<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 AUGUST 31, 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 (ZIP Code)
executive offices)
(901) 369-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding Shares at September 30, 1994
Common Stock, par value $.10 per share 55,925,842
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
August 31, 1994 and May 31, 1994..................................... 3-4
Condensed Consolidated Statements of Operations
Three Months Ended August 31, 1994 and 1993.......................... 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 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.............................................. 14-19
PART II. OTHER INFORMATION
Submission of Matters to Vote of Security Holders...................... 20
Exhibits and Reports on Form 8-K....................................... 20
EXHIBIT INDEX.......................................................... E-1
- 2 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
- ------
August 31,
1994 May 31,
(Unaudited) 1994
------------ -------------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 415,829 $ 392,923
Receivables, less allowance for doubtful accounts
of $35,725,000 and $33,933,000.................. 1,037,647 1,020,511
Spare parts, supplies and fuel.................... 173,080 173,993
Deferred income taxes............................. 118,853 113,035
Prepaid expenses and other........................ 57,065 61,234
----------- -----------
Total current assets.......................... 1,802,474 1,761,696
----------- -----------
Property and Equipment, at Cost (Note 6)............ 7,040,253 6,890,225
Less accumulated depreciation and amortization.... 3,556,778 3,441,132
----------- -----------
Net property and equipment.................... 3,483,475 3,449,093
----------- -----------
Other Assets:
Goodwill.......................................... 410,786 415,178
Equipment deposits and other assets (Note 6)...... 375,843 366,531
----------- -----------
Total other assets............................ 786,629 781,709
----------- -----------
$ 6,072,578 $ 5,992,498
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- ----------------------------------------
August 31,
1994 May 31,
(Unaudited) 1994
------------ -------------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt (Note 3)......... $ 193,181 $ 198,180
Accounts payable................................... 487,235 518,849
Accrued expenses (Note 2).......................... 868,602 819,399
----------- -----------
Total current liabilities...................... 1,549,018 1,536,428
----------- -----------
Long-Term Debt, Less Current Portion (Note 3)........ 1,588,135 1,632,202
----------- -----------
Deferred Income Taxes................................ 7,056 3,563
----------- -----------
Other Liabilities.................................... 937,323 895,600
----------- -----------
Commitments and Contingencies (Notes 6 and 7)
Common Stockholders' Investment (Note 5):
Common Stock, $.10 par value;
100,000,000 shares authorized; 55,925,457 and
55,885,456 shares issued......................... 5,593 5,589
Other.............................................. 1,985,453 1,919,116
----------- -----------
Total common stockholders' investment......... 1,991,046 1,924,705
----------- -----------
$ 6,072,578 $ 5,992,498
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
-------------------------
1994 1993
---------- -----------
(In thousands, except
per share amounts)
<S> <C> <C>
Revenues.............................................. $2,231,127 $ 2,015,725
---------- -----------
Operating Expenses:
Salaries and employee benefits...................... 1,061,808 992,061
Rentals and landing fees............................ 188,630 166,209
Depreciation and amortization....................... 156,932 145,226
Fuel................................................ 117,357 114,736
Maintenance and repairs............................. 136,183 119,894
Other............................................... 427,232 375,692
---------- -----------
2,088,142 1,913,818
---------- -----------
Operating Income...................................... 142,985 101,907
---------- -----------
Other Income (Expense):
Interest, net....................................... (32,987) (37,267)
Other, net.......................................... (2,731) (3,805)
---------- -----------
(35,718) (41,072)
---------- -----------
Income Before Income Taxes............................. 107,267 60,835
Income Tax Provision.................................. 46,125 27,984
---------- -----------
Net Income............................................ $ 61,142 $ 32,851
========== ==========
Earnings per Share.................................... $ 1.08 $ .60
========== ==========
Common and Common Equivalent Shares (Note 5).......... 56,614 55,186
========== ==========
</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>
Three Months Ended
August 31,
-----------------------
1994 1993
--------- ---------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities........ $ 237,652 $ 167,050
--------- ---------
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $42,612,000 and
$44,047,000.................................. (243,780) (394,489)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions.................. - 286,400
Reimbursements of A300 deposits.............. 38,794 -
Other dispositions........................... 12,698 6,746
Other, net..................................... 27,269 777
--------- ---------
Net cash used in investing activities............ (165,019) (100,566)
--------- ---------
Financing Activities:
Proceeds from debt issuances................... - 10,506
Principal payments on debt..................... (51,415) (11,903)
Other, net..................................... 1,688 5,110
--------- ---------
Net cash provided by (used in)
financing activities (49,727) 3,713
--------- ---------
Net increase in cash and cash equivalents........ 22,906 70,197
Cash and cash equivalents at beginning of period. 392,923 155,456
--------- ---------
Cash and cash equivalents at end of period....... $ 415,829 $ 225,653
========= =========
Cash payments for:
Interest (net of capitalized interest)......... $ 18,608 $ 10,649
========= =========
Income taxes................................... $ 4,023 $ 1,796
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
<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, 1994. 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 August 31, 1994, the consolidated results of their operations
for the three-month periods ended August 31, 1994 and 1993, and their
consolidated cash flows for the three-month periods ended August 31, 1994 and
1993. Operating results for the three-month period ended August 31, 1994 are
not necessarily indicative of the results that may be expected for the year
ending May 31, 1995.
Certain prior period amounts have been reclassified to conform to the current
presentation.
(2) Accrued Expenses
----------------
<TABLE>
<CAPTION>
August 31,
1994 May 31,
(Unaudited) 1994
----------- --------
(In thousands)
<S> <C> <C>
Compensated absences........................... $181,659 $180,105
Insurance...................................... 163,669 156,906
Taxes other than income taxes.................. 125,007 130,801
Salaries....................................... 86,933 82,563
Aircraft overhaul.............................. 61,279 50,933
Federal income taxes........................... 65,222 34,775
Interest....................................... 56,895 32,374
Employee benefits.............................. 54,390 86,352
Other.......................................... 73,548 64,590
-------- --------
$868,602 $819,399
======== ========
</TABLE>
- 7 -
<PAGE>
(3) Long-Term Debt
--------------
<TABLE>
<CAPTION>
August 31,
1994 May 31,
(Unaudited) 1994
----------- ----------
(In thousands)
<S> <C> <C>
Unsecured notes payable, interest rates of
6.25% to 10.57%, due through 2013............. $1,375,059 $1,384,942
Unsecured sinking fund debentures, interest
rate of 9.63%, due through 2020............... 98,271 98,254
Capital lease obligations, Memphis-Shelby County
Airport Authority Special Facilities Revenue
Bonds, due through 2013, interest rates of
6.75% to 8.30%, net of bond reserve funds..... 199,004 199,004
Other debt, effective rates of 4.58% to 11.25%.. 108,982 148,182
---------- ----------
1,781,316 1,830,382
Less current portion........................ 193,181 198,180
---------- ----------
$1,588,135 $1,632,202
========== ==========
</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 August 31, 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 September 1994, the City of Indianapolis issued $45,000,000 of 6.80% City
of Indianapolis Airport Facility Revenue Refunding Bonds (the "Refunding Bonds")
to retire the 11.25% Indianapolis Special Facilities Revenue Bonds, Series 1984
which were originally issued to finance the acquisition, construction and
outfitting of an express package sorting hub located at the Indianapolis
International Airport and currently leased to the Company. The Refunding Bonds
have a maturity date of April 1, 2017.
In 1993, the Company entered into a $140,000,000 foreign bank facility to
provide term loans for predelivery payments on seven Airbus A300 aircraft.
Principal of and interest on borrowings is payable upon delivery of the
aircraft. As of August 31, 1994, the Company had $60,000,000 outstanding under
this facility at an effective interest rate of 4.58%.
- 8 -
<PAGE>
(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 August 31, 1994, none of these shares had been
issued.
(5) Common Stockholders' Investment
-------------------------------
During the three-month period ended August 31, 1994, 40,001 shares of common
stock were issued under employee incentive plans at prices ranging from $30.31
to $62.00 per share.
On September 26, 1994, the stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized common stock of
the Company from 100,000,000 to 200,000,000 shares.
(6) Commitments
------------
As of August 31, 1994, the Company's purchase commitments for the remainder of
1995 and annually thereafter under various contracts are as follows (in
thousands):
<TABLE>
<CAPTION>
Aircraft-
Aircraft Related (1) Other (2) Total
-------- --------- -------- ========
<S> <C> <C> <C> <C>
1995 (remainder) $342,400 $ 47,100 $246,000 $635,500
1996 447,600 8,800 20,600 477,000
1997 238,400 4,200 5,600 248,200
1998 298,300 - 21,300 319,600
1999 - - 15,600 15,600
<FN>
(1) Primarily aircraft modifications, rotables, and development and upgrade of
aircraft simulators.
(2) Primarily facilities, vehicles, computers and other equipment.
</TABLE>
The Company is committed to purchase 21 Airbus A300 and 25 Cessna 208B
aircraft to be delivered through 1998. Deposits and progress payments of
$308,400,000 have been made toward these purchases. At August 31, 1994, the
Company had options to purchase up to 46 additional Airbus A300 aircraft for
delivery beginning in 1997 and an option to purchase 25 additional Cessna 208B
aircraft for delivery beginning in 1995.
- 9 -
<PAGE>
During the three-month period ended August 31, 1994, the Company acquired two
Airbus A300-600 aircraft under operating leases. These aircraft were included
as purchase commitments as of May 31, 1994. At the time of delivery, the
Company sold its rights to purchase these aircraft to each of two third parties
who reimbursed the Company for its deposits on the aircraft and paid additional
consideration. The Company then entered into operating leases with each of the
third parties who purchased the aircraft from the manufacturer. Additional
lease commitments for these aircraft plus two DC-10-10 aircraft, scheduled for
delivery in 1995, which the Company is committed to acquire under operating
lease, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1995 $ 3,210
1996 17,177
1997 17,177
1998 17,177
1999 17,177
Thereafter 326,239
</TABLE>
(7) Legal Proceedings
-----------------
The Company has reached a tentative settlement to the shareholder class-action
lawsuit filed in 1990 against it, Frederick W. Smith, Chairman and Chief
Executive Officer, and James L. Barksdale, the Company's former Executive Vice
President and Chief Operating Officer. The settlement, which still must be
approved by the United States District Court for the Western District of
Tennessee, is for an immaterial amount (the Company's portion of which has been
recorded in the 1994 financial statements). The Company's insurance carrier
will pay a majority of the settlement amount.
The Company currently believes that the Court will approve or disapprove the
settlement agreement before the end of its current fiscal year. Prior to the
Court's decision, the purchasers of the Company's common stock affected by the
settlement agreement must be notified of the terms of the settlement and a
hearing must be held in the District Court.
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
$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.
- 10 -
<PAGE>
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 is vigorously pursuing 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 excise tax matter referred to above,
management is currently unable to predict with certainty the outcome of this
matter or the ultimate effect, if any, its resolution would have on the
Company's financial condition or results of operations. No amount has been
reserved for this contingency.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
aggregate liability, if any, with respect to these other actions will not
materially adversely affect the financial position or results of operations of
the Company.
- 11 -
<PAGE>
REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, has performed a review of
the condensed consolidated balance sheet of the Company as of August 31, 1994,
and the related condensed consolidated statements of operations for the
three-month periods ended August 31, 1994 and 1993 and the condensed
consolidated statements of cash flows for the three-month periods ended August
31, 1994 and 1993, included herein, as indicated in their report thereon
included on page 13.
-12 -
<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 August 31, 1994 and the
related condensed consolidated statements of operations for the three-month
periods ended August 31, 1994 and 1993 and the condensed consolidated statements
of cash flows for the three-month periods ended August 31, 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, 1994 and the related consolidated statements of
operations, changes in common stockholders' investment and cash flows for the
year then ended. In our report dated June 29, 1994, 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,
1994 is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
Arthur Andersen LLP
Memphis, Tennessee,
September 14, 1994
- 13 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company's international operations continued to improve, resulting in
significant year-over-year increases in profitability. U.S. domestic results,
in comparison, worsened slightly because of a continuing trend of declines in
average revenue per package (yield) exceeding declines in cost per package.
A comparison of first quarter consolidated results is presented below (in
millions, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------
1994 1993
------ ------
<S> <C> <C>
Revenues........................................ $2,231 $2,016
Operating income................................ 143 102
Pre-tax income.................................. 107 61
Net income ..................................... 61 33
Earnings per share.............................. $ 1.08 $ .60
</TABLE>
The revenue increase of 10.7% is primarily attributable to volume growth in
U.S. domestic and international express services. Operating income increased
40.3% because of volume growth and yield improvements in the Company's
International Priority service despite lower year-over-year U.S. domestic
operating profits.
Total operating expenses increased 9.1% compared with the prior year's first
quarter. The detail for total operating expenses is presented below (dollars in
millions):
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------
1994 1993
------ ------
<S> <C> <C>
Salaries and employee benefits.................. $1,062 $ 992
Rentals and landing fees........................ 189 166
Depreciation and amortization................... 157 145
Fuel............................................ 117 115
Maintenance and repairs......................... 136 120
Other........................................... 427 376
------ ------
$2,088 $1,914
====== ======
</TABLE>
The 7.0% increase in salaries and employee benefits is primarily due to
increased U.S. domestic employment levels associated with rising U.S. domestic
volumes. Also contributing to the increase are increased provisions under the
Company's performance-based incentive compensation plans.
- 14 -
<PAGE>
The 13.5% increase in rentals and landing fees is due to rentals for
additional leased MD-11 and Airbus A300 aircraft. As of August 31, 1994, there
were thirteen MD-11 and four A300 aircraft under operating lease compared with
eleven MD-11s at the end of the first quarter in the prior year. This trend of
increased rentals is expected to continue for the remainder of 1995 because of
additional DC-10, A300 and A310 leases.
The 13.6% increase in maintenance and repairs is due to engine maintenance on
B727 and MD-11 aircraft. The engines of both aircraft types are the subject of
maintenance directives issued by regulatory agencies. These directives require
the Company to assess and, where applicable, take corrective action on the
aircraft engines. Additionally, the Company's MD-11 fleet, which has grown from
one aircraft at the end of 1991 to its present size of thirteen aircraft, is
experiencing higher scheduled maintenance and repairs expense. It is expected
that this trend of increased year-over-year maintenance and repairs expense will
continue for the remainder of 1995.
The 13.7% increase in other operating expenses is primarily attributable to
increased advertising and expenses related to the transportation of packages by
outside contractors. The increase in transportation expense is a function of
rising domestic volumes coupled with a greater emphasis on transporting certain
packages using ground transportation.
Income Taxes
- ------------
The Company's effective tax rate decreased to 43.0% during the quarter ended
August 31, 1994, compared with 46.0% for the same period in the prior year.
During the first quarter of 1995, the Company implemented a legal restructuring
of its Mexico operations which permits the one-time deduction in 1995 of certain
items for U.S. federal income tax purposes that were not deductible in prior
years.
U.S. Domestic Services
- ----------------------
Operating results and selected statistics for U.S. domestic services are as
follows (dollars in millions, except yields):
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------
1994 1993*
------ ------
<S> <C> <C>
Revenues......................................... $1,634 $1,480
Operating income................................. 120 135
Operating margin................................. 7.4% 9.1%
Express package statistics:
Average daily packages (000s).................. 1,891 1,633
Revenue per package............................ $13.12 $13.75
Operating weekdays............................... 65 65
<FN>
* Certain prior period information reflects a reclassification of certain
revenues and volumes to conform to the current year classification of these
services as express package business.
</TABLE>
- 15 -
<PAGE>
The Company's U.S. domestic results for the first quarter reflect a continuing
trend of growth in expenses exceeding the growth in revenues. Revenues grew
10.4% while expenses rose 12.5% resulting in a decline in operating margin from
9.1% to 7.4%. This decline in operating margin is primarily a function of lower
per package revenues (down 4.6% compared with the first quarter of 1994). While
the Company was able to reduce its overall domestic cost per package (2.7%
compared with the first quarter of 1994), certain costs related to maintenance
and repairs on B727 aircraft were incurred which offset a portion of these cost
reductions. Also contributing additional expenses were investments which are
designed to reduce unit costs in the future, e.g., pilot training for the new
Airbus A300 and A310 aircraft and improved customer automation systems.
The Company's U.S. domestic results for the first quarter were significantly
impacted by the competitive pressures prevalent in the U.S. domestic express
market. This factor, along with persistent customer demand for high quality
express delivery services at lower prices, has combined to cause an extremely
price-sensitive U.S. domestic express market.
The Company has responded to changes in the competitive environment by
offering lower-priced deferred services and increasing discounting. These
actions have resulted in greater revenues and volumes but lower operating
margins because the Company has not been able to offset declines in revenue per
package with corresponding declines in unit costs.
The Company is working to improve its current level of U.S. domestic
profitability by seeking further means to lower unit costs, managing the
decline in yield, and cultivating close working relationships with its
customers.
To lower average cost per package, the Company is replacing certain of its
older aircraft with Airbus A300 and A310 aircraft. Despite higher ownership
costs, these aircraft are expected to produce future benefits with relatively
lower fuel, maintenance and crew costs. The most significant benefit of using
these aircraft will ultimately be realized in situations where more than one
B727 aircraft can be replaced with a single A300 or A310 aircraft and where
incremental volume can be absorbed without adding additional aircraft.
The Company is also reducing the cost of handling packages through increased
automation of its package pick-up, delivery, sorting and transportation
operations. The passage of the Airport Improvements Act, effective January
1995, eliminates many of the intrastate transportation regulations that
restricted the maximum use of the Company's lower cost ground transportation
system. With these regulations effectively eliminated, management anticipates
more effective use of its ground transportation network which is expected to
reduce unit costs in the long term.
- 16 -
<PAGE>
To manage the decline in yield, the Company has implemented programs intended
to moderate the level of discounting, to promote heavier weights per package and
to attract lower-volume but higher-yielding customers. It is expected, however,
that yields will continue to fall because of selective discounting and faster
growth in deferred services compared with priority services.
Management recognizes the importance of enhancing effective working
relationships with its customers, especially in the highly competitive market in
which the Company operates. Accordingly, the Company continues to focus on
increasing the number of convenience locations, implementing direct aircraft
service to new locations, developing alliances with retail businesses and
increasing the placement of customer automation devices. In addition, the
Company intends to intensify its sales and marketing efforts by increasing its
advertising expenditures, adding sales personnel, and targeting selected
customer groups for special marketing promotions.
International Services
- ----------------------
Operating results and selected package and airfreight statistics for
international operations are as follows (dollars in millions, except yields):
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------
1994 1993*
------ ------
<S> <C> <C>
Revenues:
International Priority Services (IP)............ $ 380 $ 307
International EXPRESSfreight (IXF) and Airport-
to-Airport (ATA) airfreight services.......... 142 121
International FedEx Logistics
Services, Charter and other................... 75 107
------ ------
597 535
Operating income (loss)........................... $ 23 $ (33)
Operating margin.................................. 3.8% (6.2)%
Package and airfreight statistics:
Average daily IP packages (000s)................ 149 122
Revenue per package............................. $39.34 $38.62
Average daily airfreight pounds (000s).......... 2,083 1,778
Revenue per pound............................... $ 1.05 $ 1.05
Operating weekdays................................ 65 65
<FN>
* Certain prior period information reflects a reclassification of certain
revenues and volumes to conform to the current year classification of these
services as express package or airfreight business.
</TABLE>
The Company's international operations continue to post year-over-year
improvement. This trend is primarily attributable to sustained growth in
International Priority (IP) revenues, volumes and yields along with actions to
control costs. IP revenues, average daily volumes and yields increased 23.8%,
21.4% and 1.9%, respectively, compared with the first quarter of 1994.
- 17 -
<PAGE>
Airfreight revenues and average daily volumes increased 17.8% and 17.2%,
respectively, compared with the first quarter of 1994 while yields remained
unchanged. Most of the revenue and volume gains are attributable to growth in
the Company's IXF service. During 1994, pricing actions were initiated which
narrowed the price differential between ATA, a lower-priority service whose
price is typically determined by market conditions, and IXF, a premium-priced,
time-definite service. As a result, IXF average daily volumes and revenues grew
significantly (92.8% and 65.6%, respectively, over 1994's first quarter) and
overall airfreight yields remained unchanged. Double-digit increases in
airfreight revenues and volumes that the Company has experienced since the
fourth quarter of 1994 are dependent upon continued customer demand and
available capacity.
The revenue decrease in International FedEx Logistics Services, Charter and
other is primarily due to the sale, effective May 31, 1994, of the Company's
German logistics subsidiary.
Sustained improvement in the Company's international operations is dependent
on continued growth in IP, the Company's ability to manage incremental costs
associated with that growth and system efficiencies. To promote IP growth,
aggressive sales and marketing efforts are targeting time-sensitive industries
to capture new business. Also, as economic conditions improve in certain global
markets, the Company's distribution network will be positioned to benefit from
increased volumes associated with business growth. To contain costs, management
will monitor customer demand patterns and make changes to its distribution
network to make optimum use of Company resources. Furthermore, through
technological advances that aid in the sorting, routing and delivery of
packages, the Company has the ability to add limited incremental volume without
adding a corresponding amount of incremental cost.
FINANCIAL CONDITION
Capital Expenditures and Resources
- ----------------------------------
The Company's operations are capital intensive, characterized by significant
investments in aircraft, package handling facilities, sort equipment, 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 three months of 1995 totaled $244 million
and included deposits on future Airbus A300 aircraft, vehicle and ground support
equipment, and customer automation and computer equipment. In comparison, prior
year first quarter additions totaled $394 million and included three MD-11
aircraft, three B727-200 aircraft, deposits on A300 aircraft, vehicle and
ground support equipment, and customer automation and computer equipment.
- 18 -
<PAGE>
At August 31, 1994, the Company had commitments aggregating approximately
$1.1 billion, net of deposits and progress payments of $308 million, for the
acquisition of 21 Airbus A300 and 25 Cessna 208B aircraft (scheduled for
delivery through 1998), aircraft modifications and related parts and the
development and upgrade of aircraft simulators. An estimated $390 million will
be expended in the remainder of 1995, $456 million in 1996, $243 million in 1997
and $298 million in 1998, in connection with these commitments. At August 31,
1994, the Company also had options for up to 46 additional A300 aircraft for
delivery beginning in 1997 and an option to purchase 25 additional Cessna 208B
aircraft for delivery beginning in 1995. In addition, the Company has other
commitments related to facility and other equipment acquisitions that
approximated $309 million at August 31, 1994, of which an estimated
$246 million will be expended in the remainder of 1995.
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 residual
value risk, liquidity and after-tax cash flows. The Company has been successful
in obtaining investment capital, both U.S. domestic and international, 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.
Management believes that the capital resources available to the Company
provide it with the appropriate flexibility to gain access to the most efficient
market with respect to any particular aircraft acquisition and afford adequate
capital resources for its future capital needs. These resources include
backstop financing for the 21 Airbus A300 aircraft the Company is committed to
purchase in 1995 to 1998, $100 million of unsecured notes available under a
shelf registration filed with the Securities and Exchange Commission in June
1992 and the ability to draw upon the public and private debt markets for
leveraged lease financing.
Liquidity and Financial Position
- --------------------------------
Cash and cash equivalents totaled $416 million, an increase of $23 million
during the first three months of 1995. Cash provided from operations during the
first three months was $238 million compared with $167 million for the same
period in the prior year. 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.
- 19 -
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the 1994 Annual Meeting of Stockholders held on September 26, 1994, the
Company's stockholders elected the Class II Directors to serve for a three-year
term expiring at the 1997 Annual Meeting. The tabulation of votes with respect
to each nominee for office was:
<TABLE>
<CAPTION>
Nominee For Withheld
----------------- ---------- --------
<S> <C> <C>
Ralph D. DeNunzio 50,836,310 458,274
Charles T. Manatt 50,836,622 457,962
Jackson W. Smart, Jr. 50,837,669 456,915
Joshua I. Smith 50,836,977 457,607
</TABLE>
The stockholders also approved an amendment to the Company's Restated
Certificate of Incorporation to increase the authorized common stock from
100,000,000 shares to 200,000,000 shares by a vote of 42,021,535 to 9,002,512
with 270,537 abstentions and broker non-votes. The stockholders also approved
the Board of Directors' designation of Arthur Andersen LLP as independent
auditors for the fiscal year ended May 31, 1995 by a vote of 51,169,972 to
72,433 with 52,179 abstentions and broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 First Amendment to the Federal Express Corporation Retirement
Parity Pension Plan.
11.1 Statement re Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27.1 Financial Data Schedule
(b) Reports on Form 8-K. There were no reports filed on Form 8-K during the
quarter ended August 31, 1994.
- 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: October 13, 1994 /s/ GRAHAM R. SMITH
------------------------------
GRAHAM R. SMITH
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 21 -
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.1 First Amendment to the Federal Express Corporation Retirement Parity
Pension Plan.
11.1 Statement re Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27.1 Financial Data Schedule.
E-1
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT
FEDERAL EXPRESS CORPORATION
RETIREMENT PARITY PENSION PLAN
THIS AMENDMENT is made pursuant to the authority to amend the Federal
Express Corporation Retirement Parity Pension Plan (the "Plan") as provided in
Section 14 therein.
WHEREAS, Federal Express Corporation (the "Company") desires to amend the
Plan to provide for payment of 100% of the difference between the Unreduced
Benefit and the Maximum Benefit; and
WHEREAS, the Compensation Committee of the Company's Board of Directors
approved such enhancement at its May 31, 1994 meeting;
NOW, THEREFORE, the Plan is hereby amended, effective June 1, 1994, in the
following respects:
FIRST
Section 3, Benefit Amount and Limitations, of the Plan is hereby
amended by deleting "80%" where it occurs therein and inserting "100%" in its
place.
IN WITNESS WHEREOF, the undersigned duly authorized officer of the Company
has executed this First Amendment this 1ST day of September, 1994.
FEDERAL EXPRESS CORPORATION
/S/ STEVEN E. PRIDDY
------------------------------------------
Steven E. Priddy, Vice President
Personnel Administration
Date: 9/1/94
----------------------------------------
ATTEST:
/S/ GEORGE W. HEARN
- -------------------------------------------
Title: ASSISTANT SECRETARY
-------------------------------
<PAGE>
EXHIBIT 11.1
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Net income applicable to common and common equivalent shares and the weighted
average number of shares used in the calculation of earnings per share for the
three-month periods ended August 31, 1994 and 1993 were as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Ended August 31,
-------------------
1994 1993
-------- --------
<S> <C> <C>
Net income applicable to common and
common equivalent shares......................... $ 61,142 $ 32,851
======== ========
Average shares of common stock outstanding......... 55,905 54,786
Common Equivalent Shares:
Assumed exercise of outstanding
dilutive options............................... 2,849 1,982
Less shares repurchased from proceeds of
assumed exercise of options.................... (2,140) (1,582)
-------- --------
Average common and common equivalent shares........ 56,614 55,186
======== ========
Earnings per share................................. $ 1.08 $ .60
======== ========
</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.
<PAGE>
EXHIBIT 12.1
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended May 31, August 31,
-------------------------------------------------- -------------------
1990 1991 1992 1993 1994 1993 1994
-------- -------- --------- -------- -------- -------- ---------
(In thousands except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes.. $218,423 $ 40,942 $(146,828) $203,576 $378,462 $ 60,835 $107,267
Add back: Interest expense,
net of Capitalized
interest.............. 199,237 196,982 176,321 168,762 152,170 38,809 37,150
Amortization of debt
issuance costs........ 2,989 1,634 2,570 4,906 2,860 746 671
Portion of rent expense
representative of
interest factor....... 248,830 292,840 299,012 262,724 285,261 67,215 75,903
-------- -------- --------- -------- -------- -------- --------
Earnings as adjusted............... $669,479 $532,398 $ 331,075 $639,968 $818,753 $167,605 $220,991
======== ======== ========= ======== ======== ======== ========
Fixed Charges:
Interest expense, net of
capitalized interest............. $199,237 $196,982 $ 176,321 $168,762 $152,170 $ 38,809 $ 37,150
Capitalized interest............... 16,986 35,442 26,603 31,256 29,738 8,720 5,703
Amortization of debt issuance costs 2,989 1,634 2,570 4,906 2,860 746 671
Portion of rent expense
representative of interest factor 248,830 292,840 299,012 262,724 285,261 67,215 75,903
-------- -------- --------- -------- -------- -------- --------
$468,042 $526,898 $ 504,506 $467,648 $470,029 $115,490 $119,427
======== ======== ========= ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 1.4 1.0 (A) 1.4 1.7 1.5 1.9
======== ======== ========= ======== ======== ======== ========
<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
September 14, 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, 33-51623 and 33-55055 its Report on Form 10-Q for
the quarter ended August 31, 1994, which includes our report dated September 14,
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,
Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS ON PAGES 3-5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD
ENDING AUGUST 31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> AUG-31-1994
<CASH> 415,829
<SECURITIES> 0
<RECEIVABLES> 1,073,372
<ALLOWANCES> 35,725
<INVENTORY> 173,080
<CURRENT-ASSETS> 1,802,474
<PP&E> 7,040,253
<DEPRECIATION> 3,556,778
<TOTAL-ASSETS> 6,072,578
<CURRENT-LIABILITIES> 1,549,018
<BONDS> 1,588,135
<COMMON> 5,593
0
0
<OTHER-SE> 1,985,453
<TOTAL-LIABILITY-AND-EQUITY> 6,072,578
<SALES> 0
<TOTAL-REVENUES> 2,231,127
<CGS> 0
<TOTAL-COSTS> 2,088,142
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,987
<INCOME-PRETAX> 107,267
<INCOME-TAX> 46,125
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,142
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
