<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 1995, 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 December 29, 1995
Common Stock, par value $.10 per share 56,689,475
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
November 30, 1995 and May 31, 1995. . . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Income
Three and Six Months Ended November 30, 1995 and 1994 . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 1995 and 1994 . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . 7-10
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants . . . . . . . . . . . . . . . . . . . 11
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . 12
Management's Discussion and Analysis of Results of Operations
and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . 13-17
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 18
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
November 30,
1995 May 31,
(Unaudited) 1995
----------- -----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . $ 115,147 $ 357,548
Receivables, less allowance for doubtful accounts
of $30,971,000 and $31,173,000. . . . . . . . . 1,283,493 1,130,254
Spare parts, supplies and fuel. . . . . . . . . . 210,387 193,251
Deferred income taxes . . . . . . . . . . . . . . 110,369 115,801
Prepaid expenses and other. . . . . . . . . . . . 27,976 72,228
----------- -----------
Total current assets . . . . . . . . . . . . . 1,747,372 1,869,082
----------- -----------
Property and Equipment, at Cost (Note 6) . . . . . . 8,295,386 7,697,711
Less accumulated depreciation and amortization. . 4,274,196 3,982,467
----------- -----------
Net property and equipment . . . . . . . . . . 4,021,190 3,715,244
----------- -----------
Other Assets:
Goodwill. . . . . . . . . . . . . . . . . . . . . 388,639 397,272
Equipment deposits and other assets (Note 6). . . 477,473 451,774
----------- -----------
Total other assets . . . . . . . . . . . . . . 866,112 849,046
----------- -----------
$ 6,634,674 $ 6,433,372
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
November 30,
1995 May 31,
(Unaudited) 1995
----------- -----------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt (Note 3). . . . $ 181,014 $ 255,448
Accounts payable. . . . . . . . . . . . . . . . . 652,121 618,621
Accrued expenses (Note 2) . . . . . . . . . . . . 912,269 904,466
----------- -----------
Total current liabilities. . . . . . . . . . . 1,745,404 1,778,535
----------- -----------
Long-Term Debt, Less Current Portion (Note 3). . . . 1,336,381 1,324,711
----------- -----------
Deferred Income Taxes. . . . . . . . . . . . . . . . 52,097 55,956
----------- -----------
Other Liabilities. . . . . . . . . . . . . . . . . . 1,080,469 1,028,601
----------- -----------
Commitments and Contingencies (Notes 6 and 7)
Common Stockholders' Investment (Note 5):
Common Stock, $.10 par value;
200,000,000 shares authorized; 56,683,992 and
56,174,180 shares issued . . . . . . . . . . . 5,668 5,617
Other . . . . . . . . . . . . . . . . . . . . . . 2,414,655 2,239,952
----------- -----------
Total common stockholders' investment. . . . . 2,420,323 2,245,569
----------- -----------
$ 6,634,674 $ 6,433,372
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $2,547,012 $2,358,765 $5,000,406 $4,589,892
---------- ---------- ---------- ----------
Operating Expenses:
Salaries and employee benefits . 1,121,047 1,105,875 2,268,573 2,167,683
Rentals and landing fees . . . . 236,770 199,306 459,977 387,936
Depreciation and amortization. . 178,674 161,585 352,795 318,517
Fuel . . . . . . . . . . . . . . 143,256 127,747 269,632 245,104
Maintenance and repairs. . . . . 162,063 133,219 286,638 269,402
Other. . . . . . . . . . . . . . 534,297 454,657 1,042,656 881,889
---------- ---------- ---------- ----------
2,376,107 2,182,389 4,680,271 4,270,531
---------- ---------- ---------- ----------
Operating Income . . . . . . . . . 170,905 176,376 320,135 319,361
---------- ---------- ---------- ----------
Other Income (Expense):
Interest, net. . . . . . . . . . (24,175) (30,462) (48,020) (63,449)
Other, net . . . . . . . . . . . 8,222 5,206 12,723 2,475
---------- ---------- ---------- ----------
(15,953) (25,256) (35,297) (60,974)
---------- ---------- ---------- ----------
Income Before Income Taxes . . . . 154,952 151,120 284,838 258,387
Income Tax Provision . . . . . . . 65,081 64,981 119,633 111,106
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . . . $ 89,871 $ 86,139 $ 165,205 $ 147,281
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per Share . . . . . . . . $ 1.57 $ 1.53 $ 2.90 $ 2.61
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Common and Common Equivalent
Shares (Note 5). . . . . . . . . 57,260 56,385 56,974 56,500
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
-----------------------
1995 1994
--------- ---------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities. . . . . . $ 425,495 $ 465,968
--------- ---------
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $49,453,000 and
$62,130,000. . . . . . . . . . . . . . . . . . (689,278) (479,498)
Proceeds from disposition of property
and equipment:
Reimbursements of A300 deposits . . . . . . . 80,820 77,588
Other dispositions. . . . . . . . . . . . . . 24,790 15,144
Other, net. . . . . . . . . . . . . . . . . . . . (34,204) 52,801
--------- ---------
Net cash used in investing activities. . . . . . . . (617,872) (333,965)
--------- ---------
Financing Activities:
Proceeds from debt issuances. . . . . . . . . . . 17,298 45,460
Principal payments on debt. . . . . . . . . . . . (80,505) (327,431)
Proceeds from stock issuances . . . . . . . . . . 25,427 3,010
Other, net. . . . . . . . . . . . . . . . . . . . (12,244) -
--------- ---------
Net cash used in financing activities. . . . . . . . (50,024) (278,961)
--------- ---------
Net decrease in cash and cash equivalents. . . . . . (242,401) (146,958)
Cash and cash equivalents at beginning of period . . 357,548 392,923
--------- ---------
Cash and cash equivalents at end of period . . . . . $ 115,147 $ 245,965
--------- ---------
--------- ---------
Cash payments for:
Interest (net of capitalized interest). . . . . . $ 49,753 $ 79,827
--------- ---------
--------- ---------
Income taxes. . . . . . . . . . . . . . . . . . . $ 71,135 $ 91,287
--------- ---------
--------- ---------
</TABLE>
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 Report 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, 1995. Accordingly, significant
accounting policies and other disclosures normally provided have been omitted
since such items are disclosed therein.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of Federal Express Corporation and
subsidiaries as of November 30, 1995, the consolidated results of their
operations for the three- and six-month periods ended November 30, 1995 and
1994, and their consolidated cash flows for the six-month periods ended
November 30, 1995 and 1994. Operating results for the three- and six-month
periods ended November 30, 1995 are not necessarily indicative of the results
that may be expected for the year ending May 31, 1996.
Certain prior period amounts have been reclassified to conform to the
current presentation.
(2) ACCRUED EXPENSES
<TABLE>
<CAPTION>
November 30,
1995 May 31,
(Unaudited) 1995
--------- ---------
(In thousands)
<S> <C> <C>
Compensated absences. . . . . . . . . . . . . . $200,244 $192,785
Insurance . . . . . . . . . . . . . . . . . . . 189,467 176,806
Taxes other than income taxes . . . . . . . . . 135,203 137,037
Salaries. . . . . . . . . . . . . . . . . . . . 114,870 100,024
Employee benefits . . . . . . . . . . . . . . . 88,035 127,870
Aircraft overhaul . . . . . . . . . . . . . . . 66,567 53,540
Interest. . . . . . . . . . . . . . . . . . . . 28,789 30,443
Other . . . . . . . . . . . . . . . . . . . . . 89,094 85,961
--------- ---------
$912,269 $904,466
--------- ---------
--------- ---------
</TABLE>
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<PAGE>
(3) LONG-TERM DEBT
<TABLE>
<CAPTION>
November 30,
1995 May 31,
(Unaudited) 1995
----------- ----------
(In thousands)
<S> <C> <C>
Unsecured notes payable, interest rates of
6.25% to 10.57%, due through 2013 . . . . . . $1,107,149 $1,187,413
Unsecured sinking fund debentures, interest
rate of 9.63%, due through 2020 . . . . . . . 98,357 98,323
Capital lease obligations and tax exempt bonds,
due through 2017, interest rates of
6.75% to 8.30%. . . . . . . . . . . . . . . . 255,100 255,100
Less bond reserve funds . . . . . . . . . . . 11,096 11,096
----------- ----------
244,004 244,004
Other debt, interest rates of 9.68% to 9.98%. . 67,885 50,419
----------- ----------
1,517,395 1,580,159
Less current portion . . . . . . . . . . . 181,014 255,448
----------- ----------
$1,336,381 $1,324,711
----------- ----------
----------- ----------
</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, 2000, all
of which was available at November 30, 1995. 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.
(4) PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors, at its
discretion, to issue up to 4,000,000 shares of Series Preferred Stock. The
stock is issuable in series which may vary as to certain rights and preferences
and has no par value. As of November 30, 1995, none of these shares had been
issued.
(5) COMMON STOCKHOLDERS' INVESTMENT
During the six-month period ended November 30, 1995, 657,312 shares of
common and treasury stock were issued under employee incentive plans at prices
ranging from $30.56 to $80.06 per share. During the same period, the Company
acquired 144,062 shares of its common stock at an average cost of $84.99 per
share.
- 8 -
<PAGE>
(6) COMMITMENTS
As of November 30, 1995, the Company's purchase commitments for the
remainder of 1996 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>
1996 (remainder) $249,300 $ 69,800 $214,100 $533,200
1997 588,300 18,500 72,400 679,200
1998 478,600 15,300 33,600 527,500
1999 240,800 18,100 15,600 274,500
2000 124,200 9,900 - 134,100
</TABLE>
(1) Primarily spare parts and engines, aircraft modifications and
rotables.
(2) Primarily facilities, vehicles, computers and other equipment.
The Company is committed to purchase 12 Airbus A300, 13 Airbus A310, 12
MD-11, five B-727-200 and 17 Cessna 208B aircraft to be delivered through 2000.
Deposits and progress payments of $247,142,000 have been made toward these
purchases. At November 30, 1995, the Company had options to purchase up to 40
additional Airbus A300 aircraft for delivery beginning in 1999. In addition,
the Company may be required to purchase seven MD-11 aircraft for delivery
beginning no later than 2000 under a put option agreement.
During the six-month period ended November 30, 1995, the Company acquired
four Airbus A300 aircraft under operating leases. These aircraft were included
as purchase commitments as of May 31, 1995. At the time of delivery, the
Company sold its rights to purchase these aircraft to 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.
Lease commitments added since May 31, 1995 for the four Airbus A300
aircraft and three additional MD-11 aircraft to be acquired by operating
lease are as follows (in thousands):
1996 $ 6,900
1997 42,400
1998 48,300
1999 51,600
2000 48,400
Thereafter 536,700
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<PAGE>
(7) LEGAL PROCEEDINGS
In August 1995, the Company reached an agreement with the Internal Revenue
Service ("IRS") concerning an excise tax dispute for the seven and one-half year
period ended March 31, 1991. Under the terms of the settlement, the Company
will not owe any additional federal excise tax for this period. The dispute
involved a claim by the IRS that the Company had underpaid federal excise tax by
as much as $159 million. This settlement agreement completes the IRS' audit of
the Company's federal excise tax return for the period covered by the
settlement. The Company also gave up its claim for a $70 million refund of
excise tax for the same time period.
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.
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<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 November 30, 1995,
and the related condensed consolidated statements of income for the three- and
six-month periods ended November 30, 1995 and 1994 and the condensed
consolidated statements of cash flows for the six-month periods ended
November 30, 1995 and 1994, included herein, as indicated in their report
thereon included on page 12.
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Federal Express Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Federal Express Corporation and subsidiaries as of November 30, 1995 and the
related condensed consolidated statements of income for the three- and six-month
periods ended November 30, 1995 and 1994 and the condensed consolidated
statements of cash flows for the six-month periods ended November 30, 1995 and
1994. 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, 1995 and the related consolidated statements of
income, changes in common stockholders' investment and cash flows for the year
then ended. In our report dated June 29, 1995, 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,
1995 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,
December 13, 1995
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the quarter ended November 30, 1995, the Company recorded net income of
$90 million ($1.57 per share) on revenues of $2.5 billion compared with net
income of $86 million ($1.53 per share) on revenues of $2.4 billion for the same
period in the prior year. For the six months ended November 30, 1995, the
Company recorded net income of $165 million ($2.90 per share) on revenues of
$5 billion compared with net income of $147 million ($2.61 per share) on
revenues of $4.6 billion for the same period in the prior year. Operating
results reflect the effects of a weak international airfreight market
and delays in the start-up of the Company's intra-Asian express network
(AsiaOne).
Revenues
The following table shows a comparison of revenues (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
November 30, November 30,
--------------- Percent --------------- Percent
1995 1994 Change 1995 1994 Change
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
U.S. domestic express. . . . . . $1,779 $1,657 + 7 % $3,514 $3,270 + 7 %
International Priority (IP). . . 496 415 +19 965 795 +21
International Express Freight
(IXF) and Airport-to-Airport
(ATA). . . . . . . . . . . . . 159 156 + 2 304 299 + 2
Charter, Logistics services
and other. . . . . . . . . . . 113 131 -13 217 226 - 4
------ ------ ------ ------
$2,547 $2,359 + 8 $5,000 $4,590 + 9
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The following table shows a comparison of selected express and airfreight
(IXF/ATA) statistics (in thousands, except dollar amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
November 30, November 30,
--------------- Percent --------------- Percent
1995 1994 Change 1995 1994 Change
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
U.S. domestic express:
Average daily packages. . . . 2,224 2,057 + 8 % 2,164 1,973 +10 %
Revenue per package . . . . . $12.70 $12.79 - 1 $12.69 $12.95 - 2
IP:
Average daily packages. . . . 192 163 +18 185 156 +19
Revenue per package . . . . . $40.94 $40.50 + 1 $40.70 $39.94 + 2
IXF/ATA:
Average daily pounds. . . . . 2,429 2,326 + 5 2,229 2,203 + 1
Revenue per pound . . . . . . $ 1.04 $ 1.07 - 3 $ 1.06 $ 1.06 --
</TABLE>
- 13 -
<PAGE>
During the quarter, yield-management actions continued to slow the rate
of decline in U.S. domestic express revenue per package (yield), but also
contributed to a slowing of year-over-year volume growth. These actions
included examining and, where applicable, realigning the level of customer
discount to be commensurate with customer shipping profiles and increasing
the list price for one of the Company's deferred services in June 1995. As a
result, yields declined only 1% and 2% for the quarter and year-to-date
periods, respectively, compared with declines of 6% and 5% for the same periods
in the prior year. Volume growth slowed to 8% and 10% for the quarter and
year-to-date periods for 1996 compared to 16% for these same periods in the
prior year. The drop in the rate of domestic volume growth is particularly
evident in the Company's economy two-day service which experienced growth
rates of 1% and 5% in 1996's second quarter and year-to-date periods,
respectively, compared to 22% and 24% for the same periods in 1995.
Management will continue to review and realign customer discounts for the
remainder of 1996.
The Company's IP volumes and yields continued to experience year-over-year
growth. However, airfreight results were mixed. IXF service volumes (a space-
confirmed, time-definite service) increased 25% and 31% for the quarter and
year-to-date periods, but yields declined 8% and 7% for the same periods. ATA
volumes (a lower-priced, space-available service) declined 14% and 21% for the
quarter and year-to-date periods, with yields essentially unchanged. Increased
capacity in the global airfreight market and slowing growth in world
demand adversely affected airfreight yields. The Company's Subic Bay hub
in the Philippines, opened September 1995, and its new intra-Asia express
network contributed to the growth in IP volumes and attracted incremental
airfreight, although not as much as originally anticipated, given the
impact on sales and marketing efforts of the delay in the planned July
opening. Management expects both IP and airfreight volume growth to continue
to be restrained by a weak international economy during the remainder of 1996.
The decrease in Charter, Logistics services and other revenue is largely
attributable to the January 1995 sale of two dedicated warehousing and contract
distribution companies in the United Kingdom. Also contributing to the decline
are decreases in charter activity of $6 million and $11 million for the quarter
and year-to-date periods, respectively, partially offset by increased sales of
engine noise reduction kits in the first quarter.
Operating Expenses
Salaries and employee benefits increased 1% and 5% for the quarter and
year-to-date periods. This increase is a result of volume-related growth,
largely offset by decreased provisions under the Company's performance-based
incentive compensation plans in the second quarter.
A 19% increase in Rentals and landing fees for both the quarter and year-
to-date periods is primarily due to the leasing of additional Airbus A300 and
A310 aircraft. As of November 30, 1995, the Company had 13 A300 and 13 A310
aircraft under operating lease compared with six A300 and five A310 aircraft as
of the
- 14 -
<PAGE>
same date in the prior year. Management expects year-over-year increases in
lease expense to continue as the Company enters into additional aircraft leases
during 1996 and thereafter. The Company expects to be able to convert its
A300 purchase commitments into direct operating leases. (See Note 6 of Notes
to Condensed Consolidated Financial Statements.)
Fuel expense increased 12% and 10% for the quarter and year-to-date
periods, respectively, due to increases in gallons consumed and average jet fuel
price per gallon. The increase in average jet fuel price per gallon is
primarily due to the 4.3 cents per gallon excise tax on aviation fuel which
became effective October 1, 1995.
Maintenance and repairs expense increased 22% and 6% for the quarter and
year-to-date periods, respectively. Earlier than expected DC-10 engine
maintenance, increased spare parts supplies on aircraft in preparation for peak
season and distribution of spare parts to the newly-opened Subic Bay facility
contributed to these increases. Although the Company incurred a larger
percentage of the year-to-date maintenance and repairs expense in the second
quarter due to the above factors, the year-to-date increase is consistent with a
long-term trend of increasing maintenance and repairs expense.
Other operating expense increased 18% for both the second quarter and year-
to-date periods of 1996, primarily due to the cost of on-going projects designed
to optimize the value of goods and services purchased and the use of resources.
Management expects these projects to result in future, long-term cost savings.
Volume-related increases in transportation services by outside vendors and
temporary manpower also contributed to the rise in other operating expense.
Management does not believe that a labor dispute between the Company and
the Air Line Pilots Association ("ALPA"), the collective bargaining agent
representing the Company's pilots, had a material adverse effect on the
Company's results of operations for the quarter or year-to-date periods ended
November 30, 1995. During the quarter, the Company incurred certain contingency
expenses associated with maintaining service reliability while the Company
attempted to reach a collective bargaining agreement. These expenses can be
expected to continue until such time as a collective bargaining agreement is
reached with ALPA.
Operating Income
The Company's consolidated operating income for the second quarter of 1996
decreased 3% from the prior year, while consolidated operating income for the
year-to-date period remained essentially unchanged.
U.S. domestic operating income rose to $137 million for the second quarter
(a 3% year-over-year increase) and $263 million for the year-to-date period (a
4% year-over-year increase). These increases reflect slower volume growth and
reduced yield decline as well as cost per package reductions of 0.3%
and 1.3% for the quarter and six-month periods, respectively. U.S. domestic
operating margin for the quarter and year-to-date periods was 7.6% and 7.3%,
respectively, compared to 7.9% and 7.6% for the same periods in the prior year.
- 15 -
<PAGE>
The Company's international operating income was $33 million for the second
quarter (a 22% year-over-year decline) and $57 million for the year-to-date
period (a 13% year-over-year decline). These declines are attributable to a
weaker than expected airfreight market and a two-month delay in opening the
Subic Bay hub, which hampered sales momentum for the fall peak season.
Concurrent with the delay, incremental costs resulted from the addition of a
trans-Pacific flight, the establishment of the AsiaOne network and the impact
of two typhoons in the Philippines. A decline in charter revenue also
negatively affected international operating income. International operating
margin for the quarter and year-to-date periods was 4.6% and 4.1%,
respectively, compared to 6.5% and 5.2% for the same periods in the prior year.
Other Income and Expense
A decrease in net interest expense of 21% and 24% for the quarter and year-
to-date periods was due to lower debt levels and a higher level of capitalized
interest. Interest is capitalized during the modification of certain Airbus
A310 aircraft from passenger to freighter configuration. During the first six
months of 1996, seven A310 aircraft were modified, or were undergoing
modification, compared with none in the same period of the prior year.
Other, net includes a $7.3 million and a $5.9 million distribution in the
second quarter of 1996 and 1995, respectively, from the bankruptcy estate of a
firm engaged by the Company in 1990 to remit payments of employees' withholding
taxes to the appropriate authorities. During the third quarter of 1991, the
Company recorded a $32 million charge to other income and expense for an
estimated probable loss due to the failure of the firm to remit taxes due.
Through November 30, 1995, the Company has received $17.5 million from the
bankruptcy estate of the firm. All major issues pertaining to the bankruptcy
have been resolved, and any additional amounts the Company may receive are
expected to be insignificant.
Other, net also includes gains on sales of B-727 aircraft during both the
first and second quarters of 1996.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $115 million at November 30, 1995, and
decreased $242 million during the first six months of 1996. Cash provided
from operations was $425 million compared with $466 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. Management believes that cash flows from operations and
available cash under its commercial paper program and revolving bank credit
facility will adequately meet its working capital needs for the foreseeable
future.
- 16 -
<PAGE>
Capital Resources
The Company's operations are capital intensive, characterized by
significant investments in aircraft, vehicles, package handling facilities, sort
equipment, and computer and telecommunication equipment. The amount and timing
of capital additions are dependent on various factors including volume growth,
new or enhanced services, geographical expansion of services, competition and
availability of satisfactory financing.
Capital expenditures for the first six months of 1996 totaled $689 million
and included four A310 aircraft, 18 Cessna 208 aircraft, deposits on future
Airbus A300 aircraft, vehicles and ground support equipment, and customer
automation and computer equipment. In comparison, prior year expenditures
totaled $479 million and included vehicle and ground support equipment, customer
automation and computer equipment and deposits on future Airbus A300 aircraft.
For information on the Company's purchase commitments, see Note 6 of Notes to
Condensed Consolidated Financial Statements.
Additional investing activities included the purchase of an all-cargo route
authority between the U.S. and China in the first quarter of 1996.
In August and October 1995, approximately $123 and $195 million,
respectively, of pass through certificates were issued under a November 1994
shelf registration filed with the Securities and Exchange Commission to
refinance the debt portion of leveraged leases related to five Airbus A300
aircraft. The pass through certificates are not direct obligations of, or
guaranteed by, the Company, but amounts payable by the Company under the five
leveraged leases are sufficient to pay the principal of and interest on the
certificates. The Company has $147 million of certificates remaining under this
registration statement which may be used to partially finance the purchase of
aircraft, or to finance or refinance aircraft in leveraged lease transactions.
The Company's capital resources include backstop financing for 12 Airbus
A300 aircraft and the public and private debt markets for leveraged lease
financing. Management believes that the capital resources available to the
Company provide flexibility to access the most efficient markets for financing
aircraft acquisitions and are adequate for the Company's future capital needs.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 7 Legal Proceedings in Part I is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
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.
(b) Reports on Form 8-K.
During the quarter ended November 30, 1995, the Registrant filed four
Current Reports on Form 8-K. The first report was dated September 14, 1995 and
filed under Items 5 and 7, Other Events and Financial Statements and Exhibits.
The report contained a press release dated September 14, 1995 and Appendix A to
a Private Placement Memorandum prepared with respect to the Registrant's
commercial paper program.
The second report was dated October 17, 1995 and filed under Item 7,
Financial Statements and Exhibits. The report contained a Consent and a Form
T-1 Statement of Eligibility Under the Trust Indenture Act of 1939 in
connection with Registration Statement on Form S-3 No. 33-56569.
The third report was dated October 25, 1995 and filed under Items 5 and 7,
Other Events and Financial Statements and Exhibits. The report contained a
press release dated October 25, 1995.
The fourth report was dated October 26, 1995 and filed under Item 7,
Financial Statements and Exhibits. The report contained documents relating to
the 1995 Pass Through Certificates, Series B1, B2, and B3.
- 18 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL EXPRESS CORPORATION
(Registrant)
Date: January 11, 1996 /s/ JAMES S. HUDSON
----------------------------
JAMES S. HUDSON
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 19 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
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.
E-1
<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- and six-month periods ended November 30, 1995 and 1994 were as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended November 30, Ended November 30,
------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income applicable to common
and common equivalent shares . . . . . . $ 89,871 $ 86,139 $165,205 $147,281
-------- -------- -------- --------
-------- -------- -------- --------
Average shares of common stock
outstanding. . . . . . . . . . . . . . . 56,532 55,943 56,370 55,924
Common Equivalent Shares:
Assumed exercise of outstanding
dilutive options . . . . . . . . . . . 2,822 2,177 2,866 2,513
Less shares repurchased from
proceeds of assumed exercise
of options . . . . . . . . . . . . . . (2,094) (1,735) (2,262) (1,937)
-------- -------- -------- --------
Average common and common
equivalent shares. . . . . . . . . . . . 57,260 56,385 56,974 56,500
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share . . . . . . . . . . . . $ 1.57 $ 1.53 $ 2.90 $ 2.61
-------- -------- -------- --------
-------- -------- -------- --------
</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>
Six Months Ended
Year Ended May 31, November 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1994
-------- --------- -------- -------- -------- -------- --------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes. . . . . . . $ 40,942 $(146,828) $203,576 $378,462 $522,084 $284,838 $258,387
Add back: Interest expense, net of
capitalized interest . . . . . . . 196,982 176,321 168,762 152,170 130,923 53,497 71,692
Amortization of debt
issuance costs . . . . . . . . . . 1,634 2,570 4,906 2,860 2,493 841 1,327
Portion of rent expense
representative of
interest factor. . . . . . . . . . 292,840 299,012 262,724 285,261 329,370 184,595 155,701
-------- --------- -------- -------- -------- -------- --------
Earnings as adjusted . . . . . . . . . . . . . $532,398 $ 331,075 $639,968 $818,753 $984,870 $523,771 $487,107
-------- --------- -------- -------- -------- -------- --------
-------- --------- -------- -------- -------- -------- --------
Fixed Charges:
Interest expense, net of
capitalized interest . . . . . . . . . . . . $196,982 $ 176,321 $168,762 $152,170 $130,923 $ 53,497 $ 71,692
Capitalized interest . . . . . . . . . . . . . 35,442 26,603 31,256 29,738 27,381 20,563 11,970
Amortization of debt issuance costs. . . . . . 1,634 2,570 4,906 2,860 2,493 841 1,327
Portion of rent expense
representative of interest factor. . . . . . 292,840 299,012 262,724 285,261 329,370 184,595 155,701
-------- --------- -------- -------- -------- -------- --------
$526,898 $ 504,506 $467,648 $470,029 $490,167 $259,496 $240,690
-------- --------- -------- -------- -------- -------- --------
-------- --------- -------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges . . . . . . 1.0 (A) 1.4 1.7 2.0 2.0 2.0
-------- --------- -------- -------- -------- -------- --------
-------- --------- -------- -------- -------- -------- --------
</TABLE>
(A) Earnings were inadequate to cover fixed charges by $173.4 million for the
year ended May 31, 1992.
<PAGE>
EXHIBIT 15.1
[Arthur Andersen LLP letterhead]
December 13, 1995
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, 33-55055 and 33-56569 its Report on Form 10-Q for the
quarter ended November 30, 1995, which includes our report dated December 13,
1995 covering the unaudited interim financial information contained therein.
Pursuant to Regulation C of the Securities Act of 1933, that report is not
considered part of these registration statements prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME ON PAGES 3-5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDING
NOVEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 115,147
<SECURITIES> 0
<RECEIVABLES> 1,314,464
<ALLOWANCES> 30,971
<INVENTORY> 210,387
<CURRENT-ASSETS> 1,747,372
<PP&E> 8,295,386
<DEPRECIATION> 4,274,196
<TOTAL-ASSETS> 6,634,674
<CURRENT-LIABILITIES> 1,745,404
<BONDS> 1,336,381
0
0
<COMMON> 5,668
<OTHER-SE> 2,414,655
<TOTAL-LIABILITY-AND-EQUITY> 6,634,674
<SALES> 0
<TOTAL-REVENUES> 5,000,406
<CGS> 0
<TOTAL-COSTS> 4,680,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,020
<INCOME-PRETAX> 284,838
<INCOME-TAX> 119,633
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165,205
<EPS-PRIMARY> 2.90
<EPS-DILUTED> 2.90
</TABLE>
