- ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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, 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.) 942 South Shady Grove Road Memphis, Tennessee 38120 (Address of principal (Zip Code) executive offices) (901) 818-7200 (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 December 31, 1999 Common Stock, par value $.10 per share 289,956,501 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
FDX CORPORATION INDEX PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> PAGE <S> <C> Condensed Consolidated Balance Sheets November 30, 1999 and May 31, 1999.............................. 3-4 Condensed Consolidated Statements of Income Three and Six Months Ended November 30, 1999 and 1998........... 5 Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, 1999 and 1998..................... 6 Notes to Condensed Consolidated Financial Statements................. 7-12 Review of Condensed Consolidated Financial Statements by Independent Public Accountants............................... 13 Report of Independent Public Accountants............................. 14 Management's Discussion and Analysis of Results of Operations and Financial Condition......................................... 15-22 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 23 Item 6. Exhibits and Reports on Form 8-K............................ 23 EXHIBIT INDEX........................................................ E-1 </TABLE> - 2 -
FDX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS - ------ <TABLE> <CAPTION> November 30, 1999 May 31, (Unaudited) 1999 ------------ ----------- (In thousands) <S> <C> <C> Current Assets: Cash and cash equivalents......................................$ 517,893 $ 325,323 Receivables, less allowances of $80,327,000 and $68,305,000.................................. 2,378,934 2,153,166 Spare parts, supplies and fuel................................. 277,559 291,922 Deferred income taxes.......................................... 322,129 290,721 Prepaid expenses and other..................................... 72,949 79,896 ----------- ----------- Total current assets....................................... 3,569,464 3,141,028 Property and Equipment, at Cost..................................... 14,478,808 13,719,907 Less accumulated depreciation and amortization................. 7,609,418 7,160,690 ----------- ----------- Net property and equipment................................. 6,869,390 6,559,217 Other Assets: Goodwill....................................................... 439,575 344,002 Other.......................................................... 659,798 603,964 ----------- ----------- Total other assets......................................... 1,099,373 947,966 ----------- ----------- $11,538,227 $10,648,211 =========== =========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. - 3 -
FDX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' INVESTMENT - ---------------------------------------- <TABLE> <CAPTION> November 30, 1999 May 31, (Unaudited) 1999 ----------- ----------- (In thousands) <S> <C> <C> Current Liabilities: Short-term borrowings...............................................$ 200,000 $ - Current portion of long-term debt................................... 7,576 14,938 Accrued salaries and employee benefits.............................. 698,315 740,492 Accounts payable.................................................... 1,119,505 1,133,952 Accrued expenses.................................................... 973,858 895,375 ----------- ----------- Total current liabilities....................................... 2,999,254 2,784,757 Long-Term Debt, Less Current Portion..................................... 1,849,989 1,359,668 Deferred Income Taxes.................................................... 299,702 293,462 Other Liabilities........................................................ 1,748,896 1,546,632 Commitments and Contingencies (Notes 7 and 8) Common Stockholders' Investment: Common Stock, $.10 par value; 800,000,000 shares authorized, 298,573,887 and 297,987,200 issued.......................................... 29,857 29,799 Additional paid-in capital.......................................... 1,065,446 1,061,312 Retained earnings .................................................. 3,945,348 3,615,797 Treasury stock, at cost............................................. (352,726) (1,281) Deferred compensation and other..................................... (24,487) (17,247) Accumulated other comprehensive income.............................. (23,052) (24,688) ----------- ----------- Total common stockholders' investment........................... 4,640,386 4,663,692 ----------- ----------- $11,538,227 $10,648,211 =========== =========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. - 4 -
FDX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, -------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ---------- ----------- ---------- (In thousands, except per share amounts) <S> <C> <C> <C> <C> Revenues ........................................ $4,570,104 $4,209,237 $8,890,081 $8,291,539 Operating Expenses: Salaries and employee benefits ............. 1,873,804 1,756,999 3,704,637 3,505,115 Purchased transportation.................... 437,409 397,142 827,717 768,363 Rentals and landing fees.................... 393,512 347,717 760,219 679,228 Depreciation and amortization............... 285,360 252,196 562,622 502,373 Maintenance and repairs..................... 278,092 236,367 533,361 484,077 Fuel ....................................... 225,101 153,710 409,561 303,141 Other....................................... 772,291 728,119 1,503,622 1,428,412 ---------- ---------- ---------- ---------- 4,265,569 3,872,250 8,301,739 7,670,709 ---------- ---------- ---------- ---------- Operating Income................................. 304,535 336,987 588,342 620,830 Other Income (Expense): Interest, net............................... (26,589) (24,853) (47,197) (50,087) Other, net.................................. 4,982 270 4,663 (2,991) ---------- ---------- ---------- ---------- (21,607) (24,583) (42,534) (53,078) ---------- ---------- ---------- ---------- Income Before Income Taxes....................... 282,928 312,404 545,808 567,752 Provision for Income Taxes....................... 111,745 129,648 215,591 235,617 ---------- ---------- ---------- ---------- Net Income....................................... $ 171,183 $ 182,756 $ 330,217 $ 332,135 ========== ========== ========== ========== Earnings per common share: Basic....................................... $ .58 $ .62 $ 1.12 $ 1.13 ========== ========== ========== ========== Assuming dilution........................... $ .57 $ .61 $ 1.10 $ 1.11 ========== ========== ========== ========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. - 5 -
FDX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six Months Ended November 30, ---------------------- 1999 1998 --------- --------- (In thousands) <S> <C> <C> Net Cash Provided by Operating Activities.......................... $ 676,454 $ 887,115 Investing Activities: Purchases of property and equipment........................... (838,586) (964,163) Proceeds from disposition of property and equipment: Sale-leaseback transactions............................... - 80,995 Reimbursements of A300 and MD11 deposits.................. 24,377 25,130 Other dispositions........................................ 142,979 154,087 Acquisition of business....................................... (115,768) - Other, net.................................................... (13,848) (692) --------- --------- Net cash used in investing activities.............................. (800,846) (704,643) Financing Activities: Short-term borrowings, net.................................... 200,000 422,512 Proceeds from debt issuances.................................. 497,120 - Principal payments on debt.................................... (12,564) (167,690) Proceeds from stock issuances................................. 12,662 5,753 Purchase of treasury stock.................................... (369,508) - Other, net.................................................... (10,748) (8,169) --------- --------- Net cash provided by financing activities.......................... 316,962 252,406 --------- --------- Net increase in cash and cash equivalents.......................... 192,570 434,878 Cash and cash equivalents at beginning of period................... 325,323 229,565 --------- --------- Cash and cash equivalents at end of period......................... $ 517,893 $ 664,443 ========= ========= Cash payments for: Interest (net of capitalized interest)........................ $ 51,251 $ 56,798 ========= ========= Income taxes.................................................. $ 210,859 $ 202,257 ========= ========= Non-cash investing and financing activities: Fair value of assets surrendered under exchange agreements (with two airlines)..................... $ 19,450 $ 26,006 Fair value of assets acquired under exchange agreements......................................... 18,903 14,300 --------- --------- Fair value of assets surrendered in excess of assets acquired................................... $ 547 $ 11,706 ========= ========= </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. - 6 -
FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim financial statements of FDX Corporation (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, 1999. 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, 1999 and the consolidated results of its operations for the three and six-month periods ended November 30, 1999 and 1998, and its consolidated cash flows for the six-month periods ended November 30, 1999 and 1998. Operating results for the three and six-month periods ended November 30, 1999 are not necessarily indicative of the results that may be expected for the year ending May 31, 2000. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, which is 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 adoption of this Statement. The Company has entered into contracts on behalf of its subsidiary Federal Express Corporation ("FedEx"), that are designed to limit FedEx's exposure to fluctuations in jet fuel prices. Under these contracts, the Company 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 expenses. As of early January 2000, contracts in place to fix the price of jet fuel cover a small percentage of the estimated gallons of usage for the third quarter of 2000 and approximately 40 percent of the estimated usage for the fourth quarter of 2000. Through early January 2000, contracts covering 2001 fix the price of approximately one-third of the estimated requirements for jet fuel. Certain prior period amounts have been reclassified to conform to the current presentation. (2) ACQUISITION On September 10, 1999, the Company's FDX Logistics subsidiary acquired the assets of GeoLogistics Air Services, Inc., an airfreight forwarder servicing freight shipments between the United States and Puerto Rico, for approximately $116,000,000 in cash in a business combination accounted for as a purchase. This - 7 -
FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) ACQUISITION (CONTINUED) business is operating under the name Caribbean Transportation Services, Inc. ("CTS"). Its operating results are included in the operations of the Company from the date of acquisition. The excess of purchase price over the estimated fair value of the net assets acquired ($103,000,000) has been recorded as goodwill and is being amortized ratably over 15 years. Pro forma results would not differ materially from reported results in any of the periods presented. (3) COMPREHENSIVE INCOME The following table provides a reconciliation of net income reported in the Company's consolidated financial statements to comprehensive income (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------------ ----------------------- 1999 1998 1999 1998 -------- -------- --------- -------- <S> <C> <C> <C> <C> Net income....................................... $171,183 $182,756 $330,217 $332,135 Other comprehensive income: Unrealized gain (loss) on available-for-sale securities ............... 969 -- (3,062) -- Tax effect.................................... (378) -- 1,194 -- -------- -------- -------- -------- Net of tax.................................. 591 -- (1,868) -- Foreign currency translation adjustments................................. 2,912 20,583 4,236 3,762 Tax effect.................................... (577) (3,284) (732) 92 -------- -------- ------- -------- Net of tax.................................. 2,335 17,299 3,504 3,854 -------- -------- ------- -------- Comprehensive income.......................... $174,109 $200,055 $331,853 $335,989 ======== ======== ======== ======== </TABLE> (4) FINANCING ARRANGEMENTS At November 30, 1999, short-term borrowings comprise funds drawn on a credit agreement executed on October 13, 1999. The interest rate on these borrowings is 7.21%. Principal and interest are payable on January 28, 2000, at which time the facility will be terminated. During the second quarter, the Company issued $500,000,000 of commercial paper which was outstanding at November 30, 1999. Interest rates on these borrowings approximate 6.6%. The commercial paper is reflected in Long-Term Debt based on the Company's ability and intent to refinance this instrument with long-term debt. The Company has a $1,000,000,000 revolving credit agreement with domestic and foreign banks. 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. This portion of the agreement, originally set to expire on January 14, 2000, was amended October 15, 1999 to expire October 13, 2000. Interest rates on borrowings under this agreement are generally determined by maturities selected and prevailing market conditions. Commercial paper borrowings, which are backed by unused - 8 -
FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (4) FINANCING ARRANGEMENTS (CONTINUED) commitments under this revolving credit agreement, and the short-term borrowings under the credit agreement described above reduce the amount available under the revolving credit agreement. At November 30, 1999, $300,000,000 of the commitment amount was available. (5) COMPUTATION OF EARNINGS PER SHARE The calculation of basic and diluted earnings per share for the three and six-month periods ended November 30, 1999 and 1998 was as follows (in thousands, except per share amounts): <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------------ ---------------------- 1999 1998 1999 1998 --------- --------- -------- --------- <S> <C> <C> <C> <C> Net income applicable to common stockholders.................................. $171,183 $182,756 $330,217 $332,135 ======== ======== ======== ======== Average shares of common stock outstanding................................... 293,415 295,107 295,793 294,987 ======== ======== ======== ======== Basic earnings per share......................... $ .58 $ .62 $ 1.12 $ 1.13 ======== ======== ======== ======== Average shares of common stock outstanding................................... 293,415 295,107 295,793 294,987 Common equivalent shares: Assumed exercise of outstanding dilutive options............................. 12,906 10,749 13,056 11,733 Less shares repurchased from proceeds of assumed exercise of options................................... (8,240) (8,004) (7,888) (8,423) -------- -------- -------- -------- Average common and common equivalent shares............................. 298,081 297,852 300,961 298,297 ======== ======== ======== ======== Earnings per share, assuming dilution............................. $ .57 $ .61 $ 1.10 $ 1.11 ======== ======== ======== ======== </TABLE> In September 1999, the Company's Board of Directors approved a plan that authorized the purchase of up to 15,000,000, or approximately five percent, of the Company's outstanding shares of common stock. As of November 30, 1999, the Company had acquired 8,856,500 shares under the plan at an average cost of $40.56 per share and reissued 181,184 of these shares to fund employee benefits. The remaining shares (8,675,316) are being held in treasury for general corporate purposes. - 9 -
FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (6) BUSINESS SEGMENT INFORMATION FDX is a global transportation and logistics provider whose operations are primarily represented by FedEx, the world's largest express transportation company, and RPS, a business-to-business ground small-package carrier. These operating companies comprise the Company's reportable segments. Other operating companies included in the FDX portfolio are Viking Freight, Inc., a less-than-truckload carrier operating principally in the western United States; Roberts Express, Inc., a critical-shipment carrier; and FDX Logistics, Inc., a contract logistics provider. Amounts included in Other in the following table also include certain unallocated corporate items. The following table provides a reconciliation of reportable segment revenues and operating income to the Company's consolidated financial statement totals (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------------------- ---------------------- 1999 1998 1999 1998 --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenue FedEx.................................... $3,736,027 $3,482,236 $7,322,833 $6,899,419 RPS...................................... 521,062 480,836 996,958 921,417 Other.................................... 313,015 246,165 570,290 470,703 ---------- ---------- ---------- ---------- $4,570,104 $4,209,237 $8,890,081 $8,291,539 ========== ========== ========== ========== Operating income FedEx.................................... $ 211,216 $ 250,939 $ 420,159 $ 470,011 RPS...................................... 65,637 61,236 116,150 109,819 Other.................................... 27,682 24,812 52,033 41,000 ---------- ---------- ---------- --------- $ 304,535 $ 336,987 $ 588,342 $ 620,830 ========== ========== ========== ========== </TABLE> (7) COMMITMENTS As of November 30, 1999, the Company's purchase commitments for the remainder of 2000 and annually thereafter under various contracts are as follows (in thousands): <TABLE> <CAPTION> Aircraft- Aircraft Related(1) Other(2) Total -------- ---------- ---------- -------- <S> <C> <C> <C> <C> 2000 (remainder) $ 11,500 $158,500 $309,000 $479,000 2001 245,800 324,200 97,500 667,500 2002 242,800 337,500 11,400 591,700 2003 439,600 461,300 7,600 908,500 2004 235,200 188,500 7,600 431,300 </TABLE> (1) Primarily aircraft modifications, rotables, spare parts and spare engines. (2) Primarily vehicles, facilities, computers and other equipment. FedEx is committed to purchase three DC10s, 30 MD11s and 75 Ayres ALM 200s to be delivered through 2007. Deposits and progress payments of $5,717,000 have been made toward these purchases. FedEx has entered into agreements with two airlines to acquire 53 DC10 aircraft (44 of which had been received as of November 30, 1999), 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 - 10 -
FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (7) COMMITMENTS (CONTINUED) airlines may exercise put options through December 31, 2003, requiring FedEx to purchase up to 22 additional DC10s along with additional aircraft engines and equipment. During the six-month period ended November 30, 1999, FedEx acquired five A300s and one MD11 under operating leases. These aircraft were included as purchase commitments as of May 31, 1999. 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, 1999 for the five A300s and one MD11 are as follows (in thousands): <TABLE> <S> <C> 2000 $ 17,700 2001 33,800 2002 32,500 2003 32,900 2004 34,600 Thereafter 740,400 </TABLE> (8) LEGAL PROCEEDINGS There were two separate class-action lawsuits against FedEx generally alleging that FedEx breached its contract with the plaintiffs in transporting packages shipped by them. These lawsuits alleged that FedEx continued to collect a 6.25% federal excise tax on the transportation of property shipped by air after the excise tax expired on December 31, 1995, until it was reinstated in August of 1996. The plaintiffs sought 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. One case was filed in Circuit Court of Greene County, Alabama. On October 6, 1999, the Greene County Circuit Court dismissed all claims against FedEx by entering summary judgment. Time for appeal has expired and this decision is final. The other case, which was filed in the Supreme Court of New York, New York County, and contained allegations and requests for relief substantially similar to the Alabama case, 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. On December 20, 1999, the highest appellate court in New York denied the plaintiffs' request to appeal the dismissal of the excise tax class action. The plaintiffs may ask for re-argument within thirty days, but the Company believes it is very unlikely any such request would be granted. 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 ten years through September 30, 2007. - 11 -
FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (8) LEGAL PROCEEDINGS (CONTINUED) In the opinion of management, the aggregate liability, if any, with respect to the above mentioned suits and any other claims arising in the normal course of business will not materially adversely affect the financial position or results of operations of the Company. - 12 -
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, 1999, and the related condensed consolidated statements of income for the three and six-month periods ended November 30, 1999 and 1998 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 1999 and 1998, included herein, as indicated in their report thereon included on page 14. - 13 -
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 November 30, 1999 and the related condensed consolidated statements of income for the three and six-month periods ended November 30, 1999 and 1998 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 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 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, 1999 and the related consolidated statements of income, changes in stockholders' investment and comprehensive income and cash flows for the year then ended. In our report dated June 29, 1999, 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, 1999, 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 15, 1999 - 14 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Consolidated results Operating results for the second quarter ended November 30, 1999 continue to reflect higher fuel prices and lower than expected volume growth in U.S. domestic markets at Federal Express Corporation ("FedEx"), the Company's largest business segment. Strong package volume growth in certain international markets contributed positively to earnings for the second quarter and year-to-date periods. Higher fuel costs and recent trends in domestic and international package volume growth are expected to continue for the remainder of 2000. Cost controls to restrain short-term spending combined with productivity enhancements have been implemented in light of lower volume growth. Also, the FedEx sales force is being realigned to include a greater emphasis on small and medium-sized customers and to target growth in higher-yielding packages. Management believes these changes in tandem with other actions currently under consideration will improve the long-term growth of the Company's share of the express package market, which has eroded slightly in the current fiscal year. Certain capital spending projects are also being delayed; however, the Company plans to continue to make strategic capital investments in support of its long-term growth goals. Increased fuel prices negatively affected second quarter operating income by $55 million and year-to-date operating income by $82 million compared to the comparable periods in the prior year. In order to offset most of the effects of substantially higher fuel costs during the second half of the fiscal year, FedEx announced on December 30, 1999 that it would impose a fuel surcharge of 3% on most FedEx U.S. domestic and international services effective February 1, 2000. The surcharge will apply to all shipments tendered within the United States and all U.S. export shipments, where legally and contractually possible. The Company has also entered into contracts designed to limit the Company's exposure to further increases in fuel prices. Other income and expense declined in the second quarter as a slight increase in interest expense was more than offset by gains on the sales of equipment. The effective tax rate was 39.5% for both the second quarter and first half of 2000 versus 41.5% in the comparable prior year periods, reflecting stronger results from international operations. Actual results for the remainder of 2000 may vary depending upon many factors such as economic growth rates, rates of volume growth in the U.S. domestic markets at both of the Company's principal business segments, the actions of competitors, the spot prices of aviation and diesel fuel (which have continued to increase in the early part of the Company's third quarter), the extent to which the Company enters into additional contracts designed to limit its exposure to fluctuations in jet fuel prices, the amount and duration of the fuel surcharge and any other pricing actions and the impact those actions may have on demand for the Company's services. - 15 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FEDERAL EXPRESS CORPORATION 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: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- Three Months Ended Percent Six Months Ended Percent 1999 1998 Change 1999 1998 Change ---- ---- ------ ----- ------ ------ <S> <C> <C> <C> <C> <C> <C> Revenues: Package: U.S. overnight $1,844 $1,777 + 4 $3,677 $3,556 + 3 U.S. deferred 588 558 + 5 1,147 1,102 + 4 International Priority (IP) 881 762 +15 1,699 1,487 +14 ------ ------ ------ ------ Total package revenue 3,313 3,097 + 7 6,523 6,145 + 6 Freight: U.S. 144 107 +35 274 207 +32 International 127 139 - 9 253 272 - 7 ------ ------ ------ ------ Total freight revenue 271 246 +10 527 479 +10 Other 152 139 +10 273 275 - ------ ------ ------ ------ Total revenues $3,736 $3,482 + 7 $7,323 $6,899 + 6 ====== ====== ====== ====== Operating income $ 211 $ 251 -16 $ 420 $ 470 -11 ====== ====== ====== ====== Package statistics: Average daily packages: U.S. overnight 2,011 1,954 + 3 1,981 1,916 + 4 U.S. deferred 913 895 + 2 876 864 + 1 IP 323 285 +13 310 275 +13 ------ ------ ------ ------ Composite 3,247 3,134 + 4 3,167 3,055 + 4 Revenue per package (yield): U.S. overnight $14.56 $14.44 + 1 $14.50 $14.38 + 1 U.S. deferred 10.22 9.89 + 3 10.24 9.89 + 4 IP 43.31 42.45 + 2 42.88 41.96 + 2 Composite 16.20 15.69 + 3 16.09 15.59 + 3 Freight statistics: Average daily pounds: U.S. 5,072 4,480 +13 4,810 4,199 +15 International 2,574 2,719 - 5 2,539 2,669 - 5 ------ ------ ------ ------ Composite 7,646 7,199 + 6 7,349 6,868 + 7 Revenue per pound (yield): U.S. $ .45 $ .38 +18 $ .45 $ .38 +18 International .78 .81 - 4 .78 .79 - 1 Composite .56 .54 + 4 .56 .54 + 4 ============================================================================================================= </TABLE> - 16 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FEDERAL EXPRESS CORPORATION (CONTINUED) Revenues While total revenue increased at FedEx by 7% in the second quarter and 6% for the first half of the year, growth rates in U.S. domestic overnight package volume continued to lag behind the levels that management expected. However, strong revenue growth in high-yielding IP services, especially in Asia and Europe, continued in the second quarter and is expected to remain at current levels for the remainder of the fiscal year. U.S deferred package revenue growth was near management expectations for the quarter and the year-to-date periods as management continues to restrict the growth of these lower-yielding services. List price increases, including an average 2.8% domestic rate increase in March 1999 and FedEx's ongoing yield-management program also contributed to the slight increase in yields in the current quarter. In order to stimulate U.S. domestic revenue growth in higher-yielding package products, FedEx is realigning its sales force. The changes will include a greater emphasis on small and medium-sized customers and modifications to the sales incentive program to target higher-yielding packages. Actual results, however, may vary depending on a number of factors, including the impact of competitive pricing changes, customer responses to yield-management initiatives and the fuel surcharge, changing customer demand patterns, actions by FedEx's competitors, regulatory conditions for aviation rights and economic conditions. Total freight revenue also continued to increase in the current quarter and for the year-to-date period due to higher average daily pounds and yields in U.S. freight, offset by declines in international freight pounds and yields. Other revenue included charter services, sales of engine noise reduction kits, Canadian domestic revenue, logistics services and other. Operating Income Operating income declined in the second quarter and year-to-date periods due to higher fuel costs and lower than expected growth in U.S. package services. Fuel expenses increased 44% and 34% for the quarter and year-to-date periods, respectively. For the quarter, average cost per gallon for aircraft fuel increased 38% and gallons consumed increased 8%. Year to date, average cost per gallon increased 29% and gallons consumed increased 7%. The Company has entered into contracts designed to limit its exposure to jet fuel price fluctuations. As of early January 2000, contracts in place to fix the price of jet fuel cover a small percentage of the estimated gallons of usage for the third quarter of 2000 and approximately 40% of the estimated usage for the fourth quarter of 2000. Through early January 2000, contracts covering 2001 fix the price of approximately one-third of the estimated requirements for jet fuel. In order to offset most of the effects of substantially higher fuel costs during the second half of the fiscal year, FedEx announced on December 30, 1999 that it would impose a fuel surcharge of 3% on most FedEx U.S. domestic and international services effective February 1, 2000. The surcharge will apply to all shipments tendered within the United States and all U.S. export shipments, where legally and contractually possible. Also, FedEx continues to execute cost containment and productivity enhancement programs which management believes could reduce anticipated second half 2000 operating expenses by up to $75 million. These cost reductions are expected to be achieved by lowering discretionary spending and limiting staffing additions, but will not affect plans for strategic spending in support of long-term growth goals. The actual impact of the fuel surcharge and management's cost containment plans on operating income will depend on a number of factors such as the impact of competitive pricing changes, customer responses - 17 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FEDERAL EXPRESS CORPORATION (CONTINUED) to yield-management initiatives, changing customer demand patterns, actions by FedEx's competitors and general economic conditions. Rentals and landing fees increased due to an increase in aircraft and facilities leases entered into based on planned volume growth. Aircraft lease expense for the quarter and year-to-date periods rose 16% and 15%, respectively. As of November 30, 1999, FedEx had 102 wide-bodied aircraft under operating lease compared with 93 as of November 30, 1998. Management expects year-over-year increases in lease expense to continue if the Company enters into additional aircraft rental agreements during 2000 and thereafter. Maintenance and repairs increased 18% in the second quarter and 11% year to date compared to the prior year periods. Given FedEx's increasing fleet size and age and variety of aircraft types, management believes that maintenance and repairs expense will continue to increase for the remainder of 2000. In part, this higher expense will likely be attributed to scheduled maintenance and repairs expense and a greater number of routine cycle checks resulting from fleet usage and certain Federal Aviation Administration directives. Salaries and employee benefits increased only 6% in the second quarter and 5% for the year-to-date period as higher costs in connection with the agreement with the Fedex Pilots Association that became effective May 31, 1999 were offset by improved productivity and lower provisions for incentive compensation. Contributions from the sales of engine noise reduction kits declined $14 million for the quarter and $28 million year to date. Management expects similar declines for each of the remaining quarters of the year. RPS, INC. The following table compares revenues and operating income (in millions) and selected package statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------- Three Months Ended Percent Six Months Ended Percent 1999 1998 Change 1999 1998 Change ---- ---- ------ ---- ----- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $521 $481 + 8 $997 $922 + 8 - -------------------------------------------------------------------------------------------------------------- Operating income $ 66 $ 61 + 7 $116 $110 + 6 - -------------------------------------------------------------------------------------------------------------- Average daily packages 1,541 1,464 + 5 1,453 1,386 + 5 Revenue per package (yield) $ 5.45 $ 5.30 + 3 $ 5.49 $ 5.28 + 4 ============================================================================================================== </TABLE> Revenues RPS revenues grew 8% for both the quarter and the first half of the year reflecting yield increases and higher average daily packages. Yields were positively impacted by a rate increase of 2.3% in February 1999 and a better mix of higher-yielding packages. Weather conditions in the eastern United States during the second quarter negatively affected package volume. RPS continues to expand capacity in order to accommodate volume growth, while maintaining or improving yields. RPS recently opened two additional hub facilities and will continue to expand package processing capacity to - 18 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) RPS, INC. (CONTINUED) meet its aggressive growth plans. Actual results will depend on the impact of competitive pricing changes, customer responses to yield-management initiatives and changing customer demand patterns. Operating Income Operating income for the quarter and the first half of the year reflect higher operating costs during periods of investment in capacity expansion and technology. The effects of these higher costs were partially mitigated by improved yield, effective cost controls and lower provisions for incentive compensation. Depreciation expense increased 18% for the second quarter and first half periods as new terminal facilities were opened late in 1999 and throughout the first half of 2000. In the first quarter of 2000, RPS began testing new delivery services to residential areas. To date, the tests have been favorable and the Company currently expects to offer the new services by the spring of calendar 2000 to approximately 50% of the U. S. population. Year-to-date costs associated with this test have been minimal, but will accelerate as the test progresses. If the services are implemented there will be additional start-up and capital costs associated with the implementation. The actual results of these new services, if they are ultimately offered, will depend upon a number of factors such as consumer demand for and satisfaction with the RPS product, the service coverage and brand awareness of the RPS product, competitive pricing, the extent of the Company's ability to penetrate the business-to-consumer electronic commerce market and the ability to attract and retain qualified contractors for the delivery network. OTHER OPERATIONS Other operations include Viking Freight, Inc. ("Viking"), a regional less than truckload freight carrier operating in the western United States; Roberts Express, Inc. ("Roberts"), a critical shipment carrier; FDX Logistics, Inc. ("Logistics"), a contract logistics provider; and certain unallocated corporate items. Other operations also include the results of Caribbean Transportation Services, Inc. from the time of its acquisition by Logistics in September, 1999. Revenue and operating income from other operations increased 27% and 12% for the quarter and 21% and 27% year to date compared to the prior year periods. The increase in revenue is due to substantially higher revenues at Roberts and Logistics, combined with double-digit revenue growth at Viking. The increase in operating income is due to strong earnings at Roberts and Viking, offset by the results at Logistics. Viking posted an operating margin of 10.8% for the second quarter and 10.4% for the year-to-date period. FINANCIAL CONDITION Liquidity Cash and cash equivalents totaled $518 million at November 30, 1999. Management believes that cash flow from operations, the Company's commercial paper program, the revolving bank credit facility and other borrowing arrangements will adequately meet the Company's working capital and stock repurchase program needs for the foreseeable future. On September 27, 1999, the Company's Board of Directors approved a plan that authorizes the purchase of up to 15 million, or approximately 5%, of the Company's outstanding shares of common stock. Through November 30, 1999, the - 19 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FINANCIAL CONDITION (CONTINUED) Company had acquired 8,856,500 shares under the plan at an average cost of $40.56 per share and reissued 181,184 shares to fund employee benefits. The purchase of these treasury shares was funded principally through the issuance of commercial paper. Shares held in treasury will be used for general corporate purposes. Capital Resources The Company's operations are capital intensive, characterized by significant investments in aircraft, vehicles, computer and telecommunications equipment, package handling facilities and sort equipment. The amount and timing of capital additions depend on various factors including 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. Capital expenditures for the first six months of 2000 totaled $839 million and included aircraft, aircraft modifications, vehicles and ground support equipment, customer automation and computer equipment and facilities. In 1999 expenditures primarily included one MD11, aircraft modifications, vehicles and ground support equipment and customer automation and computer equipment. As a result of lower than expected U.S. domestic volume growth at FedEx, the Company has reduced planned capital expenditures for 2000 by $200 million. For information on the Company's purchase commitments, see Note 7 of Notes to Condensed Consolidated Financial Statements. Management believes that the capital resources available to the Company provide flexibility to access the most efficient markets for financing its 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, 1999. 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 able to quote rates to customers, generate billings and accept payments, in both euro 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 - 20 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FINANCIAL CONDITION (CONTINUED) 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. 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 approximately two million customers via its proprietary products and technologies. The Company's Year 2000 ("Y2K") computer compliance issues were, therefore, broad and complex. The FedEx Y2K Project Office, which was established in 1996, coordinates and supports FedEx's continuing Y2K compliance effort. The Company also used a major international consulting firm to assist its subsidiaries in their Y2K program management. The Company's Y2K compliance efforts focused on business-critical areas including its IT systems, non-IT systems and interfaces with third parties. Hardware, software, systems, technologies and applications were considered "business-critical" if a failure either would have had a material adverse impact on the Company's business, financial condition or results of operations or would have involved a safety risk to employees or customers. In the Company's previous filings with the Securities and Exchange Commission on Form 10-Q and 10-K, extensive descriptions and definitions of business-critical items were presented. State of Readiness Nothing has come to the Company's attention which would cause it to believe that its Y2K compliance effort was not successful. While the Company will continue to monitor for Y2K related problems, to date no significant Y2K issues have been encountered. Costs to Address Y2K Compliance Since 1996, the Company has incurred approximately $108 million on Y2K compliance ($15 million in the first half of 2000), which includes internal and external software/hardware analysis, repair, vendor and supplier assessments, risk mitigation planning, and related costs. The Company currently expects that it will incur additional total costs of approximately $12 million on Y2K matters, including depreciation of $6 million. Remaining Y2K expenditures 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, 2000, Y2K expenditures are expected to be 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 addressed the activities to be performed in preparation for and during a Y2K-related failure that could have an immediate and - 21 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) YEAR 2000 COMPLIANCE (CONTINUED) significant impact on normal operations. Possible failures were identified and contingency plans were formulated. These plans included items such as alternative operating locations, alternative procedures for mission critical functions and 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 created a Y2K contingency command and control center that links to its other operations command and control centers. Key command and control personnel were on site commencing December 31, 1999. Other contingency plans for FedEx and the Company's other operating subsidiaries, including those covering vendor and supplier issues, continue to be in place to minimize Y2K-related risks including those that vendors and suppliers might pose if they are behind in their own Y2K efforts. * * * STATEMENTS IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" OR MADE BY MANAGEMENT OF THE COMPANY THAT CONTAIN MORE THAN HISTORICAL INFORMATION MAY BE CONSIDERED FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995), WHICH ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS BECAUSE OF IMPORTANT FACTORS IDENTIFIED IN THIS SECTION. - 22 -
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. <TABLE> <CAPTION> Exhibit Number Description of Exhibit -------- ----------------------- <S> <C> 3.1 Amended and Restated Certificate of Incorporation of FDX Corporation, as amended. 10.1 Extension Agreement dated as of October 15, 1999 to Credit Agreement dated as of December 10, 1998 among the Company and First National Bank of Chicago, individually and as agent, and certain lenders. 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). </TABLE> (b) Reports on Form 8-K. During the quarter ended November 30, 1999, the Registrant filed one Current Report on Form 8-K dated September 27, 1999. The report was filed under Item 5, Other Events, and Item 7, Financial Statements and Exhibits, and contained a press release announcing the authorization of the repurchase of up to 15 million shares of the Company's common stock. - 23 -
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: January 12, 2000 /S/ JAMES S. HUDSON ------------------------------------------- JAMES S. HUDSON CORPORATE VICE PRESIDENT STRATEGIC FINANCIAL PLANNING & CONTROL (PRINCIPAL ACCOUNTING OFFICER) - 24 -
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description of Exhibit - ------- ---------------------- <S> <C> 3.1 Amended and Restated Certificate of Incorporation of FDX Corporation, as amended. 10.1 Extension Agreement dated as of October 15, 1999 to Credit Agreement dated as of December 10, 1998 among the Company and First National Bank of Chicago, individually and as agent, and certain lenders. 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). </TABLE> E-1