10-Q 1 a2034927z10-q.txt 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 NOVEMBER 30, 2000, OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ---------- TO ----------. COMMISSION FILE NUMBER: 1-7806 FEDERAL EXPRESS CORPORATION (Exact name of registrant as specified in its charter) Delaware 71-0427007 (State of incorporation) (I.R.S. Employer Identification No.) 3610 Hacks Cross Road Memphis, Tennessee 38125 (Address of principal (Zip Code) executive offices) (901) 369-3600 (Registrant's telephone number, including area code) 2005 Corporate Avenue, Memphis, TN 38132 ------------------------------------------ Former name, former address or former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares of common stock outstanding as of December 31, 2000 was 1,000. The Registrant is a wholly-owned subsidiary of FedEx Corporation, and there is no market for the Registrant's common stock. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PERMITTED BY GENERAL INSTRUCTION H(2). -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS) INDEX PART I. FINANCIAL INFORMATION
PAGE ITEM 1: Financial Statements Condensed Consolidated Balance Sheets November 30, 2000 and May 31, 2000.............................. 3-4 Condensed Consolidated Statements of Income Three and Six-Months Ended November 30, 2000 and 1999........... 5 Condensed Consolidated Statements of Cash Flows Six-Months Ended November 30, 2000 and November 30, 1999........................................... 6 Notes to Condensed Consolidated Financial Statements.............. 7-9 Review of Condensed Consolidated Financial Statements by Independent Public Accountants............................... 10 Report of Independent Public Accountants.......................... 11 ITEM 2: Management's Discussion and Analysis of Results of Operations and Financial Condition.............................. 12-15 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk........ 16 PART II. OTHER INFORMATION ITEM 6: Exhibits and Reports on Form 8-K............................... 17 Signatures........................................................ 18 EXHIBIT INDEX..................................................... E-1
-2- PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS) CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS November 30, 2000 May 31, (Unaudited) 2000 ----------- ---------- (In thousands) Current Assets: Cash and cash equivalents....................................................$ 92,591 $ 88,630 Receivables, less allowances of $62,604,000 and $56,517,000................................................ 2,133,610 2,088,854 Spare parts, supplies and fuel............................................... 240,936 247,372 Deferred income taxes........................................................ 288,156 247,802 Prepaid expenses and other................................................... 35,284 69,139 ----------- ----------- Total current assets..................................................... 2,790,577 2,741,797 Property and Equipment, at Cost................................................... 11,597,307 12,958,570 Less accumulated depreciation and amortization............................... 6,172,651 6,846,647 ----------- ----------- Net property and equipment............................................... 5,424,656 6,111,923 Other Assets: Goodwill..................................................................... 332,623 327,765 Due from parent.............................................................. 341,485 86,890 Other........................................................................ 513,432 472,164 ----------- ----------- Total other assets....................................................... 1,187,540 886,819 ----------- ----------- $ 9,402,773 $ 9,740,539 =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements. - 3 - FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS) CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND OWNER'S EQUITY November 30, 2000 May 31, (Unaudited) 2000 ----------- ---------- (In thousands) Current Liabilities: Current portion of long-term debt............................................ $ 22,339 $ 6,339 Accrued salaries and employee benefits....................................... 617,994 636,375 Accounts payable............................................................. 984,647 956,929 Accrued expenses............................................................. 843,533 805,800 Due to parent company........................................................ 8,468 16,425 ---------- ---------- Total current liabilities................................................ 2,476,981 2,421,868 Long-Term Debt, Less Current Portion.............................................. 1,038,551 1,054,430 Deferred Income Taxes............................................................. 127,997 240,569 Other Liabilities................................................................. 1,702,868 1,657,405 Commitments (Note 3) Owner's Equity: Common Stock, $.10 par value; 1,000 shares authorized, issued and outstanding............................ - - Additional paid-in capital................................................... 297,688 894,718 Retained earnings ........................................................... 3,806,272 3,505,422 Accumulated other comprehensive income....................................... (47,584) (33,873) ---------- ---------- Total owner's equity..................................................... 4,056,376 4,366,267 ---------- ---------- $9,402,773 $9,740,539 ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements. - 4 - FEDERAL EXPRESS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended November 30, November 30, ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ---------- ---------- ---------- (In thousands) Revenues..........................................$3,981,092 $3,736,027 $7,896,773 $7,322,833 Operating Expenses: Salaries and employee benefits .............. 1,582,184 1,639,851 3,177,634 3,248,911 Purchased transportation..................... 146,876 138,571 297,236 269,923 Rentals and landing fees..................... 354,267 364,831 697,779 711,573 Depreciation and amortization................ 200,687 245,124 397,951 487,201 Fuel......................................... 300,505 217,328 541,094 398,149 Maintenance and repairs...................... 238,114 258,204 505,835 496,485 Intercompany charges (Note 5)................ 345,508 21,121 672,654 36,295 Other........................................ 542,441 639,781 1,078,352 1,254,137 ---------- ---------- ---------- ---------- 3,710,582 3,524,811 7,368,535 6,902,674 ---------- ---------- ---------- ---------- Operating Income.................................. 270,510 211,216 528,238 420,159 Other Income (Expense): Interest, net................................ (18,586) (19,525) (37,899) (38,549) Other, net................................... 725 4,218 (1,153) 3,069 ---------- ---------- ---------- ---------- (17,861) (15,307) (39,052) (35,480) ---------- ---------- ---------- ---------- Income Before Income Taxes........................ 252,649 195,909 489,186 384,679 Provision for Income Taxes........................ 97,270 77,384 188,337 151,948 ---------- ---------- ---------- ---------- Net Income........................................$ 155,379 $ 118,525 $ 300,849 $ 232,731 ========== ========== ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements. - 5 - FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended November 30, --------------------------- 2000 1999 ---------- -------- (In thousands) Net Cash Provided by Operating Activities.........................................$ 692,130 $ 531,341 Investing Activities: Purchases of property and equipment.......................................... (516,972) (706,584) Proceeds from disposition of property and equipment: Sales-leaseback transaction.............................................. 80,000 - Reimbursements of A300 and MD11 deposits................................. - 24,377 Other dispositions....................................................... 5,053 139,647 Other, net................................................................... (1,655) 408 ----------- ---------- Net cash used in investing activities............................................. (433,574) (542,152) Financing Activities: Principal payments on debt................................................... - (12,500) Net (payments) receipts from parent company.................................. (254,595) 22,371 ----------- ----------- Net cash (used in) provided by financing activities............................... (254,595) 9,871 ----------- ----------- Net increase (decrease) in cash and cash equivalents.............................. 3,961 (940) Cash and cash equivalents at beginning of period.................................. 88,630 88,238 ----------- ----------- Cash and cash equivalents at end of period........................................$ 92,591 $ 87,298 =========== =========== Cash payments for: Interest (net of capitalized interest).......................................$ 41,933 $ 40,841 =========== =========== Income taxes.................................................................$ 256,108 $ 150,948 =========== =========== Non-cash investing and financing activities: Fair value of assets surrendered under exchange agreements (with two airlines)....................................$ - $ 19,450 Fair value of assets acquired under exchange agreements........................................................ 1,785 18,903 ----------- ----------- Fair value of assets surrendered (under) over fair value of assets acquired..............................................$ (1,785) $ 547 =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements. - 6 - FEDERAL EXPRESS CORPORATION (FEDEX EXPRESS) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim financial statements of Federal Express Corporation ("FedEx Express" or the "Company") 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, 2000. 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 November 30, 2000 and the consolidated results of its operations for the three- and six-month periods ended November 30, 2000 and 1999, and cash flows for the six-month periods ended November 30, 2000 and 1999. Operating results for the three- and six-month periods ended November 30, 2000 are not necessarily indicative of the results that may be expected for the year ending May 31, 2001. The Company is in a single line of business and operates in one business segment - the worldwide express transportation and distribution of goods and documents. In June 1998, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137 and SFAS No. 138 and is now effective for fiscal years beginning after June 15, 2000. The Statement requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. The impact, if any, on earnings, comprehensive income and financial position of the adoption of SFAS No. 133 will depend on the amount, timing and nature of any agreements entered into by the Company. Management has not yet completed its estimate of the effect of the adoption of this Statement. FedEx Corporation, the Company's parent, has entered into contracts on behalf of FedEx Express that are designed to limit its exposure to fluctuations in jet fuel prices. Under these contracts, the Company's parent makes (or receives) payments based on the difference between a fixed price and the market price of jet fuel, as determined by an index of spot market prices representing various geographic regions. The difference is recorded as an increase or decrease in fuel expense. Under jet fuel hedging contracts, the Company received $30,493,000 for the second quarter of 2001 and $57,427,000 for the first half of 2001. Through the first half of 2000, there were no such settlements. As of November 30, 2000, contracts in place to fix the price of jet fuel covered a total notional volume of 521,920,000 gallons through 2002. Based on current market prices, the fair value of these jet fuel hedging contracts was an asset of approximately $14,534,000 at November 30, 2000 and $51,060,000 at May 31, 2000. As of December 31, 2000, contracts in place to fix the price of jet fuel covered approximately 41% of the expected jet fuel usage for 2001 and approximately 33% through 2002. Certain prior period amounts have been reclassified to conform to the current presentation. - 7 - (2) COMPREHENSIVE INCOME The following table provides a reconciliation of net income reported in the Company's consolidated financial statements to comprehensive income:
Three Months Ended November 30, -------------------------- 2000 1999 -------- -------- (In thousands) Net income................................................................... $155,379 $118,525 Other comprehensive income: Foreign currency translation adjustments, net of deferred tax benefit of $2,486,000 and deferred taxes of $577,000............................................... (11,453) 2,476 -------- -------- Comprehensive income....................................................... $143,926 $121,001 ======== ========
Six Months Ended November 30, -------------------------- 2000 1999 -------- -------- (In thousands) Net income................................................................... $300,849 $232,731 Other comprehensive income: Foreign currency translation adjustments, net of deferred tax benefit of $3,749,000 and deferred taxes of $732,000............................................... (13,710) 3,681 -------- -------- Comprehensive income....................................................... $287,139 $236,412 ======== ========
(3) COMMITMENTS As of November 30, 2000, the Company's purchase commitments for the remainder of 2001 and annually thereafter under various contracts are as follows (in thousands):
Aircraft- Aircraft Related(1) Other(2) Total --------- ------------- -------- -------- 2001 (remainder) $186,700 $263,400 $145,500 $595,600 2002 400,500 421,500 15,100 837,100 2003 482,300 516,700 300 999,300 2004 354,100 479,900 - 834,000 2005 176,100 512,900 - 689,000
(1) Primarily aircraft modifications, rotables, spare parts and spare engines. (2) Primarily vehicles, facilities, computers and other equipment. The Company is committed to purchase 11 DC10s, 29 MD11s, 8 A300s, 8 A310s, and 75 Ayres ALM 200s to be delivered through 2006. Deposits and progress payments of $9,050,000 have been made toward these purchases. The Company has entered into agreements with two airlines to acquire 53 DC10 aircraft (49 of which had been received as of November 30, 2000), spare parts, aircraft engines and other equipment, and maintenance services, in exchange for a combination of aircraft engine noise reduction kits and cash. Delivery of these aircraft began in 1997 and will continue through 2001. Additionally, these airlines may exercise put options through December 31, 2003, requiring FedEx Express to purchase up to 12 additional DC10s along with additional aircraft engines and equipment. - 8 - Lease commitments added since May 31, 2000 for the one MD11 purchased in 2000 and subsequently sold and leased back, are as follows (in thousands): 2001 $ 1,025 2002 5,011 2003 6,719 2004 6,568 2005 7,076 Thereafter 116,122
(4) RELATED PARTY TRANSACTIONS The following table represents FedEx Express' related party balances outstanding at November 30, 2000 and May 31, 2000 (in thousands). The long-term amounts primarily represent the net activity from participation in FedEx Corporation's consolidated cash management program.
November 30, 2000 Other Current Other Assets Current Due From/ Assets (Non-Current) Liabilities (Due To) ------- ------------- ----------- -------- FedEx Corporation $ - $341,485 $ (8,468) $333,017 Other Corporate Subsidiaries 8,175 - (87,408) (79,233) ------------------------------------------------------------------------------- May 31, 2000 Other Current Other Assets Current Due From/ Assets (Non-Current) Liabilities (Due To) ------- ------------- ----------- -------- FedEx Corporation $ - $ 86,890 $ (16,425) $ 70,465 Other Corporate Subsidiaries - - - - -------------------------------------------------------------------------------
(5) INTERCOMPANY TRANSACTIONS The formation of FedEx Services Inc., ("FedEx Express"), a subsidiary of the Company's parent, FedEx Corporation, has changed the way certain costs are captured and allocated between the various FedEx Corporation operating segments. For example, salaries, wages and benefits, depreciation and other costs for the sales, marketing and information technology departments previously incurred at FedEx Express are now incurred at FedEx Services and allocated to FedEx Corporation's operating segments using various relevant metrics and are included in the line item "Intercompany charges". Consequently, certain expense data presented is not comparable to prior periods. The Company's parent believes the total amounts allocated to FedEx Express reasonably reflect the cost of providing such services. In addition, certain net assets owned by FedEx Express were transferred to FedEx Corporation in connection with the formation of FedEx Services. - 9 - 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 November 30, 2000, and the related condensed consolidated statements of income for the three- and six-month periods ended November 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2000 and 1999, included herein, as indicated in their report thereon included on page 11. - 10 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholder of Federal Express Corporation: We have reviewed the accompanying condensed consolidated balance sheet of Federal Express Corporation (a Delaware corporation) and subsidiaries as of November 30, 2000 and the related condensed consolidated statements of income for the three- and six-month periods ended November 30, 2000, and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Federal Express Corporation as of May 31, 2000 and the related consolidated statements of income, changes in owner's equity and comprehensive income and cash flows for the year then ended. In our report dated June 27, 2000, we expressed an unqualified opinion on those financial statements, which are not presented herein. In our opinion, the accompanying condensed consolidated balance sheet as of May 31, 2000 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Arthur Andersen LLP Arthur Andersen LLP Memphis, Tennessee December 19, 2000 - 11 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following table compares revenues and operating income (in millions) and selected statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30:
-------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended ------------------ Percent ---------------- Percent 2000 1999(1) Change 2000 1999(1) Change ---- ---- ------ ---- ----- ------- Revenues: Package: U.S. overnight box(2) $1,484 $1,393 + 7 $2,964 $2,773 + 7 U.S. overnight envelope(3) 456 451 + 1 928 904 + 3 U.S. deferred 634 588 + 8 1,252 1,147 + 9 International Priority (IP) 1,023 881 +16 2,007 1,699 +18 ------ ------ ------ ------ Total package revenue 3,597 3,313 + 9 7,151 6,523 +10 Freight: U.S. 177 144 +23 339 274 +24 International 102 127 -20 217 253 -14 ------ ------ ------ ------ Total freight revenue 279 271 + 3 556 527 + 6 Other 105 152 -31 190 273 -30 ------ ------ ------ ------ Total revenues $3,981 $3,736 + 7 $7,897 $7,323 + 8 ====== ====== ====== ====== Operating Expenses: Salaries and employee benefits 1,582 3,178 Purchased transportation 147 297 Rentals and landing fees 354 698 Depreciation and amortization 201 398 Fuel 300 541 Maintenance and repairs 238 506 Intercompany charges 346 673 Other 542 1,078 ------ ----- Total operating expenses 3,710 3,525 + 5 7,369 6,903 + 7 ------ ------ ------ ------ Operating income $ 271 $ 211 +28 $ 528 $ 420 +26 ====== ====== ====== ====== -------------------------------------------------------------------------------------------------------- Package statistics: Average daily packages: U.S. overnight box 1,292 1,241 + 4 1,273 1,222 + 4 U.S. overnight envelope 757 770 - 2 757 759 - U.S. deferred 924 913 + 1 900 876 + 3 IP 359 323 +11 348 310 +12 ------ ------ ------ ------ Composite 3,332 3,247 + 3 3,278 3,167 + 4 Revenue per package (yield): U.S. overnight box $18.23 $17.82 + 2 $18.19 $17.72 + 3 U.S. overnight envelope 9.56 9.29 + 3 9.58 9.30 + 3 U.S. deferred 10.88 10.22 + 6 10.87 10.24 + 6 IP 45.27 43.31 + 5 45.04 42.88 + 5 Composite 17.13 16.20 + 6 17.04 16.09 + 6 Freight statistics: Average daily pounds: U.S. 4,749 5,072 - 6 4,556 4,810 - 5 International 2,234 2,574 -13 2,273 2,539 -10 ------ ------ ------ ------ Composite 6,983 7,646 - 9 6,829 7,349 - 7 Revenue per pound (yield): U.S. $ .59 $ .45 +31 $ .58 $ .45 +29 International .73 .78 - 6 .75 .78 - 4 Composite .63 .56 +13 .64 .56 +14
1 Operating expense detail for the three- and six-month periods ended November 30, 1999 has been omitted, as this data is not comparable to the three- and six-month periods ended November 30, 2000. See Note 5 to Condensed Consolidated Financial Statements. 2 The U.S. Overnight Box category includes packages exceeding 8 ounces in weight. 3 The U.S. Overnight Envelope category includes envelopes weighing 8 ounces or less. =============================================================================== - 12 - Revenues Federal Express Corporation (referred to herein as the "Company") total package revenue increased 9% in the second quarter and 10% in the first half of 2001, principally due to increases in IP and U.S. overnight box volumes. Average daily package volume growth rates for U.S. domestic overnight box maintained a steady growth rate of 4% for the second quarter and the first half. Total package yield increased 6% for the second quarter and first half of 2001, continuing the upward trend resulting from our yield-management strategy, which includes restricting growth of less profitable business. Total freight revenue for the second quarter and first half of 2001 increased due to significantly improved yields in U.S. freight, offset by declines in domestic freight volume and international freight volume and yield. Other revenue included Canadian domestic revenue, charter services, logistics services, sales of hushkits and other. Hushkit sales have continued to decrease compared to the prior year periods and are expected to be immaterial for the remainder of 2001. Operating Income Operating income increased 28% for the second quarter and 26% for the first half of 2001 year over year, despite higher fuel costs. A 36% increase in average jet fuel price per gallon contributed to a negative impact of approximately $67 million on second quarter total fuel costs, including the results of jet fuel hedging contracts entered into to mitigate some of the increased jet fuel costs. For the first half, the impact was $110 million, net of hedging effects, resulting from a 33% increase in average jet fuel price per gallon. Fuel surcharges implemented during 2000 offset the increase in fuel costs in the second quarter. The Company's parent, FedEx Corporation, has also entered into jet fuel hedging contracts on behalf of the Company through 2002, as outlined in the table below:
2001 ----------------- Third Fourth Quarter Quarter 2002 ------- ------- ----- Percentage of usage hedged 23% 62% 33% Price per gallon (including $.727 $.786 $.964 taxes and fees)
Cost containment and productivity enhancement programs contributed to the increased second quarter and year-to-date operating margin. Staffing levels in general and administrative support functions were held flat, and discretionary spending was reduced. Maintenance and repairs expense decreased year over year for the second quarter due to the timing of scheduled aircraft maintenance; for the first half, these expenses were consistent with the prior year period. Year-over-year comparisons were also affected by the reduction in the contribution from sales of hushkits. Operating profit from these sales was $6 million for the second quarter and $7 million for the first half of 2001 compared to $14 million and $29 million in the respective prior year periods. - 13 - OUTLOOK Recently, the U.S. economy has slowed substantially. While softness in some market segments, such as the automotive sector, has been experienced over the past six months, the continued slowing of the economy has more recently been noted as a decrease in general consumer spending resulting in less demand for the transportation of all consumer goods. Volumes for the month of December 2000 were adversely affected by the current economic situation. Our fiscal third quarter will also be negatively affected by the recent severe winter weather in much of the U.S., causing increased costs for de-icing, overtime and re-deliveries. In response to these slowing volume growth rates, the Company has implemented cost controls, further reducing discretionary spending, and decreased capital spending from our original plan (see "Capital Resources"). In late December 2000, the Company announced list rate increases averaging 4.9% for shipments within the U.S. and 2.9% for U.S. export shipments, which will be effective February 1, 2001. We do not anticipate that the forecasted economic conditions will impact our pricing or pricing strategies. Despite the near-term outlook, we believe that we are well positioned for long-term growth. In January 2001, we entered into a business alliance with the U.S. Postal Service, which is expected to generate revenue of approximately $7 billion over seven years and is consistent with our goals of improving margins, cash flows and returns. Moreover, our strategic initiatives in support of long-term growth goals have not changed: we will continue to make expenditures for the expansion of our IP business through strategic alliances such as LaPoste in Europe and through global network enhancements such as adding routes and increasing capacity as well as for the design, testing and implementation of new customer-facing technologies such as e-commerce solutions, enhanced customer service tools and internet-based offerings, as well as internal technologies such as improved scanning and wireless transmissions. The globalization of markets will continue, and because of our extensive international network, we believe we are in a position to continue to capitalize on that expansion. We also believe the reliable service and tracking capabilities offered by the Company will become even more important to customers as they seek to shorten their supply chains and decrease inventory levels. FINANCIAL CONDITION Liquidity Cash and cash equivalents totaled $93 million at November 30, 2000 compared to $89 million at May 31, 2000. Cash flows from operating activities for the first half of 2001 totaled $692 million, compared to $531 million for the prior year period. We believe that cash flow from operations and the FedEx Corporation commercial paper program and credit facilities will adequately provide for the Company's working capital needs for the foreseeable future. Capital Resources Our operations require significant investments in aircraft, vehicles, computer and telecommunications equipment, package handling facilities and sort equipment. The amount and timing of capital additions depend on various factors including volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, competition, availability of satisfactory financing and actions of regulatory authorities. - 14 - We have historically financed our capital investments through the use of lease, debt and equity financing in addition to the use of internally generated cash from operations. For information on the Company's purchase commitments, see Note 3 of Notes to Condensed Consolidated Financial Statements. We believe that the capital resources available to us provide flexibility to access the most efficient markets for financing capital acquisitions, including aircraft, and are adequate for the Company's future capital needs. Regulatory Matters In November 2000, the U.S. Occupational Safety and Health Administration, or OSHA, published final regulations to mandate an ergonomics standard that could require many businesses, including the Company, to make significant changes in the workplace in an effort to reduce the incidence of musculoskeletal disorders such as lower back pain. The new regulations do not specify which workplace changes would be required in order for businesses to be in compliance. We have joined other affected parties in lawsuits challenging the legality, as well as the economic and technical feasibility, of the proposed regulations. Pending the results of these legal challenges, the new regulations will go into effect in mid-January 2001 and will have an initial compliance date of October 15, 2001. If the new regulations are upheld and if OSHA applies the new regulations in the same way as it attempted unsuccessfully in the past to impose ergonomic measures under its general authority, we would be required to make extensive changes to the layout of our sorting facilities and hire a significant number of additional employees. We believe that the cost of compliance would be substantial and have a material adverse effect on our business. We expect that our competitors, along with the rest of American industry, would also incur substantial compliance costs. Euro Currency Conversion Since the beginning of the European Union's transition to the euro on January 1, 1999, we have been prepared to quote rates to customers, generate billings and accept payments, in both euro and legacy currencies. The legacy currencies will remain legal tender through December 31, 2001. We believe 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 our consolidated financial position, results of operations or cash flows. Costs associated with the euro transition are being expensed as incurred and are being funded entirely by internal cash flows. The devaluation of the Euro had an immaterial negative impact on the results of operations of the Company for the second quarter and first half of 2001. * * * CERTAIN STATEMENTS CONTAINED IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, SUCH AS STATEMENTS RELATING TO MANAGEMENT'S VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EXPERIENCE OR FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, ECONOMIC AND COMPETITIVE CONDITIONS IN THE MARKETS WHERE THE COMPANY OPERATES, CONTINUED INCREASES IN FUEL COSTS AND THE ABILITY TO MITIGATE THE EFFECTS OF SUCH INCREASES THROUGH FUEL SURCHARGES AND HEDGING ACTIVITIES, MATCHING CAPACITY TO VOLUME LEVELS AND OTHER UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS. EXCEPT AS OTHERWISE INDICATED, REFERENCES TO YEARS MEANS THE COMPANY'S FISCAL YEAR ENDING MAY 31 OF THE YEAR REFERENCED. - 15 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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, 2000. Foreign currency fluctuations during the second quarter of 2001 did not have a material effect on the results of operations for the period. Many of the Company's international sales transactions are denominated in U.S. dollars, which mitigates the impact of foreign currency fluctuations. - 16 - PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits.
Exhibit Number Description of Exhibit ------- ---------------------- 10.1 Amendment dated November 27, 2000 to Sales Agreement dated April 7, 1995 between Federal Express Corporation and American Airlines, Inc. (Filed as Exhibit 10.1 to FedEx Corporation's Quarterly Report on Form 10-Q for the quarter ended November 30, 2000, and incorporated herein by reference.) 10.2 Credit Agreement among FedEx Corporation, the Lenders named therein, Commerzbank AG, as Syndication Agent, Bank of America, N.A., as Documentation Agent, The Chase Manhattan Bank, as Administrative Agent, and Chase Securities Inc., as Lead Arranger and Book Manager, dated as of December 13, 2000 (filed as Exhibit (b)(2) to FedEx's Schedule TO (Amendment No. 2)). (Filed by FedEx Corporation with the SEC on December 15, 2000, and incorporated herein by reference.) 10.3 Guarantee of Federal Express Corporation dated as of December 13,2000, relating to Credit Agreement of FedEx Corporation dated December 13, 2000. 12.1 Computation of Ratio of Earnings to Fixed Charges. 15.1 Letter re: Unaudited Interim Financial Statements.
(b) Reports on Form 8-K. During the quarter ended November 30, 2000, the registrant filed one Current Report on Form 8-K dated January 10, 2001. The report disclosed the execution of a transportation agreement and a retail agreement with the United States Postal Service. - 17 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FEDERAL EXPRESS CORPORATION Date: January 12, 2001 /s/ MICHAEL W. HILLARD ------------------------------ MICHAEL W. HILLARD VICE PRESIDENT & CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) - 18 - EXHIBIT INDEX
Exhibit Number Description of Exhibit ------- ---------------------- 10.3 Guarantee of Federal Express Corporation dated as of December 13,2000, relating to Credit Agreement of FedEx Corporation dated December 13, 2000. 12.1 Computation of Ratio of Earnings to Fixed Charges. 15.1 Letter re: Unaudited Interim Financial Statements.
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