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    The New FedEx Leading the Way Annual Report 02


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    Percent In millions, except earnings per share 2002 2001 Change OPERATING RESULTS Revenues $20,607 $ 19,629 + 5 Operating income 1,321 1,071 + 23 Operating margin 6.4% 5.5% Net income 710 584 + 22 Diluted earnings per common share $ 2.34 $ 1.99 + 18 Diluted earnings per common share, excluding nonrecurring items 1 $ 2.39 $ 2.26 + 6 Average common and common equivalent shares 303 293 + 3 EBITDA, as adjusted 2 $ 2,662 $ 2,347 + 13 Capital expenditures 1,615 1,893 – 15 Free cash flow 3 616 (69) FINANCIAL POSITION Total assets $13,812 $ 13,392 + 3 Long-term debt, including current por tion 1,806 2,121 – 15 Common stockholders’ investment 6,545 5,900 + 11 14.6 % 14.6 % $ 2.32 13.5 % $ 2.34 $ 2.10 $ 20.6 $ 1.99 11.4 % 10.9 % $ 19.6 $ 18.3 $ 1.69 $ 16.8 $ 15.9 ’98 ’99 ’00 ’01 ’02 ’98 ’99 ’00 ’01 ’02 ’98 ’99 ’00 ’01 ’02 revenues (in billions) diluted earnings per common share return on average equity 29.3 % 27.1 % 26.4 % 22.8 % $ 2.3 $ 2.3 $ 2.7 21.6 % $ 2.4 $ 2.0 $ 1.9 $ 2.3 $ 2.2 $ 2.0 $ 1.6 ’98 ’99 ’00 ’01 ’02 ’98 ’99 ’00 ’01 ’02 ’98 ’99 ’00 ’01 ’02 EBITDA, as adjusted (in billions) 2 capital expenditures (in billions) 4 debt to total capitalization 1 Nonrecurring items for 2002 include an accounting change impairment charge of $25 million ($15 million net of tax or $.05 per share) resulting from the adop- tion of new rules from t he Financial Accounting Standards Board for t he treatment of goodw ill and intangible assets. Nonrecurring items for 2001 include primarily noncash charges of $124 million ($78 million net of tax or $0.27 per share) associated w ith the cur tailing of cer tain aircraft modification and develop- ment programs and the reorganizing of operations at FedEx Supply Chain Services, Inc. 2 Represents earnings before goodw ill accounting change, interest, taxes, depreciation and amor tization. 3 Represents net cash provided by operating activities less net cash used in investing activities. 4 Represents actual cash expenditures plus the equivalent amount of cash that w ould have been expended for the acquisition of assets (principally aircraft), w hose use w as obtained through operating leases (leases w ith terms in excess of 50% of the asset’s useful life) entered into during the period.


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    fedex annual report 2002 L EA D I N G T H E W A Y Leading the Way At FedEx, leading the w ay comes naturally. We originated the modern air/ ground express industry. We invented the concept of time-critical expedited delivery. We were the first to use bar code labeling in the ground transportation industry and the first express company to offer time-definite freight service. And yet, today, FedEx is so much more. M ore services. M ore technology. All backed by more than 214,000 employees and contractors w ho are more focused than ever on meeting customer needs – about five million times a day. As today’s FedEx, w e’re proud to be one of the w orld’s most admired companies. We’re proud to be recognized as a great place to w ork. M ost of all, we’re proud to continue leading the w ay for our customers, our investors, our employees and our communities. 1 ––


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    “ At FedEx, we pride ourselves on being agile in the marketplace, anticipating opportunities and capitalizing on the unexpected.” LETTER FROM THE CEO Dear Fellow Shareholders, In addition, w e produced $616 million in free cash flow – a significant milestone for our company This past fiscal year, a w eakened economy, 9/ 11 and other And, for the first time in our history, w e declared a quarterly unsettling w orld events made everyone in boardrooms to shopping aisles dividend of $0.05 per share on our common stock. This dividend reflects more cautious of w hat lay ahead. our confidence in the company’s future and in its unique role in the How ever, w hether the economy is up or dow n, at FedEx w e global economy. pride ourselves on being agile in the marketplace, anticipating opportuni- We have taken significant steps to reduce overhead, increase ties and capitalizing on the unexpected. The reason w e can flex w ith productivit y and tightly focus our sales and marketing ef forts. These changing market conditions is that w e are grounded in a solid strategy – ef forts, combined w it h an improving economy, should position us to “ operate independently, compete collectively.” It has been a compass for increase revenue, profitability and return on invested capital and to gen- our decision-making and has distinguished us from the competition. erate positive free cash flow in the 2003 fiscal year. The new strategy w e have put in place over the past several years has made us a full-service transportation company, of fering the Leading the Way w ith Unmatched Service Options broadest array of services. W ith FedEx Express, FedEx Ground, FedEx In FY02, w e knew w e had to retool during a sagging economy Freight, FedEx Custom Critical and FedEx Trade Netw orks, w e can offer in order to soar w hen it recovered. We examined each of our businesses our customers an unprecedented array of shipping and supply chain serv- to either expand service offerings and netw orks to meet higher demand ices quickly and conveniently across the globe. or to scale back through cost-reduction measures. Thanks to the diversification of our business, w e can now give With softer demand for high-tech and high-value-added goods, customers more options, shif t resources as markets dictate and keep FedEx Express, w hich primarily serves those sectors, faced the biggest more business w ithin the FedEx family of companies. challenge. By containing costs and matching resources to low er business volumes w hile keeping service levels high, FedEx Express performed w ell Delivering Financial Results in a tough market environment. The implementation of our landmark In FY02, we executed well according to our plan and, despite a agreement w ith the United States Postal Service last summer also forti- sluggish economy, we came through with the flying colors of all our operat- fied our FedEx Express business. And our unsurpassed FedEx Express ing companies. FedEx Corporation delivered a solid financial performance global netw ork remains ready to exploit a reviving global economy. while growing revenues, managing costs and balancing resources. FedEx Ground experienced outstanding grow th, grow ing year over year by double digits. FedEx Ground reached tw o million packages - Annual revenue increased 5% to a record $20.6 billion. a day in November 2001, due mainly to an expanded netw ork, improved - Net income increased 22% to a record $710 million. service levels, improved sales capabilities, especially for small- and - And diluted earnings per share increased 18% to a record $2.34. medium-sized customers, and the pow er of the FedEx brand. Our new FedEx Corporation FedEx Express FedEx Ground FedEx Freight The leader of the FedEx family, The w orld’s largest express Nor t h America’s second-largest The U.S. market leader of providing strategic focus and direction transpor tation c ompany, providing small-package ground carrier, next-day and second-day regional, for the FedEx operating companies. the most reliable time-definite providing competitively priced, less-than-truckload freight services, deliver y. W it h its unmatched global dependable deliver y in one to five provided by tw o independent netw ork, FedEx Express connects business days w ith a money-back yet c omplementar y operating 212 c ountries – c omprising over guarantee. Includes FedEx Home companies, FedEx Freight East and 90% of the w orld’s economic activity Delivery, offering low -cost business- FedEx Freight West, both know n – w ith typical delivery times of one to-residential delivery. for exc eptional ser vic e, reliabilit y to tw o business days. and on-time per formance. 2 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y “ Our goal is to deliver the perfect customer experience every time – one that’s seamless, convenient and efficient.” FedEx Home Delivery expanded to serve 90% of the U.S. residential mar- Corporation and its subsidiaries with four Summit Awards, which honor ket and w ill reach virtually 100% in September 2002. businesses commit ted to building bet ter communities. As alw ays, our FedEx Freight continued to make competitive gains despite a employees were instrumental in our receiving these awards through their slow economy, and now offers the best service in the regional less-than- beyond-the-call-of-duty performances at work and in our communities. truckload transportation sector. The decision to rebrand Viking Freight and American Freightw ays as FedEx Freight and to offer additional serv- Leading the Way Ahead ice options w ill solidify its position as the largest carrier in its segment. We have honed our core strategy of “ operate independently, compete collectively” to the point that all our operating companies are Leading the Way w ith Cutting-Edge Technology finely calibrated to the segments they serve. In FY03, w e w ill focus more Technology “ talks,” and FedEx technology helps customers on perfecting the “ compete collectively” side of our strategic equation by listen. Why? Because it w innow s out the clutter and delivers, quickly and improving the customer experience at every point of contact. conveniently, the information customers need to manage their inventory in Our goal is to deliver the perfect customer experience every motion. As w e’ve alw ays said at FedEx, information about the shipment is time – one that’s seamless, convenient and efficient. In FY03, w e w ill as important as the shipment itself, and this simple philosophy continues w ork tow ard refining numerous processes af fecting the customer. By to press us tow ard even more innovative customer technology. making these systems “ customer-simple,” w e intend to increase cus- In FY02, w e announced next-generation w ireless technology tomer loyalty and corporate revenue. to boost pickup and delivery efficiency and to give customers another We are confident in our strategy and people, and are poised convenient w ay to access FedEx information. We launched FedEx InSight for economic recovery. Our market opportunities are very large, and w e to give our customers unparalleled information about their FedEx Express look confidently and optimistically tow ards improving results in FY03 and FedEx Ground shipments, w hether inbound or outbound. And our and beyond. Web site, fedex.com, continued to be recognized as one of the best, most conveni ent busi ness W eb si t es, w i nni ng such honors as Best Sincerely, Transportation Web Site and the number-tw o spot on eWeek magazine‘s annual list of leading e-business innovators. Leading the Industry and the Community Frederick W. Smith Despite a challenging economy, FedEx received a record number Chairman, President and Chief Executive Officer of accolades – ten in all, including Fortune magazine’s Top 10 World’s M ost Admired Companies, and Harris Interactive & Reputation Institute Top 10. Another important honor was United Way of America recognizing FedEx FedEx Custom Critical FedEx Trade Netw orks FedEx Services Nor th America’s largest sur face- A leading provider of global trade Coordinates sales, marketing and expedited carrier, providing exclusive- ser vices, specializing in full-ser vice tec hnology suppor t for FedEx use, nonstop, door-to-door delivery customs brokerage, international air Express and FedEx Ground. Includes services. FedEx Custom Critical offers and ocean freight forw arding, FedEx Supply Chain Services, w hich 24-hour, seven-day-a-w eek pickup e-clearance, information technology offers customized supply chain and delivery. and trade consulting. solutions, inc luding transpor tation management, integrated logistic s and consulting services. 3 ––


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    We’re overnight delivery – but so much more. Providing M ore Choices to M ore Places FedEx leads the w ay w ith a choice of independent transportation netw orks – express, ground, freight and expedited – so our customers can select the right service, at the right time and the right price. We’re alw ays improving, changing, grow ing to stay ahead of our customers’ needs. FedEx First Overnight ® has recently added 15 w estern U.S. markets, so the FedEx Express early-morning service now delivers to over a million more businesses by 8:30 a.m. Combined w ith FedEx Priorit y Overnight ® and FedEx Standard Overnight ® , our customers have a range of overnight delivery options they can absolutely, positively count on, day after day. FedEx Freight Next Day Plus SM extends the next-day reach for FedEx Freight East up to 900 miles for the next business day in selected lanes, nearly doubling the regional less-than-truckload industry standard of 500 miles. FedEx Trade Netw orks Air-Ground DistributionSM and Ocean-Ground DistributionSM allow North American importers to bundle ocean and air freight forw arding from Europe and Asia w ith domestic delivery via FedEx Express, FedEx Ground, and FedEx Freight. FedEx Custom Critical SM Customer Response Team finds a w ay to meet any customer need – even w hen other FedEx freight services can’t. FedEx Custom Critical lives the company motto: “ Don’t w orry. There’s a FedEx for that.” “ Whenever I have an emergency shipment, I explain my situation to the FedEx Custom Critical service agents and they inform me of the best options – giving me a choice.” – Preston Chaney Jr. Logistics M anager, AM General 4 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y Expanding Customer Choices FedEx Home Delivery w ill W hy the great demand? FedEx Home And it offers unmatched premium serve virtually 100% of U.S. homes Delivery fills a need unmet by any options like day-specific delivery and in September 2002. That’s other service. Designed specifically delivery by appointment. dog-gone fast grow th for a new ly for cataloguers and online retailers, introduced service. FedEx Home Delivery is the only Clearly, FedEx Home Delivery is a ground service dedicated exclusively special breed. To say that FedEx Home Delivery has to t he low -c ost, residential deliver y been enthusiastically received is a market. It’s t he first residential bit of an understatement. In t he last ground service to offer a money-back 12 months alone, the number of guarantee. It’s t he only deliver y shippers using FedEx Home Delivery service to offer standard evening and has more than tripled. w eekend delivery. 5 ––


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    We deliver information w ith every package. Putting Information at Your Fingertips FedEx w as the first to offer online shipping and tracking, and our aw ard-w inning Web site – fedex.com – is still leading the w ay. Customers can access key information for all FedEx operating companies – comparing services, determining rates, preparing shipping labels, finding the nearest drop-off location, arranging pickup times, tracking shipments, and more. Anything you need to know “ About FedEx” is just a few clicks aw ay. Speeding International Trade FedEx Global Trade M anager at fedex.com makes international shipping simple. This Web- based application identifies and prints the documents that customers need to ship to and from major countries. A new feature – Estimate Duties and Taxes – lives up to its name by providing advance infor- mation on all duties and taxes to be levied against a shipment. Going global has never been so easy. Delivering W ireless Solutions FedEx technology gives customers, couriers and contract delivery personnel w ireless access to the company’s information systems netw orks. Customers can access package tracking and drop-off location data for FedEx Express, FedEx Ground and FedEx Home Delivery via Web-enabled personal digital assistants, cell phones and pagers. FedEx couriers, contract delivery personnel and other team members use w ireless data collection devices to scan bar codes on shipments. These “ magic w ands” are a key part of w hat makes it possible for you to find out w here your package is in transit, w hether on a FedEx Express jet speeding across the Atlantic Ocean or a FedEx Ground tractor- trailer on the Pennsylvania Turnpike. “ International trade is complex, so it is critical that our 200 monthly international shipments don’t get delayed in customs. We can estimate duties and taxes, but the process is very manual and time-consuming. The new FedEx duty and tax estimator speeds up the process. We can input a few facts; then print out the calculation-results screen to send to our customers in advance of shipping.” – Dan Polkow ski Distribution and Logistics M anager, Imperial Graphics 6 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y Enhancing the Customer Experience FedEx InSight SM : Visibility like no The first Web-based application to FedEx InSight also of fers ot her one has ever seen before. offer proactive, real-time status features never before seen. Like t he information on inbound, outbound ability to access multiple shipment Lear ning about a delayed c ustoms and t hird-par ty shipments, FedEx information simultaneously. The ability clearance may not sound like good InSight enables customers to to customize information w ith more new s, until you consider the value of identify issues instantly and address detail such as box contents. And the learning about it so quickly that you them before they become problems. ability to receive e-mail, w ireless and have time to adjust your plans and And, FedEx InSight allow s customers fax status alerts of critical shipping take c orrec tive ac tions. That’s w hat to see t he progress of t heir events such as clearance delays and FedEx InSight does. It’s such a shipments w it hout requiring a failed delivery attempts. tec hnologic al mar vel, it helps tracking number – giving t hem shippers become practically psychic. convenient and unprecedented data All of these make FedEx InSight a visibility critical to managing t heir sight for our customers’ eyes. supply chains efficiently. 7 ––


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    Employees. Customers. Communities. FedEx is a people company – people you can count on. Reaching Out to Communities FedEx leads the w ay in philanthropy, providing both dollars and in-kind shipping services for a nation in crisis or an everyday community need. After September 11, the FedEx family of com- panies carried survivors to safet y, aided burn victims, transported medicine, supplies and even booties for the canine rescue team – donating a total of $1 million in in-kind services plus a cash con- tribution totaling $1 million to the United Way September 11 Fund and the American Red Cross. But FedEx also delivers for communities every day, w orking w ith Heart to Heart International to deliver food and medicine throughout the w orld, operating the “ flying eye hospital” for ORBIS International to provide eye care and treatment to people in developing countries and helping the Red Cross pro- vide quick response for disasters. W hen President George W. Bush asked schoolchildren to contribute to America’s Fund for Afghan Children, it w as FedEx that shipped more than 134,000 pounds of relief supplies. Anyw here. Any time. FedEx touches lives in w ays you’ve never imagined. Protecting and Respecting the Environment FedEx has been recognized as one of America’s most environmentally responsible companies. We are increasing the amount of recycled material in all FedEx packaging, minimizing w aste generation through recycling at our facilities and expanding our fleet of low -emission vehi- cles. As a result, FedEx is the only company in our industry to be rated “ A” in the Council on Economic Priorities’ corporate responsibility profile for the environment. Providing Employees w ith a Great Place to Work We believe FedEx is a great place to w ork – and plenty of people agree w ith us. In the past year, Fortune magazine has listed FedEx on three of its prestigious lists, including: - America’s M ost Admired Companies - W orld’s M ost Admired Companies - 100 Best Companies To Work For In addition, FedEx placed in the top 10 in corporate reputation according to a Harris Interactive & Reputation Institute survey. “ ORBIS is a one-of-a-kind operation that has brought the gift of sight to countless people throughout the developing w orld. In searching for a global aviation sponsor, our ‘w ish list’ asked for a global, efficient and aggressive company w hose employees possess a level of pride that inspires them to go the extra mile. We’ve found that w ith FedEx.” – Kathy Spahn President and Executive Director, ORBIS 8 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y Safeguarding Kids and Communities Having safe kids today means FedEx is a major sponsor of National Providing cash and volunteer support, having more leaders tomorrow . Safe Kids’ elementary-school-based w e helped triple the reach of the pedestrian safety initiative. On the National Safe Kids program – from FedEx operating companies put more highly public ized “ Walk This Way” 41 locations in 2000 to 120 locations in than 60,000 vehicles on the w orld’s day, FedEx couriers volunteer their 2002, affecting more t han 200 roads. You’d bet ter believe safety is time at t he schools, analyzing traffic schools. We also launched programs our highest priorit y. And our flow and instructing children on in tw o international loc ations. c ommitment to safety goes beyond pedestrian safet y. In addition to careful driving. corporate publications, e-mail, W hile w e handle millions of daily broc hures and let ters, FedEx has priorities for our customers, placed full-page ads in Time and w e are proud to say safety is our USA Today to promote t he initiative. top priority. 9 ––


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    We‘re leading the w ay financially – focused on long-term, profitable grow th that rew ards our shareholders. LETTER FROM THE CFO Faced w ith the toughest business environment in a decade, In 2003, w e w ill continue leading the w ay, delivering the best FedEx employees and contractors delivered record results in 2002. Their possible transportation solutions and service experience to our cus- efforts exemplified and substantiated our “ operate independently, com- t omers. W e w ill also provide high-qualit y, t ransparent f inancial pete collectively” strategy and provided superior value to our shareholders. statements and disclosures, so that our shareholders can easily under- We increased revenues to a record $20.6 billion w ith the start- stand the key business opportunities w e see and the issues and risks up of the transportation agreement betw een FedEx Express and the U.S. w e manage, the critical accounting policies w e employ and the impor- Postal Service, strong volume grow th at FedEx Ground and its Home tant judgments w e make in preparing our financial statements. And, w e Delivery service, and our first full year of operations of FedEx Freight. w ill remain focused on managing our costs and capital spending, deliv- At the same time, w e tightened our belts. Overhead costs ering strong cash flow s and increased earnings, margins, and returns to w ere held in check, fuel price fluctuations w ere substantially mitigated our shareholders. by our new index-based fuel surcharge, productivit y improved, and cap- ital spending decreased to t he low est level in eight years. Despite these cutbacks, our operations performed at record service levels, unri- valed by our competitors. The net effect of these efforts w as a nearly 100-basis-point Alan B. Graf, Jr. rise in our operating margin, record earnings per share, and the genera- Executive Vice President and Chief Financial Officer tion of $616 million in free cash flow. With this cash, w e low ered our debt levels by more than $300 million, repurchased more than three mil- lion shares of FedEx stock and announced our first-ever cash dividend. At the same time, the stock market recognized our efforts and increased our share price by nearly 35%. $600 18.1% CAGR 500 400 300 12.1% CAGR 9.6% CAGR 200 100 ’92 ’94 ’96 ’98 ’00 ’02 Stock Performance FedEx (FDX) Common Stock S& P 500 Index Dow Jones Transpor tation Average The stock per formance graph show s changes over the past ten fiscal years in the value of $100 invested on M ay 31, 1992. CAGR represents compound annual grow th rate. 10 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y M anagement’s Discussion and Analysis of Results of Operations and Financial Condition GENERAL Our 2002 results reflect outstanding revenue and earn- ings grow th at FedEx Ground. Operating income at this segment The follow ing management’s discussion and analysis increased $162 million or 93%, reflecting volume grow th in FedEx describes the principal factors affecting the results of operations, Ground’s core business and reduced losses in its home delivery liquidity and capital resources, as w ell as the critical accounting service. The performance of FedEx Ground, and the addition of policies, of FedEx Corporation (also referred to as “ FedEx” ). This FedEx Freight East (formerly know n as American Freightw ays) in discussion should be read in conjunction w ith the accompanying the third quarter of 2001, contributed to improved net income for audited financial statements, w hich include additional informa- 2002, but w ere mitigated by continued softness in package vol- tion about our significant accounting policies and practices and umes at FedEx Express. Volume levels in our FedEx Express the transactions that underlie our financial results. domestic and international package services declined in 2002 as FedEx is one of the largest transportation companies in a result of continued w eakness in the U.S. and global economies the w orld. Our business strategy is to offer a portfolio of trans- (par t ic ularly in t he manufac turing and w holesale sec tors), portation services through our independently operated business w hich has decreased demand for our higher-priced express units. These business units are primarily represented by our services. Revenue from our transportation agreement w ith the repor table operat ing segments: FedEx Express, the w orld’s U.S. Postal Ser vice (“ USPS” ), w hich commenced in the first largest express transportation company; FedEx Ground, North quarter of 2002, as w ell as effective cost management, helped America’s second largest provider of small-package ground deliv- soften the impact of reduced package volumes at FedEx Express. er y ser vic e; and FedEx Freight, t he largest U.S. provider of Largely due to the contributions of FedEx Ground and regional less-than-truckload freight services. FedEx Freight, and the fact that 2001 included approximately The key factors that affect our operating results are the $124 million in noncash charges (discussed below ), operating volumes of shipments transpor ted through our netw orks, as income increased significantly in 2002. Discretionary spending measured by our average daily volume; the mix of services pur- (such as professional fees and travel-related expenses) w as chased by our customers; the prices w e obtain for our services, reduced approximately $108 million during 2002. Pension costs as measured by average price per shipment (yield); our ability to w ere approximately $90 million higher in 2002, due principally to manage our cost structure for capital expenditures and operat- low er discount rates and decreased returns on pension plan ing expenses such as salaries, w ages and benefits, fuel and assets. Variable compensation w as slightly higher in 2002. maintenance; and our ability to match operating costs to shifting During 2002, w e implemented new indices for calculat- volume levels. ing fuel surcharges at FedEx Express and FedEx Ground, w hich Except as other w ise indicated, references to years more closely link the surcharges to prevailing market prices for mean our fiscal year ended M ay 31, 2002 or ended M ay 31 of the jet and diesel fuel, respectively. Low er fuel prices during 2002 had year referenced and comparisons are to the prior year. a positive impact on operating expenses; how ever, declines in fuel surcharge revenue more than offset the impact of low er fuel RESULTS OF OPERATIONS prices on operating income. Conversely, fuel surcharge revenue in 2001 more than offset the impact of higher fuel costs. During Consolidated Results 2001, increased fuel prices negatively impacted year-over-year expenses by approximately $160 million, net of the effects of jet The follow ing table c ompares revenues, operat ing fuel hedging contracts. We received approximately $92 million in income, net income and diluted earnings per share (in millions, 2001 under jet fuel hedging c ontrac ts, w hic h w e effec tively except per share amounts) for the years ended M ay 31: closed during the fourth quarter of 2001 by entering into offset- ting contracts. The maturity of these contracts increased 2002 Percent Change fuel costs by approximately $15 million. 2002/ 2001/ 2002 20011 2000 2001 2000 Net income for 2002 reflects the cumulative effect of an accounting change recorded in the first quarter. This change Revenues $20,607 $19,629 $18,257 + 5 + 8 r esult ed f r om adopt ion of new r ules f r om t he Financ ial Operating income 1,321 1,071 1,221 +23 –12 Accounting Standards Board (“ FASB” ) for the treatment of good- Net income 710 584 688 +22 –15 w ill and other intangible assets (see Note 2 and Note 4 to the accompanying audited financial statements). Adoption of these Diluted earnings per share $ 2.34 $ 1.99 $ 2.32 +18 –14 new rules resulted in the first quarter recognition of a $25 million 1 Results for 2001 include noncash charges of $102 million for impairment of ($15 million net of tax or $.05 per share) impairment charge to our certain assets related to aircraft programs at FedEx Express and a $22 million reorganization charge at FedEx Supply Chain Services. These charges w ere $78 million after tax or $.27 per diluted share. 11 ––


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    M anagement’s Discussion and Analysis recorded goodw ill. Results for 2002 also reflect the cessation of Our 2001 operating results reflec ted the c ontinuing $36 million of goodw ill amor t izat ion t hat w ould have been implementation of the rebranding and reorganization initiatives recorded in operating expenses, as required under the new begun in the last half of 2000 to leverage the FedEx name and accounting rules. Goodw ill amortization expense w as $26 million centralize certain sales, marketing and technology functions of for 2001 and $17 million for 2000. FedEx Express and FedEx Ground into FedEx Ser vic es (see Our results for 2001 reflected strong performance dur- “ Reportable Segments” below ). These rebranding costs did not ing the first half, w hich w as more than offset by the effects of have a significant impact on 2002 results and w ere approximately w eakened economic conditions in the second half of the year. $26 million for 2001 and $21 million for 2000. Our 2001 results As a result of low er domestic volumes at FedEx Express in the included a significant reduction in operating costs related to second half of 2001 and low ered capacity grow th forecasts, man- reduc ed provisions under our variable c ompensation plans. agement committed to eliminate certain excess aircraft capacity Pension costs w ere approximately $70 million low er in 2001, due related to our M D10 program (w hich upgrades and modifies our principally to higher discount rates. older DC10 aircraf t to make them more compatible w ith our new er M D11 aircraft). By curtailing the M D10 program, w e elimi- Other Income and Expense and Income Taxes nated signific ant future c apital expenditures t hrough 2008. Interest expense w as slightly low er in 2002, as w e uti- During 2001, w e also took actions to reorganize our FedEx Supply lized available cash to reduce debt balances during the year (see Chain Services subsidiary to eliminate certain unprofitable, non- “ Financial Condition” below ). Financing for the acquisition of strategic logistics business and reduce its overhead. In addition, FedEx Freight East, w hich w as completed in the third quarter of due to t he bankruptc y of Ayres Corporat ion, w e w rote of f 2001, w as the principal reason net interest expense w as 36% deposits and related items in 2001 in connection w ith the Ayres higher in 2001. ALM 200 airc raf t program. Follow ing is a summar y of t hese In 2002, other nonoperating expenses included losses charges (in millions): of approximately $17 million from the retirement of debt assumed in the FedEx Freight East ac quisition and the refinanc ing of Impairment of cer tain assets related to the certain capital lease obligations. Other nonoperating expenses in M D10 aircraft program $ 93 2000 included gains of approximately $12 million from an insur- Strategic realignment of logistics subsidiary 22 ance settlement for a destroyed M D11 aircraft and approximately Ayres program w rite-off 9 $11 million from the sale of securities. Total $124 Our effective tax rate w as 37.5% in 2002, 37.0% in 2001 and 39.5% in 2000. The 37.5% effective tax rate in 2002 w as higher Results for 2002 w ere favorably affected by approxi- than the 2001 effective rate primarily due to the utilization of mately $12 million, r elated to t he c har ges above, based excess foreign tax credits in 2001. The 2002 rate w as favorably on ac tual outc omes as c ompared to the original estimates. impacted by the cessation of goodw ill amortization (as discussed No material amounts remained on the balance sheet for these above) and by several other factors, none of w hich w ere individu- items at the end of 2002. ally significant. The effective tax rate exceeds the statutory U.S. Excluding the effects of business acquisitions in 2001 federal tax rate primarily because of state income taxes. For 2003, and 2000, revenues increased slightly in 2001, reflecting revenue w e expect the effective tax rate to be approximately 38.0%. The grow th of FedEx International Priority ® (“ IP” ) packages. During actual rate, how ever, w ill depend on a number of factors, includ- 2001, volume grow th w as higher at FedEx Ground as this sub- ing the amount and source of operating income. sidiary continued to grow its core business and expand its new At M ay 31, 2002, w e had a net deferred tax liability of home delivery service offering. The effects of the acquisition of $130 million, consisting of $1 billion of deferred tax assets and FedEx Freight East added approximately $630 million to 2001 rev- $1.1 billion of deferred tax liabilities. The reversal of deferred tax enues. The acquisition resulted in recognition of approximately assets in future periods is expec ted to be of fset by similar $600 million in goodw ill and w as slightly accretive to 2001 earn- amounts of deferred tax liabilities. ings per diluted share. For fur ther information regarding this acquisition, see “ Liquidity” and Note 3 to the accompanying audited financial statements. 12 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation Terrorist Attacks of September 11 such interpretations, but it is reasonably possible that a material Fisc al 2002 sec ond quar ter operat ions w ere sig- reduc tion to the amount of c ompensation rec ognized by us nific antly affec ted by the terrorist attac ks that oc c urred on under the Act could occur. September 11, 2001. All domestic FedEx Express aircraft w ere Alt hough inc reased sec urit y requirements for air mandatorily grounded on September 11 and 12, and flight opera- cargo carriers have been put in place and fur ther measures tions resumed on the evening of September 13, 2001. During the may be for thcoming, as of yet w e have no estimate of w hat period our aircraft w ere grounded, both domestic and interna- impact any such measures may have on our results of opera- tional shipments w ere impacted, w ith domestic average daily tions or financial position. Furthermore, w e are not certain how express volumes declining almost 50% from prior year levels. the events of September 11, or any subsequent terrorist activi- We executed contingency plans and transported all domestic ties, w ill ultimately impact the U.S. and global economies in shipments during this period through ground-based trucking general, and the air transportation industry in particular, and operations. We resumed air operations w ithin hours of receiv- w hat effec ts these events w ill have on our c osts or on the ing c lear anc e fr om t he Feder al Aviat ion Administr at ion. demand for our services. Business levels at FedEx Ground and FedEx Freight w ere not materially affected. Outlook In the aftermath of the terrorist attacks of September 11, On M ay 31, 2002, w e announced our first-ever payment the U.S. Congress passed the Air Transpor tation Safety and of a quarterly cash dividend to shareholders of $.05 per share. We System Stabilization Act (the “ Act” ), an emergency economic expect to continue these quar terly cash dividend payments, assistance package to mitigate the dramatic financial losses although each subsequent dividend is subject to review and experienced by the nation’s air carriers. The Act provides for approval by our Board of Directors. $5 billion to be used for financial assistance to airlines to offset The economic dow nturn that began in calendar 2001 pro- losses caused by service disruptions and declines in business vided opportunities for management teams w ithin the FedEx family activity related to these attacks for the period September 11, 2001 to examine grow th strategies and take steps to right-size our trans- through December 31, 2001. portation netw orks, improve service and provide choices to fit our The Emerging Issues Task Force (“ EITF” ) issued EITF01-10, customers’ transportation needs. We believe w e are w ell posi- “ Accounting for the Impact of the Terrorist Attacks of September 11, tioned for long-term grow th w hen the economy, particularly the 2001,” in September 2001 to establish accounting for the impact manufacturing and w holesale sectors, recovers and experiences of the terrorist attacks of September 11, 2001. Under EITF 01-10, sustained grow th. federal assistance provided to air carriers in the form of direct For 2003, w e anticipate revenue and volume grow th in compensation from the U.S. government under the Act should all segments if our expectations of an economic stabilization dur- be rec ognized w hen t he related losses are inc urred and ing the first half of 2003 and a recovery during the remainder of c ompensat ion under t he Ac t is probable. We rec ognized the year are realized. $119 million of compensation under the Act in 2002. We have Our diverse portfolio of services is the key factor to our classified all amounts recognized under this program (of w hich long-term grow th. The expansion of FedEx Ground’s home deliv- $101 million w as received as of M ay 31, 2002), as a reduction of ery netw ork and continued development and cross-selling of the operating expenses under the c aption “ Airline stabilization diverse FedEx portfolio of services, particularly to small- and compensation.” W hile w e believe w e have complied w ith all medium-sized businesses, is central to our strategy. Our Web aspects of the Act and that it is probable w e w ill ultimately site, fedex.com, is heavily utilized and has helped us reduce costs rec eive the remaining $18 million rec eivable, c ompensation and improve customer satisfaction. M anagement believes that previously recognized is subject to audit and interpretation by our substantially fixed cost infrastructure w ill allow us to realize the Depar tment of Transpor tation (“ DOT” ). We have received incremental profits w hen the economy recovers. requests from the DOT for additional information in suppor t of our claims under the Act and have responded fully to these requests. We cannot be assured of the ultimate outcome of 13 ––


  • Page 16

    M anagement’s Discussion and Analysis Pension costs are expected to continue to increase periods. Shipment levels, operating costs and earnings for each over the near term. Our pension cost for 2003 w ill increase by of our operating companies can also be adversely affected by approximately $90 million due to low er interest rates in 2002 and inclement w eather. the effects of decreased returns on pension plan assets. For 2003, w e w ill low er our expected long-term rate of return on plan New Accounting Pronouncements assets from 10.9% to 10.1%. W hile employee retirement costs continue to rise, our retirement programs are w ell funded, w ith The FASB issued Statement of Financial Accounting assets sufficient to meet our current obligations. Standards No. (“ SFAS” ) 143, “ Accounting for Asset Retirement M aintenance costs are expected to be higher in 2003 Obligations” in June 2001 and SFAS 144, “ Accounting for the due to scheduled maintenance activities. Higher group health Impairment or Disposal of Long-Lived Assets” in October 2001. and other insurance costs are also anticipated. In spite of the These statements w ill be effective for FedEx beginning in 2003. impact of these increased expenses, w e expect our operating We do not expec t the applic ation of these new ac c ounting margin to slightly improve as a result of continued focus on cost standards to have a material effect on our financial position reductions (including hiring restrictions and reduced discre- or results of operat ions. See N ote 2 to t he ac c ompanying tionary spending), productivity improvements and a reduction in audited financial statements for fur ther discussion of recent the FedEx Home Delivery loss. accounting pronouncements. Actual results for 2003 w ill depend upon a number of factors, including the timing, speed and magnitude of the eco- Repor table Segments nomic recovery, our ability to match capacity w ith volume levels and our ability to ef fec t ively leverage our new ser vic e and Our reportable operating segments are FedEx Express, grow th initiatives. In addition, our fuel surcharges have a lag that FedEx Ground and FedEx Freight, each of w hich operates in a sin- exists before the surcharges are adjusted for changes in jet and gle line of business. Included w ithin “ Other” are the operations of diesel fuel pric es. Therefore, our operat ing inc ome may be FedEx Custom Critical, FedEx Trade Netw orks and FedEx Services. affected should the spot price of fuel suddenly change by a sig- “ Other” also includes certain unallocated corporate items and nificant amount. See “ Forw ard-Looking Statements” for a more eliminations. M anagement evaluates segment financial perfor- complete description of potential risks and uncertainties that mance based on operating income. could affect our future performance. The formation of FedEx Services at the beginning of 2001 represented the implementation of a business strategy that Seasonality of Business combined the sales, marketing and information technology func- Our express pac kage and freight businesses are tions of our FedEx Express and FedEx Ground reportable segments seasonal in nature. Historically, the U.S. package business experi- to form a shared services company that supports the package ences an increase in volumes in late November and December. businesses of both of these segments. FedEx Services provides International business, particularly in the Asia to U.S. market, our customers w ith a single point of contact for all express and peaks in October and November due to U.S. holiday sales. Our ground services. Prior to the formation of FedEx Services, each first and third fiscal quarters, because they are summer vacation business had its ow n self-contained sales, marketing and infor- and post w inter-holiday seasons, have historically exhibited mation technology functions. low er volumes relative to other periods. The costs for these activities are now allocated based The transpor tation and logistics industry is affected on metrics such as relative revenues and estimated services directly by the state of the overall domestic and international provided. These allocations materially approximate the cost of economies. Seasonal fluctuations affect tonnage, revenues and providing these functions. The line item “ Intercompany charges” earnings. Normally, the fall of each year is the busiest shipping on the accompanying financial summaries of our reportable seg- period for FedEx Ground and FedEx Custom Critical, w hile the lat- ments includes the allocations from FedEx Services to FedEx ter part of December, January, June and July of each year are the Express and FedEx Ground, and certain other costs such as cor- slow est periods. For FedEx Freight, the spring and fall of each porate management fees. year are the busiest shipping periods and the latter par t of December, January and February of each year are the slow est 14 ––


  • Page 17

    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation FedEx Express The follow ing table compares revenues, operating expenses and operating income (dollars in millions) and selected statis- tics (in thousands, except yield amounts) for the years ended M ay 31: Percent Change Percent Change 2002/ 2001/ 2002/ 2001/ 1 1 2002 2001 2000 2001 2000 2002 2001 2000 2001 2000 Revenues: Package statistics: Package: Average daily packages: U.S. overnight box 2 $ 5,338 $ 5,830 $ 5,684 – 8 + 3 U.S. overnight box 1,170 1,264 1,249 – 7 + 1 U.S. overnight U.S. overnight envelope 699 757 771 – 8 – 2 envelope 3 1,755 1,871 1,854 – 6 + 1 U.S. deferred 868 899 916 – 3 – 2 U.S. deferred 2,383 2,492 2,428 – 4 + 3 Total domestic Total domestic packages 2,737 2,920 2,936 – 6 – 1 package revenue 9,476 10,193 9,966 – 7 + 2 IP 340 346 319 – 2 + 8 International Total packages 3,077 3,266 3,255 – 6 – Priority (IP) 3,834 3,940 3,552 – 3 +11 Revenue per Total package package (yield): revenue 13,310 14,133 13,518 – 6 + 5 U.S. overnight box $ 17.90 $ 18.09 $ 17.70 – 1 + 2 Freight: U.S. overnight envelope 9.84 9.69 9.36 + 2 + 4 U.S. 1,273 651 566 +96 +15 U.S. deferred 10.77 10.87 10.31 – 1 + 5 International 384 424 492 – 9 –14 Domestic composite 13.58 13.69 13.21 – 1 + 4 Total freight revenue 1,657 1,075 1,058 +54 + 2 IP 44.16 44.70 43.36 – 1 + 3 Other 360 326 492 +10 –34 Composite 16.96 16.97 16.16 – + 5 Total revenues 15,327 15,534 15,068 – 1 + 3 Freight statistics: Operating expenses: Average daily pounds: Salaries and employee U.S. 7,736 4,337 4,693 +78 – 8 benefits 6,467 6,301 + 3 International 2,082 2,208 2,420 – 6 – 9 Purchased transpor tation 562 584 – 4 Total freight 9,818 6,545 7,113 +50 – 8 Rentals and landing fees 1,524 1,419 + 7 Revenue per pound (yield): Depreciation and U.S. $ .65 $ .59 $ .47 +10 +26 amor tization 806 797 + 1 International .72 .75 .79 – 4 – 5 Fuel 1,009 1,063 – 5 Composite .66 .64 .58 + 3 +10 M aintenance and repairs 980 968 + 1 1 Operating expense detail for 2000 is not inc luded as t his data is not c om- Airline stabilization parable. See “ Repor table Segments” above. compensation (119) – n/a 2 The U.S. overnight box c ategor y inc ludes pac kages exc eeding 8 ounc es Intercompany charges, net 1,332 1,317 + 1 in w eight. 3 Other 4 1,955 2,238 –13 The U.S. over night envelope c ategor y inc ludes envelopes w eighing Total operating 8 ounc es or less. 4 2001 inc ludes a $93 million c harge for impair ment of t he M D10 airc raf t expenses 14,516 14,687 14,168 – 1 + 4 program and a $9 million c harge for t he Ayres program w rite-of f. Operating income $ 811 $ 847 $ 900 – 4 – 6 15 ––


  • Page 18

    M anagement’s Discussion and Analysis FedEx Express Revenues our transportation agreement w ith the USPS, effective for a 10- Volumes at FedEx Express continue to be below levels month period beginning January 1, 2002, w hich allow s us to carry experienced prior to the economic slow dow n, w hich began in incremental pounds of mail at higher committed volumes than 2001. Volumes w ere also significantly impacted by the terrorist required under the original agreement. In 2001, total freight rev- attacks on September 11, 2001. All domestic FedEx Express air- enue increased slightly over 2000 due to significantly improved craft w ere mandatorily grounded on September 11 and 12, and yields in U.S. freight, par tially offset by declines in domestic flight operations resumed on the evening of September 13, 2001. freight volume and international freight volume and yield. Both domestic and international shipments w ere impacted by Other revenue (w hich includes Canadian domestic rev- this event. enue, charter services, logistics services, sales of hushkits and During 2002, total package revenue decreased 6%, prin- other) increased 10% in 2002. In 2001 and 2000, other revenue cipally due to decreases in volumes. In the United States, package decreased, mostly due to declines in the sale of hushkits. Hushkits revenue dec lined 7% (on 6% low er average daily domest ic sales w ere insignificant in 2002. express package volume, principally in U.S. overnight box and envelope volumes). W hile IP volume decreased slightly in 2002, FedEx Express Operating Income principally due to a decline in U.S. outbound shipments, IP vol- In 2002, operating income at FedEx Express decreased umes w ere posit ively impac ted by the European and Asian 4%. Excluding $102 million of asset impairment charges taken in economies, although volumes in these markets did not grow as 2001, operating income w as dow n 15% in 2002. Revenue declines much as in 2001. For 2002, FedEx Express experienced IP average in 2002 on a largely fixed cost structure more than offset contin- daily volume grow th rates of 15% and 5% in the European and ued c ost management ac t ions. Dur ing 2002, c ontr ac tual Asian markets, respectively. Package yields are slightly low er in reimbursements received from the USPS substantially offset net- vir tually all service categories due to a decrease in average w ork expansion costs incurred (principally in increased salaries). w eight per package and a decline in fuel surcharge revenue. In USPS reimbursements during 2002 are reflected as a credit to the second quarter of 2002, w e implemented a new index for other operating expenses. This reimbursement, how ever, had no determining our fuel surcharge. Using this new index, the fuel effect on operating income, as it represented the recovery of surcharge ranged betw een 0% and 3% from November 2001 incremental costs incurred. In 2002, FedEx Express recognized through M ay 2002. The fuel surcharge during all of 2001 w as 4%. $27 million of operating income from the resolution of certain In 2001, total package revenue increased 5%, princi- state tax matters, w hich is also reflected as a reduction of other pally due to increases in yields and IP volumes. The increase in operating expenses. yields in 2001 w as a result of yield-management, w hich included Operating income for 2002 also reflects the adoption of limiting grow th of less profitable business and recovering the new rules from the FASB for the treatment of goodw ill and other higher c ost of fuel through a fuel surc harge. Domestic rate intangible assets (as discussed in “ Consolidated Results” above). increases in February 2001 also contributed to the higher yield For FedEx Express, adoption of these new rules resulted in the during 2001. W hile the IP volume grow th w as 8% for 2001, this cessation of $12 million in goodw ill amortization that w ould have rate w as impacted by a year-over-year increase in U.S. outbound been recorded in operating expenses during 2002 (this amortiza- shipments, offset by w eakness in the Asian economy in the last tion amount is comparable to 2001 and 2000). half of the year. For 2001, FedEx Express experienced IP average Rentals and landing fees w ere higher in 2002 primarily daily volume grow th rates of 24% in the European market and due to an increase in aircraft usage as a result of incremental 12% in the Asian market. domestic freight volume. While fuel usage w as higher in 2002 due Total freight revenue for 2002 increased significantly to incremental freight pounds transported under the USPS agree- due to improved domestic freight volume and yield, reflecting the ment, fuel costs w ere dow n, as the average price per gallon of impact of the USPS transportation agreement, w hich began in aircraft fuel decreased 12% in 2002. During 2001, increased fuel August 2001. On January 10, 2001, FedEx Express and the USPS expense reflected a 17% increase in average jet fuel price per entered into tw o service contracts: one for domestic air trans- gallon, w hich contributed to a negative impact of approximately portation and the other for placement of FedEx Drop Boxes at U.S. $150 million, including the results of jet fuel hedging contracts Post Offices. On December 13, 2001, w e signed an addendum to entered into to mitigate some of the increased jet fuel costs. 16 ––


  • Page 19

    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation For 2002, salaries, w ages and benefits w ere higher in FedEx Ground spite of reductions in hours and full-time equivalents, w hich w ere not sufficient to offset base salary increases and higher pension The follow ing table c ompares revenues, operat ing and medical costs. This is partially because a significant portion expenses and operating income (dollars in millions) and selected of incremental cost increases related to the USPS contract is package statistics (in thousands, except yield amounts) for the reflected in salaries and w ages. Pension costs at FedEx Express years ended M ay 31: w ere approximately $60 million higher in 2002. Profit sharing and incentive compensation provisions w ere dow n significantly Percent Change 2002/ 2001/ for 2002. 2002 2001 20001 2001 2000 In 2001, operating income decreased 6%, reflecting Revenues $2,711 $2,237 $2,033 +21 +10 charges related to the impairment of aircraft in the fourth quarter Operating expenses: (see “ Consolidated Results” above). Excluding these charges, Salaries and employee operating income increased 5% in 2001, despite a slow dow n in benefits 532 450 +18 revenue grow th that year, as reduced variable compensation Purchased transpor tation 1,032 881 +17 and pension costs, coupled w ith intensified cost controls over Rentals 71 67 + 6 discretionary spending, had a positive impact. Declining contri- Depreciation and butions from sales of hushkits negatively impacted operating amor tization 132 111 +19 profit by $40 million in 2001. Fuel 4 8 –50 M aintenance and repairs 73 63 +16 FedEx Express Outlook Intercompany charges 238 215 +11 W hile w e believe economic grow th during the first half Other 292 267 + 9 of 2003 w ill be slow, particularly in the manufacturing and w hole- Total operating sale sectors, w e expect revenue to increase during 2003, in both expenses 2,374 2,062 1,807 +15 +14 the domestic and international markets. Revenue grow th is Operating income $ 337 $ 175 $ 226 +93 –23 expected to exceed expense grow th due to increases in both domestic and international package volumes and yield. Average daily packages 1,755 1,520 1,442 +15 + 5 Operat ing margin for t his segment is expec ted to Revenue per package (yield) $ 6.11 $ 5.79 $ 5.55 + 6 + 4 increase in 2003 despite increasing pension and health care 1 Operating expense detail for 2000 has been omit ted, as t his data is not costs, insurance expenses, maintenance costs and costs associ- c omparable. See “ Repor table Segments” above. ated w ith annual w age increases. Our expectation of improved performance is based upon continued cost control efforts, w ith a particular focus on significant improvements in productivity and FedEx Ground Revenues transportation netw ork efficiency. We w ill also benefit in 2003 Core business grow th and the increasing popularity of from a full year of operations under our transportation contract our new home delivery service helped FedEx Ground realize w ith the USPS. double-digit revenue grow th in both 2002 and 2001, as volumes Although fuel price increases are anticipated during and yields increased. Sales and marketing activities have been 2003, they are not expected to significantly impact earnings as effective in attracting new small- and medium-sized customers, our fuel surcharge is closely linked to prevailing market prices for w hich generate higher yielding package revenues. For 2002 and jet fuel. Our fuel surcharge has a lag that exists before it is 2001, the increase in average daily packages represents positive adjusted for changes in jet fuel prices. Therefore, our operating volume grow th experienced in all principal markets served by income may be affected should the spot price of jet fuel suddenly FedEx Ground, including FedEx Home Delivery, w hich added facil- change by a significant amount. ities to reach almost 90% coverage of the U.S. population. 17 ––


  • Page 20

    M anagement’s Discussion and Analysis In 2002 and 2001, year-over-year yield increases w ere Total operating profit for FedEx Ground is expected to due primarily to general rate increases, ongoing yield manage- improve over 2002, although w e expec t operating margin to ment and a slight increase in the mix of higher yielding packages. decrease because FedEx Ground w ill absorb a larger portion of In the third quarter of 2002, w e implemented a new dynamic fuel allocated sales, marketing, customer support and information surcharge, w hich is indexed to the current price of diesel fuel. technology costs during 2003. During 2003, w e expect the operat- Using this new index, the fuel surcharge ranged betw een .50% ing loss from FedEx Home Delivery to improve, w ith this service and .75% from February through M ay 2002. A 1.25% fuel sur- becoming profitable sometime in 2004. charge w as in effect for most of 2001. FedEx Freight FedEx Ground Operating Income FedEx Gr ound’s oper at ing inc ome signif ic ant ly The follow ing table show s revenues, operating expenses increased in 2002 primarily due to package volume grow th, higher and operating income (in millions) and selected statistics for the yields, productivity improvements in both employee and contrac- years ended M ay 31: tor labor and effective cost management. FedEx Home Delivery had a loss of $32 million in 2002, w hich is a significant improve- 2002 20011 ment from the loss in 2001. Facility openings and expansions, Revenues $1,960 $ 835 as w ell as inc reased investments in infor mat ion systems, Operating expenses: resulted in increased depreciation, rental and other property- Salaries and employee benefits 1,170 489 related expenses during 2002. Salaries, w ages and benefits Purchased transpor tation 57 23 also w ere higher in 2002 due to additional full-time equivalents Rentals 64 27 and higher pension and medical costs. Costs for our variable Depreciation and amor tization 86 44 and other inc ent ive c ompensat ion plans w ere signific antly Fuel 72 41 higher during 2002, reflecting FedEx Ground’s outstanding finan- M aintenance and repairs 90 39 cial performance. Intercompany charges 8 1 During 2001, operating income decreased 23%, primarily Other 245 116 due to a FedEx Home Delivery operating loss of $52 million and Total operating expenses 1,792 780 rebranding and reorganizat ion expenses of $15 million. The Operating income $ 168 $ 55 rebranding and reorganization expenses consisted of incremen- Shipments per day 2 56,000 56,012 tal external costs for rebranding vans, trailers and signage. Such Weight per shipment (lbs)2 1,114 1,132 costs w ere expensed as incurred. Excluding the negative impact Revenue per hundredw eight 2 $12.41 $11.83 of these expenses, operating income decreased 2% from 2000. Facility openings and expansions, as well as increased investments 1 Results for 2001 inc lude t he financ ial results of FedEx Freight West from in information systems, resulted in higher depreciation, rental Dec ember 1, 2000 and of FedEx Freight East from J anuar y 1, 2001 (t he and other property-related expenses during 2001. date of ac quisition for financ ial repor ting purposes). Therefore, 2001 FedEx Home Delivery, launched in M arch 2000, nega- results are not c omparable to 2002. 2 Statistic s for 2001 are based on por tion of t he year inc luding bot h FedEx tively affected 2000 operating income by approximately $19 million. Freight West and FedEx Freight East (J anuar y t hrough M ay). FedEx Ground Outlook Although revenues w ere higher in 2002 due to the inclu- For 2003, volumes and yield are expected to grow in sion of a full year of operations, revenues w ere impacted by both the core business and FedEx Home Delivery. FedEx Ground low er than expected volumes, due to the economic slow dow n, w ill continue expansion of the FedEx Home Delivery netw ork to and by a decrease in our fuel surcharge. The FedEx Freight fuel serve nearly 100% of the U.S. population by mid-September 2002. surcharge is tied to the “ Retail on Highw ay Diesel Fuel Price,” as Plans for 2003 w ill be focused on improvements in on-time deliv- published by the U.S. Department of Energy, and changes w eekly ery, productivity and safety. based on changes in the index. In 2002, average daily shipments w ere comparable to the prior year, w eight per shipment w as dow n 2% and revenue per hundredw eight w as up 5%. 18 ––


  • Page 21

    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation During t his dif fic ult ec onomic environment, FedEx be effective July 22, 2002. Yield management, enhanced productiv- Freight improved yields and managed costs. Operating margins ity and cost-control measures continue to be major focus areas for w ere 8.6% in 2002, reflecting the elimination of goodw ill amorti- FedEx Freight in order to minimize the effects of a soft economy in a zat ion and stable pric ing, par t ially of fset by t he impac t of highly competitive pricing environment. $6 million of rebranding expenses, primarily for tractors and trail- ers. Our foc us on providing superior ser vic e to at trac t and Other Operations maintain c ustomers solidified our leadership position in the regional less-than-truckload (“ LTL” ) market. Other operations include FedEx Custom Critical, a critical- Operating income for FedEx Freight in 2002 reflects the shipment carrier; FedEx Trade Netw orks, w hose subsidiaries adoption of new rules from the FASB for the treatment of goodw ill for m a global trade ser vic es c ompany; FedEx Ser vic es, a and other intangible assets (as disc ussed in “ Consolidated provider of supply chain management services and sales, mar- Results” above). For FedEx Freight, adoption of these new rules keting and IT support for FedEx Express and FedEx Ground; and resulted in the cessation of $15 million of goodw ill amortization certain unallocated corporate items. Also included in this cate- that w ould have been recorded in operating expenses during gory are the operating results of FedEx Freight West prior to 2002. For 2001, goodw ill amortization recorded by FedEx Freight December 1, 2000. w as $6 million, reflecting the acquisition of FedEx Freight East in Revenues from ot her operat ions w ere $609 million January 2001. (dow n 40%) in 2002 compared to $1.0 billion in 2001 and $1.2 billion in 2000. During 2002, a significant portion of the decrease in rev- FedEx Freight Outlook enues reflects the fact that current year results for this category We announced in February 2002 that FedEx Freight East no longer include FedEx Freight West’s revenues (see “ FedEx (formerly know n as American Freightw ays) and FedEx Freight Freight” above). In both 2002 and 2001, revenues at FedEx Custom West (formerly know n as Viking Freight) are being rebranded Critical w ere dow n 24%, largely due to the economic dow nturn. under the name “ FedEx Freight.” We believe this w ill allow us to The demand for services provided by this operating subsidiary take advantage of the FedEx brand and create additional syner- (critical shipments) is highly elastic and tied to key economic gies, w hich w ill give us a competitive advantage and continue to indicators, principally in the automotive industry, w here volumes improve our market share in the LTL segment. The rebranding have been depressed since calendar 2001. expenses w ill consist primarily of incremental external costs for Operating income from other operations w as $5 million rebranding trac tors and trailers, w hic h w ill be expensed as in 2002 compared to an operating loss of $6 million in 2001 and incurred. The cost of the rebranding is expected to increase operating income of $95 million in 2000. The improvement in FedEx Freight’s operating expenses by approximately $15 million 2002 over 2001 reflects reduced operating costs at FedEx Supply in 2003. We expect a total of approximately $40 to $45 million to be Chain Services. The decrease in operating income in 2001 over spent on rebranding at FedEx Freight through 2005. 2000 reflects the effect of the economic slow dow n on FedEx The c omplementar y geographic regions ser ved by Custom Critical during 2001 (w hich had strong earnings grow th in FedEx Freight East and FedEx Freight West are expected to have 2000) and low er performance of FedEx Supply Chain Services. a positive impact on results of operations for this segment. Both Operating income in 2000 had strong earnings from FedEx Freight companies w ill continue to focus on day-definite regional LTL West and also included a $10 million favorable adjustment related service, but w ill also collaborate to serve customers w ho have to estimated future lease costs from a 1997 restructuring at FedEx multiregional LTL needs. Freight West. In June 2002 w e announced a series of new premium On M arch 1, 2002, a subsidiary of FedEx Trade Netw orks service offerings, including optional money-back guaranteed acquired certain assets of Fritz Companies, Inc., w hich provide transit times in the West and expanded next-day coverage up to essential c ustoms c learanc e ser vic es exc lusively for FedEx 900 miles in selected lanes in the East. These new service offer- Express in three U.S. locations at a cost of $36.5 million. ings w ill provide our customers w ith additional shipping options. On June 27, 2002, w e announced a general rate increase of 5.9% to 19 ––


  • Page 22

    M anagement’s Discussion and Analysis CRITICAL ACCOUNTING POLICIES the balance sheet date for shipments in transit and accrue all AND ESTIM ATES delivery costs as incurred. We believe this accounting policy effectively and consistently matches revenue w ith expenses and The preparation of financial statements in accordance recognizes liabilities as incurred. w ith accounting principles generally accepted in the United There are three key estimates that are included in the States requires management to adopt accounting policies and rec ognit ion and measurement of our revenue and related make significant judgments and estimates to develop amounts accounts receivable under the policies described above: (1) esti- reflected and disclosed in the financial statements. In many mates for unbilled revenue on shipments that have been delivered; cases, there are alternative policies or estimation techniques (2) estimates for revenue associated w ith shipments in transit; that could be used. We maintain a thorough process to review and (3) estimates for future adjustments to revenue or accounts the application of our accounting policies and to evaluate the receivable for billing adjustments and bad debts. appropriateness of the many estimates that are required to pre- pare the financial statements of a large, global corporation. Unbilled Revenue How ever, even under optimal circumstances, estimates routinely Primarily due to cycle billings to some of our larger cus- require adjustment based on changing circumstances and the tomers, there is a time lag betw een the completion of a shipment receipt of new or better information. and t he generat ion of an invoic e. A t t he end of a mont h, The policies and estimates discussed below include the unprocessed invoices may be as much as one-third of the total financial statement elements that are either the most judgmental month’s revenue. This revenue is recognized through systematic or involve the selection or application of alternative accounting accrual processes. M ost of these accruals are represented by policies, and are material to our financial statements. M anage- invoices that are essentially complete, w ith little subjectivity over ment has discussed the development and selection of these critical the amounts accrued. The remaining amounts are estimated accounting policies and estimates w ith the Audit Committee of using actual package or shipment volumes and current trends of our Board of Directors and w ith our independent auditors. average revenue per shipment. These estimates are adjusted in subsequent months to the actual amounts invoiced. Because of Revenue Recognition the low level of subjectivity inherent in these accrual processes, the estimates have historic ally not varied signific antly from We believe the policies adopted to recognize revenue actual amounts subsequently invoiced. are critical because an understanding of the accounting applied in this area is fundamental to assessing a company’s overall Shipments in Process financ ial per for manc e, and bec ause revenue and revenue The majority of our shipments have short cycle times grow th are key measures of financial performance in the market- and therefore less than 5% of a total month’s revenue is typically place. Our businesses are primarily involved in the direct pickup in transit at the end of a period. At month-end, w e estimate the and delivery of commercial package and freight shipments. Our amount of revenue earned on shipments in process based on employees and agents are involved throughout the process and actual shipments picked up, the scheduled day of delivery, the our operational, billing and accounting systems directly capture day of the w eek on w hich the month ends (w hich affects the per- and control all relevant information necessary to record revenue, centage of completion) and current trends in our average price bill customers and collect amounts due to us. for the respective services. We believe these estimates provide a We recognize revenue upon delivery of shipments or, reasonable approximation of the actual revenue earned at the for our logistics and trade services businesses, upon the comple- end of a period. t ion of ser vic es. In addit ion, transpor tat ion industr y prac - tice includes tw o primary methods for revenue recognition for Future Adjustments to Revenue and Accounts Receivable shipments in process at the end of an accounting period: (1) rec- Like many companies, w e experience some credit loss ognize all revenue and the related delivery costs w hen shipments on our trade accounts receivable. Historically, our credit losses are delivered or (2) recognize a portion of the revenue earned for from bad debts have not fluctuated materially because our credit shipments that have been picked up but not yet delivered at management processes have been highly effective. We also period end and accrue delivery costs as incurred. We use the recognize billing adjustments to revenue and accounts receivable second method; w e recognize the portion of revenue earned at 20 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation for c er tain disc ounts, money bac k ser vic e guarantees and decrease in the discount rate to 7.1% for 2002 from 7.7% for 2001 billing corrections. w ill negatively affect our 2003 pension cost by approximately Estimates for credit losses and billing adjustments are $60 million. regularly updated based on historical experience of bad debts, We determine the discount rate (w hich is meant to be adjustments processed, and current collections trends. Allow - the current rate at w hich the projected benefit obligation could ances for these future adjustments aggregated $147 million at be effectively settled) w ith the assistance of actuaries, w ho cal- M ay 31, 2002 and $137 million at M ay 31, 2001. We consider the culate the yield on a theoretical portfolio of high-grade corporate sensitivity and subjectivity of these estimates to be moderate, as bonds w ith c oupon payments and maturit ies that generally c hanges in ec onomic c onditions, pric ing arrangements and match our expected benefit payments. This methodology is con- billing systems can significantly affect the estimates used to sistently applied and involves little subjectivity. How ever, the determine the allow ances. calculated discount rate can change materially from year to year based on economic market conditions that impact yields on cor- Pension Cost porate bonds. We sponsor defined benefit pension plans covering a Plan Assets majority of our employees. The accounting for pension benefits is The estimated average rate of return on plan assets is a determined by standardized accounting and actuarial methods long-term assumption that also materially affects our pension that inc lude numerous est imates, w hic h inc lude: employee cost. W ith over $5.5 billion of plan assets, a one-basis-point turnover, mortality and retirement ages; discount rates; expected c hange in this assumpt ion direc tly af fec ts pension c ost by long-term investment returns on plan assets; and future salary approximately $600,000 (a decrease in the assumed expected increases. We consider the most critical of these to be our dis- long-term rate of return has a negative effect on pension expense). count rate, the expected long-term rate of return on plan assets Our 2002 expected long-term rate of return of 10.9% (and the method for determining the value of plan assets to w hich reflects our active investment management program, w hich has the expected long-term rate of return is applied) and the rate of consistently outperformed the related market indices over the future increases in salaries. past ten years. Also, because of our relatively young w orkforce, For FedEx, many of these assumptions are highly sensi- w e are able to maintain more of our pension assets invested in tive in the determination of a year’s pension cost because w e higher-returning, longer-term equity investments. W hile plan have a large w orkforce that is relatively young and w e have a sig- investments are subject to shor t-term volatility, they are w ell nificant amount of assets in the pension plans. For example, diversified and the asset por tfolios are closely managed. We few er than 5% of the participants covered under our principal review the expected long-term rate of return on an annual basis pension plan are ret ired and c urrent ly rec eiving benef its. and revise it accordingly. Based on recent trends in asset perfor- Therefore, the payout of pension benefits w ill occur over a long mance and generally low er risk premiums in equity markets, w e period in the future. This long-time period increases the sensitiv- low ered the expected long-term rate of return for 2003 to 10.1%. ity of certain estimates on our pension cost. Total pension costs This 80-basis-point decrease in the expected long-term rate of increased approximately $90 million in 2002 and are expected to return w ill negatively affect our 2003 pension cost by approxi- increase an additional $90 million in 2003. mately $48 million. Further adjustments to this estimate may be necessary in the future. Discount Rate Investment losses have also reduc ed t he level of This is the interest rate used to discount the estimated assets to w hich the expected long-term rate of return is applied, future benefit payments that have been earned to date to their w hich w ill further increase our pension cost in 2003. Despite poor net present value (defined as the projected benefit obligation). asset performance over the past tw o years that has generated The discount rate is determined at the plan measurement date investment losses, our pension plan is and w ill continue to be (February 28) and affects the succeeding year’s pension cost. A appropriately funded to meet the payment of benefits as such decrease in the discount rate has a negative effect on pension obligations become due. expense. This assumption is highly sensitive, as a one-basis-point Pension expense is also affected by the accounting change in the discount rate affects our pension expense by policy used to determine the value of plan assets at the measure- approximately $1 million. For example, t he 60-basis-point ment date. We use a c alc ulated value method, w hic h helps 21 ––


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    M anagement’s Discussion and Analysis mit igate shor t-ter m volat ilit y in market per for manc e (bot h Long-Lived Assets increases and decreases). The application of this accounting policy reduced 2002 pension cost by approximately $16 million. Property and Equipment Our key businesses are capital intensive. Over 60% of Salary Increases our total assets are invested in our transportation and informa- The assumed future increase in salaries and w ages is tion systems infrastructures. We capitalize only those costs that also a key estimate in determining pension cost. We correlate meet the definition of capital assets under accounting standards. changes in estimated future salary increases to changes in the dis- Accordingly, repair and maintenance costs that do not extend the count rate (since that is an indicator of general inflation and cost of useful life of the asset are expensed as incurred. living adjustments) and general estimated levels of profitability The depreciation or amortization of our capital assets (incentive compensation is a component of pensionable w ages). over their estimated useful lives, and the determination of any A one-basis-point change in the rate of estimated future salaries salvage values, requires management to make judgments about affects pension costs by approximately $700,000 (a decrease in this future events. Because w e utilize many of our capital assets over rate w ill decrease pension cost). Thus, the decrease in the assump- relatively long periods (over 20 years for certain of our aircraft tion to 3.3% at the end of 2002 from 4.0% w ill favorably impact 2003 equipment), w e periodically evaluate w hether adjustments to our pension cost by approximately $50 million. estimated lives or salvage values are necessary. The accuracy of these estimates affects the amount of depreciation expense rec- Self-Insurance Accruals ognized in a period and, ultimately, the gain or loss on the disposal of the asset. Historically, gains and losses on operating equip- We are self-insured up to certain limits for costs associ- ment have not been material (typic ally less than $10 million ated w ith w orkers’ compensation claims, vehicle accident and annually). How ever, such amounts may differ materially in the general business liabilities, and benefits paid under employee future based on technological obsolescence, accident frequency, health care programs. At M ay 31, 2002 w e had total self-insurance regulatory requirements, and other factors beyond our control. accruals reflected in our balance sheet of approximately $839 mil- Because w e must plan for future volume levels for mul- lion ($776 million at M ay 31, 2001). tiple years in order to make commitments for aircraft based on The measurement of these costs requires the consider- those projections, w e have risks that asset capacity may exceed ation of historic al loss experienc e and judgments about the demand and that an impairment of our assets may occur. The present and expected levels of cost per claim. We account for accounting test for w hether an asset held for use is impaired these costs primarily through actuarial methods, w hich develop involves first comparing the carrying value of the asset w ith its estimates of the undiscounted liability for claims incurred, includ- estimated future undiscounted cash flow s. If the cash flow s do ing those c laims inc urred but not repor ted. These methods not exceed the carrying value, the asset must be adjusted to its provide estimates of future ultimate claim costs based on claims current fair value. Because the cash flow s of our transportation incurred as of the balance sheet date. Other acceptable methods netw orks cannot be identified to individual assets, and based on of accounting for these accruals include measurement of claims the ongoing profitability of our operations, w e have not experi- outstanding and projected payments. enced any significant impairment of assets to be held and used. We believe the use of actuarial methods to account for How ever, from t ime to t ime w e make dec isions to these liabilities provides a consistent and effective w ay to meas- remove certain long-lived assets from service based on projec- ure these highly judgmental accruals. How ever, the use of any tions of capacity needs, and those decisions may result in an estimation technique in this area is inherently sensitive given the impairment. For example, in 2001 w e made the decision to elimi- magnitude of claims involved and the length of time until the ulti- nate certain excess aircraft capacity at FedEx Express related to mate cost is know n. We believe our recorded obligations for our M D10 conversion program. The decision allow ed us to avoid these expenses are consistently measured on a conservative approximately $1.1 billion in future c apital expenditures and basis. Nevertheless, changes in health costs, accident frequency resulted in an impairment charge of $93 million to reduce the and severity, and other factors can materially affect the esti- mates for these liabilities. 22 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation value of the affected assets to their estimated disposal value. The FINANCIAL CONDITION estimate of fair value requires management to make assumptions about the most likely potential value of assets to be disposed of Liquidity and the estimated future costs of disposal. During 2002 w e sub- stantially completed the disposal of the impaired M D10 program We reac hed a signific ant milestone in 2002, as w e assets, w hich resulted in a favorable adjustment of $9 million. dec lared our first-ever c ash dividend. On M ay 31, 2002, w e announced that shareholders of record as of the close of busi- Leases ness on June 17, 2002 w ill be paid a $.05 cash dividend per share We utilize operating leases to financ e a signific ant of common stock. We expect to continue these quarterly divi- number of our aircraft. Over the years, w e have found these leas- dend payments, although each subsequent dividend payment is ing arrangements to be favorable from a cash flow and risk subject to review and approval by our Board of Directors. management standpoint. Such arrangements typically shift the Cash and c ash equivalents totaled $331 million at risk of loss on the residual value of the assets at the end of the M ay 31, 2002, compared to $121 million at M ay 31, 2001. The fol- lease period to the lessor. As disclosed in “ Contractual Cash low ing table provides a summary of our cash flow s for the years Obligations” below and Note 7 to the accompanying audited ended M ay 31 (in millions): financial statements, at M ay 31, 2002 w e had approximately $15 billion (on an undiscounted basis) of future commitments for 2002 2001 2000 operating leases. Cash provided by operating activities $ 2,228 $ 2,044 $ 1,625 The future commitments for operating leases are not Cash used in investing activities: reflected as a liability in our balance sheet because the leases do Capital investments and other (1,577) (1,636) (1,451) not meet the accounting definition of capital leases. The determi- Business acquisitions (35) (477) (257) nation of w hether a lease is accounted for as a capital lease or an Free cash flow 616 (69) (83) operating lease requires management to make estimates pri- Cash (used in) provided by marily about t he fair value of t he asset and its est imated financing activities (406) 122 (174) economic useful life. We believe w e have w ell-defined and con- Increase (decrease) in cash $ 210 $ 53 $ (257) trolled processes for making this evaluation. The follow ing cash-based measure is presented as an Goodw ill additional means of evaluating our financial condition because We have in excess of $1 billion of goodw ill on our bal- w e incur significant noncash charges, including depreciation ance sheet resulting from the acquisition of businesses. New and amortization, related to the material capital assets utilized in accounting standards adopted in 2002 require that w e review this our business. This measure should not be considered as a supe- goodw ill for impairment on an annual basis and cease all good- rior alternative to net inc ome, operating inc ome, c ash from w ill amortization. As previously indicated, the adoption of these operations, or any other operating or liquidity per for manc e new rules resulted in an impairment of our recorded goodw ill of measure as defined by accounting principles generally accepted $25 million in 2002 at one of our smaller businesses. The annual in the United States. The follow ing table compares EBITDA, as evaluation of goodw ill impairment requires the use of estimates adjusted (earnings before goodw ill accounting change, interest, about the future cash flow s of each of our repor ting units to taxes, depreciation and amortization) for the years ended M ay 31 determine their estimated fair values. Changes in forecasted (in billions): operations and changes in discount rates can materially affect these estimates. How ever, once an impairment of goodw ill has 2002 2001 2000 been recorded, it cannot be reversed. EBITDA, as adjusted $ 2.7 $ 2.3 $ 2.4 23 ––


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    M anagement’s Discussion and Analysis The increase in cash flow s from operating activities in Debt Financing Activities 2002 reflects increases in EBITDA, as adjusted (w hich includes At April 1, 2002, certain existing debt at FedEx Express FedEx Freight for an entire year) and aggressive w orking capital matured, principally $175 million of 9.875% Senior Notes. Also, in management. In 2001, the addition of FedEx Freight East improved the fourth quarter of 2002, w e prepaid the remaining $101 million cash provided by operating activities for that year. of debt that w as assumed in connection w ith the purchase of FedEx Freight East. Cash Used for Capital Investments In the third quarter of 2001, w e issued $750 million of Capital expenditures during 2002 w ere low er, primarily senior unsecured notes in three maturity tranches: three, five at FedEx Express w here capital expenditures w ere 14% low er and ten years, at $250 million eac h. Net proc eeds from the due to our ef for ts at the end of 2001 to matc h our planned borrow ings w ere used to repay indebtedness, principally bor- spending w ith anticipated volume levels. We have taken vari- row ings under our commercial paper program, and for general ous actions to reduce future capital expenditures over the past corporate purposes. These notes are guaranteed by all of our tw o years, inc luding those related to the c ur tailment of our subsidiaries that are not considered minor under Securities and M D10 program (discussed in “ Consolidated Results” above) Exchange Commission (“ SEC” ) regulations. and the cancellation of certain contractual obligations to pur- We currently have $1 billion in revolving bank credit chase 19 M D11 aircraft from an affiliate of SAirGroup. These facilities that are generally used to finance temporary operating actions resulted in the elimination of approximately $2.1 billion cash requirements and to provide support for the issuance of in future capital expenditures. During 2002, w e continued to commercial paper. As of M ay 31, 2002, w e had no commercial make investments in FedEx Ground’s infrastructure and infor- paper outstanding and the entire credit facilities w ere available. mat ion tec hnology and w e also made c apital investments For more information regarding these credit facilities, see Note 6 to expand FedEx Freight. See “ Capital Resources” below for of the accompanying audited financial statements. further discussion. During 2002, w e filed a $1.0 billion shelf registration statement w ith the SEC to provide flexibility and efficiency w hen Cash Used for Business Acquisitions obtaining financing. Under this shelf registration statement w e During 2002, a subsidiar y of FedEx Trade Netw orks may issue, in one or more offerings, either unsecured debt secu- acquired cer tain assets of Fritz Companies, Inc. that provide rities, common stock, or a combination of such instruments. essential c ustoms c learanc e ser vic es exc lusively for FedEx Express in three U.S. locations. During 2001, w e acquired FedEx Cash Used for Share Repurchases Freight East for approximately $980 million w ith a combination of We repurchased approximately 3.3 million shares of our cash and FedEx common stock. During 2000, w e acquired three common stock in 2002, at a cost of approximately $177 million, businesses for approximately $264 million, primarily in cash. See under our 5.0 million share repurc hase program. During the Note 3 to the accompanying audited financial statements for fur- fourth quarter of 2002, the Board of Directors authorized us to buy ther discussion of business combinations. back an additional 5.0 million shares of common stock. There w ere no treasury share repurchases during 2001 and, during Free Cash Flow 2000, cash flow s w ere affected by approximately $607 million Cash flow from operations during 2002 exceeded our from the repurchase of 15 million shares. cash used for investing activities, creating free cash flow of $616 million, w ith w hich w e paid off over $300 million in debt and Other Liquidity Information repurchased treasury shares. The achievement of positive free We w ill remain focused on cost containment and capi- cash flow is attributable to management of capital expenditures tal expenditure discipline so w e may continue to achieve positive and w orking capital. Positive free cash flow indicates excess free cash flow in the future. We believe that cash flow from oper- funds are available to invest in operations, reduce outstanding ations, our commercial paper program and revolving bank credit debt and provide return on capital to our shareholders. facilities w ill adequately meet our w orking capital needs for the foreseeable future. 24 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation Capital Resources needed airlift capacity many years before aircraft are actually needed. We w ill continue to manage our capital spending based We have invested aggressively to build our global net- on current and anticipated volume levels, and defer or limit capital w ork and information systems. In recent years, w e invested in additions w here economically feasible in order to achieve positive the strategic acquisitions that have become FedEx Ground, FedEx cash flow. Freight, FedEx Custom Critical and FedEx Trade Netw orks. The On July 12, 2002, FedEx Express entered into an agree- sustained need for capital investments and strategic acquisitions ment w it h AVSA , S.A.R.L. for t he pur c hase of ten A ir bus throughout those years meant w e w ere not able to generate a A380- 800F aircraft, a new high-capacity, long-range airplane. We positive cash flow after investing activities until 2002. W ith the expect to take delivery of three of the ten aircraft in each of the infrastructure and operating systems now largely in place, w e years 2008, 2009 and 2010 and the remaining one in 2011. The total have been able to reduce our capital spending, including equiva- commitment under the agreement approximates $2 billion. M ost lent capital (as defined below ), since 2000. of the purchase price of each aircraft is due upon delivery of the Despite the decrease in capital spending, our opera- aircraft. The agreement also provides for an option to purchase t ions remain c apital intensive, c harac terized by signific ant an additional ten aircraft. investments in aircraft, vehicles, computer hardw are and soft- We have historically financed our long-term capital w are and telecommunications equipment, package-handling investments through the use of lease, debt and equity financing facilities and sort equipment. The amount and timing of capital in addition to the use of internally generated cash from opera- additions depend on various factors, including preexisting con- tions. The determination to lease versus buy equipment is a tractual commitments, anticipated volume grow th, domestic and financing decision, and all forms of financing are considered international economic conditions, new or enhanced services, w hen evaluat ing t he resourc es c ommit ted for c apital. The geographical expansion of services, competition, availability of amount w e w ould have expended to purchase these assets had satisfactory financing and actions of regulatory authorities. w e not chosen to obtain their use through operating leases The follow ing table c ompares c apital expenditures (leases w ith terms in excess of 50% of the asset’s useful life) is (including equivalent capital) for the years ended M ay 31 (in millions): considered equivalent capital in the table above and is included in our internal capital budget. We had no equivalent capital 2002 2001 2000 expenditures during 2002 or 2001. Aircraft and related equipment $ 730 $ 756 $ 469 We finance a significant amount of our aircraft needs Facilities and sor t equipment 292 353 437 (and certain other equipment needs) using operating leases (a Information and technology investments 240 406 378 type of “ off-balance sheet financing” ). Certain of these operat- Vehicles and other equipment 353 378 343 ing leases w ere arranged using special purpose entities under Total capital expenditures 1,615 1,893 1,627 terms that are considered customary in the airline industry. At Equivalent capital, principally aircraft-related – – 365 the time that the decision to lease w as made, w e determined Total $1,615 $1,893 $1,992 that these operating leases w ould provide economic benefits favorable to ow nership w ith respect to market values, liquidity (See Note 13 to t he ac c ompanying audited financ ial statements for a break- and after-tax cash flow s. In accordance w ith accounting princi- dow n of c apital expenditures by segment.) ples generally ac c epted in the United States, our operating leases are not recorded in our balance sheet; how ever, the mini- In 2002, in spite of capital spending related to the 2001 mum lease payments related to these leases are disclosed in addition of FedEx Freight East, as w ell as scheduled deliveries of Note 7 to the accompanying audited financial statements as w ell aircraft that w ere planned and committed to w ell before the eco- as in “ Contractual Cash Obligations” below. nomic slow dow n, management’s cost-reduction actions resulted Credit rating agencies routinely use the information in a decrease in capital spending compared to both 2001 and 2000. concerning our operating leases to calculate our debt capacity. For 2003, w e expect capital expenditures to be approximately Furthermore, our debt covenants w ould not be adversely affected $1.9 billion, as w e are required to take 17 aircraft committed to in by the capitalization of some or all of our operating leases. prior years. Because of substantial lead times associated w ith the In the future, other forms of secured financing may be manufacture or modification of aircraft, w e must generally plan pursued to finance aircraft acquisitions if w e determine that it our airc raf t orders or modific at ions t hree to eight years in best suits our needs. We have been successful in obtaining advance. Therefore, w e must make projections regarding our investment capital, both domestic and international, for long-term 25 ––


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    M anagement’s Discussion and Analysis leases on acceptable terms, although the marketplace for such the end of the respective operating lease periods. These guaran- capital can become restricted depending on a variety of eco- tees are not reflected in our balance sheet since they are not nomic factors. We believe the capital resources available to us currently considered probable; therefore, they do not represent provide flexibility to access the most efficient markets for financ- liabilities under accounting principles generally accepted in the ing capital acquisitions, including aircraft, and are adequate for United States. our future capital needs. For information on our purchase com- mitments, see Note 15 of the accompanying audited financial M arket Risk Sensitive Instruments and Positions statements, as w ell as the table below. W hile w e currently have market risk sensitive instru- Contractual Cash Obligations ments related to interest rates, w e have no significant exposure to changing interest rates on our long-term debt because the interest The follow ing table sets forth a summary of our contrac- rates are fixed. We have outstanding long-term debt (exclusive of tual c ash obligat ions as of M ay 31, 2002. Cer tain of t hese capital leases) of $1.6 billion and $1.9 billion at M ay 31, 2002 and contractual obligations are reflected in our balance sheet, w hile 2001, respectively. M arket risk for fixed-rate, long-term debt is others are disclosed as future obligations under accounting prin- estimated as the potential decrease in fair value resulting from a ciples generally accepted in the United States. hypothetic al 10% inc rease in interest rates and amounts to approximately $49 million as of M ay 31, 2002 and $55 million as of Payments Due by Fiscal Year M ay 31, 2001. The underlying fair values of our long-term debt There- w ere estimated based on quoted market prices or on the current (in millions) 2003 2004 2005 2006 2007 after Total rates offered for debt w ith similar terms and maturities. Currently, Amounts reflected in balance sheet: derivative instruments are not used to manage interest rate risk. Long-term debt1 $ 6 $ 275 $ 6 $ 257 $ 226 $ 830 $ 1,600 While w e are a global provider of transportation services, Capital lease the substantial majority of our transactions are denominated in obligations2 12 12 12 12 12 253 313 U.S. dollars. The distribution of our foreign currency denominated Other cash obligations not included in balance sheet: transactions is such that currency declines in some areas of the Operating w orld are often offset by foreign currency gains of equal magni- leases 2 1,501 1,235 1,162 1,053 1,028 8,791 14,770 tude in other areas of the w orld. The principal foreign currency Unconditional exchange rate risks to w hich w e are exposed are in the euro, purchase Brit ish pound sterling, Canadian dollar and J apanese yen. obligations 3,4 1,024 371 323 305 195 243 2,461 Foreign currency fluctuations during 2002 did not have a material Total $2,543 $1,893 $1,503 $1,627 $1,461 $10,117 $19,144 effect on our results of operations. At M ay 31, 2002, the result of a 1 uniform 10% strengthening in the value of the dollar relative See Note 6 to t he ac c ompanying audited financ ial statements. 2 to the currencies in w hich our transactions are denominated See Note 7 to t he ac c ompanying audited financ ial statements. 3 See Note 15 to t he ac c ompanying audited financ ial statements. w ould result in a decrease in operating income of approximately 4 Does not inc lude c ommitments made on J uly 12, 2002 for purc hase of $30 million for the year ending M ay 31, 2003 (the comparable Airbus A380 airc raf t . amount in the prior year w as approximately $70 million). This cal- culation assumes that each exchange rate w ould change in the In addition, w e have other commercial commitments same direction relative to the U.S. dollar. incurred in the normal course of business to support our opera- In practice, our experience is that exchange rates in tions, including surety bonds and standby letters of credit. These the principal foreign markets w here w e have foreign currency instruments are generally required under certain self-insurance denominated transactions tend to have offsetting fluctuations. programs. While the notional amounts of these instruments are Therefore, the calculation above is not indicative of our actual material, there are no additional contingent liabilities associated experience in foreign currency transactions. In addition to the w ith them because the liabilities for these self-insurance pro- direc t ef fec ts of c hanges in exc hange rates, w hic h are a grams are already reflected in our balance sheet as accrued changed dollar value of the resulting reported operating results, expenses and other long-term liabilities. We also have guarantees, changes in exchange rates also affect the volume of sales or the amounting to $137 million at M ay 31, 2002, under certain operating foreign currency sales price as competitors’ services become leases for the residual values of aircraft, vehicles and facilities at more or less attractive. The sensitivity analysis of the effects of 26 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation changes in foreign currency exchange rates does not factor in a statements involve risks and uncertainties. Actual results may potential change in sales levels or local currency prices. differ materially from those c ontemplated by suc h for w ard- We have market risk for changes in the price of jet and looking statements, because of, among other things, potential diesel fuel; how ever, this risk is largely mitigated by revenue risks and uncertainties, such as: from our fuel surcharges. In 2002, w e implemented new indices - the impact of the events of September 11, 2001, or any sub- for calculating fuel surcharges, w hich more closely link the sequent terrorist activities, on the United States and global fuel surcharges to prevailing market prices for fuel. Therefore, economies in general, or the transportation industry in par- a hypothetical 10% change in the price of fuel w ould not be ticular, and w hat effects these events w ill have on our costs or expected to materially affect our earnings. How ever, our fuel the demand for our services; surcharges have a lag that exists before they are adjusted for - economic conditions in the markets in w hich w e operate, changes in jet and diesel fuel prices. Therefore our operating including the timing, speed and magnitude of the economy’s income may be affected should the spot price of fuel suddenly recovery from the dow nturn that began in calendar 2001 in the change by a significant amount. sectors that drive demand for our services; For 2001, market risk for jet fuel w as estimated as the - our ability to manage our cost structure for capital expen- potential decrease in earnings resulting from a hypothetical 10% ditures and operating expenses and match them, especially increase in jet fuel prices applied to projected 2002 usage and those relating to aircraft, vehicle and sort capacity, to shifting amounted to approximately $100 million, net of hedging settle- customer volume levels; ments. As of M ay 31, 2001, all outstanding jet fuel hedging - market acceptance of our new service and grow th initiatives, contracts w ere effectively closed by entering into offsetting jet including our residential home delivery service; fuel hedging contracts. See Notes 1 and 2 to the accompanying - sudden changes in fuel prices; audited financial statements for accounting policy and additional - the timing and amount of any money w e are entitled to receive information regarding jet fuel hedging contracts. under the Air Transportation Safety and System Stabilization Act; We do not purchase or hold any derivative financial - competition from other providers of transportation and logis- instruments for trading purposes. tics services; - our ability to compete w ith new or improved services offered Euro Currency Conversion by our competitors; - changes in customer demand patterns; Since the beginning of the European Union’s transition - our ability to obtain and maintain aviation rights in important to the euro on January 1, 1999, our subsidiaries have been pre- international markets; pared to quote rates to customers, generate billings and accept - changes in government regulation, w eather and technology; payments, in both euro and legacy currencies. The legacy cur- - availability of financing on terms acceptable to us; and rencies remained legal tender through January 1, 2002. We did - other risks and uncertainties you can find in our press releases not experience a material impact on our consolidated financial and SEC filings. position, results of operations or cash flow s from the introduction As a result of these and other factors, no assurance of the euro and any price transparency brought about by its intro- c an be given as to our futur e r esults and ac hievements. duction and the phasing out of the legacy currencies. Costs Accordingly, a forw ard-looking statement is not a prediction of associated w ith the euro project w ere expensed as incurred and future events or circumstances, and those future events or cir- w ere funded entirely by internal cash flow s. cumstances may not occur. You should not place undue reliance on the forw ard-looking statements, w hich speak only as of the FORWARD-LOOKING STATEM ENTS date of this report. We are under no obligation, and w e expressly disclaim any obligation, to update or alter any forw ard-looking This report contains forw ard-looking statements w ith statements, w het her as a result of new infor mat ion, future respect to the financial condition, results of operations, plans, events or otherw ise. objectives, future performance and business of FedEx. Forw ard- looking statements include those preceded by, follow ed by or that include the w ords “ believes,” “ expects,” “ anticipates,” “ est imates” or similar expressions. These for w ard-looking 27 ––


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    Consolidated Statements of Income Years ended M ay 31 In millions, except per share amounts 2002 2001 2000 REVENUES $20,607 $19,629 $18,257 Operating Expenses Salaries and employee benefits 9,099 8,263 7,598 Purchased transpor tation 1,825 1,713 1,675 Rentals and landing fees 1,780 1,650 1,538 Depreciation and amor tization 1,364 1,276 1,155 Fuel 1,100 1,143 919 M aintenance and repairs 1,240 1,170 1,101 Airline stabilization compensation (119) – – Other 2,997 3,343 3,050 19,286 18,558 17,036 OPERATING INCOM E 1,321 1,071 1,221 Other Income (Expense) Interest, net (139) (144) (106) Other, net (22) – 23 (161) (144) (83) Income Before Income Taxes 1,160 927 1,138 Provision for Income Taxes 435 343 450 Income Before Cumulative Effect of Change in Accounting Principle 725 584 688 Cumulative Effect of Change in Accounting for Goodw ill, Net of Tax Benefit of $10 (15) – – NET INCOM E $ 710 $ 584 $ 688 BASIC EARNINGS PER COM M ON SHARE: Income before cumulative effect of change in accounting principle $ 2.43 $ 2.02 $ 2.36 Cumulative effect of change in accounting for goodw ill (.05) – – Basic Earnings Per Common Share $ 2.38 $ 2.02 $ 2.36 DILUTED EARNINGS PER COM M ON SHARE: Income before cumulative effect of change in accounting principle $ 2.39 $ 1.99 $ 2.32 Cumulative effect of change in accounting for goodw ill (.05) – – Diluted Earnings Per Common Share $ 2.34 $ 1.99 $ 2.32 The ac c ompanying notes are an integral par t of t hese c onsolidated financ ial statements. 28 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y Consolidated Balance Sheets M ay 31 In millions, except share data 2002 2001 ASSETS Current Assets Cash and cash equivalents $ 331 $ 121 Receivables, less allow ances of $147 and $137 2,491 2,506 Spare par ts, supplies and fuel, less allow ances of $91 and $78 251 269 Deferred income taxes 469 488 Prepaid expenses and other 123 117 Total current assets 3,665 3,501 Property and Equipment, at Cost Aircraft and related equipment 5,843 5,313 Package handling and ground suppor t equipment and vehicles 4,866 4,621 Computer and electronic equipment 2,816 2,637 Other 4,051 3,841 17,576 16,412 Less accumulated depreciation and amor tization 9,274 8,312 Net proper ty and equipment 8,302 8,100 Other Assets Goodw ill 1,063 1,052 Other assets 782 739 Total other assets 1,845 1,791 $13,812 $13,392 LIABILITIES AND STOCKHOLDERS’ INVESTM ENT Current Liabilities Current por tion of long-term debt $ 6 $ 221 Accrued salaries and employee benefits 739 700 Accounts payable 1,133 1,256 Accrued expenses 1,064 1,073 Total current liabilities 2,942 3,250 Long-Term Debt, Less Current Portion 1,800 1,900 Deferred Income Taxes 599 508 Other Liabilities 1,926 1,834 Commitments and Contingencies Common Stockholders’ Investment Common stock, $.10 par value; 800,000,000 shares authorized; 298,573,387 shares issued for 2002 and 2001 30 30 Additional paid-in capital 1,144 1,120 Retained earnings 5,465 4,880 Accumulated other comprehensive income (53) (56) 6,586 5,974 Less treasury stock, at cost and deferred compensation 41 74 Total common stockholders’ investment 6,545 5,900 $13,812 $13,392 The ac c ompanying notes are an integral par t of t hese c onsolidated financ ial statements. 29 ––


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    Consolidated Statements of Cash Flow s Years ended M ay 31 In millions 2002 2001 2000 OPERATING ACTIVITIES Net income $ 710 $ 584 $ 688 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amor tization 1,364 1,276 1,155 Provision for uncollectible accounts 110 114 72 Aircraft-related (recoveries) impairment charges (9) 102 – Deferred income taxes and other noncash items 14 (20) (24) Cumulative effect of change in accounting principle 15 – – Changes in operating assets and liabilities, net of the effects of businesses acquired: (Increase) decrease in receivables (88) 60 (406) Decrease (increase) in other current assets 63 (112) 71 Increase in accounts payable and other operating liabilities 81 102 108 Other, net (32) (62) (39) Cash provided by operating activities 2,228 2,044 1,625 INVESTING ACTIVITIES Capital expenditures (1,615) (1,893) (1,627) Proceeds from: Sale-leaseback transactions – 237 – Reimbursements of A300 and M D11 deposits – – 24 Dispositions 27 37 165 Business acquisitions, net of cash acquired (35) (477) (257) Other, net 11 (17) (13) Cash used in investing activities (1,612) (2,113) (1,708) FINANCING ACTIVITIES Principal payments on debt (320) (650) (115) Proceeds from debt issuances – 744 518 Proceeds from stock issuances 88 29 16 Purchases of treasury stock (177) – (607) Other, net 3 (1) 14 Cash (used in) provided by financing activities (406) 122 (174) CASH AND CASH EQUIVALENTS Net increase (decrease) in cash and cash equivalents 210 53 (257) Balance at beginning of year 121 68 325 Balance at end of year $ 331 $ 121 $ 68 The ac c ompanying notes are an integral par t of t hese c onsolidated financ ial statements. 30 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y Consolidated Statements of Changes in Stockholders’ Investment and Comprehensive Income Accumulated Additional Other Com- Deferred Common Paid-in Retained prehensive Treasury Compen- In millions, except shares Stock Capital Earnings Income Stock sation Total BALANCE AT M AY 31, 1999 $30 $1,061 $3,616 $(25) $ (1) $(17) $4,664 Net income – – 688 – – – 688 Foreign currency translation adjustment, net of deferred tax benefit of $2 – – – (9) – – (9) Unrealized loss on available-for-sale securities, net of deferred tax benefit of $2 – – – (2) – – (2) Total comprehensive income 677 Shares issued for acquisition (175,644 shares) – – – – 7 – 7 Purchase of treasury stock – – – – (607) – (607) Employee incentive plans and other (1,539,941 shares issued) – 18 (9) – 37 (14) 32 Amor tization of deferred compensation – – – – – 12 12 BALANCE AT M AY 31, 2000 30 1,079 4,295 (36) (564) (19) 4,785 Net income – – 584 – – – 584 Foreign currency translation adjustment, net of deferred tax benefit of $7 – – – (19) – – (19) Unrealized loss on available-for-sale securities, net of deferred tax benefit of $1 – – – (1) – – (1) Total comprehensive income 564 Shares issued for acquisition (11,042,965 shares) – 41 28 – 438 – 507 Employee incentive plans and other (1,841,543 shares issued) – – (27) – 73 (14) 32 Amor tization of deferred compensation – – – – – 12 12 BALANCE AT M AY 31, 2001 30 1,120 4,880 (56) (53) (21) 5,900 Net income – – 710 – – – 710 Foreign currency translation adjustment, net of deferred taxes of $1 – – – 6 – – 6 M inimum pension liability adjustment, net of deferred tax benefit of $2 – – – (3) – – (3) Reclassification of deferred jet fuel hedging charge upon adoption of SFAS 133, net of deferred tax benefit of $6 – – – (9) – – (9) Adjustment for jet fuel hedging charges recognized in expense during period, net of deferred taxes of $6 – – – 9 – – 9 Total comprehensive income 713 Purchase of treasury stock – – – – (177) – (177) Cash dividends declared ($0.05 per share) – – (15) – – – (15) Employee incentive plans and other (4,224,444 shares issued) – 24 (110) – 210 (12) 112 Amor tization of deferred compensation – – – – – 12 12 BALANCE AT M AY 31, 2002 $30 $1,144 $5,465 $(53) $ (20) $(21) $6,545 The ac c ompanying notes are an integral par t of t hese c onsolidated financ ial statements. 31 ––


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    Notes to Consolidated Financial Statements Note 1: Description of Business and Credit Risk Summary of Significant Accounting Policies We routinely grant credit to many of our customers for transportation services w ithout collateral. The risk of credit loss Description of Business in our trade receivables is substantially mitigated by our credit FedEx Cor por at ion (“ FedEx” ) is a pr emier global evaluation process, short collection terms, and sales to a large provider of transportation, e-commerce and supply chain man- number of customers, as w ell as the low revenue per transaction agement services, w hose operations are primarily represented for most of our transportation services. Allow ances for potential by Federal Express Corporation (“ FedEx Express” ), the w orld’s credit losses are determined based on historical experience, cur- largest express transportation company; FedEx Ground Package rent evaluation of the composition of accounts receivable and System, Inc. (“ FedEx Ground” ), North America’s second largest expected credit trends. Historically, credit losses have been provider of small-package ground delivery service; and FedEx w ithin management’s expectations. Freight Corporation (“ FedEx Freight” ), the largest U.S. provider of regional less-than-truckload (“ LTL” ) freight services. These busi- Revenue Recognition nesses c omprise our repor table operating segments. Other Revenue is recognized upon delivery of shipments or operating companies included in the FedEx portfolio are FedEx the completion of the service for our logistics and trade services Custom Crit ic al, Inc . (“ FedEx Custom Crit ic al” ), a c rit ic al- businesses. For shipments in transit, revenue is recorded based shipment c arrier; FedEx Trade Netw orks, Inc . (“ FedEx Trade on the percentage of service completed at the balance sheet Netw orks” ), a global trade services company; and FedEx Supply date. Delivery costs are accrued as incurred. Chain Services, Inc. (“ FedEx Supply Chain Services” ), a contract Our contract logistics and global trade services busi- logistics provider. nesses engage in certain transactions w herein they act as agents. FedEx Freight w as formed in the third quarter of 2001 in Revenue from these transactions is recorded on a net basis. c onnec t ion w it h our ac quisit ion of FedEx Freight East, Inc . (“ FedEx Freight East” ), formerly know n as American Freightw ays, Advertising Inc., a multiregional LTL carrier. FedEx Freight includes the results Adver tising costs are expensed as incurred and are of operations of FedEx Freight East from January 1, 2001 and classified in other operating expenses. Adver tising expenses FedEx Freight West, Inc. (“ FedEx Freight West” ), formerly know n w ere $226 million, $237 million and $222 million in 2002, 2001 and as Viking Freight, Inc., an LTL carrier operating principally in the 2000, respectively. w estern United States, from December 1, 2000. Cash Equivalents Fiscal Years Cash equivalents in excess of current operating require- Except as other w ise indicated, references to years ments are invested in short-term, interest-bearing instruments mean our fiscal year ended M ay 31, 2002 or ended M ay 31 of the w ith maturities of three months or less at the date of purchase year referenced. and are stated at c ost, w hic h approximates market value. Interest income w as $5 million, $11 million and $15 million in 2002, Principles of Consolidation 2001 and 2000, respectively. The c onsolidated financ ial statements inc lude t he accounts of FedEx and its subsidiaries, substantially all of w hich Spare Parts, Supplies and Fuel are w holly-ow ned. All significant intercompany accounts and Spare parts are stated principally at w eighted-average transactions have been eliminated. cost. Supplies and fuel are stated principally at standard cost, w hich approximates actual cost on a first-in, first-out basis. Subsidiary Guarantors Allow ances for obsolescence are provided, over the estimated Certain of our long-term debt is guaranteed by our sub- useful life of the related aircraft and engines, for spare parts sidiaries. The guarantees are full and unconditional, joint and expected to be on hand at the date the aircraft are retired from several, and any subsidiaries that are not guarantors are minor service, plus allow ances for spare parts currently identified as as defined by Securities and Exchange Commission (“ SEC” ) reg- excess or obsolete. These allow ances are based on manage- ulations. FedEx, as the parent company issuer of this debt, has no ment estimates, w hich are subject to change. independent assets or operat ions. There are no signific ant restrictions on our ability or the ability of any guarantor to obtain funds from its subsidiaries by such means as a dividend or loan. 32 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation Property and Equipment Impairment of Long-Lived Assets Expenditures for major additions, improvements, flight Long-lived assets are review ed for impairment w hen equipment modifications and certain equipment overhaul costs circumstances indicate the carrying value of an asset may not be are capitalized w hen such costs are determined to extend the recoverable. For assets that are to be held and used, an impair- useful life of the asset. M aintenance and repairs are charged to ment is recognized w hen the estimated undiscounted cash flow s expense as incurred, except for certain aircraft-related costs, associated w ith the asset or group of assets is less than their w hich are capitalized and amortized over their estimated service carrying value. If impairment exists, an adjustment is made to lives. We capitalize cer tain direct internal and external costs w rite the asset dow n to its fair value, and a loss is recorded as the associated w ith the development of internal use softw are. The difference betw een the carrying value and fair value. Fair values cost and accumulated depreciation of property and equipment are determined based on quoted market values, discounted cash disposed of are removed from the related accounts, and any gain flow s or internal and external appraisals, as applicable. Assets to or loss is reflected in the results of operations. Gains and losses be disposed of are carried at the low er of carrying value or esti- on sales of property used in operations are classified w ith depre- mated net realizable value. See Notes 17 and 18 for information ciation and amortization. concerning the impairment charges. For financial reporting purposes, depreciation and amor- tization of property and equipment is provided on a straight-line Goodw ill basis over the asset’s service life or related lease term as follow s: Goodw ill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net Range assets of businesses acquired. Prior to the adoption of Statement Aircraft and related equipment 5 to 20 years of Financial Accounting Standards No. (“ SFAS” ) 142, “ Goodw ill Package handling and ground suppor t and Other Intangible Assets” in June 2001, goodw ill w as amor- equipment and vehicles 2 to 30 years tized over the estimated period of benefit on a straight-line basis Computer and electronic equipment 3 to 10 years over periods generally ranging from 15 to 40 years, and w as Other 2 to 30 years review ed for impairment under the policy for other long-lived assets. Since adoption of SFAS 142 in June 2001, amortization of Aircraft airframes and engines are assigned residual goodw ill w as discontinued and goodw ill is review ed at least values ranging up to 20% of asset c ost. All ot her proper t y annually for impairment. Accumulated amortization w as $196 mil- and equipment have no material residual values. Vehicles are lion and $202 million at M ay 31, 2002 and 2001, respectively. depreciated on a straight-line basis over five to ten years. We periodically evaluate the estimated service lives and residual val- Income Taxes ues used to depreciate our aircraft and ground equipment. This Deferred income taxes are provided for the tax effect of evaluation may result in changes in the estimated lives and resid- temporary differences betw een the tax basis of assets and liabil- ual values. Depreciation expense, excluding gains and losses ities and their reported amounts in the financial statements. The on sales of proper ty and equipment used in operations, w as liability method is used to ac c ount for inc ome taxes, w hic h $1.331 billion, $1.234 billion and $1.124 billion in 2002, 2001 and requires deferred taxes to be recorded at the statutory rate to be 2000, respec t ively. Deprec iat ion and amor t izat ion expense in effect w hen the taxes are paid. includes amortization of assets under capital lease. We have not recognized deferred taxes for U.S. federal For inc ome tax purposes, deprec iation is generally income taxes on foreign subsidiaries’ earnings that are deemed computed using accelerated methods. to be permanently reinvested and any related taxes associated w ith such earnings are not material. Capitalized Interest Interest on funds used to finance the acquisition and Self-Insurance Accruals modification of aircraft, construction of certain facilities, and We are primarily self-insured for w orkers’ compen- development of cer tain softw are up to the date the asset is sation, employee health care and vehicle liabilities. Accruals placed in service is capitalized and included in the cost of the are primarily based on the actuarially estimated undiscounted asset. Capitalized interest w as $27 million in both 2002 and 2001 cost of claims, w hich includes incurred-but-not-reported claims. and $35 million in 2000. Current w orkers’ compensation, employee health claims and 33 ––


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    Notes to Consolidated Financial Statements vehicle liabilities are included in accrued expenses. The noncur- Use of Estimates rent portion of these accruals is included in other liabilities. The preparation of our consolidated financial state- ments requires the use of estimates and assumptions that affect Deferred Lease Obligations the repor ted amounts of assets and liabilities, the repor ted W hile certain aircraft and facility leases contain fluctu- amounts of revenues and expenses and the disclosure of contin- at ing or esc alat ing payments, t he related rent expense is gent liabilities. M anagement makes its best estimate of the recorded on a straight-line basis over the lease term. The cumu- ultimate outcome for these items based on historical trends and lative excess of rent expense over rent payments is included in other information available w hen the financial statements are other liabilities. prepared. Changes in estimates are recognized in accordance w ith the accounting rules for the estimate, w hich is typically in Deferred Gains the period w hen new information becomes available to manage- Gains on the sale and leaseback of aircraft and other ment . A r eas w her e t he nat ur e of t he est imat e makes it property and equipment are deferred and amortized ratably over reasonably possible that actual results could materially differ the life of the lease as a reduction of rent expense. Substantially from amounts estimated include: impairment assessments on all of these deferred gains w ere related to aircraft transactions long-lived assets (including goodw ill), obsolescence of spare and are included in other liabilities. parts, income tax liabilities, self-insurance accruals, airline stabi- lization compensation, employee retirement plan obligations and Stock Compensation contingent liabilities. Accounting Principles Board Opinion No. 25, “ Accounting for Stock Issued to Employees,” and its related interpretations Note 2: Recent Accounting Pronouncements are applied to measure compensation expense for stock-based compensation plans. Derivative Instruments Ef fec t ive J une 1, 2001, w e adopted SFA S 133, Derivative Instruments “ Accounting for Derivative Instruments and Hedging Activities,” Through the period ended M ay 31, 2001, jet fuel forw ard as amended. SFAS 133 requires an entity to recognize all deriva- c ontrac ts w ere ac c ounted for as hedges under SFA S 80, tives as either assets or liabilities in the balance sheet and to “ Accounting for Futures Contracts.” At June 1, 2001, w e adopted measure those instruments at fair value. Prior to our adoption of SFAS 133, “ Accounting for Derivative Instruments and Hedging SFAS 133, w e accounted for our jet fuel hedging contracts under Activities,” as amended. SFAS 80, “ Accounting for Futures Contracts.” Under SFAS 80, no asset or liability for the hedges w as recorded and the income Foreign Currency Translation statement effect w as recognized in fuel expense upon settlement Translation gains and losses of foreign operations that of the contract. In the past, w e had jet fuel hedging contracts that use local currencies as the functional currency are accumulated w ould have qualified under SFAS 133 as c ash flow hedges. and reported, net of applicable deferred income taxes, as a com- How ever, during 2001 all outstanding jet fuel hedging contracts ponent of ac c umulated other c omprehensive inc ome w ithin w ere effectively closed by entering into offsetting contracts. The common stockholders’ investment. Transaction gains and losses net value of those contracts of $15 million ($9 million net of tax) t hat arise from exc hange rate fluc tuat ions on transac t ions w as recognized as a deferred charge in the M ay 31, 2001 balance denominated in a currency other than the local functional cur- sheet. Effective June 1, 2001, under the SFAS 133 transition rules, rency are included in the results of operations. Balances for the deferred charge w as reclassified to be included as a compo- foreign currency translation in accumulated other comprehen- nent of accumulated other comprehensive income. This entire sive income w ere $(50) million, $(56) million and $(37) million at charge w as recognized in income in 2002 as the related fuel w as M ay 31, 2002, 2001 and 2000, respectively. purchased. We did not enter into any new jet fuel hedging con- tracts during 2002 and had no derivative instruments outstanding Reclassifications at M ay 31, 2002. Cer tain reclassifications and additional disclosures have been made to prior year financial statements to conform to Airline Stabilization Compensation the current year presentation. The Emerging Issues Task Force (“ EITF” ) issued EITF01-10, “ Accounting for the Impact of the Terrorist Attacks of September 11, 34 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation 2001” in September 2001 to establish accounting for the impact of Absent any impair ment indic ators, w e per for m our annual the terrorist attacks of September 11, 2001. Under EITF 01-10, impairment tests during our fourth quarter, in connection w ith federal assistanc e provided to air c arriers in t he for m of our annual budgeting process. direct compensation from the U.S. government under the Air Based on our initial impairment tests, w e recognized an Transportation Safety and System Stabilization Act (the “ Act” ) adjustment of $25 million ($15 million or $.05 per share, net of tax) should be recognized w hen the related losses are incurred and in the first quarter of 2002 to reduce the carrying value of goodw ill c ompensat ion under t he Ac t is pr obable. W e r ec ognized at a subsidiary of one of our nonreportable operating segments $119 million of compensation under the Act in 2002. We have to its implied fair value. The adjustment w as required because classified all amounts recognized under this program (of w hich economic conditions at the time of testing (including declining $101 million w as received as of M ay 31, 2002) as a reduction of volumes and higher fuel costs) reduced the estimated future operating expenses under the caption “ Airline stabilization com- expected performance for this reporting unit. Under SFAS 142, pensation.” W hile w e believe w e have complied w ith all aspects the impairment adjustment recognized at adoption of the new of the Act and that it is probable w e w ill ultimately receive the rules w as reflected as a cumulative effect of accounting change remaining $18 million receivable, compensation recognized is in our 2002 income statement. Impairment adjustments recog- subjec t to audit and inter pr etat ion by t he Depar tment of nized af ter adopt ion, if any, gener ally ar e r equir ed to be Transportation (“ DOT” ). We have received requests from the DOT recognized as operating expenses. for additional information in support of our claim under the Act and have responded fully to those requests. We c annot be Asset Retirement Obligations assured of the ultimate outcome of such interpretations, but it is In June 2001, the FASB issued SFAS 143, “ Accounting reasonably possible that a material reduction to the amount of for Asset Retirement Obligations,” effec tive for fisc al years compensation recognized by us under the Act could occur. beginning after June 15, 2002. This statement addresses the diverse accounting practices for obligations associated w ith the Business Combinations retirement of tangible long-lived assets and the associated asset In June 2001, the Financial Accounting Standards Board retirement costs. The adoption of this statement is not antici- (“ FASB” ) completed SFAS 141, “ Business Combinations,” w hich pated to have a material effect on our financial position or results requires all business combinations initiated after June 30, 2001 to of operations. be accounted for under the purchase method. SFAS 141 also sets forth guidelines for applying the purchase method of accounting Impairment and Disposal of Long-Lived Assets in the determination of intangible assets, including goodw ill In October 2001, the FASB issued SFAS 144, “ Accounting acquired in a business combination, and expands financial disclo- for the Impairment or Disposal of Long-Lived Assets,” effective sures concerning business combinations consummated after for fiscal years beginning after December 15, 2001. SFAS 144 June 30, 2001. The application of SFAS 141 did not affect any of our supersedes SFAS 121, “ Accounting for the Impairment of Long- previously reported amounts included in goodw ill or other intan- Lived Assets and for Long-Lived Assets to Be Disposed Of,” and gible assets. provides a single accounting model for the disposal of long-lived assets from continuing and discontinued operations. The adop- Goodw ill tion of this statement is not anticipated to have a material effect Effective June 1, 2001, w e early adopted SFAS 142, on our financial position or results of operations. “ Goodw ill and Other Intangible Assets,” w hich establishes new accounting and reporting requirements for goodw ill and other Note 3: Business Combinations intangible assets. Under SFAS 142, all goodw ill amor tization ceased effective June 1, 2001 (2002 goodw ill amortization other- On M arch 1, 2002, a subsidiary of FedEx Trade Netw orks w ise w ould have been $36 million) and material amounts of acquired for cash certain assets of Fritz Companies, Inc. that pro- recorded goodw ill attributable to each of our repor ting units vide essential customs clearance services exclusively for FedEx w ere tested for impairment by comparing the fair value of each Express in three U.S. locations, at a cost of $36.5 million. The excess reporting unit w ith its carrying value (including attributable good- cost over the estimated fair value of the net assets acquired w ill). Fair value w as determined using a discounted cash flow (approximately $35 million) has been recorded as goodw ill, w hich methodology. These impairment tests are required to be per- is entirely attributed to FedEx Express. Goodw ill for tax purposes formed at adoption of SFAS 142 and at least annually thereafter. associated w ith this transaction w ill be deductible over 15 years. 35 ––


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    Notes to Consolidated Financial Statements On February 9, 2001, w e completed the acquisition of Note 4: Goodw ill and Intangibles FedEx Freight East for approximately $980 million, inc luding approximately $475 million in cash, 11.0 million shares of FedEx The carrying amount of goodw ill attributable to each common stock and options to purchase 1.5 million shares of repor table operat ing segment w it h goodw ill balanc es and FedEx common stock. The acquisition included the assumption of changes therein follow s (in millions): $240 million of debt for a total consideration of $1.2 billion. The ac quisit ion w as c ompleted in a tw o-step transac t ion t hat FedEx FedEx Express Freight Other Total included a cash tender offer and a merger that resulted in the acquisition of all outstanding shares of FedEx Freight East. The M ay 31, 2001 $357 $595 $100 $1,052 first step of the transaction w as completed on December 21, 2000 Goodw ill acquired by acquiring for cash 50.1% of the outstanding shares of FedEx during the year 35 – – 35 Freight East, or 16,380,038 shares at a price of $28.13 per share. Impairment adjustment – – (25) (25) On February 9, 2001, FedEx Freight East w as merged into a new ly- Other 1 – – 1 created subsidiary of FedEx and each remaining outstanding M ay 31, 2002 $393 $595 $ 75 $1,063 share of FedEx Freight East common stock w as converted into 0.6639 shares of common stock of FedEx. The excess purchase In connection with adopting SFAS 142, we also reassessed price over the estimated fair value of the net assets acquired the useful lives and the classification of our identifiable intangible (approximately $600 million) has been recorded as goodw ill. assets other than goodw ill and determined that they continue to On M arch 31, 2000, the common stock of World Tariff, be appropriate. The components of our amor tizing intangible Limited (“ World Tariff” ) w as acquired for approximately $8 million assets follow (in millions): in cash and stock. World Tariff is a source of customs duty and tax information around the globe. This business is operating as a M ay 31, 2002 M ay 31, 2001 subsidiary of FedEx Trade Netw orks. The excess of purchase Gross Gross Carrying Accumulated Carrying Accumulated price over the estimated fair value of the net assets acquired Amount Amortization Amount Amortization ($8 million) has been recorded as goodw ill. Contract based $ 73 $(32) $ 73 $(27) On February 29, 2000, the common stock of Tow er Group Technology based International, Inc. (“ Tow er” ) w as acquired for approximately and other 64 (28) 63 (22) $140 million in cash. Tow er primarily provides international cus- $137 $(60) $136 $(49) toms c learanc e ser vic es. This business is operat ing as a subsidiary of FedEx Trade Netw orks. The excess of purchase price over the estimated fair value of the net assets acquired Amortization expense for intangible assets other than ($30 million) has been recorded as goodw ill. goodw ill w as $14 million for 2002 and $15 million for 2001. On September 10, 1999, the assets of GeoLogistics Air Estimated amortization expense for the five succeeding fiscal Services, Inc. w ere acquired for approximately $116 million in years follow s (in millions): c ash. This business oper ates under t he name Car ibbean Transpor tation Ser vices, Inc. (“ CTS” ), and is a subsidiary of Estimated Amor tization FedEx Trade Netw orks. CTS is an airfreight forw arder servicing Expense freight shipments primarily betw een t he United States and 2003 $13 Puerto Rico. The excess of purchase price over the estimated fair 2004 9 value of the net assets acquired ($103 million) has been recorded 2005 8 as goodw ill. 2006 8 All of these acquisitions w ere accounted for under the 2007 8 purchase method of accounting, and the operating results of these acquired companies are included in consolidated opera- tions from the date of acquisition. For FedEx Freight East, the Actual results of operations for 2002, 2001 and 2000 and results of operations are included from January 1, 2001. Pro pro forma results of operations had w e applied the nonamortization forma results including these acquisitions w ould not differ mate- rially from reported results. 36 ––


  • Page 39

    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation provisions of SFAS 142 in those periods follow (in millions, except Note 6: Long-Term Debt and per share amounts): Other Financing Arrangements Years ended M ay 31 2002 2001 2000 M ay 31 In millions 2002 2001 Repor ted net income $ 710 $ 584 $ 688 Add: Goodw ill amor tization, net of tax – 17 10 Unsecured debt $1,529 $1,837 Adjusted net income $ 710 $ 601 $ 698 Capital lease obligations 206 202 Other debt, interest rates of 6.80% to 9.98%, Basic earnings per share due through 2017 71 82 Repor ted net income $2.38 $2.02 $2.36 1,806 2,121 Goodw ill amor tization – .06 .04 Less current por tion 6 221 Adjusted net income $2.38 $2.08 $2.40 $1,800 $1,900 Diluted earnings per share Repor ted net income $2.34 $1.99 $2.32 On September 28, 2001, w e closed $1 billion of revolving Goodw ill amor tization – .06 .04 bank credit facilities to replace our existing $1 billion credit Adjusted net income $2.34 $2.05 $2.36 agreement. The revolving credit agreements comprise tw o parts. The first part provides for $750 million through September 28, 2006. The second part provides for a 364-day commitment for Note 5: Selected Liabilities $250 million through September 27, 2002. Facility fees paid under the revolver for 2002 w ere approximately $1 million and are pro- The components of selected liability captions follow jected to be approximately $1 million annually. Interest rates on (in millions): borrow ings under the agreements are generally determined by maturities selected and prevailing market conditions. Borrow ing M ay 31 2002 2001 under the credit agreements w ill bear interest, at our option, at a Accrued Salaries and Employee Benefits: rate per annum equal to either (a) the LIBO rate plus a credit Salaries $ 111 $ 193 spread, or (b) the higher of the Federal Funds Effective Rate, as Employee benefits 261 153 defined, plus 1⁄2 of 1% or the bank’s Prime Rate. The revolving Compensated absences 367 354 credit agreements contain certain covenants and restrictions, $ 739 $ 700 none of w hich are expected to significantly affect our operations Accrued Expenses: or ability to pay dividends. Self-insurance accruals $ 452 $ 412 Commercial paper borrow ings are backed by unused Taxes other than income taxes 253 240 commitments under our revolving credit agreements and reduce Other 359 421 the amount available under the agreements. As of M ay 31, 2002, $1,064 $1,073 no commercial paper borrow ings w ere outstanding and the entire amount under the credit facilities w as available. There w ere no Other Liabilities: commercial paper borrow ings outstanding at M ay 31, 2001. Deferred lease obligations $ 417 $ 398 Deferred gains, principally related to aircraft transactions 484 512 Self-insurance accruals 387 364 Other 638 560 $1,926 $1,834 37 ––


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    Notes to Consolidated Financial Statements The components of unsecured debt (net of discounts) in the balance sheet. Therefore, no additional liability is reflected w ere as follow s: for the letters of credit. Scheduled annual principal maturities of long-term debt M ay 31 for the five years subsequent to M ay 31, 2002, are as follow s In millions 2002 2001 (in millions): Senior unsecured debt (fixed rates): Interest rates of 6.63% to 7.25%, Amount due through 2011 $ 747 $ 746 2003 $ 6 Interest rates of 9.65% to 9.88%, 2004 275 due through 2013 299 474 2005 6 Interest rate of 7.80%, due 2007 200 200 2006 257 Interest rates of 6.92% to 8.91%, 2007 226 due through 2012 – 118 Bonds, interest rate of 7.60%, due in 2098 239 239 Long-term debt, exclusive of capital leases, had carry- M edium term notes, interest rates of ing values of $1.600 billion and $1.919 billion at M ay 31, 2002 and 8.00% to 10.57%, due through 2007 44 60 2001, respectively, compared w ith fair values of approximately $1,529 $1,837 $1.746 billion and $1.999 billion at those respective dates. The estimated fair values w ere determined based on quoted market In conjunction w ith the acquisition of FedEx Freight prices or on the current rates offered for debt w ith similar terms East, debt of $240 million w as assumed, a portion of w hich w as and maturities. refinanced subsequent to the acquisition. On April 5, 2002, w e prepaid the remaining $101 million. The debt carried interest rates Note 7: Lease Commitments of 6.92% to 8.91%, and w as due in installments through 2012. Under the debt agreements, w e incurred a prepayment penalty of We utilize certain aircraft, land, facilities and equip- $13 million, w hich w as included in other nonoperating expense. ment under capital and operating leases that expire at various On February 12, 2001, senior unsecured notes w ere dates through 2038. In addition, supplemental aircraft are leased issued in the amount of $750 million. These notes are guaranteed under agreements that generally provide for cancellation upon by all of our subsidiaries that are not considered minor as defined 30 days notice. by SEC regulations. Net proceeds from the borrow ings w ere The components of property and equipment recorded used to repay indebtedness, principally borrow ings under the under capital leases w ere as follow s: commercial paper program, and for general corporate purposes. The notes w ere issued in three $250 million tranches w ith various M ay 31 In millions 2002 2001 terms and interest rates. Special facility revenue bonds have been issued by Package handling and ground suppor t certain municipalities primarily to finance the acquisition and equipment and vehicles $213 $197 construction of various facilities and equipment. In certain cases, Other, principally facilities 138 139 the bond issue proceeds w ere loaned to us and are included in 351 336 long-term debt and in other cases, the related lease agreements Less accumulated amor tization 258 237 are accounted for as capital leases. Approximately $249 million in $ 93 $ 99 principal of these bonds (w ith total future principal and interest payments of approximately $438 million as of M ay 31, 2002) are Rent expense under operating leases for the years guaranteed by FedEx Express. These guarantees can only be ended M ay 31 w as as follow s: invoked in the event FedEx Express defaults on the lease obliga- tions and certain other remedies are not available. In millions 2002 2001 2000 We incur other commercial commitments in the normal M inimum rentals $1,453 $1,399 $1,299 course of business to support our operations. Letters of credit at Contingent rentals 132 91 99 M ay 31, 2002 w ere $124 million. These instruments are generally $1,585 $1,490 $1,398 required under certain self-insurance programs that are reflected 38 ––


  • Page 41

    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation Contingent rentals are based on hours flow n under sup- Stock Compensation Plans plemental aircraft leases. If compensation cost for stock-based compensation A summary of future minimum lease payments under plans had been determined under SFAS 123, “ Accounting for capital leases and noncancellable operating leases (principally Stock-Based Compensation,” net income and earnings per share aircraft and facilities) w ith an initial or remaining term in excess w ould have been the pro forma amounts indicated below : of one year at M ay 31, 2002 is as follow s: In millions, except per share amounts 2002 2001 2000 Capital Operating Net income: In millions Leases Leases As repor ted $710 $584 $688 2003 $ 12 $ 1,501 Pro forma 673 553 660 2004 12 1,235 Diluted earnings per common share: 2005 12 1,162 As repor ted 2.34 1.99 2.32 2006 12 1,053 Pro forma 2.22 1.89 2.23 2007 12 1,028 Thereafter 253 8,791 Fixed Stock Option Plans 313 $14,770 Under the provisions of our stock incentive plans, options Less amount representing interest (107) may be granted to certain key employees (and, under the 1997 Present value of net minimum lease payments $ 206 plan, to directors w ho are not employees) to purchase shares of common stock at a price not less than its fair market value at the FedEx Express makes payments under certain lever- date of grant. Options granted have a maximum term of ten years. aged operating leases that are sufficient to pay principal and Vesting requirements are determined at the discretion of the interest on certain pass-through certificates. The pass-through Compensation Committee of the Board of Directors. Presently, certificates are not direct obligations of, or guaranteed by, us or option vesting periods range from one to eight years. At M ay 31, FedEx Express. 2002, there w ere 3,503,433 shares available for future grants under these plans. Note 8: Preferred Stock Beginning w ith the grants made on or after June 1, 1995, the fair value of each option grant w as estimated on the grant The Certificate of Incorporation authorizes the Board of date using the Black-Scholes option-pricing model w ith the fol- Directors, at its discretion, to issue up to 4,000,000 shares of low ing assumptions for each option grant: Series Preferred Stock. The stock is issuable in series, w hich may vary as to certain rights and preferences, and has no par value. 2002 2001 2000 As of M ay 31, 2002, none of these shares had been issued. Dividend yield 0% 0% 0% Expected volatility 30% 35% 30% Note 9: Common Stockholders’ Investment Risk-free interest rate 2.9%–4.9% 4.3%–6.5% 5.6%–6.8% Expected lives 2.5–5.5 years 2.5–5.5 years 2.5–9.5 years Treasury Shares During 2002, w e purchased 3,350,000 treasury shares, or The w eighted-average fair value of options granted approximately 1% of our outstanding shares of common stock, during the year w as $12.39, $13.19 and $16.63 for the years ended under a 5,000,000 share repurchase program at an average cost of M ay 31, 2002, 2001 and 2000, respectively. $52.70 per share. Treasur y shares w ere ut ilized in 2002 for issuances under the stock-based compensation plans discussed below. On M ay 31, 2002, the Board of Directors approved a plan to repurchase an additional 5,000,000 shares of our common stock. At M ay 31, 2002 and 2001, respectively, 382,046 and 1,244,490 shares remained in treasury. During 2000, w e purchased approximately 15,000,000 treasury shares at an average cost of $39.75. 39 ––


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    Notes to Consolidated Financial Statements The follow ing table summarizes information about our fixed stock option plans for the years ended M ay 31: 2002 2001 2000 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 17,498,558 $30.24 15,010,651 $29.12 13,399,532 $23.11 Granted and assumed 4,023,098 40.66 4,267,7531 31.19 3,218,450 50.79 Exercised (3,875,767) 22.34 (1,465,684) 20.02 (1,232,699) 18.81 For feited (339,875) 㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮 35.06 㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮 (314,162) 37.25 㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮 (374,632) 33.81 Outstanding at end of year 17,306,014 34.32 17,498,558 30.24 15,010,651 29.12 㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮 㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮 㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮 Exercisable at end of year 8,050,362 29.98 8,704,009 25.09 5,781,855 21.44 1 Inc ludes 1,479,016 options assumed upon ac quisition of FedEx Freight East in 2001. The follow ing table summarizes information about fixed stock options outstanding at M ay 31, 2002: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price $ 9.22–$13.58 24,133 0.4 years $10.30 24,000 $10.29 14.03– 21.03 3,771,225 3.3 years 18.32 2,820,024 18.15 21.06– 29.53 1,528,190 5.5 years 25.67 1,202,942 26.05 31.77– 47.00 10,009,457 7.8 years 37.48 3,032,647 34.40 48.44– 57.84 1,973,009 㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮 7.1 years 55.87 㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮㛮 970,749 55.93 9.22– 57.84 17,306,014 6.6 years 34.32 8,050,362 29.98 Restricted Stock Plans Under the terms of our Restricted Stock Plans, shares of common stock are aw arded to key employees. All restrictions on the shares expire over periods varying from tw o to five years from their date of aw ard. Shares are valued at the market price at the date of aw ard. Compensation related to these plans is recorded as a reduction of common stockholders’ investment and is amortized to expense as restrictions on such shares expire. The follow ing table summarizes information about restricted stock aw ards for the years ended M ay 31: 2002 2001 2000 Weighted- Weighted- Weighted- Average Average Average Shares Fair Value Shares Fair Value Shares Fair Value Aw arded 329,500 $43.01 330,250 $39.89 283,750 $51.90 For feited 12,000 49.79 8,438 40.92 20,000 37.71 At M ay 31, 2002, there w ere 846,038 shares available for future aw ards under these plans. Compensation cost for the restricted stock plans w as approximately $12 million for 2002, 2001 and 2000. 40 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation Note 10: Computation of Earnings Per Share Note 11: Income Taxes The calculation of basic earnings per common share The components of the provision for income taxes for and diluted earnings per common share for the years ended the years ended M ay 31 w ere as follow s: M ay 31 w as as follow s: In millions 2002 2001 2000 In millions, except per share amounts 2002 2001 2000 Current provision: Net income applicable to Domestic: common stockholders $ 710 $ 584 $ 688 Federal $333 $310 $365 Weighted-average common State and local 39 43 49 shares outstanding 298 289 292 Foreign 41 36 40 413 389 454 Basic earnings per common share $2.38 $2.02 $2.36 Deferred provision (credit): Weighted-average common Domestic: shares outstanding 298 289 292 Federal 21 (43) (3) Common equivalent shares: State and local 3 (3) – Assumed exercise of outstanding Foreign (2) – (1) dilutive options 16 14 12 22 (46) (4) Less shares repurchased from $435 $343 $450 proceeds of assumed exercise of options (11) (10) (8) A reconciliation of the statutory federal income tax rate Weighted-average common and to the effective income tax rate for the years ended M ay 31 is common equivalent as follow s: shares outstanding 303 293 296 Diluted earnings per common share $2.34 $1.99 $2.32 2002 2001 2000 Statutory U.S. income tax rate 35.0% 35.0% 35.0% Increase resulting from: State and local income taxes, net of federal benefit 2.4 2.8 2.8 Other, net 0.1 (0.8) 1.7 Effective tax rate 37.5% 37.0% 39.5% 41 ––


  • Page 44

    Notes to Consolidated Financial Statements The significant components of deferred tax assets and certain tax law limitations. International defined benefit pension liabilities as of M ay 31 w ere as follow s: plans provide benefits primarily based on final earnings and years of service and are funded in accordance w ith local law s In millions 2002 2001 and income tax regulations. Plan assets consist primarily of mar- Deferred Deferred Deferred Deferred ketable equity securities and fixed income instruments. Tax Tax Tax Tax Assets Liabilities Assets Liabilities In 2001, w e changed the actuarial valuation measure- ment date for our princ ipal pension plans from M ay 31 to Proper ty, equipment February 28 to conform to the measurement date used for our and leases $ 266 $ 897 $ 269 $ 816 postretirement health care plans and to facilitate our planning Employee benefits 273 126 226 118 and budgeting process. Additionally, w e adopted a calculated Self-insurance accruals 288 – 277 – value method for determining the fair value of plan assets, w hich Other 191 125 241 99 is a method more consistent w ith the long-term nature of pension $1,018 $1,148 $1,013 $1,033 accounting. These changes had no material impact on reported net periodic pension cost, either cumulatively at June 1, 2001 or In connection w ith an Internal Revenue Service (“ IRS” ) on a pro forma basis for any of the prior three years. These audit for the tax years 1993 and 1994, the IRS proposed adjust- c hanges reduc ed total 2002 pension c ost by approximately ments characterizing routine jet engine maintenance costs as $32 million. Our pension cost is materially affected by the dis- capital expenditures that must be recovered over seven years, count rate used to measure pension obligations, the level of plan rather than as expenses that are deducted immediately, as has assets available to fund those obligations at the measurement been our practice. We filed an administrative protest of these date and the expected long-term rate of return on plan assets. adjustments and engaged in discussions w ith the Appeals office Due to a low er discount rate and a reduction in the value of plan of the IRS. After these discussions failed to result in a settlement, assets as a result of investment losses at the measurement date in 2001 w e paid $70 million in tax and interest and filed suit in for 2002 pension expense (February 28, 2001), our total net pen- Federal District Court for a complete refund of the amounts paid, sion cost for 2002 increased by approximately $90 million. plus interest. The IRS has continued to assert its position in audits An increase in pension cost of approximately $90 million for the years 1995 through 1998 w ith respect to maintenance costs is also expected for 2003 based primarily on a continuing decline for jet engines and rotable aircraft parts. Based on these audits, in the discount rate (to 7.1%) and a reduction in the expected the total proposed deficiency for the 1995–1998 period, including long-term rate of return on plan assets (to 10.1%). M anagement tax and interest through M ay 31, 2002 w as approximately $187 mil- review s the assumptions used to measure pension costs (includ- lion. In addition, w e have continued to expense these types of ing the discount rate and the expected long-term rate of return on maintenance costs subsequent to 1998. We believe that our prac- pension assets) on an annual basis. Economic and market condi- tice of expensing these types of maintenance costs is correct, tions at the measurement date may impact these assumptions consistent w ith industry practice and w ith IRS ruling 2001–4. We from year to year and it is reasonably possible that material intend to vigorously contest the adjustments. changes in pension cost may be experienced in the future. Note 12: Employee Benefit Plans Postretirement Health Care Plans Cer tain of our subsidiaries offer medical, dental and Pension Plans vision coverage to eligible U.S. retirees and their eligible depen- We sponsor defined benefit pension plans covering a dents. U.S. employees covered by the principal plan become majority of employees. The largest plan c overs c er tain U.S. eligible for these benefits at age 55 and older, if they have perma- employees age 21 and over, w ith at least one year of service, and nent, continuous service of at least ten years after attainment of provides benefits based on average earnings and years of serv- age 45 if hired prior to January 1, 1988, or at least 20 years after ice. Plan funding is actuarially determined, and is subject to attainment of age 35 if hired on or after January 1, 1988. 42 ––


  • Page 45

    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation The follow ing table provides a reconciliation of the changes in the pension and postretirement health care plans’ benefit obligations and fair value of assets over the tw o-year period ended M ay 31, 2002 and a statement of the funded status as of M ay 31, 2002 and 2001: Postretirement Health In millions Pension Plans Care Plans 2002 2001 2002 2001 CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation at beginning of year $5,384 $4,494 $ 286 $ 257 Service cost 348 325 27 25 Interest cost 409 382 25 23 Actuarial loss (gain) 168 211 (1) (12) Benefits paid (84) (57) (13) (8) Amendments, benefit enhancements and other 2 29 5 1 Projected benefit obligation at end of year $6,227 $5,384 $ 329 $ 286 ACCUM ULATED BENEFIT OBLIGATION $5,097 $4,104 CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $5,622 $5,727 $ – $ – Actual loss on plan assets (191) (142) – – Company contributions 161 97 10 6 Benefits paid (84) (57) (13) (8) Other 2 (3) 3 2 Fair value of plan assets at end of year $5,510 $5,622 $ – $ – FUNDED STATUS OF THE PLANS $ (717) $ 238 $(329) $(286) Unrecognized actuarial loss (gain) 823 (160) (59) (60) Unamor tized prior service cost 130 144 3 1 Unrecognized transition amount (8) (9) – – Prepaid (accrued) benefit cost $ 228 $ 213 $(385) $(345) AM OUNTS RECOGNIZED IN THE BALANCE SHEET AT M AY 31: Prepaid benefit cost $ 411 $ 365 $ – $ – Accrued benefit liability (183) (152) (385) (345) M inimum pension liability (19) (20) – – Accumulated other comprehensive income 5 – – – Intangible asset 14 20 – – Prepaid (accrued) benefit cost $ 228 $ 213 $(385) $(345) The projected benefit obligation (“ PBO” ) is the actuarial an indication of the assets currently available to fund vested and present value of benefits attributable to employee service ren- nonvested benefits accrued through M ay 31. dered to date, inc luding the effec ts of estimated future pay At M ay 31, 2002, all of our material pension plans had a increases. The accumulated benefit obligation (“ ABO” ) is also PBO in excess of plan assets (due primarily to the significant presented in the table above. The ABO also reflects the actuarial decline in the discount rate at the 2002 measurement date and present value of benefits attributable to employee service ren- investment losses during the year). At M ay 31, 2001, there w ere dered to date, but does not include the effects of estimated future some plans w ith a PBO in excess of plan assets. The PBO w as pay increases. Therefore, the ABO as compared to plan assets is $259 million on plan assets of $57 million for such plans. 43 ––


  • Page 46

    Notes to Consolidated Financial Statements How ever, the measure of w hether a pension plan is related to those plans, w e have ABOs aggregating approximately under funded for financial accounting purposes is based on a $180 million at M ay 31, 2002 and $170 million at M ay 31, 2001 w ith c omparison of the ABO to the fair value of plan assets and no material related assets. Plans w ith this funded status resulted amounts accrued for such benefits in the balance sheet. We have in the recognition of a minimum pension liability in our balance certain nonqualified defined benefit plans that are not funded sheets. This minimum liability w as $19 million at M ay 31, 2002 and because such funding provides no current tax benefit. Primarily $20 million at M ay 31, 2001. Net periodic benefit cost for the three years ended M ay 31 w as as follow s: In millions Pension Plans Postretirement Health Care Plans 2002 2001 2000 2002 2001 2000 Service cost $348 $ 325 $ 338 $27 $25 $26 Interest cost 409 382 336 25 23 20 Expected return on plan assets (621) (624) (546) – – – Net amor tization and deferral 13 (23) 6 (2) (1) – Cur tailment gain – – – – (2) – $149 $ 60 $ 134 $50 $45 $46 W EIGHTED-AVERAGE ACTUARIAL ASSUM PTIONS Pension Plans Postretirement Health Care Plans 2002 2001 2000 2002 2001 2000 Discount rate 7.1% 7.7% 8.5% 7.3% 8.2% 8.3% Rate of increase in future compensation levels 3.3 4.0 5.0 – – – Expected long-term rate of return on assets 10.9 10.9 10.9 – – – Future medical benefit costs are estimated to increase expense amounts are cash distributions made directly to employ- at an annual rate of 14.0% during 2003, decreasing to an annual ees of $10 million, $45 million and $39 million in 2002, 2001 and grow th rate of 5.3% in 2011 and thereafter. Future dental benefit 2000, respectively. costs are estimated to increase at an annual rate of 8.0% during 2003, decreasing to an annual grow th rate of 5.3% in 2009 and Note 13: Business Segment Information thereafter. Our cost is capped at 150% of the 1993 employer cost and, therefore, is not subject to medical and dental trends after We have determined our repor table operating seg- the capped cost is attained. Therefore, a 1% change in these ments to be FedEx Express, FedEx Ground and FedEx Freight, annual trend rates w ould not have a significant impact on the each of w hich operates in a single line of business. Included accumulated postretirement benefit obligation at M ay 31, 2002, or w ithin Other are the operations of FedEx Custom Critical, FedEx 2002 benefit expense. Trade Netw orks and FedEx Services. Other also includes the operations of FedEx Freight West through November 30, 2000 and Defined Contribution Plans certain unallocated corporate items and eliminations. Segment Profit sharing and other defined contribution plans are financial performance is evaluated based on operating income. in place covering a majority of U.S. employees. Profit sharing The for mat ion of FedEx Ser vic es at t he beginning plans provide for discretionary employer contributions, w hich of 2001 represented the implementation of a business strategy are determined annually by the Board of Directors. Other plans that combined the sales, marketing and information technology provide matching funds based on employee contributions to functions of our FedEx Express and FedEx Ground repor table 401(k) plans. Expense under these plans w as $75 million in 2002, segments to form a shared services company that supports the $99 million in 2001 and $125 million in 2000. Included in these package businesses of both of these segments. FedEx Services 44 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation provides our customers w ith a single point of contact for all The follow ing table provides a reconciliation of reportable express and ground services. Prior to the formation of FedEx segment capital expenditures to consolidated totals for the years Services, each business had its ow n self-contained sales, mar- ended M ay 31: keting and information technology functions. The costs for these activities are now allocated based on metrics such as relative Consoli- FedEx FedEx FedEx dated revenues and estimated services provided. These allocations In millions Express Ground Freight 1 Other Total materially approximate the cost of providing these functions. 2002 $1,059 $212 $82 $262 $1,615 In addition, certain segment assets associated w ith the 2001 1,233 212 62 386 1,893 sales, marketing and information technology departments previ- 2000 1,331 244 – 52 1,627 ously rec orded at FedEx Express and FedEx Ground w ere transferred to FedEx Ser vices. The related depreciation and 1 2001 inc ludes t he financ ial infor mation of FedEx Freight West from amortization for those assets is now allocated to these operating Dec ember 1, 2000 and of FedEx Freight East from J anuar y 1, 2001 (t he segments as “ Interc ompany c harges.” Consequently, 2000 date of ac quisition for financ ial repor ting purposes). Therefore, 2001 depreciation and amor tization expense segment information c apital expenditures are not c omparable to 2002. presented is not comparable to subsequent periods. We believe the total amounts allocated to the business segments reasonably The follow ing table presents revenue by service type reflect the cost of providing such services. and geographic information for the years ended or as of M ay 31: The follow ing table provides a reconciliation of reportable segment revenues, depreciation and amor tization, operating Revenue by Service Type income and segment assets to consolidated financial state- In millions 2002 2001 2000 ment totals: FedEx Express: Consoli- Package: FedEx FedEx FedEx dated U.S. overnight box 1 $ 5,338 $ 5,830 $ 5,684 In millions Express Ground Freight 1 Other Total U.S. overnight envelope 2 1,755 1,871 1,854 Revenues U.S. deferred 2,383 2,492 2,428 2002 $15,327 $2,711 $1,960 $ 609 $20,607 Total domestic package revenue 9,476 10,193 9,966 2001 15,534 2,237 835 1,023 19,629 International priority 3,834 3,940 3,552 2000 15,068 2,033 – 1,156 18,257 Total package revenue 13,310 14,133 13, 518 Depreciation and amortization Freight: 2002 $ 806 $ 132 $ 86 $ 340 $ 1,364 U.S.3 1,273 651 566 2001 797 111 44 324 1,276 International 384 424 492 2000 998 99 – 58 1,155 Total freight revenue 1,657 1,075 1,058 Operating income (loss) Other 360 326 492 2002 $ 811 $ 337 $ 168 $ 5 $ 1,321 Total FedEx Express 15,327 15,534 15,068 2001 8472 175 55 (6)3 1,071 FedEx Ground 2,711 2,237 2,033 2000 900 226 – 95 1,221 FedEx Freight 4 1,960 835 – Segment assets Other 609 1,023 1,156 2002 $ 9,949 $1,430 $1,702 $ 731 $13,812 $20,607 $19,629 $18,257 2001 9,623 1,158 1,703 908 13,392 1 The U.S. over night box c ategor y inc ludes pac kages exc eeding eight 1 2001 includes t he financial results of FedEx Freight West from December 1, ounc es in w eight. 2 2000 and of FedEx Freight East from J anuar y 1, 2001 (t he date of ac quisi- The U.S. overnight envelope c ategor y inc ludes envelopes w eighing eight tion for financial repor ting purposes). Therefore, 2001 results are not com- ounc es or less. 3 parable to 2002. Inc ludes revenue from our air transpor tation agreement w it h t he USPS, 2 Inc ludes $93 million c harge for impairment of c er tain assets related to t he w hic h took ef fec t in August 2001. 4 M D10 airc raf t program and $9 million c harge related to t he Ayres pro- Results for 2001 inc lude t he financ ial results of FedEx Freight West from gram w rite-off. Dec ember 1, 2000 and of FedEx Freight East from J anuar y 1, 2001 (t he 3 Inc ludes $22 million of FedEx Supply Chain Ser vic es reorganization c osts. date of ac quisition for financ ial repor ting purposes). Therefore, 2001 results are not c omparable to 2002. 45 ––


  • Page 48

    Notes to Consolidated Financial Statements Geographic Information1 Note 15: Commitments In millions 2002 2001 2000 Annual purchase commitments under various contracts Revenues: as of M ay 31, 2002, w ere as follow s (in millions): U.S. $15,968 $14,858 $13,805 International 4,639 4,771 4,452 Aircraft- $20,607 $19,629 $18,257 Aircraft Related1 Other 2 Total Long-lived assets: 2003 $284 $473 $267 $1,024 U.S. $ 8,627 $ 8,637 $ 7,224 2004 23 295 53 371 International 1,520 1,254 1,018 2005 – 304 19 323 $10,147 $ 9,891 $ 8,242 2006 19 275 11 305 2007 – 184 11 195 1 International revenue inc ludes shipments t hat eit her originate in or are destined to loc ations outside t he United States. Long-lived assets 1 Primarily airc raf t modific ations, rotables, spare par ts and spare engines. inc lude proper t y and equipment, goodw ill and ot her long-ter m assets. 2 Primarily fac ilities, vehic les, c omputer and ot her equipment. Flight equipment is alloc ated betw een geographic areas based on usage. FedEx Express is committed to purchase eight DC10s, Note 14: Supplemental Cash Flow Information three M D11s, seven A300s and three A310s to be delivered through 2006. Deposits and progress payments of $12 million Cash paid for interest expense and income taxes for the have been made tow ard these purchases and other planned air- years ended M ay 31 w as as follow s: c raf t transac t ions. Total c ommitments for years 2003 and thereafter exclude approximately $825 million due to the cancel- In millions 2002 2001 2000 lation of cer tain contractual obligations to acquire 19 M D11 Interest (net of capitalized interest) $146 $139 $125 aircraft from an affiliate of SAirGroup, w hich filed for protection Income taxes 312 445 355 from creditors under Sw iss law and $207 million of contractual obligations related to the purchase of 75 ALM 200s because Noncash investing and financing activities for the years Ayres Corporation filed for Chapter 11 bankruptcy protection in ended M ay 31 w ere as follow s: November 2000 and its assets w ere subsequently foreclosed on by its senior lender. We believe it is unlikely that any of the In millions 2002 2001 2000 ALM 200 aircraft w ill be delivered to FedEx Express. Fair value of assets surrendered under In January 2001, FedEx Express entered into a memo- exchange agreements randum of understanding to acquire ten Airbus A380 aircraft from (w ith tw o airlines) $– $ – $19 AVSA, S.A.R.L. At M ay 31, 2002, the acquisition of these aircraft Fair value of assets acquired under w as subject to the execution of a definitive purchase agreement exchange agreements 8 5 28 and no amounts for these aircraft are included in the preceding Fair value of assets surrendered under fair table. value of assets acquired $(8) $ (5) $ (9) Fair value of treasury stock and common stock options issued in business acquisition $– $506 $ 7 Noncash investing activities reflect the contractual ac quisit ion of airc raf t, spare par ts and ot her equipment in exchange for engine noise reduction kits. 46 ––


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    fedex annual report 2002 L EA D I N G T H E W A Y FedEx Corporation Note 16: Legal Proceedings These aircraft procurement programs w ere in place to ensure adequate aircraft capacity for future volume grow th. Due to A class action law suit is pending in Federal District low ered capacity requirements, it became evident during the fourth Court in San Diego, California against FedEx Express generally quarter of 2001 that FedEx Express had more aircraft capacity com- alleging that customers w ho had late deliveries during the 1997 mitments than required. Certain aircraft aw aiting modification Teamsters strike at United Parcel Service w ere entitled to a full under the M D10 program, w hich w ere not yet in service and w ere refund of shipping charges pursuant to our money-back guaran- not being depreciated, and the purchase commitments for the tee, regardless of w hether they gave timely notice of their claim. Ayres aircraft w ere evaluated and determined to be impaired. At the hearing on the plaintiffs’ motion for summary judgment, the The M D10 program charge is comprised primarily of the court ruled against FedEx Express. The judgment totaled approxi- w rite-dow n of impaired DC10 airframes, engines and parts to a mately $68 million, including interest and fees for the plaintiffs’ nominal estimated salvage value. Costs relating to the disposal of attorney. We plan to appeal to the 9th Circuit Court of Appeals. No the assets w ere also recorded. The disposal w as substantially accrual has been recorded as w e believe the case is w ithout completed during 2002 and a $9 million credit w as recognized in merit and it is probable w e w ill prevail upon appeal. operat ing inc ome. The Ayres program c harge is c omprised Another class action law suit is pending in Illinois state primarily of the w rite-off of deposits for airc raf t purc hases. c our t against FedEx Express generally alleging t hat FedEx Capitalized interest and other costs estimated to be unrecover- Express imposed a fuel surcharge in a manner that is not consis- able in connection w ith the bankruptcy of Ayres Corporation tent w ith the terms and conditions of its contracts w ith customers. w ere also expensed. We are presently attempting to negotiate a settlement. If a settle- ment is not reached and approved, a trial date w ill be set for Note 18: Other Events somet ime in 2003. A lt hough set t lement disc ussions have occurred, the amount of loss (if any) is not currently estimable. On April 24, 2001, FedEx Supply Chain Services commit- We have denied any liability w ith respec t to these ted to a plan to reorganize certain of its unprofitable, nonstrategic claims and intend to vigorously defend ourselves in these cases. logistic s business and reduc e overhead. Total 2001 c osts of A lso, see N ot e 11 f or disc ussion of t ax- r elat ed $22 million w ere recorded in connection w ith this plan, primarily legal proc eedings. comprising costs for estimated contractual settlements of $8 mil- FedEx and its subsidiaries are subject to other legal pro- lion, asset impairment charges of $5 million and severance and ceedings that arise in the ordinary course of their business. In the employee separation of $5 million. Asset impairment charges opinion of management, t he aggregate liability, if any, w it h w ere rec ognized to reduc e the c arr ying value of long-lived respect to these other actions w ill not materially adversely affect assets (primarily sof tw are) to estimated fair values, and an our financial position, results of operations or cash flow s. accrual of $17 million w as recorded for the remaining reorganiza- t ion c osts. All c harges w ere ref lec ted as ot her operat ing Note 17: Asset Impairments expenses in the Consolidated Statements of Income. The reor- ganization w as completed in 2002 and based on actual expenses Asset impairment adjustments of $102 million at FedEx incurred during the year, a $3 million credit w as recognized in Express w ere recorded in the fourth quarter of 2001. Impaired operating income. Approximately 120 principally administrative assets w ere adjusted to fair value based on estimated fair market positions w ere eliminated under the plan. The balance of the values. All charges relating to asset impairments w ere reflected accrual at M ay 31, 2002 w as zero. as other operating expenses in the Consolidated Statements of In 2000, FedEx Express recorded nonoperating gains of Income. The asset impairment charge consisted of tw o par ts approximately $11 million from the sale of securities and approxi- (in millions): mately $12 million from the insurance settlement for a leased M D11 aircraft destroyed in October 1999. Cer tain assets related to the M D10 aircraft program $ 93 Ayres program deposits and other 9 $102 47 ––


  • Page 50

    Notes to Consolidated Financial Statements Note 19: Summary of Quar terly Operating Results (Unaudited) First Second Third Four th In millions, except per share amounts Quar ter Quar ter Quar ter 1 Quar ter 2 2002 Revenues $5,037 $5,135 $5,019 $5,416 Operating income 235 433 237 416 Income before cumulative effect of change in accounting principle 124 245 120 236 Net income 109 245 120 236 Basic earnings per common share: Income before cumulative effect of change in accounting principle .42 .82 .40 .79 Cumulative effect of change in accounting for goodw ill (.05) – – – Basic earnings per common share .37 .82 .40 .79 Diluted earnings per common share: Income before cumulative effect of change in accounting principle .41 .81 .39 .78 Cumulative effect of change in accounting for goodw ill (.05) – – – Diluted earnings per common share .36 .81 .39 .78 2001 Revenues $4,779 $4,895 $4,839 $5,116 Operating income 311 345 191 224 Net income 169 194 108 113 Basic earnings per common share 3 .59 .68 .38 .38 Diluted earnings per common share 3 .58 .67 .37 .38 1 Third quar ter 2001 inc ludes t he results of FedEx Freight East from J anuar y 1, 2001 (t he date of ac quisition for financ ial repor ting purposes). 2 Four t h quar ter of 2001 inc ludes a $102 million c harge for impairment of c er tain assets related to airc raf t programs at FedEx Express and a $22 million reorganization c harge at FedEx Supply Chain Ser vic es. 3 The sums of t he quar terly earnings per share do not equal annual amounts due to dif ferenc es in t he w eighted-average number of shares outstanding during t he respec tive periods. 48 ––

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