<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>a2045146z10-q.txt
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED FEBRUARY 28,
2001, 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: 1-15829
FEDEX 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 March 30, 2001
Common Stock, par value $.10 per share 297,109,218
================================================================================
<PAGE>
FEDEX CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets
February 28, 2001 and May 31, 2000 ........................................................... 3-4
Condensed Consolidated Statements of Income
Three and Nine Months Ended February 28, 2001 and February 29, 2000 .......................... 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 2001 and February 29, 2000 .................................... 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
ITEM 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition ........................................................ 15-25
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk .................................. 26
PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K ............................................................ 27
Signatures ..................................................................................... 28
EXHIBIT INDEX .................................................................................. E-1
</TABLE>
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
February 28,
2001 May 31,
(Unaudited) 2000
----------- -----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................. $ 139,944 $ 67,959
Receivables, less allowances of
$98,406,000 and $85,972,000 ......................... 2,707,025 2,547,043
Spare parts, supplies and fuel ........................ 281,723 255,291
Deferred income taxes ................................. 402,747 317,784
Prepaid expenses and other ............................ 116,943 96,667
----------- -----------
Total current assets .............................. 3,648,382 3,284,744
Property and Equipment, at Cost ............................ 16,391,477 14,742,543
Less accumulated depreciation and amortization ........ 8,397,324 7,659,016
----------- -----------
Net property and equipment ........................ 7,994,153 7,083,527
Other Assets:
Goodwill .............................................. 1,097,950 500,547
Other ................................................. 779,246 658,293
----------- -----------
Total other assets ................................ 1,877,196 1,158,840
----------- -----------
$13,519,731 $11,527,111
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
February 28,
2001 May 31,
(Unaudited) 2000
------------- -------------
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt.....................$ 42,776 $ 6,537
Accrued salaries and employee benefits................ 678,126 755,747
Accounts payable...................................... 1,192,511 1,120,855
Accrued expenses...................................... 951,900 1,007,887
----------- -----------
Total current liabilities......................... 2,865,313 2,891,026
Long-Term Debt, Less Current Portion....................... 2,658,776 1,776,253
Deferred Income Taxes...................................... 439,351 344,613
Other Liabilities.......................................... 1,777,712 1,729,976
Commitments (Note 7)
Common Stockholders' Investment:
Common stock, $.10 par value;
800,000,000 shares authorized, 298,573,387
issued............................................ 29,857 29,857
Additional paid-in capital............................ 1,116,951 1,079,462
Retained earnings .................................... 4,770,913 4,295,041
Treasury stock, at cost; deferred compensation
and other........................................... (91,141) (583,043)
Accumulated other comprehensive income................ (48,001) (36,074)
----------- -----------
Total common stockholders' investment............. 5,778,579 4,785,243
----------- -----------
$13,519,731 $11,527,111
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $4,838,780 $4,518,057 $14,512,437 $13,408,138
Operating Expenses:
Salaries and employee benefits............... 2,098,168 1,926,473 6,092,787 5,631,110
Purchased transportation..................... 411,612 416,912 1,285,801 1,244,629
Rentals and landing fees..................... 417,696 386,473 1,215,734 1,146,692
Depreciation and amortization................ 325,823 293,727 938,007 856,349
Fuel ........................................ 302,160 256,879 865,339 666,440
Maintenance and repairs...................... 270,495 270,837 858,653 804,198
Other........................................ 821,521 760,284 2,408,432 2,263,906
---------- ---------- ---------- -----------
4,647,475 4,311,585 13,664,753 12,613,324
---------- ---------- ---------- ------------
Operating Income.................................. 191,305 206,472 847,684 794,814
Other Income (Expense):
Interest, net................................ (34,197) (30,282) (102,327) (77,479)
Other, net................................... 1,381 10,808 2,505 15,471
---------- ---------- ---------- -----------
(32,816) (19,474) (99,822) (62,008)
---------- ---------- ---------- -----------
Income Before Income Taxes........................ 158,489 186,998 747,862 732,806
Provision for Income Taxes........................ 49,800 73,870 276,709 289,461
---------- ---------- ---------- -----------
Net Income........................................$ 108,689 $ 113,128 $ 471,153 $ 443,345
========== ========== ========== ===========
Earnings per Common Share:
Basic........................................$ .38 $ .39 $ 1.65 $ 1.51
========== ========== ========== ===========
Assuming dilution............................$ .37 $ .39 $ 1.62 $ 1.49
========== ========== ========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
February 28, February 29,
2001 2000
------------- -------------
(In thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities.........................................$ 1,025,953 $ 875,569
Investing Activities:
Purchases of property and equipment.......................................... (1,272,374) (1,227,943)
Proceeds from disposition of property
and equipment:
Sale-leaseback transaction............................................... 80,000 -
Reimbursements of A300 and MD11 deposits................................. - 24,377
Other dispositions....................................................... 23,176 150,792
Acquisition of businesses, net of cash acquired.............................. (466,702) (257,973)
Other, net................................................................... (10,579) (15,804)
----------- -----------
Net cash used in investing activities............................................. (1,646,479) (1,326,551)
Financing Activities:
Short-term borrowings, net................................................... - 150,000
Proceeds from debt issuances................................................. 794,522 590,613
Principal payments on debt................................................... (120,777) (12,596)
Proceeds from stock issuances................................................ 18,410 11,792
Purchase of treasury stock................................................... - (491,229)
Other, net................................................................... 356 6,571
----------- -----------
Net cash provided by financing activities......................................... 692,511 255,151
----------- -----------
Net increase (decrease) in cash and cash equivalents.............................. 71,985 (195,831)
Cash and cash equivalents at beginning of period.................................. 67,959 325,323
----------- -----------
Cash and cash equivalents at end of period........................................$ 139,944 $ 129,492
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements of FedEx Corporation (the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and 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 February 28,
2001 and the consolidated results of its operations for the three- and
nine-month periods ended February 28, 2001 and February 29, 2000, and its
consolidated cash flows for the nine-month periods ended February 28, 2001 and
February 29, 2000. Operating results for the three- and nine-month periods ended
February 28, 2001 are not necessarily indicative of the results that may be
expected for the year ending May 31, 2001.
Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and
SFAS 138, 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 Company has performed a review to identify and measure the accounting
effects of all stand-alone and embedded derivatives. The impact, if any, on
earnings, comprehensive income and financial position of the adoption of SFAS
133 will depend on the amount, timing and nature of any agreements entered into
by the Company. However, based on its review, the Company does not expect the
adoption of this Statement to have a material effect on its consolidated results
of operations or financial position.
During the third quarter, the Company recognized the utilization of
approximately $12,800,000 or $.04 per share of excess foreign tax credits. This
change in estimate reduced the effective annual income tax rate to 37% for
the nine months ended February 28, 2001, which is the expected annual
effective rate for 2001.
The Company has entered into contracts on behalf of its subsidiary
Federal Express Corporation ("FedEx Express") that are designed to limit its
exposure to fluctuations in jet fuel prices. Under these contracts, the Company
makes (or receives) payments based on the difference between a 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 the following amounts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- -------------------------
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Jet Fuel Hedging Receipts $15,229,000 $855,000 $72,656,000 $864,000
</TABLE>
- 7 -
<PAGE>
As of February 28, 2001, contracts in place to fix the price of jet fuel
covered a total notional volume of 465,941,000 gallons through 2002. Based on
current market prices, the fair values of these jet fuel hedging contracts were:
<TABLE>
<CAPTION>
February 28, 2001 May 31, 2000
------------------- ----------------
<S> <C> <C>
Fair Value of Jet Fuel Hedging Contracts
asset(liability) $(6,661,000) $51,060,000
</TABLE>
As of March 30, 2001, contracts in place to fix the price of jet fuel
covered approximately 62% of the expected jet fuel usage for the remainder of
2001 and approximately 33% of the expected usage for 2002.
(2) ACQUISITION
On February 9, 2001, the Company completed its previously announced
acquisition of American Freightways Corporation ("American Freightways"), a
multi-regional less-than-truckload motor carrier, for approximately
$978,000,000, including $471,000,000 in cash, 11.0 million common shares of
Company stock and options to purchase 1.5 million common shares of Company
stock.
The acquisition was completed in a two-step transaction that included a
cash tender offer and a merger that resulted in the Company acquiring all of the
outstanding shares of American Freightways. The Company completed the first step
of the transaction on December 21, 2000 by acquiring 50.1% of the outstanding
shares of American Freightways, or 16,380,038 shares at a price of $28.13 per
share. On February 9, 2001, American Freightways was merged into a newly-created
subsidiary of the Company and each remaining outstanding share of American
Freightways common stock was converted into 0.6639 shares of common stock of the
Company.
This business combination was accounted for as a purchase. The excess
purchase price over the estimated fair value of the net assets acquired
(approximately $600,000,000) has been recorded as goodwill and is being
amortized ratably over 40 years. For financial reporting purposes, the results
of operations of American Freightways are included in the Company's consolidated
results from January 1, 2001.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of American Freightways had been made at the
beginning of the periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
February 28, February 29,
2001 2000
-------------- -------------
<S> <C> <C>
Revenues.............................. $15,377,389 $14,330,738
Net income............................ 489,472 456,635
Basic earnings per share.............. 1.65 1.50
Diluted earnings per share............ 1.63 1.47
</TABLE>
The pro forma consolidated results of operations include adjustments to
give effect to the amortization of goodwill, interest expense on
acquisition-related debt and certain other purchase accounting adjustments. The
unaudited pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the beginning
of the periods presented or the future results of the combined operations.
- 8 -
<PAGE>
(3) COMPREHENSIVE INCOME
The following table provides a reconciliation of net income reported in
the Company's consolidated financial statements to comprehensive income:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
February 28, February 29,
2001 2000
----------- -------------
(In thousands)
<S> <C> <C>
Net income ........................................................... $ 108,689 $ 113,128
Other comprehensive income:
Unrealized gain (loss) on available-for-sale
securities, net of deferred tax benefit of
$12,000 and deferred taxes of $5,663,000 .......................... (19) 8,857
Foreign currency translation adjustments,
net of deferred tax benefit of $690,000 and
deferred taxes of $68,000 ........................................ 3,543 (3,829)
--------- ---------
Comprehensive income ............................................... $ 112,213 $ 118,156
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
February 28, February 29,
2001 2000
----------- -------------
(In thousands)
<S> <C> <C>
Net income ........................................................... $ 471,153 $ 443,345
Other comprehensive income:
Unrealized gain (loss) on available-for-sale
securities, net of deferred tax benefits of
$565,000 and deferred taxes of $4,469,000 ......................... (799) 6,989
Foreign currency translation adjustments,
net of deferred tax benefit of $4,440,000 and
deferred taxes of $799,000 ....................................... (11,128) (325)
--------- ---------
Comprehensive income ............................................... $ 459,226 $ 450,009
========= =========
</TABLE>
(4) FINANCING ARRANGEMENTS
Commercial paper in the amount of $573,000,000 and $522,000,000 was
outstanding at February 28, 2001 and May 31, 2000, respectively. The
weighted-average interest rates on these borrowings approximated 6.1% at
February 28, 2001 and 6.7% at May 31, 2000. The commercial paper is classified
as Long-Term Debt based on the Company's ability and intent to refinance these
borrowings 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 through
September 30, 2001. Interest rates on borrowings under this agreement are
generally determined by maturities selected and prevailing market conditions.
The commercial paper borrowings, which are backed by unused commitments under
the revolving credit agreement, reduce the amount available under the revolving
credit agreement. At February 28, 2001, $427,000,000 was available under this
commitment.
On February 12, 2001, the Company issued senior unsecured notes in the
amount of $750,000,000. The notes are guaranteed by the Company's principal
operating subsidiaries. Net proceeds from the borrowings were used to repay
indebtedness, principally borrowings under the Company's commercial paper
program, and for general corporate purposes.
- 9 -
<PAGE>
The notes were issued in three tranches, with the following terms and interest
rates:
<TABLE>
<CAPTION>
Amount Maturity Rate
---------------------- ------------------ ---------------
<S> <C> <C>
$250,000,000 2004 6.625%
$250,000,000 2006 6.875%
$250,000,000 2011 7.250%
</TABLE>
On December 13, 2000, the Company obtained an additional 364-day
$750,000,000 revolving credit facility. This facility was utilized to back
commercial paper borrowings that funded the cash requirements of the American
Freightways acquisition and for general corporate purposes. On March 21, 2001,
the Company terminated this facility.
In conjunction with the American Freightways acquisition on February 9,
2001, the Company assumed approximately $240,000,000 in debt. Of this amount,
$120,000,000 of borrowings under an existing American Freightways revolving
credit facility were paid and the revolving credit facility was cancelled.
Of the remaining debt assumed, approximately $114,000,000
(approximately $14,000,000 of which is classified as current at February 28,
2001) represents unsecured notes and $5,100,000 represents Arkansas Development
Finance Authority ("ADFA") tax-exempt bonds. The unsecured notes mature at
various dates between April 2001 and April 2012, with interest paid quarterly or
semi-annually at rates ranging from 6.92% to 8.85%. The ADFA bonds were subject
to mandatory redemption as a result of the American Freightways acquisition, and
were redeemed by the Company on March 15, 2001. These bonds were classified as
current at February 28, 2001.
(5) COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the three-
and nine-month periods ended February 28, 2001 and February 29, 2000, was as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net income applicable to common
stockholders.................................. $108,689 $113,128 $471,153 $443,345
======== ======== ======== ========
Weighted-average shares of common
stock outstanding............................. 288,043 289,294 285,947 293,627
======== ======== ======== ========
Basic earnings per share......................... $ .38 $ .39 $ 1.65 $ 1.51
======== ======== ======== ========
Weighted-average shares of common
stock outstanding............................. 288,043 289,294 285,947 293,627
Common equivalent shares:
Assumed exercise of outstanding
dilutive options............................. 14,799 12,690 14,707 12,934
Less shares repurchased from
proceeds of assumed exercise
of options................................... (10,272) (8,317) (10,281) (8,031)
-------- -------- -------- --------
Weighted-average common and
common equivalent shares...................... 292,570 293,667 290,373 298,530
======== ======== ======== ========
Earnings per share,
assuming dilution............................. $ .37 $ .39 $ 1.62 $ 1.49
======== ======== ======== ========
</TABLE>
- 10 -
<PAGE>
(6) BUSINESS SEGMENT INFORMATION
The Company is a premier global provider of transportation, e-commerce and
supply chain management services, whose operations are primarily represented by
FedEx Express, the world's largest express transportation company; FedEx Ground
Package System, Inc. ("FedEx Ground"), North America's second largest provider
of small-package ground delivery service, and FedEx Freight System, Inc. ("FedEx
Freight"), a leading provider of regional less-than-truckload ("LTL") freight
services. FedEx Freight includes American Freightways, Inc., a multi-regional
LTL carrier, and Viking Freight, Inc., an LTL carrier operating principally in
the western United States. These operating companies comprise the Company's
reportable segments. Included within "Other" are the operations of FedEx Custom
Critical, Inc., a critical-shipment carrier; FedEx Trade Networks,Inc., a global
trade services company; FedEx Supply Chain Services, Inc., a contract logistics
provider, and Caribbean Transportation Services, Inc., a freight forwarder.
Other also includes the operations of Viking Freight, Inc. through November 30,
2000 and certain unallocated corporate items.
The newly-formed FedEx Freight segment includes the operations of American
Freightways from January 1, 2001 and the operations of Viking Freight, Inc. from
December 1, 2000. At February 28, 2001, total assets of the FedEx Freight
segment were $1,692,000,000.
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 Nine Months Ended
------------------------------- -------------------------------
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
FedEx Express............................ $3,785,094 $3,757,833 $11,681,867 $11,080,666
FedEx Ground............................. 528,734 486,506 1,653,243 1,483,464
FedEx Freight............................ 336,532 - 336,532 -
Other.................................... 188,420 273,718 840,795 844,008
---------- ---------- ----------- -----------
$4,838,780 $4,518,057 $14,512,437 $13,408,138
========== ========== =========== ===========
Operating income (loss)
FedEx Express............................ $ 160,396 $ 143,394 $ 688,634 $ 563,553
FedEx Ground............................. 18,324 39,465 118,740 155,615
FedEx Freight............................ 18,487 - 18,487 -
Other.................................... (5,902) 23,613 21,823 75,646
---------- ---------- ----------- -----------
$ 191,305 $ 206,472 $ 847,684 $ 794,814
========== ========== =========== ===========
</TABLE>
(7) COMMITMENTS
As of February 28, 2001, the Company's purchase commitments for the
remainder of 2001 and annually thereafter under various contracts were as
follows (in thousands):
<TABLE>
<CAPTION>
Aircraft-
Aircraft Related(1) Other(2) Total
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
2001 (remainder) $107,100 $102,800 $240,100 $ 450,000
2002 418,100 378,200 115,600 911,900
2003 484,500 507,200 8,400 1,000,100
2004 363,100 554,900 8,000 926,000
2005 198,500 562,300 7,600 768,400
</TABLE>
(1) Primarily aircraft modifications, rotables, spare parts and spare engines.
(2) Primarily vehicles, facilities, computers and other equipment.
- 11 -
<PAGE>
FedEx Express is committed to purchase 11 DC10s, 28 MD11s, 7 A300s, 8
A310s and 75 Ayres ALM 200s to be delivered through 2007. Deposits and progress
payments of $15,000,000 have been made toward these purchases and other planned
aircraft transactions.
FedEx Express has entered into agreements with two airlines to acquire
53 DC10 aircraft (49 of which had been received as of February 28, 2001), 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 2002.
Additionally, these airlines may exercise put options through December 31, 2003,
requiring FedEx Express to purchase up to 10 additional DC10s, along with
additional aircraft engines and equipment.
In January 2001, FedEx Express entered into a memorandum of understanding
to acquire 10 A380 aircraft from Airbus Industrie. The acquisition of these
aircraft is subject to the execution of a definitive purchase agreement, which
is currently under negotiation.
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):
<TABLE>
<CAPTION>
<S> <C>
2001 $ -
2002 5,011
2003 6,719
2004 6,568
2005 7,076
Thereafter 116,122
</TABLE>
(8) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense and income taxes was as follows (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
February 28, February 29,
2001 2000
----------- -------------
<S> <C> <C>
Cash payments for:
Interest (net of capitalized interest).......................................$ 111,343 $ 88,644
Income taxes................................................................. 431,744 297,309
</TABLE>
Noncash investing and financing activities were as follows (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
February 28, February 29,
2001 2000
----------- -------------
<S> <C> <C>
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........................................................ 3,118 26,190
----------- -----------
Fair value of assets surrendered (under) over
fair value of assets acquired..............................................$ (3,118) $ (6,740)
=========== ===========
Fair value of treasury stock and common stock
options issued in a business acquisition...................................$ 506,390 $ -
=========== ===========
</TABLE>
(9) OTHER EVENTS
On January 10, 2001, FedEx Express and the U.S. Postal Service entered
into two service contracts: one for domestic air transportation of postal
express shipments, and the other for placement of FedEx Express drop boxes at
U.S. post offices. The two seven-year service agreements are expected to
generate approximately $7,000,000,000 of revenue for the Company over the
term of the agreements.
- 12 -
<PAGE>
REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, has performed a
review of the condensed consolidated balance sheet of the Company as of February
28, 2001, and the related condensed consolidated statements of income for the
three- and nine-month periods ended February 28, 2001 and February 29, 2000, and
the condensed consolidated statements of cash flows for the nine-month periods
ended February 28, 2001 and February 29, 2000, included herein, as indicated in
their report thereon included on page 14.
- 13 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of FedEx Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
FedEx Corporation (a Delaware corporation) and subsidiaries as of February 28,
2001, and the related condensed consolidated statements of income for the three-
and nine-month periods ended February 28, 2001 and February 29, 2000, and the
condensed consolidated statements of cash flows for the nine-month periods ended
February 28, 2001 and February 29, 2000. 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 generally accepted
auditing standards, the consolidated balance sheet of FedEx Corporation as of
May 31, 2000 (not presented herein), and, in our report dated June 27, 2000, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in 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
March 19, 2001
- 14 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
--------------------------------------------------------------------------
FINANCIAL CONDITION
-------------------
RESULTS OF OPERATIONS
Consolidated Results
--------------------
In millions, except per share amounts
Three and nine months ended February 28, 2001 and February 29, 2000:
<TABLE>
<CAPTION>
Three Months Ended Percent Nine Months Ended Percent
--------------------- ------------------
2001 2000 Change 2001 2000 Change
---- ---- ------ ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues $4,839 $4,518 +7 $14,512 $13,408 +8
Operating income 191 206 -7 848 795 +7
Net income 109 113 -4 471 443 +6
------ ------ ------ ------- ---- ----
Earnings per diluted share $ 0.37 $ 0.39 -5 $ 1.62 $ 1.49 +9
====== ====== ====== ======= ======= ====
</TABLE>
FedEx Corporation (also referred to herein as "FedEx" or the "Company")
revenue for the third quarter increased 7% over the prior year period. Excluding
the effects of business acquisitions, revenues of FedEx increased 1% for the
third quarter and 6% for the year-to-date period ended February 28, 2001. During
the third quarter, the further slowing of the U.S. and Asian economies adversely
affected operations, as FedEx experienced either lower volumes or lower volume
growth rates at all operating subsidiaries. Increased product yields for the
third quarter for most services included the effects of the February 2001 rate
increases at Federal Express Corporation ("FedEx Express") and FedEx Ground
Package System, Inc. ("FedEx Ground"), the effects of fuel surcharges and other
yield-management strategies, including a sales focus on higher yielding
business. The year-to-date revenue increase is largely reflective of the
continued growth of FedEx Express International Priority (IP) packages.
The third quarter and year-to-date IP revenue growth rates of 7% and 14%
from the prior year respective periods are due to increased volumes and yields.
Volume growth and yield improvement at FedEx Ground also contributed to the
increase in revenue for the third quarter. Effective February 1, 2001, FedEx
Express implemented list rate increases averaging 4.9% for shipments within the
U.S. and 2.9% for U.S. export shipments. FedEx Ground also implemented a base
rate increase of 3.1% on February 5, 2001.
In response to deteriorating market conditions, the Company intensified
cost control measures at all operating subsidiaries during the third quarter.
Discretionary spending was held to a minimum, capital spending was reduced or
delayed and staffing additions were limited.
Year-over-year operating income decreased 12% for the third quarter and
increased 6% year to date, excluding the effects of business acquisitions.
Increased fuel prices negatively impacted year-over-year expenses by $24 million
for the third quarter and $157 million year to date, net of the effects of jet
fuel hedging contracts. In response to higher fuel costs, fuel surcharges have
been implemented at all of the Company's material operating subsidiaries. The
Company will continue to manage its exposure to material changes in fuel costs
through the selective use of fuel hedging contracts and the use of fuel
surcharges.
- 15 -
<PAGE>
FedEx received approximately $15 million in the third quarter and $73
million in the year-to-date period under jet fuel hedging contracts. The Company
has also entered into jet fuel hedging contracts through 2002, as outlined in
the table below:
<TABLE>
<CAPTION>
2001
Fourth Quarter 2002
----------------- ------------
<S> <C> <C>
Percentage of usage hedged 62% 33%
Price per gallon (including
estimated taxes and fees) $ .786 $ .964
</TABLE>
The Company will adopt Statement of Financial Accounting Standards No.
("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities"
(as amended by SFAS 137 and SFAS 138) effective June 1, 2001. We do not
believe the adoption of this Statement will have a material effect on the
Company's financial position or results of operations.
Operating results also reflect the continuing implementation of the
rebranding and reorganization initiatives begun in 2000. We believe this
strategy will enable our operating subsidiaries to compete collectively while
retaining the independent operating structure of their business units. Over
time, this strategy will also allow us to better align the services provided by
each operating subsidiary based on the strengths of their respective networks.
FedEx Corporate Services, Inc. ("FedEx Services") provides customers with a
single point of contact for all express and ground services. The sales,
marketing, customer service and most of the information technology functions of
our two largest subsidiaries are now centralized in FedEx Services. We have
largely completed the expansion and retraining of our sales force, but continue
to incur costs associated with the retooling of our automation systems and
vehicle and facilities rebranding. The rebranding costs were approximately $7
million for the third quarter and approximately $20 million for the year-to-date
period, compared to $9 million for both of the prior year respective periods.
On February 9, 2001, FedEx completed the acquisition of American
Freightways Corporation ("American Freightways") for $28.13 per share, or
approximately $978 million in cash and FedEx common stock. The acquisition was
accounted for as a purchase and resulted in recognition of approximately $600
million in goodwill, as well as the formation of a new operating segment, FedEx
Freight System, Inc. ("FedEx Freight"). For further information, see "Liquidity"
and Note 2 of Notes to Condensed Consolidated Financial Statements.
Net interest expense increased 13% for the third quarter due to higher
commercial paper borrowings, primarily incurred for the cash requirements of the
American Freightways acquisition. The year-to-date increase of 32% in net
interest expense was due to higher commercial paper borrowings that were
primarily incurred as a result of the prior year stock repurchase program. In
the prior year third quarter, other income included an $11 million gain from the
sale of securities.
The Company's effective tax rates of 31.4% for the third quarter and
37.0% for the year-to-date period compare with rates of 39.5% for the same
respective periods in the prior year. The reduction in the 2001 effective tax
rate is primarily attributable to the utilization of excess foreign tax credits.
This decrease in the effective tax rate resulted in an increase to third quarter
net income of approximately $12,800,000, or $0.04 per share. The Company expects
its effective tax rate for the fourth quarter of 2001 to be 37% and for periods
after 2001 to be in the approximate range of 38.0% to 38.5%.
- 16 -
<PAGE>
OUTLOOK
Economic conditions continue to weaken during the first half of calendar
2001, as evidenced by numerous corporate earnings warnings and layoffs,
particularly in the automotive and high-technology market sectors. For the
Company, volume growth, yield growth and weights for February dropped noticeably
for all of our operating units. We expect volumes for the remainder of 2001 to
continue to be adversely affected by the current economic situation.
Despite the near-term economic outlook, we continue to believe FedEx is
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. The alliance consists of two
service agreements, one in which FedEx Express will provide air capacity
beginning August 2001 for transportation of certain postal packages, and a
non-exclusive agreement that allows us to install FedEx Express drop boxes in
U.S. postal locations. During March 2001, approximately 80 drop boxes were
placed in post offices throughout the Charlotte, North Carolina area, which
serves as our first test market for the expansion of our network of drop box
locations through this agreement.
Also in January 2001, we announced plans to acquire 10 A380-800F
aircraft. These aircraft will be capable of flying directly between Asia,
Europe and our hubs in the U.S. and will offer superior international service
capabilities. FedEx plans to take delivery of these aircraft beginning in
calendar 2008.
We also continue to pursue strategies in support of our long-term
growth goals that offer our customers superior supply chain solutions. In
direct response to customer demand, FedEx Express extended pick-up and
drop-off times by up to three hours in many major markets beginning February
26, 2001, through FedEx Extra Hours(SM). In March 2001, we rolled out new
wireless electronic services that make shipping information available
anytime, anywhere to customers and employees. These software solutions,
available through most web-enabled devices, including mobile telephones,
personal digital assistants and two-way pagers, are free to all FedEx
customers with internet access. We are also continuing to expand the FedEx
Home Delivery network, which offers consumers the convenience of later
delivery hours and guaranteed Saturday delivery.
We believe the reliable service and tracking capabilities offered by
FedEx will become even more important to customers as they seek to become more
productive, shorten their supply chains and decrease inventory levels. Also, our
extensive international network has positioned FedEx to continue to capitalize
on the globalization of markets.
However, management expects that near-term economic conditions will
continue to result in slow to negative growth in package volumes and freight
shipments. In March of 2001, U.S. domestic express traffic at FedEx Express
declined 4.4% from the prior year while IP volume grew at 5% and FedEx Ground
volume was up 6% from the prior year. The economic uncertainty, however, makes
it difficult to forecast future financial results.
- 17 -
<PAGE>
REPORTABLE SEGMENTS
FedEx Freight was formed in the third quarter in conjunction with our
acquisition of American Freightways. FedEx Freight represents the Company's
regional less-than-truckload ("LTL") operations, focusing on one- and two-day
deliveries. This new reportable segment includes the results of operations of
American Freightways from January 1, 2001 and Viking Freight, Inc. ("Viking")
from December 1, 2000. On a combined basis, these companies comprise one of the
largest regional LTL networks in the U.S., with 8,700 tractors, 24,000 trailers
and 54,000 freight shipments each day.
The formation of FedEx Services changed the way certain costs are
captured and allocated between the Company's 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 and FedEx Ground are now allocated to these operating segments and are
included in the line item "Intercompany charges" on the accompanying financial
summaries of our reportable segments. Consequently, certain segment expense data
presented is not comparable to prior periods. We believe the total amounts
allocated to the business segments reasonably reflect the cost of providing such
services.
- 18 -
<PAGE>
FEDEX EXPRESS
The following table compares revenues and operating income (in millions)
and selected statistics (in thousands, except yield amounts) for the three- and
nine-month periods ended February 28, 2001 and February 29, 2000:
<TABLE>
<CAPTION>
Three Months Ended Percent Nine Months Ended Percent
-------------------- -------- ------------------ -------
2001 2000(1) Change 2001 2000(1) Change
---- ----- -------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Package:
U.S. overnight box2 $1,425 $1,420 - $ 4,388 $ 4,194 + 5
U.S. overnight envelope3 451 455 - 1 1,379 1,358 + 2
U.S. deferred 639 642 - 1,891 1,789 + 6
International Priority 945 887 + 7 2,952 2,586 +14
------ ------ ------- -------
Total package revenue 3,460 3,404 + 2 10,610 9,927 + 7
Freight:
U.S. 157 141 +11 496 415 +20
International 103 117 -12 321 370 -13
------ ------ ------- -------
Total freight revenue 260 258 + 1 817 785 + 4
Other 65 96 -32 255 369 -31
------ ------ ------- -------
Total revenues $3,785 $3,758 + 1 $11,682 $11,081 + 5
====== ====== ======= =======
Operating Expenses:
Salaries and employee benefits 1,574 4,752
Purchased transportation 144 441
Rentals and landing fees 356 1,053
Depreciation and amortization 199 596
Fuel 275 817
Maintenance and repairs 216 722
Intercompany charges 321 993
Other 540 1,619
------ -------
Total operating expenses 3,625 3,615 - 10,993 10,517 + 5
------ ------ ------- -------
Operating income $ 160 $ 143 +12 $ 689 $ 564 +22
====== ====== ======= =======
Package statistics:
Average daily packages:
U.S. overnight box 1,288 1,277 + 1 1,278 1,241 + 3
U.S. overnight envelope 749 765 - 2 755 761 - 1
U.S. deferred 962 991 - 3 920 914 + 1
IP 340 318 + 7 345 312 +11
------ ------ ------- -------
Composite 3,339 3,351 - 3,298 3,228 + 2
Revenue per package (yield):
U.S. overnight box $17.84 $17.38 + 3 $18.08 $17.60 + 3
U.S. overnight envelope 9.70 9.29 + 4 9.62 9.30 + 3
U.S. deferred 10.71 10.12 + 6 10.81 10.19 + 6
IP 44.89 43.60 + 3 44.99 43.12 + 4
Composite 16.71 15.87 + 5 16.93 16.02 + 6
Freight statistics:
Average daily pounds:
U.S. 4,204 4,607 - 9 4,441 4,742 - 6
International 2,164 2,265 - 4 2,238 2,448 - 9
------ ------ ------- -------
Composite 6,368 6,872 - 7 6,679 7,190 - 7
Revenue per pound (yield):
U.S. $ .60 $ .48 +25 $ .59 $ .46 +28
International .77 .81 - 5 .75 .79 - 5
Composite .66 .59 +12 .64 .57 +12
</TABLE>
1 Operating expense detail for the three- and nine-month periods ended
February 29, 2000 has been omitted, as this data is not comparable to the
three- and nine-month periods ended February 28, 2001. See "Reportable
Segments" above.
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.
-------------------------------------------------------------------------------
- 19 -
<PAGE>
Revenues
Total package revenue increased 2% in the third quarter and 7% in the
year-to-date period, principally due to increases in IP volumes. Year-over-year
comparisons for both the quarter and year-to-date periods were negatively
affected by two fewer operating days in the third quarter of 2001.
Although less than the double-digit growth rates of the prior quarters,
the third quarter year-over-year IP volume growth rate of 7% remained strong.
For example, European quarterly year-over-year growth rates continue to be 25%,
but these rates are offset by Asian growth rates that have slowed from 26% in
the first quarter to 7% in the third quarter.
In the U.S., average daily domestic express package volume declined 1%
year over year for the third quarter, despite slight growth in U.S. Overnight
Box and modest growth in FedEx 2Day volume. Total package yield increased 5% for
the third quarter and 6% year to date, continuing the upward trend resulting
from our yield-management strategy, which includes limiting growth of less
profitable business and recovering the higher cost of fuel through a fuel
surcharge.
Total freight revenue for the third quarter and year-to-date periods
increased due to significantly improved yields in U.S. freight, partially 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. As expected, hushkit sales have
continued to decrease compared to the prior year periods and are expected to be
immaterial for future periods.
Operating Income
Operating income increased 12% for the third quarter and 22% for the
year-to-date period. Operating margin improved for the third quarter despite the
slowdown in revenue growth, as intensified cost controls and reduced variable
compensation and pension costs helped hold expenses relatively flat compared to
the prior year third quarter. An 8% increase in average jet fuel price per
gallon contributed to a negative impact of approximately $17 million on third
quarter total fuel costs, including the results of jet fuel hedging contracts
entered into to mitigate these increased costs. For the year-to-date period, the
impact was $127 million, net of hedging effects, resulting from a 23% increase
in average jet fuel price per gallon. A 4% fuel surcharge, in effect since April
1, 2000, offset the increase in fuel costs in the third quarter.
Year-over-year comparisons were also affected by the anticipated
reduction in the contribution from sales of hushkits. Operating profit from
these sales was immaterial for the third quarter and $7 million for the
year-to-date period, compared to $9 million and $38 million in the respective
prior year periods.
- 20 -
<PAGE>
FEDEX GROUND
The following table compares revenues and operating income (in
millions) and selected package statistics (in thousands, except dollar amounts)
for the three- and nine-month periods ended February 28, 2001 and February 29,
2000:
<TABLE>
<CAPTION>
Three Months Ended Percent Nine Months Ended Percent
------------------ ------------------
2001 2000(1) Change 2001(1) 2000(1) Change
---- ----- ------ ---- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues $529 $487 + 9 $1,653 $1,483 +11
Operating Expenses:
Salaries and employee benefits 112 337
Purchased transportation 213 657
Rentals and landing fees 17 49
Depreciation and amortization 29 80
Fuel 3 5
Maintenance and repairs 16 47
Intercompany charges 52 161
Other 69 198
--- ---
Total operating expenses 511 448 +14 1,534 1,327 +16
---- ---- ----- ------
Operating income $ 18 $ 39 -54 $ 119 $ 156 -24
==== ==== ====== ======
Average daily packages 1,441 1,415 + 2 1,512 1,440 + 5
Revenue per package (yield) $ 5.82 $ 5.54 + 5 $ 5.72 $ 5.51 + 4
</TABLE>
1 Operating expense detail for the three- and nine-month periods ended February
29, 2000 has been omitted, as this data is not comparable to the three- and
nine-month periods ended February 28, 2001. See "Reportable Segments" above.
===============================================================================
Revenues
FedEx Ground revenues for the third quarter increased 9% from the prior
year period, due to increases in yields and average daily package volumes, as
well as an additional operating day. Overall economic conditions depressed
volume growth rates in the third quarter. Yields increased largely due to the
February 2001 base rate increase of 3.1%, higher package weight and the 1.25%
fuel surcharge implemented on August 7, 2000. For the year-to-date period,
revenues increased 11% due to higher average daily volumes and yields, as well
as four additional operating days.
The new FedEx Home Delivery service continued to post increased average
daily package volumes during the third quarter. In spite of the weakened
economic conditions, the continued expansion of FedEx Home Delivery, in
conjunction with FedEx's new bundling and branding strategies, helped to
increase the year-over-year average daily volume growth rates to 2% for the
third quarter and 5% for the year-to-date period.
Operating Income
FedEx Home Delivery operating losses and rebranding and reorganization
expenses totaled $19 million for the third quarter and $45 million year to date,
compared to $8 million and $10 million in the prior year respective periods.
Excluding the negative effects of these amounts, operating income for the third
quarter and year-to-date period decreased 21% and 1% year over year,
respectively. For the third quarter, higher sales, marketing and information
technology support costs, utilities expenses and depreciation from investments
in systems further reduced operating income. Facility openings or expansions in
the Ground and FedEx Home Delivery networks increased depreciation, rental and
other property-related expenses.
- 21 -
<PAGE>
The FedEx Home Delivery service, initiated in March 2000, is dedicated to
meeting the needs of business-to-consumer shippers. In February 2001, 85
additional facilities were opened, expanding Home Delivery coverage to 70% of
the U.S. population. Coverage of approximately 80% of the U.S. population is
planned by September 2001. We continue to estimate that FedEx Home Delivery
operating losses will approximate $50 million in 2001.
FEDEX FREIGHT
The FedEx Freight segment, formed in the third quarter, includes the
financial results of Viking from December 1, 2000, and the financial results of
American Freightways from January 1, 2001 (the date of acquisition for financial
reporting purposes).
The following table shows revenues and operating income (in millions)
and selected statistics for the three-month period ended February 28, 2001:
<TABLE>
<CAPTION>
<S> <C>
Revenues $337
Operating Expenses:
Salaries and employee benefits 198
Purchased transportation 9
Rentals and landing fees 11
Depreciation and amortization 18
Fuel 18
Maintenance and repairs 15
Intercompany charges 1
Other 49
----
Total operating expenses 319
----
Operating income $ 18
====
Shipments per day1 54,176
Weight per shipment (pounds)1 1,132
Revenue per hundredweight1 $11.80
</TABLE>
1 Based on portion of the quarter including both American Freightways and Viking
(January and February).
================================================================================
Revenues
FedEx Freight experienced lower than expected volumes during the third
quarter, due to the economic slowdown. The lower than expected volumes were
partially offset by strong yields. The complementary geographic regions served
by American Freightways and Viking are expected to have a positive impact on
revenues. Both companies will continue to focus on day-definite regional LTL
service, but will be able to collaborate as partners to serve customers who have
multi-regional LTL needs.
Fuel surcharges for this segment included the following at February 28,
2001:
<TABLE>
<CAPTION>
Shipments Shipments
Operating Under Over
Subsidiary 20,000 Pounds 20,000 Pounds
---------- --------------- ---------------
<S> <C> <C>
American Freightways 3% 7%
Viking 3% 6%
</TABLE>
The American Freightways fuel surcharge, which was in effect at acquisition, is
tied to the "Retail on Highway Diesel Fuel Price" as published by the Department
of Energy and changes weekly based on changes in the index. A fuel surcharge has
been in effect at Viking since August 16, 1999.
- 22 -
<PAGE>
Operating Income
In addition to the lower volumes mentioned above, operating income for
the third quarter was negatively affected by higher than planned fuel expenses.
The third quarter also reflects seasonally low volume and operating results.
OTHER OPERATIONS
Other operations include FedEx Custom Critical, Inc. ("FedEx Custom
Critical"), a critical-shipment carrier; FedEx Trade Networks, Inc., a global
trade services company; FedEx Supply Chain Services, Inc. ("FedEx Supply
Chain"), a contract logistics provider; Caribbean Transportation Services,
Inc., a freight forwarder; and certain unallocated corporate items. The
operating results of Viking prior to December 1, 2000, are also included in
this category.
The following table compares revenues and operating income (in millions)
for the three- and nine-month periods ended February 28, 2001 and February 29,
2000:
<TABLE>
<CAPTION>
Three Months Ended Percent Nine Months Ended Percent
-------------------- -----------------
2001 2000 Change 2001 2000 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $188 $273 - 31 $840 $844 -
Operating income (loss) $(5) $ 24 -121 $ 22 $ 75 -71
</TABLE>
Revenues from other operations decreased 31% for the third quarter and
were approximately flat year to date from the respective prior year periods.
Excluding the effects of businesses acquired during or after the comparable
periods and the prior year revenues of Viking, revenues from other operations
decreased 9% and 2% for the third quarter and year-to-date period, respectively,
principally due to lower year-over-year revenues at FedEx Custom Critical. The
demand for services provided by this operating subsidiary (critical shipments)
is highly elastic and tied to key economic indicators, principally in the
automotive industry, where volumes have continued to decline since the beginning
of 2001.
Operating income decreased 121% for the third quarter and 71% year to
date from the prior year periods. The combined effects of acquired businesses
and the inclusion of Viking in the FedEx Freight segment did not materially
change the percentage decreases above. These decreases reflect primarily the
decline in volume and yield at FedEx Custom Critical and lower performance at
FedEx Supply Chain.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $140 million at February 28, 2001,
compared to $68 million at May 31, 2000. Cash flows from operating activities
for the year-to-date period totaled $1.026 billion, compared to $876 million for
the prior year period.
As mentioned previously, FedEx completed the acquisition of American
Freightways on February 9, 2001 in a transaction accounted for as a purchase.
The $978 million purchase price was a combination of cash and FedEx common stock
(11.0 million shares of treasury stock were utilized). The Company also assumed
approximately $240 million in American Freightways debt.
- 23 -
<PAGE>
FedEx's operations are generally capital intensive and generate cash
earnings substantially in excess of reported earnings. The following table
compares certain cash-based earnings measures (in millions, except per share
amounts) for the three- and nine-month periods ended February 28, 2001 and
February 29, 2000:
<TABLE>
<CAPTION>
Three Months Ended Percent Nine Months Ended Percent
-------------------- -----------------
2001 2000 Change 2001 2000 Change
--------- ------- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
EBITDA (earnings before interest, taxes,
depreciation and amortization) $ 519 $ 511 +2 $1,788 $1,667 + 7
Cash earnings per share (net income plus depreciation
and amortization divided by average common and common
equivalent shares) $1.49 $1.39 +7 $ 4.85 $ 4.35 +11
</TABLE>
The Company currently has a $1.0 billion revolving credit facility that
is generally used to finance temporary operating cash requirements and to
provide support for the issuance of commercial paper. As of February 28, 2001,
$427 million was available under this commitment. In December 2000, the Company
secured an additional $750 million credit facility. This facility was utilized
to back commercial paper borrowings that funded the cash requirements of the
American Freightways acquisition and for general corporate purposes. On March
21, 2001, the Company terminated this facility.
On February 12, 2001, the Company issued $750 million of senior unsecured
notes in three maturity tranches: three, five and ten years, at $250 million
each. Net proceeds from the borrowings were used to repay indebtedness,
principally borrowings under the Company's commercial paper program, and for
general corporate purposes. For more information regarding these credit
facilities, see Note 4 of Notes to Condensed Consolidated Financial Statements.
We believe that cash flow from operations, our commercial paper program
and our revolving credit facility 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 and systems, 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.
The following table compares capital expenditures (including equivalent
capital, which is defined below) for the three- and nine- months ended February
28, 2001 and February 29, 2000 (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Aircraft and related equipment $216 $121 $ 502 $ 370
Facilities and sort equipment 81 105 253 325
Information and technology
equipment 84 29 265 247
Other equipment 72 134 252 286
---- ---- ------ ------
Total capital expenditures 453 389 1,272 1,228
Equivalent capital, principally
aircraft-related - 5 - 361
---- ---- ------ ------
Total $453 $394 $1,272 $1,589
==== ==== ====== ======
</TABLE>
- 24 -
<PAGE>
We finance certain of our aircraft and other equipment needs using
long-term operating leases. The determination to lease versus buy equipment is a
financing decision, and both forms of financing are considered when evaluating
the resources committed for capital. The amount that the Company would have
expended to purchase these assets had it not chosen to obtain their use through
operating leases is considered equivalent capital in the table above.
As a result of our current outlook for the remainder of 2001, we have
reduced planned capital expenditures for 2001 from our earlier estimate of $2.3
billion to approximately $2.0 billion, the same level as the prior year.
However, we plan to continue to make strategic capital investments in support of
our long-term growth goals. For information on the Company's purchase
commitments, see Note 7 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 FedEx's future capital needs.
Euro Currency Conversion
Since the beginning of the European Union's transition to the euro on
January 1, 1999, our subsidiaries 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. FedEx believes that the introduction of the euro, any price transparency
brought about by its introduction and the phasing out of the legacy currencies
will not have a material impact on 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. Year
to date, the devaluation of the Euro had an immaterial negative impact on the
results of operations of the Company.
* * *
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 SECURITIES AND EXCHANGE COMMISSION FILINGS AND
PRESS RELEASES OF THE COMPANY AND ITS SUBSIDIARIES.
EXCEPT AS OTHERWISE INDICATED,
- REFERENCES TO YEARS MEAN THE COMPANY'S FISCAL YEAR ENDING MAY 31 OF THE YEAR
REFERENCED
- REFERENCES TO THE "THIRD QUARTER" MEAN THE THREE MONTH PERIOD ENDED FEBRUARY
28, 2001
- REFERENCES TO "YEAR-TO-DATE" OR THE "YEAR-TO-DATE PERIOD" MEAN THE NINE
MONTH PERIOD ENDED FEBRUARY 28, 2001
- 25 -
<PAGE>
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 third quarter 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.
- 26 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
-------- ------------------------
<S> <C>
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re: Unaudited Interim Financial Statements.
</TABLE>
(b) Reports on Form 8-K.
During the quarter ended February 28, 2001, the Registrant filed a
Current Report on Form 8-K dated January 10, 2001. The report disclosed
the execution of a transportation and retail agreement with the United
States Postal Service.
- 27 -
<PAGE>
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.
FEDEX CORPORATION
Date: April 13, 2001 /s/ James S. Hudson
--------------------------------------------
James S. Hudson
Corporate Vice President
Strategic Financial PLanning & Control
(Principal Accounting Officer)
- 28 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ------------------------
<S> <C>
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re: Unaudited Interim Financial Statements.
</TABLE>
E-1
</TEXT>
</DOCUMENT>