-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, REfgUkFd6CRU4RY1YPrZhgcEzqVnRVfbbfMU3P7AcM/M5YvVZJcKp6+I9DJ2CfWt Of6X5580Jg2G1NIMqFRBYw== 0001047469-98-037121.txt : 19981014 0001047469-98-037121.hdr.sgml : 19981014 ACCESSION NUMBER: 0001047469-98-037121 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981013 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FDX CORP CENTRAL INDEX KEY: 0001048911 STANDARD INDUSTRIAL CLASSIFICATION: AIR COURIER SERVICES [4513] IRS NUMBER: 621721435 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-39483 FILM NUMBER: 98724772 BUSINESS ADDRESS: STREET 1: C/O FDX CORPORATION STREET 2: 2005 CORPORATE AVENUE CITY: MEMPHIS STATE: TN ZIP: 38132 BUSINESS PHONE: 9013955029 MAIL ADDRESS: STREET 1: C/O FDX CORPORATION STREET 2: 2005 CORPORATE AVE CITY: MEMPHIS STATE: TN ZIP: 38132 10-Q 1 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1998, OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________. COMMISSION FILE NUMBER: 333-39483 FDX CORPORATION (Exact name of registrant as specified in its charter) Delaware 62-1721435 (State of incorporation) (I.R.S. Employer Identification No.) 6075 Poplar Avenue, Suite 300 Memphis, Tennessee 38119 (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 / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock Outstanding Shares at September 30, Common Stock, par value $.10 per share 1998 147,553,130 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FDX CORPORATION INDEX PART I. FINANCIAL INFORMATION
PAGE Condensed Consolidated Balance Sheets August 31, 1998 and May 31, 1998. . . . . . . . . . . . . . . . . . . . 3-4 Condensed Consolidated Statements of Income Three Months Ended August 31, 1998 and 1997 . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Cash Flows Three Months Ended August 31, 1998 and 1997 . . . . . . . . . . . . . . 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 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . .14-21 PART II. OTHER INFORMATION Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . 22 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 22 EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
- 2 - FDX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
August 31, 1998 May 31, (Unaudited) 1998 ------------ ----------- (In thousands) Current Assets: Cash and cash equivalents . . . . . . . . . $ 195,181 $ 229,565 Receivables, less allowances of $64,666,000 and $61,409,000. . . . . . . 1,976,815 1,943,423 Spare parts, supplies and fuel. . . . . . . 351,132 364,714 Deferred income taxes . . . . . . . . . . . 245,508 232,790 Prepaid expenses and other. . . . . . . . . 88,931 109,640 ------------ ----------- Total current assets. . . . . . . . . 2,857,567 2,880,132 ------------ ----------- Property and Equipment, at Cost. . . . . . . . 12,881,046 12,463,874 Less accumulated depreciation and amortization 6,748,229 6,528,824 ------------ ----------- Net property and equipment. . . . . . 6,132,817 5,935,050 ------------ ----------- Other Assets: Goodwill. . . . . . . . . . . . . . . . . . 353,079 356,272 Equipment deposits and other assets . . . . 505,627 514,606 ------------ ----------- Total other assets. . . . . . . . . . 858,706 870,878 ------------ ----------- $ 9,849,090 $ 9,686,060 ------------ ----------- ------------ -----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 3 - FDX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' INVESTMENT
August 31, 1998 May 31, (Unaudited) 1998 ------------ ----------- (In thousands) Current Liabilities: Current portion of long-term debt . . . . . $ 265,481 $ 257,529 Accounts payable. . . . . . . . . . . . . . 1,031,691 1,145,410 Salaries, wages and benefits. . . . . . .. 589,304 612,482 Accrued expenses. . . . . . . . . . . . . . 904,922 788,418 ------------ ----------- Total current liabilities . . . . . . 2,791,398 2,803,839 ------------ ----------- Long-Term Debt, Less Current Portion . . . . . 1,371,302 1,385,180 Deferred Income Taxes. . . . . . . . . . . . . 268,940 274,147 Other Liabilities. . . . . . . . . . . . . . . 1,324,863 1,261,664 Commitments and Contingencies (Notes 6 and 7) Common Stockholders' Investment: Common Stock, $.10 par value; 400,000,000 shares authorized, 147,460,802 and 147,410,578 issued. . . 14,746 14,741 Additional paid-in capital. . . . . . . . . 994,518 992,821 Retained earnings . . . . . . . . . . . . . 3,148,733 2,999,354 Deferred compensation . . . . . . . . . . . (24,688) (18,409) Cumulative foreign currency translation adjustments. . . . . . . . . (40,722) (27,277) ------------ ----------- Total common stockholders' investment. . . . . . . . . . . . .. 4,092,587 3,961,230 ------------ ----------- $ 9,849,090 $ 9,686,060 ------------ ----------- ------------ -----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 4 - FDX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended August 31, ------------------------ 1998 1997 ---------- ----------- (In thousands, except per share amounts) Revenues . . . . . . . . . . . . . . . . . . . $4,082,302 $3,866,491 Operating Expenses: Salaries and employee benefits. . . . . . . 1,748,116 1,637,041 Purchased transportation. . . . . . . . . . 371,221 328,706 Rentals and landing fees. . . . . . . . . . 331,559 292,393 Depreciation and amortization . . . . . . . 250,177 230,144 Maintenance and repairs . . . . . . . . . . 248,610 212,599 Fuel . . . . . . . . . . . . . . . . . . 149,431 178,738 Other . . . . . . . . . . . . . . . . . . . 699,345 682,965 ---------- ----------- 3,798,459 3,562,586 ---------- ----------- Operating Income . . . . . . . . . . . . . . . 283,843 303,905 Other Income (Expense): Interest, net . . . . . . . . . . . . . . . (25,234) (29,668) Other, net. . . . . . . . . . . . . . . . . (3,261) 10,549 ---------- ----------- (28,495) (19,119) ---------- ----------- Income Before Income Taxes . . . . . . . . . . 255,348 284,786 Provision for Income Taxes . . . . . . . . . . 105,969 120,009 ---------- ----------- Net Income . . . . . . . . . . . . . . . . . . $ 149,379 $ 164,777 ---------- ----------- ---------- ----------- Earnings per common share: Basic . . . . . . . . . . . . . . . . . . . $ 1.01 $ 1.13 ---------- ----------- ---------- ----------- Assuming dilution . . . . . . . . . . . . . $ 1.00 $ 1.11 ---------- ----------- ---------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 5 - FDX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended August 31, ------------------------ 1998 1997 ---------- ----------- (In thousands) Net Cash Provided by Operating Activities. . . $ 395,901 $ 322,655 Investing Activities: Purchases of property and equipment, including deposits on aircraft . . . . . . . . . . (495,238) (388,188) Proceeds from disposition of property and equipment: Sale-leaseback transactions . . . . . - 81,500 Reimbursements of A300 deposits . . . 23,630 85,169 Other dispositions. . . . . . . . . . 11,149 45,796 Proceeds from sale of A300 purchase rights and other, net . . . . . . . . . . . . . 42,745 17,556 ---------- ----------- Net cash used in investing activities. . . . . (417,714) (158,167) ---------- ----------- Financing Activities: Proceeds from debt issuances. . . . . . . . - 267,105 Principal payments on debt. . . . . . . . . (6,000) (362,846) Proceeds from stock issuances . . . . . . . 1,597 3,591 Other, net. . . . . . . . . . . . . . . . . (8,168) (7,441) ---------- ----------- Net cash used in financing activities. . . . . (12,571) (99,591) ---------- ----------- Net (decrease) increase in cash and cash equivalents . . . . . . . . . (34,384) 64,897 Cash and cash equivalents at beginning of period 229,565 161,361 ---------- ----------- Cash and cash equivalents at end of period . . $ 195,181 $ 226,258 ---------- ----------- ---------- ----------- Cash payments for: Interest (net of capitalized interest). . . $ 22,942 $ 18,332 ---------- ----------- ---------- ----------- Income taxes. . . . . . . . . . . . . . . . $ 36,228 $ 26,145 ---------- ----------- ---------- ----------- Non-cash investing and financing activities: Fair value of assets surrendered under exchange agreements (with two airlines). $ 10,446 $ 25,741 Fair value of assets acquired under exchange agreements. . . . . . . . . . . 6,690 31,413 ---------- ----------- Fair value of assets receivable (liabilities incurred) under exchange agreements. . . $ 3,756 $ (5,672) ---------- ----------- ---------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 6 - FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BUSINESS COMBINATION AND BASIS OF PRESENTATION On January 27, 1998, Federal Express Corporation ("FedEx") and Caliber System, Inc. ("Caliber") became wholly-owned subsidiaries of a newly-formed holding company, FDX Corporation (the "Company"). In this transaction, which was accounted for as a pooling of interests, Caliber shareholders received 0.8 shares of the Company's common stock for each share of Caliber common stock. Each share of FedEx common stock was automatically converted into one share of the Company's common stock. There were approximately 146,800,000 of $0.10 par value shares so issued or converted. The accompanying financial statements have been restated to include the financial position and results of operations for both FedEx and Caliber for all periods presented. Prior to the current fiscal year, Caliber operated on a 13 four-week period calendar ending December 31 with 12 weeks in each of the first three quarters and 16 weeks in the fourth quarter. FedEx's fiscal year ending May 31 consists of four, three-month quarters. The Company's consolidated results of operations and cash flows for the quarter ended August 31, 1997 comprise Caliber's prior year period from May 25, 1997 to August 16, 1997 consolidated with FedEx's quarter ended August 31, 1997. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended May 31, 1998. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the consolidated financial position of the Company as of August 31, 1998 and the consolidated results of its operations and its consolidated cash flows for the three-month periods ended August 31, 1998 and 1997. Operating results for the three-month period ended August 31, 1998 are not necessarily indicative of the results that may be expected for the year ending May 31, 1999. Effective June 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement requires the Company to include within its financial statements information on comprehensive income, which is defined as all activity impacting equity from non-owner sources. For the Company, comprehensive income includes net income and foreign currency translation adjustments. Total comprehensive income, net of taxes, for the three months ended August 31, 1998 and 1997 was $135,934,000 and $160,875,000, respectively. - 7 - Effective June 1, 1998, the Company also adopted Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for these costs, requiring certain of them to be capitalized. For the three months ended August 31, 1998, incremental costs of $7,200,000 were capitalized. Certain prior period amounts have been reclassified to conform to the current presentation. (3) LONG-TERM DEBT
August 31, 1998 May 31, (Unaudited) 1998 ------------ ----------- (In thousands) Unsecured notes payable, interest rates of 7.60% to 10.57%, due through 2098......... $1,247,872 $1,253,770 Unsecured sinking fund debentures, interest rate of 9.63%, due through 2020........... 98,546 98,529 Capital lease obligations and tax exempt bonds, interest rates of 5.35% to 7.88%, due through 2017.......................... 253,425 253,425 Less bond reserves........................ 9,024 9,024 ------------ ----------- 244,401 244,401 Other debt, interest rates of 9.68% to 9.98%... 45,964 46,009 ------------ ----------- 1,636,783 1,642,709 Less current portion...................... 265,481 257,529 ------------ ----------- $1,371,302 $1,385,180 ------------ ----------- ------------ -----------
The Company has a revolving credit agreement with domestic and foreign banks that provides for a total commitment of $1,000,000,000, all of which was available at August 31, 1998. This agreement is composed of two parts. The first part provides for a commitment of $800,000,000 through January 15, 2003. The second part provides for a commitment of $200,000,000 through January 14, 1999. Interest rates on borrowings under this agreement and commercial paper borrowings, if any, are generally determined by maturities selected and prevailing market conditions. Commercial paper borrowings are backed by unused commitments under this revolving credit agreement and reduce the amount available under the agreement. Borrowings under this credit agreement and commercial paper borrowings are classified as long-term based on the Company's ability and intent to refinance such borrowings. (4) 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 August 31, 1998, none of these shares had been issued. - 8 - (5) COMPUTATION OF EARNINGS PER SHARE The calculation of basic and diluted earnings per share for the three-month periods ended August 31, 1998 and 1997 was as follows (in thousands, except per share amounts):
Three Months Ended August 31, ----------------------- 1998 1997 --------- ---------- Net income applicable to common stockholders. . . . . . . . . . . . . . . . $149,379 $164,777 --------- ---------- --------- ---------- Average shares of common stock outstanding . . . . . . . . . . . . . . . . 147,434 146,337 --------- ---------- --------- ---------- Basic earnings per share . . . . . . . . . . . $ 1.01 $ 1.13 --------- ---------- --------- ---------- Average shares of common stock outstanding . . . . . . . . . . . . . . . . 147,434 146,337 Common equivalent shares: Assumed exercise of outstanding dilutive options . . . . . . . . . . . . 6,358 6,999 Less shares repurchased from proceeds of assumed exercise of options . . . . . (4,421) (4,627) --------- ---------- Average common and common equivalent shares . . . . . . . . . . . . . 149,371 148,709 --------- ---------- --------- ---------- Diluted earnings per share . . . . . . . . . . $ 1.00 $ 1.11 --------- ---------- --------- ----------
(6) COMMITMENTS As of August 31, 1998, the Company's purchase commitments for the remainder of 1999 and annually thereafter under various contracts are as follows (in thousands):
Aircraft- Aircraft Related(1) Other(2) Total -------- ---------- -------- ----- 1999 (remainder) $244,600 $413,400 $471,600 $1,129,600 2000 639,400 578,800 217,100 1,435,300 2001 269,800 509,000 59,600 838,400 2002 240,600 156,200 18,100 414,900 2003 457,400 156,600 - 614,000
(1) Primarily aircraft modifications, rotables and spare parts and engines. (2) Vehicles, facilities, computers and other equipment. FedEx is committed to purchase nine Airbus A300s, 33 MD11s and 50 Ayres ALM 200s to be delivered through 2007. Deposits and progress payments of $70,094,000 have been made toward these purchases. FedEx has entered into agreements with two airlines to acquire 53 DC10 aircraft, spare parts, aircraft engines and other equipment, and maintenance services in exchange for a combination of aircraft engine noise reduction kits and cash. Delivery of these aircraft began in 1997 and will continue through 2001. Additionally, these airlines may exercise put options through December 31, 2003, requiring FedEx to purchase up to 29 additional DC10s along with additional aircraft engines and equipment. - 9 - During the three-month period ended August 31, 1998, FedEx acquired three Airbus A300s under operating leases. These aircraft were included as purchase commitments as of May 31, 1998. At the time of delivery, FedEx sold its rights to purchase these aircraft to third parties who reimbursed FedEx for its deposits on the aircraft and paid additional consideration. FedEx then entered into operating leases with each of the third parties who purchased the aircraft from the manufacturer. Lease commitments added since May 31, 1998 for the three Airbus A300s are as follows (in thousands): 1999 $ 12,900 2000 15,500 2001 15,800 2002 15,900 2003 17,700 Thereafter 336,200 (7) LEGAL PROCEEDINGS Customers of FedEx have filed four separate class-action lawsuits against FedEx generally alleging that FedEx has breached its contract with the plaintiffs in transporting packages shipped by them. These lawsuits allege that FedEx continued to collect a 6.25% federal excise tax on the transportation of property shipped by air after the tax expired on December 31, 1995, until it was reinstated in August 1996. The plaintiffs seek certification as a class action, damages, an injunction to enjoin FedEx from continuing to collect the excise tax referred to above, and an award of attorneys' fees and costs. Three of those cases were consolidated in Minnesota Federal District Court. That court stayed the consolidated cases in favor of a case filed in Circuit Court of Greene County, Alabama. The stay was lifted in July 1998. The complaint in the Alabama case also alleges that FedEx continued to collect the excise tax on the transportation of property shipped by air after the tax expired again on December 31, 1996. A fifth case, filed in the Supreme Court of New York, New York County, containing allegations and requests for relief substantially similar to the other four cases was dismissed with prejudice on FedEx's motion on October 7, 1997. The Court found that there was no breach of contract and that the other causes of action were preempted by federal law. The plaintiffs have appealed. This case originally alleged that FedEx continued to collect the excise tax on the transportation of property shipped by air after the tax expired on December 31, 1996. The New York complaint was later amended to cover the first expiration period of the tax (December 31, 1995 through August 27, 1996) covered in the original Alabama complaint. The air transportation excise tax expired on December 31, 1995, was reenacted by Congress effective August 27, 1996, and expired again on December 31, 1996. The excise tax was then reenacted by Congress effective March 7, 1997. The expiration of the tax relieved FedEx of its obligation to pay the tax during the periods of expiration. The Taxpayer Relief Act of 1997, signed by President Clinton in August 1997, extended the tax for 10 years through September 30, 2007. FedEx intends to vigorously defend itself in these cases. No amount has been reserved for these contingencies. - 10 - The Company and its subsidiaries are subject to other legal proceedings and claims which arise in the ordinary course of their 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. - 11 - REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BY INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP, independent public accountants, has performed a review of the condensed consolidated balance sheet of the Company as of August 31, 1998, and the related condensed consolidated statements of income for the three-month periods ended August 31, 1998 and 1997 and the condensed consolidated statements of cash flows for the three-month periods ended August 31, 1998 and 1997, included herein, as indicated in their report thereon included on page 13. - 12 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of FDX Corporation: We have reviewed the accompanying condensed consolidated balance sheet of FDX Corporation and subsidiaries as of August 31, 1998 and the related condensed consolidated statements of income for the three-month periods ended August 31, 1998 and 1997 and the condensed consolidated statements of cash flows for the three-month periods ended August 31, 1998 and 1997. 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 review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of FDX Corporation and subsidiaries as of May 31, 1998 and the related consolidated statements of income, changes in common stockholders' investment and cash flows for the year then ended. In our report dated July 8, 1998, we expressed an unqualified opinion on those financial statements, which are not presented herein. In our opinion, the accompanying condensed consolidated balance sheet of FDX Corporation and subsidiaries as of May 31, 1998, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Memphis, Tennessee September 23, 1998 -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS For the three months ended August 31, 1998, the Company recorded consolidated net income of $149 million ($1.00 per share, assuming dilution) on revenues of $4.1 billion compared with net income of $165 million ($1.11 per share, assuming dilution) on revenues of $3.9 billion for the same period in the prior year. The prior year's results included the impact of the Teamsters strike against United Parcel Service ("UPS") in August 1997. During the 12 operating days of the strike, Federal Express Corporation ("FedEx") delivered approximately 800,000 additional U.S. domestic express packages per day, and RPS, Inc. ("RPS") delivered approximately 300,000 additional packages per day. Although it is difficult to estimate with precision the impact of this additional volume, FedEx and RPS have retained a portion of this volume. The Company analytically calculated that the volume not retained at the end of the first quarter of 1998 contributed approximately $170 million in revenues and approximately $.25 additional earnings per share to that quarter. Excluding the strike-related impact, diluted earnings per share for the quarter rose from $.86 in the prior year to $1.00 in the current year. These increased earnings per share were achieved primarily through improved results domestically at FedEx as well as at RPS and Viking Freight, Inc. ("Viking"). Revenues The following table shows a comparison of revenues (in millions):
First Quarter Ended August 31, -------------------- Percent 1998 1997 Change --------- -------- --------- FedEx: U.S. domestic express. . . . . . . . $2,423 $2,335 + 4 International Priority (IP). . . . . 725 655 +11 International Express Freight (IXF) and Airport-to-Airport (ATA). . . 134 151 -11 Charter, Logistics services and other . . . . . . . . . . . . 135 156 -13 --------- -------- 3,417 3,297 + 4 --------- -------- RPS . . . . . . . . . . . . . . . . . . 41 357 +23 Viking. . . . . . . . . . . . . . . . . 95 103 - 7 Other . . . . . . . . . . . . . . . . . 129 110 +18 --------- -------- $4,082 $3,867 + 6 --------- -------- --------- --------
- 14 - The following table shows a comparison of selected operating statistics (packages, pounds and shipments in thousands):
First Quarter Ended August 31, -------------------- Percent 1998 1997 Change --------- -------- --------- FedEx: U.S. domestic express: Average daily packages. . . . . . 2,725 2,692 + 1 Revenue per package . . . . . . . $13.47 $13.55 - 1 IP: Average daily packages. . . . . . 265 246 + 8 Revenue per package . . . . . . . $41.45 $41.56 - IXF/ATA: Average daily pounds. . . . . . . 2,621 2,652 - 1 Revenue per pound . . . . . . . . $ .77 $ .89 -13 Operating weekdays . . . . . . . . . 66 64 RPS: Average daily packages. . . . . . 1,311 1,231 + 6 Revenue per package . . . . . . . $ 5.25 $ 5.00 + 5 Operating weekdays . . . . . . . . . 64 58 Viking: Shipments per day . . . . . . . . 12.8 17.0 -25 Revenue per hundredweight . . . . $ 9.64 $ 8.69 +11 Operating weekdays . . . . . . . . . 65 58
FedEx's U.S. domestic package volume growth was relatively flat primarily due to the impact of the additional volume during the UPS strike in the prior year. The majority of the strike-related volume was in the deferred service category, generally at list price and above average weight per package. Excluding the revenue and volume associated with the strike and the proceeds from a temporary fuel surcharge in the prior year, U.S. domestic average daily package volume and revenue per package (yield) increased 6% and 2% year over year, respectively, in the current quarter. Management expects total U.S. domestic package volume in 1999 to grow at a lower rate than that experienced in the past two fiscal years. Management believes that U.S. domestic yield should remain stable or increase slightly year over year during the remainder of 1999 due to continued effects of yield-management actions, including a 3% to 4% rate increase in February 1998. Actual results may vary depending on the impact of domestic economic conditions, competitive pricing changes, customer responses to yield-management initiatives and changing customer demand patterns. -15- FedEx's IP revenue and volume year-over-year growth rates slowed to 11% and 8% for the quarter, respectively. In the current quarter, which contained two additional operating days, IP revenue rose 7% on a daily basis. Slower growth in the current quarter was primarily due to weakness in Asian markets and was especially evident in U.S. outbound shipments to that region. Total IP yield remained stable during the quarter compared to the same period of the prior year. Management expects continued pressure on IP volume and yield for the remainder of 1999. Actual IP results will depend on international economic conditions, actions by FedEx's competitors and regulatory conditions for international aviation rights. FedEx's airfreight (IXF/ATA) volume, revenue and yield declined year over year for the quarter. IXF volume (a space-confirmed, time-definite service) increased 3% for the quarter, but yield declined 12% for the same period. ATA volume (a lower-priced, space-available service) decreased 9% for the quarter, with yield lower by 17% for the same period. Management expects airfreight volume and yield to continue to decline, year over year, through the balance of 1999. Due to the impact of difficult international economic conditions on IP and airfreight traffic, management has adjusted the Company's expansion and aircraft deployment plans accordingly. Actual airfreight results will, however, depend on international economic conditions, actions by the Company's competitors, including capacity fluctuations, and regulatory conditions for international aviation rights. RPS's year-over-year revenue growth of 23% for the quarter reflected six additional operating days in the current year's first quarter. The prior year's revenue included approximately $20 million of UPS strike-related revenue. After adjusting for the additional operating days and the benefit of the UPS strike, revenue increased 18% year over year. This revenue growth is a result of a 12% increase in average daily volume, after adjusting for the prior year's strike-related volume, and a 5% increase in yield. Yields improved as a result of various yield-management actions, including a 3.7% rate increase in February 1998. Viking's prior year revenues and shipment statistics reflect the operations of Central Freight Lines Inc., which was sold at the end of June 1997, in conjunction with Viking's restructuring in March 1997. Due to this divestiture, revenue and shipments declined 17% and 25%, respectively, on a daily basis considering seven additional operating days in the current year's first quarter. At the same time, revenue per hundredweight increased 11% primarily due to the restructuring. Operating Expenses Salaries and employee benefits rose 7% for the quarter, primarily due to higher employment levels associated with volume growth. After adjusting for prior year items, primarily the additional revenue and salaries and employee benefits expense associated with the UPS strike and the proceeds from a temporary fuel surcharge, the increase is consistent with the rate of revenue growth. Included in the prior year's expense was a $25 million special appreciation bonus for U.S. operations employees at FedEx for their extra efforts during the UPS strike and increased provisions under the Company's performance-based incentive compensation plans. The increase in purchased transportation for the quarter was primarily volume related, with the majority of the increase occurring at RPS. - 16 - A 13% increase for the quarter in rentals and landing fees was primarily due to additional facilities and aircraft leased by FedEx. The current year's expense includes additional building leases at the Indianapolis and Alliance-Fort Worth hubs. As of August 31, 1998, FedEx had 89 wide-bodied aircraft under operating lease compared with 82 as of August 31, 1997. The prior year's expense was favorably impacted by approximately $9 million of a $17 million net gain resulting from the destruction of a leased MD11 aircraft in an accident in July 1997 (described below in Other Income and Expense and Income Taxes). Management expects year-over-year increases in lease expense to continue as FedEx enters into additional aircraft rental agreements during 1999 and thereafter. FedEx expects to be able to convert its A300 purchase commitments into direct operating leases. (See Note 6 of Notes to Condensed Consolidated Financial Statements.) Maintenance and repairs expense increased 17% for the quarter primarily due to higher year-over-year engine maintenance expense on MD11 and B727 aircraft. In the first quarter of 1998, an operating reserve for the disposition of leased B747 was increased $9 million, with the majority of this increase recorded as maintenance and repairs expense. Management believes that maintenance and repairs expense will continue a long-term trend of year-over-year increases for the foreseeable future due to the increasing size and age of FedEx's fleet and the variety of aircraft types. Fuel expense fell 16% for the quarter primarily as a result of a 24% decline in average jet fuel price per gallon, partially offset by a 10% increase in jet fuel gallons consumed. The prior year's first quarter fuel expense included payments made by FedEx under contracts which were designed to limit FedEx's exposure to fluctuations in jet fuel prices. Effective August 1, 1997, FedEx lifted its temporary 2% fuel surcharge that had been in place on certain U.S. domestic and U.S. export shipments. This surcharge was implemented on February 3, 1997 to mitigate the impact of rising jet fuel prices. Other operating expense increased at a lower rate than revenue because the prior year included incremental expenses associated with the additional volume during the UPS strike, including temporary manpower and uniforms and supplies. Other operating expense includes temporary manpower and other outside service contracts, communications expense and the cost of sales of engine noise reduction kits. Operating Income Including the impact of the UPS strike on prior year results, the Company's consolidated operating income decreased 7% for the quarter from the prior year. Excluding the impact of the UPS strike, operating income increased 15% due to improved results domestically at FedEx, RPS and Viking. FedEx's U.S. domestic operating income was $205 million and $241 million for the quarters ended August 31, 1998 and 1997, respectively. The prior year's operating income included approximately $50 million related to the UPS strike as well as proceeds from a 2% temporary fuel surcharge through August 1, 1997. Excluding these prior year factors, operating income increased 23%, cost per package rose 0.9%, yields increased 2% and package volume grew 6%. Sales of engine noise reduction kits contributed $29 million and $36 million to U.S. domestic operating income in the first quarter of 1999 and 1998, respectively. FedEx's U.S. domestic operating margin for the quarter was 8.2%, compared with 9.9% (7.4%, excluding the aforementioned prior year items) for the same period in the prior year. - 17 - FedEx's international operating income was $14 million for the quarter, compared with $23 million for the prior year. International operating results declined as a result of slower IP volume growth and declining airfreight volumes at a time of year-over-year capacity increases. Fixed costs associated with the increased capacity, including salaries and employee benefits and aircraft lease expense, also negatively impacted international results. In addition, the net effect of foreign currency fluctuations contributed to the decline in FedEx's international operating income. FedEx's international operating margin was 1.5% for the quarter compared with 2.7% for the same period in the prior year. RPS reported operating income of $49 million for the first quarter of 1999, compared with $34 million for the prior year. The current quarter has six additional operating days as compared to the prior year's first quarter. The prior year's results include approximately $6 million of operating income related to the UPS strike. Operating margin increased to 11.0%, compared with 9.6% for the prior year due to continued package volume growth and yield-management actions. Viking's operating income for the quarter was $7 million, compared with an operating loss of $5 million in the prior year. Prior year results include the operations of divisions which were subsequently sold or shut down. Other Income and Expense and Income Taxes Net interest expense declined 15% for the quarter due to lower debt levels at the Company and a slightly higher amount of capitalized interest at FedEx. Other, net for the prior year's first quarter included a gain from an insurance settlement for an MD11 aircraft destroyed in an accident in July 1997. At that time, FedEx realized a net gain of $17 million from the insurance settlement and the release from certain related liabilities on the leased aircraft. Approximately $8 million of this gain was recorded in non-operating income. FINANCIAL CONDITION Liquidity Cash and cash equivalents totaled $195 million at August 31, 1998, a decrease of $34 million since May 31, 1998. Cash provided from operations was $396 million for the current quarter compared with $323 million for the same period in the prior year. The Company currently has a $1.0 billion bank revolving 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, the commercial paper program and the bank revolving credit facility will adequately meet the Company's working capital needs for the foreseeable future. Capital Resources The Company's operations are capital intensive, characterized by significant investments in aircraft, vehicles, computer and telecommunication equipment, package handling facilities and sort equipment. The amount and timing of capital additions depend on various factors including global economic conditions, volume growth, new or enhanced services, geographical expansion of services, competition, availability of satisfactory financing and actions of regulatory authorities. -18- Capital expenditures for the first three months of 1998 totaled $495 million and included one MD11, aircraft modifications, customer automation and computer equipment and vehicles and ground support equipment. In comparison, prior year expenditures totaled $388 million and included one MD11, aircraft modifications, vehicles and ground support equipment and customer automation and computer equipment. In June 1997, an MD11 purchased in February 1997 was sold and leased back. For information on the Company's purchase commitments, see Note 6 of Notes to Condensed Consolidated Financial Statements. Proceeds from the disposition of property and equipment for the year-to-date period ended August 31, 1997 included proceeds from the sale of Viking's south- western division and other Viking assets in conjunction with the restructuring of Viking's operations. Management believes that the capital resources available to the Company provide flexibility to access the most efficient markets for financing capital acquisitions, including aircraft, and are adequate for the Company's future capital needs. Market Risk Sensitive Instruments and Positions There have been no material changes in the Company's market risk sensitive instruments and positions since its disclosure in its Annual Report on Form 10-K for the year ended May 31, 1998. YEAR 2000 COMPLIANCE Introduction The Company's operating subsidiaries rely heavily on sophisticated information technology ("IT") for their business operations. For example, FedEx maintains electronic connections with more than a million customers via its proprietary products and technologies. The Company's Year 2000 ("Y2K") computer compliance issues are, therefore, broad and complex. The FedEx Y2K Project Office, which was established in 1996, coordinates and supports FedEx's Y2K compliance effort. FedEx has engaged a major international consulting firm to assist it in its Y2K program management. This consulting firm has recommended to the Company that the firm extend its Y2K program management oversight to the Company's other operating subsidiaries. The Company has adopted this recommendation, and the managers of the operating subsidiaries are in the process of implementing it. The oversight provided by the consulting firm to the Company's other operating subsidiaries should add further controls to the subsidiaries' Y2K compliance schedule and overall Y2K project management. The Company's Y2K compliance efforts are focused on business-critical items. Hardware, software, systems, technologies and applications are considered "business-critical" if a failure would either have a material adverse impact on the Company's business, financial condition or results of operations or involve a safety risk to employees or customers. Generally, the Company believes that FedEx's Y2K compliance effort is on schedule. The Y2K compliance efforts of the Company's other operating subsidiaries are behind schedule, but these companies are in the process of accelerating their Y2K programs, and both their IT and Non-IT systems are targeted for Y2K compliance by November 1, 1999. State of Readiness FedEx has inventoried all business-critical infrastructure and applications software (collectively, "IT Systems"). Assessment/Design (researching the compliance status and determining the impact of, and renovation requirements for, FedEx IT Systems) and renovation (making FedEx IT Systems compliant) are approximately 85% and 75% complete, respectively. Testing, which involves validating compliance, is approximately 65% complete. Certification, which involves FedEx's independent, internal review to verify that the appropriate testing process has occurred, is approximately 40% complete. - 19 - The Company's other operating subsidiaries have completed the inventory and assessment phases relating to business-critical IT Systems. The remaining phases relating to IT Systems are underway. FedEx's IT Systems compliance effort is targeted to be 95% complete by December 31, 1998 and 100% complete by September 1, 1999. The IT Systems compliance effort of the Company's other operating subsidiaries is targeted to be 100% complete by November 1, 1999. The inventory and assessment phases of FedEx's Y2K program relating to business-critical purchased hardware and software, customized software applications, facilities/equipment and other embedded chip systems (collectively, "Non-IT Systems") are 100% complete. The remaining phases relating to FedEx's Non-IT Systems are targeted for completion by May 31, 1999. The inventory and assessment phases relating to the Non-IT Systems of the Company's other operating subsidiaries are targeted for completion by July 31, 1999, with the remaining phases targeted to be complete by November 1, 1999. Y2K Interfaces with Material Third Parties FedEx is making concerted efforts to understand the Y2K status of third parties (including, among others, domestic and international government agencies, customs bureaus, U.S. and international airports and air traffic control systems, vendors and suppliers) whose Y2K non-compliance could either have a material adverse effect on the Company's business, financial condition or results of operations or involve a safety risk to employees or customers. FedEx is actively encouraging Y2K compliance on the part of third parties and is developing contingency plans in the event of their Y2K non-compliance. In conjunction with the International Air Transport Association (IATA) and the Air Transport Association of America (ATA), FedEx is involved in a global and industry-wide effort to understand the Y2K compliance status of airports, air traffic systems, customs clearance and other U.S. and international government agencies, and common vendors and suppliers. FedEx's vendor and product compliance program includes the following tasks: assessing vendor compliance status; product testing; tracking vendor compliance progress; developing contingency plans, including identifying alternate suppliers, as needed; addressing contract language; replacing, renovating or upgrading parts; requesting presentations from vendors or making on-site assessments, as required; and sending questionnaires. Failure to respond to these questionnaires results in further mail or phone correspondence, contingency plan development or vendor/product replacement. The Company's other operating subsidiaries have begun to develop a supply chain dependency model to assess the risk levels associated with the Y2K non-compliance of material third parties. - 20 - Testing FedEx's Y2K testing effort includes functional testing of remedial measures and regression testing to validate that changes have not altered existing functionality. FedEx's test plans include sections which define the scope of the testing effort, roles and responsibilities of test participants, the test approach planned, software, hardware and data requirements, and test environments/techniques to be used, as well as other sections defining the test effort. System functionality is being verified and documented for future dates. A separate Y2K mainframe environment has been created to test all operating system software and program product software. This Y2K environment is designed to accomplish future date "end to end" testing of the larger applications and to validate interface communications between applications. FedEx uses an independent, internal review to verify that the appropriate testing process has occurred. Costs to Address Y2K Compliance Since 1996, the Company has spent approximately $60 million on Y2K compliance. The Company expects that its Y2K compliance efforts will require additional expenditures of approximately $90 million through 2000. The Company's Y2K compliance effort is being funded entirely by internal cash flows. For the fiscal year ending May 31, 1999, Y2K expenditures should represent less than 10% of the Company's total IT expense budget. Although there are opportunity costs to the Company's Y2K compliance efforts, management believes that no significant information technology projects have been deferred due to this work. Contingency Planning and Risks FedEx has begun developing contingency plans for Y2K non-compliance. These plans will include identifying alternate suppliers, vendors, procedures and operational sites, generating supply/equipment lists, conducting staff training and developing communication plans. A FedEx-wide contingency planning task force has been formed to ensure appropriate coverage and coordination of these plans and to integrate these with FedEx's existing contingency plans. FedEx's goal for completion of key Y2K contingency plans is January 31, 1999, with all other Y2K contingency plans targeted for completion by September 30, 1999. FedEx plans to establish a contingency command and control center by April 30, 1999 to address any issues caused by Y2K non-compliance, with personnel on call beginning in November 1999. The Company's other operating subsidiaries are beginning to formulate their contingency plans for Y2K non-compliance. Due to the general uncertainty inherent in the Company's Y2K compliance, mainly resulting from the Company's dependence upon the Y2K compliance of the government agencies, third-party suppliers, vendors and customers with whom the Company deals, the Company is unable to determine at this time its most reasonably likely worst case scenario. While costs related to the lack of Y2K compliance of third parties, business interruptions, litigation and other liabilities related to Y2K issues could materially and adversely affect the Company's business, results of operations and financial condition, the Company expects its Y2K compliance efforts to reduce significantly the Company's level of uncertainty about the impact of Y2K issues affecting both its IT Systems and Non-IT Systems. Statements in this "Management's Discussion and Analysis of Results of Operations and Financial Condition" or made by management of the Company which contain more than historical information may be considered forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) which are subject to risks and uncertainties. Actual results may differ materially from those expressed in the forward-looking statements because of important factors identified in this section. - 21 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Note 7 Legal Proceedings in Part I is hereby incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 1998 Annual Meeting of Stockholders held on September 28, 1998, the Company's stockholders elected the Class III Directors to serve for a three-year term expiring at the 2001 Annual Meeting. The tabulation of votes with respect to each nominee for office was: Nominee For Withheld ----------------- ----------- ----------- Judith L. Estrin 120,107,112 1,166,795 Philip Greer 120,099,500 1,174,407 J.R. Hyde, III 120,120,469 1,153,438 Frederick W. Smith 120,119,715 1,154,192 The stockholders also approved an amendment to the Company's 1997 Stock Incentive Plan by a vote of 113,069,137 to 6,375,656 with 1,829,114 abstentions. The stockholders also ratified the Board of Directors' designation of Arthur Andersen LLP as independent auditors for the fiscal year ended May 31, 1999 by a vote of 120,635,919 to 305,747 with 332,241 abstentions. The stockholders defeated a stockholder proposal concerning declassification of the Board of Directors by a vote of 46,752,739 in favor of the proposal to 56,295,682 against with 18,225,486 abstentions and broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits.
Exhibit Number Description of Exhibit ------- ----------------------- 12.1 Computation of Ratio of Earnings to Fixed Charges. 27.1 Financial Data Schedule.
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed during the quarter ended August 31, 1998. -22- 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. FDX CORPORATION (Registrant) Date: October 13, 1998 /s/ JAMES S. HUDSON --------------------------------------- JAMES S. HUDSON CORPORATE VICE PRESIDENT STRATEGIC FINANCIAL PLANNING & CONTROL (PRINCIPAL ACCOUNTING OFFICER) -23- EXHIBIT INDEX
Exhibit Number Description of Exhibit - ------- ----------------------- 12.1 Computation of Ratio of Earnings to Fixed Charges. 27.1 Financial Data Schedule.
E-1 EX-12.1 2 EXHIBIT 12.1 EXHIBIT 12.1 FDX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
Three Months Ended Year Ended May 31, August 31, -------------------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 1997 1998 ---------- ---------- ----------- --------- ----------- -------- ----------- (In thousands, except ratios) Earnings: Income before income taxes . . . . $540,131 $ 693,564 $ 702,094 $425,865 $ 899,518 $284,786 $ 255,348 Add back: Interest expense, net of capitalized interest . . . . 152,170 130,923 109,249 110,080 135,696 31,484 27,380 Amortization of debt issuance costs . . . . . . . 2,860 2,493 1,628 1,328 1,481 337 219 Portion of rent expense representative of interest factor. . . . . . . 288,716 333,971 393,775 439,729 508,325 114,262 136,883 ---------- ---------- ----------- --------- ----------- -------- ----------- Earnings as adjusted . . . . . . . $983,877 $1,160,951 $1,206,746 $977,002 $1,545,020 $430,869 $ 419,830 ---------- ---------- ----------- --------- ----------- -------- ----------- ---------- ---------- ----------- --------- ----------- -------- ----------- Fixed Charges: Interest expense, net of capitalized interest. . . . . . $152,170 $ 130,923 $ 109,249 $110,080 $ 135,696 $ 31,484 $ 27,380 Capitalized interest . . . . . . . 29,738 27,381 44,654 45,717 33,009 10,721 11,384 Amortization of debt issuance costs. . . . . . . . . 2,860 2,493 1,628 1,328 1,481 337 219 Portion of rent expense representative of interest factor.. . . . . . . . 288,716 333,971 393,775 439,729 508,325 114,262 136,883 ---------- ---------- ----------- --------- ----------- -------- ----------- $473,484 $ 494,768 $ 549,306 $596,854 $ 678,511 $156,804 $ 175,866 ---------- ---------- ----------- --------- ----------- -------- ----------- ---------- ---------- ----------- --------- ----------- -------- ----------- Ratio of Earnings to Fixed Charges 2.1 2.3 2.2 1.6 2.3 2.7 2.4 ---------- ---------- ----------- --------- ----------- -------- ----------- ---------- ---------- ----------- --------- ----------- -------- -----------
EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME ON PAGES 3-5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDING AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAY-31-1999 JUN-01-1998 AUG-31-1998 195,181 0 2,041,481 64,666 351,132 2,857,567 12,881,046 6,748,229 9,849,090 2,791,398 1,371,302 0 0 14,746 4,077,841 9,849,090 0 4,082,302 0 3,798,459 0 0 25,234 255,348 105,969 0 0 0 0 149,379 1.01 1.00
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