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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED FEBRUARY 29, 2000, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
COMMISSION FILE NUMBER: 333-39483
FEDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 62-1721435
(State of incorporation) (I.R.S. Employer
Identification No.)
942 South Shady Grove Road
Memphis, Tennessee 38120
(Address of principal (Zip Code)
executive offices)
(901) 818-7200
(Registrant's telephone number, including area code)
FDX Corporation
(Former name)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding Shares at March 31, 2000
Common Stock, par value $.10 per share 287,072,262
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FEDEX CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets
February 29, 2000 and May 31, 1999 ................................... 3-4
Condensed Consolidated Statements of Income
Three and Nine Months Ended February 29, 2000
and February 28, 1999 ................................................ 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 29, 2000
and February 28, 1999 ................................................ 6
Notes to Condensed Consolidated Financial Statements ...................... 7-12
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants .................................... 13
Report of Independent Public Accountants .................................. 14
Management's Discussion and Analysis of Results of Operations
and Financial Condition .............................................. 15-22
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K........................................... 23
EXHIBIT INDEX.............................................................. E-1
- 2 -
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
February 29,
2000 May 31,
(Unaudited) 1999
------------- ----------
(In thousands)
Current Assets:
Cash and cash equivalents......................... $ 129,492 $ 325,323
Receivables, less allowances of
$89,226,000 and $68,305,000 ..................... 2,487,651 2,153,166
Spare parts, supplies and fuel .................... 279,425 291,922
Deferred income taxes ............................. 314,259 290,721
Prepaid expenses and other ........................ 108,520 79,896
----------- -----------
Total current assets .......................... 3,319,347 3,141,028
Property and Equipment, at Cost ........................ 14,837,203 13,719,907
Less accumulated depreciation and amortization .... 7,850,721 7,160,690
----------- -----------
Net property and equipment .................... 6,986,482 6,559,217
Other Assets:
Goodwill .......................................... 466,156 344,002
Other ............................................. 743,699 603,964
----------- -----------
Total other assets ............................ 1,209,855 947,966
----------- -----------
$11,515,684 $10,648,211
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
February 29,
2000 May 31,
(Unaudited) 1999
------------- ------------
(In thousands)
Current Liabilities:
Short-term borrowings ..................................... $ 150,000 $ --
Current portion of long-term debt ......................... 101,229 14,938
Accrued salaries and employee benefits .................... 639,896 740,492
Accounts payable .......................................... 1,065,847 1,133,952
Accrued expenses .......................................... 966,754 895,375
----------- -----------
Total current liabilities ............................. 2,923,726 2,784,757
Long-Term Debt, Less Current Portion ........................... 1,855,773 1,359,668
Deferred Income Taxes .......................................... 327,221 293,462
Other Liabilities .............................................. 1,769,895 1,546,632
Commitments (Note 8)
Common Stockholders' Investment:
Common Stock, $.10 par value;
800,000,000 shares authorized, 298,573,387
and 297,987,200 issued ................................ 29,857 29,799
Additional paid-in capital ................................ 1,059,078 1,061,312
Retained earnings ......................................... 4,053,843 3,615,797
Treasury stock, at cost ................................... (464,739) (1,281)
Deferred compensation and other ........................... (20,946) (17,247)
Accumulated other comprehensive income .................... (18,024) (24,688)
----------- -----------
Total common stockholders' investment ................. 4,639,069 4,663,692
----------- -----------
$11,515,684 $10,648,211
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------------ ----------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
----------- ------------ ------------ ------------
(In thousands, except per share amounts)
Revenues ......................................... $4,518,057 $ 4,098,418 $13,408,138 $12,389,957
Operating Expenses:
Salaries and employee benefits............... 1,926,473 1,762,275 5,631,110 5,267,390
Purchased transportation..................... 416,912 375,582 1,244,629 1,143,945
Rentals and landing fees..................... 386,473 364,157 1,146,692 1,043,385
Depreciation and amortization................ 293,727 263,725 856,349 766,098
Maintenance and repairs...................... 270,837 237,616 804,198 721,693
Fuel......................................... 256,879 146,091 666,440 449,232
Other........................................ 760,284 796,934 2,263,906 2,225,346
---------- ---------- ----------- -----------
4,311,585 3,946,380 12,613,324 11,617,089
---------- ---------- ----------- -----------
Operating Income.................................. 206,472 152,038 794,814 772,868
Other Income (Expense):
Interest, net................................ (30,282) (25,159) (77,479) (75,246)
Other, net................................... 10,808 (5,610) 15,471 (8,601)
---------- ---------- ----------- -----------
(19,474) (30,769) (62,008) (83,847)
---------- ---------- ----------- -----------
Income Before Income Taxes........................ 186,998 121,269 732,806 689,021
Provision for Income Taxes........................ 73,870 43,436 289,461 279,053
---------- ---------- ----------- -----------
Net Income........................................ $ 113,128 $ 77,833 $ 443,345 $ 409,968
========== ========== =========== ===========
Earnings per common share:
Basic........................................ $ .39 $ .26 $ 1.51 $ 1.39
========== ========== =========== ===========
Assuming dilution............................ $ .39 $ .26 $ 1.49 $ 1.37
========== ========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
February 29, February 28,
2000 1999
-------------- ------------
(In thousands)
Net Cash Provided by Operating Activities ......................................... $ 875,569 $ 1,039,094
Investing Activities:
Purchases of property and equipment .......................................... (1,227,943) (1,335,543)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions .............................................. -- 80,995
Reimbursements of A300 and MD11 deposits ................................. 24,377 25,130
Other dispositions ....................................................... 150,792 157,583
Acquisitions of businesses ................................................... (257,973) --
Other, net ................................................................... (15,804) (19,912)
----------- -----------
Net cash used in investing activities ............................................. (1,326,551) (1,091,747)
Financing Activities:
Short-term borrowings, net ................................................... 150,000 102,428
Proceeds from long-term debt issuances ....................................... 590,613 --
Principal payments on long-term debt ......................................... (12,596) (167,722)
Proceeds from stock issuances ................................................ 11,792 35,656
Purchase of treasury stock ................................................... (491,229) (8,169)
Other, net ................................................................... 6,571 --
----------- -----------
Net cash provided by (used in) financing activities ............................... 255,151 (37,807)
----------- -----------
Net decrease in cash and cash equivalents ......................................... (195,831) (90,460)
Cash and cash equivalents at beginning of period .................................. 325,323 229,565
----------- -----------
Cash and cash equivalents at end of period........................................ $ 129,492 $ 139,105
=========== ===========
Cash payments for:
Interest (net of capitalized interest)....................................... $ 88,644 $ 86,999
=========== ===========
Income taxes................................................................. $ 297,309 $ 362,970
=========== ===========
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines).................................... $ 19,450 $ 39,881
Fair value of assets acquired under
exchange agreements ........................................................ 26,190 21,603
----------- -----------
Fair value of assets surrendered (under) over
fair value of assets acquired.............................................. (6,740) $ 18,278
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BUSINESS
On January 19, 2000, a new branding strategy was announced that resulted
in name changes of the holding company and operating companies to include the
FedEx brand name and creation of a new services company subsidiary.
Effective January 19, 2000, the name of the holding company was
changed from FDX Corporation to FedEx Corporation (the "Company"). Effective
February 3, 2000, RPS became FedEx Ground Package System, Inc. ("FedEx
Ground"), Roberts Express became FedEx Custom Critical, Inc. ("FedEx Custom
Critical") and FDX Logistics became FedEx Global Logistics, Inc. ("FedEx
Logistics"). The names of Federal Express Corporation and Viking Freight,
Inc. ("Viking") did not change; however, Federal Express Corporation will be
commonly referred to as FedEx Express ("FedEx Express"). A newly created
FedEx Corporate Services subsidiary will be in effect June 1, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information, the
instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X,
and should be read in conjunction with the Company's Annual Report on Form 10-K
for the year ended May 31, 1999. Accordingly, significant accounting policies
and other disclosures normally provided have been omitted since such items are
disclosed therein.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of the Company as of February 29,
2000 and the consolidated results of its operations for the three and nine-month
periods ended February 29, 2000 and February 28, 1999, and its consolidated cash
flows for the nine-month periods ended February 29, 2000 and February 28, 1999.
Operating results for the three and nine-month periods ended February 29, 2000
are not necessarily indicative of the results that may be expected for the year
ending May 31, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, which is
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.
The Company has entered into contracts on behalf of its subsidiary FedEx
Express, that are designed to limit FedEx Express's exposure to fluctuations in
jet fuel prices. Under these contracts, the Company 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.
- 7 -
As of early April 2000, contracts in place to fix the price of jet fuel cover
approximately half of the estimated usage for the fourth quarter of 2000.
Through early April 2000, contracts covering 2001 fix the price of approximately
one-third of the estimated requirements for jet fuel.
Certain prior period amounts have been reclassified to conform to the
current presentation.
(3) ACQUISITIONS
On September 10, 1999, the Company's FedEx Logistics subsidiary acquired
the assets of GeoLogistics Air Services, Inc., an airfreight forwarder servicing
freight shipments between the United States and Puerto Rico, for approximately
$116,000,000 in cash in a business combination accounted for as a purchase. This
business is operating under the name Caribbean Transportation Services, Inc. The
excess of purchase price over the estimated fair value of the net assets
acquired ($103,000,000) has been recorded as goodwill and is being amortized
ratably over 15 years.
On February 29, 2000, the Company acquired all of the common stock of
Tower Group International, a leader in the business of international
transportation logistics and trade information technology, for approximately
$140,000,000 in cash in a business combination accounted for as a purchase.
This business is operating as a subsidiary of FedEx Trade Networks, Inc.
("FTN"). The excess of purchase price over the estimated fair value of the
net assets acquired ($28,000,000) has been recorded as goodwill and is being
amortized ratably over 25 years.
The operating results of these acquired companies are included in the
operations of the Company from the date of acquisition.
Pro forma results including these acquisitions would not differ
materially from reported results in any of the periods presented.
(4) COMPREHENSIVE INCOME
The following table provides a reconciliation of net income reported in
the Company's consolidated financial statements to comprehensive income (in
thousands):
Three Months Ended Nine Months Ended
-----------------------------------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
------------ ------------ ----------- ------------
Net income....................................... $113,128 $ 77,833 $443,345 $409,968
Other comprehensive income:
Unrealized gain on
available-for-sale securities ............... 14,520 -- 11,458 --
Tax effect.................................... (5,663) -- (4,469) --
-------- -------- -------- --------
Net of tax.................................. 8,857 -- 6,989 --
Foreign currency translation
adjustments................................. (3,761) (5,231) 474 (1,469)
Tax effect.................................... (68) 845 (799) 937
-------- -------- -------- --------
Net of tax.................................. (3,829) (4,386) (325) (532)
-------- -------- -------- --------
Comprehensive income.......................... $118,156 $ 73,447 $450,009 $409,436
======== ======== ======== ========
- 8 -
(5) FINANCING ARRANGEMENTS
At February 29, 2000, short-term borrowings comprise funds drawn on the
Company's revolving credit agreement. These borrowings, which have an
approximate interest rate of 6.5%, mature through April 2000.
Unsecured sinking fund debentures of FedEx Express in the amount of
$100,000,000 and the related discount are included in current portion of
long-term debt, as FedEx Express gave notice to call the bonds on January 25,
2000. The bonds, which were redeemed by FedEx Express on March 1, 2000, were
originally due through 2020. Interest accrued at the rate of 9.63% through the
redemption date. A charge of approximately $6,000,000 representing the premium
paid to the holders of the bonds retired and write-off of the related
unamortized deferred finance charges and remaining unamortized discount was
incurred upon redemption and will be recognized in the Company's fourth quarter.
Commercial paper in the amount of $595,200,000 was outstanding at
February 29, 2000. Interest rates on these borrowings approximate 6%. The
commercial paper is reflected in Long-Term Debt based on the Company's ability
and intent to refinance this instrument with long-term debt.
The Company has a $1,000,000,000 revolving credit agreement with
domestic and foreign banks. The revolving credit agreement comprises two parts.
The first part provides for a commitment of $800,000,000 through January 27,
2003. The second part provides for a 364-day commitment of $200,000,000 through
October 13, 2000. Interest rates on borrowings under this agreement are
generally determined by maturities selected and prevailing market conditions.
The commercial paper borrowings, which are backed by unused commitments under
the revolving credit agreement, as well as the short-term borrowings described
above, reduce the amount available under the revolving credit agreement. At
February 29, 2000, $254,800,000 of the commitment amount was available.
- 9 -
(6) COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the three and
nine-month periods ended February 29, 2000 and February 28, 1999 was as follows
(in thousands, except per share amounts):
Three Months Ended Nine Months Ended
----------------------------------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
------------ ------------ ----------- ------------
Net income applicable to common
stockholders.................................. $113,128 $ 77,833 $443,345 $409,968
======== ======== ======== ========
Average shares of common stock
outstanding................................... 289,294 296,327 293,627 295,434
======== ======== ======== ========
Basic earnings per share......................... $ .39 $ .26 $ 1.51 $ 1.39
======== ======== ======== ========
Average shares of common stock
outstanding................................... 289,294 296,327 293,627 295,434
Common equivalent shares:
Assumed exercise of outstanding
dilutive options............................. 12,690 15,140 12,934 12,868
Less shares repurchased from
proceeds of assumed exercise
of options................................... (8,317) (9,523) (8,031) (8,789)
-------- --------- -------- --------
Average common and common
equivalent shares............................. 293,667 301,944 298,530 299,513
======== ======== ======== ========
Earnings per share,
assuming dilution............................. $ .39 $ .26 $ 1.49 $ 1.37
======== ======== ======== ========
In September 1999, the Company's Board of Directors approved a plan that
authorized the purchase of up to 15,000,000, or approximately five percent, of
the Company's outstanding shares of common stock. As of February 29, 2000, the
Company had acquired 12,000,000 shares under the plan at an average cost of
$40.08 per share and reissued 449,123 of these shares to fund employee benefits.
The remaining shares (11,550,877) are being held in treasury for general
corporate purposes.
(7) BUSINESS SEGMENT INFORMATION
The Company is a global transportation and logistics provider whose
operations are primarily represented by FedEx Express, the world's largest
express transportation company, and FedEx Ground, a business-to-business ground
small-package carrier. These operating companies comprise the Company's
reportable segments. Other operating companies included in the FedEx Corporation
portfolio are Viking Freight, a less-than-truckload carrier operating
principally in the western United States; FedEx Custom Critical, a
critical-shipment carrier; FedEx Logistics, a contract logistics provider; and
FTN, a trade services provider which was formed in February 2000. Amounts
included in Other in the following table also include certain unallocated
corporate items.
- 10 -
The following table provides a reconciliation of reportable segment
revenues and operating income to the Company's consolidated financial statement
totals (in thousands):
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
----------- ------------ ------------ --------------
Revenue
FedEx Express................. $3,757,833 $3,430,708 $11,080,666 $10,330,127
FedEx Ground.................. 486,506 455,329 1,483,464 1,376,746
Other......................... 273,718 212,381 844,008 683,084
---------- ---------- ----------- -----------
$4,518,057 $4,098,418 $13,408,138 $12,389,957
========== ========== =========== ===========
Operating income
FedEx Express................ $ 143,394 $ 95,274 $ 563,553 $ 565,285
FedEx Ground................. 39,465 49,791 155,615 159,610
Other........................ 23,613 6,973 75,646 47,973
---------- ---------- ----------- -----------
$ 206,472 $ 152,038 $ 794,814 $ 772,868
========== ========== =========== ===========
(8) COMMITMENTS
As of February 29, 2000, the Company's purchase commitments for the
remainder of 2000 and annually thereafter under various contracts are as follows
(in thousands):
Aircraft-
Aircraft Related(1) Other(2) Total
-------- ---------- -------- -------
2000 (remainder) $ 65,700 $121,000 $187,600 $374,300
2001 188,100 326,900 190,000 705,000
2002 242,800 375,500 12,600 630,900
2003 439,600 463,900 7,700 911,200
2004 235,200 450,800 7,700 693,700
(1) Primarily aircraft modifications, rotables, spare parts and spare engines.
(2) Primarily vehicles, facilities, computers and other equipment.
FedEx Express is committed to purchase three DC10s, 29 MD11s and 75 Ayres
ALM 200s to be delivered through 2007. Deposits and progress payments of
$7,150,000 have been made toward these purchases.
FedEx Express has entered into agreements with two airlines to acquire 53
DC10 aircraft (48 of which had been received as of February 29, 2000), spare
parts, aircraft engines and other equipment, and maintenance services, in
exchange for a combination of aircraft engine noise reduction kits and cash.
Delivery of these aircraft began in 1997 and will continue through 2001.
Additionally, these airlines may exercise put options through December 31, 2003,
requiring FedEx Express to purchase up to 21 additional DC10s along with
additional aircraft engines and equipment.
During the nine-month period ended February 29, 2000, FedEx Express
acquired five A300s and one MD11 under operating leases. These aircraft were
included as purchase commitments as of May 31, 1999. At the time of delivery,
FedEx Express sold its rights to purchase these aircraft to third parties who
reimbursed FedEx Express for its deposits on the aircraft and paid additional
consideration. FedEx Express then entered into operating leases with each of the
third parties who purchased the aircraft from the manufacturer.
- 11 -
Lease commitments added since May 31, 1999 for the five A300s and one
MD11 are as follows (in thousands):
2000 $ 17,700
2001 33,800
2002 32,500
2003 32,900
2004 34,600
Thereafter 740,400
- 12 -
REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, has performed a
review of the condensed consolidated balance sheet of the Company as of February
29, 2000, and the related condensed consolidated statements of income for the
three and nine-month periods ended February 29, 2000 and February 28, 1999 and
the condensed consolidated statements of cash flows for the nine-month periods
ended February 29, 2000 and February 28, 1999, included herein, as indicated in
their report thereon included on page 14.
- 13 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of FedEx Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
FedEx Corporation (a Delaware corporation) and subsidiaries as of February 29,
2000 and the related condensed consolidated statements of income for the three
and nine-month periods ended February 29, 2000 and February 28, 1999 and the
condensed consolidated statements of cash flows for the nine-month periods ended
February 29, 2000 and February 28, 1999. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of FedEx Corporation and
subsidiaries as of May 31, 1999 and the related consolidated statements of
income, changes in stockholders' investment and comprehensive income and cash
flows for the year then ended. In our report dated June 29, 1999, we expressed
an unqualified opinion on those financial statements, which are not presented
herein. In our opinion, the accompanying condensed consolidated balance sheet of
FedEx Corporation and subsidiaries as of May 31, 1999, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Memphis, Tennessee
March 22, 2000
- 14 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Consolidated results
Results for the third quarter ended February 29, 2000 continued to
reflect the effects of higher fuel prices, partially offset by strong
international growth and the effects of the Company's cost containment
initiatives. Increased fuel prices negatively affected third quarter and
year-to-date expense by $105 million and $193 million compared to the comparable
periods in the prior year. The third quarter also included two more operating
days compared to the prior year at the Company's largest business unit. The
prior year's third quarter results included $91 million in pre-tax expenses
associated with strike contingency planning ($81 million affecting operating
income).
In response to higher fuel costs, Federal Express Corporation ("FedEx
Express"), the Company's largest business segment, implemented a fuel surcharge
of 3% on most U.S. domestic and international services effective February 1,
2000. In March 2000, the Company announced that it would increase the current
fuel surcharge to 4%, effective April 1, 2000. The surcharge applies to all
shipments tendered within the United States and all U.S. export shipments, where
legally and contractually possible. The Company has also entered into contracts
designed to limit its exposure to higher year-over-year jet fuel prices. The
combination of the surcharge and the hedging program is expected to mitigate the
increased year-over-year fuel cost for the fourth quarter.
Strong package volume growth in certain international markets contributed
positively to earnings for the third quarter and year-to-date periods. Cost
controls to align short-term spending with current business growth levels
combined with productivity enhancements helped offset the effects of lower than
expected volume growth in U.S. domestic markets. These trends are expected to
continue for the remainder of 2000.
During the third quarter the Company announced a major rebranding and
reorganization initiative that management believes will enable it to compete
better collectively while retaining the independent operating structure of the
Company's business units. The new branding strategy extended the FedEx brand
name to three subsidiaries and the Company. These organizational changes are
designed to enhance revenue growth by centralizing the sales, marketing and
customer service functions of the Company's two largest business segments,
effective June 1, 2000. As planned, the Company launched the FedEx Home Delivery
service in March 2000 with initial coverage extending to 38 major U.S. markets.
Costs associated with the rebranding and reorganization actions and FedEx Home
delivery negatively affected third quarter operations by approximately $15
million.
Net interest expense increased in both the third quarter and the
year-to-date period compared to prior year due to higher average debt levels.
Other, net for the third quarter includes an $11 million gain from the sale of
securities held by FedEx Express. The prior year's third quarter included
approximately $10 million of non-operating expenses related to FedEx Express's
strike contingency plans. The Company's effective tax rate for the third quarter
and year-to-date periods was 39.5%. The prior year third quarter effective tax
rate of 35.8% reflected the decrease of the year-to-date tax rate from 41.5% to
40.5%. The year-over-year decline in the effective tax rate is primarily due to
stronger results from international operations.
- 15 -
Actual results for the remainder of 2000 may vary depending upon many
factors such as economic growth rates, rates of volume growth in U.S. domestic
markets at both of the Company's principal business segments, the actions of
competitors, the spot prices of aviation and diesel fuel, the extent to which
the Company enters into additional contracts designed to limit its exposure to
fluctuations in jet fuel prices, the duration of the fuel surcharge and any
other pricing actions and the impact those actions may have on demand for the
Company's services.
FedEx Express
The following table compares revenues and operating income (in millions)
and selected statistics (in thousands, except yield amounts) for the three- and
nine-month periods ended February 29, 2000 and February 28, 1999:
Three Months Ended Percent Nine Months Ended Percent
2000 1999 Change 2000 1999 Change
---- ---- ------ ----- ------ ------
Revenues:
Package:
U.S. overnight ............ $ 1,875 $ 1,752 + 7 $ 5,552 $ 5,308 + 5
U.S. deferred ............. 642 584 +10 1,789 1,686 + 6
International Priority (IP) 887 730 +21 2,586 2,218 +17
------- ------- ------- -------
Total package revenue . 3,404 3,066 +11 9,927 9,212 + 8
Freight:
U.S ....................... 141 108 +30 415 315 +32
International ............. 117 129 -10 370 402 - 8
------- ------- ------- -------
Total freight revenue . 258 237 + 9 785 717 + 9
Other ............................ 96 128 -24 369 401 - 8
------- ------- ------- -------
Total revenues ........ $ 3,758 $ 3,431 +10 $11,081 $10,330 + 7
======= ======= ======= =======
Operating income ................. $ 143 $ 95 +51 $ 564 $ 565 --
======= ======= ======= =======
Package statistics:
Average daily packages:
U.S. overnight ............ 2,042 1,995 + 2 2,002 1,942 + 3
U.S. deferred ............. 991 966 + 3 914 897 + 2
IP ........................ 318 279 +14 312 276 +13
------- ------- ------- -------
Total packages ........ 3,351 3,240 + 3 3,228 3,115 + 4
Revenue per package (yield):
U.S. overnight ............ $ 14.35 $ 14.16 + 1 $ 14.45 $ 14.31 + 1
U.S. deferred ............. 10.12 9.76 + 4 10.19 9.84 + 4
IP ........................ 43.60 42.14 + 3 43.12 42.02 + 3
Package composite ..... 15.87 15.26 + 4 16.02 15.48 + 3
Freight statistics:
Average daily pounds:
U.S ....................... 4,607 4,391 + 5 4,742 4,261 +11
International ............. 2,265 2,645 -14 2,448 2,661 - 8
------- ------- ------- -------
Total freight ......... 6,872 7,036 - 2 7,190 6,922 + 4
Revenue per pound (yield):
U.S ....................... $ .48 $ .40 +20 $ .46 $ .39 +18
International ............. .81 .79 + 3 .79 .79 --
Freight composite ..... .59 .54 + 9 .57 .54 + 6
=====================================================================================================
- 16 -
REVENUES
Total revenue increased by 10% in the third quarter and 7% for the
nine-month period; however, growth in U.S. domestic overnight package volume
continued to be lower than long-term growth goals. Strong revenue growth in
higher-yielding IP services, especially in Asia and Europe, continued in the
third quarter and is expected to stay strong for the remainder of the fiscal
year. U.S. deferred package revenue growth for the third quarter and
year-to-date periods matched anticipated levels as management continues to
slow the growth of these lower-yielding services. List price increases,
including an average 2.8% domestic rate increase in March 1999, the 3% fuel
surcharge implemented in February 2000 and an ongoing yield-management
program also contributed to the slight increase in yields in the third
quarter. In an effort to stimulate U.S. domestic revenue growth in
higher-yielding package products, FedEx Express is realigning its sales
force. The changes will include a greater emphasis on small and medium-sized
customers and modifications to the sales incentive program to target
higher-yielding packages. Management believes that these actions should
improve the long-term growth of express packages and improve market share at
FedEx Express, which has eroded slightly in the current year. Actual results,
however, may vary depending on a number of factors, including the effective
execution of the sales force realignment, the impact of competitive pricing
changes, customer responses to yield-management initiatives and the fuel
surcharge, changing customer demand patterns, actions by competitors,
regulatory conditions for aviation rights and general economic conditions.
Total freight revenue increased in the third quarter and year-to-date
periods due to higher average daily pounds and improved yields in U.S. freight,
offset by declines in international freight pounds.
Other revenue included charter services, sales of engine noise reduction
kits, Canadian domestic revenue, logistics services and other.
OPERATING INCOME
Operating income for the third quarter and year-to-date periods reflects
the impact of higher fuel costs, offset partially by higher growth in
international shipments. Slower than expected growth in U.S. package services
also negatively impacted operating income during the year-to-date period. The
prior year's third quarter included $81 million in strike contingency costs
related to contracts for supplemental airlift and ground transportation.
Fuel expenses increased 72% and 46% for the third quarter and
year-to-date periods. For the third quarter, average cost per gallon for
aircraft fuel increased 79% and gallons consumed increased 2%. Year to date,
average cost per gallon increased 45% and gallons consumed increased 5%. In
order to offset most of the effects of substantially higher fuel costs, FedEx
Express implemented a fuel surcharge of 3% on most U.S. domestic and
international services effective February 1, 2000. In March 2000, FedEx Express
announced that it would increase the surcharge to 4% effective April 1, 2000.
The surcharge will apply to all shipments tendered within the United States and
all U.S. export shipments, where legally and contractually possible.
Additionally, the Company has entered into contracts designed to limit
its exposure to jet fuel price fluctuations. These contracts did not materially
affect fuel expense during the third quarter. As of early April 2000, contracts
in place to fix the price of jet fuel cover approximately 50% of the estimated
usage for the fourth quarter of 2000 and approximately one-third of the
estimated requirements for jet fuel in 2001.
- 17 -
In light of lower than expected U.S. domestic package volume growth,
FedEx Express continues to execute cost containment and productivity enhancement
programs. By lowering discretionary spending and limiting staffing additions,
management expects to align controllable costs with current business growth;
however, these actions will not affect plans for strategic spending in support
of long-term growth goals. The actual impact of the fuel surcharge, the jet fuel
price contracts and management's cost containment actions on operating income
will depend on a number of factors such as the impact of competitive pricing
changes, customer responses to yield-management initiatives, the actual price of
jet fuel, changing customer demand patterns, actions by FedEx Express's
competitors and general economic conditions.
Rentals and landing fees increased at a rate higher than revenues for the
nine months ended February 29, 2000 due to an increase in aircraft leases
entered into based on anticipated needs. Aircraft lease expense at FedEx Express
for the third quarter and year-to-date periods rose 12% and 14%.
As of February 29, 2000, FedEx Express had 102 wide-bodied aircraft under
operating lease compared with 93 as of February 28, 1999.
Maintenance and repairs at FedEx Express increased 15% in the third
quarter and 12% year to date. Given FedEx Express's increasing fleet size and
age and variety of aircraft types, management believes that maintenance and
repairs expense will continue to increase for the remainder of 2000. In part,
this higher expense will likely be attributed to scheduled maintenance and
repairs and a greater number of routine cycle checks resulting from fleet usage
and certain Federal Aviation Administration directives.
Salaries and employee benefits increased 9% in the third quarter and 7%
for the year-to-date period due to higher costs in connection with the agreement
with the Fedex Pilots Association that became effective May 31, 1999 and a
slight increase in the number of employees.
Contributions from the sales of engine noise reduction kits declined $15
million for the quarter and $43 million year to date. Management expects
declines for the remainder of the calendar year, after which it expects minimal
sales of these kits.
FedEx Ground
The following table compares revenues and operating income (in millions)
and selected package statistics (in thousands, except yield amounts) for the
three- and nine-month periods ended February 29, 2000 and February 28, 1999:
Three Months Ended Percent Nine Months Ended Percent
2000 1999 Change 2000 1999 Change
------- ------ ------- ------- ------- -------
Revenues $ 487 $ 455 + 7 $1,483 $1,377 + 8
------- ------ ------ ------
Operating income $ 39 $ 50 -21 $ 156 $ 160 - 3
------- ------ ------ ------
Average daily packages 1,415 1,364 + 4 1,440 1,379 + 4
Revenue per package (yield) $ 5.54 $ 5.38 + 3 $ 5.51 $ 5.31 + 4
======= ====== ====== ======
- 18 -
REVENUES
Revenues for FedEx Ground Package System, Inc. ("FedEx Ground") grew 7%
for the third quarter and 8% for the year-to-date period, reflecting higher
average daily packages and improvement in yields. Yields were positively
impacted by a rate increase of 2.3% in February 1999 and higher-yielding
packages. Weather conditions in the eastern United States during the third
quarter negatively affected package volume. Revenue in 1999 reflected a one-time
benefit of approximately $7 million to align FedEx Ground's estimation
methodology for in-transit revenue with that of the Company's other operating
subsidiaries. Reported package yield was increased in the third quarter of 1999
by $.08 due to this one time adjustment.
FedEx Ground continues to expand capacity in order to accommodate volume
growth, while maintaining or improving yields. FedEx Ground has opened two
additional hub facilities in the current year and will continue to expand
package processing capacity to meet its growth plans. In March 2000 FedEx Ground
launched its new service, FedEx Home Delivery. This new service is dedicated to
meeting the needs of business-to-consumer shippers. Currently this service is
available for approximately 50% of the U.S. population, with plans for expansion
which will extend the service to approximately 75% of the U.S. population within
a year. The actual results of these new services will depend upon a number of
factors, such as consumer demand for and satisfaction with the FedEx Ground
product, the service coverage and brand awareness of the FedEx Ground product,
competitive responses including pricing, the extent of the Company's ability to
penetrate the business-to-consumer electronic commerce market and the ability to
attract and retain qualified contractors for the delivery network.
OPERATING INCOME
Operating income for the third quarter and nine-month period reflects
higher operating costs, due primarily to investment in capacity expansion and
technology. In the third quarter, FedEx Ground incurred approximately $5 million
in costs associated with the roll-out of home delivery service. The effects of
these higher costs were partially mitigated by improved yield and effective cost
controls. Depreciation expense increased 20% for the third quarter and 18% for
the year-to-date period as new terminal facilities were opened late in 1999 and
throughout the first half of 2000.
Other operations
Other operations include Viking Freight, Inc. ("Viking"), a regional
less than truckload freight carrier operating in the western United States;
FedEx Custom Critical, Inc. ("FedEx Custom Critical"), a critical shipment
carrier; FedEx Global Logistics, Inc. ("FedEx Logistics"), a contract logistics
provider; FedEx Trade Networks, Inc. ("FTN"), a trade services provider which
was formed in February 2000; and certain unallocated corporate items. On
February 29, 2000, Tower Group International ("Tower"), a leader in the
business of international transportation logistics and trade information
technology, was acquired and became a subsidiary of FTN.
Revenue and operating income from other operations increased 29% and 245%
for the third quarter and 24% and 57% year to date compared to the prior year
periods. The increase in revenue is due to substantially higher revenues at
FedEx Custom Critical and FedEx Logistics, combined with double-digit revenue
growth at Viking. The increase in operating income is due to strong earnings at
FedEx Custom Critical and Viking. Excluding a favorable adjustment of
approximately $10 million related to estimated future lease costs, operating
margins at Viking were 6.2% and 9.0% for the third quarter and year-to-date
periods.
- 19 -
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $129 million at February 29, 2000,
compared to $325 million at May 31, 1999. Cash flows from operating
activities for the nine-month period ended February 29, 2000 totaled $876
million, compared to $1.039 billion for the prior year period. The Company
currently has a $1 billion revolving credit facility that is generally used
to finance temporary operating cash requirements and to provide support for
the issuance of commercial paper. As of February 29, 2000, approximately $255
million of the credit facility remains available. For more information
regarding the credit facility, see Note 5 in the Notes to Condensed
Consolidated Financial Statements.
On September 10, 1999, the Company acquired the assets of GeoLogistics
Air Services, Inc. (currently operating under the name Caribbean Transportation
Services, Inc.) for approximately $116 million in cash. On February 29, 2000,
the Company acquired the common stock of Tower for approximately $140 million in
cash. These purchases were funded from operations and borrowings under the
Company's commercial paper program.
On September 27, 1999, the Company's Board of Directors approved a plan
that authorizes the purchase of up to 15 million, or approximately 5%, of the
Company's outstanding shares of common stock. Through February 29, 2000, the
Company had acquired 12,000,000 shares under the plan at an average cost of
$40.08 per share and reissued 449,123 shares to fund employee benefits. The
purchase of these treasury shares was funded principally through the issuance of
commercial paper. Shares held in treasury will be used for general corporate
purposes.
On January 25, 2000, FedEx Express gave notice to call $100 million of
9.63% unsecured sinking fund debentures. The bonds, which were originally due
through 2020, were redeemed on March 1, 2000. The bond redemption was financed
with short-term borrowings.
Management believes that cash flow from operations, the Company's
commercial paper program and revolving bank credit facility will adequately meet
the Company's working capital and stock repurchase program needs for the
foreseeable future.
Capital resources
The Company's operations are capital intensive, characterized by
significant investments in aircraft, vehicles, computer and telecommunications
equipment, package handling facilities and sort equipment. The amount and timing
of capital additions depend on various factors including volume growth, domestic
and international economic conditions, new or enhanced services, geographical
expansion of services, competition, availability of satisfactory financing and
actions of regulatory authorities.
Capital expenditures for the first nine months of 2000 totaled $1.228
billion and included aircraft, aircraft modifications, vehicles and ground
support equipment, customer automation and computer equipment and facilities. In
1999 expenditures primarily included one MD11, aircraft modifications, vehicles
and ground support equipment and customer automation and computer equipment. As
a result of lower than expected U.S. domestic volume growth at FedEx Express,
the Company has reduced planned capital expenditures for 2000 by approximately
$180 million; however, the Company plans to continue to make strategic capital
- 20 -
investments in support of its long-term growth goals. For information on the
Company's purchase commitments, see Note 8 of Notes to Condensed Consolidated
Financial Statements.
Management believes that the capital resources available to the Company
provide flexibility to access the most efficient markets for financing its
capital acquisitions, including aircraft, and are adequate for the Company's
future capital needs.
Market risk sensitive instruments and positions
There have been no material changes in the Company's market risk
sensitive instruments and positions since its disclosure in its Annual Report on
Form 10-K for the year ended May 31, 1999.
Euro currency conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
fixed conversion rates between their existing sovereign currencies ("legacy
currencies") and a single currency called the euro. On January 4, 1999, the euro
began trading on currency exchanges and became available for non-cash
transactions. The legacy currencies will remain legal tender through December
31, 2001. Beginning January 1, 2002, euro-denominated bills and coins will be
introduced, and by July 1, 2002, legacy currencies will no longer be legal
tender.
Since January 1, 1999, the Company's subsidiaries have been able to
quote rates to customers, generate billings and accept payments, in both euro
and legacy currencies. Based on the work of the Company's euro task forces to
date, the Company believes that the introduction of the euro, any price
transparency brought about by its introduction and the phasing out of the legacy
currencies will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows. Costs associated with
the euro project are being expensed as incurred and are being funded entirely by
internal cash flows.
YEAR 2000 COMPLIANCE
The Company's operating subsidiaries rely heavily on sophisticated
information technology for their business operations. The Company's Year 2000
("Y2K") computer compliance issues were, therefore, broad and complex. The FedEx
Express Y2K Project Office, which was established in 1996, coordinated and
supported FedEx Express's continuing Y2K compliance effort.
Nothing has come to the Company's attention which would cause it to
believe that its Y2K compliance effort was not successful. While the Company
will continue to monitor for Y2K-related problems, to date no significant Y2K
issues have been encountered. Contingency plans for FedEx Express and the
Company's other operating subsidiaries, including those covering vendor and
supplier issues, continue to be in place to minimize Y2K-related risks, if any,
including those that vendors and suppliers might pose if they are behind in
their own Y2K efforts.
Since 1996, the Company has incurred approximately $114 million on Y2K
compliance ($21 million in the first nine months of 2000), which includes
internal and external software/hardware analysis, repair, vendor and supplier
assessments, risk mitigation planning and related costs. The Company does not
expect to incur any material additional Y2K-related costs. The Company
classified
- 21 -
costs as Y2K for reporting purposes if they remedied only Y2K risks or resulted
in the formulation of contingency plans and would otherwise have been
unnecessary in the normal course of business.
The Company's Y2K compliance effort was funded entirely by internal cash
flows. For 2000, Y2K expenditures are expected to be less than 10% of the
Company's total Information Technology expense budget. Although there were
opportunity costs to the Company's Y2K compliance effort, management believes
that no significant information technology projects were deferred due to this
work.
* * *
CERTAIN STATEMENTS CONTAINED IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, SUCH
AS STATEMENTS RELATING TO MANAGEMENT'S VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL EXPERIENCE OR FROM FUTURE RESULTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, ECONOMIC AND COMPETITIVE CONDITIONS IN THE
MARKETS WHERE THE COMPANY OPERATES, MATCHING CAPACITY TO VOLUME LEVELS AND OTHER
UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS.
- 22 -
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibit
- - - - - - - - - - - - - - - ------- ----------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant,
as amended.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K.
During the quarter ended February 29, 2000, the Registrant filed one
Current Report on Form 8-K dated January 19, 2000. The report was filed
under Item 5, Other Events, and Item 7, Financial Statements and
Exhibits, and contained a press release announcing FedEx Corporation's
strategic initiatives designed to strengthen its competitive position and
to offer new and more robust solutions for customers worldwide.
- 23 -
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.
FEDEX CORPORATION
(Registrant)
Date: April 12, 2000 /S/ JAMES S. HUDSON
---------------------------------------
JAMES S. HUDSON
CORPORATE VICE PRESIDENT
STRATEGIC FINANCIAL PLANNING & CONTROL
(PRINCIPAL ACCOUNTING OFFICER)
- 24 -
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- - - - - - - - - - - - - - - ------- ---------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as amended.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
E-1