Federal Express 2006 Annual Report Download

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We’re all part of something bigger.

Table of contents

  • Page 1
    We're all part of som ething bigger.

  • Page 2

  • Page 3
    As more of us have access to the goods, services and ideas the w orld has to offer, w e gain the pow er to think new thoughts and reach new horizons.

  • Page 4
    2

  • Page 5
    For some of us, it's entering new markets. 3

  • Page 6
    4

  • Page 7
    For others, it's accelerating changes that create opportunities and m ake m ore possible. 5

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    6

  • Page 9
    For many of us, it's having a world of choices. 7

  • Page 10

  • Page 11
    ... about advances in life and business the world couldn't have imagined just 30 years ago. No matter where you see possibilities, being connected to FedEx means having access to innovations and solutions that let you take full advantage of the potential. And as the network grows, the more others want...

  • Page 12
    ... share) charge to adjust the accounting for certain facility leases, predominantly at FedEx Express. (2) 2005 includes $48 million ($31 million, net of tax, or $0.10 per diluted share) related to the Airline Stabilization Act charge and a $12 million or $0.04 per diluted share benefit from an income...

  • Page 13
    ...create a com prehensive LTL solution for our custom ers. Our FedEx Ground netw ork is on track to expand its average daily package pickup capacity to approxim ately five m illion in the next five years, w ith three new hubs opened in FY06. FedEx Ground has accelerated transit times in more than half...

  • Page 14
    ... for years - that open markets, open skies and open communication among nations and peoples are good for the world. In this annual report, our custom ers share success stories that prove this point. No tw o stories are the sam e, of course, but each dem onstrates how FedEx has helped change w hat...

  • Page 15
    ... ers. Our global transportation and information netw orks enable convenient, customizable solutions: FedEx Express provides time-definite shipping to more than 220 countries and territories. FedEx Ground provides cost-effective, day-definite package delivery throughout the United States and Canada...

  • Page 16
    ...Heart secured 16 water purification systems, each weighing 1,600 pounds, from a manufacturer in South Carolina. FedEx Freight and FedEx Custom Critical transported the systems to staging areas in New York and California, w here FedEx Express aircraft helped get them to Sri Lanka. When Southeast Asia...

  • Page 17

  • Page 18
    In 2005, there was an 18% increase in the number of natural disasters but a significant decrease in the number of resulting deaths. 16 Fact source: Center for Research on Epidemiology of Disasters

  • Page 19
    Fact source: John D. Kasarda, University of North Carolina 40% of the value of world trade today is shipped by air, yet barely comprises 1% of the total weight . 17

  • Page 20
    ... exactly w hen they're needed. FedEx Express helps Sam sung ensure that supply m atches dem and by operating the industry's first direct flight betw een m ainland China and Europe. The FedEx Express daily w estbound around-the-w orld flight connects Shanghai, China, to Frankfurt, Germany, and North...

  • Page 21
    19

  • Page 22
    In 2004, the world produced more transistors than grains of rice - and at a lower cost. 20 Fact source: Semiconductor Industry Association

  • Page 23
    Fact source: Yahoo! The world's population of Internet users is likely to expand to almost 1.8 billion in the next 4 years. 21

  • Page 24
    ...' orders get picked, arranged and packed for shipm ent right on the spot, w ith the help of FedEx technology installed on-site at the farm s and greenhouses. Direct-to-consum er business m odels are an increasing trend. Com panies like ProFlowers give their customers not only a fresher product but...

  • Page 25
    23

  • Page 26
    Only 5 million Americans had high-speed Internet access at home in 2000. By the end of 2005, that number had grown to 73 million. 24 Fact source: The Pew Internet & American Life Project

  • Page 27
    Fact source: U.S. Census Bureau In 2003 alone, U.S. businesses saved an estimated $495 billion from increased supply chain efficiency and reduced inventory costs. 25

  • Page 28
    26

  • Page 29
    ...aker to provide just-in-tim e delivery to w holesalers, helping them keep inventory costs to a m inim um . What's m ore, Shoem aker can give builders the advantage of direct purchase and shipment to the construction site, saving them tim e and m oney. With the increasing speed of FedEx Freight lanes...

  • Page 30
    Companies save up to an estimated $1.50 in overall inventory and logistics costs for every $1 spent on faster and more reliable transportation. 28 Fact source: The Colography Group

  • Page 31
    Fact source: Airbus China and India are expected to become the world's largest consumer markets within the next 25 years, with total purchasing power 5 times greater than that of the United States today. 29

  • Page 32
    ... way FedEx Kinko's helped our company deliver training materials to New Delhi will help us meet large-scale client needs as we expand our business in the Netherlands, the United Kingdom, China and Mexico. - Peter Gray, Vice President of Operations, The Ken Blanchard Com panies As the inform ation...

  • Page 33
    31

  • Page 34
    The value of Chinese e-commerce grew 58% to nearly $70 billion in 2005. 32 Fact source: China Internet Development Research Center

  • Page 35
    Fact source: John D. Kasarda, University of North Carolina Over the past 30 years, global GDP has risen 154% and the value of world trade has grown 355%, while the value of air cargo has climbed a remarkable 1,395%. 33

  • Page 36
    34

  • Page 37
    ...and with the expectations of its customers. The company uses FedEx Freight to move large shipments from its many vendors to its central distribution center in Chicago. From there, FedEx Ground and FedEx Hom e Delivery transport orders to custom ers, and FedEx Express provides an expedited option for...

  • Page 38
    ... Financial Officer Comparison of Five-Year Cumulative Total Return* $ 300 $ 250 $ 200 $ 150 $ 100 $ 50 2001 2002 2003 2004 2005 2006 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...

  • Page 39
    ... Registered Public Accounting Firm 65 Consolidated Financial Statements 69 Notes to Consolidated Financial Statements 88 Report of Independent Registered Public Accounting Firm 89 Selected Financial Data 90 Board of Directors 91 Executive Officers and Senior M anagement 92 Corporate Information

  • Page 40
    ...of the year referenced and comparisons are to the prior year. References to our transportation segments mean, c ollec tively, our FedEx Express, FedEx Ground and FedEx Freight segments. ORGANIZATION OF INFORM ATION Our M D& A is c omprised of three major sec tions: Results of Operations, Financ ial...

  • Page 41
    ... diluted share benefit related to a favorable ruling on a tax case and the reduction of our effective tax rate described below. Also see Note 12 to the accompanying consolidated financial statements. The follow ing table show s changes in revenues and operating income by reportable segment for 2006...

  • Page 42
    .... Operating income improvement w as partially offset by higher costs at FedEx Express to support international volume grow th, expansion costs at FedEx Ground and reduced operating profit at FedEx Kinko's. W hile fuel costs increased substantially in 2006, fuel surcharges more than offset the effect...

  • Page 43
    ... increased operating expenses by $79 million, in the first quarter of 2006. Airline Stabilization Act Charge During the second quarter of 2005, the United States Department of Transportation (" DOT" ) issued a final order in its administrative review of the FedEx Express claim for compensation under...

  • Page 44
    ... FedEx Ground c ontinues its multi-year c apac ity expansion plan and FedEx Freight continues to grow its regional and interregional servic es. FedEx Kinko's w ill foc us on key strategies related to adding new locations, improving customer service and increasing investments in employee development...

  • Page 45
    ... costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and financ e func tions. M anagement evaluates segment financial performance based on operating income. In addition, certain FedEx operating companies...

  • Page 46
    ...) for the years ended M ay 31: 2006 (1) 2005 2004 Percent Change 2006/ 2005/ 2005 2004 Revenues: Package: U.S. overnight box $ 6,422 U.S. overnight envelope 1,974 U.S. deferred 2,853 Total U.S. domestic package revenue 11,249 International Priority (IP) 6,979 Total package revenue 18,228 Freight...

  • Page 47
    ... shipments from the United States, Europe and Latin America continued to improve. U.S. domestic volumes at FedEx Express increased 2% in 2005. U.S. domestic composite yield increased 5% in 2005 due to higher fuel surcharges and increases in average w eight per package and average rate per pound...

  • Page 48
    ... Change 2006/ 2005/ 2005 2004 Revenues Operating expenses: Salaries and employee benefits Purchased transportation Rentals Depreciation and amortization Fuel M aintenance and repairs Intercompany charges Other Total operating expenses Operating income Operating margin Average daily package volume...

  • Page 49
    ... by higher year-over-year expenses related to investments in new technology and the opening of additional FedEx Ground facilities. Salaries and employee benefits increased 10% in 2006 principally due to w age rate increases and increases in staffing and facilities to support volume grow th. Deprec...

  • Page 50
    ..., fuel sur11 charges more than offset the effect of higher fuel costs. Increased 49 staffing to support volume grow th and higher incentive compensation expense increased salaries and employee benefits in 2006. 10 Depreciation costs increased primarily due to investments in 24 operating equipment...

  • Page 51
    ... and full year 2006 as the increase in package acceptance revenues w as more than offset by a decline in copy product line revenues. In 2006, salaries and employee benefits increased due to the addition of FedEx Kinko's Ship Centers, higher group health insurance costs and increased costs associated...

  • Page 52
    ...multi-year netw ork expansion program to increase the retail locations for customer access to FedEx Kinko's business services and the FedEx Express and FedEx Ground shipping netw ork. In addition, FedEx Kinko's w ill focus on key strategies related to improving customer service and employee training...

  • Page 53
    ...drop below investment grade, our access to financing may become more limited. The follow ing table c ompares c apital expenditures by asset c ategory and reportable segment for the years ended M ay 31 (in millions): Percent Change 2006 2005 2004 2006/ 2005 2005/ 2004 Aircraft and related equipment...

  • Page 54
    ... benefits favorable to ow nership w ith respect to market values, liquidity or after-tax cash flow s. In accordance w ith accounting principles generally accepted in the United States, our operating leases are not recorded in our balance sheet. Credit rating agencies routinely use information...

  • Page 55
    ... benefits is determined by accounting and actuarial methods that include numerous estimates, including: discount rates; expected long-term investment returns on plan assets; future salary inc reases; employee turnover; mortality; and retirement ages. The determination of our annual pension cost...

  • Page 56
    ... 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 thirdparty pension fund investment managers. The estimated average rate of return on plan assets is a long...

  • Page 57
    ... our total pension liabilities and costs. Under the Portable Pension Account, the retirement benefit is expressed as a dollar amount in a notional account that grow s w ith annual credits based on pay, age and years of credited service and interest on the notional account balance. An employee's pay...

  • Page 58
    ... to their esti- SELF-INSURANCE ACCRUALS We are self-insured up to certain limits for costs associated w ith w orkers' compensation claims, vehicle accidents and general business liabilities, and benefits paid under employee healthcare and long-term disability programs. At M ay 31, 2006 there w ere...

  • Page 59
    ... value, no impairment charge w as necessary. W hile FedEx Kinko's experienc ed slight revenue grow th w ith dec reased profitability in 2006, w e believe that our long-term grow th and expansion strategies support our fair value conclusions. For both goodw ill and recorded intangible assets at FedEx...

  • Page 60
    ... Costs associated w ith independent contractor settlements are recognized as incurred and included in the purc hased transportation c aption in the ac c ompanying income statements. We recognize revenue upon delivery of shipments or, for our business services, logistics and trade services businesses...

  • Page 61
    ... or less attrac tive. 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. Commodity. We have market risk for changes in the price of jet and diesel fuel; how ever, this risk is largely...

  • Page 62
    ... increase operating costs for businesses, inc luding those in the transportation industry. For example, in M ay 2006, the U.S. Transportation Sec urity Administration (" TSA" ) adopted new rules enhancing many of the security requirements for air cargo on both passenger and all-cargo aircraft. The...

  • Page 63
    ... • increasing costs for employee benefits, especially pension and healthcare benefits; • significant changes in the volumes of shipments transported through our netw orks, customer demand for our various services or the prices w e obtain for our services; • market acceptance of our new service...

  • Page 64
    ... in this report, including (but not limited to) those c ontained in " Outlook (inc luding segment outlooks)," " Liquidity," " Capital Resources," " Contractual Cash Obligations" and " Critical Accounting Estimates," and the " Employee Benefit Plans" note to the consolidated financial statements, are...

  • Page 65
    ... 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...

  • Page 66
    ... the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of FedEx Corporation as of M ay 31, 2006 and 2005, and related consolidated statements of income, changes in stockholders' investment and comprehensive income, and cash flow s for each of the three years...

  • Page 67
    ...ENTS OF INCOM E (In millions, except per share amounts) 2006 Years ended M ay 31, 2005 2004 REVENUES Operating Expenses: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Fuel M aintenance and repairs Business realignment costs Other $32...

  • Page 68
    ... Receivables, less allow ances of $144 and $125 Spare parts, supplies and fuel, less allow ances of $150 and $142 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...

  • Page 69
    ...charge Depreciation and amortization Provision for uncollectible accounts Deferred income taxes and other noncash items Tax benefit on the exercise of stock options Changes in operating assets and liabilities, net of the effects of businesses acquired: Receivables Other current assets Pension assets...

  • Page 70
    ... tax benefit of $12 Total comprehensive income Purchase of treasury stock (2,625,000 shares repurchased at an average price of $68.14 per share) Cash dividends declared ($0.29 per share) Employee incentive plans and other (4,013,182 shares issued) Amortization of deferred compensation BALANCE...

  • Page 71
    ...e 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 transportation...

  • Page 72
    ... benefit plans are measured as of the last day of our fiscal third quarter of each year using actuarial techniques that reflect management's assumptions for discount rate, rate of return, salary increases, expected retirement, mortality, employee turnover and future increases in healthcare costs...

  • Page 73
    ... cost of claims, w hich includes incurred-but-not-reported claims. Current w orkers' compensation claims, vehicle and general 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...

  • Page 74
    ... 2004, the Financial Accounting Standards Board (" FASB" ) issued SFAS 123R, " Share-Based Payment." The new standard requires companies to record compensation expense for stock-based aw ards using a fair value method. Compensation expense w ill be recorded over the requisite service period, w hich...

  • Page 75
    ... and equipment and acquired intangible assets, including the value of the Kinko's trade name, customer-related intangibles, technology assets and contract-based intangibles. Approximately $1.8 billion w as recorded as goodw ill, as the acquisition expands our portfolio of business services, w hile...

  • Page 76
    ... M ay 31, 2006 Accumulated Amortization Net Book Value Gross Carrying Amount M ay 31, 2005 Accumulated Amortization Net Book Value Amortizable intangible assets Customer relationships Contract related Technology related and other Total Non-amortizing intangible asset Kinko's trade name $ 77 79 54...

  • Page 77
    ... the credit facility w as available. The components of unsecured debt (net of discounts) w ere as follow s (in millions): M ay 31, 2006 2005 Accrued Salaries and Employee Benefits Salaries Employee benefits Compensated absences Accrued Expenses Self-insurance accruals Taxes other than income taxes...

  • Page 78
    ... U.S. self-insurance programs and are used in the normal course of international operations. The underlying liabilities insured by these instruments are reflected in the balance sheets, w here applicable. Therefore, no additional liability is reflected for the letters of credit. Scheduled annual...

  • Page 79
    ...approximately six years. W hile 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. FedEx Express makes payments under certain...

  • Page 80
    ... four-year period. Shares are valued at the market price at the date of aw ard. Compensation related to these plans is recorded as a reduction of common stockholders' investment and is amortized to expense over the explicit service period. Annual compensation cost for the restricted stock plans w as...

  • Page 81
    ... provision Domestic: Federal State and local Foreign Deferred provision (benefit) Domestic: Federal State and local Foreign $ 719 79 132 930 $ 634 65 103 802 $ 371 54 85 510 Property, equipment, leases and intangibles Employee benefits Self-insurance accruals Other Net operating loss/credit...

  • Page 82
    ...fixed income portfolios, to earn a long-term investment return that meets our pension plan obligations. Active management strategies are utilized w ithin the plan in an effort to realize investment returns in excess of market indices. Our pension cost is materially affected by the discount rate used...

  • Page 83
    ... plan assets Company contributions Benefits paid Other Fair value of plan assets at end of year Funded Status of the Plans Unrecognized actuarial loss (gain) Unamortized prior service cost and other Unrecognized transition amount Prepaid (accrued) benefit cost Amount Recognized in the Balance Sheet...

  • Page 84
    FEDEX CORPORATION The measure of w hether a pension plan is underfunded for financial accounting purposes is based on a comparison of the ABO to the fair value of plan assets and amounts accrued for such benefits in the balance sheets. Although not legally required, w e made $456 million in tax-...

  • Page 85
    ...Segment FedEx Kinko's Segment FedEx Services provides customer-facing sales, marketing and information technology support, primarily for FedEx Express and FedEx Ground. The costs for these activities and certain other costs such as corporate management fees related to services received for general...

  • Page 86
    ... time to c ause the release and disc harge of certain subsidiary guarantors from their respective guarantees. Revenue by Service Type 2006 2005 2004 FedEx Express segment: Package: U.S. overnight box U.S. overnight envelope U.S. deferred Total domestic package revenue International Priority Total...

  • Page 87
    ...long-term debt. The M ay 31, 2005 balance sheet includes an additional $120 million of fixed assets and $125 million of longterm debt. In M arch 2006, FedEx Express provided notification to the lessor of our intent to purchase these aircraft in M arch 2007. 2007 2008 2009 2010 2011 Thereafter Total...

  • Page 88
    ...ith respect to these other actions w ill not materially adversely affect our financial position, results of operations or cash flow s. NOTE 20: RELATED PARTY TRANSACTIONS In November 1999, FedEx entered into a multi-year naming rights agreement w ith the National Football League Washington Redskins...

  • Page 89
    ... Act charge described in Note 1, as w ell as an $11 million ($0.04 per basic and diluted share) benefit from an income tax adjustment described in Note 12. (3) The sum of the quarterly earnings per share may not equal annual amounts due to differences in the w eighted-average number of shares...

  • Page 90
    ... period ended M ay 31, 2006, in conformity w ith U.S. generally accepted accounting principles. We also have audited, in accordance w ith the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of FedEx Corporation's internal control over financial reporting...

  • Page 91
    ... 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 Other Operating Data FedEx Express aircraft fleet Average full-time...

  • Page 92
    ... Chief Executive Officer Packet Design, LLC Internet technology company Frederick W. Smith Chairman, President and Chief Executive Officer FedEx Corporation J. Kenneth Glass (1)(4) Chairman, President and Chief Executive Officer First Horizon National Corporation Bank holding company Dr. Joshua...

  • Page 93
    ... Chief Information Officer John L. M erino Corporate Vice President and Principal Accounting Officer FedEx Express David J. Bronczek President and Chief Executive Officer FedEx Ground Daniel J. Sullivan President and Chief Executive Officer David F. Rebholz Executive Vice President, Operations...

  • Page 94
    ... Account Inquiries: Contact Computershare Investor Services, P.O. Box 43069, Providence, Rhode Island 02940-3069, (800) 446-2617. Direct Stock Purchase and Dividend Reinvestment Inquiries: For information on the direct stock purchase and dividend reinvestment plan for FedEx Corporation common stock...

  • Page 95
    $1,000 invested in FedEx when we went public in 1978 was worth $111,500 on May 31, 2006. That's an 11,050% return over 28 years, or a com pound average annual grow th rate of m ore than 18%.

  • Page 96
    Dream new ideas. Act on new opportunities. Reach new horizons. FedEx. Changing w hat's possible. FedEx Corporation 942 South Shady Grove Road M em phis, Tennessee 38120 fedex.com