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DEAR SHAREOWNERS:
YOU AIN’T SEEN NOTHING YET.
ANNUAL REPORT 2010
FedEx Corporation ANNUAL REPORT 2010

Table of contents

  • Page 1
    DEAR SHAREOWNERS: YOU AIN'T SEEN NOTHING YET. ANNUAL REPORT 2010

  • Page 2

  • Page 3
    ... the toughest economic contraction since World War II, we stuck to our strategy, to our long view of the future. Despite the downturn, we kept making smart investments that put us far ahead of any competitor. We kept breaking technological ground to give our customers better service and to make...

  • Page 4
    2

  • Page 5
    ... net income of $1.2 billion. Our share price rose by more than 50 percent over the course of the fiscal year, outpacing the S&P 500, the Dow Jones Industrial Average, and the Dow Jones Transportation Average. Over the years, we have built a business model that allowed us to adjust shipping capacity...

  • Page 6
    ...47 percent lower fuel consumption per pound of payload, greater operational efficiencies, and lower maintenance costs. And we expanded the list of countries where we operate branded FedEx Express domestic services to include India, along with the United States, China, Canada, Mexico, and the United...

  • Page 7
    ...have a nonstop ï¬,ight from Shanghai to Memphis. The ï¬,ight leaves Shanghai two hours later, so the cutoff time for our customers is two hours later. The other difference is operation time. With its power-loading system, we can load an additional 14,000 pounds into this plane 15 minutes faster than...

  • Page 8
    ... such as smart phone printing and other creative publishing solutions. Our retail network is an increasingly important channel for express and ground shipping. Also, FedEx Office has completed its rebranding and is now testing different store prototypes to identify the best model for the future...

  • Page 9
    .... And the most important thing is that it's friendly to the environment. My route is inside the University of Southern California campus. When people see me drive through, they give me the thumbs up and say, 'That's the way to go!' I drive an average of 20 miles every day. One time I tested it, and...

  • Page 10
    ... to our company. Over almost four decades of operation, all of us at FedEx have broadened our view of what's possible and why our work matters. We make about eight million deliveries every day, but we deliver more than packages, freight, and business services. We deliver the opportunity for people...

  • Page 11
    ..., net of tax, or $2.23 per diluted share) predominately related to impairment charges associated with intangible assets from the FedEx Office acquisition. (3) Shows the value, at the end of each of the last five fiscal years, of $100 invested in FedEx Corporation common stock or the relevant...

  • Page 12
    ...our average daily volume and shipment weight; • the mix of services purchased by our customers; • the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per hundredweight for LTL freight shipments); • our ability to manage our cost structure...

  • Page 13
    ..., net of tax, or $2.23 per diluted share), predominantly related to impairment charges associated with intangible assets from the FedEx Office acquisition (described below). The following table shows changes in revenues and operating income by reportable segment for 2010 compared to 2009, and 2009...

  • Page 14
    ....2 75.0 85.0 Average Daily LTL Shipments FedEx Freight LTL Group 82.3 79.7 74.4 2010 70.0 2007 2008 2009 2010 2009 The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected yield trends for the years ended May 31: FedEx Express Revenue per Package - Yield...

  • Page 15
    ... during 2009 due to market share gains, including volumes gained from DHL and FedEx Express customers who chose to use our more economical ground delivery services during the recession. In 2010, we recorded a charge of $18 million for the impairment of goodwill related to the FedEx National LTL...

  • Page 16
    ... share), predominantly related to impairment charges associated with intangible assets from the FedEx Office acquisition (described above). 2010 Percent of Revenue (1) 2009 2008 Operating expenses: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation...

  • Page 17
    ... prices compared to changes in fuel surcharges. OTHER INCOME AND EXPENSE increases in aircraft maintenance expenses, the reinstatement of employee compensation programs and higher healthcare expense due to continued inï¬,ation in the cost of medical services will dampen our earnings growth in 2011...

  • Page 18
    ... services) FEDEX GROUND SEGMENT FedEx Ground (small-package ground delivery) FedEx SmartPost (small-parcel consolidator) FedEx Freight LTL Group: FedEx Freight (fast-transit LTL freight transportation) FedEx National LTL (economical LTL freight transportation) FedEx Custom Critical (time-critical...

  • Page 19
    ... our international domestic express operations, primarily in the United Kingdom, Canada, China, India and Mexico. (2) Other revenues includes FedEx Trade Networks and, beginning in the second quarter of 2010, FedEx SupplyChain Systems. (3) Represents charges associated with aircraft-related asset...

  • Page 20
    ... other charges primarily associated with aircraft-related lease and contract termination costs and employee severance. Average daily package volume (ADV): 1,157 1,127 U.S. overnight box U.S. overnight envelope 614 627 U.S. deferred 867 849 Total U.S. domestic ADV 2,638 2,603 International priority...

  • Page 21
    ... fuel surcharge and the international fuel surcharges ranged as follows for the years ended May 31: 2010 2009 2008 In January 2010, we implemented a 5.9% average list price increase on FedEx Express U.S. domestic and U.S. outbound express package and freight shipments and made various changes...

  • Page 22
    ... higher fuel surcharges. FedEx Express segment operating income and operating margin are expected to increase in 2011, driven by continued growth in international package and freight services and productivity enhancements. However, we anticipate that volume-related increases in aircraft maintenance...

  • Page 23
    ... lower-cost FedEx Ground offerings. Yield improvement at FedEx Ground during 2009 was primarily due to higher base rates (partially offset by higher customer discounts), increased extra service revenue and higher fuel surcharges. FedEx SmartPost volume growth during 2009 resulted from market share...

  • Page 24
    ... continued revenue growth in 2011, led by increases in commercial, FedEx Home Delivery and FedEx SmartPost volumes due to market share gains. Yields for all services at FedEx Ground are expected to improve in 2011 as a result of increases in list prices. FedEx Ground segment operating income in 2011...

  • Page 25
    ... Services into FedEx Express effective June 1, 2009, mostly offset by higher average daily LTL shipments. LTL yield decreased 10% during 2010 due to a continuing highly competitive LTL freight market, resulting from excess capacity and lower fuel surcharges. Discounted pricing drove an increase...

  • Page 26
    ... effects that fuel prices and related fuel surcharge levels have on our business, including changes in customer demand and the impact on base rates and rates paid to our third-party transportation providers. Purchased transportation costs decreased during 2009 primarily due to lower shipment volumes...

  • Page 27
    ... ï¬,ows for the years ended May 31 (in millions): 2010 2009 2008 Operating activities: Net income $ 1,184 Noncash impairment charges 18 Other noncash charges and credits 2,514 Changes in assets and liabilities (578) Cash provided by operating activities 3,138 Investing activities: (2,816) Capital...

  • Page 28
    ...Aircraft and aircraft-related equipment purchases at FedEx Express during 2010 included six new B777Fs, the first of which entered revenue service during the second quarter of 2010, and 12 B757s. FedEx Services capital expenditures increased in 2010 due to information technology facility expansions...

  • Page 29
    .... We have other long-term liabilities reï¬,ected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare plan liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reï¬,ected...

  • Page 30
    ...require increasingly aggressive funding levels for our pension plans. Our retirement plans cost is included in the "Salaries and Employee Benefits" caption in our consolidated income statements. A summary of our retirement plans costs over the past three years is as follows (in millions): 2010 2009...

  • Page 31
    ...) Effect on 2011 Effect on 2010 Pension Expense Pension Expense Pension Cost. The accounting for pension and postretirement healthcare plans includes numerous assumptions, such as: discount rates; expected long-term investment returns on plan assets; future salary increases; employee turnover...

  • Page 32
    ... compound geometric long-term rate of return on our U.S. domestic pension plan assets for 2011 and 2010 and 8.5% in 2009 and 2008, as described in Note 11 of the accompanying consolidated financial statements. A one-basispoint change in our expected return on plan assets impacts our pension expense...

  • Page 33
    ... as of the balance sheet date. These estimates include consideration of factors such as severity of claims, frequency of claims and future healthcare costs. Cost trends on material accruals are updated each quarter. We self-insure up to certain limits that vary by operating company and type of risk...

  • Page 34
    ...recognized in 2010 or 2008. However, during 2009, we recorded $202 million in property and equipment impairment charges. These charges were primarily related to our decision to permanently remove from service certain aircraft, along with certain excess aircraft engines, at FedEx Express. Leases. We...

  • Page 35
    ... related to these charges is included in Note 3 to our consolidated financial statements. FedEx National LTL Goodwill. In 2009, we recorded a goodwill impairment charge of $90 million at our FedEx National LTL reporting unit. This charge was a result of reduced revenues and increased operating...

  • Page 36
    ... both current taxes payable and deferred tax assets and liabilities. Our provision for income taxes is based on domestic and international statutory income tax rates in the jurisdictions in which we operate, applied to taxable income, reduced by applicable tax credits. We account for operating taxes...

  • Page 37
    ...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...

  • Page 38
    ... levels. For example, during 2009, as a result of excess aircraft capacity at FedEx Express, we permanently removed certain aircraft and certain excess aircraft engines from service and thus recorded a charge of $199 million. We rely heavily on technology to operate our transportation and business...

  • Page 39
    ...as class actions) and state tax and other administrative proceedings 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...

  • Page 40
    ... our sales levels and foreign currency sales prices; • market acceptance of our new service and growth initiatives; • any liability resulting from and the costs of defending against class-action litigation, such as wage-and-hour and discrimination and retaliation claims, and any other legal...

  • Page 41
    ... of May 31, 2010. The effectiveness of our internal control over financial reporting as of May 31, 2010, 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...

  • Page 42
    ...as of May 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders' investment and comprehensive income, and cash ï¬,ows for each of the three years in the period ended May 31, 2010 of FedEx Corporation and our report dated July 15, 2010 expressed an unqualified...

  • Page 43
    FEDEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share amounts) 2010 Years ended May 31, 2009 2008 REVENUES OPERATING EXPENSES: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Fuel Maintenance and repairs ...

  • Page 44
    FEDEX CORPORATION CONSOLIDATED BALANCE SHEETS May 31, (In millions, except share data) 2010 2009 ASSETS Current Assets Cash and cash equivalents Receivables, less allowances of $166 and $196 Spare parts, supplies and fuel, less allowances of $170 and $175 Deferred income taxes Prepaid expenses and...

  • Page 45
    ... accounts Deferred income taxes and other noncash items Noncash impairment charges Stock-based compensation Changes in assets and liabilities: Receivables Other assets Pension assets and liabilities, net Accounts payable and other liabilities Other, net Cash provided by operating activities...

  • Page 46
    ..., net of tax of $617 Total comprehensive income Purchase of treasury stock Cash dividends declared ($0.44 per share) Employee incentive plans and other (2,375,753 shares issued) BALANCE AT MAY 31, 2010 The accompanying notes are an integral part of these consolidated financial statements. 44

  • Page 47
    ... 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 the FedEx Freight LTL Group, which comprises the FedEx Freight and FedEx National...

  • Page 48
    ... that reï¬,ect 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...

  • Page 49
    ...of FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that will become amendable during the second quarter of 2011. In accordance with applicable labor law, we will continue to operate under our current agreement while...

  • Page 50
    ...available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include: self-insurance accruals; retirement plan obligations; long-term incentive accruals; tax liabilities; accounts receivable allowances...

  • Page 51
    ... forecast period, and the discount rate. For 2009, our discount rate of 12.0% represented our estimated weighted-average cost of capital ("WACC") of the FedEx Office reporting unit adjusted for company-specific risk premium to account for the estimated uncertainty associated with our future cash...

  • Page 52
    ... consolidated statements of income. The charge was included in the results of the FedEx Services segment and was not allocated to our transportation segments, as the charge was unrelated to the core performance of those businesses. Amortization expense for intangible assets was $51 million in 2010...

  • Page 53
    ... weighted-average remaining lease term of all operating leases outstanding at May 31, 2010 was approximately six years. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements...

  • Page 54
    ...compensation expense 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...

  • Page 55
    ... TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about stock option activity for the year ended May 31, 2010: Stock Options WeightedWeighted-Average Average Remaining Exercise Price Contractual Term Aggregate Intrinsic Value (in millions) (1) Shares Outstanding at...

  • Page 56
    FEDEX CORPORATION NOTE 10: INCOME TAXES The components of the provision for income taxes for the years ended May 31 were as follows (in millions): 2010 2009 2008 The net deferred tax liabilities as of May 31 have been classified in the balance sheets as follows (in millions): 2010 2009 Current ...

  • Page 57
    ..., such as: discount rates; expected long-term investment returns on plan assets; future salary increases; employee turnover; mortality; and retirement ages. These assumptions most significantly impact our U.S. domestic pension plans. We made significant changes to our retirement plans during 2008...

  • Page 58
    ... a long-term investment return that meets our pension plan obligations. Our pension plan assets are invested primarily in listed securities, and our pension plans hold only a minimal investment in FedEx common stock that is entirely at the discretion of thirdparty pension fund investment managers...

  • Page 59
    ... fixed income securities are estimated by using bid evaluation pricing models or quoted prices of securities with similar characteristics. The fair values of investments by level and asset category and the weighted-average asset allocations for our domestic pension plans at the measurement date are...

  • Page 60
    FEDEX CORPORATION 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, 2010 and a statement of the funded status as of May 31, 2010 and 2009 (in millions...

  • Page 61
    ... in our discount rate at our May 31, 2010 measurement date, which increased the number of plans whose assets did not exceed their liability, including our U.S. domestic pension plans ("U.S. Retirement Plans"). At May 31, 2010 and 2009, the fair value of plan assets for pension plans with a PBO...

  • Page 62
    ...A 1% change in these annual trend rates would not have a significant impact on the APBO at May 31, 2010 or 2010 benefit expense because the level of these benefits is capped. FEDEX FREIGHT SEGMENT FEDEX SERVICES SEGMENT FedEx Services (sales, NOTE 12: BUSINESS SEGMENT INFORMATION FedEx Express...

  • Page 63
    ... from the FedEx Services segment to the respective transportation segments. The "Intercompany charges" caption also includes charges and credits for administrative services provided between operating companies and certain other costs such as corporate management fees related to services received for...

  • Page 64
    ...operating income (loss) and segment assets to consolidated financial statement totals for the years ended or as of May 31 (in millions): FedEx Express Segment (1) FedEx Ground Segment FedEx Freight Segment (2) FedEx Services Segment (3) Other and Eliminations Consolidated Total Revenues 2010 2009...

  • Page 65
    ...13: SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest expense and income taxes for the years ended May 31 was as follows (in millions): 2010 2009 2008 Revenue by Service Type FedEx Express segment: Package: $ 5,602 $ 6,074 $ 6,578 U.S. overnight box U.S. overnight envelope 1,640 1,855 2,012...

  • Page 66
    ...fication order, but the court refused to accept it at this time. In September 2009, in Taylor v. FedEx Freight, a California state court granted class certification, certifying a class of all current and former drivers employed by FedEx Freight in California who performed linehaul services since...

  • Page 67
    ...40 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...

  • Page 68
    ... per diluted share) primarily related to noncash impairment charges associated with goodwill and aircraft-related asset impairments. (2) The sum of the quarterly diluted earnings per share may not equal annual amounts due to differences in the weighted-average number of shares outstanding during the...

  • Page 69
    ... NOTE 19: 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...

  • Page 70
    ... 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...

  • Page 71
    ... CONDENSED CONSOLIDATING STATEMENTS OF INCOME Parent Guarantor Subsidiaries Year Ended May 31, 2010 Non-guarantor Subsidiaries Eliminations Consolidated REVENUES OPERATING EXPENSES: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Fuel...

  • Page 72
    FEDEX CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF INCOME Parent Guarantor Subsidiaries Year Ended May 31, 2008 Non-guarantor Subsidiaries Eliminations Consolidated REVENUES OPERATING EXPENSES: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and ...

  • Page 73
    ... on debt Proceeds from debt issuance Proceeds from stock issuances Excess tax benefit on the exercise of stock options Dividends paid Other, net CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and...

  • Page 74
    ... 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, 2010 and 2009, and the related consolidated statements of income, changes...

  • Page 75
    ... 671 221,677 Other Operating Data FedEx Express aircraft ï¬,eet Average full-time equivalent employees and contractors (1) Results for 2009 include a charge of $1.2 billion ($1.1 billion, net of tax, or $3.45 per diluted share) primarily related to impairment charges associated with goodwill and...

  • Page 76
    ... Barksdale Management Corporation Investment management company John A. Edwardson (1*) Chairman, President and Chief Executive Officer Harrah's Entertainment, Inc. Branded gaming entertainment company Chairman and Chief Executive Officer CDW Corporation Technology products and services company...

  • Page 77
    ... Executive Vice President, Market Development and Corporate Communications Robert B. Carter Executive Vice President, FedEx Information Services and Chief Information Officer John L. Merino Corporate Vice President and Principal Accounting Officer FEDEX EXPRESS SEGMENT FEDEX GROUND SEGMENT...

  • Page 78
    ..., Manager, Investor Relations, Tennessee 38120, (901) 818-7500, fedex.com ANNUAL MEETING OF SHAREOWNERS: Monday, September 27, 2010, 10:00 a.m. local time, FedEx Express World Headquarters, Auditorium, 3670 Hacks Cross Road, Building G, Memphis, Tennessee 38125. STOCK LISTING: FedEx Corporation...

  • Page 79
    FEDEX EXPRESS is the world's largest express transportation company, providing time-certain delivery to more than 220 countries and territories. FEDEX GROUND provides low-cost, small-package shipping to businesses and residences in the United States and Canada. FEDEX FREIGHT is the leading North ...

  • Page 80
    FEDEX CORPORATION 942 South Shady Grove Road Memphis, Tennessee 38120 fedex.com THE FUTURE OF FUEL We call it "30 by 30" - our goal to get 30 percent of our jet fuel from alternative fuels by the year 2030. New advances bring that goal closer to reality every day, with jet fuel already being ...