<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 NOVEMBER 30, 1993,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: 1-7806
FEDERAL EXPRESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 71-0427007
(State of incorporation) (I.R.S. Employer
Identification No.)
2005 Corporate Avenue
Memphis, Tennessee 38132
(Address of principal
executive offices) (ZIP Code)
(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 December 31, 1993
Common Stock, par value $.10 per share 55,437,962
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
November 30, 1993 and May 31, 1993................................. 3-4
Condensed Consolidated Statements of Operations
Three and Six Months Ended November 30, 1993 and 1992.............. 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 1993 and 1992........................ 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............................................ 14-19
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K........... ......................... 20
EXHIBIT INDEX.......................................................... E-1
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
- ------
November 30,
1993 May 31,
(Unaudited) 1993
------------ -----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 359,270 $ 155,456
Receivables, less allowance for doubtful accounts
of $33,339,000 and $31,308,000.................. 987,555 922,727
Spare parts, supplies and fuel.................... 156,933 164,087
Deferred income taxes............................. 138,355 133,875
Prepaid expenses and other........................ 51,282 63,573
----------- -----------
Total current assets.......................... 1,693,395 1,439,718
----------- -----------
Property and Equipment, at Cost (Note 6)............ 6,954,044 6,706,209
Less accumulated depreciation and amortization.... 3,486,805 3,229,941
----------- -----------
Net property and equipment.................... 3,467,239 3,476,268
----------- -----------
Other Assets:
Goodwill.......................................... 423,672 432,215
Equipment deposits and other assets (Note 6)...... 374,450 444,863
----------- -----------
Total other assets............................ 798,122 877,078
----------- -----------
$ 5,958,756 $ 5,793,064
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- ----------------------------------------
<CAPTION>
November 30,
1993 May 31,
(Unaudited) 1993
------------ -----------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt (Note 3)......... $ 302,326 $ 133,797
Accounts payable................................... 486,464 554,111
Accrued expenses (Note 2).......................... 845,031 761,357
----------- -----------
Total current liabilities...................... 1,633,821 1,449,265
----------- -----------
Long-Term Debt, Less Current Portion (Note 3)........ 1,669,845 1,882,279
----------- -----------
Deferred Income Taxes and Other Liabilities.......... 873,931 790,139
----------- -----------
Commitments and Contingencies (Notes 6 and 7)
Common Stockholders' Investment (Note 5):
Common Stock, $.10 par value;
100,000,000 shares authorized; 55,334,746 and
54,743,208 shares issued......................... 5,533 5,474
Other.............................................. 1,775,626 1,665,907
----------- -----------
Total common stockholders' investment......... 1,781,159 1,671,381
----------- -----------
$ 5,958,756 $ 5,793,064
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- --------------------
1993 1992 1993 1992
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues....................... $2,121,525 $1,964,674 $4,137,250 $3,829,610
---------- ---------- ---------- ----------
Operating Expenses:
Salaries and employee
benefits................... 1,024,819 938,206 2,016,880 1,866,931
Rentals and landing fees..... 172,323 164,790 338,532 327,842
Depreciation and
amortization............... 147,935 143,242 293,161 285,697
Fuel......................... 119,076 130,121 233,812 250,845
Maintenance and repairs...... 115,899 100,845 235,793 195,945
Other........................ 391,755 374,815 767,447 719,971
---------- ---------- ---------- ----------
1,971,807 1,852,019 3,885,625 3,647,231
---------- ---------- ---------- ----------
Operating Income............... 149,718 112,655 251,625 182,379
---------- ---------- ---------- ----------
Other Income (Expense):
Interest, net................ (36,584) (40,382) (73,851) (81,870)
Other, net................... (2,595) (1,754) (6,400) (9,774)
---------- ---------- ---------- ----------
(39,179) (42,136) (80,251) (91,644)
---------- ---------- ---------- ----------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting Principle... 110,539 70,519 171,374 90,735
Income Tax Provision........... 50,848 35,118 78,832 45,186
---------- ---------- ---------- ----------
Income Before Cumulative Effect
of Change in Accounting
Principle.................... 59,691 35,401 92,542 45,549
Cumulative Effect of Change in
Accounting for Postretirement
Benefits, Net of Tax Benefit
of $34,287,000............... - - - (55,943)
---------- ---------- ---------- ----------
Net Income (Loss).............. $ 59,691 $ 35,401 $ 92,542 $ (10,394)
========== ========== ========== ==========
Earnings (Loss) per Share:
Before Cumulative Effect
of Change in Accounting
Principle.................. $ 1.07 $ .65 $ 1.67 $ .84
Cumulative Effect of Change
in Accounting for
Postretirement Benefits... - - - (1.03)
---------- ---------- ---------- ----------
$ 1.07 $ .65 $ 1.67 $ (.19)
========== ========== ========== ==========
Common and Common Equivalent
Shares (Note 5).............. 55,850 54,292 55,518 54,284
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
----------------------
1993 1992
--------- ---------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities............ $ 379,167 $ 412,648
--------- ---------
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $65,667,000 and
$110,364,000..................................... (762,632) (681,938)
Proceeds from sale-leaseback transactions.......... 581,400 118,944
Other, net......................................... 21,655 3,502
--------- ---------
Net cash used in investing activities................ (159,577) (559,492)
-------- ---------
Financing Activities:
Proceeds from debt issuances....................... 10,558 720,741
Principal payments on debt......................... (51,602) (451,783)
Other, net......................................... 25,268 (7,895)
--------- ----------
Net cash provided by (used in) financing activities.. (15,776) 261,063
--------- ---------
Net increase in cash and cash equivalents............ 203,814 114,219
Cash and cash equivalents at beginning of period..... 155,456 78,177
--------- ---------
Cash and cash equivalents at end of period........... $ 359,270 $ 192,396
========= =========
Cash payments for:
Interest (net of capitalized interest)............. $ 74,404 $ 72,629
========= =========
Income taxes....................................... $ 68,796 $ 37,381
========= =========
</TABLE>
Non-cash investing and financing activities:
In November 1992, approximately $73,000,000 of secured debt related to a
portion of the purchase price of one MD-11 aircraft acquired by the Company was
assumed by a third party in a sale-leaseback of the aircraft.
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Summary of Significant Accounting Policies
------------------------------------------
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information,
the instructions to Quarterly Reports on Form 10-Q and Rule 10-01 of
Regulation S-X, and should be read in conjunction with Federal Express
Corporation's Annual Report on Form 10-K for the year ended May 31, 1993.
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 Federal Express Corporation and
subsidiaries as of November 30, 1993, the consolidated results of their
operations for the three- and six-month periods ended November 30, 1993 and
1992, and their consolidated cash flows for the six-month periods ended
November 30, 1993 and 1992. Operating results for the three- and six-month
periods ended November 30, 1993 are not necessarily indicative of the results
that may be expected for the year ending May 31, 1994.
In the fourth quarter of 1993, the Company retroactively adopted Statement of
Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions," effective June 1, 1992.
Accordingly, previously reported results for the first, second and third
quarters of 1993 have been restated to reflect this change in accounting
principle.
Certain prior period amounts have been reclassified to conform to the current
presentation.
(2) Accrued Expenses
----------------
<TABLE>
<CAPTION>
November 30,
1993 May 31,
(Unaudited) 1993
------------ ---------
(In thousands)
<S> <C> <C>
Employee benefits.............................. $120,225 $ 91,651
Insurance...................................... 173,167 169,176
Compensated absences........................... 171,803 163,553
Taxes other than income taxes.................. 117,731 114,460
Aircraft overhaul.............................. 60,288 59,507
Salaries....................................... 82,272 64,716
Interest....................................... 42,094 38,353
Other.......................................... 77,451 59,941
-------- --------
$845,031 $761,357
======== ========
</TABLE>
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<PAGE>
(3) Long-Term Debt
--------------
<TABLE>
<CAPTION>
November 30,
1993 May 31,
(Unaudited) 1993
----------- -----------
(In thousands)
<S> <C> <C>
Unsecured notes payable, interest rates of
6.25% to 12.125%, due through 2013............ $1,452,784 $1,493,700
Unsecured sinking fund debentures, interest
rate of 9.625%, due through 2020.............. 98,220 98,185
Capital lease obligations, Memphis-Shelby County
Airport Authority Special Facilities Revenue
Bonds, due through 2013, interest rates of
6.75% to 8.3%, net of bond reserve funds and
unamortized discounts......................... 221,739 221,740
Other debt, effective rates of 4.36% to 11.25%.. 199,428 202,451
---------- ----------
1,972,171 2,016,076
Less current portion........................ 302,326 133,797
---------- ----------
$1,669,845 $1,882,279
========== ==========
</TABLE>
The Company has a revolving credit agreement with domestic and foreign banks
that provides for a commitment of $1,000,000,000 through May 31, 1996, all of
which was available at November 30, 1993. 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. Borrowings under this credit agreement and commercial paper
borrowings are classified as long-term based on the Company's ability and intent
to refinance such borrowings.
In August 1993 an agreement was executed to issue $45,000,000 of City of
Indianapolis Airport Facility Revenue Refunding Bonds (the "Refunding Bonds") in
September 1994. The Refunding Bonds will be used to retire the 11.25%
Indianapolis Special Facilities Revenue Bonds, Series 1984 which were originally
issued in November 1984 to finance the acquisition, construction and outfitting
of an express package sorting hub at the Indianapolis International Airport for
a third party. In 1988, the Company acquired the hub facility from the third
party and assumed liability for the lease obligation and the guarantee position
related to the bonds. The Refunding Bonds have a maturity date of April 1, 2017
and a coupon rate of 6.85%, which will be adjusted in the event of any changes
to the Company's credit rating on its long-term debt prior to the date of
issuance.
The Company filed a registration statement in August 1993 with the Securities
and Exchange Commission for the issuance of up to $233,600,000 of equipment
trust certificates and pass through certificates. During October and December
1993, $152,320,000 and $236,000,000, respectively, of pass through certificates
were issued under September 1992 and August 1993 registration statements to
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<PAGE>
refinance the debt portion of leveraged leases related to five MD-11 aircraft.
The pass through certificates are not direct obligations of, or guaranteed by,
the Company but amounts payable by the Company under the five leveraged leases
are sufficient to pay the principal and interest on the certificates. The
Company has $11,680,000 of certificates remaining which may be used to
partially finance the purchase of aircraft, or to finance or refinance
aircraft in leveraged lease transactions.
In December 1993, the Company filed a new registration statement with the
Securities and Exchange Commission for the issuance of up to $400,000,000 of
pass through certificates. These pass through certificates can be used to
finance the debt portion of leveraged lease transactions.
In 1993, the Company entered into a $140,000,000 foreign bank facility to
provide a source of funds for predelivery payments on Airbus A300 aircraft to be
delivered to the Company. As of November 30, 1993, the Company had $140,000,000
outstanding under this facility.
The Company retired $38,000,000 of 9 1/2% Series A Medium-Term Notes in
October and November 1993. In addition, in December 1993, the Company redeemed
$34,970,000 of Memphis-Shelby County Airport Authority ("MSCAA") Special
Facilities Revenue Bonds, retired its 46,000,000 pound sterling Private
Placement ($70,062,000 at retirement) and repaid the balance due under a
yen-denominated Term Loan Agreement ($11,537,000 at repayment). The Company
also recorded a pre-tax charge of $800,000 in November 1993 related to a call
premium associated with the early redemption of the MSCAA bonds.
(4) 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 November 30, 1993, none of these shares had been
issued.
(5) Common Stockholders' Investment
-------------------------------
During the six-month period ended November 30, 1993, 602,538 shares of common
and treasury stock were issued under employee incentive plans at prices ranging
from $30.56 to $63.63 per share. During the same period, the Company acquired
10,250 shares (including restricted stock forfeitures) of its common stock at an
average cost of $61.80 per share.
(6) Commitments
-----------
At November 30, 1993, the Company had contractual agreements to purchase 25
Airbus A300 aircraft to be delivered through 1999. Deposits and progress
payments of $301,200,000 have been made toward these purchases. Additional
deposits and payments in connection with these agreements are expected to
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<PAGE>
approximate $150,300,000 for the remainder of 1994, $464,500,000, $410,900,000,
$251,200,000, and $309,700,000, in 1995 through 1998, respectively, and
$62,700,000, thereafter. The Company also has commitments for aircraft
modifications and related parts and the development and upgrade of aircraft
simulators approximating $53,900,000 for the remainder of 1994 and $44,100,000
in 1995. At May 31, 1993, the Company had options to purchase up to 50
additional Airbus A300 aircraft for delivery beginning in 1997. In September
1993, the Company allowed four of these aircraft options to expire and received
refunds for substantially all of the deposits related to the expired options.
In addition to commitments related to aircraft, the Company has other
commitments aggregating $120,500,000 at November 30, 1993, of which
approximately $102,800,000 will be expended during the remainder of 1994. These
commitments primarily relate to capital expenditures for facilities, vehicles,
computer and other equipment.
During the six-month period ended November 30, 1993, the Company also entered
into an agreement to lease 13 Airbus A310 aircraft (to be delivered beginning in
July 1994), sold and leased back six MD-11 aircraft and entered into an
operating lease for additional maintenance facilities and ramp expansion at
Memphis International Airport. These new agreements in the aggregate increased
the Company's future minimum lease payments under operating leases by
$24,000,000 for 1994, $63,800,000 for 1995, $86,600,000 for 1996, $85,700,000
for 1997, $87,100,000 for 1998, and $1,547,800,000 thereafter.
(7) Legal Proceedings
-----------------
On May 24, 1990, a shareholder filed a class-action suit in the United States
District Court for the Western District of Tennessee against the Company,
Frederick W. Smith and James L. Barksdale, the Company's former Executive Vice
President and Chief Operating Officer. The complaint alleges fraud and
violations of Sections 10(b) and 20 of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder. Subsequently, three other shareholders filed separate
suits which contain substantially similar allegations. The complaints allege
that purchasers of the Company's common stock during periods ending May 21, 1990
were damaged when the market value of the stock dropped by nearly 10% on May 22,
1990. The plaintiffs allege generally that the defendants artificially inflated
the market value of the Company's common stock by a series of misleading
statements or by failing to disclose certain adverse information. An
unspecified amount of damages is sought. The separate actions have been
consolidated and a motion to dismiss the action has been denied. Both
plaintiffs and defendants have filed motions for summary judgment. The Company
and Messrs. Smith and Barksdale are co-defendants in the suit. The Company will
bear the cost of the defense and is obligated to indemnify Messrs. Smith and
Barksdale for their expenses in defending the suit and for any settlement or
damages in the action to the extent permitted by law.
The Internal Revenue Service ("IRS") issued an Examination Report on
October 31, 1991 asserting the Company underpaid federal excise taxes for the
calendar quarters ended December 31, 1983 through March 31, 1987. The
Examination Report contains a primary position and a mutually exclusive
alternative position asserting the Company underpaid federal excise taxes by
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<PAGE>
$54,000,000 and $26,000,000, respectively. Disagreeing with essentially all of
the proposed adjustments contained in the Examination Report, the Company filed
a Protest on March 16, 1992 which set forth the Company's defenses to both IRS
positions and a claim for refund of overpaid federal excise taxes of
$23,500,000. On March 19, 1993, the IRS issued another Examination Report to
the Company asserting the Company underpaid federal excise taxes by $105,000,000
for the calendar quarters ended June 30, 1987 through March 31, 1991. On June
17, 1993, the Company filed a Protest contesting the March 19 Examination Report
which set forth the Company's defenses to the IRS position and a claim for
refund of overpaid federal excise taxes of $46,500,000. Interest would be
payable on the amount of any refunds by the IRS to the Company or underpaid
federal excise taxes payable by the Company to the IRS at statutorily determined
rates. The interest rates payable by the Company for underpaid taxes are higher
than the rates payable by the IRS on refund amounts.
The Company plans to vigorously pursue its Protests administratively with the
IRS Appeals Division. If it is unsuccessful with the IRS Appeals Division, the
Company intends to pursue its position in court. Pending resolution of this
matter, the IRS can be expected to take positions similar to those taken in
their Examination Reports for periods after March 31, 1991.
Given the inherent uncertainties in the shareholder litigation and the excise
tax matter referred to above, management is currently unable to predict with
certainty the outcome of these matters or the ultimate effect, if any, their
resolution would have on the Company's financial condition or results of
operations. No amounts have been reserved for these contingencies.
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<PAGE>
REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen & Co., independent public accountants, has performed a review
of the condensed consolidated balance sheet of the Company as of November 30,
1993, and the related condensed consolidated statements of operations for the
three- and six-month periods ended November 30, 1993 and 1992 and the condensed
consolidated statements of cash flows for the six-month periods ended
November 30, 1993 and 1992, included herein, as indicated in their report
thereon included on page 13.
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Federal Express Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Federal Express Corporation and subsidiaries as of November 30, 1993 and the
related condensed consolidated statements of operations for the three- and six-
month periods ended November 30, 1993 and 1992 and the condensed consolidated
statements of cash flows for the six-month periods ended November 30, 1993 and
1992. 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 Federal Express Corporation and
subsidiaries as of May 31, 1993 and the related consolidated statements of
operations, changes in common stockholders' investment and cash flows for the
year then ended. In our report dated July 13, 1993, we expressed an unqualified
opinion on those financial statements, which are not presented herein. In our
opinion, the accompanying condensed consolidated balance sheet as of May 31,
1993 is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
Arthur Andersen & Co.
Memphis, Tennessee,
December 13, 1993
- 13 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company's second quarter and year-to-date results reflect marked
improvement in international operations while U.S. domestic operating margins
were slightly below prior year levels. The Company's international operations
posted its first profitable quarter since the Company commenced international
service in June 1985. International losses have been significantly reduced
because of lower costs associated with capacity reduction and growth in the
intercontinental express business. Improvement in the Company's U.S. domestic
operating margin continues to be restrained by a rate of decline in its average
revenue per package (yield) that has not been offset by a corresponding
reduction in cost per package.
A comparison of second quarter and year-to-date results is presented below (in
millions, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------ -----------------
1993 1992 1993 1992
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenue.............................. $2,122 $1,965 $4,137 $3,830
Operating Income..................... 150 113 252 182
Pre-tax Income....................... 111 71 171 91
Income before Cumulative Effect of
Change in Accounting Principle..... 60 35 93 46
Earnings per Share Before Cumulative
Effect of Change in Accounting
Principle.......................... $ 1.07 $ 0.65 $ 1.67 $ 0.84
</TABLE>
Results for 1993 have been restated to reflect the adoption in 1993 of SFAS
No. 106.
Revenue increased 8% for the quarter and year-to-date periods primarily
reflecting volume gains in domestic and international express package
services, partially offset by volume decreases in the Company's international
airfreight service. Operating income for these same periods improved
33% and 38%, respectively, as a result of growth in the Company's
International Priority Service. U.S. domestic profits were essentially level
with prior year results. Total operating expense increased 6% and 7% over
the prior year's second quarter and year-to-date periods, respectively.
Salaries and employee benefits increased 9% and 8%, respectively, primarily
due to volume-related increases in employment levels and increased
provisions under the Company's performance-based incentive compensation plans.
Maintenance and repairs expense increased 15% and 20%, respectively,
principally due to the timing of DC-10 engine maintenance. Year-over-year
increases in maintenance and repairs expense are expected to continue for the
remainder of 1994 and into 1995, primarily for continued DC-10
engine maintenance and increased levels of maintenance for other aircraft.
Fuel expense decreased 8% and 7% for the quarter and year-to-date periods,
respectively, due to reduced consumption and lower fuel prices.
Other Income (Expense) declined 7% and 12% for the quarter and year-to-date
periods, respectively, primarily reflecting reduced debt levels and lower
- 14 -
<PAGE>
interest rates. In addition, prior year results included $6 million in
charges for write-offs of deferred financing costs from a refunding of
approximately $96 million of Memphis-Shelby County Airport Authority (MSCAA)
Special Facilities Revenue Bonds and an early redemption of $100 million of
10 5/8% Senior Notes and a call premium associated with the bond refunding.
In comparison, current year results include a call premium of $1.4 million
recorded in the first quarter in connection with the execution of an agreement
to issue $45 million of City of Indianapolis Airport Facility Revenue
Refunding Bonds in September 1994. In addition, in November 1993 the Company
recorded a call premium of $.8 million related to a redemption of
approximately $35 million of MSCAA bonds.
U.S. Domestic Services
- ----------------------
Operating results and selected volume and yield statistics for domestic
operations were as follows (in millions, except yields):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
1993 1992* 1993 1992*
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue.......................... $1,538 $1,400 $3,018 $2,742
Operating Income................. 148 151 283 278
Operating Margin................. 9.6% 10.8% 9.4% 10.1%
Express Package Statistics:
Total Packages................ 111 99 216 194
Revenue per Package........... $13.42 $13.59 $13.51 $13.65
<FN>
* Results restated for the adoption of SFAS No. 106.
</TABLE>
Quarterly and year-to-date U.S. Domestic operating results reflect a 10%
increase in revenues and an 11% increase in operating expenses causing operating
margins to decline year-over-year. Revenue growth resulted from year-over-year
increases in volumes (12% increase for the quarter and year-to-date periods)
even though yields were slightly lower (1% decrease for the quarter and
year-to-date periods). Although operating expenses increased, a continued
emphasis on quality enhancements and increased productivity resulted in a cost
per package essentially equal to that of the prior year.
The decline in yield is attributable to faster growth of lower-priced deferred
services relative to premium-priced priority services and discounting fostered
by highly competitive market conditions. Seasonal demand patterns typically
intensify the growth of deferred services in the second quarter. As yields have
dropped, the Company has not been able to completely offset this decline with
corresponding reductions in cost per package.
Management has addressed the decline in operating margin by yield management
actions and continued emphasis on reducing cost per package. On a
year-over-year basis beginning with the second half of 1993, the Company has
been able to slow the rate of yield declines. This is attributable to programs
intended to moderate the level of discounting, to attract lower-volume,
higher-yielding customers and to promote heavier weights per package. The
Company is striving to reduce its cost per package by replacing certain of
its aging aircraft with newer, more efficient Airbus A300 and A310 aircraft,
implementing programs to better control rising health care costs and further
enhancing its package-handling, distribution and information systems. To
the extent that the competitive activity and changes in customer demand
patterns mentioned above continue, pressures on profit margins may persist.
- 15 -
<PAGE>
International Services
- ----------------------
Operating results and selected volume and yield statistics for international
operations were as follows (in millions, except yields):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
1993 1992* 1993 1992*
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
International Priority Services (IP).. $ 320 $ 281 $ 622 $ 540
International EXPRESSfreight (IXF)
and Airport-to-Airport (ATA)
Airfreight Services................. 139 159 260 313
Charter Services...................... 36 34 63 56
Intra-country Services and Other...... 89 90 174 178
------ ------ ------ ------
584 564 1,119 1,087
------ ------ ------ ------
Operating Income (Loss)................. 2 (38) (31) (95)
Operating Margin........................ 0.4% (6.7)% (2.8)% (8.8)%
Volume/Yield Statistics:
Total IP Packages..................... 8 7 16 14
Revenue per Package................... $38.33 $38.61 $38.26 $37.71
Total Airfreight Pounds............... 123 144 239 279
Revenue per Pound..................... $ 1.13 $ 1.10 $ 1.09 $ 1.12
<FN>
* Results restated for the adoption of SFAS No. 106.
</TABLE>
The Company's international operating results for the current year showed
significant gains over prior year operating losses for the quarter and
year-to-date periods as revenues increased 3% while operating expenses decreased
3% for both periods. In addition, prior year's first quarter results included
a $12.5 million reduction in restructuring reserves from less than expected
costs to settle certain estimated liabilities from the Company's European
restructuring.
This year-over-year improvement in operating results primarily reflects a
continued strong growth in IP revenue and reduced operating costs from changes,
effective March 1, 1993, to the Company's international flight schedules which
decreased flight hours, reduced aircraft capacity on certain international
routes and eliminated certain airfreight terminal operations. Through
aggressive marketing and sales promotions the Company was able to boost
worldwide IP volumes (14% increase for the quarter and year-to-date periods)
while maintaining relatively stable yields. Volume growth and yield
improvement were most notable in Far East operations.
Airfreight revenues decreased 12% and 17% for the quarter and year-to-date
periods, respectively, compared with the prior year, primarily reflecting a
continued decline in ATA volumes and yields. ATA volumes declined 31% and 26%
for the quarter and year-to-date periods, respectively, while yields declined 4%
and 8% during these same comparative periods. These declines reflect the highly
competitive and price sensitive nature of the current airfreight market,
characterized by excess capacity resulting from a large number of participants
offering relatively similar services and, with respect to revenues and volumes,
the Company's reduction in airfreight capacity. This trend of declining ATA
revenues and volumes is expected to continue as the Company increasingly focuses
on promoting its time-definite IP and IXF express services.
- 16 -
<PAGE>
IXF volumes increased 67% and 40% during the second quarter and year-to-date
periods, respectively, and yields decreased 13% and 11%, respectively, for these
same periods compared with the prior year. The significant increase in IXF
volumes during the second quarter was the result of selected sales promotions
during the international peak season for airfreight shipments and the
seasonal peak in demand for space by customers desiring to ensure a
time-definite delivery. Yields were lower because of competitive pressures
in the airfreight market.
The long-term profitability of the Company's international operations is
dependent on sustained growth in express services and cost containment.
The Company will continue to seek ways to manage its international
distribution network to make optimal use of its resources. Productivity
measures will continue to be implemented to ensure control over per package
costs. To boost volume growth, aggressive marketing efforts are underway to
promote new services and service enhancements. Actual results, however, are
dependent on successful implementation of the above factors and effective
management of economic and competitive challenges.
FINANCIAL CONDITION
Capital Expenditures and Resources
- ----------------------------------
The Company's operations are capital intensive, characterized by significant
investments in aircraft, package handling facilities, sort equipment and
vehicles, and computer and telecommunication equipment. The amount and timing
of capital additions are dependent on various factors including volume growth,
new or enhanced services, geographical expansion of services, competition and
availability of satisfactory financing.
Capital expenditures for the first six months of 1994 totaled $763 million and
included five MD-11 aircraft (all of which, together with a sixth aircraft
acquired in 1993, were subsequently sold and leased back), three B727-200
aircraft, deposits on future Airbus A300 aircraft, vehicle and ground support
equipment, and customer automation and computer equipment. In comparison, prior
year additions include four MD-11 aircraft, 12 B727-200 aircraft, deposits on
MD-11 and Airbus A300 aircraft, and customer automation and computer equipment.
At November 30, 1993, the Company had commitments aggregating approximately
$1.7 billion, net of deposits and progress payments of $301 million, for the
acquisition of 25 Airbus A300 aircraft (scheduled for delivery through 1999),
aircraft modifications and related parts and the development and upgrade of
aircraft simulators. An estimated $204 million will be expended in the
remainder of 1994, $509 million in 1995, $411 million in 1996, $251 million
in 1997, $310 million in 1998, and $63 million thereafter, in connection
with these commitments. At November 30, 1993, the Company also had options
for up to 46 additional Airbus A300 aircraft for delivery beginning in 1997.
In addition, the Company has other commitments related to facility and other
equipment acquisitions that approximated $121 million at November 30, 1993, of
which an estimated $103 million will be expended in the remainder of 1994.
During the six-month period ended November 30, 1993, the Company also entered
into an agreement to lease 13 Airbus A310 aircraft (to be delivered beginning in
July 1994), sold and leased back six MD-11 aircraft and entered into an
operating lease for additional maintenance facilities and ramp expansion at
- 17 -
<PAGE>
Memphis International Airport. These new agreements in the aggregate increased
the Company's future minimum lease payments under operating leases by $24
million for 1994, $63.8 million for 1995, $86.6 million for 1996, $85.7 million
for 1997, $87.1 million for 1998, and $1.5 billion thereafter.
The Company has historically financed its capital investments through the use
of lease, debt and equity financing in addition to the use of internally
generated cash from operations. Management's practice in recent years with
respect to funding new aircraft acquisitions has been to finance such aircraft
through long-term lease transactions that qualify as off balance sheet operating
leases under applicable accounting rules. Management has determined that these
leases provide economic benefits favorable to ownership with respect to market
values, liquidity and after-tax cash flows. The Company has been successful in
obtaining equity capital for long-term leases on terms acceptable to it although
the marketplace for such capital can become restricted depending on a variety of
economic factors beyond the control of the Company. The Company believes that
for the foreseeable future it will continue to be able to find financing for its
needs on acceptable terms.
The Company filed a registration statement in August 1993 with the Securities
and Exchange Commission for the issuance of up to $233.6 million of equipment
trust certificates and pass through certificates. During October and December
1993, $152.3 million and $236 million, respectively, of pass through
certificates were issued under September 1992 and August 1993 registration
statements to refinance the debt portion of leveraged leases related to five MD-
11 aircraft. The pass through certificates are not direct obligations of, or
guaranteed by, the Company but amounts payable by the Company under the above
leveraged leases are sufficient to pay the principal and interest on the
certificates. The Company has $11.7 million of certificates remaining which
may be used to partially finance the purchase of aircraft, or to finance or
refinance aircraft in leveraged lease transactions.
In December 1993, the Company filed a new registration statement with the
Securities and Exchange Commission for the issuance of up to $400 million of
pass through certificates. These pass through certificates can be used
to finance the debt portion of leveraged lease transactions.
The Company has entered into a foreign bank credit facility that provides for
a commitment of $140 million to finance predelivery payments on the first seven
Airbus A300 aircraft to be delivered in 1994 and 1995. As of November 30, 1993,
the Company had $140 million outstanding under this facility.
In July 1993, $45 million of MSCAA bonds were issued to finance a portion of
the construction cost of the aircraft maintenance facilities, hangar and ramp
expansion mentioned above. The Company is obligated under an operating
lease agreement with MSCAA to pay rentals equal to the principal and
interest due on the bonds.
In August 1993, an agreement was executed to issue $45 million of City of
Indianapolis Airport Facility Revenue Refunding Bonds associated with the
Company's Indianapolis hub. The advance refunding will provide for $45 million
of refunding bonds to be issued in September 1994 at a coupon rate of 6.85% with
a maturity date of April 1, 2017. The coupon rate will be adjusted in the
event of any changes to the Company's credit rating on its long-term debt prior
to the date of issuance.
- 18 -
<PAGE>
The Company retired $38 million of 9 1/2% Series A Medium-Term Notes in
October and November 1993. In addition, in December 1993, the Company redeemed
$35 million of MSCAA Special Facilities Revenue Bonds, retired its
46 million pound sterling Private Placement ($70.1 million at retirement)
and repaid the balance due under a yen-denominated Term Loan Agreement
($11.5 million at repayment).
At November 30, 1993, the Company had $100 million of unsecured notes
available under a shelf registration filed with the Securities and Exchange
Commission in June 1992. Management believes that the capital resources
available to the Company, including certain backstop financing commitments for
new aircraft which the Company has firm commitments to purchase in 1994 and
beyond, are adequate to meet its future capital needs.
Liquidity and Financial Position
- --------------------------------
Cash and cash equivalents totaled $359 million at November 30, 1993, an
increase of $204 million during the first six months of 1994. Cash provided
from operations during the first six months was $379 million compared with $413
million for the same period in the prior year. Cash from operations was higher
in 1993 primarily due to the settlement of receivables associated with
operations discontinued as part of the February 1992 European restructuring
partially offset by increased fiscal 1994 income. The Company currently has
available a $1 billion revolving bank credit facility that is generally used to
finance temporary operating cash requirements and to provide support for the
issuance of commercial paper.
The Omnibus Budget Reconciliation Act of 1993, to be phased in through fiscal
1997, will have a negative financial impact on the Company's future operations.
Management has determined that the impact on current year results will be
immaterial, as tax rate increases have been offset by tax benefits to be
received as a result of revaluing the Company's net deferred tax assets pursuant
to SFAS No. 109, "Accounting for Income Taxes." Other components of this
legislation, such as the limitations on deductions for meals and entertainment
and the increase in the excise tax on aviation fuel, will affect the
Company's financial results beginning in fiscal 1995 and 1996, respectively.
Based on the Company's current fuel consumption level, the increase in the
excise tax on aviation fuel of 4.3 cents per gallon (effective October 1, 1995)
would increase the Company's annual aircraft fuel expense by approximately $24
million. Although the increase in fuel costs for 1996 and beyond due to the
higher excise tax rate is expected to be significant, the extent of the increase
will be dependent on fuel consumption for each individual year.
Under the Clean Air Act Amendments of 1990 many states will be required
to implement alternative fuel programs for fleet vehicles operating in
certain nonattainment areas. As states begin to implement their clean fuel
fleet programs, the Company anticipates acquiring new delivery vehicles or
modifying its existing delivery vehicles in order to comply with the
regulations. Additionally, facility modifications may be required to
accommodate the use of alternative fuels at the Company's stations and
ramps. The Company believes these new alternative fuel programs will impose
additional expenditures on the Company, however, the magnitude of the
impact has not yet been determined nor has the Company decided what steps,
if any, to take to counteract it.
- 19 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
11.1 Statement re Computation of Earnings (Loss) Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
(b) Reports on Form 8-K.
During the quarter ended November 30, 1993, the Registrant filed three Current
Reports on Form 8-K. The first report was dated September 2, 1993 and filed
under Item 7, Financial Statements and Exhibits. The report contained a press
release dated September 2, 1993.
The second report was dated September 14, 1993 and filed under Item 7,
Financial Statements and Exhibits. The report contained a press release dated
September 14, 1993.
The third report was dated September 23, 1993 and filed under Item 7,
Financial Statements and Exhibits. The report contained documents relating to
the 1993 Pass Through Certificates, Series B1 and B2.
- 20 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FEDERAL EXPRESS CORPORATION
(Registrant)
Date: January 13, 1994 /s/ GRAHAM R. SMITH
-------------------------------
GRAHAM R. SMITH
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 21 -
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------- ----------------------
11.1 Statement re Computation of Earnings (Loss) Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
E-1
<PAGE>
EXHIBIT 11.1
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
Net income (loss) applicable to common and common equivalent shares and the
weighted average number of shares used in the calculation of earnings (loss) per
share for the three- and six-month periods ended November 30, 1993 and 1992 were
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended November 30, Ended November 30,
------------------- -------------------
1993 1992 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before cumulative effect
of change in accounting
principle......................... $ 59,691 $ 35,401 $ 92,542 $ 45,549
Cumulative effect of change in
accounting for postretirement
benefits.......................... - - - (55,943)
-------- -------- -------- --------
Net income (loss) applicable to
common and common equivalent
shares............................ $ 59,691 $ 35,401 $ 92,542 $(10,394)
======== ========= ======== ========
Average shares of common stock
outstanding....................... 55,143 54,138 54,965 54,125
Common Equivalent Shares:
Assumed exercise of outstanding
dilutive options................ 3,353 1,879 2,667 1,875
Less shares repurchased from
proceeds of assumed exercise
of options...................... (2,646) (1,725) (2,114) (1,716)
-------- --------- ------- -------
Average common and common
equivalent shares................. 55,850 54,292 55,518 54,284
======== ========= ======= ========
Earnings (loss) per share:
Before cumulative effect of
change in accounting principle.. $ 1.07 $ .65 $ 1.67 $ .84
Cumulative effect of change in
accounting for postretirement
benefits........................ - - - (1.03)
-------- --------- -------- ---------
Net earnings (loss) per share....... $ 1.07 $ .65 $ 1.67 $ (.19)
======== ========= ======== =========
</TABLE>
The computation of the number of shares repurchased from the proceeds of the
assumed exercise of outstanding dilutive options is based upon the average
market price of the Company's common stock during the periods. Common
equivalent shares are excluded in periods in which their assumed exercise would
have an anti-dilutive effect.
Fully diluted earnings per share are substantially the same as earnings per
share for the three- and six-month periods ended November 30, 1993 and 1992,
respectively.
Exhibit 12.1
<TABLE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<CAPTION>
Year Ended May 31 Six Months Ended
-------------------------------------------------- ---------------------------
November 30, November 30,
1989 1990 1991 1992 1993 1993 1992
-------- -------- -------- -------- -------- ------------ ------------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes $298,332 $218,423 $ 40,942 $(146,828) $203,576 $171,374 $90,735
Add back: Interest expense 140,426 216,223 232,424 202,924 200,018 94,456 101,643
Capitalized interest (8,798) (16,986) (35,442) (26,603) (31,256) (16,311) (15,616)
Amortization of debt
issuance costs 1,217 2,989 1,634 2,570 4,906 1,504 1,755
Portion of rent expense
representative of
interest factor 168,491 248,830 292,840 299,012 262,724 136,005 129,561
-------- -------- -------- -------- -------- -------- -------
Earnings as adjusted $599,668 $669,479 $532,398 $ 331,075 $639,968 $387,028 $308,078
======== ======== ======== ========= ======== ======== ========
Fixed Charges:
Interest expense $131,628 $199,237 $196,982 $ 176,321 $168,762 $ 78,145 $ 86,027
Capitalized interest 8,798 16,986 35,442 26,603 31,256 16,311 15,616
Amortization of debt issuance costs 1,217 2,989 1,634 2,570 4,906 1,504 1,755
Portion of rent expense
representative of interest factor 168,491 248,830 292,840 299,012 262,724 136,005 129,561
-------- -------- -------- --------- -------- -------- --------
$310,134 $468,042 $526,898 $ 504,506 $467,648 $231,965 $232,959
======== ======== ======== ========= ======== ======== ========
Ratio of Earnings to Fixed Charges 1.9 1.4 1.0 (A) 1.4 1.7 1.3
======== ======== ======== ========= ======== ======== ========
<F3>
(A) Earnings were inadequate to cover fixed charges by $173.4 million for the year ended May 31, 1992.
</TABLE>
<PAGE>
EXHIBIT 15.1
January 6, 1994
Federal Express Corporation
2005 Corporate Avenue
Memphis, Tennessee 38132
We are aware that Federal Express Corporation will be incorporating by reference
in its previously filed Registration Statements No. 2-74000, 2-95720, 33-20138,
33-38041, 33-47176, 33-50013 and 33-51623 its Report on Form 10-Q for the
quarter ended November 30, 1993, which includes our report dated December 13,
1993 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,
Arthur Andersen & Co.
