Federal Express 2009 Annual Report Download - page 33

MANAGEMENT’S DISCUSSION AND ANALYSIS
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The funding requirements for our tax-qualifi ed U.S. domestic
pension plans are governed by the Pension Protection Act of
2006, which has aggressive funding requirements in order to
avoid benefi t payment restrictions that become effective if the
funded status under IRS rules falls below 80% at the beginning of
a plan year. All of our qualifi ed U.S. domestic pension plans had
funded status levels in excess of 80% for 2007, 2008 and 2009, and
are expected to for 2010 as well. Despite mark-to-market adjust-
ments required under SFAS 158, our plans remain adequately
funded to provide benefi ts to our employees as they come due,
and current benefi t payments are nominal compared to our total
plan assets (benefi t payments for 2009 were approximately 3%
of plan assets).
In September 2008, we made $483 million in voluntary contri-
butions to our U.S. tax-qualified plans. We made additional
voluntary contributions of $600 million during the fourth quarter
of 2009 in order to improve the funded status of our principal
pension plans. While our U.S. tax-qualifi ed plans have ample
funds to meet benefi t payments, current market conditions have
negatively impacted asset values and could signifi cantly impact
funding considerations in 2010. We anticipate making contribu-
tions to the U.S. tax-qualifi ed plans totaling approximately $850
million in 2010, including $350 million in minimum required quar-
terly payments.
Cumulative unrecognized actuarial losses for pension plans
expense determination were $3.7 billion through May 31, 2009,
compared to $2.5 billion at February 29, 2008. These unrecog-
nized losses refl ect changes in the discount rates and differences
between expected and actual asset returns, which are being
amortized over future periods. These unrecognized losses may
be recovered in future periods through actuarial gains. However,
unless they are below a corridor amount, these unrecognized
actuarial losses are required to be amortized and recognized in
future periods. For example, projected U.S. domestic pension plan
expense for 2010 includes $125 million of amortization of these
actuarial losses versus $44 million in 2009, $162 million in 2008
and $136 million in 2007.
SELF-INSURANCE ACCRUALS
We are self-insured up to certain limits for costs associated with
workers’ compensation claims, vehicle accidents and general
business liabilities, and benefi ts paid under employee healthcare
and long-term disability programs. At May 31, 2009, there were
$1.5 billion of self-insurance accruals refl ected in our balance
sheet ($1.4 billion at May 31, 2008). Approximately 40% of these
accruals were classifi ed as current liabilities in 2009 and 2008.
The measurement of these costs requires the consideration of
historical cost experience, judgments about the present and
expected levels of cost per claim and self-insurance retention
levels. Accruals are primarily based on the actuarially estimated,
undiscounted cost of claims, which includes incurred-but-not-
reported claims. Cost trends on material accruals are updated
each quarter. These methods provide estimates of future ultimate
claim costs based on claims incurred as of the balance sheet
date. These estimates include consideration of factors such as
severity of claims, frequency of claims and future healthcare
costs. We self-insure up to certain limits that vary by operating
company and type of risk. Periodically, we evaluate the level of
insurance coverage and adjust insurance levels based on risk
tolerance and premium expense. Historically, it has been infre-
quent that incurred claims exceeded our self-insured limits. Other
acceptable methods of accounting for these accruals include
measurement of claims outstanding and projected payments
based on historical development factors.
We believe the use of actuarial methods to account for these lia-
bilities provides a consistent and effective way to measure these
highly judgmental accruals. However, the use of any estimation
technique in this area is inherently sensitive given the magni-
tude of claims involved and the length of time until the ultimate
cost is known. We believe our recorded obligations for these
expenses are consistently measured on a conservative basis.
Nevertheless, changes in healthcare costs, accident frequency
and severity, insurance retention levels and other factors can
materially affect the estimates for these liabilities. For example,
during 2009, FedEx Ground recorded $70 million in incremental
self-insurance reserves for liability insurance based on adverse
experience on bodily injury claims.
LONG-LIVED ASSETS
Property and Equipment. Our key businesses are capital inten-
sive, with approximately 55% of our total assets invested in our
transportation and information systems infrastructures. We
capitalize only those costs that meet the defi nition of capital
assets under accounting standards. Accordingly, repair and
maintenance costs that do not extend the useful life of an asset
or are not part of the cost of acquiring the asset are expensed
as incurred. However, consistent with industry practice, we capi-
talize certain aircraft-related major maintenance costs on one
of our aircraft fl eet types and amortize these costs over their
estimated service lives.
The depreciation or amortization of our capital assets over their
estimated useful lives, and the determination of any salvage
values, requires management to make judgments about future
events. Because we utilize many of our capital assets over
relatively long periods (the majority of aircraft costs are depre-
ciated over 15 to 18 years), we periodically evaluate whether
adjustments to our estimated service lives or salvage values are
necessary to ensure these estimates properly match the eco-
nomic use of the asset. This evaluation may result in changes in
the estimated lives and residual values used to depreciate our
aircraft and other equipment. These estimates affect the amount
of depreciation expense recognized in a period and, ultimately,
the gain or loss on the disposal of the asset. Changes in the esti-
mated lives of assets will result in an increase or decrease in the
amount of depreciation recognized in future periods and could
have a material impact on our results of operations. Historically,
gains and losses on operating equipment have not been material
(typically aggregating less than $10 million annually). However,
such amounts may differ materially in the future due to changes in
business levels, technological obsolescence, accident frequency,
regulatory changes and other factors beyond our control.
Because of the lengthy lead times for aircraft manufacture
and modifi cations, we must anticipate volume levels and plan
our fleet requirements years in advance, and make commit-
ments for aircraft based on those projections. Furthermore,
the timing and availability of certain used aircraft types (par-
ticularly those with better fuel effi ciency) may create limited
opportunities to acquire these aircraft at favorable prices in