Federal Express 2011 Annual Report Download - page 52

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of future minimum lease payments under capital leases
and noncancelable operating leases with an initial or remaining term
in excess of one year at May 31, 2011 is as follows (in millions):
The weighted–average remaining lease term of all operating leases
outstanding at May 31, 2011 was approximately six years. While cer-
tain of our lease agreements contain covenants governing the use of
the leased assets or require us to maintain certain levels of insurance,
none of our lease agreements include material financial covenants
or limitations.
FedEx Express makes payments under certain leveraged operating
leases that are sufficient to pay principal and interest on certain
pass–through certificates. The pass–through certificates are not direct
obligations of, or guaranteed by, FedEx or FedEx Express.
We are the lessee in a series of operating leases covering a portion
of our leased aircraft. The lessors are trusts established specifically
to purchase, finance and lease aircraft to us. These leasing entities
meet the criteria for variable interest entities. We are not the primary
beneficiary of the leasing entities, as the lease terms are consistent
with market terms at the inception of the lease and do not include
a residual value guarantee, fixed–price purchase option or similar
feature that obligates us to absorb decreases in value or entitles us to
participate in increases in the value of the aircraft. As such, we are
not required to consolidate the entity as the primary beneficiary. Our
maximum exposure under these leases is included in the summary of
future minimum lease payments shown above.
NOTE 8: PREFERRED STOCK
Our Certificate of Incorporation authorizes the Board of Directors, at
its discretion, to issue up to 4,000,000 shares of preferred stock. The
stock is issuable in series, which may vary as to certain rights and
preferences, and has no par value. As of May 31, 2011, none of these
shares had been issued.
NOTE 9: STOCK–BASED COMPENSATION
Our total stock–based compensation expense for the years ended May
31 was as follows (in millions):
We have two types of equity–based compensation: stock options and
restricted stock.
STOCK OPTIONS. Under the provisions of our incentive stock plans,
key employees and non–employee directors may be granted options to
purchase shares of our common stock at a price not less than its fair
market value on the date of grant. Vesting requirements are deter-
mined at the discretion of the Compensation Committee of our Board
of Directors. Option–vesting periods range from one to four years,
with 83% of our options vesting ratably over four years. Compensation
expense associated with these awards is recognized on a straight–line
basis over the requisite service period of the award.
RESTRICTED STOCK. Under the terms of our incentive stock plans,
restricted shares of our common stock are awarded to key employees.
All restrictions on the shares expire ratably over a four–year period.
Shares are valued at the market price on the date of award. The terms
of our restricted stock provide for continued vesting subsequent to the
employee’s retirement. Compensation expense associated with these
awards is recognized on a straight–line basis over the shorter of the
remaining service or vesting period.
VALUATION AND ASSUMPTIONS. We use the Black–Scholes option
pricing model to calculate the fair value of stock options. The value
of restricted stock awards is based on the stock price of the award
on the grant date. We record stock–based compensation expense in
the “Salaries and employee benefits” caption in the accompanying
consolidated statements of income.
The key assumptions for the Black–Scholes valuation method include
the expected life of the option, stock price volatility, a risk–free
interest rate, and dividend yield. Many of these assumptions are
judgmental and highly sensitive. Following is a table of the weighted–
average Black–Scholes value of our stock option grants, the intrinsic
value of options exercised (in millions), and the key weighted–average
assumptions used in the valuation calculations for the options
granted during the years ended May 31, and then a discussion of
our methodology for developing each of the assumptions used in the
valuation model:
2011 2010 2009
Stock–based compensation expense $ 98 $ 101 $ 99
2011 2010 2009
Weighted–average
Black–Scholes value $ 28.12 $ 20.47 $ 23.66
Intrinsic value of options exercised $ 80 $ 77 $ 7
Black–Scholes Assumptions:
Expected lives 5.9 years 5.7 years 5.5 years
Expected volatility 34 % 32 % 23 %
Risk–free interest rate 2.36 % 3.24% 3.28%
Dividend yield 0.558 % 0.742 % 0.492%
Operating Leases
Capital
Leases
Aircraft and
Related
Equipment
Facilities
and Other
Total
Operating
Leases
2012 $ 25 $ 494 $ 1,300 $ 1,794
2013 119 499 1,155 1,654
2014 2 473 992 1,465
2015 2 455 899 1,354
2016 2 458 734 1,192
Thereafter 13 1,545 4,988 6,533
Total 163 $ 3,924 $ 10,068 $ 13,992
Less amount representing
interest 17
Present value of net
minimum lease payments $ 146