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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 AUGUST 31, 1996, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
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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, 1996
Common Stock, par value $.10 per share 56,955,692
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FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
August 31, 1996 and May 31, 1996. . . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Income
Three Months Ended August 31, 1996 and 1995 . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 1996 and 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 . . . . . . . . . . . . . . . . . . . . . . . 13-16
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 17
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
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FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
August 31,
1996 May 31,
(Unaudited) 1996
----------- -----------
(In thousands)
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . $ 154,863 $ 93,419
Receivables, less allowance for doubtful accounts
of $33,076,000 and $30,809,000 . . . . . . . . . 1,291,806 1,271,599
Spare parts, supplies and fuel . . . . . . . . . . 236,740 222,110
Deferred income taxes. . . . . . . . . . . . . . . 98,224 92,606
Prepaid expenses and other . . . . . . . . . . . . 30,401 48,527
----------- -----------
Total current assets . . . . . . . . . . . . . 1,812,034 1,728,261
----------- -----------
Property and Equipment, at Cost (Note 6) . . . . . . 8,938,027 8,678,517
Less accumulated depreciation and amortization . . 4,735,720 4,561,916
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Net property and equipment . . . . . . . . . . 4,202,307 4,116,601
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Other Assets:
Goodwill . . . . . . . . . . . . . . . . . . . . . 376,854 380,748
Equipment deposits and other assets (Note 6) . . . 439,281 473,361
----------- -----------
Total other assets . . . . . . . . . . . . . . 816,135 854,109
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$ 6,830,476 $ 6,698,971
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----------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
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FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
August 31,
1996 May 31,
(Unaudited) 1996
(In thousands)
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Current Liabilities:
Current portion of long-term debt (Note 3) . . . . $ 7,909 $ 8,009
Accounts payable . . . . . . . . . . . . . . . . . 741,702 705,532
Accrued expenses (Note 2). . . . . . . . . . . . . 920,272 904,856
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Total current liabilities. . . . . . . . . . . 1,669,883 1,618,397
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Long-Term Debt, Less Current Portion (Note 3). . . . 1,317,812 1,325,277
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Deferred Income Taxes. . . . . . . . . . . . . . . . 64,696 64,034
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Other Liabilities. . . . . . . . . . . . . . . . . . 1,135,823 1,115,124
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Commitments and Contingencies (Notes 6 and 7)
Common Stockholders' Investment (Note 5):
Common Stock, $.10 par value;
200,000,000 shares authorized; 56,947,977 and
56,885,125 shares issued . . . . . . . . . . . . 5,695 5,689
Other. . . . . . . . . . . . . . . . . . . . . . . 2,636,567 2,570,450
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Total common stockholders' investment. . . . . 2,642,262 2,576,139
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$ 6,830,476 $ 6,698,971
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----------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
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FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
August 31,
--------------------------
1996 1995
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(In thousands, except
per share amounts)
Revenues . . . . . . . . . . . . . . . . . . . . . $ 2,692,312 $ 2,453,394
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Operating Expenses:
Salaries and employee benefits . . . . . . . . . 1,231,423 1,147,526
Rentals and landing fees . . . . . . . . . . . . 253,368 223,207
Depreciation and amortization. . . . . . . . . . 190,209 174,121
Fuel . . . . . . . . . . . . . . . . . . . . . . 153,547 126,376
Maintenance and repairs. . . . . . . . . . . . . 181,419 124,575
Other. . . . . . . . . . . . . . . . . . . . . . 552,428 508,359
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2,562,394 2,304,164
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Operating Income . . . . . . . . . . . . . . . . . 129,918 149,230
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Other Income (Expense):
Interest, net. . . . . . . . . . . . . . . . . . (21,759) (23,845)
Other, net . . . . . . . . . . . . . . . . . . . (420) 4,501
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(22,179) (19,344)
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Income Before Income Taxes . . . . . . . . . . . . 107,739 129,886
Income Tax Provision . . . . . . . . . . . . . . . 45,789 54,552
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Net Income . . . . . . . . . . . . . . . . . . . . $ 61,950 $ 75,334
----------- -----------
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Earnings per Share . . . . . . . . . . . . . . . . $ 1.08 $ 1.33
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Common and Common Equivalent Shares (Note 5) . . . 57,467 56,688
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See accompanying Notes to Condensed Consolidated Financial Statements.
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FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
August 31,
--------------------------
1996 1995
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(In thousands)
Net Cash Provided by Operating Activities. . . . . $ 279,481 $ 190,577
----------- -----------
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $1,100,000 and
$40,523,000. . . . . . . . . . . . . . . . . . (272,549) (326,502)
Proceeds from disposition of property
and equipment:
Reimbursements of A300 deposits. . . . . . . 42,026 20,205
Other dispositions . . . . . . . . . . . . . 879 20,777
Other, net . . . . . . . . . . . . . . . . . . . 16,401 (56,441)
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Net cash used in investing activities. . . . . . . (213,243) (341,961)
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Financing Activities:
Principal payments on debt . . . . . . . . . . . (7,678) (5,004)
Proceeds from stock issuances. . . . . . . . . . 3,196 5,596
Other, net . . . . . . . . . . . . . . . . . . . (312) -
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Net cash provided by (used in)
financing activities . . . . . . . . . . . . . . (4,794) 592
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Net increase (decrease) in cash
and cash equivalents . . . . . . . . . . . . . . 61,444 (150,792)
Cash and cash equivalents at beginning of period . 93,419 357,548
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Cash and cash equivalents at end of period . . . . $ 154,863 $ 206,756
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Cash payments for:
Interest (net of capitalized interest) . . . . . $ 6,951 $ 5,398
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Income taxes . . . . . . . . . . . . . . . . . . $ 21,125 $ 3,263
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See accompanying Notes to Condensed Consolidated Financial Statements.
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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, 1996. 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, 1996, the consolidated results of their operations
for the three-month periods ended August 31, 1996 and 1995, and their
consolidated cash flows for the three-month periods ended August 31, 1996 and
1995. Operating results for the three-month period ended August 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ending May 31, 1997.
Certain prior period amounts have been reclassified to conform to the
current presentation.
(2) ACCRUED EXPENSES
August 31,
1996 May 31,
(Unaudited) 1996
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(In thousands)
Compensated absences . . . . . . . . $216,362 $211,499
Insurance. . . . . . . . . . . . . . 208,573 194,209
Taxes other than income taxes. . . . 138,027 153,905
Salaries . . . . . . . . . . . . . . 82,258 78,384
Aircraft overhaul. . . . . . . . . . 75,246 59,343
Employee benefits. . . . . . . . . . 67,053 111,912
Interest . . . . . . . . . . . . . . 43,764 27,840
Other. . . . . . . . . . . . . . . . 88,989 67,764
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$920,272 $904,856
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(3) LONG-TERM DEBT
August 31,
1996 May 31,
(Unaudited) 1996
----------- -----------
(In thousands)
Unsecured notes payable, interest rates of
6.25% to 10.57%, due through 2013 . . . . . . $ 928,186 $ 934,181
Unsecured sinking fund debentures, interest
rate of 9.63%, due through 2020 . . . . . . . 98,409 98,392
Capital lease obligations and tax exempt bonds,
due through 2017, interest rates of
6.75% to 8.30%. . . . . . . . . . . . . . . . 255,100 255,100
Less bond reserves. . . . . . . . . . . . . . 11,096 11,096
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244,004 244,004
Other debt, interest rates of 9.68% to 9.98%. . 55,122 56,709
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1,325,721 1,333,286
Less current portion. . . . . . . . . . . . . 7,909 8,009
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$1,317,812 $1,325,277
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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 August 31, 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 August 31, 1996, none of these shares had been
issued.
(5) COMMON STOCKHOLDERS' INVESTMENT
During the three-month period ended August 31, 1996, 66,852 shares of
common and treasury stock were issued under employee incentive plans at prices
ranging from $30.56 to $79.88 per share. During the same period, the Company
acquired 4,000 shares of its common stock at a cost of $77.93 per share.
On October 1, 1996, the Board of Directors declared a stock split to be
effected in the form of a stock dividend, payable on November 4, 1996 to
stockholders of record on October 15, 1996 at the rate of one share for each
share outstanding. After November 4, 1996, all share and per share amounts
will be adjusted to reflect the split.
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(6) COMMITMENTS
As of August 31, 1996, the Company's purchase commitments for the remainder
of 1997 and annually thereafter under various contracts are as follows (in
thousands):
Aircraft-
Aircraft Related(1) Other(2) Total
-------- ---------- -------- --------
1997 (remainder) $331,200 $161,400 $303,400 $796,000
1998 470,200 63,000 31,900 565,100
1999 402,200 18,100 15,600 435,900
2000 342,200 80,300 - 422,500
2001 218,000 - - 218,000
(1) Primarily aircraft modifications, rotables and spare parts and
engines.
(2) Primarily vehicles, facilities, computers and other equipment.
The Company is committed to purchase 18 Airbus A300, nine Airbus A310
and ten MD11 aircraft to be delivered through 2001. Deposits and progress
payments of $158,123,000 have been made toward these purchases. In August
1996, the Company entered into an agreement to acquire 11 new Airbus A300
aircraft for delivery beginning in 1999. The Company may be required to
purchase seven additional MD11 aircraft for delivery beginning no later than
2000 under a put option agreement.
During the three-month period ended August 31, 1996, the Company
acquired two Airbus A300s under operating leases. These aircraft were
included as purchase commitments as of May 31, 1996. 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, 1996 for the two Airbus A300 aircraft
and two additional MD11 aircraft acquired by operating lease are as follows (in
thousands):
1996 $ 20,100
1997 28,600
1998 28,500
1999 28,500
2000 29,500
Thereafter 248,500
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(7) LEGAL PROCEEDINGS
In May 1996, a class-action suit was filed by customers of the Company in
the United States District Court for the District of Minnesota. The complaint
generally alleges that the Company breached its contract with the plaintiffs in
transporting packages shipped by them by continuing to collect a 6.25% federal
excise tax on the transportation of property shipped by air after the tax
expired on December 31, 1995. The plaintiffs assert that the benefit to the
Company is believed to be in excess of $30,000,000. The plaintiffs seek
certification as a class action, damages, an injunction to enjoin the Company
from continuing to collect the excise tax referred to above, and an award of
attorneys fees and costs. Other customers of the Company filed two separate
lawsuits, one in California state court during April 1996 and one in Minnesota
state court during June 1996, containing substantially similar allegations and
requests for relief. All three lawsuits have been consolidated in the United
States District Court for the District of Minnesota.
On August 16, 1996, a fourth class-action lawsuit was filed against the
Company in the Circuit Court of Greene County, Alabama. The allegations in this
case are substantially similar to the allegations in the first three lawsuits.
Like the first three cases, the plaintiffs seek certification as a class action,
damages and an award of attorneys fees and costs. In addition, the plaintiffs
in the Alabama case also seek punitive damages against the Company and
prejudgment interest. A conditional order granting nationwide class-action
status has been issued by the Circuit Court in the Alabama case. The Company
has removed the Alabama case to the United States District Court for the
District of Alabama, and subsequently filed a motion to consolidate the case
with the consolidated Minnesota cases. The plaintiffs in the Alabama case have
filed a motion to remand the case back to the Alabama Circuit Court.
The Company intends to vigorously defend itself in these cases. No amount
has been reserved for these contingencies.
On August 20, 1996, President Clinton signed legislation reenacting the
6.25% federal excise tax on the transportation of property shipped by air
effective August 27, 1996.
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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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, 1996
and the related condensed consolidated statements of income for the three-month
periods ended August 31, 1996 and 1995 and the condensed consolidated statements
of cash flows for the three-month periods ended August 31, 1996 and 1995,
included herein, as indicated in their report thereon included on page 12.
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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, 1996 and the
related condensed consolidated statements of income for the three-month periods
ended August 31, 1996 and 1995 and the condensed consolidated statements of cash
flows for the three-month periods ended August 31, 1996 and 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, 1996 and the related consolidated statements of
income, changes in common stockholders' investment and cash flows for the year
then ended. In our report dated July 1, 1996, 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,
1996 is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Memphis, Tennessee,
September 16, 1996
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the three months ended August 31, 1996, the Company recorded net income
of $62 million ($1.08 per share) on revenues of $2.7 billion compared with net
income of $75 million ($1.33 per share) on revenues of $2.5 billion for the same
period in the prior year. Operating results declined primarily due to a higher
level of maintenance and repairs expense, higher jet fuel prices and lower
international airfreight yields.
Revenues
The following table shows a comparison of revenues (in millions):
Three Months Ended
August 31,
------------------- Percent
1996 1995 Change
------ ------ -------
U.S. domestic express . . . . . . . . . . $1,908 $1,736 +10 %
International Priority (IP) . . . . . . . 541 470 +15
International Express Freight (IXF)
and Airport-to-Airport (ATA). . . . . . 137 144 - 5
Charter, Logistics services and other . . 106 103 + 2
------ ------
$2,692 $2,453 +10
------ ------
------ ------
The following table shows a comparison of selected express and airfreight
(IXF/ATA) statistics (in thousands, except dollar amounts):
Three Months Ended
August 31,
------------------- Percent
1996 1995 Change
------ ------ -------
U.S. domestic express:
Average daily packages. . . . . . . . . . 2,297 2,106 + 9 %
Revenue per package . . . . . . . . . . . $12.98 $12.68 + 2
IP:
Average daily packages. . . . . . . . . . 209 179 +17
Revenue per package . . . . . . . . . . . $40.37 $40.45 --
IXF/ATA:
Average daily pounds. . . . . . . . . . . 2,340 2,035 +15
Revenue per pound . . . . . . . . . . . . $ .92 $ 1.09 -16
U.S. domestic express revenue per package (yield) increased year-over-year
for the third consecutive quarter. The expiration of the air transportation
excise tax on December 31, 1995 contributed $28 million and 1% to U.S. domestic
revenues and yield, respectively, during the quarter. The excise tax was
reenacted by Congress effective August 27, 1996, but is scheduled to expire on
December 31, 1996.
The yield improvement was also due to continuing yield-management actions,
including systematic review and revision of customer pricing and discounts and
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an increase in the list price for FedEx Standard Overnight service in April
1996. Management will continue its yield-management program during 1997 with the
goal of ensuring an appropriate balance between revenues generated and the cost
of providing express services. Management believes that year-over-year changes
in U.S. domestic yields will be flat or decrease slightly during the remainder
of 1997. Actual results may vary depending on the impact of competitive pricing
changes and changing customer demand patterns.
The Company's IP revenues and volumes continued to experience strong growth
during the quarter. However, yields remained essentially flat for the three
months ended August 31, 1996, compared to the same period of the prior year.
Management expects these trends to continue through the remainder of 1997.
Actual IP results will depend on international economic conditions, actions by
the Company's competitors in key IP markets and regulatory conditions for
international aviation rights.
The Company's airfreight volumes increased year-over-year, while yields
experienced a significant year-over-year decline. IXF volumes (a space-
confirmed, time-definite service) increased 27% for the quarter, but yields
declined 18% for the same period. ATA volumes (a lower-priced, space-available
service) increased only 1% for the quarter, but yields were lower by 17% for the
same period. Extremely competitive pricing produced by marked capacity
increases and decreased demand in the global airfreight market adversely
affected airfreight yields. Management expects airfreight 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.
Operating Expenses
A 14% increase in rentals and landing fees for the quarter is primarily due
to additional leased aircraft in the Company's fleet. As of August 31, 1996,
the Company had 76 wide-bodied aircraft under operating lease compared with 62
as of August 31, 1995. Management expects year-over-year increases in lease
expense to continue as the Company enters into additional aircraft rental
agreements during 1997 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 22% for the quarter due to increases in average jet
fuel price per gallon (14%) and gallons consumed (9%). The increase in average
price per gallon is due to higher jet fuel prices and the 4.3 cents per gallon
excise tax on aviation fuel, used domestically, which became effective
October 1, 1995.
Maintenance and repairs expense increased 46% for the quarter. The current
quarter expense is consistent with that of recent past quarters and with
management's expectations for the remainder of 1997. Partially contributing to
the large percentage increase was the unusually low level of expense incurred in
the first quarter of 1996. Management believes that maintenance and repairs
expense will continue a long-term trend of year-over-year increases for the
foreseeable future due to the Company's increasing fleet size and variety of
aircraft types.
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Operating Income
The Company's consolidated operating income decreased 13% for the quarter
ended August 31, 1996 from the prior year.
U.S. domestic operating income was $126 million for the quarter (compared
with $125 million for the prior year). Volume growth (9%) and yield
improvements (2%) were largely offset by an increase in cost per package
(3%) for the quarter, resulting in essentially flat operating income. Yields
improved due to several factors, including the expiration of the air
transportation excise tax and the effect of continuing yield management actions.
Cost per package increased due to increases in maintenance and repairs expense,
aircraft lease expense and aircraft fuel expense, and one less operating day
in the current quarter. U.S. domestic operating margin for the quarter was
6.5%, compared to 7.1% for the same period in the prior year.
The Company's international operating income was $4 million for the quarter
(compared with operating income of $24 million for the prior year). This
decrease is attributable to a decline in airfreight yields and increases in
maintenance and repairs expense and aircraft fuel expense. International
operating margin for the quarter was 0.5%, compared to 3.5% for the same period
in the prior year.
Other Income and Expense and Income Taxes
A decrease in net interest expense of 9% for the quarter was due to lower
debt levels.
Other, net for the quarter ended August 31, 1995, includes gains on sales
of B-727 aircraft.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $155 million at August 31, 1996, and
increased $61 million since May 31, 1996. Cash provided from operations was
$279 million compared with $191 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 flow from operations, its commercial paper program and the revolving bank
credit facility will adequately meet its working capital needs for the
foreseeable future.
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 three months of 1996 totaled $273
million and included three Airbus A310 aircraft, vehicles and ground support
equipment and customer automation and computer equipment. In comparison, prior
year
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expenditures totaled $327 million and included two Airbus A310 aircraft (one of
which, along with two purchased in 1995, was subsequently sold and leased back),
nine Cessna 208 aircraft, deposits on future Airbus A300 aircraft, vehicles 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 in the first quarter of 1996 included the
purchase of an all-cargo route authority between the U.S. and China.
In June 1996, approximately $190 million of pass through certificates were
issued to finance the debt portion of leveraged leases related to two Airbus
A300 and one MD11 aircraft. The pass through certificates are not direct
obligations of, or guaranteed by, the Company, but amounts payable by the
Company under the three leveraged leases are sufficient to pay the principal of
and interest on the certificates.
In July 1996, the Company filed a shelf registration with the Securities
and Exchange Commission for the issuance of up to $1 billion in pass through or
equipment trust certificates, preferred stock, common stock or unsecured debt.
Management believes that the capital resources available to the Company,
including the public and private debt markets for leveraged lease financing,
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 identified in this section.
- 16 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 7 Legal Proceedings in Part I is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1996 Annual Meeting of Stockholders held on October 1, 1996, the
Company's stockholders elected the Class I Directors to serve for a three-year
term expiring at the 1999 Annual Meeting. The tabulation of votes with respect
to each nominee for office was:
Nominee For Withheld
------------------- ---------- --------
Robert H. Allen 50,745,874 504,925
Robert L. Cox 50,745,712 505,087
Paul S. Walsh 50,744,494 506,305
Peter S. Willmott 50,747,477 503,322
The stockholders also ratified the Board of Directors' designation of
Arthur Andersen LLP as independent auditors for the fiscal year ended May 31,
1997 by a vote of 51,111,700 to 69,169 with 70,280 abstentions and broker non-
votes.
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 August 31, 1996, the Registrant filed three
Current Reports on Form 8-K. The first report was dated June 5, 1996 and filed
under Item 7, Financial Statements and Exhibits. The report contained documents
relating to 1996 Pass Through Certificates, Series A1 and A2.
The second report was dated June 7, 1996 and filed under Item 5, Other
Events and reported the filing of a class-action lawsuit against the Company.
The third report was dated August 16, 1996 and filed under Item 5, Other
Events and reported the filing of a class-action lawsuit against the Company.
- 17 -
<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: October 9, 1996 /s/ JAMES S. HUDSON
------------------------------
JAMES S. HUDSON
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 18 -
<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-month periods ended August 31, 1996 and 1995 were as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
August 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Net income applicable to common and
common equivalent shares . . . . . . . . . . . . . . . . . . . $ 61,950 $ 75,334
---------- ----------
---------- ----------
Average shares of common stock outstanding . . . . . . . . . . . 56,922 56,207
Common Equivalent Shares:
Assumed exercise of outstanding dilutive options . . . . . . . 2,616 2,911
Less shares repurchased from proceeds of
assumed exercise of options. . . . . . . . . . . . . . . . . (2,071) (2,430)
---------- ----------
Average common and common equivalent shares. . . . . . . . . . . 57,467 56,688
---------- ----------
---------- ----------
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . $ 1.08 $ 1.33
---------- ----------
---------- ----------
</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,
------------------------------------------------------------------ ------------------------
1992 1993 1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before
income taxes . . . . . . . . . $ (146,828) $ 203,576 $ 378,462 $ 522,084 $ 539,959 $ 129,886 $ 107,739
Add back:
Interest expense, net of
capitalized interest . . . . 176,321 168,762 152,170 130,923 105,449 27,297 22,875
Amortization of debt
issuance costs . . . . . . . 2,570 4,906 2,860 2,493 1,628 436 335
Portion of rent expense
representative of
interest factor. . . . . . . 299,012 262,724 285,261 329,370 386,254 90,028 102,983
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings as adjusted . . . . . . $ 331,075 $ 639,968 $ 818,753 $ 984,870 $1,033,290 $ 247,647 $ 233,932
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fixed Charges:
Interest expense, net of
capitalized interest . . . . . $ 176,321 $ 168,762 $ 152,170 $ 130,923 $ 105,449 $ 27,297 $ 22,875
Capitalized interest . . . . . . 26,603 31,256 29,738 27,381 39,254 10,329 10,036
Amortization of debt
issuance costs . . . . . . . . 2,570 4,906 2,860 2,493 1,628 436 335
Portion of rent expense
representative of
interest factor. . . . . . . . 299,012 262,724 285,261 329,370 386,254 90,028 102,983
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 504,506 $ 467,648 $ 470,029 $ 490,167 $ 532,585 $ 128,090 $136,229
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ratio of Earnings to
Fixed Charges. . . . . . . . . (A) 1.4 1.7 2.0 1.9 1.9 1.7
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
(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 16, 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, 33-55055, 333-03443, and 333-07691 its Report on Form 10-Q for the
quarter ended August 31, 1996, which includes our report dated September 16,
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 FROM THE CONDENSED
CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME ON
PAGES 3-5 OF THE COMPANY'S FORM 10Q FOR THE QUARTERLY PERIOD ENDING AUGUST 31,
1996, 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-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 154,863
<SECURITIES> 0
<RECEIVABLES> 1,324,882
<ALLOWANCES> 33,076
<INVENTORY> 236,740
<CURRENT-ASSETS> 1,812,034
<PP&E> 8,938,027
<DEPRECIATION> 4,735,720
<TOTAL-ASSETS> 6,830,476
<CURRENT-LIABILITIES> 1,669,883
<BONDS> 1,317,812
0
0
<COMMON> 5,695
<OTHER-SE> 2,636,567
<TOTAL-LIABILITY-AND-EQUITY> 6,830,476
<SALES> 0
<TOTAL-REVENUES> 2,692,312
<CGS> 0
<TOTAL-COSTS> 2,562,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,759
<INCOME-PRETAX> 107,739
<INCOME-TAX> 45,789
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,950
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
