<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED FEBRUARY 28, 1999, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
COMMISSION FILE NUMBER: 333-39483
FDX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 62-1721435
(State of incorporation) (I.R.S. Employer
Identification No.)
6075 Poplar Avenue, Suite 300
Memphis, Tennessee 38119
(Address of principal (Zip Code)
executive offices)
(901) 369-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding Shares at March 31, 1999
Common Stock, par value $.10 per share 148,722,086
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<PAGE>
FDX CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
<S> <C>
Condensed Consolidated Balance Sheets
February 28, 1999 and May 31, 1998............................................... 3-4
Condensed Consolidated Statements of Income
Three and Nine Months Ended February 28, 1999 and 1998........................... 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 1999 and 1998..................................... 6
Notes to Condensed Consolidated Financial Statements.................................. 7-11
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants................................................ 12
Report of Independent Public Accountants.............................................. 13
Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................................... 14-25
PART II. OTHER INFORMATION
Legal Proceedings..................................................................... 26
Exhibits and Reports on Form 8-K...................................................... 26
EXHIBIT INDEX......................................................................... E-1
</TABLE>
- 2 -
<PAGE>
FDX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
February 28,
1999 May 31,
(Unaudited) 1998
----------- -----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................ $ 139,105 $ 229,565
Receivables, less allowances of
$67,071,000 and $61,409,000............................................ 2,099,048 1,943,423
Spare parts, supplies and fuel........................................... 304,968 364,714
Deferred income taxes.................................................... 252,326 232,790
Prepaid expenses and other............................................... 123,663 109,640
----------- -----------
Total current assets................................................. 2,919,110 2,880,132
----------- -----------
Property and Equipment, at Cost............................................... 13,365,689 12,463,874
Less accumulated depreciation and amortization........................... 6,962,505 6,528,824
----------- -----------
Net property and equipment........................................... 6,403,184 5,935,050
----------- -----------
Other Assets:
Goodwill................................................................. 346,969 356,272
Equipment deposits and other assets...................................... 527,151 514,606
----------- -----------
Total other assets................................................... 874,120 870,878
----------- -----------
$10,196,414 $ 9,686,060
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
FDX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
February 28,
1999 May 31,
(Unaudited) 1998
------------ ------------
(In thousands)
<S> <C> <C>
Current Liabilities:
Short-term borrowings ...................... $ 102,428 $ -
Current portion of long-term debt .......... 114,102 257,529
Salaries, wages and benefits ............... 619,717 611,750
Accounts payable ........................... 996,684 1,145,410
Accrued expenses ........................... 882,478 789,150
------------ ------------
Total current liabilities .............. 2,715,409 2,803,839
------------ ------------
Long-Term Debt, Less Current Portion ............ 1,362,059 1,385,180
Deferred Income Taxes ........................... 283,860 274,147
Other Liabilities ............................... 1,429,796 1,261,664
Commitments and Contingencies (Notes 7 and 8)
Common Stockholders' Investment:
Common Stock, $.10 par value;
400,000,000 shares authorized, 148,605,817
and 147,410,578 issued ................. 14,861 14,741
Additional paid-in capital ................. 1,029,100 992,821
Retained earnings .......................... 3,409,315 2,999,354
Deferred compensation and other ............ (20,177) (18,409)
Cumulative foreign currency
translation adjustments .................. (27,809) (27,277)
------------ ------------
Total common stockholders' investment .. 4,405,290 3,961,230
------------ ------------
$ 10,196,414 $ 9,686,060
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FDX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $4,098,418 $3,986,304 $12,389,957 $11,794,813
Operating Expenses:
Salaries and employee benefits . . . . . . . . . . . . 1,762,275 1,688,185 5,267,390 4,939,818
Purchased transportation . . . . . . . . . . . . . . . 375,582 414,665 1,143,945 1,111,350
Rentals and landing fees . . . . . . . . . . . . . . . 364,157 346,877 1,043,385 975,524
Depreciation and amortization. . . . . . . . . . . . . 263,725 250,104 766,098 716,961
Maintenance and repairs. . . . . . . . . . . . . . . . 237,616 217,412 721,693 640,447
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . 146,091 191,062 449,232 556,130
Merger expenses. . . . . . . . . . . . . . . . . . . . - 88,000 - 88,000
Restructuring charge (credit). . . . . . . . . . . . . - (16,000) - (16,000)
Other. . . . . . . . . . . . . . . . . . . . . . . . . 796,934 710,618 2,225,346 2,094,348
---------- ---------- ----------- ----------
3,946,380 3,890,923 11,617,089 11,106,578
---------- ---------- ----------- ----------
Operating Income . . . . . . . . . . . . . . . . . . . . 152,038 95,381 772,868 688,235
Other Income (Expense):
Interest, net. . . . . . . . . . . . . . . . . . . . . (25,159) (33,849) (75,246) (95,627)
Other, net . . . . . . . . . . . . . . . . . . . . . . (5,610) 2,138 (8,601) 12,567
---------- ---------- ----------- ----------
(30,769) (31,711) (83,847) (83,060)
---------- ---------- ----------- ----------
Income Before Income Taxes . . . . . . . . . . . . . . . 121,269 63,670 689,021 605,175
Provision for Income Taxes . . . . . . . . . . . . . . . 43,436 50,834 279,053 277,738
---------- ---------- ----------- ----------
Income from Continuing Operations. . . . . . . . . . . . 77,833 12,836 409,968 327,437
Income from Discontinued Operations,
Net of Income Taxes. . . . . . . . . . . . . . . . . . - 4,875 - 4,875
---------- ---------- ----------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . . . . $ 77,833 $ 17,711 $ 409,968 $ 332,312
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Earnings per common share:
Continuing operations. . . . . . . . . . . . . . . . . $ .53 $ .09 $ 2.78 $ 2.24
Discontinued operations. . . . . . . . . . . . . . . . - .03 - .03
---------- ---------- ----------- ----------
$ .53 $ .12 $ 2.78 $ 2.27
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Earnings per common share -
assuming dilution:
Continuing operations . . . . . . . . . . . . . . . . $ .52 $ .09 $ 2.74 $ 2.20
Discontinued operations . . . . . . . . . . . . . . . - .03 - .03
---------- ---------- ----------- ----------
$ .52 $ .12 $ 2.74 $ 2.23
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
FDX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
---------------------------
1999 1998
---------- --------------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities.................................... $1,039,094 $ 859,554
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $7,792,000 in 1998............................ (1,335,543) (1,258,093)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions......................................... 80,995 247,852
Reimbursements of A300 deposits..................................... 25,130 106,991
Other dispositions.................................................. 157,583 151,786
Other, net.............................................................. (19,912) (342)
---------- ----------
Net cash used in investing activities........................................ (1,091,747) (751,806)
---------- ----------
Financing Activities:
Short-term borrowings, net.............................................. 102,428 -
Proceeds from long-term debt issuances.................................. - 280,103
Principal payments on long-term debt.................................... (167,722) (415,952)
Proceeds from stock issuances........................................... 35,656 22,590
Other, net.............................................................. (8,169) (11,338)
---------- ----------
Net cash used in financing activities........................................ (37,807) (124,597)
---------- ----------
Net decrease in cash and cash equivalents.................................... (90,460) (16,849)
Cash and cash equivalents at beginning of period............................. 229,565 161,361
---------- -----------
Cash and cash equivalents at end of period................................... $ 139,105 $ 144,512
---------- -----------
---------- -----------
Cash payments for:
Interest (net of capitalized interest).................................. $ 86,999 $ 91,571
---------- -----------
---------- -----------
Income taxes............................................................ $ 362,970 $ 285,766
---------- -----------
---------- -----------
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines)............................... $ 39,881 $ 78,758
Fair value of assets acquired under
exchange agreements................................................... 21,603 64,904
---------- -----------
Fair value of assets surrendered in excess
of assets acquired.................................................... $ 18,278 $ 13,854
---------- -----------
---------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
FDX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BUSINESS COMBINATION AND BASIS OF PRESENTATION
On January 27, 1998, Federal Express Corporation ("FedEx") and Caliber
System, Inc. ("Caliber") became wholly-owned subsidiaries of a newly-formed
holding company, FDX Corporation (the "Company"). In this transaction, which
was accounted for as a pooling of interests, Caliber shareholders received 0.8
shares of the Company's common stock for each share of Caliber common stock.
Each share of FedEx common stock was automatically converted into one share of
the Company's common stock. There were approximately 146,800,000 of $0.10 par
value shares so issued or converted. The accompanying financial statements
include the financial position and results of operations for both FedEx and
Caliber for all periods presented.
The Company operates on four, three-month quarters with a fiscal year
ending May 31. Prior to becoming a subsidiary of the Company, Caliber
operated on a 13 four-week period calendar ending December 31, with 12 weeks
in each of the first three quarters and 16 weeks in the fourth quarter. The
Company's consolidated results of operations for the quarter ended
February 28, 1998 comprise Caliber's prior year period from November 9, 1997 to
February 28, 1998 consolidated with FedEx's quarter ended February 28, 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information, the
instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X,
and should be read in conjunction with the Company's Annual Report on Form 10-K
for the year ended May 31, 1998. Accordingly, significant accounting policies
and other disclosures normally provided have been omitted since such items are
disclosed therein.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of the Company as of February 28,
1999 and the consolidated results of its operations for the three and nine-month
periods ended February 28, 1999 and 1998, and its consolidated cash flows for
the nine-month periods ended February 28, 1999 and 1998. Operating results for
the three and nine-month periods ended February 28, 1999 are not necessarily
indicative of the results that may be expected for the year ending May 31, 1999.
Effective June 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement
requires the Company to include within its financial statements information on
comprehensive income, which is defined as all activity impacting equity from
non-owner sources. For the Company, comprehensive income includes net income
and foreign currency translation adjustments. Total comprehensive income, net
of taxes, for the three months ended February 28, 1999 and 1998 was $73,447,000
and $11,938,000, respectively. For the nine months ended February 28, 1999 and
1998, total comprehensive income, net of taxes, was $409,436,000 and
$315,978,000, respectively.
- 7 -
<PAGE>
Effective June 1, 1998, the Company also adopted Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on accounting for these
costs, requiring certain of them to be capitalized. For the three and
nine months ended February 28, 1999, incremental costs of $10,600,000 and
$27,000,000, respectively, were capitalized. The Company estimates the pre-tax
benefit of the adoption of this Statement to be approximately $38,000,000 for
1999.
Certain prior period amounts have been reclassified to conform to the
current presentation.
(3) LONG-TERM DEBT
<TABLE>
<CAPTION>
February 28,
1999 May 31,
(Unaudited) 1998
---------- ----------
(In thousands)
<S> <C> <C>
Unsecured notes payable, interest rates of
7.60% to 10.57%, due through 2098. . . . . . . . . . $1,088,050 $1,253,770
Unsecured sinking fund debentures, interest
rate of 9.63%, due through 2020. . . . . . . . . . . 98,581 98,529
Capital lease obligations and tax exempt bonds,
interest rates of 5.35% to 7.88%,
due through 2017 . . . . . . . . . . . . . . . . . . 254,000 253,425
Less bond reserves . . . . . . . . . . . . . . . . . 9,024 9,024
---------- ----------
244,976 244,401
Other, interest rates of 9.68% to 9.98%. . . . . . . . 44,554 46,009
---------- ----------
1,476,161 1,642,709
Less current portion . . . . . . . . . . . . . . . . 114,102 257,529
---------- ----------
$1,362,059 $1,385,180
---------- ----------
---------- ----------
</TABLE>
Unsecured notes payable as of February 28, 1999, include $848,675,000 due
through 2013 and $239,375,000 due in 2098.
(4) OTHER FINANCING ARRANGEMENTS
At February 28, 1999, short-term borrowings comprise commercial paper, net
of related discounts. Interest rates on these borrowings approximate 6.0%. As
in the past, the Company may from time to time refinance its commercial paper
borrowings with the revolving credit agreement described below.
During November 1998, the Company entered into an agreement to obtain a
business interruption credit facility as one component of contingency plans
implemented in response to a threatened strike by the FedEx Pilots Association
("FPA"). This agreement became effective December 10, 1998 and provided for a
commitment of $1,000,000,000 through December 9, 1999. The facility was
canceled February 4, 1999 upon ratification of a collective bargaining agreement
with the FPA.
In connection with obtaining the business interruption credit facility
described above, the Company's existing $1,000,000,000 revolving credit
agreement with domestic and foreign banks was amended to allow for the business
interruption credit facility. The revolving credit agreement comprises two
parts. The first part provides for a commitment of $800,000,000 through January
27, 2003. The second part provides for a 364-day commitment of $200,000,000
through January 14, 2000. Interest rates on borrowings under this agreement are
generally determined by maturities selected and prevailing market conditions.
Commercial paper borrowings are backed by unused commitments under this
revolving credit agreement and reduce the amount available under the agreement.
At February 28, 1999, $897,025,000 of the commitment amount was available.
- 8 -
<PAGE>
(5) PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors, at its
discretion, to issue up to 4,000,000 shares of Series Preferred Stock. The
stock is issuable in series which may vary as to certain rights and preferences
and has no par value. As of February 28, 1999, none of these shares had been
issued.
(6) COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the three and
nine-month periods ended February 28, 1999 and 1998 was as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income from continuing operations. . . . . . . . . . . . $ 77,833 $ 12,836 $409,968 $327,437
Income from discontinued operations. . . . . . . . . . . - 4,875 - 4,875
-------- -------- -------- --------
Net income applicable to common
stockholders . . . . . . . . . . . . . . . . . . . . . $ 77,833 $ 17,711 $409,968 $332,312
-------- -------- -------- --------
-------- -------- -------- --------
Average shares of common stock
outstanding. . . . . . . . . . . . . . . . . . . . . . 148,164 146,740 147,717 146,517
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share:
Continuing operations. . . . . . . . . . . . . . . . . $ .53 $ .09 $ 2.78 $ 2.24
Discontinued operations. . . . . . . . . . . . . . . . - .03 - .03
-------- -------- -------- --------
$ .53 $ .12 $ 2.78 $ 2.27
-------- -------- -------- --------
-------- -------- -------- --------
Average shares of common stock
outstanding. . . . . . . . . . . . . . . . . . . . . . 148,164 146,740 147,717 146,517
Common equivalent shares:
Assumed exercise of outstanding
dilutive options. . . . . . . . . . . . . . . . . . . 7,570 7,007 6,434 6,967
Less shares repurchased from
proceeds of assumed exercise
of options. . . . . . . . . . . . . . . . . . . . . . (4,762) (4,588) (4,395) (4,435)
-------- -------- -------- --------
Average common and common
equivalent shares. . . . . . . . . . . . . . . . . . . 150,972 149,159 149,756 149,049
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share:
Continuing operations. . . . . . . . . . . . . . . . . $ .52 $ .09 $ 2.74 $ 2.20
Discontinued operations. . . . . . . . . . . . . . . . - .03 - .03
-------- -------- -------- --------
$ .52 $ .12 $ 2.74 $ 2.23
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
On March 15, 1999, the Board of Directors declared a stock split to be
effected in the form of a stock dividend, payable on May 6, 1999 to stockholders
of record on April 15, 1999 at the rate of one share for each share outstanding.
After May 6, 1999, all share and per share amounts will be adjusted to reflect
the split.
- 9 -
<PAGE>
(7) COMMITMENTS
As of February 28, 1999, the Company's purchase commitments for the
remainder of 1999 and annually thereafter under various contracts are as follows
(in thousands):
<TABLE>
<CAPTION>
Aircraft-
Aircraft Related(1) Other(2) Total
---------- --------- -------- ----------
<S> <C> <C> <C> <C>
1999 (remainder) $186,200 $149,700 $205,200 $ 541,100
2000 507,200 292,200 189,900 989,300
2001 281,000 561,100 59,600 901,700
2002 306,000 178,300 - 484,300
2003 494,800 150,500 200 645,500
</TABLE>
(1) Primarily aircraft modifications, rotables and spare parts and
engines.
(2) Vehicles, facilities, computers and other equipment.
FedEx is committed to purchase six Airbus A300s, 33 MD11s, nine DC10s (in
addition to those discussed in the following paragraph) and 75 Ayres ALM 200s to
be delivered through 2007. Deposits and progress payments of $68,446,000 have
been made toward these purchases.
FedEx has agreements with two airlines to acquire 53 DC10 aircraft, spare
parts, aircraft engines and other equipment, and maintenance services in
exchange for a combination of aircraft engine noise reduction kits and cash.
Delivery of these aircraft began in 1997 and will continue through 2001.
Additionally, these airlines may exercise put options through December 31, 2003,
requiring FedEx to purchase up to 20 additional DC10s along with additional
aircraft engines and equipment.
In January 1999, put options were exercised by an airline requiring FedEx
to purchase nine DC10s for a total purchase price of $29,700,000. Delivery of
the aircraft began in March 1999.
During the nine-month period ended February 28, 1999, FedEx acquired six
Airbus A300s under operating leases. These aircraft were included as purchase
commitments as of May 31, 1998. At the time of delivery, FedEx sold its rights
to purchase these aircraft to third parties who reimbursed FedEx for its
deposits on the aircraft and paid additional consideration. FedEx then entered
into operating leases with each of the third parties who purchased the aircraft
from the manufacturer.
Lease commitments added since May 31, 1998 for the six Airbus A300s and one
MD11 purchased and subsequently sold and leased back are as follows (in
thousands):
<TABLE>
<S> <C>
1999 $ 19,800
2000 37,100
2001 36,800
2002 38,400
2003 38,200
Thereafter 788,700
</TABLE>
- 10 -
<PAGE>
(8) LEGAL PROCEEDINGS
Customers of FedEx have filed four separate class-action lawsuits against
FedEx generally alleging that FedEx has breached its contract with the
plaintiffs in transporting packages shipped by them. These lawsuits allege
that FedEx continued to collect a 6.25% federal excise tax on the
transportation of property shipped by air after the tax expired on December
31, 1995, until it was reinstated in August 1996. The plaintiffs seek
certification as a class action, damages, an injunction to enjoin FedEx from
continuing to collect the excise tax referred to above, and an award of
attorneys' fees and costs. Three of those cases were consolidated in
Minnesota Federal District Court. That court stayed the consolidated cases
in favor of a case filed in Circuit Court of Greene County, Alabama. The
stay was lifted in July 1998. Summary judgement was granted to FedEx
dismissing all claims in all three consolidated cases in Minnesota. The
plaintiffs did not appeal the dismissal, which is now final. The complaint
in the Alabama case also alleges that FedEx continued to collect the excise
tax on the transportation of property shipped by air after the tax expired on
December 31, 1996.
A fifth case, filed in the Supreme Court of New York, New York County,
containing allegations and requests for relief substantially similar to the
other four cases was dismissed with prejudice on FedEx's motion on October 7,
1997. The court found that there was no breach of contract and that the
other causes of action were preempted by federal law. The plaintiffs
appealed the dismissal. This case originally alleged that FedEx continued to
collect the excise tax on the transportation of property shipped by air after
the tax expired on December 31, 1996. The New York complaint was later
amended to cover the first expiration period of the tax (December 31, 1995
through August 27, 1996) covered in the original Alabama complaint. The
dismissal was affirmed by the appellate court on March 2, 1999 and is now a
final decision.
The air transportation excise tax expired on December 31, 1995, was
reenacted by Congress effective August 27, 1996, and expired again on
December 31, 1996. The excise tax was then reenacted by Congress effective
March 7, 1997. The expiration of the tax relieved FedEx of its obligation to
pay the tax during the periods of expiration. The Taxpayer Relief Act of
1997, signed by President Clinton in August 1997, extended the tax for 10
years through September 30, 2007.
FedEx intends to vigorously defend itself in the remaining Alabama case,
which is still pending. No amount has been reserved for this contingency.
The Company and its subsidiaries are subject to other legal proceedings and
claims which arise in the ordinary course of their business. In the opinion of
management, the aggregate liability, if any, with respect to these other actions
will not materially adversely affect the financial position or results of
operations of the Company.
- 11 -
<PAGE>
REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, has performed a review
of the condensed consolidated balance sheet of the Company as of February 28,
1999, and the related condensed consolidated statements of income for the three
and nine-month periods ended February 28, 1999 and 1998 and the condensed
consolidated statements of cash flows for the nine-month periods ended February
28, 1999 and 1998, included herein, as indicated in their report thereon
included on page 13.
- 12 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of FDX Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
FDX Corporation and subsidiaries as of February 28, 1999 and the related
condensed consolidated statements of income for the three and nine-month periods
ended February 28, 1999 and 1998 and the condensed consolidated statements of
cash flows for the nine-month periods ended February 28, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of FDX Corporation and subsidiaries as
of May 31, 1998 and the related consolidated statements of income, changes in
common stockholders' investment and cash flows for the year then ended. In our
report dated July 8, 1998, we expressed an unqualified opinion on those
financial statements, which are not presented herein. In our opinion, the
accompanying condensed consolidated balance sheet of FDX Corporation and
subsidiaries as of May 31, 1998, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Memphis, Tennessee
March 17, 1999
- 13 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the third quarter ended February 28, 1999, the Company recorded
consolidated net income of $78 million ($.52 per share, assuming dilution) on
revenues of $4.1 billion compared with net income of $18 million ($.12 per
share, assuming dilution) on revenues of $4.0 billion for the same period in the
prior year. For the nine months ended February 28, 1999, the Company recorded
consolidated net income of $410 million ($2.74 per share, assuming dilution) on
revenues of $12.4 billion compared with net income of $332 million ($2.23 per
share, assuming dilution) on revenues of $11.8 billion for the same period in
the prior year.
On October 30, 1998, contract negotiations between Federal Express
Corporation ("FedEx") and the FedEx Pilots Association ("FPA") were
discontinued. In November, the FPA began actively encouraging its members to
decline all overtime work and issued ballots seeking strike authorization.
To avoid service interruptions related to a threatened strike, the Company
and FedEx began strike contingency planning including entering into
agreements for additional third party air and ground transportation and
establishing special financing arrangements. Subsequently, the FPA agreed to
end all job actions for 60 days and negotiations resumed. Such negotiations
resulted in a five-year collective bargaining agreement that was ratified by
the FPA membership in February 1999 and will take effect on May 31, 1999.
Costs associated with these contingency plans, including contracts for
supplemental airlift and ground transportation and a business interruption
credit facility, reduced the third quarter's pretax earnings by approximately
$91 million. Excluding these costs, earnings per share, assuming dilution,
was approximately $.87.
The prior year's third quarter results included $88 million ($80 million,
after taxes) of expenses related to the acquisition of Caliber System, Inc.
("Caliber") and the formation of the Company. These expenses were primarily
investment banking fees and payments to members of Caliber's management in
accordance with pre-existing management retention agreements. Excluding these
merger expenses, net income for the third quarter of 1998 was $97 million, or
$.65 per share, assuming dilution.
Also included in the third quarter of 1998 is a $16 million pre-tax gain
from the sale of certain Viking Freight, Inc. assets in its restructuring.
Caliber also recorded in this period approximately $5 million of income, net of
tax, from discontinued operations related to the exiting of the airfreight
business served by Roadway Global Air, Inc. in 1995.
The prior year's year-to-date results of operations included the impact of
the Teamsters strike against United Parcel Service ("UPS") in August 1997. The
Company analytically calculated that the volume not retained at the end of the
first quarter of 1998 contributed approximately $170 million in revenues and
approximately $.25 additional earnings per share, assuming dilution, to that
quarter.
- 14 -
<PAGE>
Revenues
The following table shows a comparison of revenues (in millions):
<TABLE>
<CAPTION>
Third Quarter YTD Period
Ended Ended
February 28, February 28,
--------------------- Percent --------------------- Percent
1999 1998 Change 1999 1998 Change
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
FedEx:
U.S. domestic express. . . . . . . . . . . $2,445 $2,301 + 6 $ 7,310 $ 6,902 + 6
International Priority (IP). . . . . . . . 730 663 +10 2,217 2,018 +10
International Express Freight
(IXF) and Airport-to-Airport
(ATA). . . . . . . . . . . . . . . . . . 129 140 - 7 402 456 -12
Charter, Logistics services
and other. . . . . . . . . . . . . . . . 127 129 - 2 401 453 -11
------ ------ ------- -------
3,431 3,233 + 6 10,330 9,829 + 5
------ ------ ------- -------
RPS... . . . . . . . . . . . . . . . . . . . 455 496 - 8 1,377 1,274 + 8
Viking . . . . . . . . . . . . . . . . . . . 85 102 -16 275 293 - 6
Other. . . . . . . . . . . . . . . . . . . . 127 155 -18 408 399 + 2
------ ------ ------- -------
$4,098 $3,986 + 3 $12,390 $11,795 + 5
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
As discussed below, third quarter and year-to-date comparisons are
significantly affected by the number of operating days in each reporting
period. For example, RPS, Inc. ("RPS") had 62 operating days in the third
quarter of 1999 versus 75 operating days in the third quarter of 1998.
- 15 -
<PAGE>
The following table shows a comparison of selected operating statistics
(packages, pounds and shipments in thousands):
<TABLE>
<CAPTION>
Third Quarter YTD Period
Ended Ended
February 28, February 28,
--------------------- Percent --------------------- Percent
1999 1998 Change 1999 1998 Change
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
FedEx:
U.S. domestic express:
Average daily packages . . . . . . . . . 2,972 2,819 + 5 2,850 2,747 + 4
Revenue per package. . . . . . . . . . . $13.27 $12.95 + 2 $13.43 $13.22 + 2
IP:
Average daily packages . . . . . . . . . 279 255 +10 276 255 + 8
Revenue per package. . . . . . . . . . . $42.14 $41.28 + 2 $42.02 $41.58 + 1
IXF/ATA:
Average daily pounds . . . . . . . . . . 2,645 2,690 - 2 2,661 2,775 - 4
Revenue per pound. . . . . . . . . . . . $ .79 $ .82 - 4 $ .79 $ .87 - 9
Operating weekdays . . . . . . . . . . . . 62 63 191 190
RPS:
Average daily packages . . . . . . . . . 1,364 1,337 + 2 1,379 1,328 + 4
Revenue per package. . . . . . . . . . . $ 5.38 $ 4.94 + 9 $ 5.31 $ 4.99 + 6
Operating weekdays . . . . . . . . . . . . 62 75 188 192
Viking:
Shipments per day. . . . . . . . . . . . 11.8 11.8 -- 12.6 13.7 - 8
Revenue per hundredweight. . . . . . . . $10.32 $ 9.43 + 9 $ 9.89 $ 9.18 + 8
Operating weekdays . . . . . . . . . . . . 61 75 188 192
</TABLE>
FedEx's U.S. domestic express package revenue rose as both package volume
and revenue per package (yield) increased for the quarter and year-to-date
periods. During these periods, FedEx experienced increased volume of its
higher-priced, overnight services and increased average weight per package.
Each of these factors contributed to the rise in U.S. domestic yield for the
quarter and nine-month periods. The year-to-date results for the prior year
included the additional volume during the UPS strike, which was primarily in the
deferred service category and generally at list price. Excluding the revenue
and volume associated with the UPS strike and the proceeds from a temporary fuel
surcharge in the prior year, U.S. domestic average daily package volume and
yield increased 5% and 3% year over year, respectively, for the nine-month
period. Management expects total U.S. domestic express package volume in the
fourth quarter of 1999 to grow at a rate consistent with the current year
year-to-date growth rate. Management believes that U.S. domestic yield should
continue to increase slightly, year over year, during the fourth quarter of 1999
due to continued effects of yield-management actions, including a list rate
increase averaging 2.8% for U.S. domestic shipments effective March 15, 1999.
Also, through enhanced technology, FedEx has improved its ability to capture
incremental revenue based upon certain package characteristics, such as weight
and package dimensions. Actual results may vary depending on the impact of
domestic economic conditions, competitive pricing changes, customer responses to
yield-management initiatives and changing customer demand patterns.
- 16 -
<PAGE>
FedEx's IP revenue increased 10% for the quarter and year-to-date periods
as average daily packages and yield increased during these periods. FedEx's IP
volume growth rates are less than those experienced in prior years primarily due
to weakness in Asian markets, especially in U.S. outbound traffic to that
region. Management expects the fourth quarter IP volume growth rate to be
consistent with the current year year-to-date growth rate. IP yield increased
2% and 1% for the quarter and year-to-date periods, respectively, primarily as a
result of increased weight per package. Management expects IP yield to remain
constant or improve slightly as a result of increased weight per package.
Actual IP results will depend on international economic conditions, actions by
FedEx's competitors and regulatory conditions for international aviation rights.
FedEx's airfreight (IXF/ATA) volume, revenue and yield declined year over
year for the quarter and nine-month periods. IXF volume (a space-confirmed,
time-definite service) increased 1% for the quarter and year-to-date periods,
but yield declined 2% and 8% for the same periods. ATA volume (a lower-priced,
space-available service) decreased 8% and 14% for the quarter and year-to-date
periods, respectively, with yield lower by 12% and 13% for the same periods.
Airfreight yield has declined year over year since the second quarter of 1996,
with both volume and yield declining for the past three quarters. Management
expects these trends to continue through the balance of 1999 and has adjusted
the Company's expansion and aircraft deployment plans accordingly. These
adjustments include deferring additional flights, reducing capacity on certain
routes, suspending flights and redeploying aircraft to areas with capacity
constraints. Actual airfreight results will depend on international economic
conditions, actions by the Company's competitors, including capacity
fluctuations, and regulatory conditions for international aviation rights.
RPS's year-over-year revenue comparisons are significantly affected by
the number and timing of operating days in each period. The current year's
third quarter included 13 fewer operating days, and the prior year's third
quarter included part of RPS's peak volume period. After adjusting for the
incremental revenue associated with the UPS strike, revenue increased 11% and
12% on a per-day basis for the quarter and year-to-date periods,
respectively. This revenue growth is a result of 2% and 5% increases in
average daily volume, after adjusting for the prior year's strike-related
volume, and 9% and 7% increases in yield for the same periods. Yield
improved primarily as a result of various yield-management actions, including
2.3% and 3.7% average rate increases in February 1999 and 1998, respectively.
During the third quarter, RPS recognized a one-time benefit of approximately
$7 million to align its estimation methodology for in-transit revenue with
that of the Company's other operating subsidiaries. Reported package yield
was increased in the third quarter of 1999 by $.08 because of this one-time
adjustment.
Viking's prior year year-to-date revenues and shipment statistics
reflect the operations of Central Freight Lines Inc., which was sold at the
end of June 1997 in conjunction with Viking's restructuring in March 1997.
Revenue increased 3% for the quarter and decreased 4% for the year-to-date
period on a daily basis considering 14 fewer operating days in the quarter
and four fewer operating days in the current year-to-date period. Revenue per
hundredweight increased 9% and 8% for the quarter and nine months ended
February 28, 1999, respectively. Viking announced a 5.8% general rate
increase effective January 4, 1999, on all tariff-based interstate and
intrastate traffic.
Operating Expenses
The increase in salaries and employee benefits for the quarter and
year-to-date periods was primarily due to package volume-related increases in
the number of employees, principally at FedEx, and increased provisions for the
Company's performance-based incentive compensation plans.
The decrease in purchased transportation for the current quarter was
primarily related to fewer operating days at RPS.
- 17 -
<PAGE>
Increases of 5% and 7% in rentals and landing fees for the quarter and
year-to-date periods, respectively, were primarily due to additional
facilities leased by FedEx. The current year's expense includes additional
building leases at the Indianapolis and Alliance-Fort Worth hubs. In the
third quarter, supplemental aircraft lease and equipment lease expense
declined year over year. As discussed below, incremental leases associated
with the strike contingency planning are included in other operating
expenses. In the prior year's third quarter, supplemental leased aircraft
were added to meet the demands of increased package volume and to replace an
MD11 destroyed in July 1997. In the current quarter, supplemental leased
aircraft were not as extensively required (excluding strike contingency costs
described below) because sufficient leased fleet aircraft were available for
FedEx's capacity needs. As of February 28, 1999, FedEx had 93 wide-bodied
aircraft under operating lease compared with 85 as of February 28, 1998.
During the nine-month period, the additional leased fleet aircraft
contributed to the rise in rentals and landing fees. The prior year's first
quarter expense was favorably impacted by approximately $9 million of a $17
million net gain resulting from the destruction of a leased MD11 aircraft in
an accident in July 1997 (described below in Other Income and Expense).
Management expects year-over-year increases in lease expense to continue as
FedEx enters into additional aircraft rental agreements, including the
conversion of A300 purchase commitments into direct operating leases, during
1999 and thereafter. (See Note 7 of Notes to Condensed Consolidated
Financial Statements.)
Maintenance and repairs expense increased 9% and 13% for the quarter and
year-to-date periods, respectively, primarily due to higher year-over-year
engine maintenance expense on MD11 and B727 aircraft. In the first quarter of
1998, an accrual for the disposition of leased B747 aircraft was increased $9
million, with the majority of this increase recorded as maintenance and repairs
expense. Management believes that maintenance and repairs expense will continue
a long-term trend of year-over-year increases for the foreseeable future due to
the increasing size and age of FedEx's fleet and the variety of aircraft types.
Fuel expense fell 24% and 19% for the quarter and nine-month periods,
respectively, primarily as a result of declines in jet fuel price per gallon
(29% and 25%, respectively), partially offset by increases in jet fuel gallons
consumed (8% and 6%, respectively). The prior year's fuel expense included
payments made by FedEx under contracts which were designed to limit FedEx's
exposure to fluctuations in jet fuel prices. Effective August 1, 1997, FedEx
lifted its temporary 2% fuel surcharge that had been in place on certain U.S.
domestic and U.S. export shipments. This surcharge was implemented on
February 3, 1997 to mitigate the impact of rising jet fuel prices.
Other operating expense increased 12% and 6% for the quarter and
year-to-date periods, respectively. This increase is due primarily to
approximately $76 million of the strike contingency costs related to aircraft
lease expense and lease termination fees incurred in the third quarter by
FedEx. Other operating expense includes temporary labor and other outside
service contracts, communications expense and the cost of sales of engine
noise reduction kits.
Operating Income
The Company's consolidated operating income increased 59% and 12% for the
quarter and year-to-date periods, respectively, from the prior year. Excluding
the impact of FedEx's strike contingency costs in the current year and
merger-related expenses and the benefit of the UPS strike in the prior year,
operating income increased 27% and 19% for the quarter and year-to-date periods
due to improved results at FedEx and RPS.
FedEx's U.S. domestic operating income was $112 million and $535 million
for the quarter and year-to-date periods ended February 28, 1999. Prior year
amounts were $105 million and $513 million for these same periods. During the
current quarter, approximately $52 million of contingency costs were incurred by
FedEx's U.S. domestic operations. Included in the third quarter of the prior
- 18 -
<PAGE>
year were $14 million of expenses related to the acquisition of Caliber. The
prior year's first quarter operating income included approximately $50
million related to the UPS strike as well as proceeds from a 2% temporary
fuel surcharge through August 1, 1997. Excluding these non-recurring items
in the current and prior years, operating income increased 38% and 29% for
the quarter and year-to-date periods. These increases were due to yield
increases (2.5% and 2.6% for the quarter and year-to-date periods,
respectively) and package volume growth (5% for both the quarter and
year-to-date periods). Cost per package remained constant for the periods.
Sales of engine noise reduction kits contributed $24 million and $81 million
to U.S. domestic operating income in the third quarter and year-to-date
periods ended February 28, 1999, compared with $26 million and $97 million
in the same periods in the prior year. FedEx's U.S. domestic operating
margins were 4.5% and 7.1% (6.5% and 7.8% excluding the contingency costs)
for the quarter and nine-month periods, respectively, compared with 4.4% and
7.2% (5.0% and 6.5%, excluding the aforementioned prior year items) for the
same periods in the prior year.
FedEx's international operations reported an operating loss of $17 million
for the third quarter and operating income of $31 million for the year-to-date
period, compared with a loss of $7 million and income of $63 million for the
same periods of the prior year. During the current quarter, approximately $29
million of contingency costs were incurred by FedEx's international operations.
Excluding these expenses, international operating results improved for the
third quarter primarily due to lower fuel costs and the effect of cost controls.
Both the quarter and year-to-date results were negatively impacted by slower IP
volume growth, declining airfreight volume and yield at a time of year-over-year
capacity increases and fixed costs associated with the increased capacity,
including salaries and employee benefits and aircraft lease expense. FedEx's
international operating margins were -1.9% and 1.1% (1.3% and 2.1%, excluding
contingency costs) for the quarter and year-to-date periods, respectively,
compared with -0.8% and 2.4% for the same periods in the prior year.
RPS reported operating income of $50 million and $160 million for the third
quarter and nine-months ended February 28, 1999, respectively, compared with $36
million and $124 million for these periods in the prior year. The current
quarter and year-to-date periods have 13 and four fewer operating days,
respectively, as compared to the same periods of the prior year. The prior
year's results include approximately $6 million of incremental operating income
related to the UPS strike. RPS achieved operating margins of 10.9% and 11.6%
for the quarter and year-to-date periods, respectively, compared with 7.2% and
9.8% for the same periods in the prior year due to continued package volume
growth and yield-management actions.
Viking's operating income for the quarter and year-to-date periods was $4
million and $18 million, respectively, compared with $21 million and $22 million
in the prior year. The current quarter and year-to-date periods have 14 and
four fewer operating days, respectively, as compared to the same periods of the
prior year. Prior year results include a $16 million pre-tax gain on the sale
of assets as a result of Viking's restructuring. Viking's operating margins
were 4.7% and 6.5% for the quarter and year-to-date periods, respectively.
Other Income and Expense and Income Taxes
Net interest expense declined 26% and 21% for the quarter and year-to-date
periods, respectively, due to lower average debt levels at the Company.
Other, net for the current quarter includes approximately $10 million of
expenses related to FedEx's contingency plans, primarily costs associated with
the business interruption credit facility discussed below.
- 19 -
<PAGE>
Other, net for the prior year's first quarter included a gain from an
insurance settlement for an MD11 aircraft destroyed in an accident in July 1997.
At that time, FedEx realized a net gain of $17 million from the insurance
settlement and the release from certain related liabilities on the leased
aircraft. Approximately $8 million of this gain was recorded in non-operating
income.
The Company's effective tax rates of 35.8% and 40.5% for the quarter and
year-to-date periods, respectively, compare with rates of 79.8% and 45.9% for
these periods in the prior year. The decline in the year-to-date rate from
41.5% recorded in the first half of 1999 to 40.5% is primarily due to the
combination of stronger than expected year-to-date results from international
operations and lower worldwide income taxes on foreign earnings. The lower
tax rate increased third quarter and year-to-date earnings per share $.05,
assuming dilution. The prior year rates were affected by certain one-time,
merger-related costs which were nondeductible for federal and state income
tax purposes. Excluding the impact of those nondeductible costs, the
effective tax rates were 39.0% and 41.3% for the prior year's quarter and
year-to-date periods, respectively.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $139 million at February 28, 1999, a
decrease of $90 million since May 31, 1998. Cash provided from operations for
the first nine months of 1999 was $1.0 billion compared with $860 million for
the same period in the prior year. The Company currently has a $1.0 billion
bank revolving credit facility (of which $897 million was available at February
28, 1999) that is generally used to finance temporary operating cash
requirements and to provide support for the issuance of commercial paper.
In December 1998, the Company established a $1.0 billion business
interruption credit facility with a 364-day maturity to fund working capital
needs and contingency plan expenses in the event of an actual or threatened
business interruption due to labor issues with the FPA. In addition, the
Company amended its existing revolving credit agreement to allow for this
business interruption credit facility and to extend part of the agreement,
previously expiring in January 1999, to January 2000. On February 4, 1999, the
business interruption credit facility was canceled following the ratification
of the contract by the members of the FPA. Approximately $10 million in fees and
interest were incurred in connection with this facility. See Note 4 of Notes to
Condensed Consolidated Financial Statements for additional information about the
Company's financing arrangements.
Management believes that cash flow from operations, the commercial paper
program, and the bank revolving credit facility will adequately meet the
Company's working capital needs for the foreseeable future.
Capital Resources
The Company's operations are capital intensive, characterized by
significant investments in aircraft, vehicles, computer and telecommunication
equipment, package handling facilities and sort equipment. The amount and
timing of capital additions depend on various factors including global economic
conditions, volume growth, new or enhanced services, geographical expansion of
services, competition, availability of satisfactory financing and actions of
regulatory authorities.
- 20 -
<PAGE>
Capital expenditures for the first nine months of 1999 totaled $1.3
billion and included one MD11, aircraft modifications, vehicles and ground
support equipment and customer automation and computer equipment. Prior year
expenditures also totaled $1.3 billion and included three MD11s, two A310s,
aircraft modifications, vehicles and ground support equipment and customer
automation and computer equipment. An MD11 purchased in June 1998 was sold
and leased back in September 1998. In June and September 1997 and February
1998, three MD11s purchased in February, June and November 1997 were sold and
leased back. For information on the Company's purchase commitments, see Note
7 of Notes to Condensed Consolidated Financial Statements.
Proceeds from the disposition of property and equipment for the
year-to-date period ended February 28, 1998 included proceeds from the sale
of Viking's southwestern division and other assets in conjunction with the
restructuring of Viking's operations.
Management believes that the capital resources available to the Company
provide flexibility to access the most efficient markets for financing capital
acquisitions, including aircraft, and are adequate for the Company's future
capital needs.
Market Risk Sensitive Instruments and Positions
There have been no material changes in the Company's market risk sensitive
instruments and positions since its disclosure in its Annual Report on Form 10-K
for the year ended May 31, 1998.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
fixed conversion rates between their existing sovereign currencies ("legacy
currencies") and a single currency called the euro. On January 4, 1999, the
euro began trading on currency exchanges and became available for non-cash
transactions. The legacy currencies will remain legal tender through
December 31, 2001. Beginning January 1, 2002, euro-denominated bills and coins
will be introduced, and by July 1, 2002, legacy currencies will no longer be
legal tender.
The Company established euro task forces to develop and implement euro
conversion plans. The work of the task forces in preparing for the introduction
of the euro and the phasing out of the various legacy currencies includes
numerous facets such as converting information technology systems, adapting
billing and payment systems and modifying processes for preparing financial
reports and records.
Since January 1, 1999, the Company's subsidiaries have been prepared to
quote rates to customers, generate billings and accept payments, in both euros
and legacy currencies. Based on the work of the Company's euro task forces to
date, the Company believes that the introduction of the euro, any price
transparency brought about by its introduction and the phasing out of the legacy
currencies will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows. Costs associated with
the euro project are being expensed as incurred and are being funded entirely by
internal cash flows.
- 21 -
<PAGE>
YEAR 2000 COMPLIANCE
Introduction
The Company's operating subsidiaries rely heavily on sophisticated
information technology ("IT") for their business operations. For example, FedEx
maintains electronic connections with more than a million customers via its
proprietary products and technologies. The Company's Year 2000 ("Y2K") computer
compliance issues are, therefore, broad and complex. The FedEx Y2K Project
Office, which was established in 1996, coordinates and supports FedEx's Y2K
compliance effort. The Company has also engaged a major international
consulting firm to assist its subsidiaries in their Y2K program management.
The Company's Y2K compliance efforts are focused on business-critical
items. Hardware, software, systems, technologies and applications are
considered "business-critical" if a failure would either have a material adverse
impact on the Company's business, financial condition or results of operations
or involve a safety risk to employees or customers.
State of Readiness
Generally, the Company believes that FedEx's Y2K compliance effort is on
schedule. The Company's other operating subsidiaries have accelerated their Y2K
programs and are now substantially on schedule.
IT SYSTEMS
FedEx's compliance effort for all business-critical infrastructure and
applications software (collectively, "IT Systems") is 98% complete. FedEx has
inventoried all IT Systems. Assessment/design (researching the compliance
status and determining the impact of, and renovation requirements for, the IT
Systems) and renovation (making IT Systems compliant) are substantially
complete. Testing, which involves validating compliance, is also substantially
complete. Within IT Systems, certification of application software, which
involves FedEx's independent, internal review to verify whether the appropriate
testing process has occurred, is approximately 96% complete. Certification of
the operating system software and program product software (collectively,
"infrastructure") at FedEx is 85% complete. FedEx's IT Systems compliance
effort is targeted to be 100% complete by September 1, 1999. At present, a
substantial portion of the key IT Systems are expected to be compliant by May
31, 1999. Those IT Systems which will most likely not be compliant until after
May 31, 1999 include systems dependent upon external government or vendor
interfaces. While all IT Systems are still expected to be compliant by
September 1, 1999, contingency plans will be in place to mitigate any negative
impact of the non-compliance of such systems.
The Company's other operating subsidiaries have completed the inventory and
assessment phases relating to business-critical IT Systems. The remaining
phases relating to IT Systems are underway. The IT Systems compliance effort of
the Company's other operating subsidiaries is targeted to be 100% complete by
November 1, 1999.
NON-IT SYSTEMS
The inventory and assessment phases of FedEx's Y2K program relating to
business-critical purchased hardware and software, customized software
applications, facilities/equipment and other embedded chip systems
(collectively, "Non-IT Systems") are 100% complete. The remaining phases
relating to the Company's Non-IT Systems are targeted for completion by May 31,
1999. FedEx is 85% complete with the remediation effort on Non-IT Systems. All
development and implementation scheduled from the present until May 31, 1999 is
being closely monitored, and while there is the possibility that some activities
may take place after the target date, FedEx believes that it will be
substantially complete by May 31, 1999. Possible exceptions include
implementation of FedEx's automated shipping solutions by customers and rollout
to FedEx's customers of the FedEx Onsite Server upgrade, which may require some
development on the part of the customer.
- 22 -
<PAGE>
The inventory and assessment phases relating to the Non-IT Systems of the
Company's other operating subsidiaries are targeted for completion by July 31,
1999, with the remaining phases targeted for completion by November 1, 1999.
FedEx has established several definitions for compliance related to Non-IT
Systems. For air infrastructure components (such as airports and air traffic
systems), FedEx defines compliant to mean that these components are being
aggressively assessed and that approved processes are in place to monitor their
evolving status and develop specific operational contingency plans. For
business critical suppliers and affiliates, FedEx defines compliant to mean that
the suppliers and affiliates have been assessed, and a contingency plan has been
developed as necessary.
For the automated shipping solutions offered to customers, FedEx defines
compliant to mean that FedEx has made available a compliant version of the
associated shipping solution. A customer may choose to remain on a non-compliant
version of software if the customer is willing to assume the associated risks
and there are no potentially unfavorable impacts on FedEx's internal systems.
For electronic interfaces with customers and suppliers, FedEx defines
compliant to mean that it has made compliant transaction sets available and has
made systems modifications that enable FedEx to translate non-compliant versions
that mitigate the potential impact to FedEx's internal systems.
Y2K Interfaces with Material Third Parties
The Company's operating subsidiaries are making concerted efforts to
understand the Y2K status of third parties (including, among others, domestic
and international government agencies, customs bureaus, U.S. and international
airports and air traffic control systems, customers, independent contractors,
vendors and suppliers) whose Y2K standing could either have a material adverse
effect on the Company's business, financial condition or results of operations
or involve a safety risk to employees or customers. All of the Company's
operating subsidiaries are actively encouraging Y2K compliance on the part of
third parties and are developing contingency plans in the event of their Y2K
non-compliance.
In conjunction with the International Air Transport Association (IATA) and
the Air Transport Association of America (ATA), FedEx is involved in a global
and industry-wide effort to understand the Y2K compliance status of airports,
air traffic systems, customs clearance and other U.S. and international
government agencies, and common vendors and suppliers. FedEx has developed
contingency plans to minimize the impact of Y2K issues on its air operations.
Contingency plans will be implemented, as necessary, to mitigate the impact of
Y2K problems that might arise during the transition into 2000.
FedEx's vendor and product compliance program includes the following tasks:
assessing vendor compliance status; product testing; tracking vendor
compliance progress; developing contingency plans, including identifying
alternate suppliers, as needed; addressing contract language; replacing,
renovating or upgrading parts; requesting presentations from vendors or making
on-site assessments, as required; and sending questionnaires. Failure to
respond to these questionnaires results in further mail or phone correspondence,
contingency plan development and/or vendor/product replacement. The Company's
other operating subsidiaries are developing a supply chain dependency model to
assess the risk levels associated with the Y2K non-compliance of material third
parties.
- 23 -
<PAGE>
Testing
FedEx's Y2K testing effort includes functional testing of remedial measures
and regression testing to validate that changes have not altered existing
functionality. FedEx's test plans include sections which define the scope of
the testing effort, roles and responsibilities of test participants, the test
approach planned, software, hardware and data requirements, and test
environments/techniques to be used as well as other sections defining the test
effort. System functionality for future date accuracy is being verified and
documented. FedEx uses an independent, internal process to verify that the
appropriate testing process has occurred.
A separate homogenous Y2K mainframe environment has been created to test
operating system software and program products software. The Y2K mainframe
environment is designed to accomplish future date "end to end" testing of the
larger applications and to validate interface communications between
applications.
Costs to Address Y2K Compliance
Since 1996, the Company has incurred approximately $80 million on Y2K
compliance, which includes internal and external software/hardware analysis,
repair, vendor and supplier assessments, risk mitigation planning, and
related costs. The Company continues to monitor its total expected costs
associated with Y2K compliance efforts, and currently expects that it will
incur additional total costs of approximately $55 million, including
depreciation of $12 million. Forty percent of the remaining expenses,
excluding depreciation, relate to the Y2K remediation efforts during the
fourth quarter. Y2K expenditures after May 31, 1999 will include project
management of the corporate contingency effort and the command and control
center, further system audit and validation, and project management to ensure
compliance of new systems development. The Company classifies costs as Y2K
for reporting purposes if they remedy only Y2K risks or result in the
formulation of contingency plans and would otherwise be unnecessary in the
normal course of business.
The Company's Y2K compliance effort is being funded entirely by internal
cash flows. For the fiscal year ending May 31, 1999, Y2K expenditures are
expected to represent less than 10% of the Company's total IT expense budget.
Although there are opportunity costs to the Company's Y2K compliance effort,
management believes that no significant information technology projects have
been deferred due to this work.
Contingency Planning and Risks
FedEx's key contingency plans were completed by January 31, 1999. These
plans address the activities to be performed by personnel in preparation for and
during a Y2K-related failure that could have an immediate and significant impact
on normal operations. A Y2K-related failure could include, but is not limited
to, power outages, system or equipment failures, erroneous data, loss of
communications and failure of a supplier or vendor. The contingency plans
include, among other things, items such as pre-arranging alternative operating
locations, replacing non-Y2K compliant suppliers and vendors, using back-up
systems equipment and stockpiling additional inventory and supplies. They also
outline alternative procedures, including manual ones, personnel can perform in
order to carry out their mission-critical functions and trouble-shooting
procedures the IT organization can follow to bring internal systems and
equipment back into operation after a Y2K-related failure. The plans also
establish procedures for company-wide communications. These are in addition to
the Company's operational contingency plans for the pick-up, delivery and
movement of packages. FedEx expects to have a Y2K contingency command and
control center by April 30, 1999 that will link to its other operations command
and control centers. Key personnel will be on call beginning November 1999 and
on site beginning December 31, 1999.
- 24 -
<PAGE>
FedEx's goal for completing all other contingency plans is September 30,
1999. Plans covering vendor and supplier issues are targeted for completion by
May 31, 1999 to minimize the risks, if any, that some of these parties may not
be on schedule in their own Y2K efforts. FedEx's goal for developing testing
plans is May 31, 1999. Testing will include structured walk-throughs, mock
drills and simulations and is expected to be completed by October 31, 1999. The
Company's other operating subsidiaries are currently formulating their
contingency plans for Y2K non-compliance. Their goal for completion of key Y2K
contingency plans is May 31, 1999. Although the cost of developing contingency
plans is included in the total project costs described above, the cost of
implementing any necessary contingency plans is not known at this time.
Due to the general uncertainty inherent in the Company's Y2K compliance,
mainly resulting from the Company's dependence upon the Y2K compliance of the
government agencies and third-party suppliers, vendors and customers with
whom the Company deals, the Company believes that there is no single most
reasonably likely worst case scenario. However, the Company believes that a
most reasonably likely worst case scenario could include, but is not limited
to, the following situations: delivery delays and the related re-routing
costs due to the lack of readiness of airports and air traffic systems,
principally outside the United States; the inability to serve certain
customers or geographic areas due to their lack of compliance and business
continuance capabilities of suppliers, vendors, customers and independent
contractors, including third party pick-up and delivery providers on whom the
Company relies in some offshore locations; and service delays or failures due
to the global utilities and telecommunications infrastructure. The Company's
Y2K program, including related contingency planning, is designed to
substantially lessen the possibility of significant interruptions of normal
operations. Despite its efforts to date, the Company may still incur
substantial expenditures or experience significant delays in delivering its
services as Y2K problems, both domestic and international, become known.
Non-compliant systems of vendors, suppliers, customers and other third
parties could also adversely affect the Company. While costs related to the
lack of Y2K compliance of third parties, business interruptions, litigation
and other liabilities related to Y2K issues could materially and adversely
affect the Company's business, results of operations and financial condition,
the Company expects its Y2K compliance efforts to reduce significantly the
Company's level of uncertainty about the impact of Y2K issues affecting both
its IT Systems and Non-IT Systems.
* * *
Statements in this "Management's Discussion and Analysis of Results of
Operations and Financial Condition" or made by management of the Company which
contain more than historical information may be considered forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) which are subject to risks and uncertainties. Actual results may
differ materially from those expressed in the forward-looking statements because
of important factors identified in this "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
- 25 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 8 Legal Proceedings in Part I is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K.
During the quarter ended February 28, 1999, the Registrant filed one
Current Report on Form 8-K dated February 22, 1999. The report was filed
under Item 5, Other Events, and Item 7, Financial Statements and Exhibits,
and contained a press release announcing that contingency expenses incurred
in connection with the Federal Express Corporation pilot contract
negotiations were less than originally forecast.
- 26 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FDX CORPORATION
(Registrant)
Date: April 12, 1999 /s/ JAMES S. HUDSON
------------------------
JAMES S. HUDSON
CORPORATE VICE PRESIDENT
STRATEGIC FINANCIAL PLANNING & CONTROL
(PRINCIPAL ACCOUNTING OFFICER)
- 27 -
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------- ----------------------
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
E-1
<PAGE>
EXHIBIT 12.1
FDX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended May 31, February 28,
---------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes . . . . . $540,131 $693,564 $702,094 $425,865 $899,518 $605,175 $689,021
Add back:
Interest expense, net of
capitalized interest. . . . . . 152,170 130,923 109,249 110,080 135,696 104,615 85,713
Amortization of debt
issuance costs. . . . . . . . . 2,860 2,493 1,628 1,328 1,481 1,091 8,987
Portion of rent expense
representative of
interest factor . . . . . . . . 288,716 333,971 393,775 439,729 508,325 381,667 430,023
-------- -------- -------- -------- -------- -------- --------
Earnings as adjusted . . . . . . . . $983,877 $1,160,951 $1,206,746 $977,002 $1,545,020 $1,092,548 $1,213,744
-------- ---------- ---------- -------- ---------- ---------- ----------
-------- ---------- ---------- -------- ---------- ---------- ----------
Fixed Charges:
Interest expense, net of
capitalized interest. . . . . . . $152,170 $130,923 $109,249 $110,080 $135,696 $104,615 $85,713
Capitalized interest . . . . . . . . 29,738 27,381 44,654 45,717 33,009 23,513 29,777
Amortization of debt
issuance costs. . . . . . . . . . 2,860 2,493 1,628 1,328 1,481 1,091 8,987
Portion of rent expense
representative of
interest factor.. . . . . . . . . 288,716 333,971 393,775 439,729 508,325 381,667 430,023
-------- -------- -------- -------- -------- -------- --------
$473,484 $494,768 $549,306 $596,854 $678,511 $510,886 $554,500
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges . 2.1 2.3 2.2 1.6 2.3 2.1 2.2
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
EXHIBIT 15.1
March 17, 1999
FDX Corporation
6075 Poplar Avenue
Memphis, Tennessee 38119
We are aware that FDX Corporation will be incorporating by reference in its
previously filed Registration Statements No. 333-45037, 333-71065, and 333-74701
its Report on Form 10-Q for the quarter ended February 28, 1999, which includes
our report dated March 17, 1999 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the Securities Act of
1933, that report is not considered part of these registration statements
prepared or certified by our firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME ON PAGES 3-5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDING
FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 139,105
<SECURITIES> 0
<RECEIVABLES> 2,166,119
<ALLOWANCES> 67,071
<INVENTORY> 304,968
<CURRENT-ASSETS> 2,919,110
<PP&E> 13,365,689
<DEPRECIATION> 6,962,505
<TOTAL-ASSETS> 10,196,414
<CURRENT-LIABILITIES> 2,715,409
<BONDS> 1,362,059
0
0
<COMMON> 14,861
<OTHER-SE> 4,390,429
<TOTAL-LIABILITY-AND-EQUITY> 10,196,414
<SALES> 0
<TOTAL-REVENUES> 12,389,957
<CGS> 0
<TOTAL-COSTS> 11,617,089
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,246
<INCOME-PRETAX> 689,021
<INCOME-TAX> 279,053
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409,968
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 2.74
</TABLE>
