<Page>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED AUGUST 31, 2001, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
TO ____________.
COMMISSION FILE NUMBER: 1-7806
FEDERAL EXPRESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 71-0427007
(State of incorporation) (I.R.S. Employer
Identification No.)
3610 Hacks Cross Road
Memphis, Tennessee 38125
(Address of principal (Zip Code)
executive offices)
(901) 369-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
The number of shares of common stock outstanding as of September 28, 2001 was
1,000. The Registrant is a wholly-owned subsidiary of FedEx Corporation, and
there is no market for the Registrant's common stock.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT
PERMITTED BY GENERAL INSTRUCTION H(2).
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<Page>
FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
INDEX
PART I. FINANCIAL INFORMATION
<Table>
<Caption>
PAGE
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets
August 31, 2001 and May 31, 2001 ........................................3-4
Condensed Consolidated Statements of Income
Three-Months Ended August 31, 2001 and August 31, 2000 ....................5
Condensed Consolidated Statements of Cash Flows
Three-Months Ended August 31, 2001 and August 31, 2000 ....................6
Notes to Condensed Consolidated Financial Statements .....................7-11
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants ........................................12
Report of Independent Public Accountants ...................................13
ITEM 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition ................................14-18
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk ...........19
PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K .....................................20
Signatures ...............................................................21
EXHIBIT INDEX ...........................................................E-1
</Table>
- 2 -
<Page>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
ASSETS
------
<Table>
<Caption>
August 31,
2001 May 31,
(Unaudited) 2001
----------- -------
Current Assets:
Cash and cash equivalents ............................... $ 109 $ 99
Receivables, less allowances of
$58 and $60 ........................................... 1,882 1,854
Spare parts, supplies and fuel .......................... 234 240
Deferred income taxes ................................... 375 362
Prepaid expenses and other .............................. 51 239
------- -------
Total current assets ................................... 2,651 2,794
Property and Equipment, at Cost ............................ 12,044 11,846
Less accumulated depreciation and amortization ........... 6,362 6,290
------- -------
Net property and equipment ............................. 5,682 5,556
Other Assets:
Goodwill ................................................. 326 326
Due from parent company .................................. 599 674
Other .................................................... 292 273
------- -------
Total other assets ..................................... 1,217 1,273
------- -------
$ 9,550 $ 9,623
======= =======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
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FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARES AND PER SHARE AMOUNTS)
LIABILITIES AND OWNER'S EQUITY
------------------------------
<Table>
<Caption>
August 31,
2001 May 31,
(Unaudited) 2001
----------- -------
Current Liabilities:
Current portion of long-term debt ....................... $ 186 $ 202
Accrued salaries and employee benefits .................. 467 532
Accounts payable ........................................ 939 1,009
Accrued expenses ........................................ 756 755
Due to parent company and other FedEx subsidiaries....... 126 80
------- -------
Total current liabilities ............................ 2,474 2,578
Long-Term Debt, Less Current Portion ...................... 852 852
Deferred Income Taxes ..................................... 189 218
Other Liabilities ......................................... 1,740 1,727
Commitments (Note 4)
Owner's Equity:
Common stock, $.10 par value;
1,000 shares authorized, issued and outstanding ....... -- --
Additional paid-in capital .............................. 298 298
Retained earnings ....................................... 4,043 4,004
Accumulated other comprehensive income .................. (46) (54)
------ ------
Total owner's equity ................................. 4,295 4,248
------ ------
$9,550 $9,623
====== ======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
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FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
Three Months Ended
August 31,
------------------
2001 2000
------- -------
Revenues ................................................ $ 3,738 $ 3,916
Operating Expenses:
Salaries and employee benefits ........................ 1,588 1,595
Purchased transportation .............................. 143 150
Rentals and landing fees .............................. 368 344
Depreciation and amortization ......................... 199 197
Fuel .................................................. 264 241
Maintenance and repairs ............................... 246 268
Intercompany charges .................................. 335 327
Other ................................................. 474 536
------- -------
3,617 3,658
------- -------
Operating Income ....................................... 121 258
Other Income (Expense):
Interest, net ........................................ (11) (19)
Other, net ........................................... (8) (3)
------- -------
(19) (22)
------- -------
Income Before Income Taxes ............................. 102 236
Provision for Income Taxes ............................. 38 91
------- -------
Net Income ............................................. $ 64 $ 145
======= =======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
<Page>
FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
Three Months Ended
August 31,
------------------
2001 2000
------- -------
Net Cash Provided by Operating Activities .................. $ 286 $ 227
Investing Activities:
Purchases of property and equipment ..................... (334) (199)
Proceeds from disposition of property and equipment...... 6 3
Other, net .............................................. (7) (1)
----- -----
Net cash used in investing activities ...................... (335) (197)
Financing Activities:
Principal payments on debt .............................. (16) --
Net receipts from (payments to) parent company .......... 75 (19)
----- -----
Net cash provided by (used in) financing activities ........ 59 (19)
----- -----
Net increase in cash and cash equivalents .................. 10 11
Cash and cash equivalents at beginning of period ........... 99 89
----- -----
Cash and cash equivalents at end of period ................. $ 109 $ 100
===== =====
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
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FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements of Federal Express Corporation
("FedEx Express") 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 our Annual Report on Form 10-K for the year ended
May 31, 2001. 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 our consolidated financial position as of August 31, 2001 and the
consolidated results of our operations and cash flows for the three-month
periods ended August 31, 2001 and August 31, 2000. Operating results for the
three-month period ended August 31, 2001 are not necessarily indicative of the
results that may be expected for the year ending May 31, 2002.
We are in a single line of business and operate in one business segment -
the worldwide express transportation and distribution of goods and documents.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 143, "Accounting for
Asset Retirement Obligations." This statement addresses the diverse accounting
practices for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. We plan to adopt this standard
on June 1, 2002. We are reviewing the statement to determine what effect, if
any, it will have on our financial position and results of operations.
Certain prior period amounts have been reclassified to conform to the
current presentation.
(2) NEW PRONOUNCEMENTS: BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE
ASSETS
In June 2001, the FASB completed SFAS 141, "Business Combinations," which
requires all business combinations initiated after June 30, 2001 to be accounted
for under the purchase method. SFAS 141 also sets forth guidelines for applying
the purchase method of accounting in the determination of intangible assets,
including goodwill acquired in a business combination, and expands financial
disclosures concerning business combinations consummated after June 30, 2001.
The application of SFAS 141 did not affect any of our previously reported
amounts included in goodwill or other intangible assets.
Effective June 1, 2001 we adopted SFAS 142, "Goodwill and Other Intangible
Assets," which establishes new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS 142, all goodwill amortization
ceased effective June 1, 2001 (first quarter 2002 goodwill amortization
otherwise would have been $3 million) and recorded goodwill attributable to
FedEx Express was tested for impairment by comparing the fair value to its
carrying value. Fair value was determined using a discounted cash flow
methodology. This impairment test is required to be performed at adoption of
SFAS 142 and at least annually thereafter. On an ongoing basis (absent any
impairment indicators), we expect to perform our impairment test during our
fourth quarter, in connection with our annual budgeting process.
- 7 -
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Based on our initial impairment test, we determined that none of the
goodwill recorded was impaired. Impairment adjustments recognized after
adoption, if any, generally are required to be recognized as operating expenses.
In connection with adopting SFAS 142, we also reassessed the useful lives
and the classification of our identifiable intangible assets and determined that
they continue to be appropriate. The components of our amortized intangible
assets follow (in millions):
<Table>
<Caption>
August 31, 2001 May 31, 2001
--------------------------------- ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------- ---------------- ---------------- -------------
Contract based $ 73 $ (29) $ 73 $ (27)
</Table>
Amortization expense for intangible assets during the first quarter of 2002
was $1.2 million. Estimated amortization expense for the remainder of 2002 and
the five succeeding fiscal years follows (in millions):
<Table>
<Caption>
Estimated
Amortization
Expense
-------------------
2002 (remainder) $ 4
2003 5
2004 5
2005 5
2006 5
2007 5
</Table>
Actual results of operations for the three months ended August 31, 2001 and
pro forma results of operations for the three months ended August 31, 2000 had
we applied the nonamortization provisions of SFAS 142 in that period follow (in
millions):
<Table>
<Caption>
Three Months Ended
August 31,
-----------------------------
2001 2000
------------- -------------
Reported net income $ 64 $ 145
Add: Goodwill amortization, net of tax -- 2
------------- -------------
Adjusted net income $ 64 $ 147
============= =============
</Table>
- 8 -
<Page>
(3) COMPREHENSIVE INCOME
The following table provides a reconciliation of net income reported in
our consolidated financial statements to comprehensive income (in millions):
<Table>
<Caption>
Three Months Ended
August 31,
-----------------
2001 2000
---- ----
Net income ............................................... $ 64 $145
Other comprehensive income:
Foreign currency translation adjustments,
net of deferred taxes of $2 and
deferred tax benefit of $1 ........................... 8 (2)
----- -----
Comprehensive income ............................ $ 72 $143
===== =====
</Table>
(4) COMMITMENTS
As of August 31, 2001, our purchase commitments for the remainder of
2002 and annually thereafter under various contracts were as follows (in
millions):
<Table>
<Caption>
Aircraft-
Aircraft Related(1) Other(2) Total
-------- ---------- -------- -----
2002 (remainder) $203 $477 $134 $814
2003 450 430 9 889
2004 231 369 8 608
2005 261 449 8 718
2006 229 406 8 643
</Table>
(1) Primarily aircraft modifications, rotables, spare parts and spare engines.
(2) Primarily vehicles, facilities and other equipment.
We are committed to purchase three DC10s, 26 MD11s, seven A300s, seven
A310s and 75 Ayres ALM 200s to be delivered through 2007. Deposits and progress
payments of $6 million have been made toward these purchases and other planned
aircraft transactions. Because Ayres Corporation filed for Chapter 11 bankruptcy
protection in November 2000 and its assets were subsequently foreclosed on by
its senior lender, we believe it is unlikely that any of the ALM 200 aircraft
will be delivered. The purchase commitment amounts related to these aircraft are
$35 million, $96 million and $76 million in 2004, 2005 and 2006, respectively,
and are included in the above table.
We are party to a put option agreement with an airline whereby nine DC10
aircraft, along with additional aircraft engines and equipment, may be put to us
through December 31, 2003.
In January 2001, we entered into a memorandum of understanding to acquire
10 A380 aircraft from Airbus Industrie. The acquisition of these aircraft is
subject to the execution of a definitive purchase agreement, which is currently
under negotiation.
- 9 -
<Page>
(5) RELATED PARTY TRANSACTIONS
The following table represents our related party balances outstanding
at August 31, 2001 and May 31, 2001 (in millions). The long-term amounts
primarily represent the net activity from participation in FedEx Corporation's
consolidated cash management program.
<Table>
<Caption>
August 31, 2001 Other Total
Current Other Assets Current Due From/
Assets (Non-Current) Liabilities (Due To)
------ ------------- ----------- --------
FedEx Corporation $ -- $ 599 $ (90) $ 509
Other FedEx Subsidiaries 9 -- (36) (27)
</Table>
--------------------------------------------------------------------------------
<Table>
<Caption>
May 31, 2001 Other Total
Current Other Assets Current Due From/
Assets (Non-Current) Liabilities (Due To)
------ ------------- ----------- --------
FedEx Corporation $ 187 $ 674 $ -- $ 861
Other FedEx Subsidiaries 7 -- (80) (73)
</Table>
--------------------------------------------------------------------------------
(6) SUPPLEMENTAL CASH FLOW INFORMATION
<Table>
<Caption>
Three Months Ended
August 31,
-------------------------
2001 2000
-------- --------
(In millions)
Cash payments for:
Interest (net of capitalized interest) ........... $ 19 $ 21
Income taxes ..................................... 42 109
Non-cash investing and financing activities:
Fair value of assets acquired under
exchange agreements ........................... 16 2
</Table>
Non-cash investing activities reflect the contractual acquisition of
aircraft, spare parts and other equipment in exchange for engine noise reduction
kits.
(7) OTHER EVENTS
During the fourth quarter of 2001, asset impairments related to aircraft
were recorded. The impaired assets are held for disposal and we expect to
complete the disposal in 2002. At August 31, 2001, no changes to our original
cost estimates for the disposal of these assets have been made.
- 10 -
<Page>
(8) SUBSEQUENT EVENTS
SEPTEMBER 11
Our operations were significantly affected by the terrorist attacks on
September 11, 2001. All of our domestic aircraft were grounded on September
11 and 12 and flight operations resumed on the evening of September 13.
During the period our aircraft were grounded, both domestic and international
priority shipments were impacted, with domestic average daily express volumes
declining almost 50% from prior year levels. We executed contingency plans
and transported all domestic shipments during this period through
ground-based trucking operations. The execution of these contingency plans
proceeded smoothly and we resumed air operations within hours of receiving
clearance from the Federal Aviation Administration. Volumes continue to be
below levels experienced prior to September 11.
In the aftermath of the terrorist attacks of September 11, the U.S.
Congress passed the Air Transportation Safety and System Stabilization Act (the
"Act"), a $15 billion emergency economic assistance package to mitigate the
dramatic financial losses experienced by the nation's air carriers. As enacted,
the legislation provides for $10 billion in federal loan guarantees and credits,
subject to such terms and conditions as the President deems necessary. We are
participating with other air carriers in seeking government assistance through
the Act; however, we do not expect to request any loan guarantees. The Act also
expands war risk insurance coverage for air carriers, and provides some
government assistance for short-term increases in insurance premiums.
The Act provides for $5 billion of the $15 billion to be used to
compensate air carriers for direct losses incurred beginning on September 11,
as a result of the nationwide grounding of all aircraft, and for the
resulting losses that will be incurred through December 31, 2001. We
submitted a claim for compensation to the Department of Transportation and
received an initial payment of $101 million on September 28, 2001. This
payment will be recognized in our second quarter income statement. We cannot
be assured of the timing or total amount of any payments we may be entitled
to receive under the Act.
Increased security requirements for air carriers may be forthcoming, but as
of yet, we have no estimate of what impact any such measures may have on our
results of operations or financial position.
Although we have delivery services in the areas affected by the terrorist
attacks, we did not experience any loss of personnel or material property damage
as a direct result of the attack.
- 11 -
<Page>
REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, has performed a review
of the condensed consolidated balance sheet of FedEx Express as of August 31,
2001, and the related condensed consolidated statements of income for the
three-month periods ended August 31, 2001 and August 31, 2000, and the condensed
consolidated statements of cash flows for the three-month periods ended August
31, 2001 and August 31, 2000, included herein, as indicated in their report
thereon included on page 13.
- 12 -
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Federal Express Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Federal Express Corporation (a Delaware corporation) and subsidiaries as of
August 31, 2001 and the related condensed consolidated statements of income for
the three-month periods ended August 31, 2001 and August 31, 2000, and the
condensed consolidated statements of cash flows for the three-month periods
ended August 31, 2001 and August 31, 2000. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Federal Express Corporation as of
May 31, 2001 (not presented herein), and, in our report dated June 27, 2001, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of May 31, 2001, 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
September 19, 2001
- 13 -
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table compares revenues, operating expenses and operating
income (dollars in millions) and selected statistics (in thousands, except yield
amounts) for the three-month periods ended August 31:
<Table>
<Caption>
Percent
2001 2000 Change
----- ----- -------
Revenues:
Package:
U.S. overnight box(1) $1,373 $1,479 - 7
U.S. overnight envelope(2) 465 472 - 1
U.S. deferred 583 618 - 6
------ ------
Total domestic package revenue 2,421 2,569 - 6
International Priority (IP) 955 984 - 3
------ ------
Total package revenue 3,376 3,553 - 5
Freight:
U.S 173 162 + 7
International 97 115 -16
------ ------
Total freight revenue 270 277 - 3
Other 92 86 + 7
------ ------
Total revenues $3,738 $3,916 - 5
Operating Expenses:
Salaries and employee benefits 1,588 1,595 --
Purchased transportation 143 150 - 5
Rentals and landing fees 368 344 + 7
Depreciation and amortization 199 197 + 1
Fuel 264 241 +10
Maintenance and repairs 246 268 - 8
Intercompany charges 335 327 + 2
Other 474 536 -11
------ ------
Total operating expenses 3,617 3,658 - 1
------ ------
Operating income $ 121 $ 258 -53
====== ======
Package:
Average daily packages:
U.S. overnight box 1,165 1,254 - 7
U.S. overnight envelope 721 758 - 5
U.S. deferred 814 876 - 7
------ ------
Total domestic packages 2,700 2,888 - 7
IP 335 338 - 1
------ ------
Total packages 3,035 3,226 - 6
</Table>
- 14 -
<Page>
<Table>
<Caption>
Percent
2001 2000 Change
------ ------ -------
Revenue per package (yield):
U.S. overnight box $18.12 $18.15 --
U.S. overnight envelope 9.93 9.59 + 4
U.S. deferred 11.03 10.85 + 2
Domestic composite 13.80 13.69 + 1
IP 43.89 44.80 - 2
Composite 17.12 16.95 + 1
Freight:
Average daily pounds:
U.S 4,352 4,369 --
International 2,107 2,312 - 9
----- -----
Total freight 6,459 6,681 - 3
Revenue per pound (yield):
U.S $ .61 $ .57 + 7
International .71 .76 - 7
Composite .64 .64 --
</Table>
(1) The U.S. overnight box category includes packages exceeding 8 ounces in
weight.
(2) The U.S. overnight envelope category includes envelopes weighing 8 ounces
or less.
--------------------------------------------------------------------------------
REVENUES
Total package revenue decreased 5% year over year in the first quarter of
2002, principally due to declines in domestic package volumes. Total package
yield increased slightly despite a 6% decrease in average daily volume and a
declining weight per package, continuing the upward trend resulting from our
yield-management strategy.
IP package revenue decreased 3% year over year in the first quarter of 2002
due principally to business declines in Asia. Asian average daily packages
decreased 3% while Europe posted a 21% increase in average daily package volume.
Total freight revenue for the first quarter of 2002 decreased 3%
principally due to a decline in international freight volume and flat domestic
volume, partially offset by improved domestic freight yield.
OPERATING INCOME
Operating income for the first quarter of 2002 decreased 53% from the prior
year period principally due to negative revenue growth on a largely fixed cost
structure. Through reduced hours and attrition, U.S.-based hourly full-time
equivalent employees declined by 5,300 or 6% year over year. This decrease was
somewhat offset by an increase in the hiring of pilots and other personnel in
anticipation of the commencement during the quarter of our transportation
agreement with the U.S. Postal Service. Contractual reimbursement received from
the U.S. Postal Service (reflected as a credit to other operating expenses) was
sufficient to offset network expansion costs incurred during the quarter. While
the commencement of operations for our U.S. Postal Service agreements went
smoothly, the new service did not materially contribute to revenues and earnings
during the first quarter of 2002. Fuel costs increased $25 million from the
prior year period as a result of higher cost per gallon.
- 15 -
<Page>
INCOME TAXES
Our effective tax rate for the first quarter of 2002 was 37.5%, compared
to 38.5% in the prior year period and 36.5% for all of 2001.
OUTLOOK
The global economy shows few signs of near-term recovery. We will
continue to manage capital spending based on current and anticipated volume
levels, reduce discretionary expenses and defer non-essential hiring. While
we anticipate the remainder of 2002 to reflect extended economic weakness, we
expect to continue to generate profits while we invest strategically for the
future. Key initiatives to support long-term revenue growth include:
- Airport-to-airport transportation of Priority, Express and First-Class
Mail for the U.S. Postal Service, which began the last week of this
quarter, and ultimately, nationwide placement of 10,000 or more FedEx
Drop Boxes outside U.S. Post Offices.
- Introduction of FedEx Online Express Savings Program, which provides a
10% discount off list rates for many express services to qualified
shippers when shipping through fedex.com.
Cost management will continue to be a focus. Incentive compensation
programs have been sharply reduced for most employees, including senior
management.
Terrorist Attacks of September 11
Our operations were significantly affected by the terrorist attacks on
September 11, 2001. All of our domestic aircraft were grounded on September
11 and 12 and flight operations resumed on the evening of September 13.
During the period our aircraft were grounded, both domestic and international
priority shipments were impacted, with domestic average daily express volumes
declining almost 50% from prior year levels. We executed contingency plans
and transported all domestic shipments during this period through
ground-based trucking operations. The execution of these contingency plans
proceeded smoothly and we resumed air operations within hours of receiving
clearance from the Federal Aviation Administration. Volumes continue to be
below levels experienced prior to September 11.
In the aftermath of the terrorist attacks of September 11, the U.S.
Congress passed the Air Transportation Safety and System Stabilization Act (the
"Act"), a $15 billion emergency economic assistance package to mitigate the
dramatic financial losses experienced by the nation's air carriers. As enacted,
the legislation provides for $10 billion in federal loan guarantees and credits,
subject to such terms and conditions as the President deems necessary. We are
participating with other air carriers in seeking government assistance through
the Act; however, we do not expect to request any loan guarantees. The Act also
expands war risk insurance coverage for air carriers, and provides some
government assistance for short-term increases in insurance premiums.
The Act provides for $5 billion of the $15 billion to be used to
compensate air carriers for direct losses incurred beginning on September 11,
as a result of the nationwide grounding of all aircraft, and for the
resulting losses that will be incurred through December 31, 2001. We
submitted a claim for compensation to the Department of Transportation and
received an initial payment of $101 million on September 28, 2001. This
payment will be recognized in our second quarter income statement. We cannot
be assured of the timing or total amount of any payments we may be entitled
to receive under the Act.
- 16 -
<Page>
Increased security requirements for air carriers may be forthcoming, but as
of yet, we have no estimate of what impact any such measures may have on our
results of operations or financial position.
Although we have delivery services in the areas affected by the terrorist
attacks, we did not experience any loss of personnel or material property damage
as a direct result of the attack.
As a participant in the Civil Reserve Air Fleet ("CRAF") program, the
Department of Defense may requisition for military use certain of our
wide-bodied aircraft in the event of a declared need. We would be compensated
for the operation of any aircraft requisitioned under the CRAF program at
standard contract rates established each year in the normal course of awarding
contracts.
We are not certain how the events of September 11 will ultimately impact
the U.S. and global economies in general and the air transportation industry in
particular, and what effects these events will have on our costs or on the
demand for our services.
FINANCIAL CONDITION
LIQUIDITY
Cash and cash equivalents totaled $109 million at August 31, 2001, compared
to $99 million at May 31, 2001. Cash flows from operating activities during the
first quarter of 2002 totaled $286 million, compared to $227 million for the
prior year period, reflecting aggressive working capital management.
FedEx Corporation ("FedEx") has $1 billion in revolving credit
facilities that are generally used to finance temporary operating cash
requirements and to provide support for the issuance of commercial paper.
These revolving credit facilities, consisting of a $750 million five
year facility and a $250 million 364-day facility, were entered into on
September 28, 2001 and replaced FedEx's prior revolving credit facility. We
believe that cash flow from operations, FedEx's commercial paper program and
revolving bank credit facilities will adequately meet our working capital
needs for the foreseeable future.
CAPITAL RESOURCES
Our 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 pre-existing contractual
commitments, anticipated 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.
We have historically financed our capital investments through the use of
lease, debt and equity financing in addition to the use of internally generated
cash from operations. For information on our purchase commitments, see Note 4 of
Notes to Condensed Consolidated Financial Statements.
We believe the capital resources available to us provide flexibility to
access the most efficient markets for financing capital acquisitions, including
aircraft, and are adequate for our future capital needs.
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<Page>
EURO CURRENCY CONVERSION
Since the beginning of the European Union's transition to the euro on
January 1, 1999, we and our subsidiaries have been prepared to quote rates to
customers, generate billings and accept payments, in both euro and legacy
currencies. The legacy currencies will remain legal tender through December
31, 2001. We believe the introduction of the euro, any price transparency
brought about by its introduction and the phasing out of the legacy
currencies will not have a material impact on our consolidated financial
position, results of operations or cash flows. Costs associated with the euro
project are being expensed as incurred and are being funded entirely by
internal cash flows.
* * *
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, ANY IMPACTS ON OUR
BUSINESS RESULTING FROM THE TERRORIST ATTACKS THAT OCCURRED ON SEPTEMBER 11,
2001, AS WELL AS GENERAL ECONOMIC AND COMPETITIVE CONDITIONS IN THE MARKETS
WHERE WE OPERATE, THE TIMING AND AMOUNTS OF ANY COMPENSATION WE MAY BE
ENTITLED TO RECEIVE UNDER THE AIR TRANSPORTATION SAFETY AND SYSTEM
STABILIZATION ACT, INCREASES IN FUEL COSTS AND THE ABILITY TO MITIGATE THE
EFFECTS OF SUCH INCREASES THROUGH FUEL SURCHARGES AND HEDGING ACTIVITIES,
MATCHING CAPACITY TO VOLUME LEVELS AND OTHER UNCERTAINTIES DETAILED FROM TIME
TO TIME IN OUR AND FEDEX CORPORATION'S SECURITIES AND EXCHANGE COMMISSION
FILINGS AND PRESS RELEASES.
EXCEPT AS OTHERWISE INDICATED, REFERENCES TO YEARS MEANS THE FISCAL YEAR ENDING
MAY 31, 2002 OR ENDED MAY 31 OF THE YEAR REFERENCED.
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<Page>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of August 31, 2001, there had been no material changes in our market
risk sensitive instruments and positions since the disclosure in our Annual
Report on Form 10-K for the year ended May 31, 2001. Foreign currency
fluctuations during the first quarter did not have a material effect on the
results of operations for the period. Many of our international sales
transactions are denominated in U.S. dollars, which mitigates the impact of
foreign currency fluctuations.
- 19 -
<Page>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<Table>
<Caption>
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 Five-Year Credit Agreement dated as of September 28, 2001
among FedEx, The Chase Manhattan Bank, individually and as
administrative agent, and certain lenders. (Filed as
Exhibit 10.1 to FedEx's FY2002 First Quarter Report on
Form 10-Q, and incorporated herein by reference.)
10.2 364-Day Credit Agreement dated as of September 28, 2001
among FedEx, The Chase Manhattan Bank, individually and as
administrative agent, and certain lenders. (Filed as
Exhibit 10.2 to FedEx's FY2002 First Quarter Report on
Form 10-Q, and incorporated herein by reference.)
10.3 Letter Agreement dated August 16, 2001 amending the
Modification Services Agreement dated September 16, 1996
between McDonnell Douglas Corporation and FedEx Express.
Confidential treatment has been requested for confidential
commercial and financial information, pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as
amended. (Filed as Exhibit 10.3 to FedEx's FY2002 First
Quarter Report on Form 10-Q, and incorporated herein by
reference.)
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re: Unaudited Interim Financial Statements.
</Table>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
August 31, 2001.
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<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL EXPRESS CORPORATION
Date: October 15, 2001 /s/ MICHAEL W. HILLARD
------------------------------
MICHAEL W. HILLARD
VICE PRESIDENT & CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
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<Page>
EXHIBIT INDEX
<Table>
<Caption>
Exhibit
Number Description of Exhibit
------ ----------------------
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re: Unaudited Interim Financial Statements.
</Table>
E-1