<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, 2000, 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 / /
The number of shares of common stock outstanding as of March 31, 2000 was
1,000. The Registrant is a wholly-owned subsidiary of FedEx Corporation, and
there is no market for the Registrant's common stock.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT PERMITTED BY GENERAL INSTRUCTION H(2).
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<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Consolidated Balance Sheets
February 29, 2000 and May 31, 1999.................................................. 3-4
Condensed Consolidated Statements of Income
Three and Nine Months Ended February 29, 2000
and February 28, 1999............................................................... 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 29, 2000
and February 28, 1999............................................................... 6
Notes to Condensed Consolidated Financial Statements................................... 7-9
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants................................................... 10
Report of Independent Public Accountants............................................... 11
Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................. 12-17
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K....................................................... 18
EXHIBIT INDEX.......................................................................... E-1
</TABLE>
- 2 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 29,
2000 May 31,
(Unaudited) 1999
------------ -----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 64,213 $ 88,238
Receivables, less allowances of
$59,114,000 and $45,432,000........................................... 2,039,479 1,840,613
Spare parts, supplies and fuel.......................................... 262,117 272,614
Deferred income taxes................................................... 242,693 220,709
Prepaid expenses and other.............................................. 78,247 56,241
----------- -----------
Total current assets................................................ 2,686,749 2,478,415
Property and Equipment, at Cost.............................................. 13,127,190 12,197,086
Less accumulated depreciation and amortization.......................... 7,070,744 6,454,579
----------- -----------
Net property and equipment.......................................... 6,056,446 5,742,507
Other Assets:
Goodwill................................................................ 330,676 339,425
Other................................................................... 528,896 555,628
----------- -----------
Total other assets.................................................. 859,572 895,053
----------- -----------
$ 9,602,767 $ 9,115,975
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND OWNER'S EQUITY
<TABLE>
<CAPTION>
February 29,
2000 May 31,
(Unaudited) 1999
----------- ----------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt.................................. $ 101,086 $ 14,938
Accrued salaries and employee benefits............................. 534,580 615,247
Accounts payable................................................... 925,738 983,350
Accrued expenses................................................... 749,027 692,599
Due to parent company.............................................. 9,838 62,720
---------- ----------
Total current liabilities...................................... 2,320,269 2,368,854
Long-Term Debt, Less Current Portion.................................... 1,060,709 1,159,126
Deferred Income Taxes................................................... 230,859 221,509
Other Liabilities....................................................... 1,814,802 1,502,481
Commitments (Note 4)
Owner's Equity:
Common Stock, $.10 par value;
1,000 shares authorized, issued and outstanding.................. -- --
Additional paid-in capital......................................... 894,718 894,718
Retained earnings ................................................. 3,307,296 2,995,076
Accumulated other comprehensive income............................. (25,886) (25,789)
---------- ----------
Total owner's equity........................................... 4,176,128 3,864,005
---------- ----------
$9,602,767 $9,115,975
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
<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,
2000 1999 2000 1999
---------- ---------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Revenues...................................... $3,757,833 $3,430,708 $11,080,666 $10,330,127
Operating Expenses:
Salaries and employee benefits........... 1,685,888 1,546,285 4,934,799 4,628,789
Rentals and landing fees................. 356,535 343,827 1,068,108 985,345
Depreciation and amortization............ 256,019 233,268 743,220 675,156
Maintenance and repairs.................. 252,726 219,363 749,211 666,195
Fuel..................................... 247,732 143,664 645,881 441,097
Other.................................... 815,539 849,027 2,375,894 2,368,260
---------- ---------- ----------- -----------
3,614,439 3,335,434 10,517,113 9,764,842
---------- ---------- ----------- -----------
Operating Income.............................. 143,394 95,274 563,553 565,285
Other Income (Expense):
Interest, net............................ (20,643) (21,967) (59,192) (64,816)
Other, net............................... 8,636 (8,063) 11,705 (14,230)
---------- ---------- ---------- -----------
(12,007) (30,030) (47,487) (79,046)
---------- ---------- ---------- -----------
Income Before Income Taxes.................... 131,387 65,244 516,066 486,239
Provision for Income Taxes.................... 51,898 22,214 203,846 196,927
---------- ---------- ----------- -----------
Net Income.................................... $ 79,489 $ 43,030 $ 312,220 $ 289,312
========== ========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
February 29, February 28,
2000 1999
----------- -----------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities.............................. $ 646,177 $ 950,433
Investing Activities:
Purchases of property and equipment............................... (1,021,818) (1,175,822)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions................................... - 80,995
Reimbursements of A300 and MD11 deposits...................... 24,377 25,130
Other dispositions............................................ 140,916 141,955
Other, net........................................................ (1,548) 5,088
----------- ----------
Net cash used in investing activities.................................. (858,073) (922,654)
Financing Activities:
Principal payments on debt........................................ (12,500) (167,668)
Net receipts from parent company.................................. 200,371 115,271
----------- -----------
Net cash provided by (used in) financing activities.................... 187,871 (52,397)
----------- -----------
Net decrease in cash and cash equivalents.............................. (24,025) (24,618)
Cash and cash equivalents at beginning of period....................... 88,238 104,606
----------- -----------
Cash and cash equivalents at end of period............................. $ 64,213 $ 79,988
=========== ===========
Cash payments for:
Interest (net of capitalized interest)............................ $ 59,678 $ 65,454
=========== ===========
Income taxes...................................................... $ 223,048 $ 247,918
=========== ===========
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines)......................... $ 19,450 $ 39,881
Fair value of assets acquired under
exchange agreements............................................. 26,190 21,603
----------- -----------
Fair value of assets surrendered (under) over
fair value of assets acquired................................... $ (6,740) $ 18,278
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements of Federal Express Corporation (the
"Company") 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 the Company's Annual Report on Form 10-K for the
year ended May 31, 1999. 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 the Company as of
February 29, 2000 and the consolidated results of its operations for the
three and nine-month periods ended February 29, 2000 and February 28, 1999,
and its consolidated cash flows for the nine-month periods ended February 29,
2000 and February 28, 1999. Operating results for the three and nine-month
periods ended February 29, 2000 are not necessarily indicative of the results
that may be expected for the year ending May 31, 2000.
On May 31, 1999, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Statement establishes
standards for reporting information about operating segments. The Company is
in a single line of business and operates in one business segment - the
worldwide express transportation and distribution of goods and documents.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was subsequently
amended by SFAS No. 137 and is now effective for fiscal years beginning after
June 15, 2000. The Statement requires an entity to recognize all derivatives
as either assets or liabilities in the balance sheet and to measure those
instruments at fair value. The impact, if any, on earnings, comprehensive
income and financial position of the adoption of SFAS No. 133 will depend on
the amount, timing and nature of any agreements entered into by the Company.
Management has not yet completed its estimate of the effect of the adoption
of this Statement.
FedEx Corporation, the Company's parent, has entered into contracts on
behalf of the Company which are designed to limit the Company's exposure to
fluctuations in jet fuel prices. Under these contracts, FedEx Corporation
makes (or receives) payments based on the difference between a fixed price
and the market price of jet fuel, as determined by an index of spot market
prices representing various geographic regions. The difference is recorded as
an increase or decrease in fuel expense. As of early April 2000, contracts in
place to fix the price of jet fuel cover approximately half of the estimated
usage for the fourth quarter of 2000. Through early April 2000, contracts
covering 2001 fix the price of approximately one-third of the estimated
requirements for jet fuel.
Certain prior period amounts have been reclassified to conform to the
current presentation.
- 7 -
<PAGE>
(2) COMPREHENSIVE INCOME
The following table provides a reconciliation of net income reported
in the Company's consolidated financial statements to comprehensive income
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income....................................... $ 79,489 $ 43,030 $312,220 $289,312
Other comprehensive income:
Foreign currency translation
adjustments ................................ (3,710) (5,000) 702 415
Tax effect.................................... (68) 845 (799) 937
-------- -------- -------- --------
Net of tax.................................. (3,778) (4,155) (97) 1,352
-------- -------- -------- --------
Comprehensive income ..................... $ 75,711 $ 38,875 $312,123 $290,664
======== ======== ======== ========
</TABLE>
(3) LONG-TERM DEBT
Unsecured sinking fund debentures in the amount of $100,000,000 and
the related discount are included in current portion of long-term debt, as
the Company gave notice to call the bonds on January 25, 2000. The bonds,
which were redeemed on March 1, 2000, were originally due through 2020.
Interest accrued at the rate of 9.63% through the redemption date. A charge
of approximately $6,000,000 representing the premium paid to the holders of
the bonds retired and write-off of the related unamortized deferred finance
charges and remaining unamortized discount was incurred upon redemption and
will be recognized in the Company's fourth quarter. The bond redemption was
financed through borrowings from the Company's parent, FedEx Corporation.
(4) COMMITMENTS
As of February 29, 2000, the Company's purchase commitments for the
remainder of 2000 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>
2000 (remainder) $ 65,700 $121,000 $133,700 $320,400
2001 188,100 326,900 167,300 682,300
2002 242,800 375,500 12,500 630,800
2003 439,600 463,900 7,600 911,100
2004 235,200 450,800 7,600 693,600
</TABLE>
(1) Primarily aircraft modifications, rotables, spare parts and spare
engines.
(2) Primarily vehicles, facilities, computers and other equipment.
The Company is committed to purchase three DC10s, 29 MD11s and 75
Ayres ALM 200s to be delivered through 2007. Deposits and progress payments
of $7,150,000 have been made toward these purchases.
The Company has entered into agreements with two airlines to acquire
53 DC10 aircraft (48 of which had been received as of February 29, 2000),
spare parts, aircraft engines and other equipment, and maintenance services,
in exchange for a combination of aircraft engine noise reduction kits and
cash. Delivery of these aircraft began in 1997 and will continue through
2001. Additionally, these
- 8 -
<PAGE>
airlines may exercise put options through December 31, 2003, requiring FedEx
to purchase up to 21 additional DC10s along with additional aircraft engines
and equipment.
During the nine-month period ended February 29, 2000, the Company
acquired five A300s and one MD11 under operating leases. These aircraft were
included as purchase commitments as of May 31, 1999. 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, 1999 for the five A300s and one
MD11 are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 17,700
2001 33,800
2002 32,500
2003 32,900
2004 34,600
Thereafter 740,400
</TABLE>
(5) RELATED PARTY TRANSACTIONS
As of February 29, 2000, the Company had a net balance due to its
parent, FedEx Corporation, of $128,948,000. Included in the net payable
amount is an intercompany operating payable of $9,838,000 included in Current
Liabilities and $119,110,000 included in Other Liabilities. The net amount
due from FedEx Corporation as of May 31, 1999 was $18,541,000. This amount
comprises an intercompany operating payable of $62,720,000 included in
Current Liabilities and $81,300,000 included in Other Assets. The long-term
amounts primarily represent the net activity from participation in FedEx
Corporation's consolidated cash management program.
- 9 -
<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, 2000, and the related condensed consolidated statements of
income for the three and nine-month periods ended February 29, 2000 and
February 28, 1999 and the condensed consolidated statements of cash flows for
the nine-month periods ended February 29, 2000 and February 28, 1999,
included herein, as indicated in their report thereon included on page 11.
- 10 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Federal Express Corporation:
We have reviewed the accompanying condensed consolidated balance sheet
of Federal Express Corporation (a Delaware corporation) and subsidiaries as
of February 29, 2000 and the related condensed consolidated statements of
income for the three and nine-month periods ended February 29, 2000 and
February 28, 1999 and the condensed consolidated statements of cash flows for
the nine-month periods ended February 29, 2000 and February 28, 1999. 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 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, 1999 and the related consolidated
statements of income, changes in owner's equity and comprehensive income and
cash flows for the year then ended. In our report dated June 29, 1999, 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, 1999 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 22, 2000
- 11 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Consolidated Results
Results for the third quarter ended February 29, 2000 continued to
reflect the effects of higher fuel prices, partially offset by strong
international growth and the effects of the Company's cost containment
initiatives. Increased fuel prices negatively affected third quarter and
year-to-date expenses by $102 million and $187 million compared to the
comparable periods in the prior year. The third quarter also included two
more operating days compared to the prior year. The prior year's third
quarter results included $91 million in pre-tax expenses associated with
strike contingency planning ($81 million affecting operating income).
In response to higher fuel costs, the Company implemented a fuel
surcharge of 3% on most U.S. domestic and international services effective
February 1, 2000. In March 2000, the Company announced that it would increase
the current fuel surcharge to 4%, effective April 1, 2000. The surcharge
applies to all shipments tendered within the United States and all U.S.
export shipments, where legally and contractually possible. FedEx
Corporation, the Company's parent, has also entered into contracts designed
to limit the Company's exposure to the higher year-over-year jet fuel prices.
The combination of the surcharge and the hedging program is expected to
mitigate the increased year-over-year fuel cost for the fourth quarter.
Strong package volume growth in certain international markets
contributed positively to earnings for the third quarter and year-to-date
periods. Cost controls to align short-term spending with current business
growth levels combined with productivity enhancements helped offset the
effects of lower than expected volume growth in U.S. domestic markets. These
trends are expected to continue for the remainder of 2000.
During the third quarter FedEx Corporation announced a major
rebranding and reorganization initiative that management believes will enable
the Company to compete better collectively while retaining its current
independent operating structure. The new branding strategy extended the FedEx
brand name to three of FedEx Corporation's subsidiaries and the holding
company. These organizational changes are designed to enhance revenue growth
by centralizing the sales, marketing and customer service functions of FedEx
Corporation's two largest business segments, effective June 1, 2000.
Actual results for the remainder of 2000 may vary depending upon many
factors such as economic growth rates, rates of volume growth in U.S.
domestic markets, the actions of competitors, the spot prices of aviation and
diesel fuel, the extent to which the Company enters into additional contracts
designed to limit its exposure to fluctuations in jet fuel prices, the
duration of the fuel surcharge and any other pricing actions and the impact
those actions may have on demand for the Company's services.
- 12 -
<PAGE>
The following table compares revenues and operating income (in
millions) and selected statistics (in thousands, except yield amounts) for
the three- and nine-month periods ended February 29, 2000 and February 28,
1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Three Months Ended Percent Nine Months Ended Percent
2000 1999 Change 2000 1999 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Package:
U.S. overnight $ 1,875 $ 1,752 + 7 $ 5,552 $ 5,308 + 5
U.S. deferred 642 584 +10 1,789 1,686 + 6
International Priority (IP) 887 730 +21 2,586 2,218 +17
------- ------- ------- -------
Total package revenue 3,404 3,066 +11 9,927 9,212 + 8
Freight:
U.S. 141 108 +30 415 315 +32
International 117 129 -10 370 402 - 8
------- ------- ------- -------
Total freight revenue 258 237 + 9 785 717 + 9
Other 96 128 -24 369 401 - 8
------- ------- ------- -------
Total revenues $ 3,758 $ 3,431 +10 $11,081 $10,330 + 7
======= ======= ======= =======
Operating income $ 143 $ 95 +51 $ 564 $ 565 -
======= ======= ======= =======
Package statistics:
Average daily packages:
U.S. overnight 2,042 1,995 + 2 2,002 1,942 + 3
U.S. deferred 991 966 + 3 914 897 + 2
IP 318 279 +14 312 276 +13
------- ------- ------- -------
Total packages 3,351 3,240 + 3 3,228 3,115 + 4
Revenue per package (yield):
U.S. overnight $ 14.35 $ 14.16 + 1 $ 14.45 $ 14.31 + 1
U.S. deferred 10.12 9.76 + 4 10.19 9.84 + 4
IP 43.60 42.14 + 3 43.12 42.02 + 3
Package composite 15.87 15.26 + 4 16.02 15.48 + 3
Freight statistics:
Average daily pounds:
U.S. 4,607 4,391 + 5 4,742 4,261 +11
International 2,265 2,645 -14 2,448 2,661 - 8
------- ------- ------- -------
Total freight 6,872 7,036 - 2 7,190 6,922 + 4
Revenue per pound (yield):
U.S. $ .48 $ .40 +20 $ .46 $ .39 +18
International .81 .79 + 3 .79 .79 -
Freight composite .59 .54 + 9 .57 .54 + 6
========================================================================================================
</TABLE>
- 13 -
<PAGE>
Revenues
Total revenue increased by 10% in the third quarter and 7% for the
nine-month period; however, growth in U.S. domestic overnight package volume
continued to be lower than long-term growth goals. Strong revenue growth in
higher-yielding IP services, especially in Asia and Europe, continued in the
third quarter and is expected to stay strong for the remainder of the fiscal
year. U.S deferred package revenue growth for the third quarter and
year-to-date periods matched anticipated levels as management continues to
slow the growth of these lower-yielding services. List price increases,
including an average 2.8% domestic rate increase in March 1999, the 3% fuel
surcharge implemented in February 2000 and the Company's ongoing
yield-management program also contributed to the slight increase in yields in
the third quarter. In an effort to stimulate U.S. domestic revenue growth in
higher-yielding package products, the Company is realigning its sales force.
The changes will include a greater emphasis on small and medium-sized
customers and modifications to the sales incentive program to target
higher-yielding packages. Management believes that these actions should
improve the long-term growth of express packages and improve market share,
which has eroded slightly in the current year. Actual results, however, may
vary depending on a number of factors, including the effective execution of
the sales force realignment, the impact of competitive pricing changes,
customer responses to yield-management initiatives and the fuel surcharge,
changing customer demand patterns, actions by the Company's competitors,
regulatory conditions for aviation rights and general economic conditions.
Total freight revenue increased in the third quarter and year-to-date
periods due to higher average daily pounds and improved yields in U.S.
freight, offset by declines in international freight pounds.
Other revenue included charter services, sales of engine noise
reduction kits, Canadian domestic revenue, logistics services and other.
Operating Income
Operating income for the third quarter and year-to-date periods
reflects the impact of higher fuel costs, offset partially by higher growth
in international shipments. Slower than expected growth in U.S. package
services also negatively impacted operating income during the year-to-date
period. The prior year's third quarter included $81 million in strike
contingency costs related to contracts for supplemental airlift and ground
transportation.
Fuel expenses increased 72% and 46% for the third quarter and
year-to-date periods. For the third quarter, average cost per gallon for
aircraft fuel increased 79% and gallons consumed increased 2%. Year to date,
average cost per gallon increased 45% and gallons consumed increased 5%. In
order to offset most of the effects of substantially higher fuel costs, the
Company implemented a fuel surcharge of 3% on most U.S. domestic and
international services effective February 1, 2000. In March 2000, the Company
announced that it would increase the surcharge to 4%, effective April 1,
2000. The surcharge will apply to all shipments tendered within the United
States and all U.S. export shipments, where legally and contractually
possible.
Additionally, FedEx Corporation has entered into contracts, on behalf
of the Company, designed to limit its exposure to jet fuel price
fluctuations. These contracts did not materially affect fuel expense during
the third quarter. As of early April 2000, contracts in place to fix the
price of jet fuel cover approximately 50% of the estimated usage for the
fourth quarter of 2000 and approximately one-third of the estimated
requirements for jet fuel in 2001.
- 14 -
<PAGE>
In light of lower than expected U.S. domestic package volume growth,
the Company continues to execute cost containment and productivity
enhancement programs. By lowering discretionary spending and limiting
staffing additions, management expects to align controllable costs with
current business growth; however, these actions will not affect plans for
strategic spending in support of long-term growth goals. The actual impact of
the fuel surcharge, the jet fuel price contracts and management's cost
containment actions on operating income will depend on a number of factors
such as the impact of competitive pricing changes, customer responses to
yield-management initiatives, the actual price of jet fuel, changing customer
demand patterns, actions by the Company's competitors and general economic
conditions.
Rentals and landing fees increased at a rate higher than revenues for
the nine months ended February 29, 2000, due to an increase in aircraft
leases entered into based on anticipated needs. Aircraft lease expense for
the third quarter and year-to-date period rose 12% and 14%. As of February
29, 2000, the Company had 102 wide-bodied aircraft under operating lease
compared with 93 as of February 28, 1999.
Maintenance and repairs increased 15% in the third quarter and 12%
year to date. Given the Company's increasing fleet size and age and variety
of aircraft types, management believes that maintenance and repairs expense
will continue to increase for the remainder of 2000. In part, this higher
expense will likely be attributed to scheduled maintenance and repairs and a
greater number of routine cycle checks resulting from fleet usage and certain
Federal Aviation Administration directives.
Salaries and employee benefits increased 9% in the third quarter and
7% for the year-to-date period due to higher costs in connection with the
agreement with the Fedex Pilots Association that became effective May 31,
1999 and a slight increase in the number of employees.
Contributions from the sales of engine noise reduction kits declined
$15 million for the quarter and $43 million year to date. Management expects
declines for the remainder of the calendar year, after which it expects
minimal sales of these kits.
Other Income and Expense and Income Taxes
Net interest expense decreased in both the third quarter and the
year-to-date period compared to prior year due to lower average debt levels.
Other, net for the third quarter includes an $11 million gain from the sale
of securities held by the Company. The prior year's third quarter included
approximately $10 million of non-operating expenses related to the Company's
strike contingency plans. The Company's effective tax rate for the third
quarter and year-to-date periods was 39.5%. The prior year third quarter
effective tax rate of 34% reflected the decrease of the year-to-date tax rate
from 41.5% to 40.5%. The year-over-year decline in the effective tax rate is
primarily due to stronger results from international operations.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $64 million at February 29, 2000,
compared to $88 million at May 31, 1999. Cash flows from operating activities
for the nine-month period ended February 29, 2000 totaled $646 million,
compared to $950 million for the prior year period.
- 15 -
<PAGE>
On January 25, 2000, the Company gave notice to call $100 million of
9.63% unsecured sinking fund debentures. The bonds, which were originally due
through 2020, were redeemed on March 1, 2000. The bond redemption was
financed through borrowings from FedEx Corporation.
Management believes that cash flow from operations, FedEx
Corporation's commercial paper program and revolving bank credit facility and
other borrowing arrangements will adequately meet the Company's working
capital needs for the foreseeable future.
Capital Resources
The Company's operations are capital intensive, characterized by
significant investments in aircraft, vehicles, computer and
telecommunications equipment, package handling facilities and sort equipment.
The amount and timing of capital additions depend on various factors
including volume growth, domestic and international economic conditions, new
or enhanced services, geographical expansion of services, competition,
availability of satisfactory financing and actions of regulatory authorities.
Capital expenditures for the first nine months of 2000 totaled $1.022
billion and included aircraft, aircraft modifications, vehicles and ground
support equipment, customer automation and computer equipment and facilities.
In 1999 expenditures primarily included one MD11, aircraft modifications,
vehicles and ground support equipment and customer automation and computer
equipment. As a result of lower than expected U.S. domestic volume growth,
the Company has reduced planned capital expenditures for 2000 by
approximately $180 million; however, the Company plans to continue to make
strategic capital investments in support of its long-term growth goals. For
information on the Company's purchase commitments, see Note 4 of Notes to
Condensed Consolidated Financial Statements.
Management believes that the capital resources available to the Company
provide flexibility to access the most efficient markets for financing its
capital acquisitions, including aircraft, and are adequate for the Company's
future capital needs.
Market Risk Sensitive Instruments and Positions
There have been no material changes in the Company's market risk
sensitive instruments and positions since its disclosure in its Annual Report
on Form 10-K for the year ended May 31, 1999.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European
Union fixed conversion rates between their existing sovereign currencies
("legacy currencies") and a single currency called the euro. On January 4,
1999, the euro began trading on currency exchanges and became available for
non-cash transactions. The legacy currencies will remain legal tender through
December 31, 2001. Beginning January 1, 2002, euro-denominated bills and
coins will be introduced, and by July 1, 2002, legacy currencies will no
longer be legal tender.
Since January 1, 1999, the Company's subsidiaries have been able to
quote rates to customers, generate billings and accept payments, in both euro
and legacy currencies. Based on the work of the Company's euro task forces to
date, the Company believes that the introduction of the euro, any price
transparency brought about by its introduction and the phasing out of the
legacy currencies
- 16 -
<PAGE>
will not have a material impact on the Company's consolidated financial
position, results of operations or cash flows. Costs associated with the euro
project are being expensed as incurred and are being funded entirely by
internal cash flows.
YEAR 2000 COMPLIANCE
The Company relies heavily on sophisticated information technology
("IT") for its business operations. The Company's Year 2000 ("Y2K") computer
compliance issues were, therefore, broad and complex. The Company's Y2K
Project Office, which was established in 1996, coordinated and supported the
Company's continuing Y2K compliance effort.
Nothing has come to the Company's attention which would cause it to
believe that its Y2K compliance effort was not successful. While the Company
will continue to monitor for Y2K-related problems, to date no significant Y2K
issues have been encountered. Contingency plans for the Company, including
those covering vendor and supplier issues, continue to be in place to
minimize Y2K-related risks, if any, including those that vendors and
suppliers might pose if they are behind in their own Y2K efforts.
Since 1996, the Company has incurred approximately $99 million on Y2K
compliance ($17 million in the first nine months of 2000), which includes
internal and external software/hardware analysis, repair, vendor and supplier
assessments, risk mitigation planning and related costs. The Company
continues to monitor its total expected costs associated with Y2K compliance
efforts, and does not expect to incur any material additional Y2K-related
costs. The Company classified costs as Y2K for reporting purposes if they
remedied only Y2K risks or resulted in the formulation of contingency plans
and would have otherwise been unnecessary in the normal course of business.
The Company's Y2K compliance effort was funded entirely by internal
cash flows. For 2000, Y2K expenditures are expected to be less than 10% of
the Company's total Information Technology expense budget. Although there
were opportunity costs to the Company's Y2K compliance effort, management
believes that no significant information technology projects were deferred
due to this work.
* * *
CERTAIN STATEMENTS CONTAINED IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
SUCH AS STATEMENTS RELATING TO MANAGEMENT'S VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM HISTORICAL EXPERIENCE OR FROM FUTURE RESULTS EXPRESSED
OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, ECONOMIC AND COMPETITIVE
CONDITIONS IN THE MARKETS WHERE THE COMPANY OPERATES, MATCHING CAPACITY TO
VOLUME LEVELS AND OTHER UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE
COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
</TABLE>
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended
February 29, 2000.
- 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: April 12, 2000 /s/ MICHAEL W. HILLARD
---------------------------------------
MICHAEL W. HILLARD
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
- 19 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
</TABLE>
E-1
<PAGE>
EXHIBIT 12.1
FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
February 28 and
Year Ended May 31, February 29,
------------------------------------------------------------ ---------------------
1995 1996 1997 1998 1999 1999 2000
-------- ---------- ---------- ---------- ---------- -------- ----------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes.............. $522,084 $ 539,959 $ 628,221 $ 735,213 $ 770,700 $486,239 $ 516,066
Add back:
Interest expense, net of
capitalized interest................ 130,923 105,449 95,689 117,726 90,595 68,282 62,092
Amortization of debt
issuance costs...................... 2,493 1,628 1,328 1,339 9,199 8,949 461
Portion of rent expense
representative of
interest factor..................... 329,370 386,254 434,846 499,823 535,486 403,904 429,003
-------- ---------- ---------- ---------- ---------- -------- ----------
Earnings as adjusted.................... $984,870 $1,033,290 $1,160,084 $1,354,101 $1,405,980 $967,374 $1,007,622
======== ========== ========== ========== ========== ======== ==========
Fixed Charges:
Interest expense, net of
capitalized interest.................. $130,923 $ 105,449 $ 95,689 $ 117,726 $ 90,595 $ 68,282 $ 62,092
Capitalized interest.................... 27,381 39,254 39,449 31,443 35,152 27,500 22,656
Amortization of debt
issuance costs........................ 2,493 1,628 1,328 1,339 9,199 8,949 461
Portion of rent expense
representative of
interest factor....................... 329,370 386,254 434,846 499,823 535,486 403,904 429,003
-------- ---------- ---------- ---------- ---------- -------- ----------
$490,167 $ 532,585 $ 571,312 $ 650,331 $ 670,432 $508,635 $ 514,212
======== ========== ========== ========== ========== ======== ==========
Ratio of Earnings to Fixed Charges...... 2.0 1.9 2.0 2.1 2.1 1.9 2.0
======== ========== ========== ========== ========== ======== ==========
</TABLE>
<PAGE>
EXHIBIT 15.1
March 22, 2000
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, 333-49411 and 333-80001 its
Report on Form 10-Q for the quarter ended February 29, 2000, which includes
our report dated March 22, 2000 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 SHEET AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME ON PAGES 3-5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDING
FEBRUARY 29, 2000 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-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 64,213
<SECURITIES> 0
<RECEIVABLES> 2,098,593
<ALLOWANCES> 59,114
<INVENTORY> 262,117
<CURRENT-ASSETS> 2,686,749
<PP&E> 13,127,190
<DEPRECIATION> 7,070,744
<TOTAL-ASSETS> 9,602,767
<CURRENT-LIABILITIES> 2,320,269
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,176,128
<TOTAL-LIABILITY-AND-EQUITY> 9,602,767
<SALES> 0
<TOTAL-REVENUES> 11,080,666
<CGS> 0
<TOTAL-COSTS> 10,517,113
<OTHER-EXPENSES> (11,705)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,192
<INCOME-PRETAX> 516,066
<INCOME-TAX> 203,846
<INCOME-CONTINUING> 312,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312,220
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
