Federal Express 2011 Annual Report Download - page 36

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MANAGEMENT’S DISCUSSION AND ANALYSIS
In determining whether a loss should be accrued or a loss contingency
disclosed, we evaluate, among other factors:
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the current status of each matter within the scope and context of the
entire lawsuit (i.e., the lengthy and complex nature of class–action
matters);
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the procedural status of each lawsuit;
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any opportunities to dispose of the lawsuit on its merits before trial
(i.e., motion to dismiss or for summary judgment);
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the amount of time remaining before the trial date;
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the status of discovery;
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the status of settlement, arbitration or mediation proceedings; and
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our judgment regarding the likelihood of success prior to or at trial.
In reaching our conclusions with respect to accrual of a loss or loss
contingency disclosure, we take a holistic view of each matter based
on these factors and the information available prior to the issuance of
our financial statements. Uncertainty with respect to an individual fac-
tor or combination of these factors may impact our decisions related to
accrual or disclosure of a loss contingency, including a conclusion that
we are unable to establish an estimate of possible loss or a meaning-
ful range of possible loss. We update our disclosures to reflect our
most current understanding of the contingencies at the time we issue
our financial statements. However, events may arise that were not
anticipated and the outcome of a contingency may result in a loss to us
that differs materially from our previously estimated liability or range
of possible loss.
Despite the inherent complexity in the accounting and disclosure of
contingencies, we believe that our processes are robust and thorough
and provide a consistent framework for management in evaluating the
potential outcome of contingencies for proper accounting recognition
and disclosure.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
INTEREST RATES. While we currently have market risk sensitive
instruments related to interest rates, we have no significant exposure
to changing interest rates on our long–term debt because the interest
rates are fixed on all of our long–term debt. As disclosed in Note 6
to the accompanying consolidated financial statements, we had out-
standing fixed–rate, long–term debt (exclusive of capital leases) with
estimated fair values of $1.9 billion at May 31, 2011 and $2.1 billion at
May 31, 2010. Market risk for fixed–rate, long–term debt is estimated
as the potential decrease in fair value resulting from a hypothetical
10% increase in interest rates and amounts to $36 million as of May
31, 2011 and $41 million as of May 31, 2010. The underlying fair
values of our long–term debt were estimated based on quoted market
prices or on the current rates offered for debt with similar terms and
maturities.
We have interest rate risk with respect to our pension and postre-
tirement benefit obligations. Changes in interest rates impact our
liabilities associated with these benefit plans as well as the amount
of pension and postretirement benefit expense recognized. Declines
in the value of plan assets could diminish the funded status of our
pension plans and potentially increase our requirement to make contri-
butions to the plans. Substantial investment losses on plan assets will
also increase pension and postretirement benefit expense in the years
following the losses.
FOREIGN CURRENCY. While we are a global provider of transportation,
e–commerce and business services, the substantial majority of our
transactions are denominated in U.S. dollars. The principal foreign
currency exchange rate risks to which we are exposed are in the
euro, Chinese yuan, Canadian dollar, British pound and Japanese yen.
Historically, our exposure to foreign currency fluctuations is more
significant with respect to our revenues than our expenses, as a
significant portion of our expenses are denominated in U.S. dollars,
such as aircraft and fuel expenses. During 2011 and 2010, operating
income was positively impacted due to foreign currency fluctuations.
However, favorable foreign currency fluctuations also may have had
an offsetting impact on the price we obtained or the demand for our
services, which is not quantifiable. At May 31, 2011, the result of a
uniform 10% strengthening in the value of the dollar relative to the
currencies in which our transactions are denominated would result in a
decrease in operating income of $38 million for 2012. This theoretical
calculation assumes that each exchange rate would change in the
same direction relative to the U.S. dollar. This calculation is not
indicative of our actual experience in foreign currency transactions.
In addition to the direct effects of changes in exchange rates,
fluctuations in exchange rates also affect the volume of sales or the
foreign currency sales price as competitors’ services become more or
less attractive. The sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change
in sales levels or local currency prices.
COMMODITY. While we have market risk for changes in the price of
jet and vehicle fuel, this risk is largely mitigated by our fuel surcharges
because our fuel surcharges are closely linked to market prices for
fuel. Therefore, a hypothetical 10% change in the price of fuel would
not be expected to materially affect our earnings.
However, our fuel surcharges have a timing lag (approximately six
to eight weeks for FedEx Express and FedEx Ground) before they are
adjusted for changes in fuel prices. Our fuel surcharge index also
allows fuel prices to fluctuate approximately 2% for FedEx Express
and approximately 4% for FedEx Ground before an adjustment to the
fuel surcharge occurs. Accordingly, our operating income in a specific
period may be significantly affected should the spot price of fuel sud-
denly change by a substantial amount or change by amounts that do
not result in an adjustment in our fuel surcharges.
OTHER. We do not purchase or hold any derivative financial instru-
ments for trading purposes.