<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, 1994, 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 March 31, 1994
Common Stock, par value $.10 per share 55,804,850
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
February 28, 1994 and May 31, 1993................................... 3-4
Condensed Consolidated Statements of Operations
Three and Nine Months Ended February 28, 1994 and 1993............... 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 1994 and 1993......................... 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.............................................. 14-20
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K....................................... 21
EXHIBIT INDEX.......................................................... E-1
- 2 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
- ------
February 28,
1994 May 31,
(Unaudited) 1993
----------- -----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 229,630 $ 155,456
Receivables, less allowance for doubtful accounts
of $37,024,000 and $31,308,000.................. 1,016,186 922,727
Spare parts, supplies and fuel.................... 159,351 164,087
Deferred income taxes............................. 139,766 133,875
Prepaid expenses and other........................ 54,110 63,573
----------- -----------
Total current assets.......................... 1,599,043 1,439,718
----------- -----------
Property and Equipment, at Cost (Note 6)............ 6,993,207 6,706,209
Less accumulated depreciation and amortization.... 3,566,164 3,229,941
----------- -----------
Net property and equipment.................... 3,427,043 3,476,268
----------- -----------
Other Assets:
Goodwill.......................................... 419,558 432,215
Equipment deposits and other assets (Note 6)...... 406,378 444,863
----------- -----------
Total other assets............................ 825,936 877,078
----------- -----------
$ 5,852,022 $ 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>
February 28,
1994 May 31,
(Unaudited) 1993
----------- -----------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt (Note 3)......... $ 198,184 $ 133,797
Accounts payable................................... 494,206 554,111
Accrued expenses (Note 2).......................... 737,374 761,357
----------- -----------
Total current liabilities...................... 1,429,764 1,449,265
----------- -----------
Long-Term Debt, Less Current Portion (Note 3)........ 1,673,441 1,882,279
----------- -----------
Deferred Income Taxes and Other Liabilities.......... 913,574 790,139
----------- -----------
Commitments and Contingencies (Notes 6 and 7)
Common Stockholders' Investment (Note 5):
Common Stock, $.10 par value;
100,000,000 shares authorized; 55,793,364 and
54,743,208 shares issued......................... 5,579 5,474
Other.............................................. 1,829,664 1,665,907
----------- -----------
Total common stockholders' investment......... 1,835,243 1,671,381
----------- -----------
$ 5,852,022 $ 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 Nine Months Ended
February 28, February 28,
---------------------- -----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues............................ $2,077,414 $1,939,781 $6,214,664 $5,769,391
---------- ---------- ---------- ----------
Operating Expenses:
Salaries and employee benefits.... 1,020,574 964,833 3,037,454 2,831,764
Rentals and landing fees.......... 181,516 167,983 520,048 495,825
Depreciation and amortization..... 151,976 145,480 445,137 431,177
Fuel.............................. 120,607 125,218 354,419 376,063
Maintenance and repairs........... 108,457 97,622 344,250 293,567
Other............................. 408,967 380,324 1,176,414 1,100,295
---------- ---------- ---------- ----------
1,992,097 1,881,460 5,877,722 5,528,691
---------- ---------- ---------- ----------
Operating Income.................... 85,317 58,321 336,942 240,700
---------- ---------- ---------- ----------
Other Income (Expense):
Interest, net..................... (35,132) (40,136) (108,983) (122,006)
Net gain on disposition of
flight equipment................ 8,864 225 7,898 778
Other, net........................ (1,332) (1,535) (6,766) (11,862)
---------- ---------- ---------- ----------
(27,600) (41,446) (107,851) (133,090)
---------- ---------- ---------- ----------
Income Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle.............. 57,717 16,875 229,091 107,610
Income Tax Provision................ 26,550 8,387 105,382 53,573
---------- ---------- ---------- ----------
Income Before Cumulative Effect of
Change in Accounting Principle.... 31,167 8,488 123,709 54,037
Cumulative Effect of Change in
Accounting for Postretirement
Benefits, Net of Tax Benefit
of $34,287,000.................... - - - (55,943)
---------- ---------- ---------- ----------
Net Income (Loss)................... $ 31,167 $ 8,488 $ 123,709 $ (1,906)
========== ========== ========== ==========
Earnings (Loss) per Share:
Before Cumulative Effect of
Change in Accounting Principle.. $ .55 $ .15 $ 2.22 $ .99
Cumulative Effect of Change in
Accounting for Postretirement
Benefits........................ - - - (1.03)
---------- ---------- ---------- ----------
$ .55 $ .15 $ 2.22 $ (0.04)
========== ========== ========== ==========
Common and Common Equivalent
Shares (Note 5)................... 56,445 55,117 55,827 54,562
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
----------------------
1994 1993
--------- ----------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities.......... $ 459,025 $ 483,055
--------- ---------
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $87,690,000 and
$141,236,000................................... (913,560) (836,214)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions.................. 581,400 118,944
Sale of B727 aircraft and other.............. 44,351 2,508
Other, net....................................... 1,571 1,797
--------- ---------
Net cash used in investing activities.............. (286,238) (712,965)
--------- ---------
Financing Activities:
Proceeds from debt issuances..................... 10,777 736,086
Principal payments on debt....................... (156,655) (500,615)
Proceeds from stock issuances.................... 49,846 22,238
Other, net....................................... (2,581) (10,648)
--------- ---------
Net cash provided by (used in) financing
activities..................................... (98,613) 247,061
--------- ---------
Net increase in cash and cash equivalents.......... 74,174 17,151
Cash and cash equivalents at beginning of period... 155,456 78,177
--------- ---------
Cash and cash equivalents at end of period......... $ 229,630 $ 95,328
========= =========
Cash payments for:
Interest (net of capitalized interest)........... $ 95,843 $ 97,668
========= =========
Income taxes..................................... $ 102,902 $ 69,218
========= =========
</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 February 28, 1994, the consolidated results of their
operations for the three- and nine-month periods ended February 28, 1994 and
1993, and their consolidated cash flows for the nine-month periods ended
February 28, 1994 and 1993. Operating results for the three- and nine-month
periods ended February 28, 1994 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>
February 28,
1994 May 31,
(Unaudited) 1993
------------ --------
(In thousands)
<S> <C> <C>
Compensated absences........................... $176,751 $163,553
Insurance...................................... 153,486 169,176
Taxes other than income taxes.................. 130,679 114,460
Salaries....................................... 62,263 64,716
Interest....................................... 58,118 38,353
Aircraft overhaul.............................. 49,700 59,507
Employee benefits.............................. 43,397 91,651
Other.......................................... 62,980 59,941
-------- --------
$737,374 $761,357
======== ========
</TABLE>
- 7 -
<PAGE>
(3) Long-Term Debt
--------------
<TABLE>
<CAPTION>
February 28,
1994 May 31,
(Unaudited) 1993
------------- -----------
(In thousands)
<S> <C> <C>
Unsecured notes payable, interest rates of
6.25% to 10.6%, due through 2013.............. $1,384,824 $1,493,700
Unsecured sinking fund debentures, interest
rate of 9.625%, due through 2020.............. 98,237 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......................... 199,004 221,740
Other debt, effective rates of 4.17% to 11.25%.. 189,560 202,451
---------- ----------
1,871,625 2,016,076
Less current portion........................ 198,184 133,797
---------- ----------
$1,673,441 $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 February 28, 1994. 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 a September 1992 and the 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
- 8 -
<PAGE>
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 registration statement with the
Securities and Exchange Commission for the issuance of up to $400,000,000 of
pass through certificates. In March 1994, $377,112,000 of pass through
certificates were issued under this registration statement to finance the debt
portion of leveraged leases related to 13 Airbus A310 aircraft to be acquired
under operating leases and to pay certain expenses. (See also Note 6,
"Commitments".) The Company has $22,888,000 available under this registration
statement 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 February 28, 1994, 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 an $800,000 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. No shares have been issued.
(5) Common Stockholders' Investment
-------------------------------
During the nine-month period ended February 28, 1994, 1,061,157 shares of
common and treasury stock were issued under employee incentive plans at prices
ranging from $30.56 to $70.19 per share. During the same period, the Company
acquired 21,188 shares (including restricted stock forfeitures) of its common
stock at an average cost of $66.46 per share.
(6) Commitments
-----------
At February 28, 1994, the Company had contractual agreements to purchase 25
Airbus A300 aircraft to be delivered through 1999. Deposits and progress
payments of $330,600,000 have been made toward these purchases. Additional
deposits and payments in connection with these agreements are expected to
approximate $124,700,000 for the remainder of 1994, $451,000,000, $399,700,000,
- 9 -
<PAGE>
$241,800,000, and $298,300,000, in 1995 through 1998, respectively, and
$61,300,000, thereafter. The Company also has commitments for aircraft
modifications and related parts and the development and upgrade of aircraft
simulators approximating $37,000,000 for the remainder of 1994 and $58,100,000
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 its obligations for aircraft, the Company has other commitments
for additional vehicles, facilities, computer and other equipment aggregating
$246,300,000 at February 28, 1994, of which approximately $75,900,000 will be
expended during the remainder of 1994.
During the nine-month period ended February 28, 1994, 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 $13,000,000 for 1994, $60,100,000 for 1995, $85,700,000 for 1996,
$88,300,000 for 1997, $89,200,000 for 1998, and $1,559,300,000 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 February 28,
1994, and the related condensed consolidated statements of operations for the
three- and nine-month periods ended February 28, 1994 and 1993 and the condensed
consolidated statements of cash flows for the nine-month periods ended
February 28, 1994 and 1993, 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 February 28, 1994 and the
related condensed consolidated statements of operations for the three- and nine-
month periods ended February 28, 1994 and 1993 and the condensed consolidated
statements of cash flows for the nine-month periods ended February 28, 1994 and
1993. 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.
/s/ Arthur Andersen & Co.
Arthur Andersen & Co.
Memphis, Tennessee,
March 11, 1994
- 13 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company's third quarter and year-to-date results reflect significant
year-over-year improvement in international operations while U.S. domestic
profitability continues to be restrained by a greater rate of decline in
average revenue per package (yield) than a corresponding rate of reduction in
cost per package. U.S. domestic profitability was also negatively impacted in
the third quarter by lower than anticipated package volume during the last week
of December, the Southern California earthquake and severe weather in the
eastern United States. The improvement in international results is largely due
to growth in the Company's intercontinental express business and lower costs
associated with capacity reduction.
A comparison of third quarter and year-to-date results is presented below (in
millions, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ -----------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue........................... $2,077 $1,940 $6,215 $5,769
Operating Income.................. 85 58 337 241
Pre-tax Income.................... 58 17 229 108
Income before Cumulative Effect
of Change in Accounting
Principle....................... 31 8 124 54
Earnings per Share Before
Cumulative Effect of Change
in Accounting Principle......... $ 0.55 $ 0.15 $ 2.22 $ 0.99
</TABLE>
Results for 1993 have been restated to reflect the adoption in 1993 of SFAS
No. 106.
Revenue increased 7% and 8% for the quarter and year-to-date periods,
respectively, primarily because of volume gains in domestic and international
express package services, partially offset by volume-related decreases in the
Company's Airport-to-Airport freight service. Operating income improved 47%
and 40% over the prior year's third quarter and year-to-date periods,
respectively, primarily as a result of growth in the Company's International
Priority Service.
Operating expenses rose 6% compared with the prior year's third quarter and
year-to-date periods. Salaries and employee benefits increased 6% and 7%,
respectively, primarily due to volume-related increases in employment levels
and increased provisions under the Company's performance-based incentive
compensation plans. Partially offsetting this increase were reduced expenses
under the Company's workers' compensation and group insurance programs that
reflect improved health care claims experience. Rentals and landing fees
increased 8% and 5%, respectively, for the comparable periods, primarily due to
an increased number of MD-11 aircraft under operating leases. Maintenance and
repairs increased 11% and 17%, respectively, primarily due to scheduled DC-10
and MD-11 engine maintenance. The higher level of maintenance related to DC-10
engines is expected to continue through the remainder of 1994. The Company
anticipates increased year-over-year maintenance in 1995 in response to
maintenance directives by regulatory agencies for B727 and MD-11 engines. Fuel
expense decreased 4% and 6% for the quarter and year-to-date periods,
respectively, as a result of lower fuel prices and reduced consumption from
fewer flight hours.
- 14 -
<PAGE>
Net interest expense decreased as a result of reduced debt levels and lower
interest rates. The net gain on disposition of flight equipment includes a
$10.9 million gain on the third quarter sale of several B727-100 aircraft and
engines. The Company anticipates replacing its older B727-100 aircraft with
newer, fuel-efficient Airbus A300 and A310 aircraft. Depending on volume
growth and the availability of newer aircraft, certain other B727-100s may be
offered for sale. Currently the Company has several of these B727-100 aircraft
subject to purchase options which may be exercised by September 1994.
Other, net for the prior year 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 $800,000
related to a redemption of approximately $35 million of MSCAA bonds.
U.S. Domestic Services
- ----------------------
Selected operating results and statistics for U.S. domestic operations were as
follows (dollars in millions, except yields):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ ------------------
1994 1993* 1994 1993*
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.......................... $1,538 $1,426 $4,556 $4,168
Operating Income.................. 104 120 386 397
Operating Margin.................. 6.8% 8.4% 8.5% 9.5%
Express Package Statistics:
Average Daily Packages (000s)... 1,834 1,660 1,739 1,561
Yield per Package............... $12.79 $13.28 $13.25 $13.52
Operating days.................... 64 62 192 190
<FN>
* Results restated for the adoption of SFAS No. 106.
</TABLE>
Third quarter results reflect an 8% increase in revenues and a 10% increase
in expenses, with year-to-date revenues and expenses up 9% and 11%,
respectively. This faster growth of expenses compared to revenues has resulted
in a year-over-year decline in operating margins. Third quarter operating
margins, in particular, were adversely impacted by additional costs and lower
volumes associated with the Southern California earthquake in January and the
severe weather in the eastern United States during January and February 1994,
and by lower than anticipated package volumes from holiday operations during
the last week of December. These events contributed to higher overall costs
compared with the prior year's third quarter. The growth in revenue is
attributable to an average daily volume growth of 10% and 11% for the quarter
and year-to-date periods, respectively. Yield, however, declined 4% for the
quarter and 2% for the year-to-date periods.
- 15 -
<PAGE>
The decline in yield is attributable to the seasonal demand for deferred
services, faster growth of lower-priced deferred services relative to
premium-priced priority services and discounting fostered by highly competitive
market conditions. Despite the additional costs associated with the unusual
events mentioned above, productivity improvements were achieved and the Company
was able to reduce its cost per package. However, this reduction was not
enough to offset the decline in yield.
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 for its higher-yielding priority
services. 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. In addition, the Company continues to implement
changes to its health care plans to improve the quality and cost effectiveness
of benefits provided under these plans. The Company anticipates replacing
certain of its aging aircraft with newer, more efficient aircraft and
continues to develop further enhancements to its package-handling,
distribution and information systems. The above actions and programs, among
others, are expected to moderate yield decline and further reduce cost per
package; however, to the extent that the competitive activity and changes in
customer demand patterns mentioned above continue, pressures on profit
margins may persist.
International Services
- ----------------------
Selected operating results and statistics for international operations were
as follows (dollars in millions, except yields):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ ------------------
1994 1993* 1994 1993*
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
International Priority Services
(IP).............................. $ 325 $ 270 $ 948 $ 811
International EXPRESSfreight (IXF)
and Airport-to-Airport (ATA)
Airfreight Services............... 109 134 369 447
International Fedex Logistics
Services, Charter and Other....... 105 110 341 343
------ ------ ------ ------
$ 539 $ 514 $1,658 $1,601
====== ====== ====== ======
Operating (Loss)...................... (18) (61) (49) (157)
Operating Margin...................... (3.3)% (11.9)% (3.0)% (9.8)%
Volume Statistics:
Average Daily IP Packages (000s).... 130 113 128 112
Yield per Package................... $39.14 $38.67 $38.56 $38.03
Average Daily Airfreight Pounds
(000s)............................ 1,639 2,071 1,791 2,146
Yield per Pound..................... $ 1.04 $ 1.04 $ 1.07 $ 1.10
Operating days........................ 64 62 192 190
<FN>
* Results restated for the adoption of SFAS No. 106.
</TABLE>
- 16 -
<PAGE>
International results for the quarter and year-to-date periods showed
significant improvement over the prior year as revenues increased 5% and 4%,
respectively, while expenses decreased 3% for these same periods. This
year-over-year improvement primarily reflects continued strong growth in IP
revenue and a lower operating cost structure from changes, effective March 1,
1993, made to the Company's international flight schedules which decreased
flight hours, reduced aircraft capacity on certain international routes and
eliminated certain airfreight terminal operations. Prior year 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 in 1992.
Through aggressive marketing and sales promotions the Company was able to
boost worldwide IP volumes (15% and 14% increases for the quarter and
year-to-date periods, respectively) while yields increased 1% for both
periods, principally as a result of an increase in weight per package. Volume
growth and yield improvement were most notable in operations in the Far East.
Airfreight revenues for the quarter and year-to-date periods compared with
the prior year decreased 19% and 17%, respectively. These decreases primarily
reflect volume declines in the Company's ATA service, while airfreight yields
remained flat for the quarter and decreased 3% year-to-date. Airfreight
yield declines were moderated by strong growth in IXF service
during the periods as a result of pricing actions designed to make IXF
more attractive than ATA.
Decreases in ATA revenues reflect continued volume declines of 35% and
29% for the quarter and year-to-date periods, respectively, while yields
for this service declined 1% and 6% during these same periods. The
reduction in ATA business reflects the highly competitive and price
sensitive nature of the current airfreight market resulting from a large
number of participants offering relatively similar services and the
Company's reduction in available 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.
Increases in IXF revenues compared with the prior year's third quarter and
year-to-date periods reflect volume increases of 44% and 41% while yields
decreased 18% and 13% over these same periods, respectively. The decreases in
yields and related increases in volume and revenue are a result of
selective discounting to key airfreight forwarders which has resulted
in some customers switching from ATA to IXF.
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 continue 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.
- 17 -
<PAGE>
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 nine months of 1994 totaled $914 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, 15 B727-200 aircraft,
deposits on MD-11 and Airbus A300 aircraft, vehicle fleet additions, and
customer automation and computer equipment.
At February 28, 1994, the Company had commitments aggregating approximately
$1.7 billion, net of deposits and progress payments of $331 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 $162 million will be expended in the
remainder of 1994, $509 million in 1995, $400 million in 1996, $242 million in
1997, $298 million in 1998, and $61 million thereafter, in connection with
these commitments. At February 28, 1994, 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 $246 million at February 28, 1994, of
which an estimated $76 million will be expended in the remainder of 1994.
During the nine-month period ended February 28, 1994, 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 $13 million for 1994, $60 million for 1995, $86 million
for 1996, $88 million for 1997, $89 million for 1998, and $1.6 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.
- 18 -
<PAGE>
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 a September 1992 and the 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. In March 1994, $377.1 million of pass through
certificates were issued under this registration statement to finance the debt
portion of Airbus A310 aircraft to be acquired under operating leases and to
pay certain expenses. The Company has $22.9 million available under this
registration statement to finance the debt portion of leveraged lease
transactions.
The Company has 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 February 28, 1994, 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.
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 February 28, 1994, 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.
- 19 -
<PAGE>
Liquidity and Financial Position
Cash and cash equivalents totaled $230 million, an increase of $74 million
during the first nine months of 1994. Cash provided from operations during the
first nine months was $459 million compared with $483 million for the same
period in the prior year. This decrease is due primarily 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 to take, if any, to counteract it.
- 20 -
<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 February 28, 1994, the Registrant filed two Current
Reports on Form 8-K. The first report was dated December 2, 1993 and filed
under Item 7, Financial Statements and Exhibits. The report contained documents
relating to the 1993 Pass Through Certificates, Series C1 and C2.
The second report was dated December 13, 1993 and filed under Item 7,
Financial Statements and Exhibits. The report contained a press release dated
December 13, 1993.
- 21 -
<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: April 11, 1994 /s/ GRAHAM R. SMITH
------------------------------
GRAHAM R. SMITH
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 22 -
<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 nine-month periods ended February 28, 1994 and 1993
were as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended February 28, Ended February 28,
------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before cumulative effect
of change in accounting
principle........................ $ 31,167 $ 8,488 $123,709 $ 54,037
Cumulative effect of change in
accounting for postretirement
benefits, net of tax benefit..... - - - (55,943)
-------- -------- -------- --------
Net income (loss) applicable to
common and common equivalent
shares........................... $ 31,167 $ 8,488 $123,709 $ (1,906)
======== ======== ======== ========
Average shares of common stock
outstanding...................... 55,573 54,507 55,167 54,253
Common Equivalent Shares:
Assumed exercise of outstanding
dilutive options............... 3,202 3,050 2,846 2,266
Less shares repurchased from
proceeds of assumed exercise
of options..................... (2,330) (2,440) (2,186) (1,957)
-------- -------- -------- --------
Average common and common
equivalent shares................ 56,445 55,117 55,827 54,562
======== ======== ======== ========
Earnings (loss) per share:
Before cumulative effect of
change in accounting principle. $ .55 $ .15 $ 2.22 $ .99
Cumulative effect of change in
accounting for postretirement
benefits....................... - - - (1.03)
-------- -------- -------- --------
Net earnings (loss) per share...... $ .55 $ .15 $ 2.22 $ (.04)
======== ======== ======== ========
</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.
EXHIBIT 12.1
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended May 31, February 28,
-------------------------------------------------- -------------------
1989 1990 1991 1992 1993 1993 1994
-------- -------- -------- --------- -------- -------- --------
(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 $107,610 $229,091
Add back: Interest expense, net of
capitalized interest.... 131,628 199,237 196,982 176,321 168,762 128,155 115,608
Amortization of debt
issuance costs.......... 1,217 2,989 1,634 2,570 4,906 2,613 2,174
Portion of rent expense
representative of
interest factor......... 168,491 248,830 292,840 299,012 262,724 197,417 208,942
-------- -------- -------- --------- -------- -------- --------
Earnings as adjusted................. $599,668 $669,479 $532,398 $ 331,075 $639,968 $435,795 $555,815
======== ======== ======== ========= ======== ======== ========
Fixed Charges:
Interest expense, net of
capitalized interest............... $131,628 $199,237 $196,982 $ 176,321 $168,762 $128,155 $115,608
Capitalized interest................. 8,798 16,986 35,442 26,603 31,256 23,352 23,094
Amortization of debt issuance costs.. 1,217 2,989 1,634 2,570 4,906 2,613 2,174
Portion of rent expense
representative of interest factor.. 168,491 248,830 292,840 299,012 262,724 197,417 208,942
-------- -------- -------- --------- -------- -------- --------
$310,134 $468,042 $526,898 $ 504,506 $467,648 $351,537 $349,818
======== ======== ======== ========= ======== ======== ========
Ratio of Earnings to Fixed Charges 1.9 1.4 1.0 (A) 1.4 1.2 1.6
======== ======== ======== ========= ======== ======== ========
<FN>
(A) Earnings were inadequate to cover fixed charges by $173.4 million for the year ended May 31, 1992.
</TABLE>
<PAGE>
EXHIBIT 15.1
March 11, 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 February 28, 1994, which includes our report
dated March 11, 1994 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 & Co.
Arthur Andersen & Co.
