Federal Express 2009 Annual Report Download - page 52

FEDEX CORPORATION
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In accordance with SFAS 142, “Goodwill and Other Intangible
Assets,” a two-step impairment test is performed on goodwill. In
the fi rst step, a comparison is made of the estimated fair value
of a reporting unit to its carrying value. If the carrying value of a
reporting unit exceeds the estimated fair value, the second step
of the impairment test is required. In the second step, an estimate
of the current fair values of all assets and liabilities is made to
determine the amount of implied goodwill and consequently the
amount of any goodwill impairment.
In connection with our annual impairment testing of goodwill and
other intangible assets conducted in the fourth quarter of 2009 in
accordance with SFAS 142, we recorded a charge of $900 million
for impairment of the value of goodwill. This charge included an
$810 million charge related to reduction of the value of the
goodwill recorded as a result of the February 2004 acquisition
of Kinko’s, Inc. (now known as FedEx Offi ce), and a $90 million
charge related to reduction of the value of the goodwill recorded
as a result of the September 2006 acquisition of the U.S. and
Canadian less-than-truckload freight operations of Watkins Motor
Lines and certain affi liates (now known as FedEx National LTL).
FedEx Offi ce Goodwill
During 2009, the U.S. recession had a signifi cant negative impact
on demand for FedEx Offi ce services, resulting in lower revenues
and continued operating losses at this reporting unit. In response
to these conditions, FedEx Offi ce initiated an internal reorganiza-
tion designed to improve revenue-generating capabilities and
reduce costs. Several actions were taken during 2009 to reduce
FedEx Offi ce’s cost structure and position it for long-term growth
under better economic conditions. These actions included head-
count reductions, domestic store closures and the termination of
operations in some international locations. In addition, we sub-
stantially curtailed future network expansion in light of current
economic conditions.
The valuation methodology to estimate the fair value of the
FedEx Offi ce reporting unit was based primarily on an income
approach. We believe use of the income approach is an appro-
priate methodology for the FedEx Offi ce reporting unit because it
is the most direct method of measuring enterprise value for this
reporting unit. Because of the nature of the service offerings at
FedEx Offi ce, it exhibits characteristics of a retailer, a business
services provider and a printing provider. Accordingly, it is dif-
fi cult to fi nd directly comparable companies for use under the
market approach. However, market approach information was
incorporated into our test to ensure the reasonableness of our
conclusions on estimated value under the income approach. Key
assumptions considered were the revenue, operating income
and capital expenditure forecasts, the assessed growth rate
in the periods beyond the detailed forecast period, and the dis-
count rate.
For 2009, we used a discount rate of 12.0%, versus a discount rate
of 12.5% in 2008. Our discount rate of 12.0% for 2009 represents
our estimated weighted-average cost of capital (“ WACC”) of the
FedEx Offi ce reporting unit adjusted for company-specifi c risk
premium to account for the estimated uncertainty associated
with our future cash fl ows. The development of the WACC used in
our estimate of fair value considered the following key factors:
• current market conditions for the equity-risk premium and risk-
free interest rate;
• benchmark capital structures for guideline companies with
characteristics similar to the FedEx Offi ce reporting unit;
• the size and industry of the FedEx Offi ce reporting unit; and
• risks related to the forecast of future revenues and profi tability
of the FedEx Offi ce reporting unit.
The discount rate incorporates current market participant con-
siderations, as indicated above, and decreased year over year,
as increases in the WACC (due to general economic conditions)
were offset by reductions in the company-specifi c risk premium.
The company-specifi c risk premium was reduced primarily due to
lower long-term growth and profi tability assumptions associated
with the 2009 forecast. The WACC used in the estimate of fair
value in future periods may be impacted by changes in market
conditions (including those of market participants), as well as the
specifi c future performance of the FedEx Offi ce reporting unit
and are subject to change, based on changes in specifi c facts
and circumstances.
Upon completion of the impairment test, we concluded that the
recorded goodwill was impaired and recorded an impairment
charge of $810 million during the fourth quarter of 2009. The
remaining goodwill attributable to the FedEx Offi ce reporting
unit is $362 million as of May 31, 2009. The goodwill impairment
charge is included in operating expenses in the accompanying
consolidated statements of income. This charge is included in the
results of the FedEx Services segment and was not allocated to
our transportation segments, as the charge was unrelated to the
core performance of those businesses.
FedEx National LTL Goodwill
During 2009, the U.S. recession had a signifi cant negative impact
on the LTL industry, resulting in steep volume declines, intense
yield pressure and the exit of numerous small to medium competi-
tors from the market. The outlook for the LTL market is uncertain
due to the recession and the negative impact of aggressive pric-
ing resulting from continued excess capacity in the market. The
results for the FedEx National LTL reporting unit in 2009 refl ect the
impact of the recession, with reduced revenues and increased
operating losses.
The valuation methodology to estimate the fair value of the
FedEx National LTL reporting unit was based primarily on a mar-
ket approach (revenue multiples and/or earnings multiples) that
considered market participant assumptions. We believe use of
the market approach for FedEx National LTL is appropriate due to
the forecast risk associated with the projections used under the
income approach, particularly in the outer years of the forecast
period (as described below). Further, there are directly com-
parable companies to the FedEx National LTL reporting unit for
consideration under the market approach. The income approach
also was incorporated into the impairment test to ensure the rea-
sonableness of our conclusions under the market approach. Key
assumptions considered were the revenue, operating income and
capital expenditure forecasts and market participant assump-
tions on multiples related to revenue and earnings forecasts.