Federal Express 2011 Annual Report Download - page 27

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MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table compares capital expenditures by asset category
and reportable segment for the years ended May 31 (in millions):
Capital expenditures during 2011 were higher than the prior–year
period primarily due to increased spending at FedEx Express for aircraft
and aircraft–related equipment and at FedEx Services for information
technology investments. Aircraft and aircraft–related equipment
purchases at FedEx Express during 2011 included the delivery of six
new B777Fs and 22 B757s. Capital expenditures during 2010 were
higher than the prior year primarily due to increased spending at
FedEx Express for aircraft and aircraft–related equipment. Aircraft
and aircraft–related equipment purchases at FedEx Express during
2010 included six new B777Fs and 12 B757s. FedEx Services capital
expenditures increased in 2010 due to information technology facility
expansions and projects. Capital spending at FedEx Ground decreased
in 2010 due to decreased spending for facilities and sort equipment
and vehicles.
LIQUIDITY OUTLOOK
We believe that our existing cash and cash equivalents, cash flow
from operations, and available financing sources will be adequate
to meet our liquidity needs, including working capital, capital expen-
diture requirements and debt payment obligations. Our cash and cash
equivalents balance at May 31, 2011 includes $300 million of cash
in offshore jurisdictions associated with our permanent reinvestment
strategy. We do not believe that the indefinite reinvestment of these
funds offshore impairs our ability to meet our domestic debt or working
capital obligations. Although we expect higher capital expenditures
in 2012, we anticipate that our cash flow from operations will be
sufficient to fund these expenditures. Historically, we have been
successful in obtaining unsecured financing, from both domestic
and international sources, although the marketplace for such
investment capital can become restricted depending on a variety
of economic factors.
Our capital expenditures are expected to be $4.2 billion in 2012 and
will include spending for aircraft and aircraft–related equipment at
FedEx Express, network expansion at FedEx Ground and revenue equip-
ment at the FedEx Freight segment. We expect approximately 59% of
capital expenditures in 2012 will be designated for growth initiatives
and 41% dedicated to maintaining our existing operations. Our capital
expenditures are expected to increase in 2012 due to spending for
vehicle equipment and on–going investments in aircraft programs. Our
expected capital expenditures for 2012 include $2.0 billion in invest-
ments for delivery of aircraft as well as progress payments toward
future aircraft deliveries at FedEx Express, including B757s and the
B777F which are significantly more fuel–efficient per unit than the
aircraft type previously utilized. Our B757 aircraft are replacing our
Boeing 727 aircraft, and we expect to be completely transitioned out of
this aircraft type by 2016. We will benefit from the tax expensing and
accelerated depreciation provisions of the Tax Relief Act of 2010 on
qualifying capital investments we make in 2012.
We have agreed to purchase a total of 45 B777F aircraft (12 of which
were in service at May 31, 2011, and an additional seven to be
delivered in 2012). Our obligation to purchase 15 of these aircraft is
conditioned upon there being no event that causes FedEx Express or
its employees not to be covered by the Railway Labor Act of 1926, as
amended. These aircraft–related capital expenditures are necessary
to achieve significant long–term operating savings and to support
projected long–term international volume growth. Our ability to delay
the timing of these aircraft–related expenditures is limited without
incurring significant costs to modify existing purchase agreements.
For 2012, we anticipate making required contributions to our U.S.
Pension Plans totaling approximately $500 million. Our U.S. Pension
Plans have ample funds to meet expected benefit payments. In 2012,
we have scheduled principal and interest payments of $25 million on
capital leases.
Standard & Poor’s has assigned us a senior unsecured debt credit rat-
ing of BBB and commercial paper rating of A–2 and a ratings outlook
of “stable.” During the third quarter of 2010, Moody’s Investors
Service reaffirmed our senior unsecured debt credit rating of Baa2
and commercial paper rating of P–2 and raised our ratings outlook to
“stable.” If our credit ratings drop, our interest expense may increase.
If our commercial paper ratings drop below current levels, we may
have difficulty utilizing the commercial paper market. If our senior
unsecured debt credit ratings drop below investment grade, our access
to financing may become limited.
Percent Change
2011 2010 2009
2011
2010
/ 2010
2009
/
Aircraft and related equipment $ 1,988 $ 1,537 $ 925 29 66
Facilities and sort equipment 555 630 742 (12) (15)
Vehicles 282 220 319 28 (31)
Information and technology
investments 455 289 298 57 (3)
Other equipment 154 140 175 10 (20)
Total capital expenditures $ 3,434 $ 2,816 $ 2,459 22 15
FedEx Express segment 2,467 1,864 1,348 32 38
FedEx Ground segment 426 400 636 7(37)
FedEx Freight segment 153 212 240 (28) (12)
FedEx Services segment 387 340 235 14 45
Other 1– – ––
Total capital expenditures $ 3,434 $ 2,816 $ 2,459 22 15