A Message from the
Chief Financial Officer
Most investors seek answers to at least three questions before electing to
invest in a particular enterprise: Does the company operate in a growth
industry? Does it enjoy leadership leverage within its industry? Do its people
demonstrate both the vision and vigor not only to defend, but to extend, their
company's leadership advantage? a As you've seen in this and recent years'
annual reports, FedEx operates and clearly excels within a rapidly growing,
forward-moving industry. FedEx revenues have grown by nearly $1 billion
annually, and our net income has nearly tripled since fiscal 1993. Looking
ahead, the global express transportation market is expected to exhibit
consistently exceptional growth over the next two decades. a With 16 million
pounds of daily cargo capacity and an unmatched portfolio of exclusive air cargo
route authorities, the FedEx integrated global distribution network affords us
tremendous economies of scale and competitive leverage as we grow. a On the
third question, the company's ability to extend its competitive advantage, FedEx
entered fiscal 1996 from a position of strength, as the express distribution
industry leader. Rather than rest on that advantage, we elected to strategically
invest $2.0 billion in overall network enhancements and information
technologies. These investments will help us continue to expand our network to
handle increasing customer demand as well as extend it to reach new markets. a
In fiscal 1997, we will remain committed to making similar investments to
improve our financial performance, continue our strong revenue growth and
solidify our leadership position.
Alan B. Graf, Jr.
Executive Vice President and Chief Financial Officer
Financial Section
Management's Discussion and Analysis of
Results of Operations and Financial Condition 18
Consolidated Statements of Income 23
Consolidated Balance Sheets 24
Consolidated Statements of Cash Flows 26
Consolidated Statements of Changes in
Common Stockholders' Investment 27
Notes to Consolidated Financial Statements 28
Report of Independent Public Accountants 39
Selected Consolidated Financial Data 40
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of Operations
In 1996, the Company achieved record net income and earnings per share for the
third consecutive year. Consolidated net income for 1996 was $308 million
($5.39 per share) compared with $298 million ($5.27 per share) and $204 million
($3.65 per share) for 1995 and 1994, respectively.
Over the past three years, the Company's consolidated financial results
improved considerably. The majority of the Company's earnings growth during
this period was attributable to the development of its international express
delivery services and a growing demand for those services. In 1996, however,
weakness in the global airfreight market and costs associated with implementing
the Company's intra-Asian network resulted in much lower international
operating income than in 1995. The Company's U.S. domestic operations over the
same period have been subject to an express delivery market characterized by
intense competition and generally declining prices. Consequently, from 1992 to
1995, U.S. domestic operating profits declined. In 1996, despite the impact of
unusually severe winter weather in the eastern United States, management
actions to control prices and expenses contributed to a significant year-over-
year improvement in U.S. domestic operating profits.
Revenues
The following table shows a comparison of revenues for the years ended May 31:
In millions Percent Change
1996/ 1995/
1996 1995 1994 1995 1994
U.S. domestic express $ 7,284 $6,700 $6,142 + 9 + 9
FedEx International Priority/R/ (IP) 1,997 1,680 1,339 +19 +25
FedEx International Express Freight/R/ (IXF)
and FedEx International
Airport-to-AirportSM (ATA) 554 580 505 - 5 +15
FedEx/R/ Air Charter 92 115 113 -20 + 1
Logistics services 94 106 248 -11 -57
Other* 253 211 132 +20 +59
------- ------ ------
$10,274 $9,392 $8,479 + 9 +11
======= ====== ======
*Includes the sale of engine noise reduction kits.
The following table shows a comparison of selected express and airfreight
(IXF/ATA) statistics for the years ended May 31:
In thousands, except dollar amounts Percent Change
1996/ 1995/
1996 1995 1994 1995 1994
U.S. domestic express:
Average daily packages 2,246 2,084 1,792 + 8 +16
Revenue per package $12.67 $12.61 $13.33 -- - 5
IP:
Average daily packages 192 164 133 +17 +23
Revenue per package $40.58 $40.28 $39.21 + 1 + 3
IXF/ATA:
Average daily pounds 2,144 2,153 1,844 -- +17
Revenue per pound $ 1.01 $ 1.06 $ 1.06 - 5 --
Federal Express Corporation and Subsidiaries
In 1996, revenue per package (yield) associated with the Company's U.S.
domestic express service improved on a year-over-year basis for the first time
in five years. This improvement was partially attributable to an ongoing
program of systematic review and revision of customer pricing and discounts.
The goal of this program is to ensure a balance between revenues generated and
the cost of providing express services. This program particularly impacted
FedEx 2DaySM volumes and yields. In 1995, FedEx 2Day yields declined 4%, while
average daily volumes increased 22%. In 1996, however, FedEx 2Day yields
increased 5%, but average daily volumes increased only 1%. Additionally, the
Company raised the list price for FedEx Standard Overnight/R/ service in June
1995 and April 1996.
Also impacting U.S. domestic revenue per package in 1996 was the expiration
of the air cargo transportation excise tax on December 31, 1995. The expiration
of this tax added approximately $50 million and 1% to U.S. domestic revenues
and yields, respectively. This benefit will continue until such time as
Congress reenacts the excise tax.
Over the past three years, the Company's IP service benefited from its
EXPRESSfreighter/R/ network which provides customers with reduced transit
times, later drop-off opportunities and daily service on a global basis that is
generally unmatched by competitors. Year-over-year increases in average daily
volumes and revenues equaled or exceeded 16% during this three-year period.
Yields remained relatively constant.
In 1995 and 1996, the Company's airfreight revenues were a significant
factor in determining overall profitability. The Company uses its ATA
airfreight service (a lower-priced, space-available service) to fill space on
its international flights not utilized by express services such as IP or IXF.
In 1995, the demand for global airfreight services generally exceeded available
market capacity. Consequently, airfreight shippers paid higher prices for
airfreight services than in prior years. This additional revenue contributed to
1995's improvement in earnings. In contrast to 1995, the available market
capacity in 1996 was greater relative to demand, which resulted in lower non-
express airfreight pounds, prices and revenues for the Company.
The decrease in logistics services revenue in 1995 and 1996 was due to the
sale, effective May 1994, of the Company's German logistics subsidiary and the
1995 sale of two dedicated warehousing and contract distribution companies in
the United Kingdom. See additional discussion in Other Income and Expense and
Income Taxes below. The increases in other revenue in 1995 and 1996 were
primarily attributable to increased sales of engine noise reduction kits.
Operating Expenses
Volume growth and expansion of the Company's operations resulted in a trend of
increasing operating expenses. Presented below are year-over-year percentage
changes in operating expenses:
Percent Change
1996/ 1995/
1995 1994
Salaries and employee benefits + 4 + 8
Rentals and landing fees +17 +16
Depreciation and amortization +10 + 9
Fuel +15 + 6
Maintenance and repairs +14 +17
Other +16 +16
Total operating expenses +10 +11
Increases in salaries and employee benefits were primarily due to higher
employment levels associated with volume growth. In 1996, decreased provisions
under the Company's performance-based incentive compensation plans offset a
large portion of the increase in salaries and wages expense.
The increases in rentals and landing fees were primarily due to the leasing
of additional aircraft. As of May 31, 1996, the Company had 74 wide-bodied
aircraft under operating lease compared with 58 as of May 31, 1995, and 37 as
of May 31, 1994. Management expects year-over-year increases in lease expense
to continue as the Company enters into additional aircraft rental agreements
during 1997 and thereafter.
Management's Discussion and Analysis
The increase in fuel expense in 1996 was due to increases in the average
price per gallon of jet fuel (7%) and gallons consumed (9%). The rise in
average price per gallon of jet fuel was due to higher jet fuel prices and a
4.3 cents per gallon excise tax on aviation fuel, used domestically, which
became effective October 1, 1995. The increase in fuel expense in 1995 was due
to an increase in gallons consumed (10%), partially offset by a decline in
average jet fuel price per gallon (5%).
The increase in maintenance and repairs expense for 1996 was due to a number
of factors. The Company's aircraft fleet has increased, resulting in a
corresponding increase in maintenance expense. The Company also incurred
significant spare parts expense outfitting the newly-opened Subic Bay facility
and earlier than expected DC10 engine maintenance expense. In 1995, regulatory
directives on B727 and MD11 aircraft engines resulted in higher maintenance and
repairs expense, and the Company's MD11 aircraft entered their initial cycle of
engine maintenance.
Maintenance and repairs expense, as it relates to aircraft, typically
follows a predictable pattern over the life of the aircraft. Unforeseen
maintenance events will occasionally disrupt this pattern, resulting in
periodic fluctuations in maintenance and repairs expense. Given the Company's
increasing fleet size and variety of aircraft types, management believes that
maintenance and repairs expense will continue a long-term trend of year-over-
year increases for the foreseeable future.
Increases in other operating expenses for 1996 and 1995 were primarily due
to expenses related to volume growth, including the transportation of packages
by third parties and temporary manpower. The cost of sales of engine noise
reduction kits increased in 1996 and 1995. A significant portion of the 1996
increase in other operating expenses was also due to consulting fees related to
ongoing projects designed to optimize the value of goods and services purchased
and the use of internal resources. Advertising also contributed to the increase
in other operating expenses in 1995.
Operating Income
The Company's operating income increased 6% and 11% in 1996 and 1995,
respectively.
U.S. domestic operating income rose 16% in 1996 and declined 17% in 1995.
During 1996, revenue per package increased 0.5% and cost per package increased
only 0.3%, while average daily volume rose 8%. These factors contributed to a
substantial improvement in operating profits. In 1996, severe winter storms in
the eastern United States closed numerous airports and businesses and,
consequently, lowered U.S. domestic operating income by approximately $30
million. U.S. domestic results declined in 1995 because of lower margins
attributable to a 5% decrease in U.S. domestic express yields, while the
average U.S. domestic cost per package declined only 3%. Sales of engine noise
reduction kits contributed an incremental $15 million and $36 million to U.S.
domestic operating income in 1996 and 1995, respectively. U.S. domestic
operating margins were 7.3%, 6.8% and 9.0% in 1996, 1995 and 1994,
respectively.
International operating income declined $44 million in 1996 compared with a
$155 million increase in 1995. In addition to the factors impacting express and
airfreight revenue discussed above, the costs of establishing the Company's
intra-Asian network and declines in charter revenue contributed to the decrease
in international operating income. International operating margins were 2.9%,
4.9% and 1.3% in 1996, 1995 and 1994, respectively.
For additional information on the Company's U.S. domestic and international
operations, see Note 10 of Notes to Consolidated Financial Statements.
Other Income and Expense and Income Taxes
Decreases in net interest expense of 17% and 19% for 1996 and 1995,
respectively, were due to lower debt levels and a higher level of capitalized
interest. Interest is capitalized during the modification of certain Airbus
A310 aircraft from passenger to freighter configuration. During 1996, 17 A310
aircraft were modified, or were undergoing modification, compared with four
during 1995.
Other, net for 1996 and 1995 included distributions of $7.8 million and $9.7
million, respectively, from the bankruptcy estate of a firm engaged by the
Company in 1990 to remit payments of employee payroll taxes to the appropriate
authorities. In total, the Company has received $17.9 million. All major issues
pertaining to the bankruptcy have been resolved, and any additional amounts the
Company may receive are expected to be insignificant. Other, net for 1996 also
included gains on sales of B727 aircraft and, for 1995, a pre-tax gain of $35.7
million from the sale of warehousing and distribution companies in the United
Kingdom.
Federal Express Corporation and Subsidiaries
The Company's effective tax rate was 43.0% in 1996 and 1995 and 46.0% for
1994. In each year, the effective tax rate was greater than the statutory U.S.
federal tax rate primarily because of state income taxes and the impact of
foreign operations. The 43.0% effective tax rate in 1996 was lower than the
46.0% effective rate in 1994 primarily due to reductions in state and local
taxes and taxes on earnings from foreign operations. The 43.0% rate in 1995 was
largely attributable to a change in the structure of the Company's foreign
entity in Mexico. This change permitted the one-time deduction in 1995 of
certain items for U.S. federal income tax purposes that were not deductible in
prior years. For 1997, management expects the effective tax rate to remain at a
level similar to the 1996 rate. The actual rate, however, is dependent on a
number of factors, including the amount and source of operating income.
Outlook
Management is committed to achieving long-term earnings growth by positioning
the Company's resources to address customers' expectations and to capitalize on
emerging markets for express distribution services. Very often this involves a
significant front-end investment in assets, technology and personnel that might
have a negative impact on near-term profitability.
As discussed above, a key factor in the improvement in the Company's U.S.
domestic operations was the customer pricing and discount review program.
Management will continue this program in 1997. Additionally, the Company has
introduced a new U.S. domestic service for certain customers in select markets
with prices based on the distance between a package's origin and destination.
Management believes that year-over-year changes in U.S. domestic yields will
remain flat or fall slightly during 1997. Actual results, however, may vary
depending primarily on the impact of competitive pricing changes, changing
customer demand patterns, and the timing of the reenactment of the air cargo
transportation excise tax.
To reduce costs, management will continue investing in technologies that
streamline package pick-up, sorting, tracking and delivery. Improving package
movement through more efficient integration of the Company's air and ground
transportation systems is a continuing Company effort and, assuming effective
implementation, is expected to reduce transportation cost per package. The
Company has also implemented programs designed to optimize the value of goods
and services purchased. These programs have already resulted in modest savings
in 1996 with additional savings anticipated in 1997 and beyond. The results of
these programs may differ from management's expectations depending upon the
Company's success and timing in implementing the program recommendations and
the timing of technological changes.
Management's long-term plan for the Company's international operations calls
for continued expansion of its international network to the emerging centers of
economic growth. Management believes that the overall success of its
international operations is strongly tied to connecting these growth areas,
most notably China, the Pacific Basin and Latin America, to its global
transportation network. Providing direct service to new areas typically entails
a significant capital investment followed by a start-up period characterized by
operating costs higher than in established service areas. Furthermore, during
the start-up period, until express volumes grow into available capacity, more
reliance is placed on lower-yielding ATA and IXF to fill available space. This
reliance on airfreight exposes the Company to cyclical downturns in the
international airfreight market.
Management expects strong IP average daily volume growth to continue in
1997. With respect to airfreight, management believes that excess market
capacity and unfavorable economic conditions encountered in 1996 will continue
to hamper profitability in 1997. Actual results for IP or airfreight, however,
will depend on international economic conditions, actions by the Company's
competitors and regulatory conditions for international aviation rights.
Financial Condition
Liquidity
Cash and cash equivalents totaled $93 million at May 31, 1996, a decrease of
$264 million during 1996 compared with a decrease of $35 million in 1995 and an
increase of $237 million in 1994. Cash provided from operations during 1996 was
$947 million compared with $1.0 billion and $767 million in 1995 and 1994,
respectively. 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.
Management's Discussion and Analysis
Capital Resources
The Company's operations are capital intensive, characterized by significant
investments in aircraft, vehicles, computer and telecommunication equipment,
package handling facilities and sort 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 1996 totaled $1.4 billion and included seven Airbus
A310 aircraft, two MD11 aircraft, five B727-200 aircraft, 35 Cessna 208
aircraft, deposits on future Airbus A300 aircraft, vehicles and ground support
equipment, customer automation and computer equipment, and package handling
facilities and sort equipment. In comparison, prior year expenditures totaled
$1.1 billion and included four A310s, 15 Cessna 208s, deposits on future A300s,
vehicle and ground support equipment, and customer automation and computer
equipment. One MD11 and one A310 acquired in 1996 along with two A310s acquired
in 1995 were subsequently sold and leased back during 1996. For information on
the Company's purchase commitments, see Note 12 of Notes to Consolidated
Financial Statements.
Additional investing activities in 1996 included the purchase of an all-
cargo route authority between the U.S. and China.
The Company has historically financed its capital investments through the
use of lease, debt and equity financing in addition to the use of internally
generated cash from operations. Generally, management's practice in recent
years with respect to funding new aircraft acquisitions has been to finance
such aircraft through long-term lease transactions that qualify as off balance
sheet operating leases under applicable accounting rules. Management has
determined that these operating leases have provided economic benefits
favorable to ownership with respect to market values, liquidity and after-tax
cash flows. In the future, alternative approaches to financing the Company's
aircraft acquisitions, such as capitalized leases or other forms of secured
financing, may be pursued when management determines that such financing best
meets the Company's needs. The Company has been successful in obtaining
investment capital, both domestic and international, for long-term leases on
terms acceptable to it although the marketplace for such capital can become
restricted depending on a variety of economic factors beyond the control of the
Company. See Note 3 of Notes to Consolidated Financial Statements for
additional information concerning the Company's debt and credit facilities.
In August and October 1995, approximately $123 and $195 million,
respectively, of pass through certificates were issued under a shelf
registration filed with the Securities and Exchange Commission to refinance the
debt portion of leveraged leases related to five Airbus A300 aircraft. The pass
through certificates are not direct obligations of, or guaranteed by, the
Company, but amounts payable by the Company under the five leveraged leases are
sufficient to pay the principal of and interest on the certificates.
The Company's capital resources include backstop financing for nine Airbus
A300 aircraft and the public and private debt markets for leveraged lease
financing. Management believes that the capital resources available to the
Company provide flexibility to access the most efficient markets for financing
its capital acquisitions, including aircraft, and are adequate for the
Company's future capital needs.
Deferred Tax Assets
At May 31, 1996, the Company had a net cumulative deferred tax asset of $29
million consisting of $443 million of deferred tax assets and $414 million of
deferred tax liabilities. The reversals of deferred tax liabilities in future
periods will offset similar amounts of deferred tax assets. Based upon
historical levels of taxable income, the Company believes that it is more
likely than not that sufficient levels of future taxable income will be
generated to realize the remaining deferred tax asset.
Consolidated Statements of Income Federal Express Corporation and Subsidiaries
Years ended May 31
In thousands, except Earnings Per Share 1996 1995 1994
Revenues $10,273,619 $9,392,073 $8,479,456
----------- ---------- ----------
Operating Expenses:
Salaries and employee benefits (Notes 8 and 9) 4,619,990 4,425,202 4,104,800
Rentals and landing fees (Note 4) 959,055 818,599 703,028
Depreciation and amortization 719,609 652,287 599,357
Fuel 578,614 502,417 472,786
Maintenance and repairs 617,657 544,170 464,557
Other 2,154,870 1,858,254 1,604,296
----------- ---------- ----------
9,649,795 8,800,929 7,948,824
----------- ---------- ----------
Operating Income 623,824 591,144 530,632
----------- ---------- ----------
Other Income (Expense):
Interest, net (Note 1) (95,599) (114,687) (142,392)
Other, net (Note 14) 11,734 45,627 (9,778)
----------- ---------- ----------
(83,865) (69,060) (152,170)
----------- ---------- ----------
Income before Income Taxes 539,959 522,084 378,462
Provision for Income Taxes (Note 7) 232,182 224,496 174,092
----------- ---------- ----------
Net Income $ 307,777 $ 297,588 $ 204,370
=========== ========== ==========
Earnings Per Share (Note 6) $5.39 $5.27 $3.65
=========== ========== ==========
Average Shares Outstanding (Note 6) 57,138 56,494 56,012
=========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Consolidated Balance Sheets
May 31
In thousands 1996 1995
Assets
Current Assets:
Cash and cash equivalents $ 93,419 $ 357,548
Receivables, less allowance for doubtful accounts of
$30,809 and $31,173 1,271,599 1,130,254
Spare parts, supplies and fuel 222,110 193,251
Deferred income taxes (Note 7) 92,606 115,801
Prepaid expenses and other 48,527 72,228
---------- ----------
Total current assets 1,728,261 1,869,082
---------- ----------
Property and Equipment, at Cost (Notes 1, 3, 4 and 12):
Flight equipment 3,372,647 3,006,693
Package handling and ground support equipment 2,148,509 1,841,108
Computer and electronic equipment 1,439,883 1,224,050
Other 1,717,478 1,625,860
---------- ----------
8,678,517 7,697,711
Less accumulated depreciation and amortization 4,561,916 3,982,467
---------- ----------
Net property and equipment 4,116,601 3,715,244
---------- ----------
Other Assets:
Goodwill (Note 1) 380,748 397,272
Equipment deposits and other assets (Note 12) 473,361 451,774
---------- ----------
Total other assets 854,109 849,046
---------- ----------
$6,698,971 $6,433,372
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
Federal Express Corporation and Subsidiaries
1996 1995
Liabilities and Stockholders' Investment
Current Liabilities:
Current portion of long-term debt (Note 3) $ 8,009 $ 255,448
Accounts payable 705,532 618,621
Accrued expenses (Note 2) 904,856 904,466
---------- ----------
Total current liabilities 1,618,397 1,778,535
---------- ----------
Long-Term Debt, Less Current Portion (Note 3) 1,325,277 1,324,711
---------- ----------
Deferred Income Taxes (Note 7) 64,034 55,956
---------- ----------
Other Liabilities (Note 1) 1,115,124 1,028,601
---------- ----------
Commitments and Contingencies (Notes 4, 12 and 13)
Common Stockholders' Investment (Note 6):
Common Stock, $.10 par value; 200,000 shares
authorized;
56,885 and 56,174 shares issued 5,689 5,617
Additional paid-in capital 815,137 775,255
Retained earnings 1,766,578 1,466,427
---------- ----------
2,587,404 2,247,299
Less treasury stock and deferred compensation 11,265 1,730
---------- ----------
Total common stockholders' investment 2,576,139 2,245,569
---------- ----------
$6,698,971 $6,433,372
========== ==========
Consolidated Statements of CashFlows Federal Express Corporation and Subsidiaries
Years ended May 31
In thousands 1996 1995 1994
Operating Activities
Net income $ 307,777 $ 297,588 $ 204,370
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 719,609 652,287 599,357
Provision for uncollectible accounts 38,963 36,334 45,763
Provision for deferred income taxes and other 26,489 25,976 3,810
Gain from disposals of property and equipment (5,397) (39,997) (11,897)
Changes in assets and liabilities, net of effects
from dispositions of businesses:
Increase in receivables (191,334) (167,319) (173,902)
Increase in other current assets (41,992) (24,101) (7,826)
Increase in accounts payable, accrued
expenses and other liabilities 100,515 258,373 110,508
Other, net (8,050) (8,424) (2,905)
--------- ---------- ----------
Cash provided by operating activities 946,580 1,030,717 767,278
--------- ---------- ----------
Investing Activities
Purchases of property and equipment, including deposits
on aircraft of $68,202, $113,073 and $112,138 (1,412,242) (1,060,761) (1,087,708)
Proceeds from dispositions of property and equipment:
Sale-leaseback transactions 176,500 -- 581,400
Reimbursements of A300 deposits 143,859 138,203 38,794
Other dispositions 26,504 59,523 46,148
Other, net 77,208 87,925 27,843
--------- ---------- ----------
Cash used in investing activities (988,171) (775,110) (393,523)
--------- ---------- ----------
Financing Activities
Proceeds from debt issuances 17,298 45,460 10,777
Principal payments on debt (264,004) (349,523) (198,243)
Proceeds from stock issuances 36,566 13,081 53,759
Other, net (12,398) -- (2,581)
--------- ---------- ----------
Cash used in financing activities (222,538) (290,982) (136,288)
--------- ---------- ----------
Cash and Cash Equivalents
Increase (decrease) during the year (264,129) (35,375) 237,467
Balance at beginning of year 357,548 392,923 155,456
--------- ---------- ----------
Balance at end of year $ 93,419 $ 357,548 $ 392,923
========= ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Consolidated Statements of Changes in Common Stockholders' Investment Federal Express Corporation and Subsidiaries
In thousands, except shares Additional
Common Paid-in Retained Treasury Deferred
Stock Capital Earnings Stock Compensation
Balance at May 31, 1993 $5,474 $699,385 $ 969,515 $ (36) $ (2,957)
Purchase of treasury stock -- -- -- (185) --
Forfeiture of restricted stock -- -- -- (1,224) --
Issuance of common and treasury
stock under employee incentive
plans (1,153,248 shares) 115 59,844 -- 670 (8)
Amortization of deferred compensation -- -- -- -- 1,467
Foreign currency translation adjustment -- -- (11,725) -- --
Net income -- -- 204,370 -- --
------- -------- --------- ------- --------
Balance at May 31, 1994 5,589 759,229 1,162,160 (775) (1,498)
Forfeiture of restricted stock -- -- -- (231) --
Issuance of common stock
under employee incentive
plans (288,724 shares) 28 16,026 -- -- --
Amortization of deferred compensation -- -- -- -- 774
Foreign currency translation adjustment -- -- 6,679 -- --
Net income -- -- 297,588 -- --
------- -------- --------- ------- --------
Balance at May 31, 1995 5,617 775,255 1,466,427 (1,006) (724)
Purchase of treasury stock -- -- -- (12,398) --
Forfeiture of restricted stock -- -- -- (1,068) 1,130
Issuance of common and treasury
stock under employee incentive
plans (886,195 shares) 72 39,882 -- 14,472 (13,898)
Amortization of deferred compensation -- -- -- -- 2,227
Foreign currency translation adjustment -- -- (7,626) -- --
Net income -- -- 307,777 -- --
------- -------- --------- ------- --------
Balance at May 31, 1996 $5,689 $815,137 $1,766,578 $ -- $(11,265)
======= ======== ========== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include the
accounts of Federal Express Corporation and its wholly-owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
Property and equipment. Expenditures for major additions, improvements, flight
equipment modifications, and certain overhaul costs are capitalized.
Maintenance and repairs are charged to expense as incurred, except for B747
airframe and engine overhaul maintenance which is accrued and charged to
expense on the basis of hours flown. The cost and accumulated depreciation of
property and equipment disposed of are removed from the related accounts, and
any gain or loss is reflected in the results of operations.
For financial reporting purposes, depreciation and amortization of property
and equipment is provided on a straight-line basis over the asset's service
life or related lease term as follows:
Flight equipment 7 to 20 years
Package handling and ground support equipment 5 to 30 years
Computer and electronic equipment 3 to 10 years
Other 2 to 30 years
Aircraft airframes and engines are assigned residual values ranging from 10%
to 20% of asset cost. All other property and equipment have no assigned
residual values. Vehicles, which are included in package handling and ground
support equipment, are depreciated on a straight-line basis over 5 to 10 years.
For income tax purposes, depreciation is generally computed using
accelerated methods.
Deferred gains. Gains on the sale and leaseback of aircraft and other property
and equipment are deferred and amortized over the life of the lease as a
reduction of rent expense. Included in other liabilities at May 31, 1996 and
1995, were deferred gains of $337,118,000 and $293,000,000, respectively.
Deferred lease obligations. While certain of the Company's aircraft and
facility leases contain fluctuating or escalating payments, the related rent
expense is recorded on a straight-line basis over the lease term. Included in
other liabilities at May 31, 1996 and 1995, were $260,977,000 and $216,683,000,
respectively, representing the cumulative difference between rent expense and
rent payments.
Self-insurance reserves. The Company is self-insured up to certain levels for
workers' compensation, employee health care and vehicle liabilities. Reserves
are based on the actuarially estimated cost of claims. Included in other
liabilities at May 31, 1996 and 1995, were $278,000,000 and $294,000,000,
respectively, representing self-insurance reserves for the Company's workers'
compensation and vehicle liabilities.
Capitalized interest. Interest on funds used to finance the acquisition and
modification of aircraft and construction of certain facilities up to the date
the asset is placed in service is capitalized and included in the cost of the
asset. Capitalized interest was $39,254,000, $27,381,000 and $29,738,000 for
1996, 1995 and 1994, respectively.
Advertising. Advertising costs are generally expensed as incurred and are
included in other operating expenses. Advertising expenses were $138,408,000,
$147,288,000 and $122,002,000 in 1996, 1995 and 1994, respectively.
Cash equivalents. Cash equivalents are cash in excess of current operating
requirements invested in short-term, interest-bearing instruments with
maturities of three months or less at the date of purchase and are stated at
cost, which approximates market value. Interest income was $9,850,000 in 1996,
$16,236,000 in 1995 and $9,778,000 in 1994.
Federal Express Corporation and Subsidiaries
Spare parts, supplies and fuel. Spare parts, supplies and fuel are stated
principally at standard cost (approximates actual cost on a first-in, first-out
basis) which is not in excess of current replacement cost.
Goodwill. Goodwill is the excess of the purchase price over the fair value of
net assets of businesses acquired. It is amortized on a straight-line basis
over periods ranging up to 40 years. Accumulated amortization was $114,606,000
and $100,527,000 at May 31, 1996 and 1995, respectively.
Foreign currency translation. Translation gains and losses of the Company's
foreign operations that use local currencies as the functional currency are
accumulated and reported as a separate component of common stockholders'
investment. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the local
functional currency are included in the results of operations.
Income taxes. Deferred income taxes are provided for the tax effect of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. The Company uses the liability
method to account for income taxes, which requires deferred taxes to be
recorded at the statutory rate expected to be in effect when the taxes are
paid.
The Company has not provided for U.S. federal income taxes on its foreign
subsidiaries' earnings deemed to be permanently reinvested. Quantification of
the deferred tax liability, if any, associated with permanently reinvested
earnings is not practicable.
Revenue recognition. Revenue is generally recognized upon delivery of
shipments. For shipments in transit, revenue is recorded based on the
percentage of service completed.
Earnings per share. Earnings per share is computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are the shares of common stock that would be
issued upon the exercise of all dilutive outstanding stock options, less the
assumed repurchase of treasury shares. Earnings per share assuming full
dilution is substantially the same as earnings per share as stated and,
accordingly, is not shown separately.
Recent pronouncements. During 1997, the Company will adopt the provisions of
two Statements of Financial Accounting Standards ("SFAS") recently issued by
the Financial Accounting Standards Board. SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles be
reviewed periodically for impairment. The Company does not expect the adoption
of SFAS 121 to have a material effect on its financial statements.
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair-value
based method of measuring and recording compensation costs for employee stock
compensation programs. This new standard, however, permits companies to follow
the intrinsic-value based method presently required by Accounting Principles
Board Opinion No. 25, as long as they also provide pro forma footnote
disclosure of the effect that the fair-value based method would have had on net
income and earnings per share had that method been adopted. Management intends
to adopt the pro forma disclosure alternative beginning in 1997.
Reclassifications. Certain amounts for 1995 and 1994 have been reclassified to
conform to the 1996 presentation.
Use of estimates. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Notes to Consolidated Financial Statements
Note 2: Accrued Expenses
May 31
In thousands 1996 1995
Compensated absences $ 211,499 $ 192,785
Insurance 194,209 176,806
Taxes other than income taxes 153,905 137,037
Employee benefits 111,912 127,870
Salaries 78,384 100,024
Aircraft overhaul 59,343 53,540
Other 95,604 116,404
---------- ---------
$ 904,856 $ 904,466
========== =========
Note 3: Long-Term Debt
May 31
In thousands 1996 1995
Unsecured notes payable, interest rates of 6.25% to 10.57%, due through 2013 $ 934,181 $1,187,413
---------- ---------
Unsecured sinking fund debentures, interest rate of 9.63%, due through 2020 98,392 98,323
---------- ---------
Capital lease obligations and tax exempt bonds, due through 2017,
interest rates of 6.75% to 8.30% 255,100 255,100
Less bond reserves 11,096 11,096
---------- ---------
244,004 244,004
---------- ---------
Other debt, interest rates of 9.68% to 9.98% 56,709 50,419
---------- ---------
1,333,286 1,580,159
Less current portion 8,009 255,448
---------- ---------
$1,325,277 $1,324,711
========== ==========
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 May 31, 1996. Interest rates on borrowings under this
agreement are generally determined by maturities selected and prevailing market
conditions. The agreement contains certain covenants and restrictions, none of
which are expected to significantly affect operations or the ability to pay
dividends. As of May 31, 1996, approximately $957,000,000 was available for the
payment of dividends. Commercial paper borrowings are backed by unused
commitments under the revolving credit agreement and reduce the amount
available under the agreement.
Tax exempt bonds were issued by the Memphis-Shelby County Airport Authority
("MSCAA") and the City of Indianapolis. A lease agreement with the MSCAA and a
loan agreement with the City of Indianapolis covering the facilities and
equipment financed with the bond proceeds obligate the Company to pay rentals
and loan payments, respectively, equal to principal and interest due on the
bonds.
Scheduled annual principal maturities of long-term debt for the five years
subsequent to May 31, 1996, are as follows: $8,000,000 in 1997; $126,700,000 in
1998; $265,500,000 in 1999; $14,900,000 in 2000; and $11,300,000 in 2001.
The Company's long-term debt, exclusive of capital leases, had carrying
values of $1,130,000,000 and $1,390,000,000 at May 31, 1996 and 1995,
respectively, compared with fair values of approximately $1,245,000,000 and
$1,470,000,000 at those dates. The estimated fair values were determined based
on quoted market prices or on the current rates offered for debt with similar
terms and maturities.
Federal Express Corporation and Subsidiaries
Note 4: Lease Commitments
The Company utilizes certain aircraft, land, facilities and equipment under
capital and operating leases which expire at various dates through 2024. In
addition, supplemental aircraft are leased under agreements which generally
provide for cancellation upon 30 days' notice.
Property and equipment recorded under capital leases at May 31 was as
follows:
In thousands 1996 1995
Package handling and ground support equipment $346,479 $378,438
Facilities 133,435 133,435
Computer and electronic equipment and other 7,143 7,175
-------- --------
487,057 519,048
Less accumulated amortization 329,678 347,738
-------- --------
$157,379 $171,310
======== ========
Rent expense under operating leases for the years ended May 31 was as
follows:
In thousands 1996 1995 1994
Minimum rentals $820,896 $707,182 $621,174
Contingent rentals 61,164 43,005 21,540
-------- -------- --------
$882,060 $750,187 $642,714
======== ======== ========
Contingent rentals are based on mileage under supplemental aircraft leases.
A summary of future minimum lease payments under capital leases and non-
cancelable operating leases (principally aircraft and facilities) with an
initial or remaining term in excess of one year at May 31, 1996, follows:
In thousands Capital Leases Operating Leases
1997 $ 15,561 $ 724,161
1998 15,561 732,675
1999 15,561 715,247
2000 15,561 671,798
2001 15,561 638,510
Thereafter 356,085 7,634,161
-------- -----------
$433,890 $11,116,552
======== ===========
At May 31, 1996, the present value of future minimum lease payments for
capital lease obligations was $199,004,000.
Note 5: 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 May 31, 1996, none of these shares had been issued.
Notes to Consolidated Financial Statements
Note 6: Common Stockholders' Investment
Under the provisions of the Company's stock incentive plans, options may be
granted to certain key employees (and, under the 1993 plan, to directors who
are not employees of the Company) to purchase common stock of the Company at a
price not less than its fair market value at the date of grant. The following
summarizes information for the past three years with respect to those plans:
Number of Shares Option Price
Under Option Per Share
Outstanding at May 31, 1993 3,147,043 $30.56-$70.19
Granted 982,750 54.31-70.81
Exercised (1,142,249) 30.56-70.19
Canceled (111,758) 34.31-62.94
----------
Outstanding at May 31, 1994 2,875,786 $30.56-$70.81
Granted 671,800 56.13-75.88
Exercised (288,724) 30.56-62.94
Canceled (89,997) 30.56-75.88
----------
Outstanding at May 31, 1995 3,168,865 $30.56-$75.88
Granted 909,000 59.13-82.31
Exercised (710,945) 30.56-75.88
Canceled (167,640) 34.50-82.31
----------
Outstanding at May 31, 1996 3,199,280 $30.56-$82.31
==========
Exercisable at May 31, 1996 1,226,400 $30.56-$75.88
==========
At May 31, 1996, 942,731 shares were available for future grants under the
above-mentioned stock incentive plans.
Under the terms of the Company's restricted stock plans, shares of the
Company's common stock may be awarded to key employees. Restrictions on the
shares expire over a period of one to ten years from the date of award. The
value of shares awarded under these plans is recorded as a reduction of common
stockholders' investment and is being amortized to compensation expense as
restrictions on such shares expire. Shares awarded under the plans totaled
175,250 in 1996 and 11,000 in 1994. No shares were awarded in 1995. During
1996, 1995 and 1994, 14,500, 3,750 and 18,438 shares, respectively, were
forfeited. At May 31, 1996, 128,938 shares were available for future awards.
At May 31, 1996, there were 4,270,949 shares of common stock reserved for
issuance under the above-mentioned plans.
In 1988, the Board of Directors authorized the purchase of up to
approximately 5,300,000 shares of the Company's common stock on the open
market. As of May 31, 1996, a total of 2,911,305 shares at an average cost of
$43.85 per share had been purchased and reissued under the above-mentioned
plans.
Federal Express Corporation and Subsidiaries
Note 7: Income Taxes
The components of the provision for income taxes for the years ended May 31
were as follows:
In thousands 1996 1995 1994
Current provision:
Federal $142,512 $137,041 $131,724
Foreign 37,759 29,787 16,387
State 18,007 23,405 26,862
-------- -------- --------
198,278 190,233 174,973
======== ======== ========
Deferred provision (credit):
Federal 27,962 24,058 2,263
Foreign 2,351 9,072 2,524
State 3,591 1,133 (5,668)
-------- -------- --------
33,904 34,263 (881)
-------- -------- --------
$232,182 $224,496 $174,092
======== ======== ========
The Company's operations included the following income (loss) with respect
to entities in foreign locations for the years ended May 31:
In thousands 1996 1995 1994
Entities with pre-tax income $ 153,000 $ 149,000 $ 127,000
Entities with pre-tax losses (228,000) (173,000) (210,000)
--------- --------- ---------
$ (75,000) $ (24,000) $ (83,000)
========= ========= =========
Income (losses) from entities which are structured as foreign subsidiaries
are not included in the U.S. consolidated income tax return. Approximately
$60,000,000, $29,000,000 and $14,000,000 of net foreign subsidiary income were
not taxable for federal income tax purposes in 1996, 1995 and 1994,
respectively. Income taxes have been provided for foreign operations based upon
the various tax laws and rates of the countries in which the Company's
operations are conducted. There is no direct relationship between the Company's
overall foreign income tax provision and foreign pre-tax book income due to the
different methods of taxation used by countries throughout the world.
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended May 31 follows:
1996 1995 1994
Statutory U.S. income tax rate 35.0% 35.0% 35.0%
Increase resulting from:
Goodwill amortization 0.9 1.0 1.3
Foreign operations 1.7 0.9 3.5
State income taxes, net of federal benefit 2.6 3.1 3.6
Other, net 2.8 3.0 2.6
---- ---- ----
43.0% 43.0% 46.0%
==== ==== ====
Notes to Consolidated Financial Statements
The significant components of deferred tax assets and liabilities as of May
31 were as follows:
In thousands 1996 1995
Deferred Deferred Deferred Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
Depreciation $ -- $324,221 $ -- $303,088
Deferred gains on sales of assets 81,370 -- 67,912 --
Employee benefits 45,137 -- 69,563 --
Self-insurance reserves 165,020 -- 165,197 --
Other 151,355 90,089 137,063 76,802
-------- -------- -------- --------
$442,882 $414,310 $439,735 $379,890
======== ======== ======== ========
Note 8: Pension and Profit Sharing Plans
The Company sponsors pension plans covering substantially all employees. The
largest plan covers U.S. domestic employees age 21 and over, with at least one
year of service, and provides benefits based on final average earnings and
years of service. Plan funding is actuarially determined, subject to certain
tax law limitations.
International defined benefit plans provide benefits primarily based on
final earnings and years of service and are funded in accordance with local
laws and income tax regulations.
The following table sets forth the funded status of the plans as of May 31:
In thousands 1996 1995
Plan assets at fair value $2,725,896 $2,093,422
Actuarial present value of the
projected benefit obligation
for service rendered to date 2,571,086 1,972,009
---------- ----------
Plan assets in excess of
projected benefit obligation 154,810 121,413
Unrecognized net gains from
past experience different
from that assumed and effects
of changes in assumptions (74,425) (123,929)
Prior service cost not yet
recognized in net periodic cost (7,398) (6,449)
Unrecognized transition amount 3,239 3,679
---------- ----------
Pension asset (liability) $ 76,226 $ (5,286)
========== ==========
Accumulated benefit obligation $1,626,877 $1,203,126
========== ==========
Vested benefit obligation $1,538,267 $1,140,545
========== ==========
Federal Express Corporation and Subsidiaries
Net periodic pension cost for the years ended May 31 included the following
components:
In thousands 1996 1995 1994
Service cost -- benefits earned during the period $ 184,305 $ 182,617 $176,861
Interest cost on projected benefit obligation 165,635 143,408 127,959
Actual return on plan assets (463,819) (192,939) (82,019)
Net amortization and deferral 256,968 19,333 (64,727)
--------- --------- --------
$ 143,089 $ 152,419 $158,074
========= ========= ========
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8.0% and 5.5%, respectively, in 1996, 8.6%
and 6.0%, respectively, in 1995 and 8.1% and 6.0%, respectively, in 1994. The
expected long-term rate of return on assets was 9.5% in 1996, 1995 and 1994.
Plan assets consist primarily of marketable equity securities and fixed income
instruments.
The Company also has a profit sharing plan, which covers substantially all
U.S. domestic employees age 21 and over, with at least one year of service with
the Company as of the contribution date, as defined in the plan. The plan
provides for discretionary contributions by the Company which are determined
annually by the Board of Directors. Profit sharing expense was $54,000,000 in
1996, $52,200,000 in 1995 and $36,800,000 in 1994.
Note 9: Postretirement Benefit Plans
The Company offers medical and dental coverage to all eligible U.S. domestic
retirees and their eligible dependents. Vision coverage is provided for
retirees only. Substantially all of the Company's U.S. domestic employees
become eligible for these benefits at age 55 and older, if they have permanent,
continuous service with the Company of at least 10 years after attainment of
age 45 if hired prior to January 1, 1988, or at least 20 years after attainment
of age 35, if hired on or after January 1, 1988. Life insurance benefits are
provided to retirees of the former Tiger International, Inc. who retired prior
to acquisition.
The following table sets forth accrued postretirement benefit cost as of May
31:
Accumulated postretirement benefit obligation:
In thousands 1996 1995
Retirees $ 39,539 $ 35,816
Fully eligible active employees 31,472 24,400
Other active employees, not fully eligible 80,001 60,769
--------- --------
151,012 120,985
Unrecognized net gain 15,402 25,421
--------- --------
$166,414 $146,406
========= ========
Net postretirement benefit cost for the years ended May 31
was as follows:
In thousands 1996 1995 1994
Service cost $12,085 $ 12,870 $ 12,392
Interest cost 11,275 10,617 10,174
Amortization of accumulated gains (780) -- --
------- -------- --------
$22,580 $ 23,487 $ 22,566
======= ======== ========
Notes to Consolidated Financial Statements
Future medical benefit costs were estimated to increase at an annual rate of
10.5% during 1997, decreasing to an annual growth rate of 5.5% in 2007 and
thereafter. Future dental benefit costs were estimated to increase at an annual
rate of 8.5% during 1997, decreasing to an annual growth rate of 5.5% in 2009
and thereafter. The Company's cost is capped at 150% of 1993 employer cost and,
therefore, will not be subject to medical and dental trends after the capped
cost is attained, projected to be in 1999. Primarily because of the cap on the
Company's cost, a 1% increase in these annual trend rates would not have a
significant impact on the accumulated postretirement benefit obligation at May
31, 1996, or 1996 benefit expense. The weighted average discount rates used in
estimating the accumulated postretirement obligation were 7.4% and 8.6% at May
31, 1996 and 1995, respectively. The Company pays claims as incurred.
Note 10: Business Segment Information
The Company is in a single line of business -- the worldwide transportation and
distribution of documents, packages and freight. For reporting purposes,
operations are classified into two geographic areas, U.S. domestic and
international. Shipments which either originate in or are destined to locations
outside the U.S. are categorized as international.
A summary of selected financial information for U.S. domestic and
international operations for the years ended May 31 follows:
In thousands U.S. Total
Domestic International Worldwide
Revenues:
1996 $7,466,311 $2,807,308 $10,273,619
1995 6,839,418 2,552,655 9,392,073
1994 6,199,940 2,279,516 8,479,456
Operating Income (Loss):
1996 $ 542,168 $ 81,656 $ 623,824
1995 465,527 125,617 591,144
1994 559,629 (28,997) 530,632
Identifiable Assets:
1996 $5,449,353 $1,249,618 $ 6,698,971
1995 5,321,811 1,111,561 6,433,372
1994 4,883,644 1,108,854 5,992,498
Identifiable assets used jointly in U.S. domestic and international
operations (principally aircraft) have been allocated based on estimated usage.
International revenues related to services originating in the U.S. totaled
$1,316,100,000, $1,201,100,000 and $1,020,000,000 for the years ended May 31,
1996, 1995 and 1994, respectively.
Note 11: Supplemental Cash Flow Information
Cash paid for interest expense and income taxes for the years ended May 31 was
as follows:
In thousands 1996 1995 1994
Interest (net of capitalized interest) $108,052 $138,833 $158,149
Income taxes 204,487 185,964 167,209
In March 1995, the Company issued three series of loan certificates totaling
$50,300,000 in exchange for a leased B747 aircraft.
Federal Express Corporation and Subsidiaries
Note 12: Commitments and Contingencies
The Company's annual purchase commitments under various contracts as of May 31,
1996, were as follows:
In thousands Aircraft-
Aircraft Related(1) Other(2) Total
1997 $482,800 $185,000 $194,400 $862,200
1998 478,600 64,200 37,800 580,600
1999 240,800 18,500 15,600 274,900
2000 124,200 9,900 -- 134,100
(1)Primarily aircraft modifications, rotables, spare parts and engines.
(2)Facilities, vehicles, computer and other equipment.
At May 31, 1996, the Company was committed to purchase nine Airbus A300, 12
Airbus A310 and ten MD11 aircraft to be delivered through 2000. Deposits and
progress payments of $199,880,000 had been made toward these purchases. In
April 1996, the Company canceled its options to purchase up to 36 additional
Airbus A300s 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.
The Company has entered into contracts which are designed to limit its
exposure to fluctuations in jet fuel prices. Under these contracts, the Company
makes (or receives) payments based on the difference between a specified lower
(or upper) limit 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. At May 31, 1996, the
Company had contracts with various financial institutions covering a total
notional volume of 365,300,000 gallons (approximately 54% of the Company's
annual jet fuel consumption), with some contracts extending through May 1997.
At May 31, 1995, the Company had similar contracts covering a total notional
volume of 97,400,000 gallons (approximately 16% of the Company's annual jet
fuel consumption), with some contracts extending through August 1996. During
1996, the Company received $1,977,000 under jet fuel contracts. Based on
current market prices, the fair value of outstanding contracts at May 31, 1996
and 1995, was approximately $1,370,000 and $141,000, respectively.
Note 13: Legal Proceedings
On May 14, 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.
During June 1996, the Company reached an agreement with the plaintiffs in
all three lawsuits to consolidate the three lawsuits in the United States
District Court for the District of Minnesota. The plaintiffs are in the process
of filing the necessary motions to accomplish this consolidation.
The Company intends to vigorously defend itself in these cases.No amount has
been reserved for these contingencies.
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.
Notes to Consolidated Financial Statements
Note 14: Unusual Events
The Company received $7,800,000 and $9,700,000 in 1996 and 1995, respectively,
from the bankruptcy estate of a firm engaged by the Company in 1990 to remit
payments of employee withholding taxes. These amounts are a partial recovery of
a $32,000,000 loss incurred by the Company in 1991 that resulted from the
firm's failure to remit certain tax payments to appropriate authorities. The
Company has received a total of $17,900,000 from the bankruptcy estate of the
firm. All major issues pertaining to the bankruptcy have been resolved, and any
additional amounts the Company may receive are expected to be insignificant.
In 1995, the Company sold two dedicated warehousing and contract
distribution companies in the United Kingdom. A gain of $35,700,000 was
recorded from the sale.
Note 15: Summary of Quarterly Operating Results (Unaudited)
In thousands, except earnings per share First Second Third Fourth
Quarter Quarter Quarter Quarter
1996
Revenues $2,453,394 $2,547,012 $2,535,470 $2,737,743
Operating income 149,230 170,905 77,943 225,746
Income before income taxes 129,886 154,952 52,637 202,484
Net income 75,334 89,871 27,156 115,416
Earnings per share $ 1.33 $ 1.57 $ .47 $ 2.01
Average shares outstanding 56,688 57,260 57,258 57,346
1995
Revenues $2,231,127 $2,358,765 $2,332,594 $2,469,587
Operating income 142,985 176,376 97,672 174,111
Income before income taxes 107,267 151,120 110,714 152,983
Net income 61,142 86,139 63,107 87,200
Earnings per share $ 1.08 $ 1.53 $ 1.12 $ 1.54
Average shares outstanding 56,614 56,385 56,374 56,601
Report of Independent Public Accountants
Federal Express Corporation and Subsidiaries
To the Stockholders of Federal Express Corporation:
We have audited the accompanying consolidated balance sheets of Federal Express
Corporation (a Delaware corporation) and subsidiaries as of May 31, 1996 and
1995, and the related consolidated statements of income, common stockholders'
investment and cash flows for each of the three years in the period ended May
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Federal Express Corporation
and subsidiaries as of May 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1996, in conformity with generally accepted accounting principles.
Memphis, Tennessee
July 1, 1996
Selected Consolidated Financial Data
Years ended May 31
In thousands, except per
share amounts and Other
Operating Data 1996 1995 1994
Operating Results
Revenues $10,273,619 $9,392,073 $8,479,456
Operating income 623,824 591,144 530,632
Income (loss) before
income taxes 539,959 522,084 378,462
Income (loss) from
continuing operations 307,777 297,588 204,370
Net income (loss) $ 307,777 $ 297,588 $ 204,370
Per Share Data
Earnings (loss) per share:
Continuing operations $ 5.39 $ 5.27 $ 3.65
Discontinued operations -- -- --
Cumulative effect of
changes in accounting
principles -- -- --
Net earnings (loss)
per share $ 5.39 $ 5.27 $ 3.65
Average shares outstanding 57,138 56,494 56,012
Cash dividends -- -- --
Financial Position
Property and equipment,
net $ 4,116,601 $3,715,244 $3,449,093
Total assets 6,698,971 6,433,372 5,992,498
Long-term debt 1,325,277 1,324,711 1,632,202
Common stockholders'
investment 2,576,139 2,245,569 1,924,705
Other Operating Data
Express package:
Average daily package
volume 2,437,662 2,247,594 1,925,105
Average pounds per
package 6.4 6.3 6.0
Average revenue per
pound* $ 2.31 $ 2.31 $ 2.51
Average revenue per
package* $ 14.87 $ 14.62 $ 15.12
Airfreight:
Average daily pounds 2,144,225 2,153,041 1,844,270
Average revenue per
pound $ 1.01 $ 1.06 $ 1.06
Operating weekdays 256 255 257
Aircraft fleet:
Airbus A300-600 16 9 2
Airbus A310-200 25 15 --
Boeing 747-100 -- -- --
Boeing 747-200 4 5 6
McDonnell Douglas MD11 18 13 13
McDonnell Douglas
DC10-10 13 13 11
McDonnell Douglas
DC10-30 22 22 19
McDonnell Douglas DC8 -- -- --
Boeing 727-100 68 68 69
Boeing 727-200 95 90 90
Cessna 208A 10 10 10
Cessna 208B 254 219 206
Fokker F27 32 32 32
Vehicle fleet 36,900 35,900 30,900
Average number of
employees (based on a
standard full-time
workweek) 99,999 94,201 88,502
* Beginning in 1995, certain service fee revenues were classified as package-
related revenue. Data for prior periods has been restated where applicable
to conform to this presentation.
Federal Express Corporation and Subsidiaries
1993 1992 1991 1990 1989 1988 1987
$7,808,043 $7,550,060 $7,688,296 $7,015,069 $5,166,967 $3,882,817 $3,178,308
377,173 22,967 252,126 387,355 414,787 379,452 364,743
203,576 (146,828) 40,942 218,423 298,332 302,328 311,885
109,809 (113,782) 5,898 115,764 166,451 187,716 166,952
$ 53,866 $ (113,782) $ 5,898 $ 115,764 $ 184,551 $ 187,716 $ (65,571)
$ 2.01 $ (2.11) $ .11 $ 2.18 $ 3.18 $ 3.56 $ 3.21
-- -- -- -- -- -- (4.48)
(1.03) -- -- -- .35 -- --
$ .98 $ (2.11) $ .11 $ 2.18 $ 3.53 $ 3.56 $ (1.27)
54,719 53,961 53,350 53,161 52,272 52,670 51,905
-- -- -- -- -- -- --
$3,476,268 $3,411,297 $3,624,026 $3,566,321 $3,431,814 $2,231,875 $1,861,432
5,793,064 5,463,186 5,672,461 5,675,073 5,293,422 3,008,549 2,499,511
1,882,279 1,797,844 1,826,781 2,148,142 2,138,940 838,730 744,914
1,671,381 1,579,722 1,668,620 1,649,187 1,493,524 1,330,679 1,078,920
1,710,561 1,472,642 1,310,890 1,234,174 1,059,882 877,543 704,392
5.8 5.7 5.6 5.4 5.4 5.3 5.1
$ 2.62 $ 2.90 $ 3.08 $ 3.13 $ 3.04 $ 3.10 $ 3.33
$ 15.30 $ 16.38 $ 17.33 $ 16.76 $ 16.28 $ 16.32 $ 16.97
2,050,033 2,258,303 2,650,204 3,148,290 4,019,353 -- --
$ 1.09 $ 1.22 $ 1.20 $ 1.13 $ 1.06 -- --
255 254 255 255 255 257 254
-- -- -- -- -- -- --
-- -- -- -- -- -- --
-- 4 8 9 9 -- --
8 9 10 10 12 -- --
8 4 1 -- -- -- --
11 11 11 10 8 8 8
19 17 16 16 16 13 11
-- -- -- 6 6 -- --
80 85 92 89 80 47 39
87 66 57 41 26 21 21
10 10 10 37 38 38 39
206 206 183 147 109 71 27
32 32 26 19 7 5 --
28,100 30,400 32,800 31,000 28,900 21,000 18,700
84,104 84,162 81,711 75,102 58,136 48,556 41,047
Board of Directors
Robert H. Allen(2)
Private Investor and
Managing Partner
Challenge Investment Partners
Investment firm
Howard H. Baker, Jr.(1)
Partner
Baker, Donelson,
Bearman & Caldwell
Law firm
Anthony J.A. Bryan(1)
Senior Managing Director
The Whatley Group L.L.C.
Private investment and
consulting firm
Robert L. Cox(1)
Partner
Waring Cox
Law firm
Ralph D. DeNunzio(2)
President
Harbor Point Associates, Inc.
Private investment and
consulting firm
Judith L. Estrin
President and
Chief Executive Officer
Precept Software, Inc.
Computer software company
Philip Greer(1*)
Senior Managing Principal
Weiss, Peck & Greer, L.L.C.
Diversified investment man-
agement and securities firm
J.R. Hyde, III (2)
Chairman and
Chief Executive Officer
AutoZone, Inc.
Auto parts retail chain
Charles T. Manatt(2)
Senior Partner
Manatt, Phelps & Phillips
Law firm
George J. Mitchell(1)
Special Counsel
Verner, Liipfert, Bernhard,
McPherson and Hand
Law firm
Jackson W. Smart, Jr.(2*)
Chairman and
Chief Executive Officer
MSP Communications, Inc.
Radio broadcasting company
Frederick W. Smith
Chairman, President and
Chief Executive Officer
Federal Express Corporation
Dr. Joshua I. Smith(1)
Chairman, President and
Chief Executive Officer
The MAXIMA Corporation
Information and
data processing firm
Peter S. Willmott(1)
Chairman and
Chief Executive Officer
Willmott Services, Inc.
Retail and consulting firm
(1) Audit Committee
(2) Compensation Committee
(*) Committee Chairman
Senior Officers Federal Express Corporation and Subsidiaries
Frederick W. Smith
Chairman, President and
Chief Executive Officer
Alan B. Graf, Jr.
Executive Vice President and
Chief Financial Officer
Kenneth R. Masterson
Executive Vice President,
General Counsel and Secretary
Theodore L. Weise
Executive Vice President
Worldwide Operations
David J. Bronczek
Senior Vice President
Europe, Middle East
and Africa
Michael L. Ducker
Senior Vice President
Asia and Pacific
Leonard B. Feiler
Senior Vice President
Central Support Services
T. Michael Glenn
Senior Vice President
Marketing, Customer Service
and Corporate Communications
Dennis H. Jones
Senior Vice President and
Chief Information Officer
Joseph C. McCarty,III
Senior Vice President
Latin America and Caribbean
Gilbert D. Mook
Senior Vice President
Air Operations
James A. Perkins
Senior Vice President and
Chief Personnel Officer
David F. Rebholz
Senior Vice President
Global Sales and Trade Services
Tracy G. Schmidt
Senior Vice President
Air Ground Terminals and
Transportation
Mary Alice Taylor
Senior Vice President
United States and Canada
Laurie A. Tucker
Senior Vice President
Logistics, Electronic
Commerce and Catalog
James S. Hudson
Vice President, Controller and
Chief Accounting Officer
Corporate Information
STOCK LISTING: The Company's common stock is listed on The New YorkStock
Exchange under the ticker symbol FDX.
STOCKHOLDERS: At July 15, 1996, there were 9,649 stockholders of record.
MARKET INFORMATION: Following are high and low closing prices, by quarter,
for Federal Express Corporation common stock in fiscal 1996 and 1995. No cash
dividends have been declared.
Closing prices of common stock First Quarter Second Quarter Third Quarter Fourth Quarter
FY1996
High $75-3/8 $86 82-5/8 82-1/2
Low 58-5/8 79-5/8 66-7/8 68-7/8
FY1995
High $80-3/4 70-3/4 65-3/4 69-5/8
Low 64 56-1/2 53-7/8 59-7/8
Corporate headquarters: 2005 Corporate Avenue,Memphis, Tennessee 38132,
(901) 369-3600.
Annual meeting: The annual meeting of stockholders will be held at the
Crowne Plaza Memphis, 250 NorthMain Street, Memphis,Tennessee, on Tuesday,
October 1, 1996, at 10:00 a.m., CDT.
Inquiries: For financial information, contact Thomas L. Holland, Managing
Director, Investor Relations and Corporate Contributions, Federal Express
Corporation, Box 727, Dept. 1854, Memphis,Tennessee 38194, (901) 395-3478. For
general information, contact Gregory M. Rossiter, Managing Director, Public
Relations, Federal Express Corporation, Box 727, Dept. 1850, Memphis, Tennessee
38194, (901) 395-3460.
Form 10-K: A copy of the Company's Annual Report on Form 10-K (excluding
exhibits), filed with the Securities and Exchange Commission (SEC) is available
free of charge.You will be mailed a copy upon request to Rebecca M. Halvorson,
Manager, Investor Relations Department,Federal Express Corporation,Box 727,
Dept. 1854, Memphis,Tennessee 38194, (901) 395-3478. Company documents filed
electronically with the SEC can also be found on the Internet at the SEC's Web
site (http://www.sec.gov).
Auditors: Arthur Andersen LLP, Memphis,Tennessee.
Registrar and transfer agent: First Chicago Trust Company of New York,
Shareholder Services, P.O.Box 2500, Jersey City, New Jersey 07303-2500, (800)
446-2617 / Michael R. Phalen (312) 407-4885.
Equal Employment Opportunity: Federal Express Corporation is firmly
committed to afford Equal Employment Opportunity to all individuals regardless
of age, sex, race, color, religion, national origin, citizenship, disability,
or status as a Vietnam era or special disabled veteran. We are strongly bound
to this commitment because adherence to Equal Employment Opportunity principles
is the only acceptable way of life. We adhere to those principles not just
because they're the law, but because it's the right thing to do.
Service Marks: Federal Express,/R/ FedEx,/R/ the FedEx logo, The World On
Time,/R/ 1-800-Go-FedEx,/R/ FedEx AsiaOne,/R/ FedEx International Priority,/R/
FedEx ShipSite,/R/ FedEx World Service Centers,/R/ FedEx First Overnight,/R/
FedEx International Express Freight,/R/ FedEx/R/ Air Charter, FedEx Standard
Overnight/R/ and FedEx EXPRESSFREIGHTER/R/ ARE REGISTERED SERVICE MARKS OF
FEDERAL EXPRESS CORPORATION REG. U.S. PAT. &TM. OFF. AND IN CERTAIN OTHER
COUNTRIES. FEDEX INTERNETSHIP,SM FEDEX INTERNATIONAL FIRST,SM FEDEX SAMEDAYSM
AND FEDEX INTERNATIONAL AIRPORT-TO-AIRPORTSM ARE SERVICE MARKS AND FEDEX SHIPTM
IS A TRADEMARK OF FEDERAL EXPRESS CORPORATION.
Portions of this Annual Report were printed on recycled paper.