Federal Express 2006 Annual Report Download - page 87

Special facility revenue bonds have been issued by certain
municipalities primarily to finance the acquisition and construc-
tion of various airport facilities and equipment. These facilities
were leased to us and are accounted for as either capital leases
or operating leases. FedEx Express has unconditionally guaran-
teed $755 million in principal of these bonds (with total future
principal and interest payments of approximately $1.2 billion as
of May 31, 2006) through these leases. Of the $755 million bond
principal guaranteed, $204 million was included in capital lease
obligations in our balance sheet at M ay 31, 2006. The remaining
$551 million has been accounted for as operating leases.
NOTE 17: VARIABLE INTEREST ENTITIES
FedEx Express entered into a lease in July 2001 for two MD11 air-
craft. These assets were held by a separate entity, which was
established to lease these aircraft to FedEx Express and is owned
by independent third parties who provide financing through debt
and equity participation. The original cost of the assets under the
lease was approximately $150 million.
FIN 46 required us to consolidate the separate entity that owns
the two MD11 aircraft. Since the entity was created before
February 1, 2003, we measured the assets and liabilities at their
carrying amounts (the amounts at which they would have been
recorded in the consolidated financial statements if FIN 46 had
been effective at the inception of the lease). As a result of this
consolidation, the accompanying May 31, 2006 balance sheet
includes an additional $115 million of fixed assets and $118 mil-
lion of long-term debt. The May 31, 2005 balance sheet includes
an additional $120 million of fixed assets and $125 million of long-
term debt. In March 2006, FedEx Express provided notification to
the lessor of our intent to purchase these aircraft in M arch 2007.
NOTE 18: COM M ITM ENTS
Annual purchase commitments under various contracts as of
May 31, 2006 were as follows (in millions):
Aircraft-
Aircraft Related(1) Other(2) Total
2007 $179 $205 $798 $1,182
2008 431 113 130 674
2009 459 61 93 613
2010 659 67 65 791
2011 460 66 56 582
Thereafter 157 8 218 383
(1) Primarily aircraft modifications.
(2) Primarily vehicles, facilities, computers, printing and other equipment and advertising
and promotions contracts.
The amounts reflected in the table above for purchase commit-
ments represent noncancelable agreements to purchase goods or
services. Commitments to purchase aircraft in passenger configu-
ration do not include the attendant costs to modify these aircraft
for cargo transport unless we have entered into noncancelable
commitments to modify such aircraft. Open purchase orders that
are cancelable are not considered unconditional purchase obliga-
tions for financial reporting purposes.
FedEx Express is committed to purchase certain aircraft.
Deposits and progress payments of $64 million have been made
toward these purchases and other planned aircraft-related trans-
actions. In addition, we have committed to modify our DC10
aircraft for passenger-to-freighter and two-man cockpit config-
urations. Future payments related to these activities are included
in the table above. Aircraft and aircraft-related contracts are sub-
ject to price escalations. The following table is a summary of our
aircraft purchase commitments as of May 31, 2006 with the year
of expected delivery by type:
A300 A310 A380 Total
2007 51–6
2008 10 – – 10
2009 2–24
2010 ––44
2011 – – 3 3
Thereafter –– 11
Total 17 1 10 28
NOTE 19: CONTINGENCIES
Wage-and-Hour. We are a defendant in a number of lawsuits filed
in federal or California state courts containing various class-
action allegations under federal or California wage-and-hour
laws. The plaintiffs in these lawsuits are employees of FedEx
operating companies who allege, among other things, that they
were forced to work “off the clock” and were not provided work
breaks or other benefits. The plaintiffs generally seek unspeci-
fied monetary damages, injunctive relief, or both.
To date, one of these wage-and-hour cases, Foster v. FedEx
Express, has been certified as a class action. The plaintiffs in
Foster represent a class of hourly FedEx Express employees in
California from October 14, 1998 to present. The plaintiffs allege
that hourly employees are routinely required to work “off the
clock” and are not paid for this additional work. The court issued
a ruling in December 2004 granting class certification on all
issues. In February 2006, the parties reached a settlement that
has been preliminarily approved by the court. FedEx Express con-
tinues to deny liability, but entered into the settlement to avoid
the cost and uncertainty of further litigation. The amount of the
proposed settlement was fully accrued at the end of the third
quarter of 2006 and is not material to FedEx.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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