Federal Express 2005 Annual Report Download - page 43

any, that the adoption of new rules by the TSA or any other addi-
tional security requirements may have on our results of operations.
However, it is possible that increased security requirements could
impose substantial incremental costs on us and our competitors.
Future results will depend upon a number of factors, including
U.S. and international economic conditions, the impact from any
terrorist activities or international conflicts, our ability to match
our cost structure and capacity with shifting volume levels, our
ability to effectively leverage our new service and growth
initiatives and our ability to successfully conclude contract nego-
tiations with our pilots and defend against challenges to our
independent contractor model described in Note 19 to the
accompanying consolidated financial statements. In addition,
adjustments to our fuel surcharges lag changes in actual fuel
prices paid. Therefore, our operating income could be materially
affected should the price of fuel suddenly change by a significant
amount. See “Forward-Looking Statements” for a more complete
discussion of potential risks and uncertainties that could materi-
ally affect our future performance.
Seasonality of Business
Our businesses are seasonal in nature. The transportation and
business services industries are affected directly by the state of
the overall domestic and international economies. Seasonal fluc-
tuations affect volumes, revenues and earnings. Historically, the
U.S. express package business experiences an increase in vol-
umes in late November and December. International business,
particularly in the Asia to U.S. market, peaks in October and
November due to U.S. holiday sales. Our first and third fiscal
quarters, because they are summer vacation and post winter-
holiday seasons, have historically exhibited lower volumes
relative to other periods. Normally, the fall is the busiest shipping
period for FedEx Ground, while late December, June and July are
the slowest periods. For FedEx Freight, the spring and fall are the
busiest periods and the latter part of December, January and
February are the slowest periods. For FedEx Kinko’s, the summer
months are normally the slowest periods. Shipment levels, oper-
ating costs and earnings for each of our companies can also be
adversely affected by inclement weather.
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS 123R, “Share-Based Payment.” SFAS 123R
is a revision of SFAS 123 and supersedes APB 25. The new stan-
dard requires companies to record compensation expense for
stock-based awards using a fair value method and is effective for
annual periods beginning after June 15, 2005 (effective in 2007 for
FedEx). Compensation expense will be recorded over the requi-
site service period, which is typically the vesting period of the
award. We plan to adopt this standard using the modified
prospective method.
The impact of the adoption of SFAS 123R cannot be predicted at
this time because it will depend on levels of share-based payments
granted in the future, as well as the assumptions and the fair value
model used to value them, and the market value of our common
stock. If applied to the years ended May 31, 2005 and 2004, the
impact of that standard would have materially approximated that of
SFAS 123 as presented in Note 1 to the accompanying consolidated
financial statements (reducing earnings per diluted share in 2005
and 2004 by $0.12 and $0.08, respectively). SFAS 123R also requires
the benefits of tax deductions in excess of recognized compensa-
tion cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current standards. Based
on historical experience, we do not expect the impact of adopting
SFAS 123R to be material to our reported consolidated cash flows.
REPORTABLE SEGMENTS
FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s
form the core of our reportable segments. Our reportable seg-
ments 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 Supply Chain Services
(contract logistics)
FedEx Freight Segment FedEx Freight (LTL freight
transportation)
FedEx Custom Critical
(time-critical transportation)
Caribbean Transportation Services
(airfreight forwarding)
FedEx Kinko’s Segment FedEx Kinko’s (document solutions
and business services)
FedEx Services provides customer-facing sales, marketing and
information technology support, primarily for FedEx Express and
FedEx Ground. The costs for these activities are allocated based
on metrics such as relative revenues or estimated services pro-
vided. We believe these allocations approximate the cost of
providing these functions. The operating expenses line item
“Intercompany charges” on the accompanying financial sum-
maries of our reportable segments includes the allocations from
FedEx Services to FedEx Express, FedEx Ground, FedEx Freight
and FedEx Kinko’s. The “Intercompany charges” caption also
includes allocations for services provided between operating
companies and certain other costs such as corporate manage-
ment fees related to services received for general corporate
oversight, including executive officers and certain legal and
finance functions. Management evaluates segment financial
performance based on operating income.
In addition, certain FedEx operating companies provide trans-
portation and related services for other FedEx companies outside
MANAGEMENT’S DISCUSSION AND ANALYSIS
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