<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 29, 1996, 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 March 29, 1996
Common Stock, par value $.10 per share 56,755,690
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
February 29, 1996 and May 31, 1995. . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Income
Three and Nine Months Ended February 29, 1996
and February 28, 1995 . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 29, 1996 and February 28, 1995 . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . 13-18
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 19
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
- 2 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
February 29,
1996 May 31,
(Unaudited) 1995
----------- -----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . $ 103,955 $ 357,548
Receivables, less allowance for doubtful accounts
of $33,314,000 and $31,173,000 . . . . . . . . 1,272,258 1,130,254
Spare parts, supplies and fuel. . . . . . . . . . 216,962 193,251
Deferred income taxes . . . . . . . . . . . . . . 101,031 115,801
Prepaid expenses and other. . . . . . . . . . . . 57,217 72,228
----------- -----------
Total current assets. . . . . . . . . . . . 1,751,423 1,869,082
----------- -----------
Property and Equipment, at Cost (Note 6) . . . . . . 8,455,145 7,697,711
Less accumulated depreciation and amortization. . 4,402,059 3,982,467
----------- -----------
Net property and equipment. . . . . . . . . 4,053,086 3,715,244
----------- -----------
Other Assets:
Goodwill. . . . . . . . . . . . . . . . . . . . . 384,678 397,272
Equipment deposits and other assets (Note 6). . . 503,766 451,774
----------- -----------
Total other assets. . . . . . . . . . . . . 888,444 849,046
----------- -----------
$ 6,692,953 $ 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
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
February 29,
1996 May 31,
(Unaudited) 1995
----------- -----------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt (Note 3). . . . $ 181,025 $ 255,448
Accounts payable. . . . . . . . . . . . . . . . . 683,578 618,621
Accrued expenses (Note 2) . . . . . . . . . . . . 911,656 904,466
----------- -----------
Total current liabilities. . . . . . . . . . . 1,776,259 1,778,535
----------- -----------
Long-Term Debt, Less Current Portion (Note 3). . . . 1,327,370 1,324,711
----------- -----------
Deferred Income Taxes. . . . . . . . . . . . . . . . 36,036 55,956
----------- -----------
Other Liabilities. . . . . . . . . . . . . . . . . . 1,101,009 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; 56,763,603 and
56,174,180 shares issued . . . . . . . . . . . 5,676 5,617
Other . . . . . . . . . . . . . . . . . . . . . . 2,446,603 2,239,952
----------- -----------
Total common stockholders' investment. . . . . 2,452,279 2,245,569
----------- -----------
$ 6,692,953 $ 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 Nine Months Ended
-------------------------- --------------------------
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . $2,535,470 $2,332,594 $7,535,876 $6,922,486
---------- ---------- ---------- ----------
Operating Expenses:
Salaries and employee benefits. . . . . . . . . 1,164,488 1,133,199 3,433,061 3,300,882
Rentals and landing fees. . . . . . . . . . . . 251,077 211,705 711,054 599,641
Depreciation and amortization . . . . . . . . . 182,298 165,071 535,093 483,588
Fuel . . . . . . . . . . . . . . . . . . . . . 150,377 127,491 420,009 372,595
Maintenance and repairs . . . . . . . . . . . . 153,704 128,111 440,342 397,513
Other . . . . . . . . . . . . . . . . . . . . . 555,583 469,345 1,598,239 1,351,234
---------- ---------- ---------- ----------
2,457,527 2,234,922 7,137,798 6,505,453
---------- ---------- ---------- ----------
Operating Income . . . . . . . . . . . . . . . . . 77,943 97,672 398,078 417,033
---------- ---------- ---------- ----------
Other Income (Expense):
Interest, net . . . . . . . . . . . . . . . . . (24,871) (26,933) (72,891) (90,382)
Other, net. . . . . . . . . . . . . . . . . . . (435) 39,975 12,288 42,450
---------- ---------- ---------- ----------
(25,306) 13,042 (60,603) (47,932)
---------- ---------- ---------- ----------
Income Before Income Taxes . . . . . . . . . . . . 52,637 110,714 337,475 369,101
Income Tax Provision . . . . . . . . . . . . . . . 25,481 47,607 145,114 158,713
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . $ 27,156 $ 63,107 $ 192,361 $ 210,388
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per Share . . . . . . . . . . . . . . . . $ .47 $ 1.12 $ 3.37 $ 3.73
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Common and Common Equivalent
Shares (Note 5) . . . . . . . . . . . . . . . . 57,258 56,374 57,069 56,458
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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>
Nine Months Ended
--------------------------
February 29, February 28,
1996 1995
----------- -----------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities. . . . . . $ 596,176 $ 643,238
----------- -----------
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $59,272,000 and
$85,305,000. . . . . . . . . . . . . . . . . . (1,002,699) (703,126)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions . . . . . . . . 95,000 -
Reimbursements of A300 deposits . . . . . . 101,833 97,793
Other dispositions. . . . . . . . . . . . . 25,395 59,270
Other, net. . . . . . . . . . . . . . . . . . . . (15,339) 66,309
----------- -----------
Net cash used in investing activities. . . . . . . . (795,810) (479,754)
----------- -----------
Financing Activities:
Proceeds from debt issuances. . . . . . . . . . . 17,298 45,460
Principal payments on debt. . . . . . . . . . . . (89,065) (349,511)
Proceeds from stock issuances . . . . . . . . . . 30,052 6,891
Other, net. . . . . . . . . . . . . . . . . . . . (12,244) -
----------- -----------
Net cash used in financing activities. . . . . . . . (53,959) (297,160)
----------- -----------
Net decrease in cash and cash equivalents. . . . . . (253,593) (133,676)
Cash and cash equivalents at beginning of period . . 357,548 392,923
----------- -----------
Cash and cash equivalents at end of period . . . . . $ 103,955 $ 259,247
----------- -----------
----------- -----------
Cash payments for:
Interest (net of capitalized interest). . . . . . $ 61,704 $ 89,795
----------- -----------
----------- -----------
Income taxes. . . . . . . . . . . . . . . . . . . $ 134,080 $ 135,512
----------- -----------
----------- -----------
</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 February 29, 1996, the consolidated results of their
operations for the three- and nine-month periods ended February 29, 1996 and
February 28, 1995, and their consolidated cash flows for the nine-month periods
ended February 29, 1996 and February 28, 1995. Operating results for the three-
and nine-month periods ended February 29, 1996 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>
February 29,
1996 May 31,
(Unaudited) 1995
----------- -----------
(In thousands)
<S> <C> <C>
Compensated absences. . . . . . . . . . . . . . $ 207,483 $ 192,785
Insurance . . . . . . . . . . . . . . . . . . . 195,187 176,806
Taxes other than income taxes . . . . . . . . . 148,318 137,037
Salaries. . . . . . . . . . . . . . . . . . . . 94,430 100,024
Employee benefits . . . . . . . . . . . . . . . 86,157 127,870
Aircraft overhaul . . . . . . . . . . . . . . . 65,176 53,540
Interest. . . . . . . . . . . . . . . . . . . . 48,867 30,443
Other . . . . . . . . . . . . . . . . . . . . . 66,038 85,961
----------- -----------
$ 911,656 $ 904,466
----------- -----------
----------- -----------
</TABLE>
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<PAGE>
(3) LONG-TERM DEBT
<TABLE>
<CAPTION>
February 29,
1996 May 31,
(Unaudited) 1995
----------- -----------
(In thousands)
<S> <C> <C>
Unsecured notes payable, interest rates of
6.25% to 10.57%, due through 2013 . . . . . . $ 1,107,266 $ 1,187,413
Unsecured sinking fund debentures, interest . .
rate of 9.63%, due through 2020 . . . . . . . 98,374 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%. . 58,751 50,419
----------- -----------
1,508,395 1,580,159
Less current portion. . . . . . . . . . . . . 181,025 255,448
----------- -----------
$ 1,327,370 $ 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 February 29, 1996. 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 February 29, 1996, none of these shares had been
issued.
(5) COMMON STOCKHOLDERS' INVESTMENT
During the nine-month period ended February 29, 1996, 748,173 shares of
common and treasury stock were issued under employee incentive plans at prices
ranging from $30.56 to $80.13 per share. During the same period, the Company
acquired 158,562 shares (including restricted stock forfeitures) of its common
stock at an average cost of $83.95 per share.
- 8 -
<PAGE>
(6) COMMITMENTS
As of February 29, 1996, 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) $226,100 $ 71,000 $135,000 $432,100
1997 452,500 111,400 83,800 647,700
1998 478,600 50,000 29,700 558,300
1999 240,800 18,500 15,600 274,900
2000 124,200 9,900 - 134,100
</TABLE>
(1) Primarily aircraft modifications, spare parts and engines, and
rotables.
(2) Primarily facilities, vehicles, computers and other equipment.
The Company is committed to purchase 11 Airbus A300, 12 Airbus A310,
11 MD-11, three B-727-200 and eight Cessna 208 aircraft to be delivered through
2000. Deposits and progress payments of $234,900,000 have been made toward
these purchases. At February 29, 1996, the Company had options to purchase up
to 36 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 nine-month period ended February 29, 1996, the Company acquired
five 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 five Airbus A300
aircraft and three additional MD-11 aircraft to be acquired by operating lease
are as follows (in thousands):
1996 $ 6,900
1997 44,500
1998 54,200
1999 57,100
2000 54,000
Thereafter 667,400
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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 February 29, 1996
and the related condensed consolidated statements of income for the three- and
nine-month periods ended February 29, 1996 and February 28, 1995 and the
condensed consolidated statements of cash flows for the nine-month periods ended
February 29, 1996 and February 28, 1995, 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 February 29, 1996 and the
related condensed consolidated statements of income for the three- and nine-
month periods ended February 29, 1996 and February 28, 1995 and the condensed
consolidated statements of cash flows for the nine-month periods ended
February 29, 1996 and February 28, 1995. 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.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Memphis, Tennessee,
March 13, 1996
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the quarter ended February 29, 1996, the Company recorded net income of
$27 million ($.47 per share) on revenues of $2.5 billion compared with net
income of $63 million ($1.12 per share) on revenues of $2.3 billion for the same
period in the prior year. For the nine months ended February 29, 1996, the
Company recorded net income of $192 million ($3.37 per share) on revenues of
$7.5 billion compared with net income of $210 million ($3.73 per share) on
revenues of $6.9 billion for the same period in the prior year. Operating
results reflect the effects of unprecedented winter storms on U.S. domestic
operations and continued weakness in the international airfreight market.
Revenues
The following table shows a comparison of revenues (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
February 29, February 28, Percent February 29, February 28, Percent
1996 1995 Change 1996 1995 Change
----------- ----------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. domestic express. . . . . $1,822 $1,683 + 8 % $5,337 $4,953 + 8 %
International
Priority (IP). . . . . . . . 490 416 +18 1,455 1,211 +20
International
Express Freight
(IXF) and Airport-to-
Airport (ATA). . . . . . . . 117 136 -14 420 435 - 3
Charter, Logistics
services and other . . . . . 106 98 + 9 324 323 --
------ ------ ------ ------
$2,535 $2,333 + 9 $7,536 $6,922 + 9
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
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<PAGE>
The following table shows a comparison of selected express and airfreight
(IXF/ATA) statistics (in thousands, except dollar amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
February 29, February 28, Percent February 29, February 28, Percent
1996 1995 Change 1996 1995 Change
----------- ----------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. domestic
express:
Average daily packages . . 2,328 2,232 + 4 % 2,218 2,057 + 8 %
Revenue per package. . . . $12.42 $12.16 + 2 $12.60 $12.67 - 1
IP:
Average daily packages . . 192 166 +16 187 159 +18
Revenue per package. . . . $40.52 $40.52 -- $40.64 $40.14 + 1
IXF/ATA:
Average daily pounds . . . 1,912 2,101 - 9 2,124 2,170 - 2
Revenue per pound. . . . . $ .97 $ 1.05 - 8 $ 1.04 $ 1.05 - 1
</TABLE>
Continued yield-management actions contributed to an increase in U.S.
domestic express revenue per package (yield) for the quarter and slowed the rate
of yield decline for the year-to-date period. Such actions also resulted in 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 shipping profiles and increasing the list price for one of the Company's
deferred services in June 1995. Yields increased 2% for the quarter and
declined 1% for the year-to-date period, compared with declines of 6% and 5% for
the same periods in the prior year. Volume growth slowed to 4% and 8% for the
quarter and year-to-date periods for 1996, compared with 21% and 17% for the
same periods in the prior year. Third quarter package volume growth is less
than year-to-date growth primarily due to the impact of winter weather. The
declining growth rate is particularly evident in the Company's economy two-day
service for which volume declined 5% in 1996's third quarter and increased only
1% in the year-to-date period, compared with increases of 26% and 24% for the
same periods in 1995. Management will continue its yield-management actions for
the remainder of 1996, including an increase in the price for one of its
deferred services in April 1996. Management expects this price increase to have
a positive impact on U.S. domestic yields. However, yields may decline if the
increase causes a shift in customer demand to the Company's two-day service. In
addition, volume growth may slow if the price increase causes customers to use
services of the Company's competitors.
Severe winter storms in the eastern United States negatively impacted U.S.
domestic revenues. Snowstorms during the quarter closed numerous airports and
- 14 -
<PAGE>
businesses, thereby reducing package volumes. The expiration of the air cargo
transportation excise tax on December 31, 1995 increased U.S. domestic revenues
and yield $19 million and 1%, respectively, during the quarter. This benefit
will continue until such time as the excise tax is reenacted by Congress.
The Company's IP revenues and volumes increased at rates slower than those
in the prior year for the quarter and year-to-date periods due to a weak
international economy. Yields remained unchanged for the quarter and increased
slightly for the nine months ended February 29, 1996. Management expects these
trends to continue through the fourth quarter of 1996. Actual IP volume growth
will depend on international economic conditions and actions by the Company's
competitors in key IP markets.
The Company's airfreight volumes and yields experienced year-over-year
declines. Although IXF volumes (a space-confirmed, time-definite service)
increased 12% and 25% for the quarter and year-to-date periods, respectively,
yields declined 13% and 9% for the same periods. ATA volumes (a
lower-priced, space-available service) declined 27% and 23% for the quarter
and year-to-date periods, respectively, with yields lower by 6% and 1% for
the same periods. Increased capacity by both the Company and others,
competition in the global airfreight market and slowing growth in world
demand adversely affected airfreight volume growth and yields. Management
expects airfreight volumes and yields to continue to decline, year-over-year,
through the balance of the fiscal year. Actual results, however, will depend
on international economic conditions, actions by the Company's competitors
and regulatory conditions for international aviation rights.
The increase in Charter, Logistics services and other revenue for the
quarter is attributable to increased sales of engine noise reduction kits,
partially offset by decreased charter revenue of $11 million for the quarter.
Operating Expenses
Salaries and employee benefits increased 3% and 4% 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 and third quarters of 1996.
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 February 29, 1996, the Company had 14 A300 and 16 A310
aircraft under operating lease compared with seven A300 and seven A310 aircraft
as of February 28, 1995. 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 18% and 13% 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 price per gallon is due to the 4.3
cents per gallon excise tax on aviation fuel which became effective October 1,
1995 and rising jet fuel prices.
- 15 -
<PAGE>
Maintenance and repairs expense increased 20% and 11% for the quarter and
year-to-date periods, respectively. Earlier than expected DC-10 engine
maintenance and maintenance of the Company's growing A310 fleet contributed to
these increases which are consistent with a long-term trend of increasing
maintenance and repairs expense.
Other operating expense increased 18% for both the third 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 the
Company's resources. Management expects these projects to result in future,
long-term cost savings. The results of these projects may differ from
management's expectations depending upon the Company's success and timing in
implementing the project recommendations and the timing of technological
changes. Increases in transportation services by outside vendors, temporary
manpower and service contracts also contributed to the rise in other operating
expense.
Operating Income
The Company's consolidated operating income decreased 20% and 5% from the
prior year for the quarter and year-to-date periods ended February 29, 1996.
U.S. domestic operating income rose to $91 million for the third quarter
(compared with $72 million for the prior year) and $354 million for the year-to-
date period (compared with $326 million for the prior year). These increases
reflect yield improvements, partially offset by an increase in cost per package
for the quarter. Yields improved due to several factors, including slower
volume growth of lower-yielding services and the expiration of the air cargo
excise tax. Although cost per package remained unchanged for the year-to-date
period, cost per package increased 2% for the quarter due to lower volumes in
January and additional expenses, both resulting from winter storms. These
unusually harsh storms lowered U.S. domestic operating profit by approximately
$30 million. Additionally, sales of engine noise reduction kits contributed an
incremental $9 million and $16 million to U.S. domestic operating income for the
quarter and year-to-date periods, respectively. U.S. domestic operating margin
for the quarter and year-to-date periods was 4.8% and 6.5%, respectively,
compared to 4.2% and 6.5% for the same periods in the prior year.
The Company's international operations reported an operating loss of $13
million for the third quarter (compared with operating income of $26 million for
the prior year) and operating income of $44 million for the year-to-date period
(compared with $91 million for the prior year). These declines are attributable
to continuing weakness in the international airfreight market, concurrent with
the addition of flight frequencies related to the Company's intra-Asian network.
An $11 million decline in charter revenue contributed to lower international
operating income. International operating margin for the quarter and year-to-
date periods was -1.9% and 2.2%, respectively, compared to 4.2% and 4.9% for the
same periods in the prior year.
- 16 -
<PAGE>
Other Income and Expense and Income Taxes
A decrease in net interest expense of 8% and 19% 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 nine months
of 1996, ten A310 aircraft were modified, or were undergoing modification,
compared with none in the same period in the prior year.
Other, net includes a $7.3 million distribution during the first six months
of 1996 and distributions of $3.8 million and $9.7 million for the quarter and
year-to-date periods of 1995 from the bankruptcy estate of a firm engaged by the
Company in 1990 to remit payments of employees' withholding taxes to the
appropriate authorities. 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 the first
half of 1996.
The prior year's third quarter includes a pre-tax gain of $35.7 million
from the sale of two dedicated warehousing and distribution companies in the
United Kingdom.
The Company's effective tax rate was 48.4% and 43.0% for the quarter and
nine-month periods ended February 29, 1996, respectively, compared with 43.0%
for the same periods in the prior year. The increase in the year-to-date rate
to 43.0% from 42.0% for the first half of 1996 is largely due to a reduction in
international operating income, which reduces the Company's ability to claim
foreign tax credits, and a reduction in consolidated operating income. The
increase in the third quarter tax rate results from the increase of the year-to-
date rate to 43.0%.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $104 million at February 29, 1996, and
decreased $254 million during the first nine months of 1996. Cash provided from
operations was $596 million compared with $643 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.
- 17 -
<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 nine months of 1996 totaled $1.0 billion
and included five A310 aircraft (one of which, along with two purchased in 1995,
was subsequently sold and leased back), one MD-11 aircraft, 27 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 $703 million and included an Airbus A310 aircraft,
five Cessna 208 aircraft, deposits on future Airbus A300 aircraft, vehicle and
ground support equipment and customer automation and computer equipment. 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 11 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.
Statements in this "Management's Discussion and Analysis of Results of
Operations and Financial Condition" or made by management of the Company
which contain more than historical information may be considered
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) which are subject to risks and uncertainties.
Actual results may differ materially from those expressed in the
forward-looking statements because of important factors indentified in this
section.
- 18 -
<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 February 29, 1996, the Registrant filed one
Current Report on Form 8-K. The report was dated January 12, 1996 and filed
under Items 5 and 7, Other Events and Financial Statements and Exhibits. The
report contained a press release dated January 12, 1996.
- 19 -
<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: April 11, 1996 /s/ JAMES S. HUDSON
------------------------------
JAMES S. HUDSON
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 20 -
<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 nine-month periods ended February 29, 1996 and February 28,
1995 were as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income applicable to
common and common equivalent
shares . . . . . . . . . . . . . . . . . . $ 27,156 $ 63,107 $192,361 $210,388
-------- -------- -------- --------
-------- -------- -------- --------
Average shares of common stock
outstanding. . . . . . . . . . . . . . . . 56,711 55,987 56,483 55,945
Common Equivalent Shares:
Assumed exercise of
outstanding dilutive
options. . . . . . . . . . . . . . . . . 2,463 1,733 2,732 2,253
Less shares repurchased from
proceeds of assumed exercise
of options . . . . . . . . . . . . . . . (1,916) (1,346) (2,146) (1,740)
-------- -------- -------- --------
Average common and common
equivalent shares. . . . . . . . . . . . . 57,258 56,374 57,069 56,458
-------- -------- -------- --------
Earnings per share . . . . . . . . . . . . . $ .47 $ 1.12 $ 3.37 $ 3.73
-------- -------- -------- --------
-------- -------- -------- --------
</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>
Nine Months Ended
Year Ended May 31, --------------------------
---------------------------------------------------- February 28, February 29,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------------ ------------
(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 $369,101 $337,475
Add back: Interest expense, net of
capitalized interest . . . . 196,982 176,321 168,762 152,170 130,923 102,182 80,128
Amortization of debt
issuance costs . . . . . . . 1,634 2,570 4,906 2,860 2,493 1,939 1,239
Portion of rent expense
representative of
interest factor. . . . . . . 292,840 299,012 262,724 285,261 329,370 241,228 285,789
-------- --------- -------- -------- -------- -------- --------
Earnings as adjusted . . . . . . . . . . . $532,398 $ 331,075 $639,968 $818,753 $984,870 $714,450 $704,631
-------- --------- -------- -------- -------- -------- --------
-------- --------- -------- -------- -------- -------- --------
Fixed Charges:
Interest expense, net of
capitalized interest . . . . . . . . . $196,982 $ 176,321 $168,762 $152,170 $130,923 $102,182 $ 80,128
Capitalized interest . . . . . . . . . 35,442 26,603 31,256 29,738 27,381 18,499 29,737
Amortization of debt issuance costs . . . . 1,634 2,570 4,906 2,860 2,493 1,939 1,239
Portion of rent expense
representative of interest factor. . . 292,840 299,012 262,724 285,261 329,370 241,228 285,789
-------- --------- -------- -------- -------- -------- --------
$526,898 $ 504,506 $467,648 $470,029 $490,167 $363,848 $396,893
-------- --------- -------- -------- -------- -------- --------
-------- --------- -------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges. . . . . 1.0 (A) 1.4 1.7 2.0 2.0 1.8
-------- --------- -------- -------- -------- -------- --------
-------- --------- -------- -------- -------- -------- --------
</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 Letterhead)
March 13, 1996
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 February 29, 1996, which includes our report dated March 13, 1996
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
February 29, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 103,955
<SECURITIES> 0
<RECEIVABLES> 1,305,572
<ALLOWANCES> 33,314
<INVENTORY> 216,962
<CURRENT-ASSETS> 1,751,423
<PP&E> 8,455,145
<DEPRECIATION> 4,402,059
<TOTAL-ASSETS> 6,692,953
<CURRENT-LIABILITIES> 1,776,259
<BONDS> 1,327,370
0
0
<COMMON> 5,676
<OTHER-SE> 2,446,603
<TOTAL-LIABILITY-AND-EQUITY> 6,692,953
<SALES> 0
<TOTAL-REVENUES> 7,535,876
<CGS> 0
<TOTAL-COSTS> 7,137,798
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,891
<INCOME-PRETAX> 337,475
<INCOME-TAX> 145,114
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,361
<EPS-PRIMARY> 3.37
<EPS-DILUTED> 3.37
</TABLE>
