Federal Express 2009 Annual Report Download - page 53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
51
The forecast used in the valuation assumes operating losses will
continue in the near-term due to the current economic condi-
tions and excess capacity in the industry. However, the long-term
outlook assumes that this excess capacity exits the market. This
assumption drives signifi cant volume and yield improvement
into the FedEx National LTL reporting unit in future periods. The
decision to include an assumption related to the elimination of
excess capacity from the market and the associated cash fl ows
is signifi cant to the valuation and refl ects management’s outlook
on the industry for future periods as of the valuation date.
We recorded an impairment charge of $90 million during the fourth
quarter of 2009. This charge represented substantially all of the
goodwill resulting from this acquisition. The goodwill impairment
charge is included in operating expenses in the accompanying
consolidated statements of income and is included in the results
of the FedEx Freight segment.
Other Reporting Units Goodwill
Our remaining reporting units with signifi cant recorded good-
will (excluding FedEx Offi ce and FedEx National LTL) include our
FedEx Express reporting unit and our FedEx Freight reporting unit.
We evaluated our remaining reporting units during the fourth
quarter of 2009, and while the estimated fair value of these report-
ing units declined from 2008, the estimated fair value of each of
our other reporting units signifi cantly exceeded their carrying
values in 2009. As a result, no additional testing or impairment
charges were necessary.
FedEx Offi ce Goodwill – 2008
During 2008, several developments and strategic decisions
occurred at FedEx Offi ce, including:
• FedEx Offi ce was reorganized as a part of the FedEx Services
segment. FedEx Offi ce provides retail access to our customers
for our package transportation businesses and an array of docu-
ment and business services. Under FedEx Services, FedEx Offi ce
benefi ts from the full range of resources and expertise of FedEx
Services to continue to enhance the customer experience, pro-
vide greater, more convenient access to the portfolio of services
at FedEx, and increase revenues through our retail network.
• Senior management at FedEx Offi ce was reorganized with sev-
eral positions terminated and numerous reporting realignments,
including naming a new president and CEO.
• We determined that we would minimize the use of the Kinko’s
trade name over the next several years.
• We began implementing revenue growth and cost management
plans to improve fi nancial performance.
• We began pursuing a more disciplined approach to the long-
term expansion of the retail network, reducing the overall level
of expansion.
In connection with our annual impairment testing in the fourth
quarter of 2008, the valuation methodology to estimate the fair
value of the FedEx Offi ce reporting unit was based primarily on
an income approach that considered market participant assump-
tions to estimate fair value. Key assumptions considered were
the revenue and operating income forecast, the assessed growth
rate in the periods beyond the detailed forecast period, and the
discount rate.
In performing our annual impairment test, the most signifi cant
assumption used to estimate the fair value of the FedEx Offi ce
reporting unit was the discount rate. We used a discount rate
of 12.5%, representing the estimated WACC of the FedEx Offi ce
reporting unit. The development of the WACC used in our esti-
mate of fair value considered the following key factors:
• benchmark capital structures for guideline companies with
characteristics similar to the FedEx Offi ce reporting unit;
• current market conditions for the risk-free interest rate;
• 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.
Upon completion of the impairment test, we concluded that the
recorded goodwill was impaired and recorded an impairment
charge of $367 million during the fourth quarter of 2008. The good-
will impairment charge is included in 2008 operating expenses
in the accompanying consolidated statements of income. This
charge was included in the results of the FedEx Services seg-
ment and was not allocated to our transportation segments,
as the charge was unrelated to the core performance of those
businesses.
INTANGIBLE ASSETS
The components of our identifi able intangible assets were as follows (in millions):
May 31, 2009 May 31, 2008
Gross Carrying Accumulated Net Book Gross Carrying Accumulated Net Book
Amount Amortization Value Amount Amortization Value
Customer relationships $ 207 $ (133) $ 74 $ 205 $ (95) $ 110
Contract related 79 (72) 7 79 (67) 12
Technology related and other 74 (62) 12 74 (51) 23
Kinko’s trade name 52 (27) 25 52 (8) 44
Total $ 412 $ (294) $ 118 $ 410 $ (221) $ 189