Federal Express 2011 Annual Report Download - page 19

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MANAGEMENT’S DISCUSSION AND ANALYSIS
FedEx SupplyChain Systems, formerly included in the FedEx Services
reporting segment, was realigned to become part of the FedEx Express
reporting segment. Prior year amounts have not been reclassified
to conform to the current year segment presentation because these
reclassifications are immaterial.
The FedEx Services segment provides direct and indirect support to
our transportation businesses, and we allocate all of the net operat-
ing costs of the FedEx Services segment (including the net operating
results of FedEx Office) to reflect the full cost of operating our
transportation businesses in the results of those segments. Within
the FedEx Services segment allocation, the net operating results of
FedEx Office are allocated to FedEx Express and FedEx Ground. The
allocations of net operating costs are based on metrics such as relative
revenues or estimated services provided. We believe these allocations
approximate the net cost of providing these functions. We review and
evaluate the performance of our transportation segments based on
operating income (inclusive of FedEx Services segment allocations).
For the FedEx Services segment, performance is evaluated based on
the impact of its total allocated net operating costs on our transporta-
tion segments.
The operating expenses line item “Intercompany charges” on the
accompanying unaudited financial summaries of our transportation
segments reflects the allocations from the FedEx Services segment to
the respective transportation segments. The “Intercompany charges”
caption also includes charges and credits for administrative services
provided between operating companies and certain other costs such
as corporate management fees related to services received for general
corporate oversight, including executive officers and certain legal and
finance functions. We believe these allocations approximate the net
cost of providing these functions.
Effective August 1, 2009, approximately 3,600 employees (predomi-
nantly from the FedEx Freight segment) were transferred to entities
within the FedEx Services segment. This internal reorganization further
centralized most customer support functions, such as sales, customer
service and information technology, into our shared services organiza-
tions. While the reorganization had no impact on the net operating
results of any of our transportation segments, the net intercompany
charges to our FedEx Freight segment increased significantly with cor-
responding decreases to other expense captions, such as salaries and
employee benefits. The impact of this internal reorganization to the
expense captions in our other segments was immaterial.
OTHER INTERSEGMENT TRANSACTIONS
Certain FedEx operating companies provide transportation and related
services for other FedEx companies outside their reportable segment.
Billings for such services are based on negotiated rates, which we
believe approximate fair value, and are reflected as revenues of the
billing segment. These rates are adjusted from time to time based
on market conditions. Such intersegment revenues and expenses are
eliminated in our consolidated results and are not separately identified
in the following segment information, because the amounts are
not material.
FEDEX EXPRESS SEGMENT
The following tables compare revenues, operating expenses, operat-
ing expenses as a percent of revenue, operating income and operating
margin (dollars in millions) for the years ended May 31:
Percent Change
2011 2010 2009
2011
2010
/ 2010
2009
/
Revenues:
Package:
U.S. overnight box $ 6,128 $ 5,602 $ 6,074 9(8)
U.S. overnight envelope 1,736 1,640 1,855 6(12)
U.S. deferred 2,805 2,589 2,789 8(7)
Total U.S. domestic
package revenue 10,669 9,831 10,718 9(8)
International priority 8,228 7,087 6,978 16 2
International domestic(1) 653 578 565 13 2
Total package revenue 19,550 17,496 18,261 12 (4)
Freight:
U.S. 2,188 1,980 2,165 11 (9)
International priority 1,722 1,303 1,104 32 18
International airfreight 283 251 369 13 (32)
Total freight revenue 4,193 3,534 3,638 19 (3)
Other(2) 838 525 465 60 13
Total revenues 24,581 21,555 22,364 14 (4)
Operating expenses:
Salaries and employee
benefits 9,183 8,402 8,217 92
Purchased transportaion 1,573 1,177 1,112 34 6
Rentals and landing fees 1,672 1,577 1,613 6(2)
Depreciation and
amortization 1,059 1,016 961 46
Fuel 3,553 2,651 3,281 34 (19)
Maintenance and repairs 1,353 1,131 1,351 20 (16)
Impairment and other
charges –– 260(3) –NM
Intercompany charges 2,043 1,940 2,103 5(8)
Other 2,917(4) 2,534 2,672 15 (5)
Total operating
expenses 23,353 20,428 21,570 14 (5)
Operating income $ 1,228 $ 1,127 $ 794 942
Operating margin 5.0% 5.2% 3.6% (20)bp 160bp
(1) International domestic revenues include our international intra–country domestic express
operations.
(2) Other revenues include FedEx Trade Networks and, beginning in the second quarter of 2010,
FedEx SupplyChain Systems.
(3) Represents charges associated with aircraft–related asset impairments and other charges
primarily associated with aircraft–related lease and contract termination costs and employee
severance.
(4) Includes a $66 million legal reserve associated with the ATA Airlines lawsuit.