Federal Express 2006 Annual Report Download - page 81

NOTE 11: COM PUTATION OF EARNINGS PER SHARE
The calculation of basic earnings per common share and diluted
earnings per common share for the years ended May 31 was as
follows (in millions, except per share amounts):
2006 2005 2004
Net income $1,806 $1,449 $ 838
Weighted-average shares of
common stock outstanding 304 301 299
Common equivalent shares:
Assumed exercise of
outstanding dilutive options 19 18 19
Less shares repurchased
from proceeds of assumed
exercise of options (13) (12) (14)
Weighted-average common
and common equivalent
shares outstanding 310 307 304
Basic earnings per
common share $ 5.94 $ 4.81 $ 2.80
Diluted earnings per
common share $ 5.83 $ 4.72 $ 2.76
NOTE 12: INCOM E TAXES
The components of the provision for income taxes for the years
ended May 31 were as follows (in millions):
2006 2005 2004
Current provision
Domestic:
Federal $ 719 $ 634 $ 371
State and local 79 65 54
Foreign 132 103 85
930 802 510
Deferred provision (benefit)
Domestic:
Federal 151 67 (22)
State and local 13 (4) (7)
Foreign (1) (1) –
163 62 (29)
$1,093 $ 864 $ 481
A reconciliation of the statutory federal income tax rate to the effec-
tive income tax rate for the years ended May 31 was as follows:
2006 2005 2004
Statutory U.S. income tax rate 35.0% 35.0% 35.0%
Increase resulting from:
State and local income taxes,
net of federal benefit 2.1 1.7 2.3
Other, net 0.6 0.7 (0.8)
Effective tax rate 37.7% 37.4% 36.5%
The 37.4% effective tax rate in 2005 was favorably impacted by
the reduction of a valuation allowance on foreign tax credits
arising from certain of our international operations as a result
of the passage of the American Jobs Creation Act of 2004
($12 million tax benefit or $0.04 per diluted share) and by a lower
effective state tax rate. The 36.5% effective tax rate in 2004
was favorably impacted by a reduction of accruals relating to
the tax treatment of jet engine maintenance costs, stronger than
anticipated international results and the results of tax audits
during 2004.
In 2004, we received a favorable ruling regarding the tax treatment
of jet engine maintenance costs, which was affirmed by the
appellate court in February of 2005, and became final in May of
2005, when the period for appeal lapsed. As a result we recog-
nized a one-time benefit of $26 million, net of tax, or $0.08 per
diluted share in 2004. These adjustments affected both net interest
expense ($30 million pretax) and income tax expense ($7 million).
The significant components of deferred tax assets and liabilities
as of May 31 were as follows (in millions):
2006 2005
Deferred Deferred Deferred Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
Property, equipment,
leases and intangibles $ 329 $1,559 $ 301 $1,506
Employee benefits 413 648 397 453
Self-insurance accruals 339 – 311 –
Other 360 78 319 77
Net operating loss/credit
carryforwards 64 – 54 –
Valuation allowance (48) – (42) –
$1,457 $2,285 $1,340 $2,036
The net deferred tax liabilities as of May 31 have been classified
in the balance sheets as follows (in millions):
2006 2005
Current deferred tax asset $539 $510
Noncurrent deferred tax liability (1,367) (1,206)
$ (828) $ (696)
The valuation allowance primarily represents amounts reserved
for operating loss and tax credit carryforwards, which expire over
varying periods starting in 2007. As a result of this and other fac-
tors, we believe that a substantial portion of these deferred tax
assets may not be realized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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