedEx Office, including:
• reorganizing senior management at FedEx Office with several
positions terminated and numerous reporting realignments,
including naming a new president and CEO;
• determining that we would minimize the use of the Kinko’s trade
name over the next several years;
• implementing revenue growth and cost management plans to
improve financial performance; and
• pursuing a more disciplined approach to the long-term
expansion of the retail network, reducing the overall level of
expansion.
We performed our annual impairment testing in the fourth quar-
ter for the Kinko’s trade name and the recorded goodwill for the
FedEx Office reporting unit. In accordance with the accounting
rules, the trade name impairment test was performed before the
goodwill impairment test.
In accordance with SFAS 142, “Goodwill and Other Intangible
Assets,” a two-step impairment test is performed on goodwill.
In the first step, we compared the estimated fair value of the
reporting unit to its carrying value. The valuation methodology
to estimate the fair value of the FedEx Office reporting unit was
based primarily on an income approach that considered market
participant assumptions to estimate fair value. Key assumptions
considered were the revenue and operating income forecast, the
assessed growth rate in the periods beyond the detailed forecast
period, and the discount rate.
In performing our impairment test, the most significant assump-
tion used to estimate the fair value of the FedEx Office reporting
unit was the discount rate. We used a discount rate of 12.5%,
representing the estimated weighted-average cost of capital
(WACC) of the FedEx Office reporting unit. The development of
the WACC used in our estimate of fair value considered the fol-
lowing key factors:
• benchmark capital structures for guideline companies with
characteristics similar to the FedEx Office reporting unit;
• current market conditions for the risk-free interest rate;
• the size and industry of the FedEx Office reporting unit; and
• risks related to the forecast of future revenues and profitability
of the FedEx Office reporting unit.
The WACC used in the estimate of fair value in future periods may
be impacted by changes in market conditions (including those of
market participants), as well as the specific future performance
of the FedEx Office reporting unit and are subject to change,
based on changes in specific facts and circumstances.
In the second step of the impairment test, we estimated the
current fair values of all assets and liabilities to determine
the amount of implied goodwill and consequently the amount of
the goodwill impairment. Upon completion of the second step
of the impairment test, we concluded that the recorded goodwill
was impaired and recorded an impairment charge of $367 million
during the fourth quarter of 2008. Significant judgments included
in the second step of the impairment test included fair value
estimates of assets and liabilities, the aggregate effect of which
increased the impairment charge to goodwill by approximately
$90 million. The goodwill impairment charge is included in oper-
ating expenses in the accompanying consolidated statements
of income. This charge is included in the results of the FedEx
Services segment and was not allocated to our transportation
segments, as the charge was unrelated to the core performance
of these businesses.
Other Reporting Units Goodwill. Our annual evaluation of goodwill
impairment requires the use of estimates and assumptions to
determine the fair value of our reporting units using an income
approach incorporating market participant considerations and
management’s assumptions on revenue growth rates, operat-
ing margins, discount rates and expected capital expenditures.
Estimates used by management can significantly affect the
outcome of the impairment test. Each year, independent of our
goodwill impairment test, we update our WACC calculation and
perform a long-range planning analysis to project expected
results of operations. Using this data, we complete a separate
fair value analysis for each of our reporting units. Changes in
forecasted operations and other assumptions could materially
affect these estimates. We compare the fair value of our report-
ing units to the carrying value, including goodwill, of each of
46
MANAGEMENT’S DISCUSSION AND ANALYSIS
those units. We performed our annual impairment tests in the
fourth quarter of 2008. Because the fair value of each of our other
reporting units exceeded its carrying value, including goodwill,
no additional testing or impairment charge was necessary.
Intangible Asset with an Indefinite Life. We have an intangible
asset associated with the Kinko’s trade name. Prior to 2008, this
intangible asset was not amortized because it had an indefinite
remaining useful life. Prior to the fourth quarter of 2008, our intent
was to continue to use the Kinko’s trade name indefinitely. During
the fourth quarter, we made the decision to change the name of
FedEx Kinko’s to FedEx Office and rebrand our retail locations
over the next several years. We believe the FedEx Office name
better describes the wide range of services available at our retail
centers and takes full advantage of the FedEx brand. This change
converted this asset to a finite life asset and resulted in an impair-
ment charge of $515 million. We estimated the fair value of this
intangible asset based on an income approach using the relief-
from-royalty method. This approach is dependent on a number of
factors, including estimates of future growth and trends, royalty
rates in the category of intellectual property, discount rates and
other variables. We base our fair value estimates on assumptions
we believe to be reasonable, but which are unpredictable and
inherently uncertain.
The $515 million impairment charge resulted in a remaining
trade name balance of $52 million, which we began amortizing
in the fourth quarter on an accelerated basis over the next four
years. The trade name impairment charge is included in oper-
ating expenses in the accompanying consolidated statements
of income. The charge is included in the results of the FedEx
Services segment and was not allocated to our transportation
segments, as the charge was unrelated to the core performance
of these businesses.
CONTINGENCIES
We are subject to various loss contingencies, including tax
proceedings and litigation, in connection with our operations.
Contingent liabilities are difficult to measure, as their measure-
ment is subject to multiple factors that are not easily predicted
or projected. Further, additional complexity in measuring these
liabilities arises due to the various jurisdictions in which these
matters occur, which makes our ability to predict their outcome
highly uncertain. Moreover, different accounting rules must be
employed to account for these items based on the nature of the
contingency. Accordingly, significant management judgment is
required to assess these matters and to make determinations
about the measurement of a liability, if any. Our material pending
loss contingencies are described in Note 17 to our consolidated
financial statements. In the opinion of management, the aggre-
gate liability, if any, of individual matters or groups of matters not
specifically described in Note 17 is not expected to be material
to our financial position, results of operations or cash flows. The
following describes our method and associated processes for
evaluating these matters.
Tax Contingencies
We are subject to income and operating tax rules of the United
States, and its states and municipalities, and of the foreign juris-
dictions in which we operate. Significant judgment is required in
determining income tax provisions, as well as deferred tax asset
and liability balances, due to the complexity of these rules and
their interaction with one another. We account for income taxes
under SFAS 109, “Accounting for Income Taxes,” by recording
both current taxes payable and deferred tax assets and liabili-
ties. Our provision for income taxes is based on domestic and
international statutory income tax rates in the jurisdictions in
which we operate, applied to taxable income, reduced by appli-
cable tax credits.
We account for operating taxes based on multi-state and local
taxing jurisdiction rules in those areas in which we operate.
Provisions for operating taxes are estimated based upon these
rules, asset acquisitions and disposals, historical spend and
other variables. These provisions are consistently evaluated for
reasonableness against compliance and risk factors.
Tax contingencies arise from uncertainty in the application of
tax rules throughout the many jurisdictions in which we oper-
ate. These tax contingencies are impacted by several factors,
including tax audits, appeals, litigation, changes in tax laws and
other rules and their interpretations, and changes in our busi-
ness, among other things, in the various federal, state, local
and foreign tax jurisdictions in which we operate. We regularly
assess the potential impact of these factors for the current and
prior years to determine the adequacy of our tax provisions.
We continually evaluate the likelihood and amount of potential
adjustments and adjust our tax positions, including the current
and deferred tax liabilities, in the period in which the facts that
give rise to a revision become known. In addition, management
considers the advice of third parties in making conclusions
regarding tax consequences.
Effective June 1, 2007, we began to measure and record income
tax contingency accruals in accordance with FIN 48. The cumula-
tive effect of adopting FIN 48 was immaterial.
Under FIN 48, we recognize liabilities for uncertain income tax
positions based on a two-step process. The first step is to evalu-
ate the tax position for recognition by determining if the weight
of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest
amount that is more than 50% likely to be realized upon ultimate
settlement. It is inherently difficult and subjective to estimate
such amounts, as we must determine the probability of various
possible outcomes. We reevaluate these uncertain tax positions
on a quarterly basis or when new information becomes avail-
able to management. These reevaluations are based on factors
including, but not limited to, changes in facts or circumstances,
changes in tax law, successfully settled issues under audit and
new audit activity. Such a change in recognition or measurement
could result in the recognition of a tax benefit or an increase to
the related provision.
47
FEDEX CORPORATION
We classify interest related to income tax liabilities as interest
expense, and if applicable, penalties are recognized as a com-
ponent of income tax expense. The income tax liabilities and
accrued interest and penalties that are due within one year of
the balance sheet date are presented as current liabilities. The
remaining portion of our income tax liabilities and accrued inter-
est and penalties are presented as noncurrent liabilities. These
noncurrent income tax liabilities are recorded in the caption
“Other liabilities” in our consolidated balance sheets.
We measure and record operating tax contingency accruals in
accordance with SFAS 5, “Accounting for Contingencies.” As
discussed below, SFAS 5 requires an accrual of estimated loss
from a contingency, such as a tax or other legal proceeding or
claim, when it is probable that a loss will be incurred and the
amount of the loss can be reasonably estimated.
Other Contingencies
Because of the complex environment in which we operate, we
are subject to other legal proceedings and claims, including
those relating to general commercial matters, employment-
related claims and FedEx Ground’s owner-operators. We account
for these contingencies in accordance with SFAS 5. SFAS 5
requires an accrual of estimated loss from a contingency, such
as a tax or other legal proceeding or claim, when it is probable
(i.e., the future event or events are likely to occur) that a loss will
be incurred and the amount of the loss can be reasonably esti-
mated. SFAS 5 requires disclosure of a loss contingency matter
when, in management’s judgment, a material loss is reasonably
possible or probable of occurring.
Our legal department maintains thorough processes to identify,
evaluate and monitor the status of litigation and other loss con-
tingencies as they arise and develop. Management has regular
litigation and contingency reviews, including updates from
internal and external counsel, to assess the need for account-
ing recognition of a loss or disclosure of these contingencies. In
determining whether a loss should be accrued or a loss contin-
gency disclosed, we evaluate, among other factors, the degree
of probability of an unfavorable outcome or settlement and the
ability to make a reasonable estimate of the amount of loss.
Events may arise that were not anticipated and the outcome of a
contingency may result in a loss to us that differs materially from
our previously estimated liability.
MARkET RISk SENSITIvE
INSTRUMENTS AND POSITIONS
INTEREST RATES
While we currently have market risk sensitive instruments related
to interest rates, we have no significant exposure to changing
interest rates on our long-term debt because the interest rates
are fixed on all of our long-term debt. As disclosed in Note 6 to
the accompanying consolidated financial statements, we had out-
standing fixed-rate, long-term debt (exclusive of capital leases)
with an estimated fair value of $1.9 billion at May 31, 2008 and
$2.4 billion at May 31, 2007. Market risk for fixed-rate, long-term
debt is estimated as the potential decrease in fair value resulting
from a hypothetical 10% increase in interest rates and amounts
to approximately $27 million as of May 31, 2008 and $36 million as
of May 31, 2007. The underlying fair values of our long-term debt
were estimated based on quoted market prices or on the current
rates offered for debt with similar terms and maturities.
FOREIGN CURRENCY
While we are a global provider of transportation, e-commerce
and business services, the substantial majority of our transac-
tions are denominated in U.S. dollars. The distribution of our
foreign currency denominated transactions is such that foreign
currency declines in some areas of the world are often offset
by currency gains in other areas of the world. The principal
foreign currency exchange rate risks to which we are exposed
are in the Chinese yuan, euro, Canadian dollar, Hong Kong
dollar, British pound and Japanese yen. Our exposure to
foreign currency fluctuations is more significant with respect to
our revenues than our expenses, as a significant portion of our
expenses are denominated in U.S. dollars, such as aircraft and
fuel expenses. During 2008 and 2007, operating income was posi-
tively impacted due to foreign currency fluctuations. However,
favorable foreign currency fluctuations also may have had an
offsetting impact on the price we obtained or the demand for our
services, which is not quantifiable. At May 31, 2008, the result of
a uniform 10% strengthening in the value of the dollar relative to
the currencies in which our transactions are denominated would
result in a decrease in operating income of approximately $74
million for 2009 (the comparable amount in the prior year was
approximately $41 million). This theoretical calculation assumes
that each exchange rate would change in the same direction
relative to the U.S. dollar.
In practice, our experience has been that exchange rates in
the principal foreign markets where we have foreign currency
denominated transactions tend to have offsetting fluctuations.
Therefore, the calculation above is not indicative of our actual
experience in foreign currency transactions. In addition to the
direct effects of changes in exchange rates, fluctuations in
exchange rates also affect the volume of sales or the foreign
currency sales price as competitors’ services become more or
less attractive. The sensitivity analysis of the effects of changes
in foreign currency exchange rates does not factor in a potential
change in sales levels or local currency prices.
48
MANAGEMENT’S DISCUSSION AND ANALYSIS
COMMODITY
While we have market risk for changes in the price of jet and
vehicle fuel, this risk is largely mitigated by our fuel surcharges
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.
However, our fuel surcharges have a timing lag (approximately
six to eight weeks for FedEx Express and FedEx Ground) before
they are adjusted for changes in fuel prices. Our fuel surcharge
index also allows fuel prices to fluctuate approximately 2% for
FedEx Express and approximately 4% for FedEx Ground before an
adjustment to the fuel surcharge occurs. Accordingly, our operat-
ing income may be affected should the spot price of fuel suddenly
change by a significant amount or change by amounts that do not
result in a change in our fuel surcharges.
OTHER
We do not purchase or hold any derivative financial instruments
for trading purposes.
RISk FACTORS
Our financial and operating results are subject to many risks and
uncertainties, as described below.
Our businesses depend on our strong reputation and the value of
the FedEx brand. The FedEx brand name symbolizes high-quality
service, reliability and speed. FedEx is one of the most widely
recognized, trusted and respected brands in the world, and the
FedEx brand is one of our most important and valuable assets. In
addition, we have a strong reputation among customers and the
general public for high standards of social and environmental
responsibility and corporate governance and ethics. The FedEx
brand name and our corporate reputation are powerful sales
and marketing tools, and we devote significant resources to pro-
moting and protecting them. Adverse publicity (whether or not
justified) relating to activities by our employees, contractors or
agents could tarnish our reputation and reduce the value of our
brand. Damage to our reputation and loss of brand equity could
reduce demand for our services and thus have an adverse effect
on our financial condition, liquidity and results of operations, as
well as require additional resources to rebuild our reputation and
restore the value of our brand.
We rely heavily on technology to operate our transportation
and business networks, and any disruption to our technology
infrastructure or the Internet could harm our operations and our
reputation among customers. Our ability to attract and retain
customers and to compete effectively depends in part upon the
sophistication and reliability of our technology network, includ-
ing our ability to provide features of service that are important to
our customers. Any disruption to the Internet or our technology
infrastructure, including those impacting our computer systems
and Web site, could adversely impact our customer service and
our volumes and revenues and result in increased costs. While
we have invested and continue to invest in technology security
initiatives and disaster recovery plans, these measures cannot
fully insulate us from technology disruptions and the resulting
adverse effect on our operations and financial results.
Our transportation businesses may be impacted by the price and
availability of fuel. We must purchase large quantities of fuel to
operate our aircraft and vehicles, and the price and availability
of fuel can be unpredictable and beyond our control. To date, we
have been mostly successful in mitigating the expense impact
of higher fuel costs through our indexed fuel surcharges, as the
amount of the surcharges is closely linked to the market prices for
fuel. If we are unable to maintain or increase our fuel surcharges
because of competitive pricing pressures or some other reason,
fuel costs could adversely impact our operating results. Even if
we are able to offset the cost of fuel with our surcharges, high
fuel surcharges could move our customers, especially in the U.S.
domestic market, away from our higher-yielding express services
to our lower-yielding ground services or even reduce customer
demand for our services altogether. These effects were evident
in the second half of 2008, as fuel prices reached all-time highs.
In addition, disruptions in the supply of fuel could have a negative
impact on our ability to operate our transportation networks.
Our businesses are capital intensive, and we must make capi-
tal expenditures based upon projected volume levels. We make
significant investments in aircraft, vehicles, technology, package
handling facilities, sort equipment, copy equipment and other
capital to support our transportation and business networks.
We also make significant investments to rebrand, integrate and
grow the companies that we acquire. The amount and timing
of capital investments depend on various factors, including our
anticipated volume growth. For example, we must make commit-
ments to purchase or modify aircraft years before the aircraft
are actually needed. We must predict volume levels and fleet
requirements and make commitments for aircraft based on those
projections. Missing our projections could result in too much or
too little capacity relative to our shipping volumes. Overcapacity
could lead to asset dispositions or write-downs, and undercapac-
ity could negatively impact service levels.
We face intense competition. The transportation and business
services markets are both highly competitive and sensitive to
price and service. Some of our competitors have more financial
resources than we do, or they are controlled or subsidized by
foreign governments, which enables them to raise capital more
easily. We believe we compete effectively with these companies
— for example, by providing more reliable service at compensa-
tory prices. However, our competitors determine the charges for
their services. If the pricing environment becomes irrational, it
could limit our ability to maintain or increase our prices (including
our fuel surcharges in response to rising fuel costs) or to maintain
or grow our market share. In addition, maintaining a broad portfo-
lio of services is important to keeping and attracting customers.
While we believe we compete effectively through our current
service offerings, if our competitors offer a broader range of ser-
vices or more effectively bundle their services, it could impede
our ability to maintain or grow our market share.
49
FEDEX CORPORATION
If we do not effectively operate, integrate, leverage and grow
acquired businesses, our financial results and reputation may
suffer. Our strategy for long-term growth, productivity and profit-
ability depends in part on our ability to make prudent strategic
acquisitions and to realize the benefits we expect when we make
those acquisitions. In furtherance of this strategy, during 2007
we acquired the LTL freight operations of Watkins Motor Lines
(renamed FedEx National LTL) and made strategic acquisitions in
China, the United Kingdom and India. During 2004, we acquired
Kinko’s, Inc. (now known as FedEx Office). While we expect these
acquisitions to enhance our value proposition to customers and
improve our long-term profitability, there can be no assurance that
we will realize our expectations within the time frame we have
established, if at all, or that we can continue to support the value
we allocate to these acquired businesses, including their goodwill
or other intangible assets. During the fourth quarter of 2008, we
recorded a charge of approximately $891 million, predominantly
for impairment of the value of the Kinko’s trade name and a por-
tion of the goodwill recorded as a result of the Kinko’s acquisition.
The charge was necessary, among other reasons, because we
revised our long-term growth plans for that company and its finan-
cial performance did not meet our original expectations.
FedEx Ground relies on owner-operators to conduct its opera-
tions, and the status of these owner-operators as independent
contractors, rather than employees, is being challenged. FedEx
Ground’s use of independent contractors is well suited to the
needs of the ground delivery business and its customers, as evi-
denced by the strong growth of this business segment. We are
involved in numerous class-action lawsuits (including many that
have been certified as class actions), several individual lawsuits
and numerous tax and other administrative proceedings (includ-
ing a tentative assessment in an IRS audit) that claim that the
company’s owner-operators or their drivers should be treated as
our employees, rather than independent contractors. We expect
to incur certain costs, including legal fees, in defending the status
of FedEx Ground’s owner-operators as independent contractors.
We believe that FedEx Ground’s owner-operators are properly
classified as independent contractors and that FedEx Ground
is not an employer of the drivers of the company’s independent
contractors. However, adverse determinations in these matters
could, among other things, entitle certain of our contractors and
their drivers to the reimbursement of certain expenses and to
the benefit of wage-and-hour laws and result in employment
and withholding tax and benefit liability for FedEx Ground, and
could result in changes to the independent contractor status of
FedEx Ground’s owner-operators. If FedEx Ground is compelled to
convert its independent contractors to employees, our operating
costs could increase materially and we could incur significant
capital outlays.
Increased security requirements could impose substantial costs
on us, especially at FedEx Express. As a result of concerns about
global terrorism and homeland security, governments around the
world are adopting or are considering adopting stricter security
requirements that will increase operating costs for businesses,
including those in the transportation industry. For example, in
May 2006, the U.S. Transportation Security Administration (“TSA”)
adopted new rules enhancing many of the security requirements
for air cargo on both passenger and all-cargo aircraft, and in
May 2007, the TSA issued a revised model all-cargo aircraft
security program for implementing the new rules. Together with
other all-cargo aircraft operators, we filed comments with the
TSA requesting clarification regarding several provisions in the
revised model program. Until the requirements for our security
program under the new rules are finalized, we cannot determine
the effect that these new rules will have on our cost structure
or our operating results. It is reasonably possible, however, that
these rules or other future security requirements for air cargo
carriers could impose material costs on us.
The regulatory environment for global aviation rights may impact
our air operations. Our extensive air network is critical to our suc-
cess. Our right to serve foreign points is subject to the approval
of the Department of Transportation and generally requires a
bilateral agreement between the United States and foreign gov-
ernments. In addition, we must obtain the permission of foreign
governments to provide specific flights and services. Regulatory
actions affecting global aviation rights or a failure to obtain or
maintain aviation rights in important international markets could
impair our ability to operate our air network.
We may be affected by global climate change or by legal, regula-
tory or market responses to such change. Concern over climate
change, including the impact of global warming, has led to sig-
nificant U.S. and international legislative and regulatory efforts to
limit greenhouse gas (GHG) emissions. For example, in the past
several years, the U.S. Congress has considered various bills that
would regulate GHG emissions. While these bills have not yet
received sufficient Congressional support, some form of federal
climate change legislation is possible in the relatively near future.
Increased regulation regarding GHG emissions, especially aircraft
or diesel engine emissions, could impose substantial costs on us,
especially at FedEx Express. These costs include an increase in
the cost of the fuel and other energy we purchase and capital
costs associated with updating or replacing our aircraft or trucks
prematurely. Until the timing, scope and extent of any future regu-
lation becomes known, we cannot predict its effect on our cost
structure or our operating results. It is reasonably possible, how-
ever, that it could impose material costs on us. Moreover, even
without such regulation, increased awareness and any adverse
publicity in the global marketplace about the GHGs emitted by
companies in the airline and transportation industries could harm
our reputation and reduce customer demand for our services,
especially our air express services.
We are also subject to risks and uncertainties that affect many
other businesses, including:
• the impact of any international conflicts or terrorist activities on
the United States and global economies in general, the trans-
portation industry or us in particular, and what effects these
events will have on our costs or the demand for our services;
• any impacts on our businesses resulting from new domestic or
international government laws and regulation, including tax,
accounting, trade, labor, environmental or postal rules;
50
MANAGEMENT’S DISCUSSION AND ANALYSIS
FORwARD-LOOkING STATEMENTS
Certain statements in this report, including (but not limited to)
those contained in “Outlook (including segment outlooks),”
“Liquidity,” “Capital Resources,” “Contractual Cash Obligations”
and “Critical Accounting Estimates,” and the “Retirement Plans”
note to the consolidated financial statements, are “forward-
looking” statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to our financial condi-
tion, results of operations, cash flows, plans, objectives, future
performance and business. Forward-looking statements include
those preceded by, followed by or that include the words “may,”
“could,” “would,” “should,” “believes,” “expects,” “anticipates,”
“plans,” “estimates,” “targets,” “projects,” “intends” or similar
expressions. These forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those
contemplated (expressed or implied) by such forward-looking
statements, because of, among other things, the risk factors iden-
tified above and the other risks and uncertainties you can find in
our press releases and SEC filings.
As a result of these and other factors, no assurance can be
given as to our future results and achievements. Accordingly, a
forward-looking statement is neither a prediction nor a guarantee
of future events or circumstances and those future events or cir-
cumstances may not occur. You should not place undue reliance
on the forward-looking statements, which speak only as of the
date of this report. We are under no obligation, and we expressly
disclaim any obligation, to update or alter any forward-looking
statements, whether as a result of new information, future events
or otherwise.
• our ability to manage our cost structure for capital expenditures
and operating expenses, and match it to shifting and future cus-
tomer volume levels;
• changes in foreign currency exchange rates, especially in
the euro, Chinese yuan, Canadian dollar, British pound and
Japanese yen, which can affect our sales levels and foreign
currency sales prices;
• our ability to maintain good relationships with our employees
and prevent attempts by labor organizations to organize groups
of our employees, which could significantly increase our oper-
ating costs and reduce our operational flexibility;
• a shortage of qualified labor and our ability to mitigate this
shortage through recruiting and retention efforts and produc-
tivity gains;
• increasing costs, the volatility of costs and legal mandates
for employee benefits, especially pension and healthcare
benefits;
• significant changes in the volumes of shipments transported
through our networks, customer demand for our various ser-
vices or the prices we obtain for our services;
• market acceptance of our new service and growth initiatives;
• any liability resulting from and the costs of defending against
class-action litigation, such as wage-and-hour and discrimina-
tion and retaliation claims, patent litigation and any other legal
proceedings;
• the impact of technology developments on our operations and
on demand for our services;
• adverse weather conditions or natural disasters, such as earth-
quakes and hurricanes, which can damage our property, disrupt
our operations, increase fuel costs and adversely affect ship-
ment levels;
• widespread outbreak of an illness or any other communicable
disease, or any other public health crisis; and
• availability of financing on terms acceptable to us and our abil-
ity to maintain our current credit ratings, especially given the
capital intensity of our operations, and the current volatility of
credit markets.
We are directly affected by the state of the economy. While the
global, or macro-economic, risks listed above apply to most com-
panies, we are particularly vulnerable. The transportation industry
is highly cyclical and especially susceptible to trends in economic
activity. Our primary business is to transport goods, so our busi-
ness levels are directly tied to the purchase and production of
goods — key macro-economic measurements. When individuals
and companies purchase and produce fewer goods, we trans-
port fewer goods. In addition, we have a relatively high fixed-cost
structure, which is difficult to adjust to match shifting volume
levels. Moreover, as we grow our international business, we are
increasingly affected by the health of the global economy.
51
FEDEX CORPORATION
MANAGEMENT’S REPORT ON INTERNAL CONTROL OvER
FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes,
among other things, defined policies and procedures for conducting and governing our business, sophisticated information systems
for processing transactions and a properly staffed, professional internal audit department. Mechanisms are in place to monitor the
effectiveness of our internal control over financial reporting and actions are taken to correct deficiencies identified. Our procedures
for financial reporting include the active involvement of senior management, our Audit Committee and our staff of highly qualified
financial and legal professionals.
Management, with the participation of our principal executive and financial officers, assessed our internal control over financial
reporting as of May 31, 2008, the end of our fiscal year. Management based its assessment on criteria established in Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Based on this assessment, management has concluded that our internal control over financial reporting was effective as of
May 31, 2008.
The effectiveness of our internal control over financial reporting as of May 31, 2008, has been audited by Ernst & Young LLP, the
independent registered public accounting firm who also audited the Company’s consolidated financial statements included
in this Annual Report. Ernst & Young LLP’s report on the Company’s internal control over financial reporting is included in
this Annual Report.
52
FEDEX CORPORATION
REPORT OF INDEPENDENT REGISTERED PUbLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have audited FedEx Corporation’s internal control over financial reporting as of May 31, 2008, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). FedEx Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabil-
ity of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial state-
ments in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, FedEx Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31,
2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of FedEx Corporation as of May 31, 2008 and 2007, and the related consolidated statements of income,
changes in stockholders’ investment and comprehensive income, and cash flows for each of the three years in the period ended
May 31, 2008 of FedEx Corporation and our report dated July 10, 2008 expressed an unqualified opinion thereon.
Memphis, Tennessee
July 10, 2008
53
FEDEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
REVENUES
OPERATING ExPENSES:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Impairment charges
Other
OPERATING INCOME
OTHER INCOME (ExPENSE):
Interest expense
Interest income
Other, net
INCOME BEFORE INCOME TAxES
PROVISION FOR INCOME TAxES
NET INCOME
BASIC EARNINGS PER COMMON SHARE
DILUTED EARNINGS PER COMMON SHARE
The accompanying notes are an integral part of these consolidated financial statements.
2008
$ 37,953
14,202
4,447
2,441
1,946
4,596
2,068
882
5,296
35,878
2,075
(98)
44
(5)
(59)
2,016
891
$ 1,125
$ 3.64
$ 3.60
Years ended May 31,
2007
$ 35,214
13,740
3,873
2,343
1,742
3,533
1,952
–
4,755
31,938
3,276
(136)
83
(8)
(61)
3,215
1,199
$ 2,016
$ 6.57
$ 6.48
2006
$ 32,294
12,571
3,251
2,390
1,550
3,256
1,777
–
4,485
29,280
3,014
(142)
38
(11)
(115)
2,899
1,093
$ 1,806
$ 5.94
$ 5.83
54
FEDEX CORPORATION
CONSOLIDATED bALANCE ShEETS
(In millions, except share data)
ASSETS
Current Assets
Cash and cash equivalents
Receivables, less allowances of $158 and $136
Spare parts, supplies and fuel, less
allowances of $163 and $156
Deferred income taxes
Prepaid expenses and other
Total current assets
Property and Equipment, at Cost
Aircraft and related equipment
Package handling and ground support equipment
Computer and electronic equipment
Vehicles
Facilities and other
Less accumulated depreciation and amortization
Net property and equipment
Other Long-Term Assets
Goodwill
Pension assets
Intangible and other assets
Total other long-term assets
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current Liabilities
Current portion of long-term debt
Accrued salaries and employee benefits
Accounts payable
Accrued expenses
Total current liabilities
Long-Term Debt, Less Current Portion
Other Long-Term Liabilities
Deferred income taxes
Pension, postretirement healthcare
and other benefit obligations
Self-insurance accruals
Deferred lease obligations
Deferred gains, principally related to aircraft transactions
Other liabilities
Total other long-term liabilities
Commitments and Contingencies
Common Stockholders’ Investment
Common stock, $0.10 par value; 800 million shares authorized;
311 million shares issued for 2008 and 308 million shares issued for 2007
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock
Total common stockholders’ investment
The accompanying notes are an integral part of these consolidated financial statements.
May 31,
2008
2007
$ 1,539
4,359
435
544
367
7,244
10,165
4,817
5,040
2,754
6,529
29,305
15,827
13,478
3,165
827
919
4,911
$ 25,633
502
$
1,118
2,195
1,553
5,368
1,506
1,264
989
804
671
315
190
4,233
31
1,922
13,002
(425)
(4)
14,526
$ 25,633
$ 1,569
3,942
338
536
244
6,629
9,593
3,889
4,685
2,561
6,362
27,090
14,454
12,636
3,497
–
1,238
4,735
$ 24,000
$
639
1,354
2,016
1,419
5,428
2,007
897
1,164
759
655
343
91
3,909
31
1,689
11,970
(1,030)
(4)
12,656
$ 24,000
55
FEDEX CORPORATION
CONSOLIDATED STATEMENTS OF CASh FLOwS
(In millions)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to cash provided by operating activities:
2008
Years ended May 31,
2007
2006
$ 1,125
$ 2,016
$ 1,806
Depreciation and amortization
Provision for uncollectible accounts
Deferred income taxes and other noncash items
Lease accounting charge
Impairment charges
Excess tax benefits on the exercise of stock options
Stock-based compensation
Changes in operating assets and liabilities,
net of the effects of businesses acquired:
Receivables
Other assets
Pension assets and liabilities, net
Accounts payable and other liabilities
Other, net
Cash provided by operating activities
INVESTING ACTIVITIES
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from asset dispositions and other
Cash used in investing activities
FINANCING ACTIVITIES
Principal payments on debt
Proceeds from debt issuances
Proceeds from stock issuances
Excess tax benefits on the exercise of stock options
Dividends paid
Other, net
Cash (used in) provided by financing activities
CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
1,946
134
124
–
882
–
101
(447)
(237)
(273)
190
(61)
3,484
(2,947)
(4)
54
(2,897)
(639)
–
108
38
(124)
–
(617)
(30)
1,569
$ 1,539
1,742
106
37
–
–
–
103
(323)
(85)
(69)
66
(30)
3,563
(2,882)
(1,310)
68
(4,124)
(906)
1,054
115
45
(110)
(5)
193
(368)
1,937
$ 1,569
1,548
121
159
79
–
62
37
(319)
(38)
(71)
346
(54)
3,676
(2,518)
–
64
(2,454)
(369)
–
144
–
(97)
(2)
(324)
898
1,039
$ 1,937
The accompanying notes are an integral part of these consolidated financial statements.
56
FEDEX CORPORATION
CONSOLIDATED STATEMENTS OF ChANGES IN STOCkhOLDERS’
INvESTMENT AND COMPREhENSIvE INCOME
Accumulated
Other
Comprehensive
Income (Loss)
$ (17)
–
Retained
Earnings
$ 8,363
1,806
Treasury
Stock
$ (1)
–
Total
$ 9,588
1,806
(In millions, except share data)
BALANCE AT MAY 31, 2005
Net income
Foreign currency translation adjustment,
net of deferred taxes of $3
Minimum pension liability adjustment,
net of deferred taxes of $24
Total comprehensive income
Cash dividends declared ($0.33 per share)
Employee incentive plans and other
(3,579,766 shares issued)
BALANCE AT MAY 31, 2006
Net income
Foreign currency translation adjustment,
net of deferred taxes of $8
Minimum pension liability adjustment,
net of deferred taxes of $24
Total comprehensive income
Retirement plans adjustment in connection
with the adoption of SFAS 158, net of
deferred taxes of $582
Cash dividends declared ($0.37 per share)
Employee incentive plans and other
(2,508,850 shares issued)
BALANCE AT MAY 31, 2007
Net income
Foreign currency translation adjustment,
net of deferred taxes of $15
Retirement plans adjustments,
net of deferred taxes of $296
Total comprehensive income
Cash dividends declared ($0.30 per share)
Employee incentive plans and other
(2,556,318 shares issued)
BALANCE AT MAY 31, 2008
Common
Stock
$ 30
–
–
–
–
1
31
–
–
–
–
–
–
31
–
–
–
–
Additional
Paid-in
Capital
$ 1,213
–
–
–
–
225
1,438
–
–
–
–
–
251
1,689
–
–
–
–
–
–
(101)
–
10,068
2,016
–
–
–
(114)
–
11,970
1,125
–
–
(93)
The accompanying notes are an integral part of these consolidated financial statements.
–
$ 31
233
$ 1,922
–
$ 13,002
29
(36)
–
–
(24)
–
26
(50)
(982)
–
–
(1,030)
–
99
506
–
–
$ (425)
–
–
–
(1)
(2)
–
–
–
–
–
(2)
(4)
–
–
–
–
29
(36)
1,799
(101)
225
11,511
2,016
26
(50)
1,992
(982)
(114)
249
12,656
1,125
99
506
1,730
(93)
–
$ (4)
233
$ 14,526
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF bUSINESS
AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
FedEx Corporation (“FedEx”) provides a broad portfolio of trans-
portation, e-commerce and business services through companies
competing collectively, operating independently and managed
collaboratively, under the respected FedEx brand. Our primary
operating companies include Federal Express Corporation
(“FedEx Express”), the world’s largest express transportation
company; FedEx Ground Package System, Inc. (“FedEx Ground”),
a leading provider of small-package ground delivery services;
and FedEx Freight Corporation, a leading U.S. provider of less-
than-truckload (“LTL”) freight services. Our FedEx Services
segment provides customer-facing sales, marketing and informa-
tion technology support, as well as retail access for customers
through FedEx Office and Print Services, Inc. (“FedEx Office”),
formerly FedEx Kinko’s, primarily for the benefit of FedEx Express
and FedEx Ground. These companies represent our major service
lines and form the core of our reportable segments.
FISCAl YEARS
Except as otherwise specified, references to years indicate
our fiscal year ended May 31, 2008 or ended May 31 of the year
referenced.
PRINCIPlES OF CONSOlIDATION
The consolidated financial statements include the accounts of
FedEx and its subsidiaries, substantially all of which are wholly
owned. All significant intercompany accounts and transactions
have been eliminated in consolidation.
REClASSIFICATIONS
Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.
REVENUE RECOGNITION
We recognize revenue upon delivery of shipments for our trans-
portation businesses and upon completion of services for our
business services, logistics and trade services businesses.
Certain of our transportation services are provided with the use of
independent contractors. FedEx is the principal to the transaction
in most instances and in those cases revenue from these trans-
actions is recognized on a gross basis. Costs associated with
independent contractor settlements are recognized as incurred
and included in the caption “Purchased transportation” in the
accompanying consolidated statements of income. For shipments
in transit, revenue is recorded based on the percentage of service
completed at the balance sheet date. Estimates for future billing
adjustments to revenue and accounts receivable are recognized
at the time of shipment for money-back service guarantees and
billing corrections. Delivery costs are accrued as incurred.
Our contract logistics, global trade services and certain transpor-
tation businesses engage in some transactions wherein they act
as agents. Revenue from these transactions is recorded on a net
basis. Net revenue includes billings to customers less third-party
charges, including transportation or handling costs, fees, commis-
sions, and taxes and duties. These amounts are not material.
Certain of our revenue-producing transactions are subject to
taxes assessed by governmental authorities, such as sales tax.
We present these revenues net of tax.
CREDIT RISk
We routinely grant credit to many of our customers for transpor-
tation and business services without collateral. The risk of credit
loss in our trade receivables is substantially mitigated by our
credit evaluation process, short collection terms and sales to a
large number of customers, as well as the low revenue per trans-
action for most of our services. Allowances for potential credit
losses are determined based on historical experience and current
evaluation of the composition of accounts receivable. Historically,
credit losses have been within management’s expectations.
ADVERTISING
Advertising and promotion costs are expensed as incurred and
are classified in other operating expenses. Advertising and pro-
motion expenses were $445 million in 2008, $406 million in 2007
and $376 million in 2006.
CASH EQUIVAlENTS
Cash in excess of current operating requirements is invested in
short-term, interest-bearing instruments with maturities of three
months or less at the date of purchase and is stated at cost,
which approximates market value.
SPARE PARTS, SUPPlIES AND FUEl
Spare parts (principally aircraft related) are reported at weight-
ed-average cost. Supplies and fuel are reported at standard
cost, which approximates actual cost on a first-in, first-out
basis. Allowances for obsolescence are provided for spare parts
expected to be on hand at the date the aircraft are retired from
service. These allowances are provided over the estimated useful
life of the related aircraft and engines. Additionally, allowances
for obsolescence are provided for spare parts currently identified
as excess or obsolete. These allowances are based on manage-
ment estimates, which are subject to change.
PROPERTY AND EQUIPMENT
Expenditures for major additions, improvements, flight equipment
modifications and certain equipment overhaul costs are capitalized
when such costs are determined to extend the useful life of the
asset or are part of the cost of acquiring the asset. Maintenance
and repairs are charged to expense as incurred, except for certain
aircraft-related major maintenance costs on one of our aircraft
fleet types, which are capitalized as incurred and amortized over
their estimated service lives. We capitalize certain direct internal
and external costs associated with the development of internal
use software. Gains and losses on sales of property used in opera-
tions are classified within operating expenses.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For financial reporting purposes, we record depreciation and
amortization of property and equipment on a straight-line basis
over the asset’s service life or related lease term. For income tax
purposes, depreciation is computed using accelerated methods
when applicable. The depreciable lives and net book value of our
property and equipment are as follows (dollars in millions):
Net Book Value at May 31,
2007
2008
Range
15 to 25 years
Wide-body aircraft and
related equipment
Narrow-body and feeder
aircraft and related equipment 5 to 15 years
Package handling and
ground support equipment
Computer and electronic
equipment
Vehicles
Facilities and other
2 to 10 years
3 to 15 years
2 to 40 years
2 to 30 years
$5,550
$ 5,391
452
352
1,897
1,420
943
1,007
3,629
1,021
957
3,495
Substantially all property and equipment have no material resid-
ual values. The majority of aircraft costs are depreciated on a
straight-line basis over 15 to 18 years. We periodically evaluate
the estimated service lives and residual values used to depre-
ciate our property and equipment. This evaluation may result
in changes in the estimated lives and residual values. Such
changes did not materially affect depreciation expense in any
period presented. Depreciation expense, excluding gains and
losses on sales of property and equipment used in operations,
was $1.8 billion in 2008, $1.7 billion in 2007 and $1.5 billion in 2006.
Depreciation and amortization expense includes amortization of
assets under capital lease.
CAPITAlIZED INTEREST
Interest on funds used to finance the acquisition and modification
of aircraft, construction of certain facilities and development of
certain software up to the date the asset is ready for its intended
use is capitalized and included in the cost of the asset if the asset
is actively under construction. Capitalized interest was $50 million
in 2008, $34 million in 2007 and $33 million in 2006.
IMPAIRMENT OF lONG-lIVED ASSETS
Long-lived assets are reviewed for impairment when circum-
stances indicate the carrying value of an asset may not be
recoverable. For assets that are to be held and used, an impair-
ment is recognized when the estimated undiscounted cash flows
associated with the asset or group of assets is less than their
carrying value. If impairment exists, an adjustment is made to
write the asset down to its fair value, and a loss is recorded as
the difference between the carrying value and fair value. Fair val-
ues are determined based on quoted market values, discounted
cash flows or internal and external appraisals, as applicable.
Assets to be disposed of are carried at the lower of carrying
value or estimated net realizable value. We operate integrated
transportation networks, and accordingly, cash flows for most of
our operating assets are assessed at a network level, not at an
individual asset level for our analysis of impairment.
GOODWIll
Goodwill is recognized for the excess of the purchase price over
the fair value of tangible and identifiable intangible net assets of
businesses acquired. Several factors give rise to goodwill in our
acquisitions, such as the expected benefit from synergies of the
combination and the existing workforce of the acquired entity.
Goodwill is reviewed at least annually for impairment by compar-
ing the fair value of each reporting unit with its carrying value
(including attributable goodwill). Fair value for our reporting units
is determined using an income approach incorporating market
participant considerations and management’s assumptions on
revenue growth rates, operating margins, discount rates and
expected capital expenditures. Unless circumstances other-
wise dictate, we perform our annual impairment testing in the
fourth quarter.
INTANGIBlE ASSETS
Intangible assets include customer relationships, trade names,
technology assets and contract-based intangibles acquired in
business combinations. Intangible assets are amortized over
periods ranging from 2 to 15 years, either on a straight-line basis
or an accelerated basis depending upon the pattern in which the
economic benefits are realized. Non-amortizing intangibles are
reviewed at least annually for impairment by comparing the carry-
ing amount to fair value. Unless circumstances otherwise dictate,
we perform our annual impairment testing in the fourth quarter.
PENSION AND POSTRETIREMENT
HEAlTHCARE PlANS
On May 31, 2007, we adopted Statement of Financial Accounting
Standards (“SFAS”) 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.” SFAS 158
requires recognition in the balance sheet of the funded status of
defined benefit pension and other postretirement benefit plans,
and the recognition in accumulated other comprehensive income
(“AOCI”) of unrecognized gains or losses and prior service costs
or credits. The adoption of SFAS 158 resulted in a $982 million
charge to shareholders’ equity at May 31, 2007 through AOCI.
Additionally, SFAS 158 requires the measurement date for plan
assets and liabilities to coincide with the sponsor’s year end.
We currently use a February 28 (February 29 in 2008) measure-
ment date for our plans; therefore, this standard will require us
to change our measurement date to May 31 (beginning in 2009).
We are required to make our transition election in the first quar-
ter of 2009 and plan to elect the two-measurement approach as
our transition method. Under the two-measurement approach,
we complete two actuarial measurements, one at February 29,
2008 and the other at June 1, 2008. For the transition period from
February 29, 2008 through June 1, 2008, we will record the net
periodic benefit cost, net of tax, as an adjustment to beginning
retained earnings and the actuarial gains and losses, net of tax,
as an adjustment to AOCI in the first quarter of 2009. The impact
of adopting the measurement date provision on our financial
statements is not expected to be material to our financial posi-
tion or results of operations, but will reduce our 2009 pension and
retiree medical expense by approximately $87 million under the
two-measurement approach due to an increase in the discount
rate and higher plan assets.
59
FEDEX CORPORATION
In 2007, we announced changes to significantly redesign cer-
tain of our retirement programs. Effective May 31, 2008, all
benefits previously accrued under our primary pension plans
using a traditional pension benefit formula were capped for
most employees, and those benefits will be payable beginning
at retirement. Beginning June 1, 2008, future pension benefits for
most employees will be accrued under a cash balance formula
we call the Portable Pension Account (as described in Note 12).
These changes will not affect the benefits of current retirees and
terminated vested participants.
Currently, our defined benefit plans are measured using actuarial
techniques that reflect management’s assumptions for discount
rate, expected long-term investment returns on plan assets, salary
increases, expected retirement, mortality, employee turnover and
future increases in healthcare costs. We determine the discount
rate (which is required to be the rate at which the projected ben-
efit obligation could be effectively settled as of the measurement
date) with the assistance of actuaries, who calculate the yield on
a theoretical portfolio of high-grade corporate bonds (rated Aa or
better) with cash flows that generally match our expected benefit
payments. A calculated-value method is employed for purposes
of determining the expected return on the plan asset component
of net periodic pension cost for our qualified U.S. pension plans.
We do not fund defined benefit plans when such funding provides
no current tax deduction or when such funding would be deemed
current compensation to plan participants.
INCOME TAXES
Deferred income taxes are provided for the tax effect of tempo-
rary differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. The liabil-
ity method is used to account for income taxes, which requires
deferred taxes to be recorded at the statutory rate expected to
be in effect when the taxes are paid.
On June 1, 2007, we adopted Financial Accounting Standards
Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes.” This interpretation establishes new
standards for the financial statement recognition, measurement
and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. The cumulative effect of adopting
FIN 48 was immaterial. See Note 11 for more information con-
cerning our adoption of FIN 48.
We recognize liabilities for uncertain income tax positions based
on a two-step process. The first step is to evaluate the tax posi-
tion for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step requires us to
estimate and measure the tax benefit as the largest amount that
is more than 50% likely to be realized upon ultimate settlement. It
is inherently difficult and subjective to estimate such amounts, as
we must determine the probability of various possible outcomes.
We reevaluate these uncertain tax positions on a quarterly basis
or when new information becomes available to management.
These reevaluations are based on factors including, but not lim-
ited to, changes in facts or circumstances, changes in tax law,
successfully settled issues under audit, and new audit activity.
60
Such a change in recognition or measurement could result in the
recognition of a tax benefit or an increase to the tax accrual.
We classify interest related to income tax liabilities as inter-
est expense, and if applicable, penalties are recognized as a
component of income tax expense. The income tax liabilities
and accrued interest and penalties that are due within one year
of the balance sheet date are presented as current liabilities.
The remaining portion of our income tax liabilities and accrued
interest and penalties are presented as noncurrent liabilities
because payment of cash is not anticipated within one year of
the balance sheet date. These noncurrent income tax liabilities
are recorded in the caption “Other liabilities” in our consolidated
balance sheets.
SElF-INSURANCE ACCRUAlS
We are primarily self-insured for workers’ compensation claims,
vehicle accidents and general liabilities, benefits paid under
employee healthcare programs and long-term disability benefits.
Accruals are primarily based on the actuarially estimated, undis-
counted cost of claims, which includes incurred-but-not-reported
claims. Current workers’ compensation claims, vehicle and gen-
eral liability, employee healthcare claims and long-term disability
are included in accrued expenses. We self-insure up to certain
limits that vary by operating company and type of risk. Periodically,
we evaluate the level of insurance coverage and adjust insurance
levels based on risk tolerance and premium expense.
lEASES
We lease certain aircraft, facilities, equipment and vehicles
under capital and operating leases. The commencement date of
all leases is the earlier of the date we become legally obligated
to make rent payments or the date we may exercise control over
the use of the property. In addition to minimum rental payments,
certain leases provide for contingent rentals based on equip-
ment usage principally related to aircraft leases at FedEx Express
and copier usage at FedEx Office. Rent expense associated with
contingent rentals is recorded as incurred. Certain of our leases
contain fluctuating or escalating payments and rent holiday peri-
ods. The related rent expense is recorded on a straight-line basis
over the lease term. The cumulative excess of rent payments
over rent expense is accounted for as a deferred lease asset
and recorded in “Intangible and other assets” in the accompa-
nying consolidated balance sheets. The cumulative excess of
rent expense over rent payments is accounted for as a deferred
lease obligation. Leasehold improvements associated with assets
utilized under capital or operating leases are amortized over the
shorter of the asset’s useful life or the lease term.
DEFERRED GAINS
Gains on the sale and leaseback of aircraft and other property
and equipment are deferred and amortized ratably over the life of
the lease as a reduction of rent expense. Substantially all of these
deferred gains are related to aircraft transactions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY TRANSlATION
Translation gains and losses of foreign operations that use local
currencies as the functional currency are accumulated and
reported, net of applicable deferred income taxes, as a compo-
nent of accumulated other comprehensive loss within common
stockholders’ investment. Transaction gains and losses that arise
from exchange rate fluctuations on transactions denominated
in a currency other than the local currency are included in the
caption “Other, net” in the accompanying consolidated state-
ments of income and were immaterial for each period presented.
Cumulative net foreign currency translation gains in accumulated
other comprehensive loss were $167 million at May 31, 2008,
$69 million at May 31, 2007 and $43 million at May 31, 2006.
EMPlOYEES UNDER COllECTIVE BARGAINING
ARRANGEMENTS
The pilots of FedEx Express, who represent a small percentage of
our total employees, are employed under a collective bargaining
agreement. During the second quarter of 2007, the pilots ratified a
new four-year labor contract that included signing bonuses and
other upfront compensation of approximately $143 million, as well
as pay increases and other benefit enhancements. These costs
were partially mitigated by reductions in the variable incentive
compensation of our other employees. The effect of this new
agreement on second quarter 2007 net income was approxi-
mately $78 million net of tax, or $0.25 per diluted share.
STOCk-BASED COMPENSATION
In 2007, we adopted the provisions of SFAS 123R, “Share-
Based Payment,” which requires recognition of compensation
expense for stock-based awards using a fair value method.
SFAS 123R is a revision of SFAS 123, “Accounting for Stock-
Based Compensation,” and supersedes Accounting Principles
Board Opinion No. (“APB”) 25, “Accounting for Stock Issued
to Employees.” Prior to the adoption of SFAS 123R, we applied
APB 25 and its related interpretations to measure compensa-
tion expense for stock-based compensation plans. As a result,
no compensation expense was recorded for stock options, as
the exercise price was equal to the market price of our common
stock at the date of grant.
We adopted SFAS 123R using the modified prospective method,
which resulted in prospective recognition of compensation
expense for all outstanding unvested share-based payments
based on the fair value on the original grant date. Under this
method of adoption, our financial statement amounts for the prior
period presented have not been restated.
The impact of adopting SFAS 123R for the year ended May 31,
2007 was approximately $71 million ($52 million, net of tax), or
$0.17 per basic and diluted share.
Stock option compensation expense, pro forma net income and
basic and diluted earnings per common share, if determined
under SFAS 123 at fair value using the Black-Scholes method,
would have been as follows (in millions, except for per share
amounts) for the year ended May 31:
Net income, as reported
Add: Stock option compensation included in
reported net income, net of tax
Deduct: Total stock option employee compensation
expense determined under fair value based
method for all awards, net of tax benefit
Pro forma net income
Earnings per common share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
2006
$ 1,806
5
46
$ 1,765
$ 5.94
$ 5.81
$ 5.83
$ 5.70
DIVIDENDS DEClARED PER COMMON SHARE
On June 2, 2008, our Board of Directors declared a dividend
of $0.11 per share of common stock. The dividend was paid on
July 1, 2008 to stockholders of record as of the close of business
on June 13, 2008. 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.
USE OF ESTIMATES
The preparation of our consolidated financial statements requires
the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, the reported amounts of rev-
enues and expenses and the disclosure of contingent liabilities.
Management makes its best estimate of the ultimate outcome
for these items based on historical trends and other information
available when the financial statements are prepared. Changes
in estimates are recognized in accordance with the accounting
rules for the estimate, which is typically in the period when new
information becomes available to management. Areas where the
nature of the estimate makes it reasonably possible that actual
results could materially differ from amounts estimated include:
self-insurance accruals; retirement plan obligations; long-term
incentive accruals; tax liabilities; obsolescence of spare parts;
contingent liabilities; loss contingencies, such as litigation and
other claims; and impairment assessments on long-lived assets
(including goodwill).
61
FEDEX CORPORATION
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our finan-
cial statements. We believe the following new accounting pronouncements, in addition to FIN 48 and SFAS 158, are relevant to the
readers of our financial statements.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which provides a common definition of fair value, establishes
a uniform framework for measuring fair value and requires expanded disclosures about fair value measurements. The requirements
of SFAS 157 are to be applied prospectively, and we anticipate that the primary impact of the standard to us will be related to the
measurement of fair value in our recurring impairment test calculations (such as measurements of our recorded goodwill). SFAS 157
is effective for us beginning on June 1, 2008; however, the FASB approved a one-year deferral of the adoption of the standard as it
relates to non-financial assets and liabilities with the issuance in February 2008 of FASB Staff Position FAS 157-2, “Effective Date of
FASB Statement No. 157.” We do not presently hold any financial assets or liabilities that would require recognition under SFAS 157
other than investments held by our pension plans. In addition, the FASB has excluded leases from the scope of SFAS 157. We anticipate
that this standard will not have a material impact on our financial condition or results of operations upon adoption.
In December 2007, the FASB issued SFAS 141R, “Business Combinations,” and SFAS 160, “Accounting and Reporting Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB No. 51.” These new standards significantly change the account-
ing for and reporting of business combination transactions and noncontrolling interests (previously referred to as minority interests)
in consolidated financial statements. The key aspects of SFAS 141R and SFAS 160 include requiring the acquiring entity in a business
combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction; establishing the acquisition-
date fair value as the measurement objective for all assets acquired and liabilities assumed; and requiring the expensing of most
transaction and restructuring costs. Both standards are effective for us beginning June 1, 2009 (fiscal 2010) and are applicable only
to transactions occurring after the effective date.
NOTE 3: bUSINESS COMbINATIONS
During 2007, we made the following acquisitions:
Segment
Business Acquired
Rebranded
Date Acquired
Total Purchase Price
(in millions)
FedEx Freight
FedEx Express
FedEx Express
Watkins Motor Lines
ANC Holdings Ltd.
Tianjin Datian W. Group Co., Ltd. (“DTW Group”)
FedEx National LTL
FedEx U.K.
N/A
September 3, 2006
December 16, 2006
March 1, 2007
$787
241
427
The acquisition of the assets and assumption of certain obliga-
tions of FedEx National LTL, a leading provider of long-haul LTL
services, extended our service offerings to the long-haul LTL
freight sector. The acquisition of all of the outstanding capital
stock of FedEx U.K. has allowed us to establish a domestic ser-
vice in the United Kingdom and better serve the U.K. international
market, which we previously served primarily through indepen-
dent agents. The FedEx Express acquisition of DTW Group’s
50% share of the FedEx-DTW International Priority express joint
venture and assets relating to DTW Group’s domestic express
network in China converted our joint venture with DTW Group
into a wholly owned subsidiary and has increased our presence
in China in the international market and established our presence
in the domestic market. During 2007, we also made other immate-
rial acquisitions that are not presented in the table above.
These acquisitions were not material to our results of operations
or financial condition. The portion of the purchase price allocated
to goodwill and other identified intangible assets for the FedEx
National LTL, FedEx U.K. and DTW Group acquisitions will be
deductible for U.S. tax purposes over 15 years.
Pro forma results of these acquisitions, individually or in the
aggregate, would not differ materially from reported results in
any of the periods presented. The purchase prices were allo-
cated as follows (in millions):
Current assets
Property and equipment
Intangible assets
Goodwill
Other assets
Current liabilities
Long-term liabilities
Total purchase price
FedEx
National LTL
FedEx U.K.
DTW Group
$ 121
525
77
121
3
(60)
–
$ 787
$ 68
20
49
168
2
(56)
(10)
$ 241
$ 54
16
17
348
10
(18)
–
$ 427
The intangible assets acquired in the FedEx National LTL and
FedEx U.K. acquisitions consist primarily of customer-related
intangible assets, which will be amortized on an accelerated basis
over their average estimated useful lives of seven years for FedEx
National LTL and up to 12 years for FedEx U.K., with the major-
ity 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 bil-
lion senior unsecured debt offering completed during 2007. See
Note 6 for further discussion of this debt offering.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: GOODwILL AND INTANGIbLES
The carrying amount of goodwill attributable to each reportable operating segment and changes therein follows (in millions):
FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Services segment
May 31, 2006
$ 530
90
656
1,549
$ 2,825
Goodwill
Acquired
Purchase
Adjustments
and Other
May 31, 2007
Impairment
Charge
Purchase
Adjustments
and Other (3)
May 31, 2008
$ 549 (1)
–
121 (2)
–
$ 670
$ 9
–
–
(7)
$ 2
$ 1,088
90
777
1,542
$ 3,497
$ –
–
–
(367)
$ (367)
$ 35
–
–
–
$ 35
$ 1,123
90
777
1,175
$ 3,165
(1) Primarily FedEx U.K. and DTW Group acquisitions.
(2) FedEx National LTL acquisition.
(3) Primarily currency translation adjustments.
During 2008, we made several strategic decisions regarding
FedEx Office. During the first quarter of 2008, FedEx Office was
reorganized as a part of the FedEx Services segment. FedEx
Office provides retail access to our customers for our package
transportation businesses and an array of document and business
services. FedEx Services provides access to customers through
digital channels such as fedex.com. Under FedEx Services, FedEx
Office benefits from the full range of resources and expertise of
FedEx Services to continue to enhance the customer experience,
provide greater, more convenient access to the portfolio of ser-
vices at FedEx, and increase revenues through our retail network.
This reorganization resulted in our ceasing to treat FedEx Office
as a core operating company; however, FedEx Office remains a
reporting unit for goodwill impairment testing purposes.
During the fourth quarter of 2008, several developments and stra-
tegic decisions occurred at FedEx Office, including:
• reorganizing senior management at FedEx Office with several
positions terminated and numerous reporting realignments,
including naming a new president and CEO;
• determining that we would minimize the use of the Kinko’s trade
name over the next several years;
• implementing revenue growth and cost management plans to
improve financial performance; and
• pursuing a more disciplined approach to the long-term
expansion of the retail network, reducing the overall level of
expansion.
We performed our annual impairment testing in the fourth quar-
ter for the Kinko’s trade name and the recorded goodwill for the
FedEx Office reporting unit. In accordance with the accounting
rules, the trade name impairment test was performed before the
goodwill impairment test.
In accordance with SFAS 142, “Goodwill and Other Intangible
Assets,” a two-step impairment test is performed on goodwill.
In the first step, we compared the estimated fair value of the
reporting unit to its carrying value. The valuation methodology
to estimate the fair value of the FedEx Office reporting unit was
based primarily on an income approach that considered market
participant assumptions to estimate fair value. Key assumptions
considered were the revenue and operating income forecast, the
assessed growth rate in the periods beyond the detailed forecast
period, and the discount rate.
In performing our impairment test, the most significant assump-
tion used to estimate the fair value of the FedEx Office reporting
unit was the discount rate. We used a discount rate of 12.5%,
representing the estimated weighted-average cost of capital
(“WACC”) of the FedEx Office reporting unit. The development
of the WACC used in our estimate of fair value considered the
following key factors:
• benchmark capital structures for guideline companies with
characteristics similar to the FedEx Office reporting unit;
• current market conditions for the risk-free interest rate;
• the size and industry of the FedEx Office reporting unit; and
• risks related to the forecast of future revenues and profitability
of the FedEx Office reporting unit.
The WACC used in the estimate of fair value in future periods may
be impacted by changes in market conditions (including those of
market participants), as well as the specific future performance
of the FedEx Office reporting unit and are subject to change,
based on changes in specific facts and circumstances.
In the second step of the impairment test, we estimated
the current fair values of all assets and liabilities to determine
the amount of implied goodwill and consequently the amount
of the goodwill impairment. Upon completion of the second
step of the impairment test, we concluded that the recorded
goodwill was impaired and recorded an impairment charge
of $367 million during the fourth quarter of 2008. Significant
judgments included in the second step of the impairment test
included fair value estimates of assets and liabilities, the aggre-
gate effect of which increased the impairment charge to goodwill
by approximately $90 million. The goodwill impairment charge
is included in operating expenses in the accompanying con-
solidated statements of income. This charge is included in the
results of the FedEx Services segment and was not allocated to
our transportation segments, as the charge was unrelated to the
core performance of these businesses.
63
FEDEX CORPORATION
The components of our intangible assets were as follows (in millions):
Customer relationships
Contract related
Technology related and other
Kinko’s trade name
Total
Gross Carrying
Amount
May 31, 2008
Accumulated
Amortization
Net Book
Value
Gross Carrying
Amount
$ 205
79
74
52
$ 410
$ (95)
(67)
(51)
(8)
$ (221)
$ 110
12
23
44
$ 189
$ 206
79
74
567
$ 926
May 31, 2007
Accumulated
Amortization
$ (58)
(62)
(39)
–
$ (159)
Net Book
Value
$ 148
17
35
567
$ 767
We have an intangible asset associated with the Kinko’s trade
name. Prior to 2008, this intangible asset was not amortized
because it had an indefinite remaining useful life. Prior to the
fourth quarter of 2008, our intent was to continue to use the Kinko’s
trade name indefinitely. During the fourth quarter, we made the
decision to change the name of FedEx Kinko’s to FedEx Office
and rebrand our retail locations over the next several years. We
believe the FedEx Office name better describes the wide range of
services available at our retail centers and takes full advantage
of the FedEx brand. This change converted this asset to a finite
life asset and resulted in an impairment charge of $515 million.
We estimated the fair value of this intangible asset based on
an income approach using the relief-from-royalty method. This
approach is dependent on a number of factors, including esti-
mates of future growth and trends, royalty rates in the category of
intellectual property, discount rates and other variables. We base
our fair value estimates on assumptions we believe to be reason-
able, but which are unpredictable and inherently uncertain.
The $515 million impairment charge resulted in a remaining
trade name balance of $52 million, which we began amortizing
in the fourth quarter on an accelerated basis over the next four
years. The trade name impairment charge is included in oper-
ating expenses in the accompanying consolidated statements
of income. The charge is included in the results of the FedEx
Services segment and was not allocated to our transportation
segments, as the charge was unrelated to the core performance
of these businesses.
Amortization expense for intangible assets was $60 million in
2008, $42 million in 2007 and $25 million in 2006. Estimated amorti-
zation expense for the next five years is as follows (in millions):
$ 73
50
26
11
9
2009
2010
2011
2012
2013
64
NOTE 5: SELECTED CURRENT
LIAbILITIES
The components of selected current liability captions were as
follows (in millions):
Accrued Salaries and Employee Benefits
Salaries
Employee benefits
Compensated absences
Accrued Expenses
Self-insurance accruals
Taxes other than income taxes
Other
May 31,
2008
2007
$ 193
404
521
$ 1,118
$ 577
339
637
$ 1,553
$ 283
599
472
$ 1,354
$ 548
310
561
$ 1,419
NOTE 6: LONG-TERM DEbT AND
OThER FINANCING ARRANGEMENTS
The components of long-term debt (net of discounts) were as
follows (in millions):
Senior unsecured debt
Interest rate of three-month LIBOR plus 0.08%
(5.44% at May 31, 2007) due in 2008
Interest rate of 3.50%, due in 2009
Interest rate of 5.50%, due in 2010
Interest rate of 7.25%, due in 2011
Interest rate of 9.65%, due in 2013
Interest rate of 7.60%, due in 2098
Capital lease obligations
Other debt, interest rate of
six-month LIBOR less 1.50%
Less current portion
May 31,
2008
2007
–
$
500
499
250
300
239
1,788
220
–
2,008
502
$ 1,506
$ 500
500
499
249
300
239
2,287
308
51
2,646
639
$ 2,007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled annual principal maturities of debt, exclusive of capi-
tal leases, for the five years subsequent to May 31, 2008, are as
follows (in millions):
2009
2010
2011
2012
2013
$ 500
499
250
–
300
Interest on our fixed-rate notes is paid semi-annually. We have
a shelf registration statement filed with the Securities and
Exchange Commission (“SEC”) that allows us to sell, in one or
more future offerings, any combination of our unsecured debt
securities and common stock. In August 2006, we issued $1 billion
of senior unsecured debt under our shelf registration statement,
comprised of floating-rate notes totaling $500 million and fixed-
rate notes totaling $500 million. The $500 million in floating-rate
notes were repaid in August 2007. The fixed-rate notes bear inter-
est at an annual rate of 5.5%, payable semi-annually, and are due
in August 2009. The net proceeds were used for working capital
and general corporate purposes, including the funding of several
business acquisitions during 2007.
From time to time, we finance certain operating and investing
activities, including acquisitions, through borrowings under
our $1.0 billion revolving credit facility or the issuance of com-
mercial paper. The revolving credit agreement contains certain
covenants and restrictions, none of which are expected to sig-
nificantly affect our operations or ability to pay dividends. Our
commercial paper program is backed by unused commitments
under the revolving credit facility and borrowings under the pro-
gram reduce the amount available under the credit facility. At
May 31, 2008, no commercial paper borrowings were outstanding
and the entire amount under the credit facility was available.
Long-term debt, exclusive of capital leases, had carrying values
of $1.8 billion compared with an estimated fair value of approxi-
mately $1.9 billion at May 31, 2008, and $2.3 billion compared
with an estimated fair value of $2.4 billion at May 31, 2007. The
estimated fair values were determined based on quoted market
prices or on the current rates offered for debt with similar terms
and maturities.
We issue other financial instruments in the normal course of
business to support our operations. Letters of credit at May 31,
2008 were $735 million. The amount unused under our letter of
credit facility totaled approximately $29 million at May 31, 2008.
This facility expires in July 2010. These instruments are required
under certain U.S. self-insurance programs and are used in the
normal course of international operations. The underlying liabili-
ties insured by these instruments are reflected in the balance
sheets, where applicable. Therefore, no additional liability is
reflected for the letters of credit.
Our capital lease obligations include leases for aircraft and
facilities. Our facility leases include leases that guarantee the
repayment of certain special facility revenue bonds that have
been issued by municipalities primarily to finance the acquisition
and construction of various airport facilities and equipment. These
bonds require interest payments at least annually, with principal
payments due at the end of the related lease agreement.
NOTE 7: LEASES
We utilize certain aircraft, land, facilities, retail locations and
equipment under capital and operating leases that expire at vari-
ous dates through 2040. We leased approximately 14% of our
total aircraft fleet under capital or operating leases as of May 31,
2008. In addition, supplemental aircraft are leased by us under
agreements that provide for cancellation upon 30 days’ notice.
Our leased facilities include national, regional and metropolitan
sorting facilities, retail facilities and administrative buildings.
The components of property and equipment recorded under capi-
tal leases were as follows (in millions):
Aircraft
Package handling and
ground support equipment
Vehicles
Other, principally facilities
Less accumulated amortization
May 31,
2008
$ –
165
20
150
335
290
$ 45
2007
$ 115
165
20
151
451
306
$ 145
Rent expense under operating leases was as follows (in millions):
For years ended May 31,
2007
2006
2008
Minimum rentals
Contingent rentals (1)
$ 1,990
228
$ 2,218
$ 1,916
241
$ 2,157
$ 1,919
245
$ 2,164
(1) Contingent rentals are based on equipment usage.
A summary of future minimum lease payments under capital
leases and noncancelable operating leases with an initial or
remaining term in excess of one year at May 31, 2008 is as fol-
lows (in millions):
Operating Leases
Aircraft
Capital and Related
Equipment
Leases
Facilities and Total Operating
Leases
Other
$ 13
97
8
8
119
18
263
$ 555
544
526
504
499
2,931
$ 5,559
$ 1,248
1,103
956
828
709
5,407
$ 10,251
$ 1,803
1,647
1,482
1,332
1,208
8,338
$ 15,810
2009
2010
2011
2012
2013
Thereafter
Total
Less amount
representing interest
43
Present value of net
minimum lease
payments
$ 220
The weighted-average remaining lease term of all operating
leases outstanding at May 31, 2008 was approximately seven
years. While certain of our lease agreements contain covenants
governing the use of the leased assets or require us to maintain
certain levels of insurance, none of our lease agreements include
material financial covenants or limitations.
65
FEDEX CORPORATION
VALUATION AND ASSUMPTIONS
We use the Black-Scholes option pricing model to calculate the
fair value of stock options. The value of restricted stock awards
is based on the stock price of the award on the grant date. We
recognize stock-based compensation expense on a straight-
line basis over the requisite service period of the award in the
“Salaries and employee benefits” caption in the accompanying
consolidated statements of income.
The key assumptions for the Black-Scholes valuation method
include the expected life of the option, stock price volatility, a
risk-free interest rate, and dividend yield. Many of these assump-
tions are judgmental and highly sensitive. Following is a table of
the weighted-average Black-Scholes value of our stock option
grants, the intrinsic value of options exercised (in millions), and
the key weighted-average assumptions used in the valuation cal-
culations for the options granted during the years ended May 31,
and then a discussion of our methodology for developing each of
the assumptions used in the valuation model:
Weighted-average
Black-Scholes value
Intrinsic value of options exercised
Black-Scholes Assumptions:
Expected lives
Expected volatility
Risk-free interest rate
Dividend yield
2008
2007
2006
$ 29.88
$ 126
$ 31.60
$ 145
$ 25.78
$ 191
5 years
5 years
5 years
19%
4.763%
0.337%
22%
4.879%
0.302%
25%
3.794%
0.323%
Expected Lives. This is the period of time over which the options
granted are expected to remain outstanding. Generally, options
granted have a maximum term of 10 years. We examine actual
stock option exercises to determine the expected life of the
options. An increase in the expected term will increase com-
pensation expense.
Expected Volatility. Actual changes in the market value of our
stock are used to calculate the volatility assumption. We cal-
culate daily market value changes from the date of grant over a
past period equal to the expected life of the options to determine
volatility. An increase in the expected volatility will increase com-
pensation expense.
Risk-Free Interest Rate. This is the U.S. Treasury Strip rate posted
at the date of grant having a term equal to the expected life of
the option. An increase in the risk-free interest rate will increase
compensation expense.
Dividend Yield. This is the annual rate of dividends per share over
the exercise price of the option. An increase in the dividend yield
will decrease compensation expense.
FedEx Express makes payments under certain leveraged operating
leases that are sufficient to pay principal and interest on certain
pass-through certificates. The pass-through certificates are not
direct obligations of, or guaranteed by, FedEx or FedEx Express.
Our results for 2006 included a noncash charge of $79 million
($49 million net of tax or $0.16 per diluted share) to adjust the
accounting for certain facility leases, predominantly at FedEx
Express. This charge, which included the impact on prior years,
related primarily to rent escalations in on-airport facility leases
that were not being recognized appropriately.
NOTE 8: PREFERRED STOCk
Our Certificate of Incorporation authorizes the Board of Directors,
at its discretion, to issue up to 4,000,000 shares of preferred stock.
The stock is issuable in series, which may vary as to certain rights
and preferences, and has no par value. As of May 31, 2008, none
of these shares had been issued.
NOTE 9: STOCk-bASED
COMPENSATION
Our total stock-based compensation expense for the years ended
May 31 was as follows (in millions):
Stock-based compensation expense
$ 101
2008
2007
$ 103
2006
$ 37
We have two types of equity-based compensation: stock options
and restricted stock.
STOCK OPTIONS
Under the provisions of our incentive stock plans, key employees
and non-employee directors may be granted options to purchase
shares of our common stock at a price not less than its fair market
value on the date of grant. Options granted have a maximum term
of 10 years. Vesting requirements are determined at the discretion
of the Compensation Committee of our Board of Directors. Option-
vesting periods range from one to four years, with approximately
84% of options granted vesting ratably over four years.
RESTRICTED STOCK
Under the terms of our incentive stock plans, restricted shares of
our common stock are awarded to key employees. All restrictions
on the shares expire ratably over a four-year period. Shares are
valued at the market price on the date of award. Compensation
related to these awards is recognized as expense over the
explicit service period.
For unvested stock options granted prior to June 1, 2006 and
all restricted stock awards, the terms of these awards provide
for continued vesting subsequent to the employee’s retirement.
Compensation expense associated with these awards is recog-
nized on a straight-line basis over the shorter of the remaining
service or vesting period. This postretirement vesting provision
was removed from all stock option awards granted subsequent
to May 31, 2006.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock option activity for the year ended May 31, 2008:
Outstanding at June 1, 2007
Granted
Exercised
Forfeited
Outstanding at May 31, 2008
Exercisable
Expected to vest
Available for future grants
Stock Options
Weighted-
Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
(in millions)
$ 68.22
111.51
45.50
102.30
$ 78.09
$ 64.05
$ 102.99
5.9 years
4.7 years
9.2 years
$ 326
$ 312
$ 13
Shares
16,590,401
2,821,758
(2,381,900)
(352,453)
16,677,806
10,666,189
5,530,688
3,684,999
The options granted during the year ended May 31, 2008 are
primarily related to our principal annual stock option grant in
July 2007.
NOTE 10: COMPUTATION OF
EARNINGS PER ShARE
The calculation of basic and diluted earnings per common share
for the years ended May 31 was as follows (in millions, except
per share amounts):
Net income
Weighted-average shares of
common stock outstanding
Common equivalent shares:
Assumed exercise of outstanding
dilutive options
Less shares repurchased from
proceeds of assumed
exercise of options
2008
2007
2006
$ 1,125
$ 2,016
$ 1,806
309
307
304
14
18
19
(11)
(14)
(13)
Weighted-average common and common
equivalent shares outstanding
Basic earnings per common share
Diluted earnings per common share
Antidilutive options excluded from
diluted earnings per common share
312
$ 3.64
$ 3.60
311
$ 6.57
$ 6.48
310
$ 5.94
$ 5.83
4.8
0.4
–
The following table summarizes information about vested and
unvested restricted stock for the year ended May 31, 2008:
Unvested at June 1, 2007
Granted
Vested
Forfeited
Unvested at May 31, 2008
Restricted Stock
Weighted-
Average Grant
Date Fair
Value
$ 92.37
114.40
86.16
104.60
$ 103.97
Shares
481,347
174,418
(212,113)
(18,667)
424,985
During the year ended May 31, 2007, there were 175,005 shares
of restricted stock granted with a weighted-average fair value of
$109.90. During the year ended May 31, 2006, there were 233,939
shares of restricted stock granted with a weighted-average fair
value of $90.12.
The following table summarizes information about stock option
vesting during the years ended May 31:
2006
2007
2008
Stock Options
Vested During
the Year
3,366,273
3,147,642
2,694,602
Fair Value
(in millions)
$ 59
65
64
As of May 31, 2008, there was $136 million of total unrecog-
nized compensation cost, net of estimated forfeitures, related to
unvested share-based compensation arrangements. This com-
pensation expense is expected to be recognized on a straight-line
basis over the remaining weighted-average vesting period of
approximately two years.
Total shares outstanding or available for grant related to equity
compensation at May 31, 2008 represented 6.5% of the total out-
standing common and equity compensation shares and equity
compensation shares available for grant.
67
FEDEX CORPORATION
NOTE 11: INCOME TAXES
The net deferred tax liabilities as of May 31 have been classified
in the balance sheets as follows (in millions):
The components of the provision for income taxes for the years
ended May 31 were as follows (in millions):
Current provision
Domestic:
Federal
State and local
Foreign
Deferred provision (benefit)
Domestic:
Federal
State and local
Foreign
2008
2007
2006
$ 514
74
242
830
31
(2)
32
61
$ 891
$ 829
72
174
1,075
62
27
35
124
$ 1,199
$ 719
79
132
930
129
13
21
163
$ 1,093
Pretax earnings of foreign operations for 2008, 2007 and 2006
were approximately $803 million, $648 million and $606 million,
respectively, which represents only a portion of total results
associated with international shipments.
A reconciliation of the statutory federal income tax rate to the
effective income tax rate for the years ended May 31 was as
follows:
Statutory U.S. income tax rate
Increase resulting from:
Goodwill impairment
State and local income taxes,
net of federal benefit
Other, net
Effective tax rate
2008
2007
2006
35.0%
35.0%
35.0%
6.8
–
–
2.1
0.3
44.2%
2.0
0.3
37.3%
2.1
0.6
37.7%
Our 2008 tax rate increased primarily as a result of the goodwill
impairment charge described in Note 4, which is not deductible
for income tax purposes. Our 2007 tax rate of 37.3% was favorably
impacted by the conclusion of various state and federal tax audits
and appeals. The 2007 rate reduction was partially offset by tax
charges incurred as a result of a reorganization in Asia associ-
ated with our acquisition in China, as described in Note 3.
The significant components of deferred tax assets and liabilities
as of May 31 were as follows (in millions):
2008
2007
Deferred
Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
Deferred
Deferred
Property, equipment,
leases and intangibles $ 321
401
359
426
Employee benefits
Self-insurance accruals
Other
Net operating loss/credit
carryforwards
Valuation allowances
135
(124)
$ 1,518
$ 1,650
398
–
190
–
–
$ 2,238
$ 328
406
350
346
172
(116)
$ 1,486
$ 1,655
53
–
139
–
–
$ 1,847
68
Current deferred tax asset
Noncurrent deferred tax liability
2008
2007
$ 544
(1,264)
$ (720)
$ 536
(897)
$ (361)
We have $404 million of net operating loss carryovers in various
foreign jurisdictions and $255 million of state operating loss carry-
overs. The valuation allowance primarily represents amounts
reserved for operating loss and tax credit carryforwards, which
expire over varying periods starting in 2009. As a result of this
and other factors, we believe that a substantial portion of these
deferred tax assets may not be realized.
Unremitted earnings of our foreign subsidiaries amounted to
$147 million in 2008 and $43 million in 2007. We have not recog-
nized deferred taxes for U.S. federal income tax purposes on the
unremitted earnings of our foreign subsidiaries that are deemed
to be permanently reinvested. Upon distribution, in the form of
dividends or otherwise, these unremitted earnings would be sub-
ject to U.S. federal income tax. Unrecognized foreign tax credits
would be available to reduce a portion, if not all, of the U.S. tax
liability. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable.
On June 1, 2007, we adopted FIN 48. The cumulative effect of adopt-
ing FIN 48 was immaterial to our retained earnings. Our liability for
income taxes under FIN 48 was $72 million at June 1, 2007, and
$88 million at May 31, 2008. The balance of accrued interest and
penalties was $26 million on June 1, 2007, and $25 million on May
31, 2008. Total interest and penalties included in our statement of
operations is immaterial. The liability recorded includes $57 million
at June 1, 2007, and $68 million at May 31, 2008, associated with
positions that if favorably resolved would provide a benefit to our
effective tax rate.
We file income tax returns in the U.S. and various foreign jurisdic-
tions. The U.S. Internal Revenue Service is currently examining
our returns for the 2004 through 2006 tax years. We are no longer
subject to U.S. federal income tax examination for years through
2003 except for specific U.S. federal income tax positions that are
in various stages of appeal. No resolution date can be reasonably
estimated at this time for these audits and appeals. We are also
subject to ongoing audits in state, local and foreign tax jurisdic-
tions throughout the world.
A reconciliation of the beginning and ending amount of unrecog-
nized tax benefits is as follows (in millions):
Balance at June 1, 2007
Increases for tax positions taken in the current year
Increases for tax positions taken in prior years
Settlements
Balance at May 31, 2008
$ 72
16
9
(9)
$ 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in the May 31, 2008 balance are $8 million of tax posi-
tions for which the ultimate deductibility or income inclusion is
certain but for which there may be uncertainty about the timing
of such deductibility or income inclusion. It is difficult to predict
the ultimate outcome or the timing of resolution for tax positions
under FIN 48. Changes may result from the conclusion of ongoing
audits or appeals in state, local, federal and foreign tax juris-
dictions, or from the resolution of various proceedings between
the U.S. and foreign tax authorities. Our liability for tax positions
under FIN 48 includes no matters that are individually material
to us. It is reasonably possible that the amount of the benefit
with respect to certain of our unrecognized tax positions will
increase or decrease within the next 12 months, but an estimate
of the range of the reasonably possible changes cannot be made.
However, we do not expect that the resolution of any of our tax
positions under FIN 48 will be material.
NOTE 12: RETIREMENT PLANS
We sponsor programs that provide retirement benefits to most
of our employees. These programs include defined benefit pen-
sion plans, defined contribution plans and retiree healthcare
plans. The accounting for pension and postretirement healthcare
plans includes numerous assumptions, such as: discount rates;
expected long-term investment returns on plan assets; future sal-
ary increases; employee turnover; mortality; and retirement ages.
These assumptions most significantly impact our U.S. domestic
pension plans.
In 2007, we announced changes to significantly redesign cer-
tain of our retirement programs. Effective January 1, 2008, we
increased the annual company matching contribution under the
largest of our 401(k) plans covering most employees from $500
to a maximum of 3.5% of eligible compensation. Employees not
participating in the 401(k) plan as of January 1, 2008 were auto-
matically enrolled at 3% of eligible pay with a company match
of 2% of eligible pay effective March 1, 2008. The full cost of
this benefit improvement will accelerate over the next few years.
Effective May 31, 2008, benefits previously accrued under our
primary pension plans using a traditional pension benefit formula
were capped for most employees, and those benefits will be
payable beginning at retirement. Beginning June 1, 2008, future
pension benefits for most employees will be accrued under a
cash balance formula we call the Portable Pension Account.
These changes will not affect the benefits of current retirees
and terminated vested participants. In addition, these pension
plans were modified to accelerate vesting from five years to
three years effective June 1, 2008 for most participants.
A summary of our retirement plans costs over the past three
years is as follows (in millions):
U.S. domestic and international
pension plans
U.S. domestic and international
defined contribution plans
Postretirement healthcare plans
2008
2007
2006
$ 323
$ 467
$ 425
216
77
$ 616
176
55
$ 698
167
73
$ 665
PENSION PlANS
Our largest pension plan covers certain U.S. employees age 21
and over, with at least one year of service. Eligible employees
as of May 31, 2003 were given the opportunity to make a one-
time election to accrue future pension benefits under either the
Portable Pension Account or a traditional pension benefit for-
mula. Benefits provided under the traditional formula are based
on average earnings and years of service. Under the Portable
Pension Account, the retirement benefit is expressed as a dol-
lar amount in a notional account that grows with annual credits
based on pay, age and years of credited service, and interest
on the notional account balance. Eligible employees hired after
May 31, 2003 accrue benefits exclusively under the Portable
Pension Account. We also sponsor or participate in nonqualified
benefit plans covering certain of our U.S. employee groups and
other pension plans covering certain of our international employ-
ees. The international defined benefit pension plans provide
benefits primarily based on final earnings and years of service
and are funded in accordance with local practice. Where plans
are funded, they are funded in compliance with local laws.
POSTRETIREMENT HEAlTHCARE PlANS
Certain of our subsidiaries offer medical, dental and vision cov-
erage to eligible U.S. retirees and their eligible dependents.
U.S. employees covered by the principal plan become eligible
for these benefits at age 55 and older, if they have permanent,
continuous service of at least 10 years after attainment of age 45
if hired prior to January 1, 1988, or at least 20 years after attain-
ment of age 35 if hired on or after January 1, 1988. Postretirement
healthcare benefits are capped at 150% of the 1993 per capita
projected employer cost, which has been reached and, therefore,
these benefits are not subject to additional future inflation.
NEW ACCOUNTING PRONOUNCEMENT
As discussed in Note 1, we adopted the recognition and disclo-
sure provisions of SFAS 158 on May 31, 2007. The adoption of
SFAS 158 required recognition in the balance sheet of the funded
status of defined benefit pension and other postretirement benefit
plans, and the recognition in AOCI of unrecognized gains or losses
and prior service costs or credits. The funded status is measured
as the difference between the fair value of the plan’s assets and
the projected benefit obligation (“PBO”) of the plan. The adoption
of SFAS 158 resulted in a $982 million charge to shareholders’
equity at May 31, 2007 through AOCI. At May 31, 2008, under the
provisions of SFAS 158, we recorded an increase to equity of
$469 million (net of tax) based on a $1 billion improvement in the
funded status of our retirement plans since May 31, 2007.
Additionally, SFAS 158 requires the measurement date for
plan assets and liabilities to coincide with the sponsor’s
year end. We currently use a February 28 (February 29 in
2008) measurement date for our plans; therefore, this stan-
dard will require us to change our measurement date to May
31 (beginning in 2009). We are required to make our transi-
tion election in the first quarter of 2009 and plan to elect the
two-measurement approach as our transition method. Under
the two-measurement approach, we complete two actu-
arial measurements, one at February 29, 2008 and the other at
June 1, 2008. For the transition period from February 29, 2008
69
FEDEX CORPORATION
through June 1, 2008, we will record the net periodic benefit cost, net of tax, as an adjustment to beginning retained earnings
and the actuarial gains and losses, net of tax, as an adjustment to accumulated other comprehensive income in the first quar-
ter of 2009. The impact of adopting the measurement date provision on our financial statements is not expected to be material
to our financial position or results of operations, but will reduce our 2009 pension and retiree medical expense by approximately
$87 million under the two-measurement approach due to an increase in the discount rate and higher plan assets.
PENSION PlAN ASSUMPTIONS
Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to
fund those obligations and the expected long-term rate of return on plan assets.
We currently use a measurement date of February 28 (February 29 in 2008) for our pension and postretirement healthcare plans.
Management reviews the assumptions used to measure pension costs on an annual basis. Economic and market conditions at the
measurement date impact these assumptions from year to year and it is reasonably possible that material changes in pension cost
may be experienced in the future. Additional information about our pension plans can be found in the Critical Accounting Estimates
section of Management’s Discussion and Analysis.
Actuarial gains or losses are generated for changes in assumptions and to the extent that actual results differ from those assumed.
These actuarial gains and losses are amortized over the remaining average service lives of our active employees if they exceed a
corridor amount in the aggregate.
Predominantly all of our plan assets are actively managed. The investment strategy for pension plan assets is to utilize a diversified
mix of global public and private equity portfolios, together with public and private fixed income portfolios, to earn a long-term invest-
ment return that meets our pension plan obligations. Active management strategies are utilized within the plan in an effort to realize
investment returns in excess of market indices.
The weighted-average asset allocations for our domestic pension plans at the measurement date were as follows (dollars in millions):
Asset Class
Domestic equities
International equities
Private equities
Total equities
Long duration fixed income securities
Other fixed income securities
Plan Assets at Measurement Date
Actual
$ 5,694
2,481
406
8,581
1,778
1,302
$ 11,661
2008
Actual
49%
21
4
74
15
11
100%
Target
53%
17
5
75
15
10
100%
Actual
$ 5,897
2,413
314
8,624
1,627
1,049
$ 11,300
2007
Actual
52%
21
3
76
15
9
100%
Target
53%
17
5
75
15
10
100%
Establishing the expected future rate of investment return on our
pension assets is a judgmental matter. Management considers
the following factors in determining this assumption:
• the duration of our pension plan liabilities, which drives the
investment strategy we can employ with our pension plan
assets;
• the types of investment classes in which we invest our pension
plan assets and the expected compound geometric return we
can reasonably expect those investment classes to earn over
the next 10- to 15-year time period (or such other time period
that may be appropriate); and
• the investment returns we can reasonably expect our active
investment management program to achieve in excess of the
returns we could expect if investments were made strictly in
indexed funds.
We review the expected long-term rate of return on an annual
basis and revise it as appropriate. As part of our strategy to
manage future pension costs and net funded status volatility, we
are also in the process of reevaluating our pension investment
strategy. We are currently evaluating the mix of investments
between equities and fixed income securities, the cash flows of
which will more closely align with the cash flows of our pension
obligations.
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 stud-
ies 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 studies performed or updated supported the reasonable-
ness of our expected rate of return of 8.5% for 2008 and 9.1% for
2007 and 2006. Our estimated long-term rate of return on plan
assets remains at 8.5% for 2009. Our actual returns exceeded this
assumption for the 15-year period ended February 29, 2008.
70
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, 2008 and a statement of the funded status as of May 31, 2008 and
2007 (in millions):
Pension Plans
Postretirement Healthcare Plans
2007
2008
Accumulated Benefit Obligation (“ABO”)
Changes in Projected Benefit Obligation (“PBO”) and
Accumulated Postretirement Benefit Obligation (“APBO”)
PBO/APBO at the beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Amendments
Other
PBO/APBO at the end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Other
Fair value of plan assets at end of year
Funded Status of the Plans
Employer contributions after measurement date
Net amount recognized
Amount Recognized in the Balance Sheet at May 31:
Noncurrent pension assets
Current pension, postretirement healthcare
and other benefit obligations
Noncurrent pension, postretirement healthcare
and other benefit obligations
Net amount recognized
Amounts Recognized in AOCI and not yet reflected in
Net Periodic Benefit Cost:
Net actuarial loss (gain)
Prior service (credit) cost and other
Total
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)
Prior service credit and other
Total
2007
$ 11,559
$ 12,153
540
707
590
(261)
(1,551)
31
$ 12,209
$ 10,130
1,086
524
(261)
27
$ 11,506
$
$
$
(703)
22
(681)
1
(24)
(658)
(681)
$
$ 3,324
(1,477)
$ 1,847
2008
$ 11,212
$ 12,209
518
720
(1,531)
(318)
1
18
$ 11,617
$ 11,506
141
548
(318)
2
$ 11,879
$
$
262
15
277
$
827
(32)
(518)
277
$
$ 2,455
(1,362)
$ 1,093
$
$
51
(114)
(63)
$ 475
31
28
9
(40)
5
17
$ 525
$
–
–
23
(40)
17
–
$
$ (525)
4
$ (521)
$
–
(30)
(491)
$ (521)
$ (97)
2
$ (95)
$ 525
35
31
(56)
(40)
–
(3)
$ 492
$
–
–
64
(40)
(24)
–
$
$ (492)
5
$ (487)
$
–
(30)
(457)
$ (487)
$ (144)
2
$ (142)
$
$
(7)
–
(7)
Our pension plans included the following components at May 31, 2008 and 2007 (in millions):
2008
Qualified
Nonqualified
International Plans
Total
2007
Qualified
Nonqualified
International Plans
Total
ABO
PBO
Fair Value of
Plan Assets
$ 10,530
333
349
$ 11,212
$ 10,926
314
319
$ 11,559
$ 10,834
338
445
$ 11,617
$ 11,487
326
396
$ 12,209
$ 11,661
–
218
$ 11,879
$ 11,300
–
206
$ 11,506
Funded
Status
$ 827
(338)
(227)
$ 262
$ (187)
(326)
(190)
$ (703)
(1) Amounts in “Other” represent employer contributions after measurement date.
Other (1)
Net Amount
Recognized
$ –
7
8
$ 15
$ –
16
6
$ 22
$ 827
(331)
(219)
$ 277
$ (187)
(310)
(184)
$ (681)
71
FEDEX CORPORATION
At May 31, 2008 and 2007, the fair value of plan assets for pen-
sion plans with a PBO or an ABO in excess of plan assets were
as follows (in millions):
Pension Benefits
PBO
Fair Value of Plan Assets
Pension Benefits
PBO
ABO
Fair Value of Plan Assets
PBO Exceeds the Fair Value
of Plan Assets
2008
2007
$ 783
218
$ 12,085
11,381
ABO Exceeds the Fair Value
of Plan Assets
2008
2007
$ 782
682
217
$ 727
637
206
The APBO exceeds plan assets for all of our postretirement
healthcare plans.
Plan funding is actuarially determined and is subject to certain tax
law limitations. International defined benefit pension plans provide
benefits primarily based on final earnings or final average earn-
ings and years of service and are funded in accordance with local
practice. Where plans are funded, they are funded in compliance
with local laws and income tax regulations. Amounts contributed
to these plans are not recoverable by us. We made tax-deductible
voluntary contributions of $479 million in 2008 and $482 million in
2007 to our qualified U.S. domestic pension plans. We currently
expect to make tax-deductible voluntary contributions to our quali-
fied plans in 2009 at levels approximating those in 2008.
At the end of 2007 and prior to our adoption of SFAS 158, we
recorded a minimum pension liability on a plan-by-plan basis for
many of our pension plans for the amount by which the ABO
exceeded the fair value of the plan assets, after adjusting for
previously recorded accrued or prepaid pension cost for the plan.
We subsequently eliminated the minimum pension liability bal-
ance and intangible assets related to our plans that had been
recorded prior to adoption. The minimum liability eliminated at
May 31, 2007 was $191 million.
Net periodic benefit cost for the three years ended May 31 were as follows (in millions):
Service cost
Interest cost
Expected return on plan assets
Recognized actuarial losses (gains) and other
Net periodic benefit cost
2008
$ 518
720
(985)
70
$ 323
Pension Plans
2007
$ 540
707
(930)
150
$ 467
2006
$ 473
642
(811)
121
$ 425
Postretirement Healthcare Plans
2007
2008
2006
$ 35
31
–
11
$ 77
$ 31
28
–
(4)
$ 55
$ 42
32
–
(1)
$ 73
Decreases in pension costs from 2007 to 2008 are primarily the result of the plan changes discussed above and in Note 1. Increases
in pension costs from 2006 to 2007 are primarily the result of changes in discount rate.
Amounts recognized in other comprehensive income (“OCI”) for 2008 for all plans were as follows (in millions):
Net gain and other, arising during period
(Loss) gain from settlements
Amortizations:
Prior service credit
Actuarial (losses) gains and other
Total recognized in OCI
Pension Plans
Postretirement Healthcare Plans
Gross Amount
Net of Tax Amount
Gross Amount
Net of Tax Amount
$ (685)
(17)
113
(166)
$ (755)
$ (430)
(10)
70
(104)
$ (474)
$ (56)
6
–
3
$ (47)
$ (38)
4
–
2
$ (32)
Weighted-average actuarial assumptions for our primary U.S. pension plans, which represent substantially all of our PBO, are as
follows:
Discount rate used to determine benefit obligation (1)
Discount rate used to determine net periodic benefit cost
Rate of increase in future compensation levels
used to determine benefit obligation
Rate of increase in future compensation levels
used to determine net periodic benefit cost (2)
Expected long-term rate of return on assets
2008
6.96%
6.01
4.51
4.47
8.50
Pension Plans
2007
6.01%
5.91
4.47
3.46
9.10
2006
5.91%
6.29
3.46
3.15
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.
72
Postretirement Healthcare Plans
2007
2008
2006
6.81%
6.08
6.08%
6.08
6.08%
6.16
–
–
–
–
–
–
–
–
–
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Benefit payments, which reflect expected future service, are
expected to be paid as follows for the years ending May 31 (in
millions):
2009
2010
2011
2012
2013
2014-2018
Postretirement
Pension Plans Healthcare Plans
$ 362
442
463
537
609
4,633
$ 30
31
33
35
36
222
These estimates are based on assumptions about future events.
Actual benefit payments may vary significantly from these
estimates.
Future medical benefit claims costs are estimated to increase
at an annual rate of 9% during 2009, decreasing to an annual
growth rate of 5% in 2017 and thereafter. Future dental benefit
costs are estimated to increase at an annual rate of 6% dur-
ing 2009, decreasing to an annual growth rate of 5% in 2013 and
thereafter. A 1% change in these annual trend rates would not
have a significant impact on the APBO at May 31, 2008 or 2008
benefit expense because the level of these benefits is capped.
NOTE 13: bUSINESS SEGMENT
INFORMATION
FedEx Express, FedEx Ground and FedEx Freight represent our
major service lines and, along with FedEx Services, form the core
of our reportable segments. Our reportable segments include the
following businesses:
FedEx Express Segment
FedEx Express
(express transportation)
FedEx Trade Networks
(global trade services)
FedEx Ground Segment
FedEx Ground
(small-package ground delivery)
FedEx SmartPost
(small-parcel consolidator)
FedEx Freight Segment
FedEx Freight LTL Group:
FedEx Freight (regional
LTL freight transportation)
FedEx National LTL
(long-haul LTL freight
transportation)
FedEx Custom Critical
(time-critical transportation)
Caribbean Transportation Services
(airfreight forwarding)
FedEx Services Segment FedEx Services (sales,
marketing and information
technology functions)
FedEx Office (document
and business services and
package acceptance)
FedEx Customer Information
Services (“FCIS”)
(customer service,
billings and collections)
FedEx Global Supply Chain
Services (logistics services)
The FedEx Services segment includes: FedEx Services, which
provides sales, marketing and information technology support;
FCIS, which is responsible for customer service, billings and
collections for FedEx Express and FedEx Ground; FedEx Global
Supply Chain Services, which provides a range of logistics ser-
vices to our customers; and FedEx Office.
During the fourth quarter of 2008, we decided to change the name
of FedEx Kinko’s to FedEx Office. We believe the FedEx Office
name better describes the wide range of services available at our
retail centers and takes full advantage of the FedEx brand.
During the first quarter of 2008, FedEx Office was reorganized as
a part of the FedEx Services segment. FedEx Office provides retail
access to our customers for our package transportation busi-
nesses and an array of document and business services. FedEx
Services provides access to customers through digital channels
such as fedex.com. Under FedEx Services, FedEx Office benefits
from the full range of resources and expertise of FedEx Services
to continue to enhance the customer experience, provide greater,
more convenient access to the portfolio of services at FedEx,
and increase revenues through our retail network. As part of this
reorganization, we are pursuing synergies in sales, marketing,
information technology and administrative areas.
With this reorganization, the FedEx Services segment became
a reportable segment. Prior year amounts have been revised to
conform to the current year segment presentation. FedEx Office
continues to be treated as a reporting unit for purposes of good-
will and impairment testing.
Effective June 1, 2006, we moved FedEx Supply Chain Services,
Inc., the results of which were previously reported in the FedEx
Ground segment, into a new subsidiary of FedEx Services named
FedEx Global Supply Chain Services, Inc. The net operating costs
of this entity are allocated to FedEx Express and FedEx Ground.
Prior year amounts were not reclassified to conform to the
2007 segment presentation, as financial results were materially
comparable.
The costs of the sales, marketing and information technology
support provided by FedEx Services and the customer service
functions of FCIS, together with the normal, ongoing net oper-
ating costs of FedEx Global Supply Chain Services and FedEx
Office, are allocated primarily to the FedEx Express and FedEx
Ground segments based on metrics such as relative revenues
73
FEDEX CORPORATION
or estimated services provided. We believe these allocations approximate the net cost of providing these functions. The $891 million
fourth quarter charge predominantly associated with the noncash impairment charges for the Kinko’s trade name and goodwill was not
allocated to the FedEx Express or FedEx Ground segments, as this cost was unrelated to the core performance of those businesses.
Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable
segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as
revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues
and expenses are eliminated in the consolidated results and are not separately identified in the following segment information, as the
amounts are not material.
The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation
segments in Management’s Discussion and Analysis of Operations and Financial Condition (“MD&A”) includes the allocations from the
FedEx Services segment to the respective transportation segments. The “Intercompany charges” caption also includes allocations for
administrative services provided between operating companies and certain other costs such as corporate management fees related to
services received for general corporate oversight, including executive officers and certain legal and finance functions. Management
evaluates transportation segment financial performance based on operating income.
The following table provides a reconciliation of reportable segment revenues, depreciation and amortization, operating income (loss)
and segment assets to consolidated financial statement totals for the years ended or as of May 31 (in millions):
Revenues
2008
2007
2006
Depreciation and amortization
2008
2007
2006
Operating income (loss) (2)
2008 (3)
2007 (4)
2006 (5)
Segment assets (6)
2008
2007
2006
FedEx
Express
Segment
$ 24,421
22,681
21,446
$
944
856
805
$ 1,901
1,991
1,813
$ 13,416
15,650
14,673
FedEx
Ground
Segment
$ 6,751
6,043
5,306
$ 305
268
224
$ 736
822
716
$ 2,770
3,937
3,378
FedEx
Freight
Segment(1)
$ 4,934
4,586
3,645
$ 227
195
120
$ 329
463
485
$ 3,276
3,150
2,245
FedEx
Services
Segment
$ 2,138
2,136
2,088
$ 469
420
400
$ (891)
–
–
$ 4,651
5,384
3,807
Other and
Eliminations
Consolidated
Total
$ (291)
(232)
(191)
$
$
1
3
1
–
–
–
$ 1,520
(4,121)
(1,413)
$ 37,953
35,214
32,294
$ 1,946
1,742
1,550
$ 2,075
3,276
3,014
$ 25,633
24,000
22,690
(1) Includes the operations of FedEx National LTL from the date of acquisition, September 3, 2006.
(2) The net operating costs of the FedEx Services segment, including FedEx Office, are allocated back to the transportation segments it supports. Prior year amounts have been revised to conform to
the current year presentation.
(3) FedEx Services segment operating expenses include a charge of approximately $891 million, 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. These charges were not allocated to our transportation segments, as the charges were unrelated to the core
performance of these businesses.
(4) FedEx Express operating expenses include a $143 million charge associated with upfront compensation and benefits under the new pilot labor contract.
(5) Includes a $79 million one-time, noncash charge to adjust the accounting for certain facility leases ($75 million at FedEx Express).
(6) Segment assets include intercompany receivables.
The following table provides a reconciliation of reportable segment capital expenditures to consolidated totals for the years ended
May 31 (in millions):
FedEx
Express
Segment
$ 1,716
1,672
1,408
FedEx
Ground
Segment
$ 509
489
487
FedEx
Freight
Segment
$ 266
287
274
FedEx
Services
Segment
$ 455
432
345
Other
$ 1
2
4
Consolidated
Total
$ 2,947
2,882
2,518
2008
2007
2006
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenue by service type and geo-
graphic information for the years ended or as of May 31 (in
millions):
NOTE 15: GUARANTEES AND
INDEMNIFICATIONS
Revenue by Service Type
FedEx Express segment:
Package:
U.S. overnight box
U.S. overnight envelope
U.S. deferred
Total domestic
package revenue
International Priority (IP)
International domestic (1)
Total package revenue
Freight:
U.S.
International Priority Freight
International airfreight
Total freight revenue
Other (2)
Total FedEx Express segment
FedEx Ground segment
FedEx Freight segment (3)
FedEx Services segment
Other and Eliminations
Geographical Information (4)
Revenues:
U.S.
International
Noncurrent assets:
U.S.
International
2008
2007
2006
$ 6,578
2,012
2,995
$ 6,485
1,990
2,883
$ 6,422
1,974
2,853
11,585
7,666
663
19,914
11,358
6,722
370
18,450
11,249
6,139
199
17,587
2,398
1,243
406
4,047
460
24,421
6,751
4,934
2,138
(291)
$ 37,953
2,412
1,045
394
3,851
380
22,681
6,043
4,586
2,136
(232)
$ 35,214
2,218
840
434
3,492
367
21,446
5,306
3,645
2,088
(191)
$ 32,294
$ 27,306
10,647
$ 37,953
$ 26,132
9,082
$ 35,214
$ 24,172
8,122
$ 32,294
$ 14,920
3,469
$ 18,389
$ 14,191
3,180
$ 17,371
$ 13,804
2,422
$ 16,226
(1) International domestic revenues include our international domestic express operations,
primarily in the United Kingdom, Canada, India and China. We reclassified the prior period
international domestic revenues previously included within other revenues to conform to the
current period presentation.
(2) Other revenues includes FedEx Trade Networks.
(3) Includes the operations of FedEx National LTL from the date of acquisition, September 3, 2006.
(4) International revenue includes shipments that either originate in or are destined to locations
outside the United States. Noncurrent assets include property and equipment, goodwill and other
long-term assets. Flight equipment is allocated between geographic areas based on usage.
NOTE 14: SUPPLEMENTAL CASh
FLOw INFORMATION
Cash paid for interest expense and income taxes for the years
ended May 31 was as follows (in millions):
Interest (net of capitalized interest)
Income taxes
2008
$ 100
816
2007
$ 136
1,064
2006
$ 145
880
In conjunction with certain transactions, primarily the lease, sale
or purchase of operating assets or services in the ordinary course
of business, we may provide routine guarantees or indemnifica-
tions (e.g., environmental, fuel, tax and software infringement),
the terms of which range in duration, and often they are not lim-
ited and have no specified maximum obligation. As a result, the
overall maximum potential amount of the obligation under such
guarantees and indemnifications cannot be reasonably estimated.
Historically, we have not been required to make significant pay-
ments under our guarantee or indemnification obligations and no
amounts have been recognized in our financial statements for the
underlying fair value of these obligations.
Special facility revenue bonds have been issued by certain
municipalities primarily to finance the acquisition and construc-
tion of various airport facilities and equipment. These facilities
were leased to us and are accounted for as either capital leases
or operating leases. FedEx Express has unconditionally guaran-
teed $755 million in principal of these bonds (with total future
principal and interest payments of approximately $1.1 billion as
of May 31, 2008) through these leases. Of the $755 million bond
principal guaranteed, $204 million was included in capital lease
obligations in our balance sheet at May 31, 2008. The remaining
$551 million has been accounted for as operating leases.
NOTE 16: COMMITMENTS
Annual purchase commitments under various contracts as of
May 31, 2008 were as follows (in millions):
2009
2010
2011
2012
2013
Thereafter
Aircraft
$ 965
919
665
31
–
–
Aircraft-
Related (1)
$ 178
132
9
–
–
–
Other (2)
$ 561
127
61
56
33
134
Total
$ 1,704
1,178
735
87
33
134
(1) Primarily aircraft modifications.
(2) Primarily vehicles, facilities, computers and advertising and promotions contracts.
The amounts reflected in the table above for purchase commit-
ments represent noncancelable agreements to purchase goods
or services. Commitments to purchase aircraft in passenger
configuration do not include the attendant costs to modify these
aircraft for cargo transport unless we have entered into non-
cancelable commitments to modify such aircraft. Open purchase
orders that are cancelable are not considered unconditional pur-
chase obligations for financial reporting purposes and are not
included in the table above.
75
FEDEX CORPORATION
Included in our aircraft commitments are aircraft under our
Boeing 757-200 (“B757”) and Boeing 777 Freighter (“B777F”) pro-
grams. In 2007, we announced a multi-year program to acquire
and modify approximately 90 B757 aircraft to replace our narrow-
body fleet of Boeing 727-200 aircraft. As of May 31, 2008, we had
entered into agreements to purchase 29 B757 aircraft, in addition
to the 12 we already owned, under this program. In addition, dur-
ing 2007, we entered into an agreement to acquire 15 new B777F
aircraft and an option to purchase an additional 15 B777F aircraft.
In connection with the decision to purchase the B777F aircraft,
we canceled an order with Airbus for 10 A380-800F aircraft. In
a settlement agreement with Airbus, we were provided, among
other things, credit memoranda applicable to the purchase of
goods and services in the future. The net impact of this settle-
ment was immaterial to our 2007 results and was recorded as an
operating gain during the fourth quarter of 2007.
Deposits and progress payments of $254 million have been made
toward aircraft purchases, options to purchase additional air-
craft and other planned aircraft-related transactions. Our primary
aircraft purchase commitments include the B757 in passenger
configuration, which will require additional costs to modify for
cargo transport, and the new B777F aircraft. In addition, we
have committed to modify our DC10 aircraft for two-man cockpit
configurations. Future payments related to these activities are
included in the table above. Aircraft and aircraft-related contracts
are subject to price escalations. The following table is a summary
of the number and type of aircraft we are committed to purchase
as of May 31, 2008, with the year of expected delivery:
2009
2010
2011
2012
2013
Thereafter
Total
A300
B757
B777F
MD11
Total
4
–
–
–
–
–
4
16
6
5
2
–
–
29
–
6
9
–
–
–
15
2
–
–
–
–
–
2
22
12
14
2
–
–
50
NOTE 17: CONTINGENCIES
Wage-and-Hour. We are a defendant in a number of lawsuits
containing various class-action allegations of wage-and-hour
violations. The plaintiffs in these lawsuits allege, among other
things, that they were forced to work “off the clock,” were not
paid overtime or were not provided work breaks or other benefits.
The complaints generally seek unspecified monetary damages,
injunctive relief, or both.
In February 2008, one of these wage-and-hour cases, Wiegele
v. FedEx Ground, was certified as a class action by a California
federal court, and in April 2008, the U.S. Court of Appeals for
the Ninth Circuit denied our petition to review the class certifi-
cation ruling. The class certification ruling, however, does not
address whether we will ultimately be held liable. The plaintiffs
in Wiegele represent a class of FedEx Ground sort managers and
dock service managers in California from May 10, 2002 to pres-
ent. The plaintiffs allege that FedEx Ground has misclassified the
managers as exempt from the overtime requirements of California
76
wage-and-hour laws and is correspondingly liable for failing to
pay them overtime compensation and for failing to provide them
with rest and meal breaks.
We have agreed to settle two wage-and-hour lawsuits against
FedEx Ground for an immaterial amount and executed a settle-
ment agreement, which awaits court approval. We have denied
any liability and intend to vigorously defend ourselves in the other
wage-and-hour lawsuits, including Wiegele. We do not believe
that any loss is probable in these other lawsuits, and given the
nature and status of the claims, we cannot yet determine the
amount or a reasonable range of potential loss, if any.
Independent Contractor — Estrada and Mason. Estrada v.
FedEx Ground is a class action involving single-route contrac-
tors in California. In August 2007, the California appellate court
affirmed the trial court’s ruling in Estrada that a limited number
of California single-route contractors (most of whom have not
contracted with FedEx Ground since 2001) should be reimbursed
as employees for some of their operating expenses. The Supreme
Court of California has affirmed the appellate court’s liability and
class certification decisions. The case has been remanded to the
trial court for reconsideration of the amount of such reimburs-
able expenses and attorneys’ fees. Forty of the class members
from the Estrada litigation have filed another lawsuit (entitled
Mason) seeking reimbursement of expenses for the post-Estrada
period (January 1, 2005 to present). The forty plaintiffs continued
to provide pickup-and-delivery services to FedEx Ground after
the damages period terminated in Estrada (December 31, 2004).
We do not expect to incur a material loss in the Estrada and
Mason matters.
Independent Contractor — Other Lawsuits and State Admini-
strative Proceedings. FedEx Ground is involved in approximately
45 other class-action lawsuits (including 21 that have been
certified as class actions), several individual lawsuits and
approximately 30 state tax and other administrative proceedings
that claim that the company’s owner-operators should be treated
as employees, rather than independent contractors.
Most of the class-action lawsuits have been consolidated for
administration of the pre-trial proceedings by a single federal
court, the U.S. District Court for the Northern District of Indiana.
With the exception of recently filed cases that have been or
will be transferred to the multidistrict litigation, discovery and
class certification briefing are now complete. In October 2007,
we received a decision from the court granting class certifica-
tion in a Kansas action alleging state law claims on behalf of
a statewide class and federal law claims under the Employee
Retirement Income Security Act of 1974 on behalf of a nationwide
class. In January 2008, the U.S. Court of Appeals for the Seventh
Circuit declined our request for appellate review of the class
certification decision. In March 2008, the court granted class
certification in 19 additional cases and denied it in nine cases.
The court has not yet ruled on class certification in the other
cases that are pending in the multidistrict litigation. Motions for
summary judgment on the classification issue (i.e., independent
contractor vs. employee) are pending in all 20 of the cases that
have been certified as class actions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2008, one of the contractor-model lawsuits that is
not part of the multidistrict litigation, Anfinson v. FedEx Ground,
was certified as a class action by a Washington state court. The
plaintiffs in Anfinson represent a class of FedEx Ground single-
route, pickup-and-delivery owner-operators in Washington from
December 21, 2001 through December 31, 2005 and allege that
the class members should be reimbursed as employees for their
uniform expenses and should receive overtime pay. The Anfinson
case is scheduled for trial in October 2008. The other contractor-
model lawsuits that are not part of the multidistrict litigation are
not as far along procedurally as Anfinson.
FedEx Ground is also involved in several lawsuits, including
three purported class actions, brought by drivers of the com-
pany’s independent contractors who claim that they were jointly
employed by the contractor and FedEx Ground.
Adverse determinations in these matters could, among other
things, entitle certain of our contractors and their drivers to the
reimbursement of certain expenses and to the benefit of wage-
and-hour laws and result in employment and withholding tax and
benefit liability for FedEx Ground, and could result in changes
to the independent contractor status of FedEx Ground’s owner-
operators. We believe that FedEx Ground’s owner-operators are
properly classified as independent contractors and that FedEx
Ground is not an employer of the drivers of the company’s
independent contractors. Given the nature and status of these
lawsuits, we cannot yet determine the amount or a reasonable
range of potential loss, if any, but it is reasonably possible that
such potential loss or such changes to the independent contrac-
tor status of FedEx Ground’s owner-operators could be material.
However, we do not believe that a material loss is probable in
any of these matters.
Independent Contractor — IRS Audit. On December 20, 2007, the
Internal Revenue Service (“IRS”) informed us that its audit team
had concluded an audit for the 2002 calendar year regarding
the classification of owner-operators at FedEx Ground. The IRS
has tentatively concluded, subject to ongoing discussions with
us, that FedEx Ground’s pickup-and-delivery owner-operators
should be reclassified as employees for federal employment tax
purposes. The IRS has indicated that it anticipates assessing tax
and penalties of $319 million plus interest for 2002. Substantially
all of the IRS’s tentative assessment relates to employment and
withholding taxes for the 2002 calendar year and, if paid by the
company, would be fully deductible. Similar issues are under
audit by the IRS for calendar years 2004 through 2006. We are
in discussions with the IRS audit team and expect that a final
resolution of this matter will not occur for some time. We believe
that we have strong defenses to the IRS’s tentative assessment
and will vigorously defend our position, as we continue to believe
that FedEx Ground’s owner-operators are independent contrac-
tors. Given the preliminary status of this matter, we cannot yet
determine the amount or a reasonable range of potential loss.
However, we do not believe that loss is probable.
Independent Contractor — Shareholder Derivative Lawsuits. The
Plumbers and Pipefitters Local 51 Pension Fund and the Western
Pennsylvania Bricklayers Pension Fund have each filed share-
holder derivative lawsuits in Tennessee federal court naming
FedEx Corporation as a nominal defendant and the members
of the Board of Directors of FedEx Corporation as defendants
(the Plumbers and Pipefitters suit was filed in May 2008 and the
Bricklayers suit was filed in June 2008). The derivative lawsuits,
which are purportedly brought to assert the rights of FedEx
Corporation, assert claims against the Board members for breach
of fiduciary duty, abuse of control, gross mismanagement, waste
of corporate assets and unjust enrichment in connection with the
management of FedEx Ground — in particular, the classification
of FedEx Ground’s owner-operators as independent contrac-
tors. Given the preliminary status of these matters, we cannot
yet determine the amount or a reasonable range of potential loss.
However, we do not believe that any loss is probable.
Antitrust — FedEx Freight Fuel Surcharge. In July 2007, a pur-
ported antitrust class-action lawsuit was filed in California federal
court, naming FedEx Corporation (particularly FedEx Freight
Corporation and its LTL freight subsidiaries) and several other
major LTL freight carriers as defendants. The lawsuit alleges that
the defendants conspired to fix fuel surcharge rates in violation of
federal antitrust laws and seeks injunctive relief, treble damages
and attorneys’ fees. Since the filing of the original case, numer-
ous similar cases have been filed against us and other LTL freight
carriers, each with allegations of conspiracy to fix fuel surcharge
rates along with other related allegations. The U.S. Judicial Panel
on Multidistrict Litigation has consolidated these cases for admin-
istration of the pre-trial proceedings by a single federal court, the
U.S. District Court for the Northern District of Georgia. We do not
believe that any loss is probable, and given the nature and status
of the claims, we cannot yet determine the amount or a reason-
able range of potential loss, if any, in these matters.
Other. FedEx and its subsidiaries are subject to other legal pro-
ceedings that arise in the ordinary course of their business. In the
opinion of management, the aggregate liability, if any, with respect
to these other actions will not have a material adverse effect on
our financial position, results of operations or cash flows.
Additional information about our contingencies can be found
in the Critical Accounting Estimates section of Management’s
Discussion and Analysis.
NOTE 18: RELATED PARTY
TRANSACTIONS
Our Chairman, President and Chief Executive Officer, Frederick
W. Smith, currently holds an approximate 10% ownership interest
in the National Football League Washington Redskins profes-
sional football team (“Redskins”) and is a member of its board of
directors. FedEx has a multi-year naming rights agreement with
the Redskins granting us certain marketing rights, including the
right to name the Redskins’ stadium “FedExField.”
77
FEDEX CORPORATION
NOTE 19: SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)
(in millions, except per share amounts)
2008
Revenues
Operating income (loss)
Net income (loss)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
2007
Revenues
Operating income
Net income
Basic earnings per common share
Diluted earnings per common share
First
Quarter
$ 9,199
814
494
1.60
1.58
$ 8,545
784
475
1.55
1.53
Second
Quarter (1)
$ 9,451
783
479
1.55
1.54
$ 8,926
839
511
1.67
1.64
Third
Quarter
$ 9,437
641
393
1.27
1.26
$ 8,592
641
420
1.37
1.35
Fourth
Quarter (2)
$ 9,866
(163)
(241)
(0.78)
(0.78)
$ 9,151
1,012
610
1.98
1.96
(1) Results for the second quarter of 2007 include a $143 million charge at FedEx Express associated with upfront compensation and benefits under the new pilot labor contract. The impact of
this new contract on second quarter net income was approximately $78 million net of tax, or $0.25 per diluted share. Additionally, FedEx National LTL’s financial results have been included from
September 3, 2006 (the date of acquisition).
(2) Results for the fourth quarter of 2008 include a charge of approximately $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.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
We are required to present condensed consolidating financial information in order for the subsidiary guarantors (other than FedEx
Express) of our public debt to continue to be exempt from reporting under the Securities Exchange Act of 1934.
The guarantor subsidiaries, which are wholly owned by FedEx, guarantee approximately $1.2 billion of our debt. The guarantees are
full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other
similar criteria, and as a result, the “Guarantor” and “Non-Guarantor” columns each include portions of our domestic and international
operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows
for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting.
Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the
following tables (in millions):
CONDENSED CONSOlIDATING BAlANCE SHEETS
Parent
Guarantor
Subsidiaries
May 31, 2008
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
ASSETS
Current Assets
Cash and cash equivalents
Receivables, less allowances
Spare parts, supplies and fuel, prepaid expenses
and other, less allowances
Deferred income taxes
Total current assets
Property and Equipment, at Cost
Less accumulated depreciation and amortization
Net property and equipment
Intercompany Receivable
Goodwill
Investment in Subsidiaries
Pension Assets
Other Assets
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current Liabilities
Current portion of long-term debt
Accrued salaries and employee benefits
Accounts payable
Accrued expenses
Total current liabilities
Long-Term Debt, Less Current Portion
Intercompany Payable
Other Liabilities
Deferred income taxes
Other liabilities
Total other long-term liabilities
Stockholders’ Investment
$ 1,101
4
10
–
1,115
24
16
8
1,902
–
11,683
813
381
$ 15,902
$
500
41
11
23
575
749
–
–
288
288
14,290
$ 15,902
$
166
3,310
710
512
4,698
26,658
14,578
12,080
–
2,299
2,678
1
744
$ 22,500
$
–
881
1,774
1,301
3,956
756
2,235
1,518
2,549
4,067
11,486
$ 22,500
$ 272
1,083
82
32
1,469
2,623
1,233
1,390
333
866
–
13
153
$ 4,224
$
2
196
448
229
875
1
–
105
132
237
3,111
$ 4,224
$
–
(38)
–
–
(38)
–
–
–
(2,235)
–
(14,361)
–
(359)
$ (16,993)
$
–
–
(38)
–
(38)
–
(2,235)
(359)
–
(359)
(14,361)
$ (16,993)
$ 1,539
4,359
802
544
7,244
29,305
15,827
13,478
–
3,165
–
827
919
$ 25,633
$
502
1,118
2,195
1,553
5,368
1,506
–
1,264
2,969
4,233
14,526
$ 25,633
79
FEDEX CORPORATION
CONDENSED CONSOlIDATING BAlANCE SHEETS
Parent
Guarantor
Subsidiaries
May 31, 2007
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
ASSETS
Current Assets
Cash and cash equivalents
Receivables, less allowances
Spare parts, supplies and fuel, prepaid expenses
and other, less allowances
Deferred income taxes
Total current assets
Property and Equipment, at Cost
Less accumulated depreciation and amortization
Net property and equipment
Intercompany Receivable
Goodwill
Investment in Subsidiaries
Other Assets
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current Liabilities
Current portion of long-term debt
Accrued salaries and employee benefits
Accounts payable
Accrued expenses
Total current liabilities
Long-Term Debt, Less Current Portion
Intercompany Payable
Other Liabilities
Deferred income taxes
Other liabilities
Total other long-term liabilities
Stockholders’ Investment
$ 1,212
–
7
–
1,219
22
14
8
–
–
14,588
670
$ 16,485
$
551
60
37
36
684
1,248
1,463
–
451
451
12,639
$ 16,485
$
124
3,029
500
505
4,158
24,681
13,422
11,259
924
2,667
3,340
457
$ 22,805
$
85
1,079
1,563
1,197
3,924
757
–
1,262
2,445
3,707
14,417
$ 22,805
$ 233
948
75
31
1,287
2,387
1,018
1,369
539
830
–
755
$ 4,780
$
3
215
448
189
855
2
–
279
116
395
3,528
$ 4,780
$
–
(35)
–
–
(35)
–
–
–
(1,463)
–
(17,928)
(644)
$ (20,070)
$
–
–
(32)
(3)
(35)
–
(1,463)
(644)
–
(644)
(17,928)
$ (20,070)
$ 1,569
3,942
582
536
6,629
27,090
14,454
12,636
–
3,497
–
1,238
$ 24,000
$
639
1,354
2,016
1,419
5,428
2,007
–
897
3,012
3,909
12,656
$ 24,000
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOlIDATING STATEMENTS OF INCOME
REVENUES
OPERATING ExPENSES:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Impairment charges
Intercompany charges, net
Other
OPERATING INCOME
OTHER INCOME (ExPENSE):
Equity in earnings of subsidiaries
Interest, net
Intercompany charges, net
Other, net
INCOME BEFORE INCOME TAxES
Provision for income taxes
NET INCOME
REVENUES
OPERATING ExPENSES:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Intercompany charges, net
Other
OPERATING INCOME
OTHER INCOME (ExPENSE):
Equity in earnings of subsidiaries
Interest, net
Intercompany charges, net
Other, net
INCOME BEFORE INCOME TAxES
Provision for income taxes
NET INCOME
Parent
$
–
Guarantor
Subsidiaries
$ 31,464
Year Ended May 31, 2008
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$ 6,860
$
(371)
$ 37,953
98
–
4
2
–
1
–
(204)
99
–
–
1,125
(44)
51
(7)
11,660
3,216
2,127
1,651
4,272
1,907
882
(94)
4,400
30,021
1,443
310
4
(66)
3
1,125
–
$ 1,125
1,694
687
$ 1,007
2,444
1,322
313
293
324
160
–
298
1,074
6,228
632
–
(14)
15
(1)
632
204
$ 428
–
(91)
(3)
–
–
–
–
–
(277)
(371)
–
(1,435)
–
–
–
(1,435)
–
$ (1,435)
14,202
4,447
2,441
1,946
4,596
2,068
882
–
5,296
35,878
2,075
–
(54)
–
(5)
2,016
891
$ 1,125
Parent
$
–
Guarantor
Subsidiaries
$ 29,894
Year Ended May 31, 2007
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$ 5,671
$
(351)
$ 35,214
103
–
3
2
–
1
(193)
84
–
–
2,016
(22)
29
(7)
11,632
2,964
2,082
1,513
3,317
1,830
(170)
4,133
27,301
2,593
390
(29)
(34)
–
2,016
–
$ 2,016
2,920
971
$ 1,949
2,005
944
261
227
216
121
363
851
4,988
683
–
(2)
5
(1)
685
228
$ 457
–
(35)
(3)
–
–
–
–
(313)
(351)
–
(2,406)
–
–
–
(2,406)
–
$ (2,406)
13,740
3,873
2,343
1,742
3,533
1,952
–
4,755
31,938
3,276
–
(53)
–
(8)
3,215
1,199
$ 2,016
81
FEDEX CORPORATION
CONDENSED CONSOlIDATING STATEMENTS OF INCOME
REVENUES
OPERATING ExPENSES:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Intercompany charges, net
Other
OPERATING INCOME
OTHER INCOME (ExPENSE):
Equity in earnings of subsidiaries
Interest, net
Intercompany charges, net
Other, net
INCOME BEFORE INCOME TAxES
Provision for income taxes
NET INCOME
Parent
$
–
Guarantor
Subsidiaries
$ 28,310
Year Ended May 31, 2006
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$ 4,325
$
(341)
$ 32,294
81
–
4
2
–
1
(164)
76
–
–
1,806
(47)
55
(8)
1,806
–
$ 1,806
11,046
2,642
2,163
1,401
3,128
1,709
(229)
4,008
25,868
2,442
327
(57)
(78)
(4)
2,630
876
$ 1,754
1,444
627
226
147
128
67
393
721
3,753
572
–
–
23
1
596
217
$ 379
–
(18)
(3)
–
–
–
–
(320)
(341)
–
(2,133)
–
–
–
(2,133)
–
$ (2,133)
12,571
3,251
2,390
1,550
3,256
1,777
–
4,485
29,280
3,014
–
(104)
–
(11)
2,899
1,093
$ 1,806
CONDENSED CONSOlIDATING STATEMENTS OF CASH FlOWS
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Business acquisitions, net of cash acquired
Collection on (payment of) loan to Parent
Proceeds from asset dispositions and other
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
FINANCING ACTIVITIES
Net transfers (to) from Parent
Dividend paid (to) from Parent
Principal payments on debt
Proceeds from stock issuances
Excess tax benefits on the exercise of stock options
Dividends paid
Other, net
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Parent
$
(44)
Guarantor
Subsidiaries
$ 3,072
Year Ended May 31, 2008
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$ 456
$ –
$ 3,484
(1)
–
(5,971)
–
(5,972)
463
5,971
(551)
108
38
(124)
–
5,905
(2,683)
–
5,971
34
3,322
(296)
(5,971)
(85)
–
–
–
–
(6,352)
(111)
1,212
$ 1,101
42
124
166
$
(263)
(4)
–
20
(247)
(167)
–
(3)
–
–
–
–
(170)
39
233
$ 272
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ –
(2,947)
(4)
–
54
(2,897)
–
–
(639)
108
38
(124)
–
(617)
(30)
1,569
$ 1,539
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOlIDATING STATEMENTS OF CASH FlOWS
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from asset dispositions
CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Net transfers (to) from Parent
Principal payments on debt
Proceeds from debt issuance
Proceeds from stock issuances
Excess tax benefits on the exercise of stock options
Dividends paid
Other, net
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended May 31, 2007
Parent
$
(57)
Guarantor
Subsidiaries
$ 2,741
Non-Guarantor
Subsidiaries
$
879
Eliminations
Consolidated
$ –
$ 3,563
(1)
(175)
–
(176)
(578)
(700)
999
115
45
(110)
(5)
(234)
(2,631)
(36)
47
(2,620)
40
(206)
55
–
–
–
–
(111)
(467)
1,679
$ 1,212
10
114
124
$
$
(250)
(1,099)
21
(1,328)
538
–
–
–
–
–
–
538
89
144
233
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ –
(2,882)
(1,310)
68
(4,124)
–
(906)
1,054
115
45
(110)
(5)
193
(368)
1,937
$ 1,569
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Proceeds from asset dispositions
CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Net transfers (to) from Parent
Principal payments on debt
Proceeds from stock issuances
Dividends paid
Other, net
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Parent
$
(69)
Guarantor
Subsidiaries
$ 3,418
Year Ended May 31, 2006
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$ 327
$ –
$ 3,676
(4)
–
(4)
1,215
(250)
144
(97)
(2)
1,010
937
742
$ 1,679
(2,321)
58
(2,263)
(1,073)
(119)
–
–
–
(1,192)
(37)
151
114
$
(193)
6
(187)
(142)
–
–
–
–
(142)
(2)
146
$ 144
–
–
–
–
–
–
–
–
–
–
–
$ –
(2,518)
64
(2,454)
–
(369)
144
(97)
(2)
(324)
898
1,039
$ 1,937
83
FEDEX CORPORATION
REPORT OF INDEPENDENT REGISTERED PUbLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have audited the accompanying consolidated balance sheets of FedEx Corporation as of May 31, 2008 and 2007, and the related
consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for each of the
three years in the period ended May 31, 2008. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of FedEx Corporation at May 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended May 31, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective June 1, 2006, the Company adopted Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” and effective May 31, 2007 the Company adopted
SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans—An Amendment of FASB
Statements No. 87, 88, 106 and 132(R).”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FedEx
Corporation’s internal control over financial reporting as of May 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 10, 2008
expressed an unqualified opinion thereon.
Memphis, Tennessee
July 10, 2008
84
FEDEX CORPORATION
SELECTED FINANCIAL DATA
The following table sets forth (in millions, except per share amounts and other operating data) certain selected consolidated financial
and operating data for FedEx as of and for the five years ended May 31, 2008. This information should be read in conjunction with the
Consolidated Financial Statements, Management’s Discussion and Analysis of Results of Operations and Financial Condition and other
financial data appearing elsewhere in this Report.
2008 (1)
2007 (2)
2006 (3)
2005 (4)
2004 (5)
Operating Results
Revenues
Operating income
Income before income taxes
Net income
Per Share Data
Earnings per share:
Basic
Diluted
Average shares of common stock outstanding
Average common and common
equivalent shares outstanding
Cash dividends declared
Financial Position
Property and equipment, net
Total assets
Long-term debt, less current portion
Common stockholders’ investment
$ 37,953
2,075
2,016
1,125
$
$
$
3.64
3.60
309
312
0.30
$ 13,478
25,633
1,506
14,526
$ 35,214
3,276
3,215
2,016
$
$
$
6.57
6.48
307
311
0.37
$ 12,636
24,000
2,007
12,656
$ 32,294
3,014
2,899
1,806
$
$
$
5.94
5.83
304
310
0.33
$ 10,770
22,690
1,592
11,511
$ 29,363
2,471
2,313
1,449
$
$
$
4.81
4.72
301
307
0.29
$ 9,643
20,404
2,427
9,588
Other Operating Data
FedEx Express aircraft fleet
Average full-time equivalent employees and contractors
677
254,142
669
241,903
671
221,677
670
215,838
$ 24,710
1,440
1,319
838
$
$
$
2.80
2.76
299
304
0.29
$ 9,037
19,134
2,837
8,036
645
195,838
(1) Results for 2008 include a charge of approximately $891 million ($696 million, net of tax, or $2.23 per diluted share) recorded during the fourth quarter, 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. 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.
(2) Results for 2007 include a $143 million charge at FedEx Express associated with upfront compensation and benefits under the new labor contract with our pilots. See Note 1 to the accompanying
consolidated financial statements.
(3) Results for 2006 include a $79 million ($49 million, net of tax, or $0.16 per diluted share) charge to adjust the accounting for certain facility leases, predominantly at FedEx Express. See Note 7 to
the accompanying consolidated financial statements.
(4) Results for 2005 include a $48 million ($31 million, net of tax, or $0.10 per diluted share) Airline Stabilization Act charge at FedEx Express and a $12 million or $0.04 per diluted share benefit from an
income tax adjustment.
(5) Results for 2004 include $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs and a $37 million, or $0.12 per diluted share, benefit related to a favorable ruling
on an aircraft engine maintenance tax case and the reduction of our effective tax rate. Additionally, FedEx Office financial results have been included from February 12, 2004 (the date of acquisition).
85
FEDEX CORPORATION
Steven R. Loranger (2)
Chairman, President and
Chief Executive Officer
ITT Corporation
Engineering and manufacturing company
Gary W. Loveman (1) (3)
Chairman, President and
Chief Executive Officer
Harrah’s Entertainment, Inc.
Casino entertainment company
Charles T. Manatt (4)
Partner and Co-Founder
Manatt, Phelps & Phillips, LLP
Law firm
Frederick W. Smith
Chairman, President and
Chief Executive Officer
FedEx Corporation
Joshua I. Smith (1)
Chairman and Managing Partner
Coaching Group, LLC
Management consulting firm
Paul S. Walsh (2)
Chief Executive Officer
Diageo plc
Beverage company
Peter S. Willmott (1) (4*)
Chairman and Chief Executive Officer
Willmott Services, Inc.
Retail and consulting firm
bOARD OF DIRECTORS
James L. Barksdale (3) (4)
Chairman and President
Barksdale Management Corporation
Investment management company
August A. Busch IV (2)
President and Chief Executive Officer
Anheuser-Busch Companies, Inc.
Brewing organization
John A. Edwardson (1*)
Chairman and Chief Executive Officer
CDW Corporation
Technology products and services company
Judith L. Estrin (3*)
Chief Executive Officer
JLABS, LLC
Technology company
Philip Greer (2*)
Managing Director
Greer Family Consulting & Investments, LLC
Investment management firm
J.R. Hyde III (3)
Chairman
GTx, Inc.
Biopharmaceutical company
Shirley A. Jackson (3) (4)
President
Rensselaer Polytechnic Institute
Technological research university
(1) Audit Committee
(2) Compensation Committee
(3) Information Technology Oversight Committee
(4) Nominating & Governance Committee
* Committee Chair
86
FEDEX CORPORATION
EXECUTIvE OFFICERS AND SENIOR MANAGEMENT
FedEx Corporation
Frederick W. Smith
Chairman, President and Chief Executive Officer
Christine P. Richards
Executive Vice President, General Counsel and Secretary
Alan B. Graf, Jr.
Executive Vice President and Chief Financial Officer
Robert B. Carter
Executive Vice President,
FedEx Information Services and Chief Information Officer
T. Michael Glenn
Executive Vice President,
Market Development and Corporate Communications
John L. Merino
Corporate Vice President and Principal Accounting Officer
FedEx Express Segment
FedEx Ground Segment
David J. Bronczek
President and Chief Executive Officer
FedEx Express
David F. Rebholz
President and Chief Executive Officer
FedEx Ground
Michael L. Ducker
Executive Vice President and President, International
FedEx Express
Rodger G. Marticke
Executive Vice President and Chief Operating Officer
FedEx Ground
William J. Logue
Executive Vice President and Chief Operating Officer, United States
FedEx Express
Ward B. Strang
President and Chief Executive Officer
FedEx SmartPost
G. Edmond Clark
President and Chief Executive Officer
FedEx Trade Networks
FedEx Freight Segment
FedEx Services Segment
Douglas G. Duncan
President and Chief Executive Officer
FedEx Freight
Donald C. Brown
Executive Vice President, Finance and Administration
and Chief Financial Officer
FedEx Freight
Patrick L. Reed
Executive Vice President and Chief Operating Officer
FedEx Freight
Virginia C. Albanese
President and Chief Executive Officer
FedEx Custom Critical
Richard A. Faieta
President and Chief Executive Officer
Caribbean Transportation Services
Sherry A. Aaholm
Executive Vice President, Information Technology
FedEx Services
Donald F. Colleran
Executive Vice President, Global Sales
FedEx Services
Brian D. Philips
President and Chief Executive Officer
FedEx Office
Cary C. Pappas
President and Chief Operating Officer
FedEx Customer Information Services
Thomas Schmitt
President and Chief Executive Officer
FedEx Global Supply Chain Services
87
FEDEX CORPORATION
CORPORATE INFORmATION
FedEx Corporation: 942 South Shady Grove Road, Memphis,
Tennessee 38120, (901) 818-7500, fedex.com
Annual Meeting of Shareowners: Monday, September 29, 2008,
10:00 a.m. local time, The Peabody Hotel, Grand Ballroom,
149 Union Avenue, Memphis, Tennessee 38103.
Stock Listing: FedEx Corporation’s common stock is listed on
the New York Stock Exchange under the ticker symbol FDX.
Shareowners: As of July 14, 2008, there were 18,589 shareowners
of record.
Market Information: Following are high and low sale prices and
cash dividends paid, by quarter, for FedEx Corporation’s common
stock in 2008 and 2007:
FY 2008
High
Low
Dividend
FY 2007
High
Low
Dividend
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$119.10
99.30
0.10
$111.29
91.10
0.10
$101.53
80.00
0.10
$99.46
82.50
0.10
$118.74
97.79
0.09
$119.21
99.34
0.09
$121.42
106.63
0.09
$116.76
104.01
0.09
Financial Information: Copies of FedEx Corporation’s Annual
Report on Form 10-K, other documents filed with the Securities
and Exchange Commission (SEC) and other financial and statis-
tical information are available through our Web site at fedex.com.
Company documents filed electronically with the SEC can
also be found at the SEC’s Web site at www.sec.gov. You will
be mailed a copy of the Form 10-K upon request to: FedEx
Corporation Investor Relations, 942 South Shady Grove Road,
Memphis, Tennessee 38120, (901) 818-7200, e-mail:
ir@fedex.com.
SEC and NYSE Certifications: The most recent certifications
by our principal executive and financial officers pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 are filed as
exhibits to our Form 10-K. We have also filed with the New York
Stock Exchange the most recent Annual CEO Certification as
required by section 303A.12(a) of the NYSE Listed Company
Manual.
Independent Registered Public Accounting Firm:
Ernst & Young LLP, Memphis, Tennessee
Customer Service: Call 1-800-Go-FedEx or visit fedex.com.
Media Inquiries: Jesse W. Bunn, Staff Director, Marketplace
Communications, FedEx Corporation, 942 South Shady Grove
Road, Memphis, Tennessee 38120, (901) 818-7463,
e-mail: mediarelations@fedex.com
Shareowner Account Services: Computershare Investor
Services, P.O. Box 43069, Providence, Rhode Island 02940-3069,
(800) 446-2617, www.computershare.com
Direct Stock Purchase and Dividend Reinvestment:
For information on the direct stock purchase and dividend
reinvestment plan for FedEx Corporation common stock, call
Computershare at (800) 446-2617 or visit their direct stock
purchase plan Web site at www.computershare.com. This plan
provides an alternative to traditional retail brokerage methods of
purchasing, holding and selling FedEx common stock. This plan
also permits shareowners to automatically reinvest their divi-
dends to purchase additional shares of FedEx common stock.
Investor Relations: Mickey Foster, Vice President, Investor
Relations, FedEx Corporation, 942 South Shady Grove Road,
Memphis, Tennessee 38120, (901) 818-7200, e-mail: ir@fedex.com
Equal Employment Opportunity: Our greatest asset is our
people. We are committed to providing a workplace where
our employees and contractors feel respected, satisfied and
appreciated. Our policies are designed to promote fairness
and respect for everyone. We hire, evaluate and promote
employees, and engage contractors, based on their skills and
performance. With this in mind, we will not tolerate certain
behaviors. These include harassment, violence, intimidation
and discrimination of any kind involving race, color, religion,
national origin, gender, sexual orientation, age, disability,
veteran status or, where applicable, marital status.
Service Marks: The following are registered service marks of
Federal Express Corporation, registered with the U.S. Patent
& Trademark Office and in other countries: FedEx®, FedEx
Express®, FedEx Ground®, FedEx Freight®, FedEx Custom
Critical®, FedEx International Priority®, FedEx International
Priority® Freight, FedEx Supply Chain Services®, FedEx
SmartPost®, FedEx Home Delivery®, FedEx Trade Networks®,
FedEx National LTL®, and FedEx Services®. Caribbean
Transportation ServicesSM, FedEx OfficeSM, ExpressfreighterSM,
and FedEx Global Supply Chain ServicesSM are service marks
of Federal Express Corporation. FedEx Kinko’s Office and
Print Centers® is a registered service mark of Federal Express
Corporation and Kinko’s Ventures, Inc.
88
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SAFE KIDS
in eMeRGinG coUnTRies a GRowinG Middle class is driving something more than an economy
— it’s driving new cars and lots of them. but many communities are unprepared for the shift from two
wheels to four. Roads often lack crosswalks and stop signs, and children grow up without learning
the basics of pedestrian safety. safe Kids worldwide is helping communities address this need
through Safe Kids Walk This Way, a program created with Fedex in 2000. at Fedex, we understand
the value of pedestrian safety, and our drivers are among the most skilled in the industry. with our
extensive networks already in place in countries like the United states, Philippines, south Korea, india,
canada and brazil, safe Kids and Fedex are working with governments to create and improve critical
infrastructure and foster behavioral changes. our volunteers are assessing environmental needs and
educating children and caregivers. Together, we helped establish the first school zone in china, and
through projects such as international walk to school day and Global Road safety week, we’re boosting
support for child pedestrian safety. There’s also an unexpected benefit: as more and more Fedex
employees give their time to safe Kids initiatives, they’re contributing to a global culture of volunteerism.
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FedEx Corporation
942 south shady Grove Road
Memphis, Tennessee 38120
fedex.com
bali, indonesia JUne 24, 2008 5:13 PM