Federal Express 2011 Annual Report Download - page 17

15
MANAGEMENT’S DISCUSSION AND ANALYSIS
new Boeing 777 Freighter (“B777F”) aircraft. These are timing benefits
only, in that the depreciation would have otherwise been recognized in
later years.
The components of the provision for federal income taxes for the years
ended May 31 were as follows (in millions):
For 2012, we expect our effective tax rate to be in the range of 36.0%
to 38.0%. The actual rate, however, will depend on a number of fac-
tors, including the amount and source of operating income.
Additional information on income taxes, including our effective tax rate
reconciliation and liabilities for uncertain tax positions, can be found in
Note 11 of the accompanying consolidated financial statements.
Business Acquisitions
On February 22, 2011, FedEx Express completed the acquisition of the
Indian logistics, distribution and express businesses of AFL Pvt. Ltd.
and its affiliate Unifreight India Pvt. Ltd. for $96 million in cash. The
financial results of the acquired businesses are included in the FedEx
Express segment from the date of acquisition and were not material to
our results of operations or financial condition. Substantially all of the
purchase price was allocated to goodwill.
On December 15, 2010, FedEx entered into an agreement to acquire
Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican
domestic express package delivery company. This acquisition will be
funded with cash from operations and is expected to be completed
during the first quarter of 2012, subject to customary closing condi-
tions. The financial results of the acquired company will be included
in the FedEx Express segment from the date of acquisition and will be
immaterial to our 2012 results.
These acquisitions will give us more robust domestic transportation
networks and added capabilities in these important global markets.
Outlook
We expect moderate growth in the global economy, combined with
ongoing yield improvement actions, to drive a significant improvement
in earnings in 2012. Results at FedEx Express, driven by international
services, are expected to be the primary driver of earnings growth
during 2012. In addition, we expect our FedEx Freight segment to be
profitable throughout 2012 and anticipate our FedEx Ground segment
to continue to grow significantly. However, our outlook is dependent
on continued strengthening in global economic conditions, particularly
in industrial production, the pace of which is uncertain due to several
factors, including the impact of higher fuel prices on demand. We
expect growth in international trade to substantially outpace growth
in the U.S. domestic economy, and our unmatched global network is
uniquely positioned to service customer needs in this sector. While
cost headwinds in pension plans and maintenance and repairs are
expected to abate, we expect higher incentive compensation expense
as a result of higher earnings and higher expenses related to the
full restoration of the company–matching contributions on our
401(k) programs.
Our capital expenditures for 2012 are expected to be approximately
$4.2 billion, an increase over 2011, driven primarily by replacement
vehicles and equipment to support international growth at FedEx
Express. Our strategic investments in our more fuel efficient B777F
and Boeing 757 (“B757”) aircraft will continue in 2012. We are com-
mitted to investing in critical long–term strategic projects focused
on enhancing and broadening our service offerings to position us for
stronger growth as global economic conditions continue to improve.
For additional details on key 2012 capital projects, refer to the
“Liquidity Outlook” section of this MD&A.
Our outlook is dependent upon a stable pricing environment for fuel, as
volatility in fuel prices impacts our fuel surcharge levels, fuel expense
and demand for our services. Historically, our fuel surcharges have
largely offset incremental fuel costs; however, volatility in fuel costs
may impact earnings because adjustments to our fuel surcharges lag
changes in actual fuel prices paid. Therefore, the trailing impact of
adjustments to our fuel surcharges can significantly affect our earnings
either positively or negatively in the short–term.
As described in Note 17 of the accompanying consolidated financial
statements and the “Independent Contractor Matters” section of
our FedEx Ground segment MD&A, we are involved in a number of
lawsuits 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, timing and amount of any changes are dependent on the
outcome of numerous future events. We cannot reasonably estimate
the potential impact of any such changes or a meaningful range of
potential outcomes, although they could be material. However, we do
not believe that any such changes will impair our ability to operate and
profitably grow our FedEx Ground business.
See “Risk Factors” for a discussion of these and other potential risks
and uncertainties that could materially affect our future performance.
2011 2010 2009
Current $ 79 $ 36 $ (35)
Deferred 485 408 327
Total Federal Provision $ 564 $ 444 $ 292