10-K 1 a05-11806_110k.htm 10-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended May 31, 2005.

 

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                  .

 

Commission file number 1-15829

 

FEDEX CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware

62-1721435

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

942 South Shady Grove Road, Memphis, Tennessee

38120

(Address of Principal Executive Offices)

(ZIP Code)

 

Registrant’s telephone number, including area code:  (901) 818-7500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

 

 

Name of each exchange on which registered

 

Common Stock, par value $.10 per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)  Yes x  No o

The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the closing price as of the last business day of the Registrant’s most recently completed second fiscal quarter, November 30, 2004, was approximately $26.6 billion. The Registrant has no non-voting stock.

As of July 11, 2005, 302,630,105 shares of the Registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement to be delivered to stockholders in connection with the 2005 annual meeting of stockholders to be held on September 26, 2005 are incorporated by reference in response to Part III of this Report.

 




TABLE OF CONTENTS

 

 

 

Page

PART I

ITEM 1.

 

Business

 

3

ITEM 2.

 

Properties

 

22

ITEM 3.

 

Legal Proceedings

 

26

ITEM 4.

 

Submission of Matters to a Vote of Security Holders

 

26

 

 

Executive Officers of the Registrant

 

26

PART II

ITEM 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and

 

 

 

 

Issuer Purchases of Equity Securities

 

30

ITEM 6.

 

Selected Financial Data

 

30

ITEM 7.

 

Management’s Discussion and Analysis

 

 

 

 

of Results of Operations and Financial Condition

 

30

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

ITEM 8.

 

Financial Statements and Supplementary Data

 

30

ITEM 9.

 

Changes in and Disagreements With Accountants on Accounting

 

 

 

 

and Financial Disclosure

 

31

ITEM 9A.

 

Controls and Procedures

 

31

ITEM 9B.

 

Other Information

 

31

PART III

ITEM 10.

 

Directors and Executive Officers of the Registrant

 

31

ITEM 11.

 

Executive Compensation

 

31

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and

 

 

 

 

Related Stockholder Matters

 

32

ITEM 13.

 

Certain Relationships and Related Transactions

 

32

ITEM 14.

 

Principal Accounting Fees and Services

 

32

PART IV

ITEM 15.

 

Exhibits, Financial Statement Schedules

 

32

FINANCIAL SECTION

Table of Contents

 

35

Management’s Discussion and Analysis

 

36

Consolidated Financial Statements

 

67

Other Financial Information

 

105

EXHIBITS

Exhibit Index

 

E-1

 

2




PART I

ITEM 1.   BUSINESS

Overview

FedEx Corporation (“FedEx”) provides a broad portfolio of transportation, e-commerce and business services with companies that operate independently and compete collectively under the respected FedEx brand. These companies are included in four reportable business segments:

·  FedEx Express:   Federal Express Corporation (“FedEx Express”) is the world’s largest express transportation company, offering time-certain delivery within one to three business days and serving markets that comprise more than 90% of the world’s gross domestic product. The FedEx Express segment also includes FedEx Trade Networks, Inc. (“FedEx Trade Networks”), which provides international trade services, specializing in customs brokerage and global cargo distribution.

·  FedEx Ground:   FedEx Ground Package System, Inc. (“FedEx Ground”) is a leading provider of small-package ground delivery service. FedEx Ground provides low-cost residential delivery to nearly 100% of U.S. residences through FedEx Home Delivery. The FedEx Ground segment also includes FedEx SmartPost, Inc. (“FedEx SmartPost”), which specializes in the consolidation and delivery of high volumes of low-weight, less time-sensitive business-to-consumer packages using the U.S. Postal Service for final delivery to residences, and FedEx Supply Chain Services, Inc. (“FedEx Supply Chain Services”), which offers supply chain solutions.

·  FedEx Freight:   FedEx Freight Corporation (“FedEx Freight”) is a leading U.S. provider of regional next-day and second-day and interregional less-than-truckload (“LTL”) freight services. The FedEx Freight segment also includes FedEx Custom Critical, Inc. (“FedEx Custom Critical”), North America’s largest time-specific, critical shipment carrier, and Caribbean Transportation Services, Inc., the leading provider of airfreight forwarding services between the United States and Puerto Rico.

·  FedEx Kinko’s:   FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”) is a leading provider of document solutions and business services. FedEx’s Kinko’s global network of digitally-connected locations offers access to technology for black & white and color copying/printing, finishing and presentation services, signs and graphics, Internet access, videoconferencing, outsourcing, managed services, Web-based printing, document management solutions, the full range of FedEx day-definite ground shipping and time-definite global express shipping services, and a variety of other retail services and products, including office supplies.

For financial information concerning our reportable business segments, refer to the accompanying financial section, which includes management’s discussion and analysis of results of operations and financial condition and our consolidated financial statements.

Our Web site is located at fedex.com. Detailed information about our services and our e-commerce tools and solutions can be found on our Web site. In addition, we make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to such reports available, free of charge, through our Web site, as soon as reasonably practicable after they are filed with or furnished to the SEC. These and other SEC filings are available through the Investor Relations page of our Web site, the address of which is http://www.fedex.com/us/investorrelations. The information on our Web site, however, is not incorporated by reference in, and does not form part of, this Annual Report on Form 10-K.

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Except as otherwise specified, any reference to a year indicates our fiscal year ended May 31 of the year referenced.

Strategy

FedEx was incorporated in Delaware on October 2, 1997 to serve as the parent holding company of FedEx Express and each of our other operating companies. Through our holding company and FedEx Corporate Services, Inc. (“FedEx Services”), we provide strategic direction to, and coordination of, the FedEx portfolio of companies. We intend to continue to leverage and extend one of our greatest assets, the FedEx brand, and to provide our customers with convenient, seamless access to our entire portfolio of integrated business solutions. We are pursuing a number of initiatives to continue to enhance the FedEx customer experience, including improving the capabilities of our sales professionals. For instance, through our FedEx OneCall program, we assign a single customer service agent to handle virtually all issues of a customer’s account.

We believe that sales and marketing activities, as well as the information systems that support the extensive automation of our package delivery services, are functions that are best coordinated across operating companies. Through the use of advanced information systems that connect the FedEx companies, we make it convenient for customers to use the full range of FedEx services. We believe that seamless information integration is critical to obtain business synergies from multiple operating units. For example, our Web site, fedex.com, provides a single point of contact for our customers to access FedEx Express, FedEx Ground and FedEx Freight shipment tracking, customer service and invoicing information and FedEx Kinko’s office and print services.

We manage our business as a portfolio—in the best interest of FedEx as a whole, not a particular operating company. As a result, we base decisions on capital investment, expansion of delivery and information technology networks, and service additions or enhancements on achieving the highest overall long-term return on capital for our business as a whole. For each FedEx company, we focus on making appropriate investments in the technology and assets necessary to optimize our earnings performance and cash flow. As an example of our commitment to managing collaboratively, certain of our management incentive compensation programs are tied in part to the performance of FedEx as a whole.

While we have increased our emphasis on competing collectively and managing collaboratively, we continue to believe that operating independent networks, each focused on its own respective markets, results in optimal service quality, reliability and profitability from each business unit. Each FedEx company is free to focus exclusively on the market sectors in which it has the most expertise. Everything about each company—operations, cost structure, policies and culture—is designed to serve the unique customer needs of a particular market segment.

Our “operate independently, compete collectively, manage collaboratively” strategy also provides flexibility in sizing our various operating companies to align with varying macro-economic conditions and customer demand for the market segments in which they operate. For example,

·  To accommodate international growth at FedEx Express, we have added flights, purchased aircraft, increased capacity and improved services to and from Europe and Asia based on the growth prospects of these regions.

·  We are expanding network capacity at our growing FedEx Ground and FedEx Freight companies. For instance, we expect to increase FedEx Ground’s daily package pick-up capacity to approximately five million by 2010.

On the other hand, we have streamlined resources within the U.S. domestic FedEx Express network, based on its slower growth rates. We continue to implement focused strategies to improve our

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productivity and operational efficiency and to increase usage of FedEx Express’s U.S. domestic services.

We believe the following four trends continue to drive world commerce and shape the global marketplace:

·  Increase in High-Tech and High-Value-Added Businesses:   High-tech and high-value-added goods continue to increase as a percentage of total economic output. These goods can be roughly defined as any product with a relatively high value-to-weight ratio or a high value-added content—for example, computers, pharmaceuticals, automotive goods, electronics, high-fashion goods and aviation products. Our various operating companies offer a unique menu of services to fit virtually all shipping needs of high-tech and high-value-added industries.

·  Globalization:   As the world’s economy becomes more fully integrated, and as barriers and borders to trade continue to decrease, companies are sourcing and selling globally. The increase in global sourcing and selling has led companies to streamline their supply chains and open new markets. With customers in more than 220 countries and territories, we facilitate this supply chain through our global reach, delivery services and information capabilities. According to the Boeing Company’s World Air Cargo Forecast Team, air cargo traffic will expand at an average annual rate of 6.2% for the next two decades, and express air cargo has grown at more than twice the rate of total worldwide air cargo traffic, averaging more than 16% annually over the last decade. According to Air Cargo World magazine, FedEx Express has the largest share of the global air cargo market and thus received a number one ranking in the magazine’s “World’s Top 50 Cargo Airlines” list during 2005.

·  Supply Chain Acceleration:   As the economy has become increasingly global, it has also become more fast-paced. Businesses cannot wait weeks to source components and finished goods from around the world, especially in high-tech industries with high obsolescence rates. As a result, companies of all sizes depend on the delivery of just-in-time inventory to help them compete faster and more efficiently. We have taken advantage of the move toward faster, more efficient supply chains by helping customers substitute near real-time information to manage inventory in motion, thereby reducing overhead and obsolescence and speeding time-to-market.

·  Growth of the Internet and E-Commerce:   According to Forrester Research, U.S. online retail sales are forecasted to more than double in the next six years—from $144 billion in calendar 2004 to $316 billion in calendar 2010. E-commerce acts as a catalyst for the other three trends and is a vital growth engine for businesses today. It makes low-cost information available to anyone with Internet access, regardless of time or space. It enables small and mid-sized companies to source and sell globally, just like large corporations.

We continue to position our companies to capitalize on these trends and move toward even stronger long-term growth, productivity and profitability by:

·  Optimizing and expanding our worldwide FedEx Express network, particularly in key markets such as China, India and Eastern Europe.

·  Aggressively growing the capacity of our FedEx Ground and FedEx Freight networks.

·  Restricting further growth in our cost structure, especially at FedEx Express within the U.S.

·  Emphasizing the “compete collectively” part of our core strategy through service improvements and focusing our employees and contractors on delivering the best customer experience in the industry, resulting in better alignment across the entire FedEx network.

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·  Integrating and expanding FedEx Kinko’s, which will further increase our retail presence for FedEx shipping services and offer growth opportunities in commercial document solutions and other business services.

We acquired FedEx Kinko’s in February 2004 and have moved quickly to implement our retail vision. We have completed the rebranding of Kinko’s locations as FedEx Kinko’s Office and Print Centers and converted 176 FedEx World Service Centers into full-service FedEx Kinko’s Ship Centers. We also opened 48 new FedEx Kinko’s locations, including 30 internationally, during 2005. In addition, FedEx Kinko’s has expanded its service offerings. For example, we have:

·  Launched the full range of FedEx Express and FedEx Ground services at virtually all U.S. locations and added packing supplies and boxes to the retail product assortment (we are also adding FedEx shipping services at FedEx Kinko’s international locations);

·  Launched packing services—creating a complete “pack-and-ship” solution—at virtually all U.S. FedEx Kinko’s Office and Print Centers;

·  Completed the roll-out of T-Mobile HotSpot Wi-Fi wireless broadband Internet access at nearly all U.S. locations; and

·  Launched File, Print FedEx Kinko’s, an innovative software tool developed with Microsoft that allows customers to access the full range of FedEx Kinko’s copying and printing services from their desktop.

FedEx Kinko’s redefines the future of the business services marketplace by serving as a complete office on the road for business customers. FedEx Kinko’s creates a one-stop resource, offering the industry’s broadest range of business services, including document services, retail products and services, large format signs and graphics and other services. FedEx Kinko’s retail network of approximately 1,440 staffed locations also substantially increases customer access to FedEx Express and FedEx Ground services.

Reputation and Responsibility

By competing collectively under the FedEx banner, our operating companies benefit from one of the world’s most recognized brands. FedEx is one of the most trusted and respected brands in the world, and the FedEx brand name is a powerful sales and marketing tool. Among the many reputation awards we received during 2005:

·  FedEx ranked in the top ten of FORTUNE magazine’s “America’s Most Admired Companies” and “World’s Most Admired Companies” lists for the fourth consecutive year and ranked first in the magazine’s “Delivery” industry list.

·  For the second consecutive year, FedEx ranked in the top ten in “corporate reputation” in The Wall Street Journal’s Harris Interactive/Reputation Institute RQ Gold Survey.

·  FedEx continued to rank highest in customer satisfaction in the University of Michigan Business School National Quality Research Center’s American Customer Satisfaction Index in the express delivery category.

·  FedEx ranked in the top 25 of InformationWeek magazine’s “InformationWeek 500” list of the most innovative users of information technology.

FedEx is well recognized as a leader, not only in the transportation industry and technological innovation, but also in social and environmental responsibility and corporate governance. Along with a strong reputation among customers and the general public, FedEx is widely acknowledged as a great place to work. In 2005, we were listed among FORTUNE’s “100 Best Companies to Work for in

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America,” a list that we have made every year it has been published, and Computerworld magazine’s “100 Best Places to Work in IT.”  It is our people—our greatest asset—that give us our strong reputation. In addition to superior physical and information networks, FedEx has an exemplary human network, with more than 250,000 employees and contractors who are “absolutely, positively” focused on safety, the highest ethical and professional standards, and the needs of their customers and communities. Through our internal Purple Promise and Humanitarian Award programs, we recognize and reward employees who enhance customer service and promote human welfare.

Community

We are committed to causes that help improve the communities where we live and work, all around the world. As an example, we routinely donate our transportation equipment and services to deliver aid to disaster sites and to support charitable causes. For instance, in response to the catastrophic earthquake and tsunamis that struck Southeast Asia in December 2004, we transported over 640 tons (1.28 million pounds) of medicine, relief supplies and water purification systems to that region. In addition to corporate philanthropy and employee volunteerism, we develop strategic relationships with charitable organizations that share our values, including:

·  United Way of America:   We believe the United Way is one of the most effective and efficient ways of meeting community needs. FedEx supports a yearly fundraising campaign company-wide, and FedEx employee volunteers donate thousands of hours each year to support United Way community efforts.

·  American Red Cross:   FedEx works with the Red Cross to provide a quick response to disasters around the world. FedEx uses its logistics and transportation expertise to provide complimentary shipping of emergency supplies and assists with financial support. In 2005, FedEx worked with the Red Cross to transport essential disaster relief items to victims of Hurricane Ivan.

·  National SAFE KIDS Campaign:   Reflecting the fact that safety is one of our top priorities, FedEx is the sole corporate sponsor of SAFE KIDS “Walk This Way,” a global program that advocates child pedestrian safety and teaches children, parents and communities how to prevent pedestrian accidents.

·  ORBIS International:   FedEx helps ORBIS International provide eye care and treatment to people in developing countries. For example, FedEx provides free aircraft maintenance and volunteer pilots for ORBIS’s “flying eye hospital”—a converted DC-10 aircraft equipped with surgical and training facilities.

·  National Civil Rights Museum:   FedEx serves as a major corporate sponsor of the National Civil Rights Museum, which educates the public on the lessons of the civil rights movement in the United States and its impact and influence on the human rights movement worldwide.

·  March of Dimes:   FedEx is a national sponsor of March of Dimes’ WalkAmerica, and thousands of FedEx employees participate in it and other events that raise funds to help improve the health of babies by preventing birth defects and infant mortality.

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Environment

We are committed to protecting the environment. FedEx evaluates the environmental impacts of FedEx packaging products and minimizes waste generation through efforts that include recycling and pollution prevention. In 2005, we increased the post-consumer recycled content of the standard white paper used at FedEx Kinko’s Office and Print Centers from 10 percent to 30 percent. The new copy paper reflects FedEx Kinko’s longstanding dedication to protecting the environment and its global commitment, which sets standards for incorporating sustainable business practices that generate economic, social and environmental value today and for future generations.

FedEx is actively involved in efforts to promote cleaner air by reducing emissions through efficient route planning and the use of clean, alternative and renewable energy sources. For example, the FedEx Express OptiFleet E700 hybrid electric vehicle decreases particulate emissions by 96 percent and increases fuel efficiency by 50 percent. In April 2005, we announced plans to add up to 75 of these hybrid electric vehicles to our already existing fleet of 18 in the next twelve months, contingent on pricing and availability. In 2005, FedEx Express constructed California’s largest corporate solar electric system atop its regional hub in Oakland. FedEx Express is also modernizing its aircraft fleet, retiring and replacing its older Boeing 727s with more fuel-efficient and quieter planes, which will have the effect of reducing greenhouse gas emissions and airport noise.

Governance

FedEx has an independent Board of Directors committed to the highest quality corporate governance. Reflecting this commitment, we have embraced the spirit of corporate governance reform rather than merely meeting the minimum compliance standards set forth in the Sarbanes-Oxley Act of 2002 and the New York Stock Exchange’s corporate governance listing standards. We were proactive in early compliance with many aspects of those laws and have implemented many governance enhancements that go well beyond those legal requirements. For example, during the past two years, we:

·                    Added four highly qualified, independent directors to the Board:  August A. Busch IV, the president of Anheuser-Busch, Inc.; John A. Edwardson, the chairman and chief executive officer of CDW Corporation; J. Kenneth Glass, the chairman, president and chief executive officer of First Horizon National Corporation; and Charles T. Manatt, a partner and co-founder of Manatt, Phelps & Phillips, LLP.

·                    Amended our Bylaws, with stockholder approval, to eliminate the classified structure of the Board and allow for the annual election of all directors. As a result, beginning with the September 26, 2005 annual meeting, all Board members will stand for election annually.

·                    Adopted a policy requiring stockholder approval for any future “poison pill” prior to or within twelve months after adoption of the poison pill. (A poison pill is a device used to deter a hostile takeover. Note that FedEx does not currently have, nor have we ever had, a poison pill.)

·                    Established a stock ownership goal for senior officers, including a recommendation that each officer and each Board member retain stock acquired upon stock option exercises until his or her goal is met. The Board of Directors has long had a stock ownership goal for non-management directors.

In addition, we have made compliance with the reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002 one of our highest priorities, and we have leveraged this expensive and time-consuming effort to further improve our already rigorous disclosure controls and procedures and effective internal control over financial reporting. Our goal was not only to comply with the law, but

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also to build upon a process that will further enhance a strong controls mindset across FedEx today and in the future.

We have a Code of Business Conduct & Ethics, which applies to all of our directors, officers and employees, including our principal executive officer and senior financial officers. Our Code of Business Conduct & Ethics is available in the corporate governance section of the Investor Relations page of our Web site at http://www.fedex.com/us/investorrelations. In addition, we intend to post in the corporate governance section of the Investor Relations page of our Web site information regarding any amendment to, or waiver from, the provisions of our Code of Business Conduct & Ethics to the extent such disclosure is required. The information on our Web site, however, does not form part of this Report.

Business Segments

The following describes in more detail the operations of each of our business segments, as well as FedEx Services:

FedEx Express Segment

FedEx Express

Overview

FedEx Express invented express distribution in 1973 and remains the industry leader, providing rapid, reliable, time-definite delivery of packages, documents and freight to more than 220 countries and territories. FedEx Express offers time-certain delivery within one to three business days, serving markets that generate more than 90% of the world’s gross domestic product through door-to-door, customs-cleared service, with a money-back guarantee. FedEx Express’s unmatched air route authorities and extensive transportation infrastructure, combined with its leading-edge information technologies, make it the world’s largest express transportation company. FedEx Express employs more than 138,000 employees and operates approximately 50,000 drop-off locations, 670 aircraft and 45,000 vehicles and trailers in its integrated global network.

Services

FedEx Express offers a wide range of shipping services for delivery of documents, packages and freight. Overnight document and package services are backed by money-back guarantees and extend to virtually the entire United States population. FedEx Express offers three U.S. overnight delivery services: FedEx First Overnight, FedEx Priority Overnight and FedEx Standard Overnight. FedEx SameDay service is for urgent shipments up to 70 pounds to virtually any U.S. destination. FedEx Express also offers express freight services to handle the needs of the time-definite global freight market.

International express delivery with a money-back guarantee is available to more than 220 countries and territories, with a variety of time-definite services to meet distinct customer needs. FedEx Express also offers the most comprehensive international freight service in the industry, backed by a money-back guarantee, real-time tracking and advanced customs clearance.

For information regarding FedEx Express e-shipping tools and solutions, see “FedEx Services — Technology.”

International Expansion

FedEx Express is focused on further expanding its international presence, especially in key markets such as China. For example, we recently announced plans to build a new Asia-Pacific hub at

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the Guangzhou Baiyun International Airport in Southern China to better serve our global customers doing business in and with the fast-growing China and Asia-Pacific markets.  The new Asia-Pacific hub is expected to assume and expand the current activities of our existing hub in Subic Bay, Philippines, beginning in 2009. We began serving China in 1984 and, since that time, have expanded our service to cover more than 200 cities across the country with plans to add 100 additional cities over the next few years. We launched the industry’s first direct flight from southern China to North America, and in 2005, we established a new regional headquarters in Shanghai. The new regional structure there provides broader expertise and expanded resources and service offerings to mainland customers as part of our long-term commitment to China.

FedEx Express has more all-cargo flights to and from China than any other U.S. airline. In June 2004, the United States and the People’s Republic of China signed a new aviation accord that will further facilitate trade to and from China. The agreement, which extends through 2010, provides for 111 new weekly U.S.-China flights for U.S. cargo airlines such as FedEx Express. The U.S. Department of Transportation (“DOT”) is responsible for allocating the new flights. In October 2004, the DOT awarded FedEx Express 12 additional weekly flights to China, giving us a total of 23 weekly flights to China. Also, FedEx Express has received tentative DOT approval for three more weekly flights to China, effective March 2006, which will bring our total to 26.

In 2005, we launched a daily direct flight from Shanghai to Frankfurt, Germany—the express air cargo industry’s first direct flight from mainland China to Europe—further expanding our airlift capacity from China. The new China-Europe flight forms an important link in the FedEx global network, connecting the United States, Asia and Europe. It is part of a new westbound around-the-world lane that originates and terminates in Memphis, Tennessee and provides connections via the FedEx AsiaOne network to and from more than 130 cities in northern and eastern China. Additionally, the flight links key manufacturing regions in Germany into the FedEx network, while other parts of Europe connect with the FedEx EuroOne network via our Paris hub. We also introduced five weekly direct flights from Cologne, Germany to Memphis during 2005. The flights will provide next-business day service improvements for shippers in the industrial heartland of Germany, as well as key markets in Belgium and the Netherlands. The flight increases westbound trans-Atlantic capacity by 20 percent, and shippers in western Germany will benefit from later pick-up times. FedEx Express already provides direct flights from Stansted, England; Paris, France; and Frankfurt, Germany to our U.S. hub locations.

Through an alliance with La Poste, one of the world’s leading postal organizations, customers of Chronopost International, a subsidiary of La Poste, have access to the FedEx Express air network. Additionally, FedEx customers in France and Belgium have benefited from the enhanced ground infrastructure of La Poste.

In anticipation of our future needs, we have agreed to purchase ten Airbus A380 aircraft, with deliveries beginning in 2009. FedEx Express will be the first company to take delivery of the Airbus A380 freighter and the first to deploy the plane into service. The immense capacity, extensive range and excellent efficiency of this aircraft make it ideally suited for the anticipated needs of the FedEx Express global network later this decade. To facilitate the use of our growing international network, we offer strong international trade consulting services and a variety of online tools that enable customers to more easily determine and comply with international shipping requirements.

U.S. Postal Service Agreements

Under two agreements with the U.S. Postal Service that run through August 2008, FedEx Express provides air capacity for transportation of Priority, Express and First-Class Mail and has placed approximately 5,000 drop boxes at U.S. Post Offices in approximately 325 metropolitan areas. In November 2004, the air transportation agreement was amended to allow us to continue carrying

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incremental pounds of mail through May 31, 2006 at higher committed volumes than required under the original agreement.

In 2005, the U.S. Postal Service chose FedEx Express as the provider of transportation and delivery for the international delivery service called Global Express Guaranteed (GXG). The service, which is available at over 8,100 postal locations, offers international express delivery with a money-back guarantee (subject to certain limitations). Customers bring their packages to a U.S. Post Office where they fill out the GXG air waybill, pay postage and fees and drop off their packages. The U.S. Postal Service tenders the packages to FedEx Express, and FedEx Express provides transportation and delivery to the ultimate international destination.

Pricing

FedEx Express periodically publishes list prices in its Service Guides for the majority of its services. In general, during 2005, U.S. shipping rates were based on the service selected, destination zone, weight, size, any ancillary service charge and whether the shipment was picked up by a FedEx Express courier or dropped off by the customer at a FedEx Express location. International rates are based on the type of service provided and vary with size, weight and destination. FedEx Express offers its customers discounts generally based on actual or potential average daily revenue produced.

FedEx Express has a dynamic fuel surcharge for all U.S. domestic and U.S. outbound shipments and for shipments originating internationally, where legally and contractually possible. The surcharge percentage is subject to monthly adjustment based on the spot price for jet fuel. For example, the fuel surcharge for June 2005 was based on the spot price for jet fuel published for April 2005. Changes to the FedEx Express fuel surcharge, when calculated according to the spot price for jet fuel and FedEx Express trigger points, are applied effective from the first Monday of the month. These trigger points may change from time to time, but information on the fuel surcharge for each month is available at fedex.com approximately two weeks before the surcharge is applicable.

Operations

FedEx Express’s primary sorting facility, located in Memphis, serves as the center of the company’s multiple hub-and-spoke system. A second national hub is located in Indianapolis. In addition to these national hubs, FedEx Express operates regional hubs in Newark, Oakland and Fort Worth and major metropolitan sorting facilities in Los Angeles and Chicago. Facilities in Anchorage, Paris and Subic Bay, Philippines serve as sorting facilities for express package and freight traffic moving to and from Asia, Europe and North America. Additional major sorting and freight handling facilities are located at Narita Airport in Tokyo, Stansted Airport outside London and Pearson Airport in Toronto. Facilities in Subic Bay and Paris are also designed to serve as regional hubs for their respective market areas. In 2005, FedEx Express opened a new facility in Miami—the Miami Gateway Hub—which serves our South Florida, Latin American and Caribbean markets. Throughout its worldwide network, FedEx Express operates city stations and employs a staff of customer service agents, cargo handlers and couriers who pick up and deliver shipments in the station’s service area. For more information about our sorting and handling facilities, see Part I, Item 2 of this Annual Report on Form 10-K under the caption “FedEx Express Segment.”  In some international areas, where low package traffic makes FedEx Express’s direct presence less economical, Global Service Participants have been selected to complete deliveries and to pick up packages.

FedEx Kinko’s offers retail access to FedEx Express shipping services at all of its U.S. locations and is adding FedEx Express shipping services at its international locations. FedEx Express also has alliances with certain other retailers to provide in-store drop-off sites. Our unmanned FedEx Drop Boxes provide customers the opportunity to drop off packages in office buildings, shopping centers, corporate or industrial parks and outside U.S. Post Offices.

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Fuel Supplies and Costs

During 2005, FedEx Express purchased aviation fuel from various suppliers under contracts that vary in length and which provide for specific amounts of fuel to be delivered. The fuel represented by these contracts is purchased at market prices that may fluctuate daily. Because of our dynamic fuel surcharge, we do not have any jet fuel hedging contracts. See “FedEx Express — Pricing.”

The following table sets forth FedEx Express’s costs for aviation fuel and its percentage of FedEx’s revenues for the last five fiscal years:

Fiscal Year

 

 

 

Total Cost
(in millions)

 

Percentage of
FedEx’s Revenues

 

2005

 

 

$

1,780

 

 

 

6.1

%

 

2004

 

 

1,160

 

 

 

4.7

 

 

2003

 

 

1,058

 

 

 

4.7

 

 

2002

 

 

852

 

 

 

4.1

 

 

2001

 

 

872

 

 

 

4.4

 

 

 

Approximately 14% of FedEx Express’s requirement for vehicle fuel is purchased in bulk. The remainder of FedEx Express’s requirement is satisfied by retail purchases with various discounts.

We believe that, barring a substantial disruption in supplies of crude oil, our fuel purchase contracts will ensure the availability of an adequate supply of fuel for FedEx Express’s needs for the immediate future. A substantial reduction of oil supplies from oil-producing regions or refining capacity, or other events causing a substantial reduction in the supply of aviation fuel, however, could have a significant adverse effect on FedEx Express.

Competition

The express package and freight markets are both highly competitive and sensitive to price and service. The ability to compete effectively depends upon price, frequency and capacity of scheduled service, ability to track packages, extent of geographic coverage, reliability and innovative service offerings. Competitors in these markets include other package delivery concerns, principally United Parcel Service, Inc. (“UPS”), DHL, passenger airlines offering express package services, regional express delivery concerns, airfreight forwarders and the U.S. Postal Service.

FedEx Express’s principal competitors in the international market are DHL, UPS, foreign postal authorities such as Deutsche Poste and TNT Post Group, freight forwarders, passenger airlines and all-cargo airlines. FedEx Express currently provides customs-cleared, door-to-door service with custodial control to more international locations than its competitors. Many of FedEx Express’s competitors in the international market, however, are government-owned, -controlled or -subsidized carriers, which may have greater resources, lower costs, less profit sensitivity and more favorable operating conditions than FedEx Express.

Employees

David J. Bronczek is the President and Chief Executive Officer of FedEx Express, which is headquartered in Memphis, Tennessee. As of May 31, 2005, FedEx Express employed approximately 87,100 permanent full-time and 51,000 permanent part-time employees, of which approximately 18% are employed in the Memphis area. FedEx Express’s international employees in the aggregate represent approximately 17% of all employees. FedEx Express believes its relationship with its employees is excellent.

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The pilots of FedEx Express are represented by the Air Line Pilots Association, International (“ALPA”), and have been employed under a collective bargaining agreement since May 31, 1999. The current agreement did not expire, but became amendable on May 31, 2004. Negotiations with ALPA to reach a new labor agreement began in March 2004 and remain underway. We will continue to operate under our current agreement while we negotiate with our pilots.

Attempts by other labor organizations to organize certain other groups of employees occur from time to time. Although these organizing attempts have not resulted in any certification of a U.S. domestic collective bargaining representative (other than ALPA), we cannot predict the outcome of these labor activities or their effect, if any, on FedEx Express or its employees.

FedEx Trade Networks

FedEx Trade Networks is a leading provider of international trade services, specializing in customs brokerage and global cargo distribution. Its value-added products and services include Global Trade Data, an information tool that allows customers to track and manage imports. FedEx Trade Networks provides international trade advisory services, including assistance with the Customs-Trade Partnership Against Terrorism (C-TPAT) program, and a set of integrated international shipping resources known as Global Trade Tools. FedEx Trade Networks has approximately 3,300 employees and 160 offices in 90 locations throughout North America. Offices are also maintained in major Asian markets through dedicated agents.

FedEx Trade Networks has an alliance with Frans Maas, a leading European provider of international freight forwarding and logistics services, to provide door-to-door air and ocean forwarding transportation services between Europe and North America, as well as similar alliances with S-Net Freight (Holdings) Pte Ltd, an Asian airfreight forwarder, and Capital Distribution Services Group (CDS), an Asian ocean freight forwarder. Through its WorldTariff subsidiary, FedEx Trade Networks publishes customs duty and tax information for 118 customs territories worldwide.

FedEx Ground Segment

FedEx Ground

Overview

By leveraging the FedEx brand, maintaining a low cost structure and efficiently using information technology and advanced automation systems, FedEx Ground continues to enhance its competitive position as a leading provider of business and residential money-back-guaranteed ground package delivery services. FedEx Ground serves customers in the North American small-package market, focusing primarily on business and residential delivery of packages weighing up to 150 pounds. Ground service is provided to 100% of the United States population and overnight service up to 400 miles to nearly 100% of the United States population. Through a subsidiary, service is also provided to nearly 100% of the Canadian population. In addition, FedEx Ground offers service to Puerto Rico, Alaska and Hawaii via a ground/air network operation coordinated with other transportation providers.

FedEx Ground continues to improve the speed, reach and service capabilities of its network, by reducing transit time for many of its lanes and introducing or expanding overnight ground service in many metropolitan areas. In addition, to meet growing customer demand for its services, FedEx Ground is in the midst of a major network capacity expansion program, which is expected to increase its daily package pick-up capacity to approximately five million by 2010. The multi-phase plan includes the addition of nine new hubs, the expansion of approximately 30 existing hubs and the expansion or relocation of more than 290 existing facilities. Each of the new hubs will feature the latest automated sorting technology. Two of the nine new hubs already have been opened in the metro areas of Dallas and Cincinnati, and two others are under construction in the metro areas of Memphis

13




and Hagerstown, Maryland. In 2005, FedEx Ground selected the Atlanta metro area as the site for another of its new hubs.

In addition to the continuing success of FedEx Ground’s business-to-business service, the increasing popularity of FedEx Home Delivery, which reaches nearly 100% of U.S. residences, has driven growth in the company’s package volumes and financial results. FedEx Home Delivery is the only service dedicated exclusively to meeting the delivery needs of residential customers. No other carrier provides routine Saturday and evening delivery and premium options such as day-specific, appointment and signature delivery. FedEx Home Delivery brings unmatched services to residential shippers and their customers and also offers a money-back guarantee. To maintain a low-cost structure, FedEx Home Delivery leverages the FedEx Ground network for pickup, package sorting and linehaul operations.

In 2005, FedEx acquired the Parcel Direct division of Quad/Graphics to expand its portfolio of residential delivery services. Parcel Direct, a leading national small-parcel consolidator, was renamed FedEx SmartPost and is now a subsidiary of FedEx Ground. FedEx SmartPost specializes in the consolidation and delivery of high volumes of low-weight, less time-sensitive business-to-consumer packages, using the U.S. Postal Service for final delivery to residences. FedEx SmartPost’s customers include e-tailers and catalog companies. Through its network of 12 distribution hubs and 750 employees, FedEx SmartPost provides delivery Monday through Saturday to all residential addresses in the U.S., including P.O. Boxes and military destinations.

Pricing

FedEx Ground periodically publishes list prices for the majority of its services in its Service Guide. In general, during 2005, U.S. shipping rates were based on the service selected, destination zone, weight, size, any ancillary service charge and whether the shipment was picked up by a FedEx Ground contractor or dropped off by the customer at a FedEx Ground location.

Effective January 3, 2005, FedEx Ground reinstated an indexed fuel surcharge, which applies to all shipments. The surcharge percentage is subject to monthly adjustment based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel as published monthly by the U.S. Department of Energy. For example, the fuel surcharge for June 2005 was based on the average diesel fuel price published for April 2005. Changes to the FedEx Ground fuel surcharge, when calculated according to the rounded index average and FedEx Ground trigger points, are applied effective from the first Monday of the month. These trigger points may change from time to time, but information on the fuel surcharge for each month is available at fedex.com approximately two weeks before the surcharge is applicable.

Operations

FedEx Ground operates a multiple hub-and-spoke sorting and distribution system consisting of 515 facilities and 28 hubs (as of May 31, 2005) in the U.S. and Canada. FedEx Ground conducts its operations primarily with 18,000 owner-operated vehicles and 19,700 company-owned trailers. To provide FedEx Home Delivery service, FedEx Ground leverages its existing pickup operation and hub and linehaul network. FedEx Home Delivery’s operations are often co-located with existing FedEx Ground facilities to achieve further cost efficiencies.

Advanced automated sorting technology is used to streamline the handling of approximately 2.6 million daily packages with each hub processing an average of 17,000 packages per hour. Using overhead laser and six-sided charge-coupled device (CCD) scan technologies, hub conveyors electronically guide packages to their appropriate destination chute, where they are loaded for transport to their respective destination terminals for local delivery. Software systems and

14




Internet-based applications are also deployed to offer customers new ways to connect internal package data with external delivery information. FedEx Ground provides multiple-carrier shipment tracing and proof-of-delivery signature functionality through the FedEx Web site, fedex.com. For additional information regarding FedEx Ground e-shipping tools and solutions, see “FedEx Services — Technology.”

FedEx Kinko’s offers retail access to FedEx Ground shipping services at all its U.S. locations. FedEx Ground is also available as a service option at many FedEx Authorized ShipCenters in the U.S.

As of May 31, 2005, FedEx Ground had approximately 38,200 employees and 13,400 independent contractors. Although FedEx Ground believes its relationship with its employees and independent contractors is excellent, the company is involved in numerous purported class-action lawsuits and other proceedings in which the threshold issue is whether some or all of FedEx Ground’s owner-operators are in fact employees, rather than independent contractors. For a description of these proceedings, see Note 19 of the accompanying consolidated financial statements.

Daniel J. Sullivan is the President and Chief Executive Officer of FedEx Ground, which is headquartered in Pittsburgh, Pennsylvania. FedEx Ground’s primary competitors are UPS, DHL and the U.S. Postal Service.

FedEx Supply Chain Services

FedEx Supply Chain Services offers a range of supply chain solutions, including transportation management, fulfillment and fleet services. FedEx Supply Chain Services focuses on information technology-sensitive business to meet the needs of its customers and to drive transportation business to other FedEx operating companies. FedEx Supply Chain Services’ service offerings use advanced electronic data interchanges to speed communications between customers and their suppliers, resulting in more cost-effective solutions and enhanced levels of customer service.

FedEx Freight Segment

FedEx Freight

FedEx Freight provides regional next-day and second-day and interregional LTL freight services and is known for its exceptional service, reliability and on-time performance. Through a comprehensive network of service centers and advanced information systems, FedEx Freight provides regional LTL freight service to virtually all U.S. ZIP Codes, including Alaska and Hawaii. FedEx Freight also offers a premium service between all regions in the U.S., providing seamless coverage and industry-leading transit times. FedEx Freight’s regional and interregional LTL service is supported by a no-fee money-back guarantee on eligible shipments. Internationally, FedEx Freight serves Canada, Mexico, Puerto Rico, Central and South America, the Caribbean, Europe and Asia via alliances and purchased transportation. Similar to its major competitors, FedEx Freight has a dynamic fuel surcharge that applies to the majority of its revenue. The surcharge percentage is subject to weekly adjustment based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel.

FedEx Freight provides tailored shipping solutions to help shippers meet tight deadlines. Through its many service offerings, FedEx Freight can match customers’ time-critical needs with reduced transit times, after-hours pickup or delivery, or same-day delivery. During 2005, FedEx Freight continued its focus on fast-cycle distribution. Currently, approximately 90% of FedEx Freight shipments are delivered next- or second-business-day. FedEx Freight is also continuing its aggressive nationwide expansion by opening new service centers and increasing capacity at a number of key locations to better meet customer demand. In 2005, FedEx Freight opened 13 new service centers and expanded five others. FedEx Freight’s fully integrated Web site and other e-tools, including a bill

15




of lading generator and e-mail delivery notification, make freight shipping easier and bring customers closer to their own account information.

FedEx Freight has leveraged its relationships with other FedEx operating companies to meet the increasingly global needs of customers. For example, the FedEx Freight sales force sells FedEx Express freight services, and FedEx Services sales representatives share LTL leads with their counterparts at FedEx Freight. The sales effort is one phase of a broad initiative aimed at leveraging FedEx’s competitive advantage in U.S. domestic freight services. In addition, FedEx Freight has collaborated with FedEx Trade Networks and FedEx Ground to serve Asia. FedEx Trade Networks facilitates the preparation and containerization of shipments in Asia and manages the ocean portion of the service, as well as customs clearance and document preparation, while FedEx Freight and FedEx Ground handle the inland distribution transportation once shipments are cleared at U.S. container freight stations in gateway cities.

FedEx Freight subsidiary Caribbean Transportation Services, Inc. (“CTS”) is the leading provider of airfreight forwarding services between the United States and Puerto Rico, specializing in arranging the shipment of heavyweight and oversized cargo. CTS, which also offers service to the Dominican Republic and Costa Rica, provides several delivery options for door-to-door or airport-to-airport airfreight forwarder services, principally to the medical, pharmaceutical and technology sectors.

As of May 31, 2005, FedEx Freight had approximately 26,500 employees operating approximately 39,500 vehicles and trailers from a network of 321 service centers. Douglas G. Duncan is the President and Chief Executive Officer of FedEx Freight, which is based in Memphis, Tennessee. FedEx Freight’s primary multiregional LTL competitors are Con-Way Transportation Services, a subsidiary of CNF Inc., USF Corporation and Overnite Corporation.

FedEx Custom Critical

FedEx Custom Critical provides exclusive-use, time-specific shipment services throughout the United States, Canada and Mexico. Among its divisions are Surface Expedite, for nonstop, door-to-door transport of critical shipments; White Glove Services, for shipments that require special care in handling, such as temperature-sensitive materials; and Air Expedite, which offers an array of air solutions to meet customers’ critical delivery times. Most FedEx Custom Critical shipments are picked up in less than 90 minutes after the customer places the order. Each shipper has exclusive vehicle usage, minimizing freight handling. FedEx Custom Critical continuously monitors shipments through Customer Link, an integrated proprietary shipment control system with two-way satellite communications. Through the Shipping Toolkit located at customcritical.fedex.com, customers can quote, ship, track and map shipments, view and print out copies of a shipment’s bill of lading, proof of delivery and invoice, and manage their online accounts. FedEx Custom Critical has a network of 152 ExpressCenters and approximately 1,300 owner-operators, and service is available 24 hours a day, 365 days a year, including weekends and holidays at no extra cost. FedEx Custom Critical also provides door-to-door vehicle transport through its Passport Auto Transport and AutoTrans subsidiaries.

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FedEx Kinko’s Segment

FedEx Kinko’s is a global leader in the document services market, offering a wide array of innovative business solutions, including retail access to the full range of FedEx day-definite ground shipping and time-definite global express shipping services. See “Strategy” above for a description of our integration of FedEx Kinko’s into the FedEx portfolio of companies. As of May 31, 2005, FedEx Kinko’s operations included approximately 1,290 FedEx Kinko’s Office & Print Centers and Ship Centers in the United States and 147 additional locations in ten other countries, as well as 39 commercial production centers. These locations create an unmatched global network of state-of-the-art printing and copying technology, which FedEx Kinko’s leverages to provide highly differentiated, innovative solutions to its customers.

We are expanding the FedEx Kinko’s retail network. During 2005, in addition to the conversion of 176 FedEx World Service Centers into FedEx Kinko’s Ship Centers, FedEx Kinko’s opened 48 new locations, including 30 internationally. In 2006, FedEx Kinko’s plans to open approximately 55 new locations, including a number of international locations. FedEx Kinko’s has a strategic plan for international expansion, focusing on growth in Canada, Asia-Pacific and Europe, regions where FedEx already has a substantial presence.

FedEx Kinko’s specifically focuses on key customer segments that are important to the other FedEx companies. To small- and medium-sized business customers, FedEx Kinko’s provides complete document management and meets basic office needs. To large corporate customers, FedEx Kinko’s provides facilities management and outsourcing of copying, printing and document management services. To the rapidly growing “mobile professional” market segment, which includes business travelers and mobile salespeople, FedEx Kinko’s provides a comprehensive “office on the road,” including Internet access, videoconferencing and presentation support.

FedEx Kinko’s offers a full range of black-and-white, color and custom printing, copying and binding services and an increasingly broad array of other business services, including, among others, facilities management and outsourcing, high-speed Internet access and computer rental, Wi-Fi (wireless fidelity) services, videoconferencing, and signs and graphics production services. FedEx Kinko’s has capitalized on the trend toward e-business, offering many Web-based services, including File, Print FedEx Kinko’s, a free software tool that works over the Web to connect Microsoft Windows desktop users to copying and printing services at FedEx Kinko’s Office and Print Centers; DocStore, an online ordering solution for digital print-on-demand; and FedEx Kinko’s Business Stationery Print System, which allows organizations to order, manage and distribute branded communications materials, such as business cards and stationery, via customized online catalogs. FedEx Kinko’s also offers retail products, such as specialty papers, greeting cards, printer cartridges, stationery and office supplies.

FedEx Kinko’s retail network of approximately 1,440 staffed locations substantially increases customer access to FedEx Express and FedEx Ground services. FedEx Kinko’s offers the full range of FedEx Express and FedEx Ground services at virtually all U.S. locations and is adding FedEx shipping services at its international locations. Packing supplies and boxes have been added to FedEx Kinko’s retail product assortment. In addition, FedEx Kinko’s now offers packing services at virtually all U.S. Office and Print Centers. By allowing customers to have unpackaged items professionally packed by specially trained FedEx Kinko’s team members and then shipped using any of the full range of FedEx day-definite ground shipping and time-definite global express shipping services, FedEx Kinko’s now provides a complete “pack-and-ship” solution.

FedEx Kinko’s is headquartered in Dallas, Texas. Gary M. Kusin is the President and Chief Executive Officer of FedEx Kinko’s, which has approximately 22,000 employees. FedEx Kinko’s competitors on the retail side of its business include office-supply superstores, such as Staples, Inc., OfficeMax Incorporated and Office Depot, Inc., franchised quick printers, pack and ship chains, such

17




as The UPS Store, and small local and regional copy and pack and ship shops. FedEx Kinko’s competitors on the facilities management and corporate outsourcing side of its business include Xerox Global Services, IKON Office Solutions, Inc. and Pitney Bowes Inc.

FedEx Services

FedEx Services provides a convenient single point of access for many customer support functions, such as marketing, sales and automation. Much of the sales, marketing and information technology support for FedEx Express and FedEx Ground have been combined under FedEx Services to more effectively sell the entire portfolio of express and ground services. FedEx Services sells and markets the full portfolio of services offered by our principal package-delivery companies and provides customer-facing solutions that meet customer needs.

Through FedEx Services, we provide our customers with a high level of service quality, as evidenced by our ISO 9001 certification for our global express and ground operations. ISO 9001 registration is required by thousands of customers around the world. FedEx’s global certification, encompassing the processes of FedEx Express, FedEx Ground and FedEx Services, enhances our single-point-of-access strategy and solidifies our reputation as the quality leader in the transportation industry. ISO 9001 is currently the most rigorous international standard for Quality Management and Assurance. ISO standards were developed by the International Organization for Standardization in Geneva, Switzerland to promote and facilitate international trade. More than 150 countries, including European Union members, the United States and Japan, recognize ISO standards.

T. Michael Glenn is the President and Chief Executive Officer of FedEx Services, which is based in Memphis, Tennessee. As of May 31, 2005, FedEx Services had approximately 9,250 employees.

Technology

In 1979, FedEx founder Frederick W. Smith said, “The information about a package is as important as the delivery of the package itself.”  Mr. Smith’s vision for FedEx technology in 1979 was a radical idea. Yet, today’s FedEx is a world leader in technology, and his vision remains at the core of our comprehensive technology strategy.

Our technology strategy is driven by our desire for customer satisfaction. We strive to build technology solutions that will solve our customers’ business problems with simplicity, convenience, speed and reliability. The focal point of our strategy is our award-winning Web site, together with our integration solutions.

The fedex.com Web site was launched over ten years ago, and during that time, customers have used the Web site to track the status of over a billion packages online. The fedex.com Web site is widely recognized for its speed, ease of use and customer-focused features. At fedex.com, our customers ship packages, determine international documentation requirements, track package status, pay invoices and access FedEx Kinko’s office and printing services. Our FedEx Insight Web-based application provides customers with visibility and package status of their inbound and outbound FedEx Express, FedEx Ground and FedEx Freight shipments. Our FedEx Global Trade Manager online resource enables customers to more easily navigate the complexities of international commerce by helping them identify the documents they need to ship to and from specific countries. FedEx Global Trade Manager also offers a currency converter, profiles of regulatory information by country, a customs regulation guide and, through its “Estimate Duties and Taxes” features, customers can estimate applicable governmental charges, duties and fees. FedEx Billing Online provides customers real-time access to their accounts, invoices and paid shipment details.

We have extended the reach of the fedex.com Web site to be accessible from most wireless devices, making it faster and easier for U.S. and Canadian customers to access real-time package

18




status tracking information, rates and drop-off location data for FedEx Express and FedEx Ground shipments. Our wireless service is available through Web-enabled devices, such as mobile telephones, personal digital assistants and Research In Motion (RIM) devices. FedEx also uses wireless data collection devices to scan bar codes on shipments. FedEx’s newest data collection device, the FedEx PowerPad, uses Bluetooth wireless technology to give our couriers wireless access to the FedEx network, thereby enhancing and accelerating the package information available to our customers.

We design our e-commerce tools and solutions to be easily integrated into our customers’ applications, as well as into third-party software being developed by leading e-procurement, systems integration and enterprise resource planning companies. This is increasingly important, given the growing customer trend toward sophisticated multi-carrier shipping platforms. Our FedEx Ship Manager suite of solutions offers a wide range of options to help our customers manage their shipping and associated processes.

Marketing

The FedEx brand name is a symbol for high-quality service, reliability and speed. FedEx is one of the most widely recognized brands in the world. Special emphasis is placed on promoting and protecting the FedEx brand, one of our most important assets. In addition to traditional print and broadcast advertising, we promote the FedEx brand through corporate sponsorships and special events. For example, FedEx sponsors:

·       The National Football League, as its “Official Delivery Service Sponsor”

·       The PGA TOUR and the Champions Tour golf organizations, as their “Official Shipping Company”

·       A Joe Gibbs Racing car in the NASCAR NEXTEL Cup Series

·       FedExField, home of the NFL’s Washington Redskins

·       The FedEx Orange Bowl, host of one of college football’s Bowl Championship Series games

·       FedExForum, the home of the NBA’s Memphis Grizzlies

·       The FedEx St. Jude Classic, a PGA TOUR event which raises millions of dollars for St. Jude Children’s Research Hospital

·       The FedEx Kinko’s Classic, a PGA Champions Tour event

·       The BMW WilliamsF1 Formula One racing team

·       The French Open tennis tournament

In 2005, FedEx and the National Basketball Association formed a strategic marketing alliance through which we promoted FedEx’s international delivery services at NBA events and league media properties, such as NBA TV and NBA.com.

Trademarks

The “FedEx” trademark, service mark and trade name is essential to our worldwide business. FedEx, FedEx Express, FedEx Ground, FedEx Freight, FedEx Kinko’s, FedEx Services, FedEx Trade Networks, FedEx SmartPost, FedEx Supply Chain Services and FedEx Custom Critical, among others, are trademarks, service marks and trade names of Federal Express Corporation for which registrations, or applications for registration, are on file. We have authorized, through licensing arrangements, the use of certain of our trademarks, service marks and trade names by our

19




contractors and Global Service Participants to support our business. In addition, we license the use of certain of our trademarks, service marks and trade names on promotional items for the primary purpose of enhancing brand awareness.

Regulation

Air.   Under the Federal Aviation Act of 1958, as amended, both the DOT and the Federal Aviation Administration (“FAA”) exercise regulatory authority over FedEx Express.

The FAA’s regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards, maintenance and corrosion control, as well as personnel and ground facilities, which may from time to time affect the ability of FedEx Express to operate its aircraft in the most efficient manner. FedEx Express holds an air carrier certificate granted by the FAA pursuant to Part 119 of the federal aviation regulations. This certificate is of unlimited duration and remains in effect so long as FedEx Express maintains its standards of safety and meets the operational requirements of the regulations.

The DOT’s authority relates primarily to economic and security aspects of air transportation. The DOT’s jurisdiction extends to aviation route authority and to other regulatory matters, including the transfer of route authority between carriers. FedEx Express holds various certificates issued by the DOT, authorizing FedEx Express to engage in U.S. and international air transportation of property and mail on a worldwide basis. FedEx Express’s international authority permits it to carry cargo and mail from several points in its U.S. route system to numerous points throughout the world. The DOT regulates international routes and practices and is authorized to investigate and take action against discriminatory treatment of United States air carriers abroad. The right of a United States carrier to serve foreign points is subject to the DOT’s approval and generally requires a bilateral agreement between the United States and the foreign government. The carrier must then be granted the permission of such foreign government to provide specific flights and services. The regulatory environment for global aviation rights may from time to time impair the ability of FedEx Express to operate its air network in the most efficient manner.

In 2001, the Aviation and Transportation Security Act transferred responsibility for aviation security from the FAA to the Transportation Security Administration (“TSA”) within the DOT, and ultimately, the Department of Homeland Security. In November 2004, the TSA proposed new rules enhancing many of the security requirements for air cargo on both passenger and all cargo aircraft. Because the TSA’s proposed rules are subject to comment, any final rules may differ significantly from the proposed rules. Accordingly, it is not yet possible to estimate the impact, if any, that the adoption of new rules by the TSA or any other additional security requirements may have on our results of operations. However, it is possible that increased security requirements could impose substantial incremental costs on us and our competitors.

FedEx Express participates in the Civil Reserve Air Fleet (“CRAF”) program. Under this program, the U.S. Department of Defense may requisition for military use certain of FedEx Express’s wide-bodied aircraft in the event of a declared need, including a national emergency. FedEx Express is compensated for the operation of any aircraft requisitioned under the CRAF program at standard contract rates established each year in the normal course of awarding contracts. Through its participation in the CRAF program, FedEx Express is entitled to bid on peacetime military cargo charter business. FedEx Express, together with a consortium of other carriers, currently contracts with the U.S. Government for charter flights.

Ground.   The ground transportation performed by FedEx Express is integral to its air transportation services. The enactment of the Federal Aviation Administration Authorization Act of 1994 abrogated the authority of states to regulate the rates, routes or services of intermodal all-cargo

20




air carriers and most motor carriers. States may now only exercise jurisdiction over safety and insurance. FedEx Express is registered in those states that require registration.

The operations of FedEx Ground, FedEx Freight and FedEx Custom Critical in interstate commerce are currently regulated by the DOT and the Federal Motor Carrier Safety Administration, which retain limited oversight authority over motor carriers. Federal legislation preempts regulation by the states of rates and service in intrastate freight transportation.

Like other interstate motor carriers, our operations are subject to certain DOT safety requirements governing interstate operations. In addition, vehicle weight and dimensions remain subject to both federal and state regulations.

Communication.   Because of the extensive use of radio and other communication facilities in its aircraft and ground transportation operations, FedEx Express is subject to the Federal Communications Commission Act of 1934, as amended. Additionally, the Federal Communications Commission regulates and licenses FedEx Express’s activities pertaining to satellite communications.

Environmental.   Pursuant to the Federal Aviation Act, the FAA, with the assistance of the U.S. Environmental Protection Agency, is authorized to establish standards governing aircraft noise. FedEx Express’s aircraft fleet is in compliance with current noise standards of the federal aviation regulations. FedEx Express’s aircraft are also subject to, and are in compliance with, the regulations governing engine emissions. In addition to federal regulation of aircraft noise, certain airport operators have local noise regulations, which limit aircraft operations by type of aircraft and time of day. These regulations have had a restrictive effect on FedEx Express’s aircraft operations in some of the localities where they apply but do not have a material effect on any of FedEx Express’s significant markets. Congress’s passage of the Airport Noise and Capacity Act of 1990 established a National Noise Policy, which enabled FedEx Express to plan for noise reduction and better respond to local noise constraints. FedEx Express’s international operations are also subject to noise regulations in certain of the countries in which it operates.

We are subject to federal, state and local environmental laws and regulations relating to, among other things, contingency planning for spills of petroleum products, the disposal of waste oil and the disposal of toners and other products used in FedEx Kinko’s copy machines and photo film developing operations. Additionally, we are subject to numerous regulations dealing with underground fuel storage tanks, hazardous waste handling, vehicle and equipment emissions and the discharge of effluents from our properties and equipment. We have environmental management programs to ensure compliance with these regulations.

Customs.   Our activities, including customs brokerage and freight forwarding, are subject to regulation by the Bureau of Customs and Border Protection and the TSA within the Department of Homeland Security (customs brokerage and security issues), the U.S. Federal Maritime Commission (ocean freight forwarding) and the DOT (airfreight forwarding). Our offshore operations are subject to similar regulation by the regulatory authorities of foreign jurisdictions.

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ITEM 2.                 PROPERTIES

FedEx Express Segment

FedEx Express’s principal owned and leased properties include its aircraft, vehicles, national, regional and metropolitan sorting facilities, administration buildings, FedEx Drop Boxes and data processing and telecommunications equipment.

Aircraft and Vehicles

As of May 31, 2005, FedEx Express’s operating aircraft fleet consisted of the following:

 

 

 

 

 

 

 

 

Maximum Operational

 

 

 

 

 

 

 

 

 

Revenue Payload

 

Description

 

 

 

Owned

 

Leased

 

Total

 

(Pounds per Aircraft)(1)

 

Boeing MD11

 

 

25

 

 

 

32

 

 

57

(3)

 

155,800

 

 

Boeing MD10-30(2)

 

 

3

 

 

 

2

 

 

5

 

 

128,900

 

 

Boeing DC10-30

 

 

5

 

 

 

12

 

 

17

 

 

128,900

 

 

Boeing MD10-10(2)

 

 

36

 

 

 

 

 

36

 

 

117,800

 

 

Boeing DC10-10

 

 

26

 

 

 

4

 

 

30

(4)

 

117,800

 

 

Airbus A300-600

 

 

11

 

 

 

36

 

 

47

(5)

 

91,000

 

 

Airbus A310-200/300

 

 

46

 

 

 

16

 

 

62

(6)

 

69,800

 

 

Boeing B727-200

 

 

83

 

 

 

11

 

 

94

 

 

43,100

 

 

Boeing B727-100

 

 

18

 

 

 

 

 

18

 

 

31,100

 

 

ATR 72-202

 

 

2

 

 

 

 

 

2

(7)

 

17,500

 

 

ATR 42-300/320

 

 

29

 

 

 

 

 

29

(8)

 

12,000

 

 

Fokker F27-500

 

 

11

 

 

 

 

 

11

 

 

12,500

 

 

Fokker F27-600

 

 

6

 

 

 

 

 

6

 

 

11,500

 

 

Cessna 208B

 

 

246

 

 

 

 

 

246

 

 

3,400

 

 

Cessna 208A

 

 

10

 

 

 

 

 

10

 

 

3,000

 

 

Total

 

 

557

 

 

 

113

 

 

670

 

 

 

 

 

 

(1) Maximum operational revenue payload is the lesser of the net volume-limited payload and the net maximum structural payload.

(2) The MD10-30s and MD10-10s are DC10-30s and DC10-10s, respectively, that have been converted to an MD10 configuration.

(3) Includes 15 aircraft not currently in operation and awaiting completion of passenger-to-freighter modification.

(4) Includes 11 aircraft not currently in operation and awaiting completion of passenger-to-freighter modification.

(5) Includes three aircraft not currently in operation and awaiting completion of passenger-to-freighter modification.

(6) Includes eight aircraft not currently in operation and awaiting completion of passenger-to-freighter modification.

(7) Includes two aircraft not currently in operation and awaiting completion of passenger-to-freighter modification.

(8) Includes 12 aircraft not currently in operation and awaiting completion of passenger-to-freighter modification.

22




·       The MD11s are three-engine, wide-bodied aircraft that have a longer range and larger capacity than DC10s.

·       The DC10s are three-engine, wide-bodied aircraft that have been specially modified to meet FedEx Express’s cargo requirements. The DC10s come in two versions, the DC10-10 and the DC10-30. The DC10-30 has a longer range and higher weight capacity than the DC10-10.

·       The MD10s are three-engine, wide-bodied DC10 aircraft that have received an Advanced Common Flightdeck (ACF) modification, which includes a conversion to a two-pilot cockpit, as well as upgrades of electrical and other systems.

·       The A300s and A310s are two-engine, wide-bodied aircraft that have a longer range and more capacity than B727s.

·       The B727s are three-engine aircraft configured for cargo service.

·       The Fokker F27, Cessna 208 and ATR turbo-prop aircraft are leased to independent operators to support FedEx Express operations in areas where demand does not justify use of a larger aircraft.

An inventory of spare engines and parts is maintained for each aircraft type.

In addition, FedEx Express “wet leases” approximately 60 smaller piston-engine and turbo-prop aircraft which feed packages to and from airports served by FedEx Express’s larger jet aircraft. The wet lease agreements call for the owner-lessor to provide flight crews, insurance and maintenance, as well as fuel and other supplies required to operate the aircraft. FedEx Express’s wet lease agreements are for terms not exceeding one year and are generally cancelable upon 30 days’ notice.

At May 31, 2005, FedEx Express operated approximately 45,000 ground transport vehicles, including pickup and delivery vans, larger trucks called container transport vehicles and over-the-road tractors and trailers.

Aircraft Purchase Commitments

As of May 31, 2005, FedEx Express was committed to purchase one MD11, four A300s, two A310s, nine ATR-72s and ten Airbus A380s (a new high-capacity, long-range aircraft). The MD11, the A300s, one A310 and the ATR-72s are expected to be delivered in 2006, and the other A310 is expected to be delivered in 2007. FedEx Express expects to take delivery of three of the ten A380 aircraft in each of 2009, 2010 and 2011 and the remaining one in 2012. FedEx Express also holds options for ten additional A380 aircraft. Deposits and progress payments of $29 million have been made toward these purchases and other planned aircraft-related transactions. Also see Note 18 of the accompanying consolidated financial statements for more information about our purchase commitments.

23




Sorting and Handling Facilities

At May 31, 2005, FedEx Express operated the following sorting and handling facilities:

 

 

 

 

 

 

Sorting

 

 

 

Lease

 

 

 

 

Square

 

Capacity

 

 

 

Expiration

Location

 

 

 

Acres

 

Feet

 

(per hour)(1)

 

 

Lessor

 

 

Year

National

 

 

 

 

 

 

 

 

 

 

 

 

 

Memphis, Tennessee

 

525

 

3,074,000

 

465,000

 

Memphis-Shelby County Airport Authority

 

2012

 

Indianapolis, Indiana

 

215

 

1,895,000

 

191,000

 

Indianapolis Airport Authority

 

2016

 

Regional

 

 

 

 

 

 

 

 

 

 

 

 

 

Fort Worth, Texas

 

168

 

977,000

 

76,000

 

Fort Worth Alliance Airport Authority

 

2014

 

Newark, New Jersey

 

64

 

595,000

 

154,000

 

Port Authority of New York and New Jersey

 

2010

 

Oakland, California

 

66

 

320,000

 

53,000

 

City of Oakland

 

2011

 

Metropolitan

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles, California

 

23

 

305,000

 

57,000

 

City of Los Angeles

 

2009

 

Chicago, Illinois

 

51

 

419,000

 

52,000

 

City of Chicago

 

2018

 

International

 

 

 

 

 

 

 

 

 

 

 

 

 

Anchorage, Alaska(2)

 

62

 

258,000

 

17,000

 

Alaska Department of Transportation and Public Facilities

 

2023

 

Subic Bay, Philippines(3)

 

18

 

316,000

 

22,000

 

Subic Bay Metropolitan Authority

 

2010

 

Paris, France(4)

 

87

 

861,000

 

48,000

 

Aeroports de Paris

 

2029

 

 

(1) Documents and packages.

(2) Handles international express package and freight shipments to and from Asia, Europe and North America.

(3) Handles intra-Asia express package and freight shipments, as well as international express package and freight shipments to and from Asia.

(4) Handles intra-Europe express package and freight shipments, as well as international express package and freight shipments to and from Europe.

FedEx Express’s facilities at the Memphis International Airport also include aircraft maintenance hangars, flight training and fuel facilities, administrative offices and warehouse space. FedEx Express leases these facilities from the Memphis-Shelby County Airport Authority (the “Authority”) under several leases. The leases cover land, administrative and sorting buildings, other facilities, ramps and certain related equipment. FedEx Express has the option to purchase certain equipment (but not buildings or improvements to real estate) leased under such leases at the end of the lease term for a nominal sum. The leases obligate FedEx Express to maintain and insure the leased property and to pay all related taxes, assessments and other charges. The leases are subordinate to, and FedEx Express’s rights thereunder could be affected by, any future lease or agreement between the Authority and the U.S. Government.

24




FedEx Express has major international sorting and freight handling facilities located at Narita Airport in Tokyo, Japan, Stansted Airport outside London, England and Pearson Airport in Toronto, Canada. FedEx Express also has a substantial presence at Chek Lap Kok Airport in Hong Kong, CKS International Airport in Taiwan, Dubai, United Arab Emirates, Frankfurt, Germany and Miami International Airport.

Administrative and Other Properties and Facilities

The World Headquarters of FedEx Express are located in southeastern Shelby County, Tennessee. The headquarters campus, which comprises eight separate buildings with more than 1.1 million square feet of space, houses approximately 1,800 employees. FedEx Express also has facilities housing administrative and technical operations on approximately 200 acres adjacent to the Memphis International Airport. Of the eight buildings located on this site, four are subject to long-term leases and the other four are owned by FedEx Express. FedEx Express also leases approximately 30 facilities in the Memphis area for administrative offices and warehouses. FedEx Express leases state-of-the-art technology centers in Collierville, Tennessee, Irving, Texas, Colorado Springs, Colorado, and Orlando, Florida. These facilities house FedEx Express personnel and FedEx Services personnel responsible for strategic software development and other functions that support FedEx’s technology and e-commerce solutions.

FedEx Express owns or leases 673 facilities for city station operations in the United States. In addition, 226 city stations are owned or leased throughout FedEx Express’s international network. The majority of these leases are for terms of five to ten years. City stations serve as the sorting and distribution center for a particular city or region. We believe that suitable alternative facilities are available in each locale on satisfactory terms, if necessary.

As of May 31, 2005, FedEx Express had approximately 40,100 Drop Boxes, including 5,000 Drop Boxes outside U.S. Post Offices. As of May 31, 2005, FedEx Express also had approximately 8,900 FedEx Authorized ShipCenters and FedEx ShipSites, which are drop-off locations situated within certain retailers, such as OfficeMax, Staples and FedEx Kinko’s. Internationally, FedEx Express has approximately 2,900 drop-off locations.

FedEx Ground Segment

FedEx Ground’s corporate offices and information and data centers are located in the Pittsburgh, Pennsylvania, area in an approximately 500,000 square-foot building owned by FedEx Ground. As of May 31, 2005, FedEx Ground had 19,700 company-owned trailers and owned or leased 515 facilities, including 28 hubs. In addition, 18,000 owner-operated vehicles supported FedEx Ground’s business. Of the 302 facilities that support FedEx Home Delivery, 166 are co-located with existing FedEx Ground facilities. Leased facilities generally have terms of five years or less. The 28 hub facilities are strategically located to cover the geographic area served by FedEx Ground. These facilities average 225,000 square feet and range in size from 31,000 to 433,000 square feet.

 

25




FedEx Freight Segment

FedEx Freight’s corporate headquarters are located in Memphis, Tennessee. FedEx Freight also has administrative offices located in Harrison, Arkansas and San Jose, California. As of May 31, 2005, FedEx Freight operated approximately 39,500 vehicles and trailers and 321 service centers, which are strategically located to provide service to virtually all U.S. ZIP Codes. These facilities range in size from 600 to 220,400 square feet of office and dock space. FedEx Custom Critical’s headquarters are located in Green, Ohio.

FedEx Kinko’s Segment

FedEx Kinko’s corporate headquarters are located in Dallas, Texas in leased facilities. As of May 31, 2005, FedEx Kinko’s operated approximately 1,440 locations, including 147 locations in ten foreign countries, and 39 commercial production centers. Substantially all FedEx Kinko’s Office and Print Centers and Ship Centers are leased, generally for terms of five to ten years with varying renewal options. FedEx Kinko’s Office and Print Centers and Ship Centers are generally located in strip malls, office buildings or stand-alone structures and average approximately 5,200 square feet in size.

ITEM 3.    LEGAL PROCEEDINGS

FedEx and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business. For a description of material pending legal proceedings, see Note 19 of the accompanying consolidated financial statements.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of 2005.

EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers

Information regarding executive officers of FedEx is as follows (included herein pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K):

Name and Office

 

 

 

Age

 

Positions and Offices Held and Business Experience

Frederick W. Smith
Chairman, President and
Chief Executive Officer

 

60

 

Chairman, President and Chief Executive Officer of FedEx since January 1998; Chairman of FedEx Express since 1975; Chairman, President and Chief Executive Officer of FedEx Express from April 1983 to January 1998; Chief Executive Officer of FedEx Express from 1977 to January 1998; and President of FedEx Express from June 1971 to February 1975.

David J. Bronczek
President and Chief Executive Officer,
FedEx Express

 

51

 

President and Chief Executive Officer of FedEx Express since January 2000; Executive Vice President and Chief Operating Officer of FedEx Express from January 1998 to January 2000; Senior Vice President—Europe, Middle East and Africa of FedEx Express from June 1995 to January 1998; Senior Vice President—Europe, Africa and Mediterranean of FedEx Express from June 1993 to June 1995; Vice President—Canadian Operations of FedEx Express from February 1987 to March 1993; and several sales and operations managerial positions at FedEx Express from 1976 to 1987.

26




 

Robert B. Carter
Executive Vice President
and Chief Information
Officer

 

46

 

Executive Vice President and Chief Information Officer of FedEx since June 2000; Corporate Vice President and Chief Technology Officer of FedEx from February 1998 to June 2000; Vice President—Corporate Systems Development of FedEx Express from September 1993 to February 1998; Managing Director—Systems Development of FedEx Express from April 1993 to September 1993. Mr. Carter serves as a director of Saks Incorporated, a retailer operating luxury, specialty and traditional department stores.

Douglas G. Duncan
President and Chief
Executive Officer,
FedEx Freight

 

54

 

President and Chief Executive Officer of FedEx Freight since February 2001; President and Chief Executive Officer of Viking Freight, Inc. (“Viking Freight”) from November 1998 to February 2001; Senior Vice President—Sales and Marketing of Viking Freight from 1996 to November 1998; Vice President—Sales and Marketing of Caliber System, Inc. (“Caliber”) from 1995 to 1996; various positions with Roadway Express, Inc., including Vice President—Sales, from 1976 to 1995.

T. Michael Glenn
Executive Vice
President—Market
Development and
Corporate
Communications

 

49

 

Executive Vice President—Market Development and Corporate Communications of FedEx since January 1998; Senior Vice President—Marketing, Customer Service and Corporate Communications of FedEx Express from June 1994 to January 1998; Senior Vice President—Marketing and Corporate Communications of FedEx Express from December 1993 to June 1994; Senior Vice President—Worldwide Marketing Catalog Services and Corporate Communications of FedEx Express from June 1993 to December 1993; Senior Vice President—Catalog and Remail Services of FedEx Express from September 1992 to June 1993; Vice President—Marketing of FedEx Express from August 1985 to September 1992; and various management positions in sales and marketing and senior sales specialist of FedEx Express from 1981 to 1985. Mr. Glenn serves as a director of Deluxe Corporation, a provider of personal and business checks, business forms, labels, personalized stamps, fraud prevention services and customer retention programs.

27




 

Alan B. Graf, Jr.
Executive Vice President
and Chief Financial Officer

 

51

 

Executive Vice President and Chief Financial Officer of FedEx since January 1998; Executive Vice President and Chief Financial Officer of FedEx Express from February 1996 to January 1998; Senior Vice President and Chief Financial Officer of FedEx Express from December 1991 to February 1996; Vice President and Treasurer of FedEx Express from August 1987 to December 1991; and various management positions in finance and a senior financial analyst of FedEx Express from 1980 to 1987. Mr. Graf serves as a director of Kimball International, Inc., a furniture and electronic components manufacturer, as a director of Mid-America Apartment Communities Inc., a real estate investment trust that focuses on acquiring, constructing, developing, owning and operating apartment communities, and as a director of NIKE, Inc., a designer and marketer of athletic footwear, apparel, equipment and accessories for sports and fitness activities.

Gary M. Kusin
President and Chief
Executive Officer,
FedEx Kinko’s

 

54

 

President and Chief Executive Officer of FedEx Kinko’s since August 2001; and President and Chief Executive Officer of HQ Global Workplaces, Inc., a provider of full-service business office centers, from September 1998 to July 2001. In April 2002 HQ Global filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code and subsequently emerged from bankruptcy in October 2003. Mr. Kusin serves as a director of Electronic Arts Inc., a developer, marketer, publisher and distributor of interactive software games, and as a director of RadioShack Corporation, a consumer electronics specialty retailer.

Christine P. Richards
Executive Vice President,
General Counsel and
Secretary

 

50

 

Executive Vice President, General Counsel and Secretary of FedEx since June 2005; Corporate Vice President—Customer and Business Transactions of FedEx from March 2001 to June 2005; Senior Vice President and General Counsel of FedEx Services from March 2000 to June 2005; Staff Vice President—Customer and Business Transactions of FedEx from November 1999 to March 2001; Vice President—Customer and Business Transactions of FedEx Express from 1998 to November 1999; and various legal positions with FedEx Express from 1984 to 1998.

28




 

Daniel J. Sullivan
President and Chief
Executive Officer,
FedEx Ground

 

59

 

President and Chief Executive Officer of FedEx Ground since January 1998; Chairman, President and Chief Executive Officer of Caliber from January 1996 to January 1998; Chairman, President and Chief Executive Officer of Roadway Services, Inc. (“Roadway”) from October 1995 to January 1996; President and Chief Executive Officer of Roadway from August 1995 to October 1995; President and Chief Operating Officer of Roadway from January 1994 to August 1995; Senior Vice President and President of National Carrier Group of Roadway during 1993; Vice President and President—National Carrier Group of Roadway during 1992; Vice President and Group Executive of Roadway from July 1990 through 1991; and President of RPS, Inc. through June 1990. Mr. Sullivan serves as a director of Computer Task Group, Incorporated, a provider of information technology application management, consulting, software development and integration and staffing solutions.

 

Executive officers are elected by, and serve at the discretion of, the Board of Directors. There is no arrangement or understanding between any executive officer and any person, other than a director or executive officer of FedEx or of any of its subsidiaries acting in his or her official capacity, pursuant to which any executive officer was selected. There are no family relationships between any executive officer and any other executive officer or director of FedEx or of any of its subsidiaries.

29




PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

FedEx’s common stock is listed on the New York Stock Exchange under the symbol “FDX.”  As of July 11, 2005, there were 18,277 holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low sale prices, as reported on the NYSE, and the cash dividends paid per share of common stock.

 

 

Sale Prices

 

 

 

 

 

High

 

Low

 

Dividend

 

Fiscal Year Ended May 31, 2004

 

 

 

 

 

 

 

 

 

First Quarter

 

$

68.96

 

$

59.01

 

 

$

0.05

 

 

Second Quarter

 

78.05

 

63.70

 

 

0.05

 

 

Third Quarter

 

75.15

 

64.84

 

 

0.06

 

 

Fourth Quarter

 

76.07

 

65.88

 

 

0.06

 

 

Fiscal Year Ended May 31, 2005

 

 

 

 

 

 

 

 

 

First Quarter

 

$

83.47

 

$

72.28

 

 

$

0.07

 

 

Second Quarter

 

96.63

 

81.88

 

 

0.07

 

 

Third Quarter

 

100.92

 

89.75

 

 

0.07

 

 

Fourth Quarter

 

101.87

 

83.11

 

 

0.07

 

 

 

FedEx also paid a cash dividend on July 1, 2005 ($0.08 per share). We expect to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by our Board of Directors. We intend to evaluate the dividend payment amount on an annual basis at the end of each fiscal year.

There are no material restrictions on our ability to declare dividends, nor are there any material restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances.

FedEx did not repurchase any of its common stock during the fourth quarter of 2005.

ITEM 6.   SELECTED FINANCIAL DATA

Selected financial data as of and for the five years ended May 31, 2005 is presented on page 106 of this Annual Report on Form 10-K.

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Management’s discussion and analysis of results of operations and financial condition is presented on pages 36 through 66 of this Annual Report on Form 10-K.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative information about market risk is presented on page 105 of this Annual Report on Form 10-K.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FedEx’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 12, 2005 thereon, are presented on pages 69 through 104 of this Annual Report on Form 10-K.

30




ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.   CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective, as of May 31, 2005 (the end of the period covered by this Annual Report on Form 10-K).

Assessment of Internal Control Over Financial Reporting

Management’s report on our internal control over financial reporting is presented on page 67 of this Annual Report on Form 10-K. The report of Ernst & Young LLP with respect to management’s assessment of internal control over financial reporting is presented on page 68 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

During our fiscal quarter ended May 31, 2005, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.   OTHER INFORMATION

None.

PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding members of the Board of Directors and FedEx’s Code of Business Conduct & Ethics will be presented in FedEx’s definitive proxy statement for its 2005 annual meeting of stockholders, which will be held on September 26, 2005, and is incorporated herein by reference. Information regarding executive officers of FedEx is included above in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant” pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K. Information regarding FedEx’s Code of Business Conduct & Ethics is included above in Part I, Item 1 of this Annual Report on Form 10-K under the caption “Reputation and Responsibility — Governance.”

ITEM 11.   EXECUTIVE COMPENSATION

Information regarding executive compensation will be presented in FedEx’s definitive proxy statement for its 2005 annual meeting of stockholders, which will be held on September 26, 2005, and is incorporated herein by reference.

31




ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and management and related stockholder matters will be presented in FedEx’s definitive proxy statement for its 2005 annual meeting of stockholders, which will be held on September 26, 2005, and is incorporated herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related party transactions will be presented in FedEx’s definitive proxy statement for its 2005 annual meeting of stockholders, which will be held on September 26, 2005, and is incorporated herein by reference.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

Information regarding principal accountant fees and services will be presented in FedEx’s definitive proxy statement for its 2005 annual meeting of stockholders, which will be held on September 26, 2005, and is incorporated herein by reference.

PART IV

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2)  Financial Statements; Financial Statement Schedules

FedEx’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 12, 2005 thereon, are listed on page 35 and presented on pages 69 through 104 of this Annual Report on Form 10-K. FedEx’s “Schedule II — Valuation and Qualifying Accounts,” together with the report of Ernst & Young LLP dated July 12, 2005 thereon, is presented on pages 108 through 109 of this Annual Report on Form 10-K. All other financial statement schedules have been omitted because they are not applicable or the required information is included in FedEx’s consolidated financial statements or the notes thereto.

(a)(3) Exhibits

See the Exhibit Index on pages E-1 through E-9 for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.

32




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

FEDEX CORPORATION

Dated: July 14, 2005

By:

/s/ FREDERICK W. SMITH

 

 

Frederick W. Smith

 

 

Chairman, President and

 

 

Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature

 

 

 

Capacity

 

 

 

Date

 

 

/s/ FREDERICK W. SMITH

Frederick W. Smith

 

Chairman, President and Chief Executive Officer and Director
(Principal Executive Officer)

 

July 14, 2005

/s/ ALAN B. GRAF, JR.

Alan B. Graf, Jr.

 

Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)

 

July 14, 2005

/s/ JOHN L. MERINO

John L. Merino

 

Corporate Vice President and Principal
Accounting Officer
(Principal Accounting Officer)

 

July 14, 2005

/s/ JAMES L. BARKSDALE*

James L. Barksdale

 

Director

 

July 14, 2005

/s/ AUGUST A. BUSCH IV*

August A. Busch IV

 

Director

 

July 14, 2005

/s/ JOHN A. EDWARDSON*

John A. Edwardson

 

Director

 

July 14, 2005

/s/ JUDITH L. ESTRIN*

Judith L. Estrin

 

Director

 

July 14, 2005

/s/ J. KENNETH GLASS*

J. Kenneth Glass

 

Director

 

July 14, 2005

/s/ PHILIP GREER*

Philip Greer

 

Director

 

July 14, 2005

33




 

/s/ J. R. HYDE, III*

J. R. Hyde, III

 

Director

 

July 14, 2005

/s/ SHIRLEY ANN JACKSON*

Shirley Ann Jackson

 

Director

 

July 14, 2005

/s/ CHARLES T. MANATT*

Charles T. Manatt

 

Director

 

July 14, 2005

/s/ JOSHUA I. SMITH*

Joshua I. Smith

 

Director

 

July 14, 2005

/s/ PAUL S. WALSH*

Paul S. Walsh

 

Director

 

July 14, 2005

/s/ PETER S. WILLMOTT*

Peter S. Willmott

 

Director

 

July 14, 2005

 

*By:

 

/s/ JOHN L. MERINO

John L. Merino
Attorney-in-Fact

 

 

 

July 14, 2005

 

 

34




FINANCIAL SECTION TABLE OF CONTENTS:

 

Page

 

Management’s Discussion and Analysis

 

 

 

 

 

Overview of Financial Section

 

 

36

 

 

Results of Operations

 

 

37

 

 

New Accounting Pronouncements

 

 

42

 

 

Reportable Segment Results

 

 

42

 

 

Liquidity

 

 

52

 

 

Capital Resources

 

 

54

 

 

Contractual Cash Obligations

 

 

55

 

 

Critical Accounting Policies and Estimates

 

 

57

 

 

Forward-Looking Statements

 

 

65

 

 

Consolidated Financial Statements

 

 

 

 

 

Management’s Report on Internal Control over Financial Reporting

 

 

67

 

 

Reports of Independent Registered Public Accounting Firm

 

 

68

 

 

Consolidated Balance Sheets
May 31, 2005 and 2004

 

 

70

 

 

Consolidated Statements of Income
Years Ended May 31, 2005, 2004 and 2003

 

 

72

 

 

Consolidated Statements of Cash Flows
Years Ended May 31, 2005, 2004 and 2003

 

 

73

 

 

Consolidated Statements of Changes in Stockholders’ Investment and Comprehensive Income
Years Ended May 31, 2005, 2004 and 2003

 

 

74

 

 

Notes to Consolidated Financial Statements

 

 

75

 

 

Other Financial Information

 

 

 

 

 

Quantitative and Qualitative Disclosures about Market Risk

 

 

105

 

 

Selected Financial Data

 

 

106

 

 

Report of Independent Registered Public Accounting Firm

 

 

108

 

 

Schedule II — Valuation and Qualifying Accounts

 

 

109

 

 

Computation of Ratio of Earnings to Fixed Charges

 

 

110

 

 

 

 

35




MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

OVERVIEW OF FINANCIAL SECTION

The financial section of the FedEx Corporation (also referred to as “FedEx”) Annual Report on Form 10-K (“Annual Report”), consists of this Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”), the Consolidated Financial Statements and the notes to the Consolidated Financial Statements, and Other Financial Information, which include information about our significant accounting policies, practices and the transactions that underlie our financial results. The following MD&A describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and the critical accounting policies and estimates of FedEx. The discussion in the financial section should be read in conjunction with the other sections of this Annual Report, particularly “Item 1: Business.”

ORGANIZATION OF INFORMATION

Our MD&A is comprised of three major sections: Results of Operations, Financial Condition and Critical Accounting Policies and Estimates. These sections include the following information:

·       Results of Operations includes an overview of consolidated 2005 results compared to 2004, and 2004 results compared to 2003. This section also includes a discussion of key actions and events that impacted our results, as well as a discussion of our outlook for 2006.

·       The overview is followed by a financial summary and analysis (including a discussion of both historical operating results and our outlook for 2006) for each of our four reportable business segments.

·       The financial condition of FedEx is reviewed through an analysis of key elements of our liquidity, capital resources and contractual cash obligations, including a discussion of our cash flows statements and our financial commitments.

·       We conclude with a discussion of the critical accounting policies and estimates that we believe are important to understanding certain of the material judgments and assumptions incorporated in our reported financial results.

DESCRIPTION OF BUSINESS

FedEx provides a broad portfolio of transportation, e-commerce and business services through operating companies that compete collectively and are managed collaboratively under the respected FedEx brands. These operating companies are primarily represented by FedEx Express, the world’s largest express transportation company; FedEx Ground, a leading provider of small-package ground delivery services; FedEx Freight, a leading U.S. provider of regional LTL freight services; and FedEx Kinko’s, a leading provider of document solutions and business services, which was formed following the acquisition of Kinko’s, Inc. on February 12, 2004. These companies form the core of our reportable segments. See “Reportable Segments” for further discussion and refer to “Item 1: Business” for a more detailed description of each of our operating companies.

The key indicators necessary to understand our operating results include:

·       the overall customer demand for our various services;

·       the volumes of transportation and business services provided through our networks, primarily measured by our average daily volume and shipment weight;

·       the mix of services purchased by our customers;

36




·       the prices we obtain for our services, primarily measured by average price per shipment (yield); and

·       our ability to manage our cost structure for capital expenditures and operating expenses such as salaries and benefits, fuel and maintenance and to match such expenses to shifting volume levels.

Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2005 or ended May 31 of the year referenced and comparisons are to the prior year.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in millions, except per share amounts) for the years ended May 31:

 

 

 

 

 

 

 

 

Dollar Change

 

Percent Change

 

 

 

 

 

 

 

 

 

2005/

 

2004/

 

2005/

 

2004/

 

 

 

2005(1)

 

2004(2)

 

2003

 

2004

 

2003

 

2004

 

2003

 

Revenues

 

$

29,363

 

$

24,710

 

$

22,487

 

4,653

 

2,223

 

19

 

10

 

Operating income

 

$

2,471

 

$

1,440

 

$

1,471

 

1,031

 

(31

)

72

 

(2

)

Operating margin

 

8.4

%

5.8

%

6.5

%

NM

 

NM

 

260 bp

 

(70) bp

 

Net income(3)

 

$

1,449

 

$

838

 

$

830

 

611

 

8

 

73

 

1

 

Diluted earnings per share(3)

 

$

4.72

 

$

2.76

 

$

2.74

 

1.96

 

0.02

 

71

 

1

 

 

(1)  Includes $48 million ($31 million, net of tax, or $0.10 per diluted share) related to an Airline Stabilization Act charge described below.

(2)  Includes $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs described below. Also, see Note 5, to the accompanying consolidated financial statements.

(3)  2005 includes a $12 million, or $0.04 per diluted share benefit from an income tax adjustment described below. 2004 includes a $37 million, net of tax, or $0.12 per diluted share benefit related to a favorable ruling on a tax case and the reduction of our effective tax rate described below. Also see Note 12, to the accompanying consolidated financial statements.

The following table shows changes in revenues and operating income by reportable segment for 2005 compared to 2004, and 2004 compared to 2003 (in millions):

 

 

Dollar 

 

Percent

 

Dollar

 

Percent

 

 

 

Change

 

Change

 

Change

 

Change

 

 

 

 

 

 

 

Operating

 

Operating

 

 

 

Revenues

 

Revenues

 

Income

 

Income

 

 

 

2005/

 

2004/

 

2005/

 

2004/

 

2005/

 

2004/

 

2005/

 

2004/

 

 

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

FedEx Express segment

 

1,988

 

1,030

 

 

11

 

 

 

6

 

 

785

(1)

(154

)(2)

125

 

 

(20

)

 

FedEx Ground segment

 

770

 

329

 

 

20

 

 

 

9

 

 

82

 

28

 

16

 

 

6

 

 

FedEx Freight segment

 

528

 

246

 

 

20

 

 

 

10

 

 

110

 

51

 

45

 

 

26

 

 

FedEx Kinko’s segment

 

1,545

 

521

 

 

NM

 

 

 

NM

 

 

61

 

39

 

NM

 

 

NM

 

 

Other and Eliminations(3)

 

(178

)

97

 

 

NM

 

 

 

NM

 

 

(7

)

5

 

(117

)

 

NM

 

 

 

 

4,653

 

2,223

 

 

19

 

 

 

10

 

 

1,031

 

(31

)

72

 

 

(2

)

 

 

(1)  Includes $48 million related to an Airline Stabilization Act charge described below.

(2)  Includes $428 million of business realignment costs described below.

(3)  Includes the results of operations of FedEx Kinko’s from February 12, 2004 (date of acquisition) through February 29, 2004 (approximately $100 million of revenue and $6 million of operating income).

37




The following table shows selected operating statistics (in thousands, except yield amounts) for the years ended May 31:

 

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

 

 

Change

 

 

 

 

 

 

 

 

 

2005/

 

2004/

 

 

 

2005

 

2004

 

2003

 

2004

 

2003

 

Average daily package volume (ADV):

 

 

 

 

 

 

 

 

 

 

 

FedEx Express

 

3,259

 

3,167

 

3,121

 

3

 

1

 

FedEx Ground

 

2,609

 

2,285

 

2,168

 

14

 

5

 

Total ADV

 

5,868

 

5,452

 

5,289

 

8

 

3

 

Average daily LTL shipments:

 

 

 

 

 

 

 

 

 

 

 

FedEx Freight

 

63

 

58

 

56

 

9

 

4

 

Revenue per package (yield):

 

 

 

 

 

 

 

 

 

 

 

FedEx Express

 

$

20.10

 

$

18.55

 

$

17.69

 

8

 

5

 

FedEx Ground

 

6.68

 

6.48

 

6.25

 

3

 

4

 

LTL yield (revenue per hundredweight):

 

 

 

 

 

 

 

 

 

 

 

FedEx Freight

 

$

15.48

 

$

14.23

 

$

13.40

 

9

 

6

 

 

During 2005, revenue growth was attributable to volume and yield improvements across all transportation segments and the inclusion of FedEx Kinko’s for the full year. Combined volume growth in our package businesses increased 8%, the strongest growth rate experienced in several years. Yields improved primarily due to incremental jet and diesel fuel surcharges and rate increases.

Revenue growth during 2004 was attributable to increased volumes of FedEx Express International Priority (IP), FedEx Ground and FedEx Freight shipments, as well as strong growth of IP yields at FedEx Express. Yield improvements at FedEx Ground and FedEx Freight also contributed to 2004 revenue growth. In addition, FedEx Kinko’s (acquired on February 12, 2004) added $621 million of revenue during 2004.

During 2005, operating income increased primarily due to revenue growth in all transportation segments and improved margins at FedEx Express and FedEx Freight. FedEx Express benefited from the realization of a full year of savings from our 2004 business realignment programs (versus a half year in 2004), which reduced the growth in salaries, wages and benefits. Although our fuel costs increased significantly during 2005, higher revenues from our jet and diesel fuel surcharges at FedEx Express and FedEx Freight more than offset these higher fuel costs. In addition, reinstatement of a fuel surcharge at FedEx Ground during the third quarter of 2005 partially mitigated the impact of their higher fuel costs during the last two quarters of 2005.

Operating income decreased 2% in 2004 as costs related to our business realignment initiatives totaled $435 million (partially offset by approximately $150 million of savings). See “Business Realignment Costs” for a discussion of these costs and related savings. Higher incentive compensation and pension costs and base salary increases, as well as higher maintenance expenses, were offset by revenue growth and ongoing cost control efforts during the year.

Salaries and employee benefits expense increased 12% during 2005 primarily due to higher incentive compensation, a full twelve months of FedEx Kinko’s and increased medical costs. Incentive compensation increased approximately $170 million during 2005 primarily due to above-plan operating income at our transportation segments. Pension cost increased only $18 million in 2005 after a $115 million increase in 2004. Salaries and benefits expense increased 10% during 2004 due to higher incentive compensation and pension costs, wage rate increases and the acquisition of FedEx

38




Kinko’s. Incentive compensation increased approximately $240 million during 2004 due to above-plan operating income, primarily at FedEx Express and FedEx Freight.

Purchased transportation increased at a faster rate than revenue in 2005 reflecting higher fuel surcharges from third party transportation providers and increased use of contract carriers to support international express and domestic LTL volume growth. Other operating expenses increased disproportionately in 2005 primarily due to the inclusion of a full year of production supplies costs at FedEx Kinko’s.

Other Income and Expense and Income Taxes

Net interest expense increased $23 million during 2005. The increase in interest expense was primarily due to the full year effect of borrowings related to the FedEx Kinko’s acquisition and the impact on comparisons of a prior year favorable adjustment (the positive resolution of the tax case described below). Net interest expense decreased slightly in 2004 as the effects of the tax case described below offset increases to interest expense. These increases were due to the amendment of aircraft operating leases and the adoption of Financial Accounting Standards Board Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” which together resulted in eight MD11 aircraft being recorded as fixed assets and the related obligations being recorded as long-term debt. Interest expense in 2004 was also affected by additional borrowings related to the FedEx Kinko’s acquisition in February of 2004. Other expense also increased $14 million during 2005, primarily due to the write down of certain individually immaterial investments and foreign exchange transaction losses.

Our effective tax rate was 37.4% in 2005, 36.5% in 2004, and 38.0% in 2003. The 37.4% effective tax rate in 2005 was favorably impacted ($12 million tax benefit or $0.04 per diluted share) by the one-time reduction of a valuation allowance on foreign tax credits arising from certain of our international operations as a result of the passage of the American Jobs Creation Act of 2004 and by a lower effective state tax rate. The lower effective rate in 2004 was primarily attributable to the favorable decision in the tax case discussed below, stronger than anticipated international results and the results of tax audits during 2004. Our stronger than anticipated international results, along with other factors, increased our ability to credit income taxes paid to foreign governments on foreign income against U.S. income taxes on the same income, thereby mitigating the exposure to double taxation. For 2006, we expect the effective tax rate to be approximately 38%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

In February 2005, the Sixth Circuit Court of Appeals reaffirmed the favorable ruling from the U.S. District Court in Memphis regarding the tax treatment of jet engine maintenance costs, previously received during the first quarter of 2004. The period during which the U.S. Department of Justice could appeal the decision lapsed in May 2005, making the decision final. The district court held that these costs were ordinary and necessary business expenses and properly deductible in our income tax returns. Neither the Sixth Circuit’s decision nor the government’s decision not to pursue an appeal had any impact on our financial condition, results of operations or tax rate during 2005. As a result of the District Court ruling, we recognized a one-time benefit of $26 million, net of tax, or $0.08 per diluted share in the first quarter of 2004, primarily related to the reduction of accruals and the recognition of interest earned on amounts previously paid to the IRS. These adjustments affected both net interest expense ($30 million pre-tax) and income tax expense ($7 million). We expect to receive a refund payment of approximately $80 million (before income taxes of approximately $16 million) from the U.S. government in the first quarter of 2006, which is included in current receivables.

39




Business Realignment Costs

During the first half of 2004, voluntary early retirement incentives with enhanced pension and postretirement healthcare benefits were offered to certain groups of employees at FedEx Express who were age 50 or older. Voluntary cash severance incentives were also offered to eligible employees at FedEx Express. These programs were limited to eligible U.S. salaried staff employees and managers. Approximately 3,600 employees accepted offers under these programs. Costs were also incurred for the elimination of certain management positions, primarily at FedEx Express and FedEx Services, based on the staff reductions from the voluntary programs and other cost reduction initiatives. Costs for the benefits provided under the voluntary programs were recognized in the period that eligible employees accepted the offer. Other costs associated with business realignment activities were recognized in the period incurred.

We recognized $435 million of business realignment costs during 2004. No material costs for these programs were incurred in 2005. At May 31, 2004, we had remaining business realignment related accruals of $28 million. The remaining accruals relate to management severance agreements, which are payable over future periods. At May 31, 2005, these accruals had decreased to $7 million due predominantly to cash payments made in 2005.

Over the past few years, we have taken many steps to bring our expense growth in line with revenue growth, particularly at FedEx Express, while maintaining our industry-leading service levels. The business realignment programs were another step in this ongoing process of reducing our cost structure to increase our competitiveness, meet the future needs of our employees and provide the expected financial returns for our shareholders.

Airline Stabilization Act Charge

During the second quarter of 2005, the United States Department of Transportation (“DOT”) issued a final order in its administrative review of the FedEx Express claim for compensation under the Air Transportation Safety and System Stabilization Act (“Act”). Under its interpretation of the Act, the DOT determined that FedEx Express was entitled to $72 million of compensation, an increase of $3 million from its initial determination. Because we had previously received $101 million under the Act, the DOT demanded repayment of $29 million, which was made in December 2004. Because we could no longer conclude that collection of the entire $119 million of such compensation recorded in 2002 was probable, we recorded a charge of $48 million in the second quarter of 2005 ($31 million net of tax, or $0.10 per diluted share), representing the DOT’s repayment demand of $29 million and the write-off of a $19 million receivable. We are vigorously contesting this determination judicially and will continue to aggressively pursue our compensation claim. Should any additional amounts ultimately be recovered by FedEx Express on this matter, they will be recognized in the period that they are realized.

Outlook

Our outlook for 2006 is based on the expectation of continued, albeit slower, growth in the U.S. economy. While comparisons will be more difficult against a very strong 2005, we expect continued revenue and earnings growth across all FedEx operating companies. We also expect a stable global economy in 2006, supported by stable worldwide monetary policy and continued growth in corporate profitability in the U.S. and Asia.

Volatility in fuel costs may pressure quarterly earnings growth as the trailing impact of adjustments to the FedEx Express fuel surcharge can significantly affect earnings in the short term. Incremental costs associated with the new westbound around-the-world flight at FedEx Express will be significant in 2006, and a competitive pricing environment may limit base U.S. domestic yield

40




growth, particularly in our package businesses. U.S. domestic pension costs are expected to increase by more than $60 million in 2006 based on a declining discount rate.

Our management teams continue to examine additional cost reduction and operational productivity opportunities as we focus on optimizing our networks, improving our service offerings and enhancing the customer experience. These opportunities include initiatives to improve pick-up and delivery efficiency, increase cross-operating company collaboration, and manage the growth of employee salaries and benefits. During 2006, we expect continued strong growth of international volumes and yields at FedEx Express. We expect modest growth in U.S. domestic revenue at FedEx Express. We anticipate improved volumes and yields at FedEx Ground and FedEx Freight, as FedEx Ground continues its multi-year capacity expansion plan and FedEx Freight continues to grow its regional and interregional business and enhance its portfolio of services. We expect that FedEx Kinko’s will generate revenue growth from the transition of FedEx World Service Centers to FedEx Kinko’s Ship Centers, the growth of current lines of business and expansion of our retail network.

Investments in our highest margin service lines will accelerate in 2006 as we add incremental international routes, deploy new productivity-enhancing technologies and broaden the size of our aircraft fleet and sortation capacity to meet future growth. While these investments will increase costs, we still expect improvement in operating margin and cash flows in 2006.

The pilots of FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on May 31, 2004. In accordance with applicable labor law, we will continue to operate under our current agreement while we negotiate with our pilots. Contract negotiations with the pilots’ union began in March 2004 and are ongoing. We cannot estimate the financial impact, if any, the results of these negotiations may have on our future results of operations.

Increased security requirements for air cargo carriers have not had a material impact on our operating results for the periods presented. In November 2004, the Transportation Security Administration (“TSA”) proposed new rules enhancing many of the security requirements for air cargo on both passenger and all-cargo aircraft. Because the TSA’s proposed rules are subject to comment, any final rules may differ significantly from the proposed rules. Accordingly, it is not yet possible to estimate the impact, if any, that the adoption of new rules by the TSA or any other additional security requirements may have on our results of operations. However, it is possible that increased security requirements could impose substantial incremental costs on us and our competitors.

Future results will depend upon a number of factors, including U.S. and international economic conditions, the impact from any terrorist activities or international conflicts, our ability to match our cost structure and capacity with shifting volume levels, our ability to effectively leverage our new service and growth initiatives and our ability to successfully conclude contract negotiations with our pilots and defend against challenges to our independent contractor model described in Note 19 to the accompanying consolidated financial statements. In addition, adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, our operating income could be materially affected should the price of fuel suddenly change by a significant amount. See “Forward-Looking Statements” for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.

Seasonality of Business

Our businesses are seasonal in nature. The transportation and business services industries are affected directly by the state of the overall domestic and international economies. Seasonal fluctuations affect volumes, revenues and earnings. Historically, the U.S. express package business experiences an increase in volumes in late November and December. International business, particularly in the Asia to U.S. market, peaks in October and November due to U.S. holiday sales. Our

41




first and third fiscal quarters, because they are summer vacation and post winter-holiday seasons, have historically exhibited lower volumes relative to other periods. Normally, the fall is the busiest shipping period for FedEx Ground, while late December, June and July are the slowest periods. For FedEx Freight, the spring and fall are the busiest periods and the latter part of December, January and February are the slowest periods. For FedEx Kinko’s, the summer months are normally the slowest periods. Shipment levels, operating costs and earnings for each of our companies can also be adversely affected by inclement weather.

NEW ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, “Share-Based Payment.” SFAS 123R is a revision of SFAS 123 and supersedes APB 25. The new standard requires companies to record compensation expense for stock-based awards using a fair value method and is effective for annual periods beginning after June 15, 2005 (effective in 2007 for FedEx). Compensation expense will be recorded over the requisite service period, which is typically the vesting period of the award. We plan to adopt this standard using the modified prospective method.

The impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, as well as the assumptions and the fair value model used to value them, and the market value of our common stock. If applied to the years ended May 31, 2005 and 2004, the impact of that standard would have materially approximated that of SFAS 123 as presented in Note 1 to the accompanying consolidated financial statements (reducing earnings per diluted share in 2005 and 2004 by $0.12 and $0.08, respectively). SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. Based on historical experience, we do not expect the impact of adopting SFAS 123R to be material to our reported consolidated cash flows.

REPORTABLE SEGMENTS

FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s form the core of our reportable segments. (For further discussion of our operating companies, refer to “Item 1: Business.”) Our reportable segments include the following businesses:

FedEx Express Segment

FedEx Express (express transportation)

 

FedEx Trade Networks (global trade services)

FedEx Ground Segment

FedEx Ground (small-package ground delivery)

 

FedEx SmartPost (small-parcel consolidator)

 

FedEx Supply Chain Services (contract logistics)

FedEx Freight Segment

FedEx Freight (LTL freight transportation)

 

FedEx Custom Critical (time-critical transportation)

 

Caribbean Transportation Services (airfreight forwarding)

FedEx Kinko’s Segment

FedEx Kinko’s (document solutions and business services)

 

42




FedEx Services provides customer-facing sales, marketing and information technology support, primarily for FedEx Express and FedEx Ground. The costs for these activities are allocated based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the cost of providing these functions. The operating expenses line item “Intercompany charges” on the accompanying financial summaries of our reportable segments includes the allocations from FedEx Services to FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s. The “Intercompany charges” caption also include allocations for 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. Management evaluates segment financial performance based on operating income.

In addition, 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. Such inter-segment revenues and expenses are not separately identified in the following segment information as the amounts are not material and are eliminated in the consolidated results.

FEDEX EXPRESS SEGMENT

The following table compares revenues, operating expenses and operating income and margin (dollars in millions) for the years ended May 31:

 

 

 

 

 

 

 

 

Percent Change

 

 

 

2005

 

2004

 

2003

 

2005/2004

 

2004/2003

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Package:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. overnight box

 

$

5,969

 

$

5,558

 

$

5,432

 

 

7

 

 

 

2

 

 

U.S. overnight envelope

 

1,798

 

1,700

 

1,715

 

 

6

 

 

 

(1

)

 

U.S. deferred

 

2,799

 

2,592

 

2,510

 

 

8

 

 

 

3

 

 

Total U.S. domestic package revenue

 

10,566

 

9,850

 

9,657

 

 

7

 

 

 

2

 

 

International Priority (IP)

 

6,134

 

5,131

 

4,367

 

 

20

 

 

 

17

 

 

Total package revenue

 

16,700

 

14,981

 

14,024

 

 

11

 

 

 

7

 

 

Freight:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

1,854

 

1,609

 

1,564

 

 

15

 

 

 

3

 

 

International

 

381

 

393

 

400

 

 

(3

)

 

 

(2

)

 

Total freight revenue

 

2,235

 

2,002

 

1,964

 

 

12

 

 

 

2

 

 

Other(1)

 

550

 

514

 

479

 

 

7

 

 

 

7

 

 

Total revenues

 

19,485

 

17,497

 

16,467

 

 

11

 

 

 

6

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

7,704

 

7,403

 

7,001

 

 

4

 

 

 

6

 

 

Purchased transportation

 

843

 

694

 

609

 

 

21

 

 

 

14

 

 

Rentals and landing fees

 

1,608

 

1,531

 

1,557

 

 

5

 

 

 

(2

)

 

Depreciation and amortization

 

798

 

810

 

818

 

 

(1

)

 

 

(1

)

 

Fuel

 

2,012

 

1,343

 

1,231

 

 

50

 

 

 

9

 

 

Maintenance and repairs

 

1,276

 

1,193

 

1,087

 

 

7

 

 

 

10

 

 

Business realignment costs

 

 

428

 

 

 

NM

 

 

 

NM

 

 

Intercompany charges

 

1,509

 

1,442

 

1,328

 

 

5

 

 

 

9

 

 

Other

 

2,321

(2)

2,024

 

2,053

 

 

15

 

 

 

(1

)

 

Total operating expenses

 

18,071

 

16,868

(3)

15,684

 

 

7

 

 

 

8

 

 

Operating income

 

$

1,414

 

$

629

 

$

783

 

 

125

 

 

 

(20

)

 

Operating margin

 

7.3

%(2)

3.6

%(3)

4.8

%

 

 

 

 

 

 

 

 

 

(1)  Other revenues includes FedEx Trade Networks.

(2)  Includes $48 million related to an Airline Stabilization Act charge, described herein, which reduced operating margin by 25 basis points.

(3)  The $428 million of business realignment costs, described herein, reduced operating margin by 244 basis points.

43




The following table compares selected statistics (in thousands, except yield amounts) for the years ended May 31:

 

 

 

 

 

 

 

 

Percent Change

 

 

 

2005

 

2004

 

2003

 

2005/2004

 

2004/2003

 

Package Statistics(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average daily package volume (ADV):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. overnight box

 

1,184

 

1,179

 

1,176

 

 

 

 

 

 

 

U.S. overnight envelope

 

680

 

667

 

679

 

 

2

 

 

 

(2

)

 

U.S. deferred

 

958

 

925

 

897

 

 

4

 

 

 

3

 

 

Total U.S. domestic ADV

 

2,822

 

2,771

 

2,752

 

 

2

 

 

 

1

 

 

IP

 

437

 

396

 

369

 

 

10

 

 

 

7

 

 

Total ADV

 

3,259

 

3,167

 

3,121

 

 

3

 

 

 

1

 

 

Revenue per package (yield):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. overnight box

 

$

19.77

 

$

18.49

 

$

18.18

 

 

7

 

 

 

2

 

 

U.S. overnight envelope

 

10.37

 

10.00

 

9.95

 

 

4

 

 

 

1

 

 

U.S. deferred

 

11.46

 

10.99

 

11.02

 

 

4

 

 

 

 

 

U.S. domestic composite

 

14.69

 

13.94

 

13.82

 

 

5

 

 

 

1

 

 

IP

 

55.07

 

50.75

 

46.59

 

 

9

 

 

 

9

 

 

Composite package yield

 

20.10

 

18.55

 

17.69

 

 

8

 

 

 

5

 

 

Freight Statistics(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average daily freight pounds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

8,885

 

8,519

 

8,969

 

 

4

 

 

 

(5

)

 

International

 

1,914

 

2,093

 

2,174

 

 

(9

)

 

 

(4

)

 

Total average daily freight pounds

 

10,799

 

10,612

 

11,143

 

 

2

 

 

 

(5

)

 

Revenue per pound (yield):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

0.82

 

$

0.74

 

$

0.69

 

 

11

 

 

 

7

 

 

International

 

0.78

 

0.74

 

0.72

 

 

5

 

 

 

3

 

 

Composite freight yield

 

0.81

 

0.74

 

0.69

 

 

9

 

 

 

7

 

 

 

(1)  Package and freight statistics include only the operations of FedEx Express.

FedEx Express Segment Revenues

FedEx Express segment total revenues increased in 2005, principally due to higher IP revenues (particularly in Asia, U.S. outbound and Europe) and higher U.S. domestic package revenues. During 2005, IP revenues experienced solid growth of 20% on volume growth of 10% and a 9% increase in yield. Asia experienced strong average daily volume growth during 2005 while outbound shipments from the United States, Europe and Latin America continued to improve. IP yield increased across all regions during 2005 due to higher fuel surcharge revenue, an increase in international average weight per package and favorable exchange rate differences, partially offset by a decline in international average rate per pound.

U.S. domestic composite yield increased 5% in 2005, due to higher fuel surcharge revenue and increases in average weight per package and average rate per pound. U.S. domestic volumes at FedEx Express increased 2% in 2005 after several years of flat to negative growth. Freight revenue increased during 2005 due to higher yields and growth in U.S. domestic freight volumes, which more than offset the effect of lower international freight volumes. As capacity is added to our international network, we may see higher international freight volume until higher yielding IP shipment traffic grows into the added capacity. We continue to prioritize sales efforts to fill space on international flights with higher yielding IP shipments. In January 2005, we implemented an average list price increase of 4.6%

44




on FedEx Express U.S. domestic shipments and U.S. outbound international shipments, while we lowered our fuel surcharge index by 2%.

FedEx Express segment total revenues increased 6% in 2004, principally due to higher IP revenues in Asia, Europe and U.S. outbound. IP revenues increased significantly on volume growth of 7% and yield growth of 9%. Asia experienced strong average daily volume growth, while outbound shipments from Europe, the United States and Latin America continued to improve. The increase in IP yield was largely attributable to Europe. The composite yield increase was primarily due to higher average weight per package, favorable exchange rate differences and higher fuel surcharge revenue.

U.S. domestic package revenue increased 2% in 2004 as both volumes and yields grew slightly. For U.S. domestic composite yield, a small decline in average rate per pound was offset by increases in average weight per package and fuel surcharge revenue. For U.S. domestic shipments and U.S. outbound international shipments, an average list price increase of 2.5%, along with certain surcharge increases, became effective January 2004. Freight revenue increased in 2004 due to increased yields related to service mix, despite lower volumes.

Fuel surcharge revenue increased in both 2005 and 2004 primarily due to higher jet fuel prices. Our fuel surcharge is indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the years ended May 31:

 

 

2005

 

2004

 

2003

 

U.S. Domestic and Outbound Fuel Surcharge

 

 

 

 

 

 

 

Low

 

6.00

%

3.00

%

2.00

%

High

 

13.00

 

6.50

 

5.50

 

Average

 

8.96

 

4.38

 

3.54

 

International Fuel Surcharges

 

 

 

 

 

 

 

Low

 

3.00

 

2.00

 

 

High

 

13.00

 

6.50

 

6.00

 

Average

 

8.60

 

3.97

 

3.08

 

 

FedEx Express Segment Operating Income

Operating income at the FedEx Express segment increased significantly during 2005 as we benefited from a full year of savings from our business realignment programs (versus a half year in 2004.) During 2004, operating income included $428 million of costs related to these programs. The savings from these programs were reflected in lower growth of salaries and employee benefits costs in 2005. During 2005, increases in revenues, savings from our business realignment programs, the timing of adjustments to fuel surcharges and ongoing cost control efforts more than offset higher fuel costs, incentive compensation, purchased transportation and maintenance costs and an Airline Stabilization Act charge of $48 million (included in other operating expenses). During 2004, operating income decreased 20% due to business realignment costs (partially offset by approximately $150 million of savings). Higher incentive compensation and pension costs and base salary increases, as well as higher maintenance expenses, were offset by revenue growth and ongoing cost control efforts during the year.

Salaries and benefits were higher during 2005 due to higher incentive compensation, increased medical benefit costs and wage rate increases. The increase in 2004 was due to higher incentive compensation, increased pension costs and wage rate increases. The increases in both 2005 and 2004 were partially offset by savings from the business realignment initiatives.

45




Purchased transportation costs increased at a greater rate than total revenues in both 2005 and 2004, led by IP volume growth requirements and higher utilization of contract pickup and delivery services. Higher fuel costs incurred by these transportation providers were partially passed through and included as part of purchased transportation costs which also led to the disproportionate increase in 2005. Higher maintenance costs during 2005 were driven by higher utilization of aircraft and a higher average age of certain types of our aircraft. Other expense increased due primarily to the Airline Stabilization Act charge of $48 million, higher aviation insurance expense and increased expenses to support volume growth. The 2004 increase in maintenance costs was primarily due to the timing of scheduled aircraft maintenance events, higher utilization of aircraft related to USPS volumes (included in U.S. freight revenues) and a higher average age of certain types of aircraft. Intercompany charges increased during both 2005 and 2004 due to higher salaries and benefits and advertising and promotion expenses at FedEx Services.

During 2005, fuel costs were higher due to a 47% increase in the average price per gallon of aircraft fuel, while gallons consumed increased 4%. Fuel costs were higher in 2004 due to a 10% increase in the average price per gallon of aircraft fuel, as fuel consumption was flat. However, fuel surcharge revenue more than offset higher jet fuel prices in both 2005 and 2004.

Rentals and landing fees decreased in 2004 due to the amendment of operating leases for six MD11 aircraft that resulted in these aircraft being recorded as fixed assets under capital lease. In addition, as discussed in Note 17 to the accompanying consolidated financial statements, two additional MD11s were recorded as fixed assets at September 1, 2003 as a result of the adoption of FIN 46. Depreciation and amortization expense decreased in both 2005 and 2004, reflecting lower capital spending over the past several years.

FedEx Express Segment Outlook

We expect continued revenue growth at FedEx Express during 2006 in both the domestic and international markets. Revenue increases will be led by IP, where we expect volume and yield growth, particularly in Asia, U.S. outbound and Europe. We expect slight U.S. domestic revenue growth at FedEx Express, driven by expected increases in U.S. domestic yields.

We expect continued operating margin improvement at FedEx Express during 2006. We anticipate additional improvement due to IP volume growth, with solid incremental margins and increased yields benefiting from a favorable product mix trend. In addition, programs to improve operational efficiency are expected to contribute to margin growth, partially offset by costs associated with international route expansion. Capital expenditures at FedEx Express are expected to be higher in 2006 due to planned aircraft purchases to support IP volume growth and vehicle replacements.

FedEx Express recently launched the express industry’s first direct flight from mainland China to Europe. The westbound around-the-world flight launched in late 2005 was the initial phase of a plan which extends our global connectivity leadership. We believe these investments will enhance our growth prospects for these highly profitable services.

46




FEDEX GROUND SEGMENT

The following table compares revenues, operating expenses and operating income and margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the years ended May 31:

 

 

 

 

 

 

 

 

Percent Change

 

 

 

2005

 

2004

 

2003

 

2005/2004

 

2004/2003

 

Revenues

 

$

4,680

 

$

3,910

 

$

3,581

 

 

20

 

 

 

9

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

845

 

740

 

709

 

 

14

 

 

 

4

 

 

Purchased transportation

 

1,791

 

1,465

 

1,327

 

 

22

 

 

 

10

 

 

Rentals

 

122

 

98

 

88

 

 

24

 

 

 

11

 

 

Depreciation and amortization

 

176

 

154

 

155

 

 

14

 

 

 

(1

)

 

Fuel

 

48

 

16

 

11

 

 

200

 

 

 

45

 

 

Maintenance and repairs

 

110

 

95

 

89

 

 

16

 

 

 

7

 

 

Business realignment costs

 

 

1

 

 

 

NM

 

 

 

NM

 

 

Intercompany charges

 

482

 

432

 

346

 

 

12

 

 

 

25

 

 

Other

 

502

 

387

 

362

 

 

30

 

 

 

7

 

 

Total operating expenses

 

4,076

 

3,388

 

3,087

 

 

20

 

 

 

10

 

 

Operating income

 

$

604

 

$

522

 

$

494

 

 

16

 

 

 

6

 

 

Operating margin

 

12.9

%

13.4

%

13.8

%

 

 

 

 

 

 

 

 

Average daily package volume(1)

 

2,609

 

2,285

 

2,168

 

 

14

 

 

 

5

 

 

Revenue per package (yield)(1)

 

$

6.68

 

$

6.48

 

$

6.25

 

 

3

 

 

 

4

 

 

 

(1)  Package statistics include only the operations of FedEx Ground.

FedEx Ground Segment Revenues

Revenues increased during 2005 principally due to strong volume growth. While the rise in average daily volume was led by continued growth of our home delivery service, average daily volumes increased across virtually all of our service lines. The results of operations of FedEx SmartPost have been included from the date of its acquisition, September 12, 2004, and contributed nominally to revenue growth in 2005.

Revenue growth in 2004 was due to higher volumes and yield improvement, led by increased usage of our home delivery service. Average daily volume increased at a lower rate in 2004 due to a difficult year-over-year comparison, as first quarter 2003 volume included an estimated 140,000 to 150,000 daily packages as a result of the threat of a UPS work stoppage.

Yield increased during 2005 primarily due to higher extra service revenue and general rate increases, partially offset by higher customer discounts and a lower average weight per package. In January 2005, we implemented an average list price increase of 2.9%. Additionally, we reintroduced an indexed fuel surcharge for all shipments effective January 3, 2005. The fuel surcharge had been previously discontinued on January 5, 2004.

Yield increased in 2004 primarily due to general rate increases and an increase in extra services revenue, partially offset by higher customer discounts and the elimination of the fuel surcharge in January.

FedEx Ground reintroduced an indexed fuel surcharge in January 2005 that ranged between 1.8% and 2.5% and averaged 2.0% during 2005. Before its elimination in January 2004, our dynamic

47




fuel surcharge ranged between 1.3% and 1.5% and averaged 1.4% during 2004. In 2003, the dynamic fuel surcharge ranged between 0.8% and 2.0% and averaged 1.2%.

On September 12, 2004, we acquired the assets and assumed certain liabilities of FedEx SmartPost (formerly known as Parcel Direct), a division of a privately held company, for $122 million in cash. FedEx SmartPost is a leading small-parcel consolidator and broadens our portfolio of services by allowing us to offer a cost effective option for delivering low-weight, less time-sensitive packages to U.S. residences through the U.S. Postal Service. The financial results of FedEx SmartPost are included in the FedEx Ground segment from the date of its acquisition and were not material to 2005 results.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 16% during 2005 as revenue growth and field productivity more than offset higher operating expenses. Purchased transportation increased at a higher rate than revenue primarily due to the impact of higher fuel costs on contractor settlements, the acquisition of FedEx SmartPost and a change in the mix of business at FedEx Supply Chain Services. Salaries and employee benefits, as well as other operating costs, increased at a faster rate in 2005 principally due to increases in staffing and facilities to support volume growth. Intercompany charges increased during 2005 due to higher salaries, advertising and promotion expenses and incentive compensation at FedEx Services. During 2005, FedEx Supply Chain Services incurred a $10 million charge in other operating expenses for the termination of a vendor agreement. The decrease in operating margin is primarily attributable to operating losses at FedEx SmartPost, the increase in purchased transportation and the one-time charge associated with FedEx Supply Chain Services.

Operating income increased in 2004 due to volume growth, yield improvements and increased productivity. These gains were partially offset by higher intercompany charges, increased healthcare and pension costs and expenses related to terminal expansions and relocations. FedEx Ground utilized a larger portion of allocated sales, marketing, information technology and customer support resources, and their allocation of these costs increased accordingly. Furthermore, the cost of providing these services increased due to higher salaries and benefits, advertising and promotions expenses at FedEx Services. Operating margin for the segment was also negatively affected by operating losses at FedEx Supply Chain Services.

FedEx Ground Segment Outlook

We expect the FedEx Ground segment to have continued revenue growth in 2006, led by increased home delivery and next-business day package volume and modest yield improvement. Yield improvements are expected from list price increases, improvement in residential and commercial delivery area surcharges and the full year of the fuel surcharge.

Slight growth in operating margin is expected in 2006, driven by productivity gains and yield improvements. During 2006, we expect continued growth in capital spending at FedEx Ground as we continue to focus on network capacity expansion. During 2006, the multi-phase expansion plan includes the addition of one new hub, five hub expansions and relocations of 35 ground and 16 home delivery facilities. We will continue to vigorously defend challenges to our independent contractor model as described in Note 19 to the accompanying consolidated financial statements.

48




FEDEX FREIGHT SEGMENT

The following table shows revenues, operating expenses and operating income and operating margin (dollars in millions) and selected statistics for the years ended May 31:

 

 

 

 

 

 

 

 

Percent change

 

 

 

2005

 

2004

 

2003

 

2005/2004

 

2004/2003

 

Revenues

 

$

3,217

 

$

2,689

 

$

2,443

 

 

20

 

 

 

10

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

1,650

 

1,427

 

1,303

 

 

16

 

 

 

10

 

 

Purchased transportation

 

315

 

254

 

224

 

 

24

 

 

 

13

 

 

Rentals and landing fees

 

99

 

100

 

105

 

 

(1

)

 

 

(5

)

 

Depreciation and amortization

 

102

 

92

 

88

 

 

11

 

 

 

5

 

 

Fuel

 

257

 

172

 

154

 

 

49

 

 

 

12

 

 

Maintenance and repairs

 

128

 

116

 

115

 

 

10

 

 

 

1

 

 

Intercompany charges

 

26

 

21

 

17

 

 

24

 

 

 

24

 

 

Other

 

286

 

263

 

244

 

 

9