Federal Express 2009 Annual Report Download - page 26

FEDEX CORPORATION
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utilization of third-party providers. Maintenance and repairs
expense decreased 13% in 2009 primarily due to lower shipment
volumes and rebranding costs for FedEx National LTL incurred in
2008. Rent expense increased 17% during 2009 primarily due to
service center expansions related to strategically investing in key
markets for long-term growth. Intercompany charges increased
35% during 2009 primarily due to allocated telecommunication
expenses (formerly a direct charge) and higher allocated informa-
tion technology costs from FedEx Services.
FedEx Freight segment operating income and operating margin
decreased substantially in 2008 primarily due to the net impact
of higher fuel costs and a fuel surcharge rate reduction in the
fi rst quarter of 2008, along with higher purchased transportation
costs due to increased utilization of and rates paid to third-party
transportation providers. Lower variable incentive compensa-
tion partially offset the net impact of these factors on operating
income during 2008.
In 2008, the full-year inclusion of FedEx National LTL in our results
impacted the comparability of all our operating expenses. Fuel
costs increased during 2008 due to an increase in the average
price per gallon of diesel fuel, which also increased rates paid
to our third-party transportation providers. Fuel surcharges were
not suffi cient to offset incremental fuel costs for 2008, based on
a static analysis of the year-over-year changes in fuel prices
compared to changes in fuel surcharges. Purchased transpor-
tation costs increased in 2008 primarily due to the inclusion of
FedEx National LTL, which uses a higher proportion of these
services, and higher rates paid to our third-party transportation
providers. Including incremental costs from FedEx National LTL,
depreciation expense increased during 2008 due to investments
in information technology and equipment purchased to sup-
port ongoing replacement requirements and long-term volume
growth. Intercompany charges increased during 2008 primarily
due to higher allocated marketing and information technology
costs from FedEx Services.
FedEx Freight Segment Outlook
We expect a decline in demand for LTL freight services in 2010 as
a result of the continued weak economic conditions and excess
capacity in the LTL industry. Ultimately, we believe it is prob-
able that excess capacity will be reduced within the LTL industry
given the current economic environment. Industry conditions will
result in lower revenues and negatively impact operating income
at the FedEx Freight LTL Group, particularly in the fi rst half of
2010. However, we expect volume growth in the second half of
2010. Given the cost-reduction actions taken in 2009, we are well
positioned to manage through the current economic recession. If
excess capacity exits the LTL industry in 2010, we have the net-
work, resources and capabilities to manage resulting incremental
volumes. We will continue to focus on cost-containment activi-
ties during 2010, including further productivity improvements and
ongoing integration of information technology platforms across
our LTL business.
Capital spending is expected to increase slightly in 2010 with
the majority of our spending resulting from the replacement
of transportation and handling equipment and information
technology projects.
Financial Condition
LIQUIDITY
Cash and cash equivalents totaled $2.292 billion at May 31, 2009,
compared to $1.539 billion at May 31, 2008 and $1.569 billion at
May 31, 2007. The following table provides a summary of our cash
fl ows for the years ended May 31 (in millions):
2009 2008 2007
Operating activities:
Net income
$ 98 $ 1,125 $ 2,016
Noncash impairment charges 1,103 882 –
Other noncash charges and credits 2,554 2,305 1,988
Changes in assets and liabilities (1,002) (847) (447)
Cash provided by
operating activities 2,753 3,465 3,557
Investing activities:
Business acquisitions,
net of cash acquired (3) (4) (1,310)
Capital expenditures and other (2,380) (2,893) (2,814)
Cash used in
investing activities (2,383) (2,897) (4,124)
Financing activities:
Proceeds from debt
issuances 1,000 – 1,054
Principal payments on debt (501) (639) (906)
Dividends paid (137) (124) (110)
Other 38 146 155
Cash provided by (used in)
fi nancing activities 400 (617) 193
Effect of exchange rate changes
on cash (17) 19 6
Net increase (decrease) in cash
and cash equivalents $ 753 $ (30) $ (368)
Cash Provided by Operating Activities. Cash fl ows from oper-
ating activities decreased $712 million in 2009 primarily due to
reduced income and a $600 million increase in contributions to
our tax-qualifi ed U.S. domestic pension plans (“ U.S. Retirement
Plans” ), partially offset by a $307 million reduction in income tax
payments. Noncash charges and credits increased in 2009 due
to our goodwill and asset impairment charges. Cash fl ows from
operating activities decreased $92 million in 2008 primarily due
to higher operating costs, particularly fuel and purchased trans-
portation, partially offset by year-over-year reductions in income
tax payments of $248 million. We made tax-deductible voluntary
contributions to our U.S. Retirement Plans of $1.1 billion during
2009, $479 million during 2008 and $482 million during 2007.