-----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, PbsD2o4jaORiFXW6k0I9Dxk5z1K8oNnCWoCN05XogjjfW+Kp9JQ/WtRpXIi6hGZc kRQHS7G7kcfs4xFX/JspHg== 0001047469-99-014626.txt : 19990414 0001047469-99-014626.hdr.sgml : 19990414 ACCESSION NUMBER: 0001047469-99-014626 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990413 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: 99592853 BUSINESS ADDRESS: STREET 1: 6075 POPLAR AVENUE CITY: MEMPHIS STATE: TN ZIP: 38119 BUSINESS PHONE: 9013693600 MAIL ADDRESS: STREET 1: 6075 POPLAR AVENUE CITY: MEMPHIS STATE: TN ZIP: 38119 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 FEBRUARY 28, 1999, 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 March 31, 1999 Common Stock, par value $.10 per share 148,722,086 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FDX CORPORATION INDEX
PART I. FINANCIAL INFORMATION PAGE Condensed Consolidated Balance Sheets February 28, 1999 and May 31, 1998............................................... 3-4 Condensed Consolidated Statements of Income Three and Nine Months Ended February 28, 1999 and 1998........................... 5 Condensed Consolidated Statements of Cash Flows Nine Months Ended February 28, 1999 and 1998..................................... 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.......................................................... 14-25 PART II. OTHER INFORMATION Legal Proceedings..................................................................... 26 Exhibits and Reports on Form 8-K...................................................... 26 EXHIBIT INDEX......................................................................... E-1
- 2 - FDX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS February 28, 1999 May 31, (Unaudited) 1998 ----------- ----------- (In thousands) Current Assets: Cash and cash equivalents................................................ $ 139,105 $ 229,565 Receivables, less allowances of $67,071,000 and $61,409,000............................................ 2,099,048 1,943,423 Spare parts, supplies and fuel........................................... 304,968 364,714 Deferred income taxes.................................................... 252,326 232,790 Prepaid expenses and other............................................... 123,663 109,640 ----------- ----------- Total current assets................................................. 2,919,110 2,880,132 ----------- ----------- Property and Equipment, at Cost............................................... 13,365,689 12,463,874 Less accumulated depreciation and amortization........................... 6,962,505 6,528,824 ----------- ----------- Net property and equipment........................................... 6,403,184 5,935,050 ----------- ----------- Other Assets: Goodwill................................................................. 346,969 356,272 Equipment deposits and other assets...................................... 527,151 514,606 ----------- ----------- Total other assets................................................... 874,120 870,878 ----------- ----------- $10,196,414 $ 9,686,060 ----------- ----------- ----------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 3 - FDX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT February 28, 1999 May 31, (Unaudited) 1998 ------------ ------------ (In thousands) Current Liabilities: Short-term borrowings ...................... $ 102,428 $ - Current portion of long-term debt .......... 114,102 257,529 Salaries, wages and benefits ............... 619,717 611,750 Accounts payable ........................... 996,684 1,145,410 Accrued expenses ........................... 882,478 789,150 ------------ ------------ Total current liabilities .............. 2,715,409 2,803,839 ------------ ------------ Long-Term Debt, Less Current Portion ............ 1,362,059 1,385,180 Deferred Income Taxes ........................... 283,860 274,147 Other Liabilities ............................... 1,429,796 1,261,664 Commitments and Contingencies (Notes 7 and 8) Common Stockholders' Investment: Common Stock, $.10 par value; 400,000,000 shares authorized, 148,605,817 and 147,410,578 issued ................. 14,861 14,741 Additional paid-in capital ................. 1,029,100 992,821 Retained earnings .......................... 3,409,315 2,999,354 Deferred compensation and other ............ (20,177) (18,409) Cumulative foreign currency translation adjustments .................. (27,809) (27,277) ------------ ------------ Total common stockholders' investment .. 4,405,290 3,961,230 ------------ ------------ $ 10,196,414 $ 9,686,060 ------------ ------------ ------------ ------------
See accompanying Notes to Condensed Consolidated Financial Statements. - 4 - FDX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended February 28, February 28, ------------------------- -------------------------- 1999 1998 1999 1998 ---------- ---------- ----------- ---------- (In thousands, except per share amounts) Revenues . . . . . . . . . . . . . . . . . . . . . . . . $4,098,418 $3,986,304 $12,389,957 $11,794,813 Operating Expenses: Salaries and employee benefits . . . . . . . . . . . . 1,762,275 1,688,185 5,267,390 4,939,818 Purchased transportation . . . . . . . . . . . . . . . 375,582 414,665 1,143,945 1,111,350 Rentals and landing fees . . . . . . . . . . . . . . . 364,157 346,877 1,043,385 975,524 Depreciation and amortization. . . . . . . . . . . . . 263,725 250,104 766,098 716,961 Maintenance and repairs. . . . . . . . . . . . . . . . 237,616 217,412 721,693 640,447 Fuel . . . . . . . . . . . . . . . . . . . . . . . . . 146,091 191,062 449,232 556,130 Merger expenses. . . . . . . . . . . . . . . . . . . . - 88,000 - 88,000 Restructuring charge (credit). . . . . . . . . . . . . - (16,000) - (16,000) Other. . . . . . . . . . . . . . . . . . . . . . . . . 796,934 710,618 2,225,346 2,094,348 ---------- ---------- ----------- ---------- 3,946,380 3,890,923 11,617,089 11,106,578 ---------- ---------- ----------- ---------- Operating Income . . . . . . . . . . . . . . . . . . . . 152,038 95,381 772,868 688,235 Other Income (Expense): Interest, net. . . . . . . . . . . . . . . . . . . . . (25,159) (33,849) (75,246) (95,627) Other, net . . . . . . . . . . . . . . . . . . . . . . (5,610) 2,138 (8,601) 12,567 ---------- ---------- ----------- ---------- (30,769) (31,711) (83,847) (83,060) ---------- ---------- ----------- ---------- Income Before Income Taxes . . . . . . . . . . . . . . . 121,269 63,670 689,021 605,175 Provision for Income Taxes . . . . . . . . . . . . . . . 43,436 50,834 279,053 277,738 ---------- ---------- ----------- ---------- Income from Continuing Operations. . . . . . . . . . . . 77,833 12,836 409,968 327,437 Income from Discontinued Operations, Net of Income Taxes. . . . . . . . . . . . . . . . . . - 4,875 - 4,875 ---------- ---------- ----------- ---------- Net Income . . . . . . . . . . . . . . . . . . . . . . . $ 77,833 $ 17,711 $ 409,968 $ 332,312 ---------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- Earnings per common share: Continuing operations. . . . . . . . . . . . . . . . . $ .53 $ .09 $ 2.78 $ 2.24 Discontinued operations. . . . . . . . . . . . . . . . - .03 - .03 ---------- ---------- ----------- ---------- $ .53 $ .12 $ 2.78 $ 2.27 ---------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- Earnings per common share - assuming dilution: Continuing operations . . . . . . . . . . . . . . . . $ .52 $ .09 $ 2.74 $ 2.20 Discontinued operations . . . . . . . . . . . . . . . - .03 - .03 ---------- ---------- ----------- ---------- $ .52 $ .12 $ 2.74 $ 2.23 ---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements. - 5 - FDX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended February 28, --------------------------- 1999 1998 ---------- -------------- (In thousands) Net Cash Provided by Operating Activities.................................... $1,039,094 $ 859,554 Investing Activities: Purchases of property and equipment, including deposits on aircraft of $7,792,000 in 1998............................ (1,335,543) (1,258,093) Proceeds from disposition of property and equipment: Sale-leaseback transactions......................................... 80,995 247,852 Reimbursements of A300 deposits..................................... 25,130 106,991 Other dispositions.................................................. 157,583 151,786 Other, net.............................................................. (19,912) (342) ---------- ---------- Net cash used in investing activities........................................ (1,091,747) (751,806) ---------- ---------- Financing Activities: Short-term borrowings, net.............................................. 102,428 - Proceeds from long-term debt issuances.................................. - 280,103 Principal payments on long-term debt.................................... (167,722) (415,952) Proceeds from stock issuances........................................... 35,656 22,590 Other, net.............................................................. (8,169) (11,338) ---------- ---------- Net cash used in financing activities........................................ (37,807) (124,597) ---------- ---------- Net decrease in cash and cash equivalents.................................... (90,460) (16,849) Cash and cash equivalents at beginning of period............................. 229,565 161,361 ---------- ----------- Cash and cash equivalents at end of period................................... $ 139,105 $ 144,512 ---------- ----------- ---------- ----------- Cash payments for: Interest (net of capitalized interest).................................. $ 86,999 $ 91,571 ---------- ----------- ---------- ----------- Income taxes............................................................ $ 362,970 $ 285,766 ---------- ----------- ---------- ----------- Non-cash investing and financing activities: Fair value of assets surrendered under exchange agreements (with two airlines)............................... $ 39,881 $ 78,758 Fair value of assets acquired under exchange agreements................................................... 21,603 64,904 ---------- ----------- Fair value of assets surrendered in excess of assets acquired.................................................... $ 18,278 $ 13,854 ---------- ----------- ---------- -----------
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 include the financial position and results of operations for both FedEx and Caliber for all periods presented. The Company operates on four, three-month quarters with a fiscal year ending May 31. Prior to becoming a subsidiary of the Company, 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. The Company's consolidated results of operations for the quarter ended February 28, 1998 comprise Caliber's prior year period from November 9, 1997 to February 28, 1998 consolidated with FedEx's quarter ended February 28, 1998. (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 February 28, 1999 and the consolidated results of its operations for the three and nine-month periods ended February 28, 1999 and 1998, and its consolidated cash flows for the nine-month periods ended February 28, 1999 and 1998. Operating results for the three and nine-month periods ended February 28, 1999 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 February 28, 1999 and 1998 was $73,447,000 and $11,938,000, respectively. For the nine months ended February 28, 1999 and 1998, total comprehensive income, net of taxes, was $409,436,000 and $315,978,000, 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 and nine months ended February 28, 1999, incremental costs of $10,600,000 and $27,000,000, respectively, were capitalized. The Company estimates the pre-tax benefit of the adoption of this Statement to be approximately $38,000,000 for 1999. Certain prior period amounts have been reclassified to conform to the current presentation. (3) LONG-TERM DEBT
February 28, 1999 May 31, (Unaudited) 1998 ---------- ---------- (In thousands) Unsecured notes payable, interest rates of 7.60% to 10.57%, due through 2098. . . . . . . . . . $1,088,050 $1,253,770 Unsecured sinking fund debentures, interest rate of 9.63%, due through 2020. . . . . . . . . . . 98,581 98,529 Capital lease obligations and tax exempt bonds, interest rates of 5.35% to 7.88%, due through 2017 . . . . . . . . . . . . . . . . . . 254,000 253,425 Less bond reserves . . . . . . . . . . . . . . . . . 9,024 9,024 ---------- ---------- 244,976 244,401 Other, interest rates of 9.68% to 9.98%. . . . . . . . 44,554 46,009 ---------- ---------- 1,476,161 1,642,709 Less current portion . . . . . . . . . . . . . . . . 114,102 257,529 ---------- ---------- $1,362,059 $1,385,180 ---------- ---------- ---------- ----------
Unsecured notes payable as of February 28, 1999, include $848,675,000 due through 2013 and $239,375,000 due in 2098. (4) OTHER FINANCING ARRANGEMENTS At February 28, 1999, short-term borrowings comprise commercial paper, net of related discounts. Interest rates on these borrowings approximate 6.0%. As in the past, the Company may from time to time refinance its commercial paper borrowings with the revolving credit agreement described below. During November 1998, the Company entered into an agreement to obtain a business interruption credit facility as one component of contingency plans implemented in response to a threatened strike by the FedEx Pilots Association ("FPA"). This agreement became effective December 10, 1998 and provided for a commitment of $1,000,000,000 through December 9, 1999. The facility was canceled February 4, 1999 upon ratification of a collective bargaining agreement with the FPA. In connection with obtaining the business interruption credit facility described above, the Company's existing $1,000,000,000 revolving credit agreement with domestic and foreign banks was amended to allow for the business interruption credit facility. The revolving credit agreement comprises two parts. The first part provides for a commitment of $800,000,000 through January 27, 2003. The second part provides for a 364-day commitment of $200,000,000 through January 14, 2000. Interest rates on borrowings under this agreement 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. At February 28, 1999, $897,025,000 of the commitment amount was available. - 8 - (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 February 28, 1999, none of these shares had been issued. (6) COMPUTATION OF EARNINGS PER SHARE The calculation of basic and diluted earnings per share for the three and nine-month periods ended February 28, 1999 and 1998 was as follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended February 28, February 28, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Income from continuing operations. . . . . . . . . . . . $ 77,833 $ 12,836 $409,968 $327,437 Income from discontinued operations. . . . . . . . . . . - 4,875 - 4,875 -------- -------- -------- -------- Net income applicable to common stockholders . . . . . . . . . . . . . . . . . . . . . $ 77,833 $ 17,711 $409,968 $332,312 -------- -------- -------- -------- -------- -------- -------- -------- Average shares of common stock outstanding. . . . . . . . . . . . . . . . . . . . . . 148,164 146,740 147,717 146,517 -------- -------- -------- -------- -------- -------- -------- -------- Basic earnings per share: Continuing operations. . . . . . . . . . . . . . . . . $ .53 $ .09 $ 2.78 $ 2.24 Discontinued operations. . . . . . . . . . . . . . . . - .03 - .03 -------- -------- -------- -------- $ .53 $ .12 $ 2.78 $ 2.27 -------- -------- -------- -------- -------- -------- -------- -------- Average shares of common stock outstanding. . . . . . . . . . . . . . . . . . . . . . 148,164 146,740 147,717 146,517 Common equivalent shares: Assumed exercise of outstanding dilutive options. . . . . . . . . . . . . . . . . . . 7,570 7,007 6,434 6,967 Less shares repurchased from proceeds of assumed exercise of options. . . . . . . . . . . . . . . . . . . . . . (4,762) (4,588) (4,395) (4,435) -------- -------- -------- -------- Average common and common equivalent shares. . . . . . . . . . . . . . . . . . . 150,972 149,159 149,756 149,049 -------- -------- -------- -------- -------- -------- -------- -------- Diluted earnings per share: Continuing operations. . . . . . . . . . . . . . . . . $ .52 $ .09 $ 2.74 $ 2.20 Discontinued operations. . . . . . . . . . . . . . . . - .03 - .03 -------- -------- -------- -------- $ .52 $ .12 $ 2.74 $ 2.23 -------- -------- -------- -------- -------- -------- -------- --------
On March 15, 1999, the Board of Directors declared a stock split to be effected in the form of a stock dividend, payable on May 6, 1999 to stockholders of record on April 15, 1999 at the rate of one share for each share outstanding. After May 6, 1999, all share and per share amounts will be adjusted to reflect the split. - 9 - (7) COMMITMENTS As of February 28, 1999, 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) $186,200 $149,700 $205,200 $ 541,100 2000 507,200 292,200 189,900 989,300 2001 281,000 561,100 59,600 901,700 2002 306,000 178,300 - 484,300 2003 494,800 150,500 200 645,500
(1) Primarily aircraft modifications, rotables and spare parts and engines. (2) Vehicles, facilities, computers and other equipment. FedEx is committed to purchase six Airbus A300s, 33 MD11s, nine DC10s (in addition to those discussed in the following paragraph) and 75 Ayres ALM 200s to be delivered through 2007. Deposits and progress payments of $68,446,000 have been made toward these purchases. FedEx has 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 20 additional DC10s along with additional aircraft engines and equipment. In January 1999, put options were exercised by an airline requiring FedEx to purchase nine DC10s for a total purchase price of $29,700,000. Delivery of the aircraft began in March 1999. During the nine-month period ended February 28, 1999, FedEx acquired six 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 six Airbus A300s and one MD11 purchased and subsequently sold and leased back are as follows (in thousands): 1999 $ 19,800 2000 37,100 2001 36,800 2002 38,400 2003 38,200 Thereafter 788,700
- 10 - (8) 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. Summary judgement was granted to FedEx dismissing all claims in all three consolidated cases in Minnesota. The plaintiffs did not appeal the dismissal, which is now final. 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 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 appealed the dismissal. 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 dismissal was affirmed by the appellate court on March 2, 1999 and is now a final decision. 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 the remaining Alabama case, which is still pending. No amount has been reserved for this contingency. 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 February 28, 1999, and the related condensed consolidated statements of income for the three and nine-month periods ended February 28, 1999 and 1998 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 1999 and 1998, 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 February 28, 1999 and the related condensed consolidated statements of income for the three and nine-month periods ended February 28, 1999 and 1998 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 1999 and 1998. 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. /s/ Arthur Andersen LLP Memphis, Tennessee March 17, 1999 - 13 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS For the third quarter ended February 28, 1999, the Company recorded consolidated net income of $78 million ($.52 per share, assuming dilution) on revenues of $4.1 billion compared with net income of $18 million ($.12 per share, assuming dilution) on revenues of $4.0 billion for the same period in the prior year. For the nine months ended February 28, 1999, the Company recorded consolidated net income of $410 million ($2.74 per share, assuming dilution) on revenues of $12.4 billion compared with net income of $332 million ($2.23 per share, assuming dilution) on revenues of $11.8 billion for the same period in the prior year. On October 30, 1998, contract negotiations between Federal Express Corporation ("FedEx") and the FedEx Pilots Association ("FPA") were discontinued. In November, the FPA began actively encouraging its members to decline all overtime work and issued ballots seeking strike authorization. To avoid service interruptions related to a threatened strike, the Company and FedEx began strike contingency planning including entering into agreements for additional third party air and ground transportation and establishing special financing arrangements. Subsequently, the FPA agreed to end all job actions for 60 days and negotiations resumed. Such negotiations resulted in a five-year collective bargaining agreement that was ratified by the FPA membership in February 1999 and will take effect on May 31, 1999. Costs associated with these contingency plans, including contracts for supplemental airlift and ground transportation and a business interruption credit facility, reduced the third quarter's pretax earnings by approximately $91 million. Excluding these costs, earnings per share, assuming dilution, was approximately $.87. The prior year's third quarter results included $88 million ($80 million, after taxes) of expenses related to the acquisition of Caliber System, Inc. ("Caliber") and the formation of the Company. These expenses were primarily investment banking fees and payments to members of Caliber's management in accordance with pre-existing management retention agreements. Excluding these merger expenses, net income for the third quarter of 1998 was $97 million, or $.65 per share, assuming dilution. Also included in the third quarter of 1998 is a $16 million pre-tax gain from the sale of certain Viking Freight, Inc. assets in its restructuring. Caliber also recorded in this period approximately $5 million of income, net of tax, from discontinued operations related to the exiting of the airfreight business served by Roadway Global Air, Inc. in 1995. The prior year's year-to-date results of operations included the impact of the Teamsters strike against United Parcel Service ("UPS") in August 1997. 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, assuming dilution, to that quarter. - 14 - Revenues The following table shows a comparison of revenues (in millions):
Third Quarter YTD Period Ended Ended February 28, February 28, --------------------- Percent --------------------- Percent 1999 1998 Change 1999 1998 Change ------ ------ ------- ------- ------- ------- FedEx: U.S. domestic express. . . . . . . . . . . $2,445 $2,301 + 6 $ 7,310 $ 6,902 + 6 International Priority (IP). . . . . . . . 730 663 +10 2,217 2,018 +10 International Express Freight (IXF) and Airport-to-Airport (ATA). . . . . . . . . . . . . . . . . . 129 140 - 7 402 456 -12 Charter, Logistics services and other. . . . . . . . . . . . . . . . 127 129 - 2 401 453 -11 ------ ------ ------- ------- 3,431 3,233 + 6 10,330 9,829 + 5 ------ ------ ------- ------- RPS... . . . . . . . . . . . . . . . . . . . 455 496 - 8 1,377 1,274 + 8 Viking . . . . . . . . . . . . . . . . . . . 85 102 -16 275 293 - 6 Other. . . . . . . . . . . . . . . . . . . . 127 155 -18 408 399 + 2 ------ ------ ------- ------- $4,098 $3,986 + 3 $12,390 $11,795 + 5 ------ ------ ------- ------- ------ ------ ------- -------
As discussed below, third quarter and year-to-date comparisons are significantly affected by the number of operating days in each reporting period. For example, RPS, Inc. ("RPS") had 62 operating days in the third quarter of 1999 versus 75 operating days in the third quarter of 1998. - 15 - The following table shows a comparison of selected operating statistics (packages, pounds and shipments in thousands):
Third Quarter YTD Period Ended Ended February 28, February 28, --------------------- Percent --------------------- Percent 1999 1998 Change 1999 1998 Change ------ ------ ------- ------- ------- ------- FedEx: U.S. domestic express: Average daily packages . . . . . . . . . 2,972 2,819 + 5 2,850 2,747 + 4 Revenue per package. . . . . . . . . . . $13.27 $12.95 + 2 $13.43 $13.22 + 2 IP: Average daily packages . . . . . . . . . 279 255 +10 276 255 + 8 Revenue per package. . . . . . . . . . . $42.14 $41.28 + 2 $42.02 $41.58 + 1 IXF/ATA: Average daily pounds . . . . . . . . . . 2,645 2,690 - 2 2,661 2,775 - 4 Revenue per pound. . . . . . . . . . . . $ .79 $ .82 - 4 $ .79 $ .87 - 9 Operating weekdays . . . . . . . . . . . . 62 63 191 190 RPS: Average daily packages . . . . . . . . . 1,364 1,337 + 2 1,379 1,328 + 4 Revenue per package. . . . . . . . . . . $ 5.38 $ 4.94 + 9 $ 5.31 $ 4.99 + 6 Operating weekdays . . . . . . . . . . . . 62 75 188 192 Viking: Shipments per day. . . . . . . . . . . . 11.8 11.8 -- 12.6 13.7 - 8 Revenue per hundredweight. . . . . . . . $10.32 $ 9.43 + 9 $ 9.89 $ 9.18 + 8 Operating weekdays . . . . . . . . . . . . 61 75 188 192
FedEx's U.S. domestic express package revenue rose as both package volume and revenue per package (yield) increased for the quarter and year-to-date periods. During these periods, FedEx experienced increased volume of its higher-priced, overnight services and increased average weight per package. Each of these factors contributed to the rise in U.S. domestic yield for the quarter and nine-month periods. The year-to-date results for the prior year included the additional volume during the UPS strike, which was primarily in the deferred service category and generally at list price. Excluding the revenue and volume associated with the UPS strike and the proceeds from a temporary fuel surcharge in the prior year, U.S. domestic average daily package volume and yield increased 5% and 3% year over year, respectively, for the nine-month period. Management expects total U.S. domestic express package volume in the fourth quarter of 1999 to grow at a rate consistent with the current year year-to-date growth rate. Management believes that U.S. domestic yield should continue to increase slightly, year over year, during the fourth quarter of 1999 due to continued effects of yield-management actions, including a list rate increase averaging 2.8% for U.S. domestic shipments effective March 15, 1999. Also, through enhanced technology, FedEx has improved its ability to capture incremental revenue based upon certain package characteristics, such as weight and package dimensions. 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. - 16 - FedEx's IP revenue increased 10% for the quarter and year-to-date periods as average daily packages and yield increased during these periods. FedEx's IP volume growth rates are less than those experienced in prior years primarily due to weakness in Asian markets, especially in U.S. outbound traffic to that region. Management expects the fourth quarter IP volume growth rate to be consistent with the current year year-to-date growth rate. IP yield increased 2% and 1% for the quarter and year-to-date periods, respectively, primarily as a result of increased weight per package. Management expects IP yield to remain constant or improve slightly as a result of increased weight per package. 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 and nine-month periods. IXF volume (a space-confirmed, time-definite service) increased 1% for the quarter and year-to-date periods, but yield declined 2% and 8% for the same periods. ATA volume (a lower-priced, space-available service) decreased 8% and 14% for the quarter and year-to-date periods, respectively, with yield lower by 12% and 13% for the same periods. Airfreight yield has declined year over year since the second quarter of 1996, with both volume and yield declining for the past three quarters. Management expects these trends to continue through the balance of 1999 and has adjusted the Company's expansion and aircraft deployment plans accordingly. These adjustments include deferring additional flights, reducing capacity on certain routes, suspending flights and redeploying aircraft to areas with capacity constraints. Actual airfreight results will 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 comparisons are significantly affected by the number and timing of operating days in each period. The current year's third quarter included 13 fewer operating days, and the prior year's third quarter included part of RPS's peak volume period. After adjusting for the incremental revenue associated with the UPS strike, revenue increased 11% and 12% on a per-day basis for the quarter and year-to-date periods, respectively. This revenue growth is a result of 2% and 5% increases in average daily volume, after adjusting for the prior year's strike-related volume, and 9% and 7% increases in yield for the same periods. Yield improved primarily as a result of various yield-management actions, including 2.3% and 3.7% average rate increases in February 1999 and 1998, respectively. During the third quarter, RPS recognized a one-time benefit of approximately $7 million to align its estimation methodology for in-transit revenue with that of the Company's other operating subsidiaries. Reported package yield was increased in the third quarter of 1999 by $.08 because of this one-time adjustment. Viking's prior year year-to-date 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. Revenue increased 3% for the quarter and decreased 4% for the year-to-date period on a daily basis considering 14 fewer operating days in the quarter and four fewer operating days in the current year-to-date period. Revenue per hundredweight increased 9% and 8% for the quarter and nine months ended February 28, 1999, respectively. Viking announced a 5.8% general rate increase effective January 4, 1999, on all tariff-based interstate and intrastate traffic. Operating Expenses The increase in salaries and employee benefits for the quarter and year-to-date periods was primarily due to package volume-related increases in the number of employees, principally at FedEx, and increased provisions for the Company's performance-based incentive compensation plans. The decrease in purchased transportation for the current quarter was primarily related to fewer operating days at RPS. - 17 - Increases of 5% and 7% in rentals and landing fees for the quarter and year-to-date periods, respectively, were primarily due to additional facilities leased by FedEx. The current year's expense includes additional building leases at the Indianapolis and Alliance-Fort Worth hubs. In the third quarter, supplemental aircraft lease and equipment lease expense declined year over year. As discussed below, incremental leases associated with the strike contingency planning are included in other operating expenses. In the prior year's third quarter, supplemental leased aircraft were added to meet the demands of increased package volume and to replace an MD11 destroyed in July 1997. In the current quarter, supplemental leased aircraft were not as extensively required (excluding strike contingency costs described below) because sufficient leased fleet aircraft were available for FedEx's capacity needs. As of February 28, 1999, FedEx had 93 wide-bodied aircraft under operating lease compared with 85 as of February 28, 1998. During the nine-month period, the additional leased fleet aircraft contributed to the rise in rentals and landing fees. The prior year's first quarter 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). Management expects year-over-year increases in lease expense to continue as FedEx enters into additional aircraft rental agreements, including the conversion of A300 purchase commitments into direct operating leases, during 1999 and thereafter. (See Note 7 of Notes to Condensed Consolidated Financial Statements.) Maintenance and repairs expense increased 9% and 13% for the quarter and year-to-date periods, respectively, primarily due to higher year-over-year engine maintenance expense on MD11 and B727 aircraft. In the first quarter of 1998, an accrual for the disposition of leased B747 aircraft 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 24% and 19% for the quarter and nine-month periods, respectively, primarily as a result of declines in jet fuel price per gallon (29% and 25%, respectively), partially offset by increases in jet fuel gallons consumed (8% and 6%, respectively). The prior year's 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 12% and 6% for the quarter and year-to-date periods, respectively. This increase is due primarily to approximately $76 million of the strike contingency costs related to aircraft lease expense and lease termination fees incurred in the third quarter by FedEx. Other operating expense includes temporary labor and other outside service contracts, communications expense and the cost of sales of engine noise reduction kits. Operating Income The Company's consolidated operating income increased 59% and 12% for the quarter and year-to-date periods, respectively, from the prior year. Excluding the impact of FedEx's strike contingency costs in the current year and merger-related expenses and the benefit of the UPS strike in the prior year, operating income increased 27% and 19% for the quarter and year-to-date periods due to improved results at FedEx and RPS. FedEx's U.S. domestic operating income was $112 million and $535 million for the quarter and year-to-date periods ended February 28, 1999. Prior year amounts were $105 million and $513 million for these same periods. During the current quarter, approximately $52 million of contingency costs were incurred by FedEx's U.S. domestic operations. Included in the third quarter of the prior - 18 - year were $14 million of expenses related to the acquisition of Caliber. The prior year's first quarter 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 non-recurring items in the current and prior years, operating income increased 38% and 29% for the quarter and year-to-date periods. These increases were due to yield increases (2.5% and 2.6% for the quarter and year-to-date periods, respectively) and package volume growth (5% for both the quarter and year-to-date periods). Cost per package remained constant for the periods. Sales of engine noise reduction kits contributed $24 million and $81 million to U.S. domestic operating income in the third quarter and year-to-date periods ended February 28, 1999, compared with $26 million and $97 million in the same periods in the prior year. FedEx's U.S. domestic operating margins were 4.5% and 7.1% (6.5% and 7.8% excluding the contingency costs) for the quarter and nine-month periods, respectively, compared with 4.4% and 7.2% (5.0% and 6.5%, excluding the aforementioned prior year items) for the same periods in the prior year. FedEx's international operations reported an operating loss of $17 million for the third quarter and operating income of $31 million for the year-to-date period, compared with a loss of $7 million and income of $63 million for the same periods of the prior year. During the current quarter, approximately $29 million of contingency costs were incurred by FedEx's international operations. Excluding these expenses, international operating results improved for the third quarter primarily due to lower fuel costs and the effect of cost controls. Both the quarter and year-to-date results were negatively impacted by slower IP volume growth, declining airfreight volume and yield at a time of year-over-year capacity increases and fixed costs associated with the increased capacity, including salaries and employee benefits and aircraft lease expense. FedEx's international operating margins were -1.9% and 1.1% (1.3% and 2.1%, excluding contingency costs) for the quarter and year-to-date periods, respectively, compared with -0.8% and 2.4% for the same periods in the prior year. RPS reported operating income of $50 million and $160 million for the third quarter and nine-months ended February 28, 1999, respectively, compared with $36 million and $124 million for these periods in the prior year. The current quarter and year-to-date periods have 13 and four fewer operating days, respectively, as compared to the same periods of the prior year. The prior year's results include approximately $6 million of incremental operating income related to the UPS strike. RPS achieved operating margins of 10.9% and 11.6% for the quarter and year-to-date periods, respectively, compared with 7.2% and 9.8% for the same periods in the prior year due to continued package volume growth and yield-management actions. Viking's operating income for the quarter and year-to-date periods was $4 million and $18 million, respectively, compared with $21 million and $22 million in the prior year. The current quarter and year-to-date periods have 14 and four fewer operating days, respectively, as compared to the same periods of the prior year. Prior year results include a $16 million pre-tax gain on the sale of assets as a result of Viking's restructuring. Viking's operating margins were 4.7% and 6.5% for the quarter and year-to-date periods, respectively. Other Income and Expense and Income Taxes Net interest expense declined 26% and 21% for the quarter and year-to-date periods, respectively, due to lower average debt levels at the Company. Other, net for the current quarter includes approximately $10 million of expenses related to FedEx's contingency plans, primarily costs associated with the business interruption credit facility discussed below. - 19 - 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. The Company's effective tax rates of 35.8% and 40.5% for the quarter and year-to-date periods, respectively, compare with rates of 79.8% and 45.9% for these periods in the prior year. The decline in the year-to-date rate from 41.5% recorded in the first half of 1999 to 40.5% is primarily due to the combination of stronger than expected year-to-date results from international operations and lower worldwide income taxes on foreign earnings. The lower tax rate increased third quarter and year-to-date earnings per share $.05, assuming dilution. The prior year rates were affected by certain one-time, merger-related costs which were nondeductible for federal and state income tax purposes. Excluding the impact of those nondeductible costs, the effective tax rates were 39.0% and 41.3% for the prior year's quarter and year-to-date periods, respectively. FINANCIAL CONDITION Liquidity Cash and cash equivalents totaled $139 million at February 28, 1999, a decrease of $90 million since May 31, 1998. Cash provided from operations for the first nine months of 1999 was $1.0 billion compared with $860 million for the same period in the prior year. The Company currently has a $1.0 billion bank revolving credit facility (of which $897 million was available at February 28, 1999) that is generally used to finance temporary operating cash requirements and to provide support for the issuance of commercial paper. In December 1998, the Company established a $1.0 billion business interruption credit facility with a 364-day maturity to fund working capital needs and contingency plan expenses in the event of an actual or threatened business interruption due to labor issues with the FPA. In addition, the Company amended its existing revolving credit agreement to allow for this business interruption credit facility and to extend part of the agreement, previously expiring in January 1999, to January 2000. On February 4, 1999, the business interruption credit facility was canceled following the ratification of the contract by the members of the FPA. Approximately $10 million in fees and interest were incurred in connection with this facility. See Note 4 of Notes to Condensed Consolidated Financial Statements for additional information about the Company's financing arrangements. 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. - 20 - Capital expenditures for the first nine months of 1999 totaled $1.3 billion and included one MD11, aircraft modifications, vehicles and ground support equipment and customer automation and computer equipment. Prior year expenditures also totaled $1.3 billion and included three MD11s, two A310s, aircraft modifications, vehicles and ground support equipment and customer automation and computer equipment. An MD11 purchased in June 1998 was sold and leased back in September 1998. In June and September 1997 and February 1998, three MD11s purchased in February, June and November 1997 were sold and leased back. For information on the Company's purchase commitments, see Note 7 of Notes to Condensed Consolidated Financial Statements. Proceeds from the disposition of property and equipment for the year-to-date period ended February 28, 1998 included proceeds from the sale of Viking's southwestern division and other 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. Euro Currency Conversion On January 1, 1999, 11 of the 15 member countries of the European Union fixed conversion rates between their existing sovereign currencies ("legacy currencies") and a single currency called the euro. On January 4, 1999, the euro began trading on currency exchanges and became available for non-cash transactions. The legacy currencies will remain legal tender through December 31, 2001. Beginning January 1, 2002, euro-denominated bills and coins will be introduced, and by July 1, 2002, legacy currencies will no longer be legal tender. The Company established euro task forces to develop and implement euro conversion plans. The work of the task forces in preparing for the introduction of the euro and the phasing out of the various legacy currencies includes numerous facets such as converting information technology systems, adapting billing and payment systems and modifying processes for preparing financial reports and records. Since January 1, 1999, the Company's subsidiaries have been prepared to quote rates to customers, generate billings and accept payments, in both euros and legacy currencies. Based on the work of the Company's euro task forces to date, the Company believes that the introduction of the euro, any price transparency brought about by its introduction and the phasing out of the legacy currencies will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Costs associated with the euro project are being expensed as incurred and are being funded entirely by internal cash flows. - 21 - 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. The Company has also engaged a major international consulting firm to assist its subsidiaries in their Y2K program 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. State of Readiness Generally, the Company believes that FedEx's Y2K compliance effort is on schedule. The Company's other operating subsidiaries have accelerated their Y2K programs and are now substantially on schedule. IT SYSTEMS FedEx's compliance effort for all business-critical infrastructure and applications software (collectively, "IT Systems") is 98% complete. FedEx has inventoried all IT Systems. Assessment/design (researching the compliance status and determining the impact of, and renovation requirements for, the IT Systems) and renovation (making IT Systems compliant) are substantially complete. Testing, which involves validating compliance, is also substantially complete. Within IT Systems, certification of application software, which involves FedEx's independent, internal review to verify whether the appropriate testing process has occurred, is approximately 96% complete. Certification of the operating system software and program product software (collectively, "infrastructure") at FedEx is 85% complete. FedEx's IT Systems compliance effort is targeted to be 100% complete by September 1, 1999. At present, a substantial portion of the key IT Systems are expected to be compliant by May 31, 1999. Those IT Systems which will most likely not be compliant until after May 31, 1999 include systems dependent upon external government or vendor interfaces. While all IT Systems are still expected to be compliant by September 1, 1999, contingency plans will be in place to mitigate any negative impact of the non-compliance of such systems. 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. The IT Systems compliance effort of the Company's other operating subsidiaries is targeted to be 100% complete by November 1, 1999. NON-IT SYSTEMS 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 the Company's Non-IT Systems are targeted for completion by May 31, 1999. FedEx is 85% complete with the remediation effort on Non-IT Systems. All development and implementation scheduled from the present until May 31, 1999 is being closely monitored, and while there is the possibility that some activities may take place after the target date, FedEx believes that it will be substantially complete by May 31, 1999. Possible exceptions include implementation of FedEx's automated shipping solutions by customers and rollout to FedEx's customers of the FedEx Onsite Server upgrade, which may require some development on the part of the customer. - 22 - 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 for completion by November 1, 1999. FedEx has established several definitions for compliance related to Non-IT Systems. For air infrastructure components (such as airports and air traffic systems), FedEx defines compliant to mean that these components are being aggressively assessed and that approved processes are in place to monitor their evolving status and develop specific operational contingency plans. For business critical suppliers and affiliates, FedEx defines compliant to mean that the suppliers and affiliates have been assessed, and a contingency plan has been developed as necessary. For the automated shipping solutions offered to customers, FedEx defines compliant to mean that FedEx has made available a compliant version of the associated shipping solution. A customer may choose to remain on a non-compliant version of software if the customer is willing to assume the associated risks and there are no potentially unfavorable impacts on FedEx's internal systems. For electronic interfaces with customers and suppliers, FedEx defines compliant to mean that it has made compliant transaction sets available and has made systems modifications that enable FedEx to translate non-compliant versions that mitigate the potential impact to FedEx's internal systems. Y2K Interfaces with Material Third Parties The Company's operating subsidiaries are 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, customers, independent contractors, vendors and suppliers) whose Y2K standing 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. All of the Company's operating subsidiaries are actively encouraging Y2K compliance on the part of third parties and are 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 has developed contingency plans to minimize the impact of Y2K issues on its air operations. Contingency plans will be implemented, as necessary, to mitigate the impact of Y2K problems that might arise during the transition into 2000. 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 and/or vendor/product replacement. The Company's other operating subsidiaries are developing a supply chain dependency model to assess the risk levels associated with the Y2K non-compliance of material third parties. - 23 - 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 for future date accuracy is being verified and documented. FedEx uses an independent, internal process to verify that the appropriate testing process has occurred. A separate homogenous Y2K mainframe environment has been created to test operating system software and program products software. The Y2K mainframe environment is designed to accomplish future date "end to end" testing of the larger applications and to validate interface communications between applications. Costs to Address Y2K Compliance Since 1996, the Company has incurred approximately $80 million on Y2K compliance, which includes internal and external software/hardware analysis, repair, vendor and supplier assessments, risk mitigation planning, and related costs. The Company continues to monitor its total expected costs associated with Y2K compliance efforts, and currently expects that it will incur additional total costs of approximately $55 million, including depreciation of $12 million. Forty percent of the remaining expenses, excluding depreciation, relate to the Y2K remediation efforts during the fourth quarter. Y2K expenditures after May 31, 1999 will include project management of the corporate contingency effort and the command and control center, further system audit and validation, and project management to ensure compliance of new systems development. The Company classifies costs as Y2K for reporting purposes if they remedy only Y2K risks or result in the formulation of contingency plans and would otherwise be unnecessary in the normal course of business. The Company's Y2K compliance effort is being funded entirely by internal cash flows. For the fiscal year ending May 31, 1999, Y2K expenditures are expected to represent less than 10% of the Company's total IT expense budget. Although there are opportunity costs to the Company's Y2K compliance effort, management believes that no significant information technology projects have been deferred due to this work. Contingency Planning and Risks FedEx's key contingency plans were completed by January 31, 1999. These plans address the activities to be performed by personnel in preparation for and during a Y2K-related failure that could have an immediate and significant impact on normal operations. A Y2K-related failure could include, but is not limited to, power outages, system or equipment failures, erroneous data, loss of communications and failure of a supplier or vendor. The contingency plans include, among other things, items such as pre-arranging alternative operating locations, replacing non-Y2K compliant suppliers and vendors, using back-up systems equipment and stockpiling additional inventory and supplies. They also outline alternative procedures, including manual ones, personnel can perform in order to carry out their mission-critical functions and trouble-shooting procedures the IT organization can follow to bring internal systems and equipment back into operation after a Y2K-related failure. The plans also establish procedures for company-wide communications. These are in addition to the Company's operational contingency plans for the pick-up, delivery and movement of packages. FedEx expects to have a Y2K contingency command and control center by April 30, 1999 that will link to its other operations command and control centers. Key personnel will be on call beginning November 1999 and on site beginning December 31, 1999. - 24 - FedEx's goal for completing all other contingency plans is September 30, 1999. Plans covering vendor and supplier issues are targeted for completion by May 31, 1999 to minimize the risks, if any, that some of these parties may not be on schedule in their own Y2K efforts. FedEx's goal for developing testing plans is May 31, 1999. Testing will include structured walk-throughs, mock drills and simulations and is expected to be completed by October 31, 1999. The Company's other operating subsidiaries are currently formulating their contingency plans for Y2K non-compliance. Their goal for completion of key Y2K contingency plans is May 31, 1999. Although the cost of developing contingency plans is included in the total project costs described above, the cost of implementing any necessary contingency plans is not known at this time. 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 and third-party suppliers, vendors and customers with whom the Company deals, the Company believes that there is no single most reasonably likely worst case scenario. However, the Company believes that a most reasonably likely worst case scenario could include, but is not limited to, the following situations: delivery delays and the related re-routing costs due to the lack of readiness of airports and air traffic systems, principally outside the United States; the inability to serve certain customers or geographic areas due to their lack of compliance and business continuance capabilities of suppliers, vendors, customers and independent contractors, including third party pick-up and delivery providers on whom the Company relies in some offshore locations; and service delays or failures due to the global utilities and telecommunications infrastructure. The Company's Y2K program, including related contingency planning, is designed to substantially lessen the possibility of significant interruptions of normal operations. Despite its efforts to date, the Company may still incur substantial expenditures or experience significant delays in delivering its services as Y2K problems, both domestic and international, become known. Non-compliant systems of vendors, suppliers, customers and other third parties could also adversely affect the Company. 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 "Management's Discussion and Analysis of Results of Operations and Financial Condition." - 25 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Note 8 Legal Proceedings in Part I is hereby incorporated by reference. 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. 15.1 Letter re Unaudited Interim Financial Statements. 27 Financial Data Schedule (electronic filing only). (b) Reports on Form 8-K. During the quarter ended February 28, 1999, the Registrant filed one Current Report on Form 8-K dated February 22, 1999. The report was filed under Item 5, Other Events, and Item 7, Financial Statements and Exhibits, and contained a press release announcing that contingency expenses incurred in connection with the Federal Express Corporation pilot contract negotiations were less than originally forecast. - 26 - 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: April 12, 1999 /s/ JAMES S. HUDSON ------------------------ JAMES S. HUDSON CORPORATE VICE PRESIDENT STRATEGIC FINANCIAL PLANNING & CONTROL (PRINCIPAL ACCOUNTING OFFICER) - 27 - EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit - ------- ---------------------- 12.1 Computation of Ratio of Earnings to Fixed Charges. 15.1 Letter re Unaudited Interim Financial Statements. 27 Financial Data Schedule (electronic filing only). E-1 EX-12.1 2 EXHIBIT 12.1 EXHIBIT 12.1 FDX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
Nine Months Ended Year Ended May 31, February 28, ---------------------------------------------------------- --------------------- 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- -------- -------- (In thousands, except ratios) Earnings: Income before income taxes . . . . . $540,131 $693,564 $702,094 $425,865 $899,518 $605,175 $689,021 Add back: Interest expense, net of capitalized interest. . . . . . 152,170 130,923 109,249 110,080 135,696 104,615 85,713 Amortization of debt issuance costs. . . . . . . . . 2,860 2,493 1,628 1,328 1,481 1,091 8,987 Portion of rent expense representative of interest factor . . . . . . . . 288,716 333,971 393,775 439,729 508,325 381,667 430,023 -------- -------- -------- -------- -------- -------- -------- Earnings as adjusted . . . . . . . . $983,877 $1,160,951 $1,206,746 $977,002 $1,545,020 $1,092,548 $1,213,744 -------- ---------- ---------- -------- ---------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- Fixed Charges: Interest expense, net of capitalized interest. . . . . . . $152,170 $130,923 $109,249 $110,080 $135,696 $104,615 $85,713 Capitalized interest . . . . . . . . 29,738 27,381 44,654 45,717 33,009 23,513 29,777 Amortization of debt issuance costs. . . . . . . . . . 2,860 2,493 1,628 1,328 1,481 1,091 8,987 Portion of rent expense representative of interest factor.. . . . . . . . . 288,716 333,971 393,775 439,729 508,325 381,667 430,023 -------- -------- -------- -------- -------- -------- -------- $473,484 $494,768 $549,306 $596,854 $678,511 $510,886 $554,500 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Ratio of Earnings to Fixed Charges . 2.1 2.3 2.2 1.6 2.3 2.1 2.2 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
EX-15.1 3 EXHIBIT 15.1 EXHIBIT 15.1 March 17, 1999 FDX Corporation 6075 Poplar Avenue Memphis, Tennessee 38119 We are aware that FDX Corporation will be incorporating by reference in its previously filed Registration Statements No. 333-45037, 333-71065, and 333-74701 its Report on Form 10-Q for the quarter ended February 28, 1999, which includes our report dated March 17, 1999 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered part of these registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP EX-27 4 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 FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAY-31-1999 JUN-01-1998 FEB-28-1999 139,105 0 2,166,119 67,071 304,968 2,919,110 13,365,689 6,962,505 10,196,414 2,715,409 1,362,059 0 0 14,861 4,390,429 10,196,414 0 12,389,957 0 11,617,089 0 0 75,246 689,021 279,053 0 0 0 0 409,968 2.78 2.74
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