1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
In 1995, the Company achieved record-high net income and earnings per share for
the second consecutive year. Consolidated net income for 1995 was $298 million
($5.27 per share) compared with net income of $204 million ($3.65 per share) in
1994 and $54 million ($.98 per share) in 1993. Excluding the effect of adopting
the new accounting standard for postretirement benefits other than pensions,
1993's net income would have been $110 million ($2.01 per share).
Management has expanded and refined the Company's unparalleled worldwide
network of express delivery services, which resulted in exceptional
year-over-year increases in net income and earnings per share for the past
three years. The Company has strategically invested in programs designed to
promote long-term growth and overall profitability and provide the Company with
the ability to effectively adapt to a continually changing business
environment. Investments in aircraft, advanced technologies and employee
productivity have been an integral part of the Company's history of providing
competitively superior express delivery services. The Company's customers have
increasingly required express services on a worldwide basis. Management
recognized this demand and created a global express distribution network. The
Company will continue to manage its resources to capture the greatest overall
economic benefit in a growing worldwide express market. Consistent with the
Company's global approach, management believes that the clearest method for
evaluating results is on a consolidated basis.
Revenues
The following table shows a comparison of revenues for the years ended May
31:
- ---------------------------------------------------------------------------------
In millions Percent Change
--------------
1995/ 1994/
1995 1994 1993 1994 1993
U.S. domestic express $6,700 $6,142 $5,556 + 9 +11
International Priority (IP) 1,680 1,339 1,117 +25 +20
International Express Freight (IXF)
and Airport-to-Airport (ATA) 580 505 570 +15 -11
Charter 115 113 112 + 1 + 1
Logistics services 106 248 263 -57 - 6
Other* 211 132 190 +59 -30
- ------------------------------------------------------------------
$9,392 $8,479 $7,808 +11 + 9
=================================================================================
*Includes sales of engine noise reduction kits
18
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Federal Express Corporation and Subsidiaries
The following table shows a comparison of selected express and airfreight
(IXF/ATA) statistics for the years ended May 31:
- ---------------------------------------------------------------------------------
In thousands, except dollar amounts Percent Change
--------------
1995/ 1994/
1995 1994 1993 1994 1993
U.S. domestic express:
Average daily packages 2,084 1,792 1,596 +16 +12
Revenue per package $ 12.61 $ 13.33 $ 13.65 - 5 - 2
IP:
Average daily packages 164 133 115 +23 +16
Revenue per package $ 40.28 $ 39.21 $ 38.18 + 3 + 3
IXF/ATA:
Average daily pounds 2,153 1,844 2,050 +17 -10
Revenue per pound $ 1.06 $ 1.06 $ 1.09 -- - 3
- ---------------------------------------------------------------------------------
Different economic and competitive conditions in the domestic and
international express delivery markets have affected the Company during the
past three years.
Beginning in 1991 and continuing to the present, the Company has contended
with intense competitive pressure in the U.S. domestic express market. Price
has become a dominant consideration in choosing express delivery services. In
an effort to increase volume, the Company offered new, lower-priced deferred
services and increased the level of discounting. As a result, U.S. domestic
average daily volumes increased as did express revenues. Revenue on a per
package basis (yield) declined significantly.
In contrast, the market for the Company's IP services is comparatively
new. The Company benefits from its EXPRESSfreighter system which provides
customers with reduced transit times, later drop-off opportunities and daily
service on a worldwide basis that is generally unmatched by competitors. The
combination of its EXPRESSfreighter system, aggressive marketing efforts and a
recent improvement in global economic activity has resulted in significant
year-over-year growth in average daily volume, revenue and yield.
Significant growth in the Company's airfreight services played an
important role in improving 1995 earnings. This improvement is primarily
attributable to a favorable global airfreight market. In markets with high
demand but limited capacity, the space-confirmed aspect of IXF (a
higher-priced, time-definite service) creates competitive advantages over ATA
(a lower-priced, space-available service). Additionally, management actions in
1994 and 1995 narrowed the price difference between IXF and ATA. Customers
responded by using IXF rather than ATA, resulting in higher-yielding IXF
comprising a greater percentage of airfreight pounds transported by the
Company.
19
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
The decrease in Logistics services revenue in 1995 is due to the sale,
effective May 1994, of the Company's German logistics subsidiary and the
January 1995 sale of two dedicated warehousing and contract distribution
companies in the United Kingdom. (See additional discussion in Other Income and
Expense and Income Taxes below.)
The increase in Other revenues in 1995 is due primarily to increased sales
of engine noise reduction kits. The decrease in other revenues in 1994 is due
primarily to the sale of a U.S. domestic subsidiary.
Operating Expenses
Operating expenses for the years 1993, 1994 and 1995 have increased primarily
because of increasing volumes. Presented below is the detail for the
year-over-year percentage change in operating expenses:
- -----------------------------------------------------------------------------
Percent Change
--------------
1995/ 1994/
1994 1993
Salaries and employee benefits + 8 + 8
Rentals and landing fees +16 + 7
Depreciation and amortization + 9 + 3
Fuel + 6 - 5
Maintenance and repairs +17 +15
Other +16 + 8
Total operating expenses +11 + 7
- -----------------------------------------------------------------------------
The increases in Salaries and employee benefits are primarily due to
volume-related growth in the Company's U.S. domestic employment levels. A
portion of the increase from 1993 to 1995 is attributable to increased
provisions under the Company's variable incentive compensation plans which
reflect increased earnings and, in 1995, a significant gain from the sale of
certain businesses. (See Revenues above and Other Income and Expense and Income
Taxes below for additional information.) Management expects this trend of
increasing salaries and employee benefits to continue because of rising U.S.
domestic express volumes.
The increases in Rentals and landing fees for 1995 and 1994 are due to the
leasing of additional aircraft. In 1995, the Company added, by operating lease,
ten Airbus A310 and seven Airbus A300 aircraft. In 1994, the Company added, by
operating lease, six MD-11 and two Airbus A300 aircraft. Management expects
year-over-year increases in lease expense to continue as the Company enters
into additional aircraft rental agreements during 1996 and thereafter.
The increase in Fuel for 1995 is primarily attributable to increases in
total flight hours (9%) and gallons consumed (10%), partially offset by a
decline in average jet fuel price per gallon (5%). The decrease in fuel expense
for 1994 reflects a reduction in gallons consumed (1%) and a decline in average
jet fuel price per gallon (7%). Under the Omnibus Budget Reconciliation Act of
1993, a 4.3 cents per gallon increase in the excise tax on
20
4
Federal Express Corporation and Subsidiaries
aviation fuel will become effective beginning in October 1995. Based upon 1995
consumption levels, this increase in excise tax would have increased the
Company's annual aircraft fuel expense by approximately $27 million.
Maintenance and repairs expense increased due to engine maintenance on
B-727 and MD-11 aircraft. During 1994, regulatory directives required the
Company to assess the engines of both aircraft types and, where applicable,
take corrective action. The initial cycle of scheduled engine maintenance on
the Company's MD-11 fleet, which began in 1994, also contributed to increased
maintenance and repairs expense. As of the end of 1995, the Company had fully
complied with the maintenance directive on the B-727 engines. Management
expects to address the maintenance directive on the MD-11 engines concurrently
with scheduled maintenance. Management believes the recent trend of increasing
maintenance expense will subside in 1996 and then rise in 1997 as DC-10
aircraft begin a new cycle of scheduled engine maintenance.
The increase in Other operating expenses for 1995 and 1994 is generally
due to year-over-year volume growth. Advertising expense, temporary manpower,
and expenses related to the transportation of packages by outside vendors
comprise the most significant portion of these expenses. The cost of sales for
engine noise reduction kits also caused an increase in other operating expenses
in 1995.
Operating Income
The Company's operating income increased 11% in 1995 and 41% in 1994. U.S.
domestic results were essentially flat in 1994 and declined significantly in
1995 because of lower margins attributable to the decrease in U.S. domestic
express yields. In contrast, the Company's international results improved
markedly in 1994 and 1995 because of growing IP and airfreight services. In
1995, the Company's international operations achieved the first full year of
profitability. For additional information on the Company's U.S. domestic and
international operations, see Note 10 of Notes to Consolidated Financial
Statements.
Other Income and Expense and Income Taxes
Decreases in net interest expense of 19% and 12% in 1995 and 1994,
respectively, are due to lower debt levels and reduced interest rates on
borrowings.
Other, net for 1995 includes a pre-tax gain of $35.7 million from the sale
of two dedicated warehousing and distribution companies in the United Kingdom.
This transaction resulted in an after-tax impact of $.27 per share, including
the effect of additional variable compensation expenses. Other, net also
includes $9.7 million received in 1995 from the bankruptcy estate of a firm
engaged by the Company in 1990 to remit employee payroll taxes to appropriate
authorities. These payments are a partial recovery of a $32 million loss
recorded by the Company in 1991 caused by the failure of this firm to remit
certain taxes. The Company may receive additional distributions from the firm's
bankruptcy estate depending on the outcome of preference litigation and other
pending bankruptcy matters against the firm.
21
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's effective tax rate for 1995 was 43.0% compared with 46.0%
and 46.1% for 1994 and 1993, respectively. In each year, the effective tax rate
was greater than the statutory U.S. federal tax rate primarily because of state
income taxes and the impact of foreign operations. During 1995, the Company
changed the structure of its foreign entity in Mexico. This change permitted
the one-time deduction in 1995 of certain items for U.S. federal income tax
purposes that were not deductible in prior years and contributed to the lower
1995 tax rate. Based upon anticipated levels of income, capital acquisitions
and other factors, the Company's effective tax rate for 1996 is expected to
remain at a level similar to the 1995 rate, and the Company does not expect to
be subject to the alternative minimum tax in future years.
Outlook
Management believes the competitive nature of the U.S. domestic express
delivery market limits the Company's near-term ability to increase prices
generally. Nonetheless, the Company continues to work to slow the rate of
decline in its U.S. domestic yield through actions which include targeting
selected customers for review and realignment of their discount levels, seeking
higher yielding customers and promoting heavier package weights. However,
reducing unit costs at a rate greater than the rate of yield decline continues
to be the Company's primary focus for improving operating margins. Management
intends to further reduce unit costs by applying information technologies that
better coordinate the processing and delivery of packages. These technologies
map courier routes, streamline station operations and balance flight schedules
with expected demand. In addition, the Company is undertaking a comprehensive
review of its procurement practices in order to optimize the value of goods and
services purchased.
The Airport Improvements Act, effective January 1995, eliminated many of
the intrastate transportation regulations that restricted the use of the
Company's lower-cost ground transportation system. Management believes that an
expanded and well-directed use of trucking, which includes investments in hub
automation and larger load carrying vehicles, will provide long-term cost
savings. The Company is also developing regional hubs that will serve as
distribution points for expanded trucking operations.
Management believes that continued growth in the Company's international
operations is a pivotal factor in improving overall earnings. As discussed
above, the Company's international express business benefits from competitive
advantages in certain markets. The Company has established an intra-Asian
transloading facility at Subic Bay, Philippines. This facility will position
the Company to capture more of the growing Far East express market. In addition
to the Subic Bay facility, the Company plans to add new EXPRESSfreighter
flights to locations in Europe and the Far East. These expansions will entail
start-up costs which may restrain short-term profitability. In addition, from
time to time, the regulatory environment for global aviation rights may impair
the ability of the Company to operate its air network in the most efficient
manner. With respect to airfreight, the
22
6
Federal Express Corporation and Subsidiaries
Company believes that a forecasted increase in overall market capacity in 1996
for airfreight may slow the volume growth in IXF but provide additional
opportunities for ATA.
The Company manages its aircraft fleet to achieve improving efficiencies
in unit costs for fuel consumption, maintenance and crew manning. MD-11 and
Airbus A300 and A310 aircraft acquisitions are designed to support this
improvement. These aircraft are expected to produce long-term benefits, despite
their higher ownership cost.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $358 million, a decrease of $35 million
during 1995 compared with increases of $237 million and $77 million in 1994 and
1993, respectively. Cash provided from operations during 1995 was $1.0 billion
compared with $767 million in 1994 and $725 million in 1993. The increase in
cash provided from operations in 1995 is primarily due to higher net income in
1995 compared to 1994 and 1993. The Company currently has available a $1
billion revolving bank credit facility that is generally used to finance
temporary operating cash requirements and to provide support for the issuance
of commercial paper. Management believes that cash flow from operations, its
commercial paper program and the revolving bank credit facility will adequately
meet its working capital needs for the foreseeable future.
Capital Resources
The Company's operations are capital intensive, characterized by significant
investments in aircraft, package handling facilities, sort equipment, vehicles,
and computer and telecommunication equipment. The amount and timing of capital
additions are dependent on various factors including volume growth, new or
enhanced services, geographical expansion of services, competition and
availability of satisfactory financing.
Capital expenditures for 1995 totaled $1.1 billion and included four
A310-200 aircraft, 15 Cessna 208 aircraft, deposits on future Airbus A300
aircraft, vehicles and ground support equipment, and customer automation and
computer equipment. In comparison, prior year expenditures also totaled $1.1
billion and included five MD-11 aircraft, three B-727-200 aircraft, deposits on
future Airbus A300 aircraft, vehicle and ground support equipment, and customer
automation and computer equipment. All of the MD-11 aircraft acquired in 1994,
along with a sixth aircraft acquired in 1993, were subsequently sold and leased
back. For information on the Company's purchase commitments, see Note 11 of
Notes to Consolidated Financial Statements.
The Company has historically financed its capital investments through the
use of lease, debt and equity financing in addition to the use of internally
generated cash from operations. Management's practice in recent years with
respect to funding aircraft acquisitions has been to finance such aircraft
through long-term lease transactions that qualify as off balance sheet
operating leases under applicable accounting rules. Management
23
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
has determined that these operating leases have provided economic benefits
favorable to ownership with respect to market values, liquidity and after-tax
cash flows. In the future, alternative approaches to financing the Company's
aircraft acquisitions, such as capitalized leases or other forms of secured
financing, may be pursued when management determines that such financing best
meets the Company's needs. The Company has been successful in obtaining
investment capital, both domestic and international, for long-term leases on
terms acceptable to it, although the marketplace for such capital can become
restricted depending on a variety of economic factors beyond the control of the
Company. See Note 3 of Notes to Consolidated Financial Statements for
additional information concerning the Company's debt and credit facilities.
In November 1994, the Company filed a shelf registration statement with
the Securities and Exchange Commission relating to $465 million of equipment
trust and pass through certificates. The Company can use these certificates to
finance the purchase of aircraft or to finance the acquisition of aircraft in
leveraged lease transactions.
The Company believes its capital resources provide access to the most
efficient capital markets with respect to any particular aircraft acquisition
and are adequate for its future capital needs. These resources include backstop
financing for 16 Airbus A300 aircraft, $465 million of equipment trust and pass
through certificates, $210 million under an interim loan facility, $100 million
of unsecured notes available under a June 1992 shelf registration and the
public and private debt markets for leveraged lease financing.
OTHER MATTERS
Deferred Tax Assets
At May 31, 1995, the Company had a net cumulative deferred tax asset of $60
million consisting of $440 million of deferred tax assets and $380 million of
deferred tax liabilities. The reversals of deferred tax liabilities in future
periods will offset similar amounts of deferred tax assets. Based upon
historical levels of taxable income, the Company believes that it is more
likely than not that sufficient levels of future taxable income will be
generated to realize the remaining deferred tax asset.
24
8
CONSOLIDATED STATEMENTS OF INCOME Federal Express Corporation and Subsidiaries
Years ended May 31
- ------------------------------------------------------------------------------------------
In thousands, except per share amounts 1995 1994 1993
REVENUES $ 9,392,073 $ 8,479,456 $ 7,808,043
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and employee benefits (Notes 8 and 9) 4,425,202 4,104,800 3,807,493
Rentals and landing fees (Note 4) 818,599 703,028 658,138
Depreciation and amortization 652,287 599,357 579,896
Fuel 502,417 472,786 495,384
Maintenance and repairs 544,170 464,557 404,639
Other 1,858,254 1,604,296 1,485,320
- ------------------------------------------------------------------------------------------
8,800,929 7,948,824 7,430,870
- ------------------------------------------------------------------------------------------
OPERATING INCOME 591,144 530,632 377,173
- ------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest, net (Note 1) (114,687) (142,392) (160,923)
Other, net (Note 13) 45,627 (9,778) (12,674)
- ------------------------------------------------------------------------------------------
(69,060) (152,170) (173,597)
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 522,084 378,462 203,576
PROVISION FOR INCOME TAXES (Note 7) 224,496 174,092 93,767
- ------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 297,588 204,370 109,809
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF
TAX BENEFIT OF $34,287 (Note 9) -- -- (55,943)
- ------------------------------------------------------------------------------------------
NET INCOME $ 297,588 $ 204,370 $ 53,866
==========================================================================================
EARNINGS PER SHARE (Note 6):
Before cumulative effect of change in
accounting principle $ 5.27 $ 3.65 $ 2.01
Cumulative effect of change in
accounting principle (Note 9) -- -- (1.03)
- ------------------------------------------------------------------------------------------
$ 5.27 $ 3.65 $ .98
==========================================================================================
AVERAGE SHARES OUTSTANDING (Note 6) 56,494 56,012 54,719
==========================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
25
9
CONSOLIDATED BALANCE SHEETS
May 31
- --------------------------------------------------------------------------------------------------
In thousands 1995 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 357,548 $ 392,923
Receivables, less allowance for doubtful accounts of $31,173 and $33,933 1,130,254 1,020,511
Spare parts, supplies and fuel 193,251 173,993
Deferred income taxes (Note 7) 115,801 113,035
Prepaid expenses and other 72,228 61,234
- --------------------------------------------------------------------------------------------------
Total current assets 1,869,082 1,761,696
- --------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST (Notes 1, 3, 4 and 11):
Flight equipment 3,006,693 2,828,021
Package handling and ground support equipment 1,841,108 1,583,428
Computer and electronic equipment 1,224,050 966,906
Other 1,625,860 1,511,870
- --------------------------------------------------------------------------------------------------
7,697,711 6,890,225
Less accumulated depreciation and amortization 3,982,467 3,441,132
- --------------------------------------------------------------------------------------------------
Net property and equipment 3,715,244 3,449,093
- --------------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill (Note 1) 397,272 415,178
Equipment deposits and other assets (Note 11) 451,774 366,531
- --------------------------------------------------------------------------------------------------
Total other assets 849,046 781,709
- --------------------------------------------------------------------------------------------------
$6,433,372 $5,992,498
==================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
26
10
Federal Express Corporation and Subsidiaries
- ----------------------------------------------------------------------------------
1995 1994
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3) $ 255,448 $ 198,180
Accounts payable 618,621 518,849
Accrued expenses (Note 2) 904,466 819,399
- ----------------------------------------------------------------------------------
Total current liabilities 1,778,535 1,536,428
- ----------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT PORTION (Note 3) 1,324,711 1,632,202
- ----------------------------------------------------------------------------------
DEFERRED INCOME TAXES (Note 7) 55,956 3,563
- ----------------------------------------------------------------------------------
OTHER LIABILITIES (Note 1) 1,028,601 895,600
- ----------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 11 and 12)
COMMON STOCKHOLDERS' INVESTMENT (Note 6):
Common Stock, $.10 par value; 200,000 shares authorized;
56,174 and 55,885 shares issued 5,617 5,589
Additional paid-in capital 775,255 759,229
Retained earnings 1,466,427 1,162,160
- ----------------------------------------------------------------------------------
2,247,299 1,926,978
Less treasury stock and deferred compensation 1,730 2,273
- ----------------------------------------------------------------------------------
Total common stockholders' investment 2,245,569 1,924,705
- ----------------------------------------------------------------------------------
$6,433,372 $5,992,498
==================================================================================
27
11
CONSOLIDATED STATEMENTS OF CASH FLOWS Federal Express Corporation and Subsidiaries
Years ended May 31
- ------------------------------------------------------------------------------------------------------------
In thousands 1995 1994 1993
OPERATING ACTIVITIES
Net income $ 297,588 $ 204,370 $ 53,866
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 652,287 599,357 579,896
Provision for uncollectible accounts 36,334 45,763 33,552
Provision for deferred income taxes and other 25,976 3,810 19,910
Gain from disposals of property and equipment (39,997) (11,897) (5,648)
Cumulative effect of accounting change -- -- 55,943
Changes in assets and liabilities, net of effects
from purchases and dispositions of businesses:
Increase in receivables (167,319) (173,902) (41,535)
Increase in other current assets (24,101) (7,826) (5,813)
Increase in accounts payable, accrued
expenses and other liabilities 258,373 110,508 13,651
Other, net (8,424) (2,905) 21,259
- ------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 1,030,717 767,278 725,081
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment, including deposits
on aircraft of $113,073, $112,138 and $177,564 (1,060,761) (1,087,708) (1,023,723)
Proceeds from dispositions of property and equipment:
Sale-leaseback transactions -- 581,400 216,444
Reimbursements of A300 deposits 138,203 38,794 --
Other dispositions 59,523 46,148 5,984
Other, net 87,925 27,843 1,992
- ------------------------------------------------------------------------------------------------------------
Cash used in investing activities (775,110) (393,523) (799,303)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from debt issuances 45,460 10,777 878,499
Principal payments on debt (349,523) (198,243) (737,334)
Proceeds from stock issuances 13,081 53,759 24,512
Other, net -- (2,581) (14,176)
- ------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (290,982) (136,288) 151,501
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Increase (decrease) during the year (35,375) 237,467 77,279
Balance at beginning of year 392,923 155,456 78,177
- ------------------------------------------------------------------------------------------------------------
Balance at end of year $ 357,548 $ 392,923 $ 155,456
============================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest (net of capitalized interest) $ 138,833 $ 158,149 $ 162,648
Income taxes 185,964 167,209 188,943
Non-cash investing and financing activities:
In November 1992, approximately $73,000,000 of secured debt related to a portion of the purchase price of
one MD-11 aircraft acquired by the Company was assumed by a third party in a sale-leaseback of the aircraft.
In March 1995, the Company issued three series of loan certificates totaling $50,300,000 in exchange for a
leased B-747 aircraft. (See Note 3 Long-Term Debt for additional information.)
- ------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
28
12
CONSOLIDATED STATEMENTS OF CHANGES IN Federal Express Corporation and Subsidiaries
COMMON STOCKHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------------------------------------
In thousands, except shares Additional
Common Paid-in Retained Treasury Deferred
Stock Capital Earnings Stock Compensation
BALANCE AT MAY 31, 1992 $5,410 $672,727 $ 906,555 $ (32) $(4,938)
Purchase of treasury stock -- -- -- (472) --
Forfeiture of restricted stock -- -- -- (63) --
Issuance of common and treasury stock
under employee incentive plans
(655,938 shares) 64 26,658 (85) 531 (393)
Amortization of deferred compensation -- -- -- -- 2,374
Foreign currency translation adjustment -- -- 9,179 -- --
Net income -- -- 53,866 -- --
- --------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1993 5,474 699,385 969,515 (36) (2,957)
Purchase of treasury stock -- -- -- (185) --
Forfeiture of restricted stock -- -- -- (1,224) --
Issuance of common and treasury stock
under employee incentive plans
(1,153,248 shares) 115 59,844 -- 670 (8)
Amortization of deferred compensation -- -- -- -- 1,467
Foreign currency translation adjustment -- -- (11,725) -- --
Net income -- -- 204,370 -- --
- --------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1994 5,589 759,229 1,162,160 (775) (1,498)
Forfeiture of restricted stock -- -- -- (231) --
Issuance of common stock under employee
incentive plans (288,724 shares) 28 16,026 -- -- --
Amortization of deferred compensation -- -- -- -- 774
Foreign currency translation adjustment -- -- 6,679 -- --
Net income -- -- 297,588 -- --
- --------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1995 $5,617 $775,255 $ 1,466,427 $(1,006) $ (724)
==============================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
29
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the
accounts of Federal Express Corporation and its wholly-owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
Property and equipment. Expenditures for major additions, improvements, flight
equipment modifications, and certain overhaul costs are capitalized.
Maintenance and repairs are charged to expense as incurred, except for B-747
airframe and engine overhaul maintenance which is accrued and charged to
expense on the basis of hours flown. The cost and accumulated depreciation of
property and equipment disposed of are removed from the related accounts and
any gain or loss reflected in the results of operations.
For financial reporting purposes, depreciation and amortization of
property and equipment is provided on a straight-line basis over the asset's
service life or related lease term as follows:
Flight equipment 7 to 20 years
Package handling and ground support equipment 5 to 30 years
Computer and electronic equipment 3 to 10 years
Other 2 to 30 years
Aircraft airframes and engines are assigned residual values ranging from
10% to 20% of asset cost. All other property and equipment have no assigned
residual values. Vehicles, which are included in Package handling and ground
support equipment, are depreciated on a straight-line basis over 5 to 10 years.
For income tax purposes, depreciation is generally computed using
accelerated methods.
Deferred gains. Gains on the sale and leaseback of aircraft and other property
and equipment are deferred and amortized over the life of the lease as a
reduction of rent expense. Included in Other Liabilities at May 31, 1995 and
1994 were deferred gains of $293,000,000 and $230,234,000, respectively.
Deferred lease obligations. While certain of the Company's aircraft and
facility leases contain fluctuating or escalating payments, the related rent
expense is recorded on a straight-line basis over the lease term. Included in
Other Liabilities at May 31, 1995 and 1994 were $216,683,000 and $185,508,000,
respectively, representing the cumulative difference between rent expense and
rent payments.
Self-insurance reserves. The Company is self-insured up to certain levels for
workers' compensation, employee health care and vehicle liabilities. Reserves
are based on the actuarially estimated cost of claims. Included in Other
Liabilities at May 31, 1995 and 1994, were $294,000,000 and $270,000,000,
respectively, representing self-insurance reserves for the Company's workers'
compensation and vehicle liabilities.
Capitalized interest. Interest on funds used to finance the acquisition and
modification of aircraft and construction of certain facilities up to the date
the asset is placed in service is capitalized and included in the cost of the
asset. Capitalized interest was $27,381,000, $29,738,000 and $31,256,000, for
1995, 1994 and 1993, respectively.
30
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Federal Express Corporation and Subsidiaries
Cash equivalents. Cash equivalents are cash in excess of current operating
requirements invested in short-term, interest-bearing instruments with
maturities of three months or less at the date of purchase and are stated at
cost, which approximates market value. Interest income was $16,236,000 in 1995,
$9,778,000 in 1994, and $7,839,000 in 1993.
Spare parts, supplies and fuel. Spare parts, supplies and fuel are stated
principally at standard cost (approximates actual cost on a first-in, first-out
basis) which is not in excess of current replacement cost.
Goodwill. Goodwill is the excess of purchase price over the fair value of net
assets of businesses acquired. It is amortized on a straight-line basis over
periods ranging up to 40 years. Accumulated amortization was $100,527,000 and
$87,202,000 at May 31, 1995 and 1994, respectively.
Foreign currency translation. The Company conducts a significant amount of its
business and has a number of operating facilities in countries outside the
United States. Translation gains and losses of foreign operations that use
local currencies as the functional currency are accumulated and reported as a
separate component of common stockholders' investment. Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the local functional currency are included in the
results of operations.
Income taxes. Deferred income taxes are provided for the tax effect of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. The Company uses the liability
method to account for income taxes, which requires deferred taxes to be
recorded at the statutory rate expected to be in effect when the taxes are
paid.
The Company has not provided taxes on its foreign subsidiaries' earnings
that are deemed to be permanently reinvested. Quantification of the deferred
tax liability, if any, associated with permanently reinvested earnings is not
practicable.
Revenue recognition. Revenue is generally recognized upon delivery of
shipments. For shipments in transit, revenue is recorded based on the
percentage of service completed.
Earnings per share. Earnings per share is computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are the shares of common stock that would be
issued upon the exercise of all dilutive outstanding stock options, less the
assumed repurchase of treasury shares. Earnings per share assuming full
dilution is substantially the same as earnings per share as stated and,
accordingly, is not shown separately.
Reclassifications. Certain amounts for 1994 and 1993 have been reclassified to
conform to the 1995 presentation.
31
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: ACCRUED EXPENSES
May 31
- -------------------------------------------------------------------------------------------
In thousands 1995 1994
Compensated absences $192,785 $180,105
Insurance 176,806 156,906
Taxes other than income taxes 137,037 130,801
Employee benefits 127,870 86,352
Salaries 100,024 82,563
Aircraft overhaul 53,540 50,933
Other 116,404 131,739
- -------------------------------------------------------------------------------------------
$904,466 $819,399
===========================================================================================
NOTE 3: LONG-TERM DEBT
May 31
- -------------------------------------------------------------------------------------------
In thousands 1995 1994
Unsecured notes payable, interest rates of 6.25% to 10.57%,
due through 2013 $1,187,413 $1,384,942
- -------------------------------------------------------------------------------------------
Unsecured sinking fund debentures, interest rate of 9.63%,
due through 2020 98,323 98,254
- -------------------------------------------------------------------------------------------
Capital lease obligations and tax exempt bonds, due through 2017,
interest rates of 6.75% to 8.30% 255,100 255,100
Less bond reserve funds 11,096 11,096
- -------------------------------------------------------------------------------------------
244,004 244,004
- -------------------------------------------------------------------------------------------
Other debt, interest rates of 9.68% to 9.98% 50,419 103,182
- -------------------------------------------------------------------------------------------
1,580,159 1,830,382
Less current portion 255,448 198,180
- -------------------------------------------------------------------------------------------
$1,324,711 $1,632,202
===========================================================================================
The Company has a revolving credit agreement with domestic and foreign
banks that provides for a commitment of $1,000,000,000 through May 31, 2000,
all of which was available at May 31, 1995. Interest rates on borrowings under
this agreement are generally determined by maturities selected and prevailing
market conditions. The agreement contains certain covenants and restrictions,
none of which are expected to significantly affect operations or the ability to
pay dividends. As of May 31, 1995, approximately $692,000,000 was available for
the payment of dividends. Commercial paper borrowings are backed by unused
commitments under the revolving credit agreement and reduce the amount
available under the agreement.
Tax exempt bonds were issued by the Memphis-Shelby County Airport
Authority ("MSCAA") and the City of Indianapolis. A lease agreement with the
MSCAA and a loan agreement with the City of Indianapolis covering
32
16
Federal Express Corporation and Subsidiaries
the facilities and equipment financed with the bond proceeds obligate the
Company to pay rentals and loan payments, respectively, equal to principal and
interest due on the bonds.
In connection with the acquisition of four Airbus A310 aircraft, the
Company issued, in March 1995, three series of loan certificates totaling
$50,300,000 at rates of 9.68% to 9.98% with maturity dates from March 2002 to
September 2007. These certificates relate to the buyout of a lease on a B-747
aircraft and are secured by a DC-10-30 aircraft.
Scheduled annual principal maturities of long-term debt for the five years
subsequent to May 31, 1995, are as follows: $255,400,000 in 1996; $26,200,000
in 1997; $126,600,000 in 1998; $257,400,000 in 1999 and $14,900,000 in 2000.
The Company's long-term debt, exclusive of capital leases, had carrying
values of $1,390,000,000 and $1,630,000,000 at May 31, 1995 and 1994,
respectively, compared with fair values of approximately $1,470,000,000 and
$1,740,000,000 at those dates. The estimated fair values were determined based
on quoted market prices or on the current rates offered for debt with similar
terms and maturities.
NOTE 4: LEASE COMMITMENTS
The Company utilizes certain aircraft, land, facilities and equipment under
capital and operating leases which expire at various dates through 2024. In
addition, supplemental aircraft are leased under agreements which generally
provide for cancellation upon 30 days' notice.
Property and equipment recorded under capital leases at May 31 was as
follows:
- --------------------------------------------------------------------------------
In thousands 1995 1994
Package handling and ground support equipment $378,438 $372,194
Facilities 133,435 133,435
Computer and electronic equipment and other 7,175 7,152
- --------------------------------------------------------------------------------
519,048 512,781
Less accumulated amortization 347,738 330,155
- --------------------------------------------------------------------------------
$171,310 $182,626
================================================================================
Rent expense under operating leases for the years ended May 31 was as
follows:
- --------------------------------------------------------------------------------
In thousands 1995 1994 1993
Minimum rentals $707,182 $621,174 $563,646
Contingent rentals 43,005 21,540 35,353
- --------------------------------------------------------------------------------
$750,187 $642,714 $598,999
================================================================================
Contingent rentals are based on mileage under supplemental aircraft
leases.
33
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of future minimum lease payments under capital leases and
non-cancelable operating leases (principally aircraft and facilities) with an
initial or remaining term in excess of one year at May 31, 1995 follows:
- --------------------------------------------------------------------------------
In thousands Capital Leases Operating Leases
1996 $ 15,561 $ 645,572
1997 15,561 649,557
1998 15,561 609,832
1999 15,561 578,107
2000 15,561 540,459
Thereafter 371,643 6,287,674
- --------------------------------------------------------------------------------
$ 449,448 $9,311,201
================================================================================
At May 31, 1995, the present value of future minimum lease payments for
capital lease obligations was $199,004,000.
NOTE 5: PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors, at its
discretion, to issue up to 4,000,000 shares of Series Preferred Stock. The
stock is issuable in series which may vary as to certain rights and preferences
and has no par value. As of May 31, 1995, none of these shares had been issued.
34
18
Federal Express Corporation and Subsidiaries
NOTE 6: COMMON STOCKHOLDERS' INVESTMENT
Under the provisions of the Company's stock incentive plans, options may be
granted to certain key employees (and, under the 1993 plan, to directors who
are not employees of the Company) to purchase common stock of the Company at a
price not less than its fair market value at the date of grant. The following
summarizes information for the past three years with respect to those plans:
- --------------------------------------------------------------------------------
Number of Shares Option Price
Under Option Per Share
Outstanding at May 31, 1992 3,653,803 $23.59-$70.19
Granted 260,750 36.88- 56.25
Exercised (643,563) 23.59- 56.63
Canceled (123,947) 34.31- 70.19
- --------------------------------------------------------------------------------
Outstanding at May 31, 1993 3,147,043 $30.56-$70.19
Granted 982,750 54.31- 70.81
Exercised (1,142,249) 30.56- 70.19
Canceled (111,758) 34.31- 62.94
- --------------------------------------------------------------------------------
Outstanding at May 31, 1994 2,875,786 $30.56-$70.81
Granted 671,800 56.13- 75.88
Exercised (288,724) 30.56- 62.94
Canceled (89,997) 30.56- 75.88
- --------------------------------------------------------------------------------
Outstanding at May 31, 1995 3,168,865 $30.56-$75.88
================================================================================
Exercisable at May 31, 1995 1,478,089 $30.56-$70.81
================================================================================
At May 31, 1995, there were 198,005 shares available for future grants
under the above-mentioned stock incentive plans.
Under the terms of the Company's 1986 Restricted Stock Plan, shares of the
Company's common stock are granted to key employees. Restrictions on the shares
expire over a period of two to five years from their date of grant. The value
of shares issued related to this plan is recorded as a reduction of common
stockholders' investment and is being amortized to compensation expense as
restrictions on such shares expire. The shares granted under this plan were
11,000 in 1994 and 12,500 in 1993. There were no shares granted in 1995. During
1995, 1994 and 1993, 3,750, 18,438 and 1,500 shares, respectively, were
forfeited. At May 31, 1995, there were 14,688 shares available for future
grants under this plan.
At May 31, 1995, there were 3,381,558 shares of common stock reserved for
issuance under the above-mentioned plans.
In 1988, the Board of Directors authorized the purchase of up to
approximately 5,300,000 shares of the Company's common stock on the open
market. As of May 31, 1995, a total of 2,765,243 shares at an average cost of
$41.68 per share had been purchased and substantially all reissued under the
above-mentioned plans.
35
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: INCOME TAXES
The components of the provision for income taxes for the years ended May 31
were as follows:
- --------------------------------------------------------------------------------
In thousands 1995 1994 1993
Current provision:
Federal $ 137,041 $ 131,724 $64,130
Foreign 29,787 16,387 9,318
State 23,405 26,862 3,170
- --------------------------------------------------------------------------------
190,233 174,973 76,618
- --------------------------------------------------------------------------------
Deferred provision (credit):
Federal 24,058 2,263 6,899
Foreign 9,072 2,524 --
State 1,133 (5,668) 10,250
- --------------------------------------------------------------------------------
34,263 (881) 17,149
- --------------------------------------------------------------------------------
$ 224,496 $ 174,092 $93,767
================================================================================
The Company's operations included the following income (loss) with respect
to entities in foreign locations for the years ended May 31:
- --------------------------------------------------------------------------------
In thousands 1995 1994 1993
Entities with pre-tax income $ 149,000 $ 127,000 $ 67,000
Entities with pre-tax losses (173,000) (210,000) (247,000)
- --------------------------------------------------------------------------------
$ (24,000) $ (83,000) $(180,000)
================================================================================
Income (losses) from entities which are structured as foreign subsidiaries
are not included in the U.S. consolidated income tax return. Approximately
$29,000,000 and $14,000,000 of net foreign subsidiary income were not taxable
for federal income tax purposes in 1995 and 1994, respectively. In 1993,
approximately $7,000,000 of net foreign subsidiary losses were not deductible
for federal income tax purposes. Income taxes have been provided for foreign
operations based upon the various tax laws and rates of the countries in which
the Company's operations are conducted. There is no direct relationship between
the Company's overall foreign income tax provision and foreign pre-tax book
income due to the different methods of taxation used by countries throughout
the world.
36
20
Federal Express Corporation and Subsidiaries
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended May 31 follows:
- ----------------------------------------------------------------------------
1995 1994 1993
Statutory U.S. income tax rate 35.0% 35.0% 34.0%
Increase resulting from:
Goodwill amortization 1.0 1.3 2.5
Foreign operations 0.9 3.5 1.3
State income taxes, net of federal benefit 3.1 3.6 4.4
Other, net 3.0 2.6 3.9
- ----------------------------------------------------------------------------
43.0% 46.0% 46.1%
============================================================================
The Omnibus Budget Reconciliation Act of 1993 increased the statutory U.S.
income tax rate from 34% to 35% retroactive to January 1, 1993. The adverse
impact of the increase in the statutory rate was offset in 1994 by a
corresponding revaluation of the Company's deferred tax assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." The net impact of these adjustments was immaterial.
At May 31, 1995, the Company had fully utilized the alternative minimum
tax credit carryovers from 1991, 1992 and 1993.
The significant components of deferred tax assets and liabilities as of
May 31 were as follows:
- -----------------------------------------------------------------------------------------------------
In thousands 1995 1994
- -----------------------------------------------------------------------------------------------------
Deferred Deferred Deferred Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
Depreciation $ -- $303,088 $ -- $285,524
Deferred gains on sales of assets 67,912 -- 45,969 --
Alternative minimum tax credits -- -- 55,844 --
Employee benefits 69,563 -- 66,875 --
Self-insurance reserves 165,197 -- 148,426 --
Other 137,063 76,802 137,205 59,323
- -----------------------------------------------------------------------------------------------------
$439,735 $379,890 $454,319 $344,847
=====================================================================================================
NOTE 8: PENSION AND PROFIT SHARING PLANS
The Company sponsors pension plans covering substantially all employees. The
largest plan covers U.S. domestic employees age 21 and over, with at least one
year of service and provides benefits based on final average earnings and years
of service. Plan funding is actuarially determined, subject to certain tax law
limitations.
International defined benefit plans provide benefits primarily based on
final earnings and years of service and are funded in accordance with local
laws and income tax regulations.
37
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the funded status of the plans as of May
31:
- ----------------------------------------------------------------------------------------------
In thousands 1995 1994
Actuarial present value of the projected benefit obligation
for service rendered to date $ 1,972,009 $ 1,800,187
Less plan assets at fair value 2,093,422 1,733,446
- ----------------------------------------------------------------------------------------------
Projected benefit obligation in excess of (less than) plan assets (121,413) 66,741
Unrecognized net gains from past experience different from
that assumed and effects of changes in assumptions 123,929 21,555
Prior service cost not yet recognized in net periodic cost 6,449 (31,581)
Unrecognized transition amount (3,679) (797)
- ----------------------------------------------------------------------------------------------
Pension liability $ 5,286 $ 55,918
==============================================================================================
Accumulated benefit obligation $ 1,203,126 $ 1,106,076
==============================================================================================
Vested benefit obligation $ 1,140,545 $ 998,024
==============================================================================================
Net periodic pension cost for the years ended May 31 included the
following components:
- ----------------------------------------------------------------------------------------------
In thousands 1995 1994 1993
Service cost - benefits earned during the period $ 182,617 $ 176,861 $ 161,100
Interest cost on projected benefit obligation 143,408 127,959 117,086
Actual return on plan assets (192,939) (82,019) (160,977)
Net amortization and deferral 19,333 (64,727) 36,055
- ----------------------------------------------------------------------------------------------
$ 152,419 $ 158,074 $ 153,264
==============================================================================================
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8.6% and 6.0%, respectively, in 1995, 8.1%
and 6.0%, respectively, in 1994 and 8.0% and 6.0%, respectively, in 1993. The
expected long-term rate of return on assets was 9.5% in 1995, 1994 and 1993.
Plan assets consist primarily of marketable equity securities and fixed income
instruments.
The Company also has a profit sharing plan, which covers substantially all
U.S. domestic employees age 21 and over, with at least one year of service with
the Company as of the contribution date, as defined. The plan provides for
discretionary contributions by the Company which are determined annually by the
Board of Directors. Profit sharing expense was $52,200,000 in 1995, $36,800,000
in 1994 and $21,900,000 in 1993.
38
22
Federal Express Corporation and Subsidiaries
NOTE 9: POSTRETIREMENT BENEFIT PLANS
The Company offers medical and dental coverage to all eligible U.S. domestic
retirees and their eligible dependents. Vision coverage is provided for
retirees only. Substantially all of the Company's U.S. domestic employees
become eligible for these benefits at age 55 and older, if they have permanent,
continuous service with the Company of at least 10 years after attainment of
age 45 if hired prior to January 1, 1988, or at least 20 years after attainment
of age 35, if hired on or after January 1, 1988. Life insurance benefits are
provided only to retirees of the former Tiger International, Inc. who retired
prior to acquisition.
Effective June 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." This standard
requires that the expected cost of providing postretirement benefits be charged
to expense during the years employees render service. Prior to the adoption of
SFAS No. 106, the Company charged retiree benefits to expense when paid. These
amounts were not significant. The cumulative effect of adopting this standard
was $90,230,000 before taxes ($55,943,000 after tax benefit, or $1.03 per
share).
The following table sets forth the accrued postretirement benefit cost as
of May 31:
- --------------------------------------------------------------------------------
In thousands 1995 1994
Accumulated postretirement benefit obligation:
Retirees $ 35,816 $ 34,581
Fully eligible active employees 24,400 25,698
Other active employees, not fully eligible 60,769 66,472
- --------------------------------------------------------------------------------
120,985 126,751
Unrecognized net gain (loss) 25,421 (958)
- --------------------------------------------------------------------------------
$146,406 $ 125,793
================================================================================
Net postretirement benefit expense for the years ended May 31 was as
follows:
- --------------------------------------------------------------------------------
In thousands 1995 1994 1993
Service cost $12,870 $ 12,392 $ 9,161
Interest cost 10,617 10,174 8,434
Transition obligation -- -- 90,230
- --------------------------------------------------------------------------------
$23,487 $ 22,566 $107,825
================================================================================
Future medical benefit costs were estimated to increase at an annual rate
of 11.0% during 1996, decreasing to an annual growth rate of 6.8% in 2005 and
thereafter. Future dental benefit costs were estimated to increase at an annual
rate of 8.8% during 1996, decreasing to an annual growth rate of 6.8% in 2004
and thereafter. The Company's cost is capped at 150% of 1993 employer cost and,
therefore, will not be subject to medical and dental trends after the capped
cost is attained, projected to be in 1998. Primarily because of the cap on the
Company's cost, a 1% increase in these annual trend rates would not have a
significant impact on the accumulated postretirement benefit obligation at May
31, 1995, or 1995 benefit expense. The weighted average discount
39
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rates used in estimating the accumulated postretirement obligation were 8.6%
and 7.7% at May 31, 1995 and 1994, respectively. The Company pays claims as
incurred.
NOTE 10: BUSINESS SEGMENT INFORMATION
The Company is in a single line of business - the worldwide transportation and
distribution of goods and documents. For reporting purposes, operations are
classified into two geographic areas, U.S. domestic and international.
Shipments which either originate in or are destined to locations outside the
U.S. are categorized as international.
A summary of selected financial information for U.S. domestic and
international operations for the years ended May 31 follows:
- --------------------------------------------------------------------------------
In thousands U.S. Total
Domestic International Worldwide
Revenues:
1995 $6,839,418 $ 2,552,655 $9,392,073
1994 6,199,940 2,279,516 8,479,456
1993 5,667,964 2,140,079 7,808,043
Operating Income (Loss):
1995 $ 465,527 $ 125,617 $ 591,144
1994 559,629 (28,997) 530,632
1993 559,140 (181,967) 377,173
Identifiable Assets:
1995 $5,321,811 $ 1,111,561 $6,433,372
1994 4,883,644 1,108,854 5,992,498
1993 4,432,578 1,360,486 5,793,064
- --------------------------------------------------------------------------------
Identifiable assets used jointly in U.S. domestic and international
operations (principally aircraft) have been allocated based on estimated usage.
International revenues related to services originating in the U.S. totaled
$1,201,100,000, $1,020,000,000 and $928,600,000 for the years ended May 31,
1995, 1994 and 1993, respectively.
40
24
Federal Express Corporation and Subsidiaries
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company's annual purchase commitments under various contracts as of May 31,
1995 are as follows:
- --------------------------------------------------------------------------------
In thousands Aircraft-
Aircraft Related(1) Other(2) Total
1996 $499,500 $135,400 $425,500 $1,060,400
1997 429,800 19,100 43,200 492,100
1998 486,000 15,300 33,700 535,000
1999 242,300 18,100 15,600 276,000
2000 124,200 9,900 -- 134,100
- --------------------------------------------------------------------------------
(1) Primarily aircraft modifications, rotables, and development and upgrade of
aircraft simulators.
(2) Primarily facilities, vehicles, computer and other equipment.
The Company is committed to purchase 16 Airbus A300, three Airbus A310, 12
MD-11 and 35 Cessna 208B aircraft to be delivered through 2000. At May 31,
1995, deposits and progress payments of $318,983,000 had been made toward these
purchases. At May 31, 1995, the Company had options to purchase up to 44
additional Airbus A300 for delivery beginning in 1999. In addition, the Company
may be required to purchase seven MD-11 aircraft for delivery beginning no
later than 2000 under a put option agreement.
The Company has entered into contracts which are designed to limit its
exposure to fluctuations in jet fuel prices. Under these contracts, the Company
makes (or receives) payments based on the difference between a specified upper
(or lower) limit and the market price of jet fuel, as determined by an index of
spot market prices representing various geographic regions. The difference is
recorded as an increase or decrease in fuel expense. At May 31, 1995, the
Company had contracts with various financial institutions covering a total
notional volume of 97.4 million gallons (approximately 16% of the Company's
annual jet fuel consumption), with some contracts extending through August
1996. As of May 31, 1995, the Company had neither received nor made any
payments related to these contracts. Based on current market prices, the fair
value of these contracts at May 31, 1995, was approximately $141,000.
NOTE 12: LEGAL PROCEEDINGS
The Internal Revenue Service ("IRS") issued an Examination Report on October
31, 1991 asserting the Company underpaid federal excise taxes for the calendar
quarters ended December 31, 1983 through March 31, 1987. The Examination Report
contains a primary position and a mutually exclusive alternative position
asserting the Company underpaid federal excise taxes by $54,000,000 and
$26,000,000, respectively. Disagreeing with essentially all of the proposed
adjustments contained in the Examination Report, the Company filed a Protest on
March 16, 1992, which set forth the Company's defenses to both IRS positions
and a claim for refund of overpaid federal excise taxes of $23,500,000. On
March 19, 1993, the IRS issued another Examination Report to the Company
asserting the Company underpaid federal excise taxes by $105,000,000 for the
calendar quarters ended June 30, 1987 through March 31, 1991. On June 17, 1993,
the Company filed a Protest contesting the March 19 Examination Report which
set forth the Company's defenses to the IRS position and a claim for refund of
overpaid federal excise taxes of $46,500,000. Interest would be payable on the
amount of any refunds by the
41
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IRS to the Company or underpaid federal excise taxes payable by the Company to
the IRS at statutorily determined rates. The interest rates payable by the
Company for underpaid taxes are higher than the rates payable by the IRS on
refund amounts.
The Company is vigorously pursuing its Protests administratively with the
IRS Appeals Division. If it is unsuccessful with the IRS Appeals Division, the
Company intends to pursue its position in court. Pending resolution of this
matter, the IRS can be expected to take positions similar to those taken in
their Examination Reports for periods after March 31, 1991.
Given the inherent uncertainties in the excise tax matter, management is
currently unable to predict with certainty the outcome of this matter or the
ultimate effect, if any, its resolution would have on the Company's financial
condition or results of operations. No amount has been reserved for this
contingency.
The Company is subject to other legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
aggregate liability, if any, with respect to these other actions will not
materially adversely affect the financial position or results of operations of
the Company.
NOTE 13: UNUSUAL EVENTS
In January 1995, the Company sold two dedicated warehousing and contract
distribution companies in the United Kingdom. A gain of $35,700,000 was
recorded from the sale.
In 1995, the Company received $9,700,000 from the bankruptcy estate of a
firm engaged by the Company in 1990 to remit payments of employee withholding
taxes. This amount is a partial recovery of a $32,000,000 loss incurred by the
Company in 1991 that resulted from the firm's failure to remit certain of these
tax payments to appropriate authorities. The Company may receive additional
distributions from the firm's bankruptcy estate depending on the outcome of
preference litigation and other pending bankruptcy matters against the firm.
NOTE 14: SUMMARY OF QUARTERLY OPERATING RESULTS (Unaudited)
- ------------------------------------------------------------------------------------------
In thousands, except earnings per share First Second Third Fourth
Quarter Quarter Quarter Quarter
1995
Revenues $2,231,127 $2,358,765 $2,332,594 $2,469,587
Operating income 142,985 176,376 97,672 174,111
Income before income taxes 107,267 151,120 110,714 152,983
Net income 61,142 86,139 63,107 87,200
Earnings per share $ 1.08 $ 1.53 $ 1.12 $ 1.54
Average shares outstanding 56,614 56,385 56,374 56,601
1994
Revenues $2,015,725 $2,121,525 $2,077,414 $2,264,792
Operating income 101,907 149,718 85,317 193,690
Income before income taxes 60,835 110,539 57,717 149,371
Net income 32,851 59,691 31,167 80,661
Earnings per share $ .60 $ 1.07 $ .55 $ 1.43
Average shares outstanding 55,186 55,850 56,445 56,569
- ------------------------------------------------------------------------------------------
42
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Federal Express Corporation:
We have audited the accompanying consolidated balance sheets of Federal Express
Corporation (a Delaware corporation) and subsidiaries as of May 31, 1995 and
1994, and the related consolidated statements of income, common stockholders'
investment and cash flows for each of the three years in the period ended May
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Federal Express Corporation
and subsidiaries as of May 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Memphis, Tennessee
June 29, 1995
43
27
SELECTED CONSOLIDATED FINANCIAL DATA
Years ended May 31
- ----------------------------------------------------------------------------------------------------
In thousands, except per share data and other operating data 1995 1994 1993
OPERATING RESULTS
Revenues $9,392,073 $8,479,456 $7,808,043
Operating income 591,144 530,632 377,173
Income (loss) before income taxes 522,084 378,462 203,576
Income (loss) from continuing operations 297,588 204,370 109,809
Net income (loss) $ 297,588 $ 204,370 $ 53,866
PER SHARE DATA
Earnings (loss) per share:
Continuing operations $ 5.27 $ 3.65 $ 2.01
Discontinued operations -- -- --
Cumulative effect of changes in accounting principles -- -- (1.03)
- ----------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 5.27 $ 3.65 $ .98
Average shares outstanding 56,494 56,012 54,719
Cash dividends -- -- --
FINANCIAL POSITION
Property and equipment, net $3,715,244 $3,449,093 $ 3,476,268
Total assets 6,433,372 5,992,498 5,793,064
Long-term debt 1,324,711 1,632,202 1,882,279
Common stockholders' investment 2,245,569 1,924,705 1,671,381
OTHER OPERATING DATA
Express package:
Average daily package volume 2,247,594 1,925,105 1,710,561
Average pounds per package 6.3 6.0 5.8
Average revenue per pound* $ 2.31 $ 2.51 $ 2.62
Average revenue per package* $ 14.62 $ 15.12 $ 15.30
Airfreight:
Average daily pounds 2,153,041 1,844,270 2,050,033
Average revenue per pound $ 1.06 $ 1.06 $ 1.09
Operating weekdays 255 257 255
Aircraft fleet:
Airbus A300-600 9 2 --
Airbus A310-200 15 -- --
Boeing 747-100 -- -- --
Boeing 747-200 5 6 8
McDonnell Douglas MD-11 13 13 8
McDonnell Douglas DC-10-10 13 11 11
McDonnell Douglas DC-10-30 22 19 19
McDonnell Douglas DC-8 -- -- --
Boeing 727-100 68 69 80
Boeing 727-200 90 90 87
Cessna 208A 10 10 10
Cessna 208B 219 206 206
Fokker F-27 32 32 32
Vehicle fleet 35,900 30,900 28,100
Average number of employees (based on a
standard full-time workweek) 94,201 88,502 84,104
- ----------------------------------------------------------------------------------------------------
*Beginning in 1995, certain service fee revenues were classified as
package-related revenue. Data for prior periods has been restated where
applicable to conform to this presentation.
44
28
Federal Express Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987 1986
$ 7,550,060 $7,688,296 $7,015,069 $5,166,967 $3,882,817 $ 3,178,308 $ 2,573,229
22,967 252,126 387,355 414,787 379,452 364,743 344,021
(146,828) 40,942 218,423 298,332 302,328 311,885 305,085
(113,782) 5,898 115,764 166,451 187,716 166,952 192,671
$ (113,782) $ 5,898 $ 115,764 $ 184,551 $ 187,716 $ (65,571) $ 131,839
$ (2.11) $ .11 $ 2.18 $ 3.18 $ 3.56 $ 3.21 $ 3.86
-- -- -- -- -- (4.48) (1.22)
-- -- -- .35 -- -- --
- ---------------------------------------------------------------------------------------------
$ (2.11) $ .11 $ 2.18 $ 3.53 $ 3.56 $ (1.27) $ 2.64
53,961 53,350 53,161 52,272 52,670 51,905 49,840
-- -- -- -- -- -- --
$ 3,411,297 $3,624,026 $3,566,321 $3,431,814 $2,231,875 $ 1,861,432 $ 1,551,845
5,463,186 5,672,461 5,675,073 5,293,422 3,008,549 2,499,511 2,276,362
1,797,844 1,826,781 2,148,142 2,138,940 838,730 744,914 561,716
1,579,722 1,668,620 1,649,187 1,493,524 1,330,679 1,078,920 1,091,714
1,472,642 1,310,890 1,234,174 1,059,882 877,543 704,392 550,306
5.7 5.6 5.4 5.4 5.3 5.1 5.3
$ 2.90 $ 3.08 $ 3.13 $ 3.04 $ 3.10 $ 3.33 $ 3.40
$ 16.38 $ 17.33 $ 16.76 $ 16.28 $ 16.32 $ 16.97 $ 17.92
2,258,303 2,650,204 3,148,290 4,019,353 -- -- --
$ 1.22 $ 1.20 $ 1.13 $ 1.06 -- -- --
254 255 255 255 257 254 254
-- -- -- -- -- -- --
-- -- -- -- -- -- --
4 8 9 9 -- -- --
9 10 10 12 -- -- --
4 1 -- -- -- -- --
11 11 10 8 8 8 6
17 16 16 16 13 11 9
-- -- 6 6 -- -- --
85 92 89 80 47 39 35
66 57 41 26 21 21 18
10 10 37 38 38 39 34
206 183 147 109 71 27 --
32 26 19 7 5 -- --
30,400 32,800 31,000 28,900 21,000 18,700 14,500
84,162 81,711 75,102 58,136 48,556 41,047 31,582
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45
29
BOARD OF DIRECTORS Federal Express Corporation and Subsidiaries
ROBERT H. ALLEN (2) J.R. HYDE, III (2)
Private Investor and Managing Partner Chairman and Chief Executive Officer
Challenge Investment Partners AutoZone,Inc.
Investment firm Auto parts retail chain
HOWARD H. BAKER, JR. (1) CHARLES T. MANATT (2)
Partner Senior Partner
Baker, Donelson, Bearman & Caldwell Manatt, Phelps & Phillips
Law firm Law firm
ANTHONY J.A. BRYAN (1) GEORGE J. MITCHELL (1)
Chairman, Executive Committee Special Counsel
Hospital Corporation International Verner, Liipfert, Bernhard, McPherson and Hand
Owns, manages and builds hospitals and health-related Law firm
facilities in various countries around the world
JACKSON W. SMART, JR. (2*)
ROBERT L. COX (1) Chairman and Chief Executive Officer
Partner MSP Communications, Inc.
Waring Cox Radio broadcasting company
Law firm
FREDERICK W. SMITH
RALPH D. DENUNZIO (2) Chairman, President and Chief Executive Officer
President Federal Express Corporation
Harbor Point Associates, Inc.
Private investment and consulting firm
DR. JOSHUA I. SMITH (1)
Chairman, President and Chief Executive Officer
JUDITH L. ESTRIN The MAXIMA Corporation
President and Chief Executive Officer Information and data processing firm
Precept Software, Inc.
Computer software company
PETER S. WILLMOTT (1)
Chairman and Chief Executive Officer
PHILIP GREER (1*) Willmott Services, Inc.
Senior Managing Principal Retail and consulting firm
Weiss, Peck & Greer, L.L.C.
Diversified investment management and securities firm (1) Audit Committee
(2) Compensation Committee
(*) Committee Chairman
46
30
SENIOR OFFICERS Federal Express Corporation and Subsidiaries
FREDERICK W. SMITH JAMES A. MCKINNEY
Chairman, President and Senior Vice President
Chief Executive Officer President, FedEx Logistics Services
WILLIAM J. RAZZOUK GILBERT D. MOOK
Executive Vice President Senior Vice President
Worldwide Customer Operations Central Support Services
DAVID J. BRONCZEK JAMES A. PERKINS
Senior Vice President Senior Vice President and
Europe, Middle East and Africa Chief Personnel Officer
T. MICHAEL GLENN DAVID F. REBHOLZ
Senior Vice President Senior Vice President
Marketing, Customer Service and Global Sales and Trade Services
Corporate Communications
TRACY G. SCHMIDT
ALAN B. GRAF, JR. Senior Vice President
Senior Vice President and Air Ground Terminals and Transportation
Chief Financial Officer
MARY ALICE TAYLOR
DENNIS H. JONES Senior Vice President
Senior Vice President and Americas and Caribbean
Chief Information Officer
THEODORE L. WEISE
KENNETH R. MASTERSON Senior Vice President
Senior Vice President, Air Operations
General Counsel and Secretary
JAMES S. HUDSON
JOSEPH C. MCCARTY, III Vice President, Controller and
Senior Vice President Chief Accounting Officer
Asia Pacific
47
31
CORPORATE INFORMATION
Form 10-K: A copy of the Company's Annual Report on Form 10-K (excluding
exhibits), filed with the Securities and Exchange Commission is available free
of charge. You will be mailed a copy upon request to Thomas L. Holland, Investor
Relations Department, Federal Express Corporation, Box 727, Dept. 1854, Memphis,
Tennessee 38194, (901) 395-3478.
Stock listing: The Company's common stock is listed on The New York Stock
Exchange under the ticker symbol FDX.
Stockholders: At July 13, 1995, there were 8,243 stockholders of record.
Market information: Following are high and low closing prices, by quarter, for
Federal Express Corporation common stock in fiscal 1995 and 1994. No cash
dividends have been declared.
- ---------------------------------------------------------------------------------------------
Closing prices of common stock First Quarter Second Quarter Third Quarter Fourth Quarter
FY 1995
HIGH $ 80.75 $ 70.75 $ 65.25 $ 69.63
LOW 64.00 56.50 53.88 59.88
- ---------------------------------------------------------------------------------------------
FY 1994
High $ 60.25 $ 71.50 $ 77.50 $ 77.25
Low 44.63 55.25 68.25 64.88
- ---------------------------------------------------------------------------------------------
Annual meeting: The annual meeting of stockholders will be held at The Memphis
Marriott, 2625 Thousand Oaks Boulevard, Memphis, Tennessee, on Monday, September
25, 1995, at 10:00 a.m., CDT.
Registrar and transfer agent: First Chicago Trust Company of New York,
Shareholder Services, P.O. Box 2500, Jersey City, NJ 07303-2500, (800) 446-2617
/ Michael Phalen (312) 407-4885.
Corporate headquarters: 2005 Corporate Avenue, Memphis, Tennessee 38132, (901)
369-3600.
Inquiries: For financial information, contact Thomas L. Holland, Manager of
Investor Relations, Federal Express Corporation, Box 727, Dept. 1854,
Memphis, Tennessee 38194, (901) 395-3478. For general information, contact
Shirlee M. Clark, Manager of Media Relations, Federal Express Corporation, Box
727, Dept. 1850, Memphis, Tennessee 38194, (901) 395-3463.
Auditors: Arthur Andersen LLP, Memphis, Tennessee.
Equal Employment Opportunity: Federal Express Corporation is firmly committed
to afford Equal Employment Opportunity to all individuals regardless of age,
sex, race, color, religion, national origin, citizenship, disability, or status
as a Vietnam era or special disabled veteran. We are strongly bound to this
commitment because adherence to Equal Employment Opportunity principles is the
only acceptable way of life. We adhere to those principles not just because
they're the law, but because it's the right thing to do.
Service Marks: Federal Express, the Federal Express logo, FedEx, FedEx
International Economy, FedEx PowerShip, FedEx PowerShip 3, FedEx PowerShip 2,
FedEx Drop Box and FedEx Cosmos are registered service marks of Federal Express
Corporation. Reg. U.S. Pat. & Tm. Off. The World On Time, FedEx SameDay,
1-800-Go-FedEx, FedEx World Service Center, FedEx ShipSite and FedEx Authorized
ShipCenter are service marks and FedEx Ship is a trademark of Federal Express
Corporation.
[LOGO] Portions of this Annual Report were printed on recycled paper.