<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 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.)
3610 Hacks Cross Road
Memphis, Tennessee 38125
(Address of principal (Zip Code)
executive offices)
(901) 369-3600
(Registrant's telephone number, including area code)
2005 Corporate Avenue, Memphis, TN 38132
------------------------------------------
Former name, former address or former fiscal year,
if changed since last report
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 December 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).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets
November 30, 2000 and May 31, 2000.............................. 3-4
Condensed Consolidated Statements of Income
Three and Six-Months Ended November 30, 2000 and 1999........... 5
Condensed Consolidated Statements of Cash Flows
Six-Months Ended November 30, 2000
and November 30, 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
ITEM 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition.............................. 12-15
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk........ 16
PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K............................... 17
Signatures........................................................ 18
EXHIBIT INDEX..................................................... E-1
</TABLE>
-2-
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
November 30,
2000 May 31,
(Unaudited) 2000
----------- ----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents....................................................$ 92,591 $ 88,630
Receivables, less allowances of
$62,604,000 and $56,517,000................................................ 2,133,610 2,088,854
Spare parts, supplies and fuel............................................... 240,936 247,372
Deferred income taxes........................................................ 288,156 247,802
Prepaid expenses and other................................................... 35,284 69,139
----------- -----------
Total current assets..................................................... 2,790,577 2,741,797
Property and Equipment, at Cost................................................... 11,597,307 12,958,570
Less accumulated depreciation and amortization............................... 6,172,651 6,846,647
----------- -----------
Net property and equipment............................................... 5,424,656 6,111,923
Other Assets:
Goodwill..................................................................... 332,623 327,765
Due from parent.............................................................. 341,485 86,890
Other........................................................................ 513,432 472,164
----------- -----------
Total other assets....................................................... 1,187,540 886,819
----------- -----------
$ 9,402,773 $ 9,740,539
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND OWNER'S EQUITY
November 30,
2000 May 31,
(Unaudited) 2000
----------- ----------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt............................................ $ 22,339 $ 6,339
Accrued salaries and employee benefits....................................... 617,994 636,375
Accounts payable............................................................. 984,647 956,929
Accrued expenses............................................................. 843,533 805,800
Due to parent company........................................................ 8,468 16,425
---------- ----------
Total current liabilities................................................ 2,476,981 2,421,868
Long-Term Debt, Less Current Portion.............................................. 1,038,551 1,054,430
Deferred Income Taxes............................................................. 127,997 240,569
Other Liabilities................................................................. 1,702,868 1,657,405
Commitments (Note 3)
Owner's Equity:
Common Stock, $.10 par value;
1,000 shares authorized, issued and outstanding............................ - -
Additional paid-in capital................................................... 297,688 894,718
Retained earnings ........................................................... 3,806,272 3,505,422
Accumulated other comprehensive income....................................... (47,584) (33,873)
---------- ----------
Total owner's equity..................................................... 4,056,376 4,366,267
---------- ----------
$9,402,773 $9,740,539
========== ==========
</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 Six Months Ended
November 30, November 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Revenues..........................................$3,981,092 $3,736,027 $7,896,773 $7,322,833
Operating Expenses:
Salaries and employee benefits .............. 1,582,184 1,639,851 3,177,634 3,248,911
Purchased transportation..................... 146,876 138,571 297,236 269,923
Rentals and landing fees..................... 354,267 364,831 697,779 711,573
Depreciation and amortization................ 200,687 245,124 397,951 487,201
Fuel......................................... 300,505 217,328 541,094 398,149
Maintenance and repairs...................... 238,114 258,204 505,835 496,485
Intercompany charges (Note 5)................ 345,508 21,121 672,654 36,295
Other........................................ 542,441 639,781 1,078,352 1,254,137
---------- ---------- ---------- ----------
3,710,582 3,524,811 7,368,535 6,902,674
---------- ---------- ---------- ----------
Operating Income.................................. 270,510 211,216 528,238 420,159
Other Income (Expense):
Interest, net................................ (18,586) (19,525) (37,899) (38,549)
Other, net................................... 725 4,218 (1,153) 3,069
---------- ---------- ---------- ----------
(17,861) (15,307) (39,052) (35,480)
---------- ---------- ---------- ----------
Income Before Income Taxes........................ 252,649 195,909 489,186 384,679
Provision for Income Taxes........................ 97,270 77,384 188,337 151,948
---------- ---------- ---------- ----------
Net Income........................................$ 155,379 $ 118,525 $ 300,849 $ 232,731
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
---------------------------
2000 1999
---------- --------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities.........................................$ 692,130 $ 531,341
Investing Activities:
Purchases of property and equipment.......................................... (516,972) (706,584)
Proceeds from disposition of property
and equipment:
Sales-leaseback transaction.............................................. 80,000 -
Reimbursements of A300 and MD11 deposits................................. - 24,377
Other dispositions....................................................... 5,053 139,647
Other, net................................................................... (1,655) 408
----------- ----------
Net cash used in investing activities............................................. (433,574) (542,152)
Financing Activities:
Principal payments on debt................................................... - (12,500)
Net (payments) receipts from parent company.................................. (254,595) 22,371
----------- -----------
Net cash (used in) provided by financing activities............................... (254,595) 9,871
----------- -----------
Net increase (decrease) in cash and cash equivalents.............................. 3,961 (940)
Cash and cash equivalents at beginning of period.................................. 88,630 88,238
----------- -----------
Cash and cash equivalents at end of period........................................$ 92,591 $ 87,298
=========== ===========
Cash payments for:
Interest (net of capitalized interest).......................................$ 41,933 $ 40,841
=========== ===========
Income taxes.................................................................$ 256,108 $ 150,948
=========== ===========
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines)....................................$ - $ 19,450
Fair value of assets acquired under
exchange agreements........................................................ 1,785 18,903
----------- -----------
Fair value of assets surrendered (under) over
fair value of assets acquired..............................................$ (1,785) $ 547
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements of Federal Express Corporation ("FedEx
Express" or 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, 2000. 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 November 30,
2000 and the consolidated results of its operations for the three- and
six-month periods ended November 30, 2000 and 1999, and cash flows for the
six-month periods ended November 30, 2000 and 1999. Operating results for the
three- and six-month periods ended November 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending May 31,
2001.
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 Statements of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was subsequently amended by SFAS No.
137 and SFAS No. 138 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 FedEx Express that are designed to limit its exposure to
fluctuations in jet fuel prices. Under these contracts, the Company's parent
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. Under jet fuel hedging contracts,
the Company received $30,493,000 for the second quarter of 2001 and
$57,427,000 for the first half of 2001. Through the first half of 2000, there
were no such settlements. As of November 30, 2000, contracts in place to fix
the price of jet fuel covered a total notional volume of 521,920,000 gallons
through 2002. Based on current market prices, the fair value of these jet
fuel hedging contracts was an asset of approximately $14,534,000 at November
30, 2000 and $51,060,000 at May 31, 2000. As of December 31, 2000, contracts
in place to fix the price of jet fuel covered approximately 41% of the
expected jet fuel usage for 2001 and approximately 33% through 2002.
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:
<TABLE>
<CAPTION>
Three Months
Ended November 30,
--------------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
Net income................................................................... $155,379 $118,525
Other comprehensive income:
Foreign currency translation adjustments,
net of deferred tax benefit of $2,486,000 and
deferred taxes of $577,000............................................... (11,453) 2,476
-------- --------
Comprehensive income....................................................... $143,926 $121,001
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended November 30,
--------------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
Net income................................................................... $300,849 $232,731
Other comprehensive income:
Foreign currency translation adjustments,
net of deferred tax benefit of $3,749,000 and
deferred taxes of $732,000............................................... (13,710) 3,681
-------- --------
Comprehensive income....................................................... $287,139 $236,412
======== ========
</TABLE>
(3) COMMITMENTS
As of November 30, 2000, the Company's purchase commitments for the
remainder of 2001 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>
2001 (remainder) $186,700 $263,400 $145,500 $595,600
2002 400,500 421,500 15,100 837,100
2003 482,300 516,700 300 999,300
2004 354,100 479,900 - 834,000
2005 176,100 512,900 - 689,000
</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 11 DC10s, 29 MD11s, 8 A300s, 8 A310s,
and 75 Ayres ALM 200s to be delivered through 2006. Deposits and progress
payments of $9,050,000 have been made toward these purchases.
The Company has entered into agreements with two airlines to acquire 53
DC10 aircraft (49 of which had been received as of November 30, 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 airlines may exercise put options through December 31, 2003,
requiring FedEx Express to purchase up to 12 additional DC10s along with
additional aircraft engines and equipment.
- 8 -
<PAGE>
Lease commitments added since May 31, 2000 for the one MD11 purchased in
2000 and subsequently sold and leased back, are as follows (in thousands):
<TABLE>
<S> <C>
2001 $ 1,025
2002 5,011
2003 6,719
2004 6,568
2005 7,076
Thereafter 116,122
</TABLE>
(4) RELATED PARTY TRANSACTIONS
The following table represents FedEx Express' related party balances
outstanding at November 30, 2000 and May 31, 2000 (in thousands). The long-term
amounts primarily represent the net activity from participation in FedEx
Corporation's consolidated cash management program.
<TABLE>
<CAPTION>
November 30, 2000 Other
Current Other Assets Current Due From/
Assets (Non-Current) Liabilities (Due To)
------- ------------- ----------- --------
<S> <C> <C> <C> <C>
FedEx Corporation $ - $341,485 $ (8,468) $333,017
Other Corporate
Subsidiaries 8,175 - (87,408) (79,233)
-------------------------------------------------------------------------------
May 31, 2000 Other
Current Other Assets Current Due From/
Assets (Non-Current) Liabilities (Due To)
------- ------------- ----------- --------
FedEx Corporation $ - $ 86,890 $ (16,425) $ 70,465
Other Corporate
Subsidiaries - - - -
-------------------------------------------------------------------------------
</TABLE>
(5) INTERCOMPANY TRANSACTIONS
The formation of FedEx Services Inc., ("FedEx Express"), a subsidiary of
the Company's parent, FedEx Corporation, has changed the way certain costs are
captured and allocated between the various FedEx Corporation operating segments.
For example, salaries, wages and benefits, depreciation and other costs for the
sales, marketing and information technology departments previously incurred at
FedEx Express are now incurred at FedEx Services and allocated to FedEx
Corporation's operating segments using various relevant metrics and are
included in the line item "Intercompany charges". Consequently, certain expense
data presented is not comparable to prior periods. The Company's parent believes
the total amounts allocated to FedEx Express reasonably reflect the cost of
providing such services.
In addition, certain net assets owned by FedEx Express were transferred to
FedEx Corporation in connection with the formation of FedEx Services.
- 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 November 30,
2000, and the related condensed consolidated statements of income for the
three- and six-month periods ended November 30, 2000 and 1999, and the condensed
consolidated statements of cash flows for the six-month periods ended November
30, 2000 and 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
November 30, 2000 and the related condensed consolidated statements of income
for the three- and six-month periods ended November 30, 2000, and the condensed
consolidated statements of cash flows for the six-month periods ended November
30, 2000 and 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Federal Express
Corporation as of May 31, 2000 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 27, 2000, 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, 2000 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
December 19, 2000
- 11 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table compares revenues and operating income (in millions)
and selected statistics (in thousands, except yield amounts) for the three-
and six-month periods ended November 30:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------ Percent ---------------- Percent
2000 1999(1) Change 2000 1999(1) Change
---- ---- ------ ---- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Package:
U.S. overnight box(2) $1,484 $1,393 + 7 $2,964 $2,773 + 7
U.S. overnight envelope(3) 456 451 + 1 928 904 + 3
U.S. deferred 634 588 + 8 1,252 1,147 + 9
International Priority (IP) 1,023 881 +16 2,007 1,699 +18
------ ------ ------ ------
Total package revenue 3,597 3,313 + 9 7,151 6,523 +10
Freight:
U.S. 177 144 +23 339 274 +24
International 102 127 -20 217 253 -14
------ ------ ------ ------
Total freight revenue 279 271 + 3 556 527 + 6
Other 105 152 -31 190 273 -30
------ ------ ------ ------
Total revenues $3,981 $3,736 + 7 $7,897 $7,323 + 8
====== ====== ====== ======
Operating Expenses:
Salaries and employee benefits 1,582 3,178
Purchased transportation 147 297
Rentals and landing fees 354 698
Depreciation and amortization 201 398
Fuel 300 541
Maintenance and repairs 238 506
Intercompany charges 346 673
Other 542 1,078
------ -----
Total operating expenses 3,710 3,525 + 5 7,369 6,903 + 7
------ ------ ------ ------
Operating income $ 271 $ 211 +28 $ 528 $ 420 +26
====== ====== ====== ======
--------------------------------------------------------------------------------------------------------
Package statistics:
Average daily packages:
U.S. overnight box 1,292 1,241 + 4 1,273 1,222 + 4
U.S. overnight envelope 757 770 - 2 757 759 -
U.S. deferred 924 913 + 1 900 876 + 3
IP 359 323 +11 348 310 +12
------ ------ ------ ------
Composite 3,332 3,247 + 3 3,278 3,167 + 4
Revenue per package (yield):
U.S. overnight box $18.23 $17.82 + 2 $18.19 $17.72 + 3
U.S. overnight envelope 9.56 9.29 + 3 9.58 9.30 + 3
U.S. deferred 10.88 10.22 + 6 10.87 10.24 + 6
IP 45.27 43.31 + 5 45.04 42.88 + 5
Composite 17.13 16.20 + 6 17.04 16.09 + 6
Freight statistics:
Average daily pounds:
U.S. 4,749 5,072 - 6 4,556 4,810 - 5
International 2,234 2,574 -13 2,273 2,539 -10
------ ------ ------ ------
Composite 6,983 7,646 - 9 6,829 7,349 - 7
Revenue per pound (yield):
U.S. $ .59 $ .45 +31 $ .58 $ .45 +29
International .73 .78 - 6 .75 .78 - 4
Composite .63 .56 +13 .64 .56 +14
</TABLE>
1 Operating expense detail for the three- and six-month periods ended
November 30, 1999 has been omitted, as this data is not comparable to the
three- and six-month periods ended November 30, 2000. See Note 5 to
Condensed Consolidated Financial Statements.
2 The U.S. Overnight Box category includes packages exceeding 8 ounces in
weight.
3 The U.S. Overnight Envelope category includes envelopes weighing 8 ounces or
less.
===============================================================================
- 12 -
<PAGE>
Revenues
Federal Express Corporation (referred to herein as the "Company") total
package revenue increased 9% in the second quarter and 10% in the first half
of 2001, principally due to increases in IP and U.S. overnight box volumes.
Average daily package volume growth rates for U.S. domestic overnight box
maintained a steady growth rate of 4% for the second quarter and the first
half. Total package yield increased 6% for the second quarter and first half
of 2001, continuing the upward trend resulting from our yield-management
strategy, which includes restricting growth of less profitable business.
Total freight revenue for the second quarter and first half of 2001
increased due to significantly improved yields in U.S. freight, offset by
declines in domestic freight volume and international freight volume and yield.
Other revenue included Canadian domestic revenue, charter services,
logistics services, sales of hushkits and other. Hushkit sales have continued to
decrease compared to the prior year periods and are expected to be immaterial
for the remainder of 2001.
Operating Income
Operating income increased 28% for the second quarter and 26% for the first
half of 2001 year over year, despite higher fuel costs. A 36% increase in
average jet fuel price per gallon contributed to a negative impact of
approximately $67 million on second quarter total fuel costs, including the
results of jet fuel hedging contracts entered into to mitigate some of the
increased jet fuel costs. For the first half, the impact was $110 million, net
of hedging effects, resulting from a 33% increase in average jet fuel price per
gallon. Fuel surcharges implemented during 2000 offset the increase in fuel
costs in the second quarter. The Company's parent, FedEx Corporation, has also
entered into jet fuel hedging contracts on behalf of the Company through 2002,
as outlined in the table below:
<TABLE>
<CAPTION>
2001
-----------------
Third Fourth
Quarter Quarter 2002
------- ------- -----
<S> <C> <C> <C>
Percentage of usage hedged 23% 62% 33%
Price per gallon (including $.727 $.786 $.964
taxes and fees)
</TABLE>
Cost containment and productivity enhancement programs contributed to the
increased second quarter and year-to-date operating margin. Staffing levels in
general and administrative support functions were held flat, and discretionary
spending was reduced. Maintenance and repairs expense decreased year over year
for the second quarter due to the timing of scheduled aircraft maintenance; for
the first half, these expenses were consistent with the prior year period.
Year-over-year comparisons were also affected by the reduction in the
contribution from sales of hushkits. Operating profit from these sales was $6
million for the second quarter and $7 million for the first half of 2001
compared to $14 million and $29 million in the respective prior year periods.
- 13 -
<PAGE>
OUTLOOK
Recently, the U.S. economy has slowed substantially. While softness in some
market segments, such as the automotive sector, has been experienced over the
past six months, the continued slowing of the economy has more recently been
noted as a decrease in general consumer spending resulting in less demand for
the transportation of all consumer goods. Volumes for the month of December 2000
were adversely affected by the current economic situation. Our fiscal third
quarter will also be negatively affected by the recent severe winter weather in
much of the U.S., causing increased costs for de-icing, overtime and
re-deliveries.
In response to these slowing volume growth rates, the Company has
implemented cost controls, further reducing discretionary spending, and
decreased capital spending from our original plan (see "Capital Resources").
In late December 2000, the Company announced list rate increases averaging
4.9% for shipments within the U.S. and 2.9% for U.S. export shipments, which
will be effective February 1, 2001. We do not anticipate that the forecasted
economic conditions will impact our pricing or pricing strategies.
Despite the near-term outlook, we believe that we are well positioned
for long-term growth. In January 2001, we entered into a business alliance
with the U.S. Postal Service, which is expected to generate revenue of
approximately $7 billion over seven years and is consistent with our goals of
improving margins, cash flows and returns. Moreover, our strategic
initiatives in support of long-term growth goals have not changed: we will
continue to make expenditures for the expansion of our IP business through
strategic alliances such as LaPoste in Europe and through global network
enhancements such as adding routes and increasing capacity as well as for the
design, testing and implementation of new customer-facing technologies such
as e-commerce solutions, enhanced customer service tools and internet-based
offerings, as well as internal technologies such as improved scanning and
wireless transmissions.
The globalization of markets will continue, and because of our extensive
international network, we believe we are in a position to continue to capitalize
on that expansion. We also believe the reliable service and tracking
capabilities offered by the Company will become even more important to customers
as they seek to shorten their supply chains and decrease inventory levels.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $93 million at November 30, 2000 compared
to $89 million at May 31, 2000. Cash flows from operating activities for the
first half of 2001 totaled $692 million, compared to $531 million for the prior
year period.
We believe that cash flow from operations and the FedEx Corporation
commercial paper program and credit facilities will adequately provide for the
Company's working capital needs for the foreseeable future.
Capital Resources
Our operations require 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.
- 14 -
<PAGE>
We have historically financed our capital investments through the use of
lease, debt and equity financing in addition to the use of internally generated
cash from operations. For information on the Company's purchase commitments, see
Note 3 of Notes to Condensed Consolidated Financial Statements.
We believe that the capital resources available to us provide flexibility
to access the most efficient markets for financing capital acquisitions,
including aircraft, and are adequate for the Company's future capital needs.
Regulatory Matters
In November 2000, the U.S. Occupational Safety and Health Administration,
or OSHA, published final regulations to mandate an ergonomics standard that
could require many businesses, including the Company, to make significant
changes in the workplace in an effort to reduce the incidence of musculoskeletal
disorders such as lower back pain. The new regulations do not specify which
workplace changes would be required in order for businesses to be in compliance.
We have joined other affected parties in lawsuits challenging the legality, as
well as the economic and technical feasibility, of the proposed regulations.
Pending the results of these legal challenges, the new regulations will go into
effect in mid-January 2001 and will have an initial compliance date of October
15, 2001.
If the new regulations are upheld and if OSHA applies the new regulations
in the same way as it attempted unsuccessfully in the past to impose ergonomic
measures under its general authority, we would be required to make extensive
changes to the layout of our sorting facilities and hire a significant number of
additional employees. We believe that the cost of compliance would be
substantial and have a material adverse effect on our business. We expect that
our competitors, along with the rest of American industry, would also incur
substantial compliance costs.
Euro Currency Conversion
Since the beginning of the European Union's transition to the euro on
January 1, 1999, we have been prepared to quote rates to customers, generate
billings and accept payments, in both euro and legacy currencies. The legacy
currencies will remain legal tender through December 31, 2001. We believe that
the introduction of the euro, any price transparency brought about by its
introduction and the phasing out of the legacy currencies will not have a
material impact on our consolidated financial position, results of operations or
cash flows. Costs associated with the euro transition are being expensed as
incurred and are being funded entirely by internal cash flows. The devaluation
of the Euro had an immaterial negative impact on the results of operations of
the Company for the second quarter and first half of 2001.
* * *
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, CONTINUED INCREASES IN FUEL COSTS AND THE
ABILITY TO MITIGATE THE EFFECTS OF SUCH INCREASES THROUGH FUEL SURCHARGES AND
HEDGING ACTIVITIES, MATCHING CAPACITY TO VOLUME LEVELS AND OTHER UNCERTAINTIES
DETAILED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION
FILINGS.
EXCEPT AS OTHERWISE INDICATED, REFERENCES TO YEARS MEANS THE COMPANY'S FISCAL
YEAR ENDING MAY 31 OF THE YEAR REFERENCED.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2000. Foreign currency fluctuations during the second
quarter of 2001 did not have a material effect on the results of operations for
the period. Many of the Company's international sales transactions are
denominated in U.S. dollars, which mitigates the impact of foreign currency
fluctuations.
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<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>
10.1 Amendment dated November 27, 2000 to Sales Agreement dated
April 7, 1995 between Federal Express Corporation and
American Airlines, Inc. (Filed as Exhibit 10.1 to FedEx
Corporation's Quarterly Report on Form 10-Q for the
quarter ended November 30, 2000, and incorporated herein
by reference.)
10.2 Credit Agreement among FedEx Corporation, the Lenders
named therein, Commerzbank AG, as Syndication Agent, Bank
of America, N.A., as Documentation Agent, The Chase
Manhattan Bank, as Administrative Agent, and Chase
Securities Inc., as Lead Arranger and Book Manager, dated
as of December 13, 2000 (filed as Exhibit (b)(2) to
FedEx's Schedule TO (Amendment No. 2)). (Filed by FedEx
Corporation with the SEC on December 15, 2000, and
incorporated herein by reference.)
10.3 Guarantee of Federal Express Corporation dated as of
December 13,2000, relating to Credit Agreement of FedEx
Corporation dated December 13, 2000.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re: Unaudited Interim Financial Statements.
</TABLE>
(b) Reports on Form 8-K.
During the quarter ended November 30, 2000, the registrant filed one
Current Report on Form 8-K dated January 10, 2001. The report disclosed
the execution of a transportation agreement and a retail agreement with
the United States Postal Service.
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<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
Date: January 12, 2001 /s/ MICHAEL W. HILLARD
------------------------------
MICHAEL W. HILLARD
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
10.3 Guarantee of Federal Express Corporation dated as of
December 13,2000, relating to Credit Agreement of FedEx
Corporation dated December 13, 2000.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re: Unaudited Interim Financial Statements.
</TABLE>
E-1
