UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, | ||
OR | |||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM |
Commission File Number: 1-15829
FEDEX CorporationCORPORATION
(Exact name of registrant as specified in its charter)
Delaware | (State or other jurisdiction of | 62-1721435 | |
| (I.R.S. Employer | ||
942 South Shady Grove Road | (Address of principal executive offices) | 38120 | |
|
|
(901) 818-7500
(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 ýx No ¨o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ýx No ¨o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock |
| Outstanding Shares at September | ||||
Common Stock, par value $0.10 per share |
|
FEDEX CORPORATION
INDEX
2
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
ASSETS
|
| August 31, |
| May 31, |
|
| August 31, |
|
|
| ||||||
|
| (Unaudited) |
|
|
|
| 2005 |
| May 31, |
| ||||||
|
|
|
|
|
|
| (Unaudited) |
| 2005 |
| ||||||
ASSETS |
|
|
|
|
|
|
| |||||||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 1,388 |
| $ | 1,046 |
|
|
| $ | 1,051 |
|
| $ | 1,039 |
|
Receivables, less allowances of $149 and $151 |
| 2,965 |
| 3,027 |
| |||||||||||
Spare parts, supplies and fuel, less allowances of $129 and $124 |
| 244 |
| 249 |
| |||||||||||
Receivables, less allowances of $137 and $125 |
|
| 3,270 |
|
| 3,297 |
| |||||||||
Spare parts, supplies and fuel, less |
|
|
|
|
|
|
| |||||||||
allowances of $144 and $142 |
|
| 251 |
|
| 250 |
| |||||||||
Deferred income taxes |
| 528 |
| 489 |
|
|
| 510 |
|
| 510 |
| ||||
Prepaid expenses and other |
| 146 |
| 159 |
|
|
| 164 |
|
| 173 |
| ||||
|
|
|
|
|
| |||||||||||
Total current assets |
| 5,271 |
| 4,970 |
|
|
| 5,246 |
|
| 5,269 |
| ||||
|
|
|
|
|
| |||||||||||
PROPERTY AND EQUIPMENT, AT COST |
| 20,670 |
| 20,311 |
|
|
| 22,650 |
|
| 22,017 |
| ||||
Less accumulated depreciation and amortization |
| 11,578 |
| 11,274 |
|
|
| 12,670 |
|
| 12,374 |
| ||||
|
|
|
|
|
| |||||||||||
Net property and equipment |
| 9,092 |
| 9,037 |
|
|
| 9,980 |
|
| 9,643 |
| ||||
|
|
|
|
|
| |||||||||||
OTHER LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| 2,801 |
| 2,802 |
|
|
| 2,835 |
|
| 2,835 |
| ||||
Prepaid pension cost |
| 1,045 |
| 1,127 |
|
|
| 1,177 |
|
| 1,272 |
| ||||
Intangible and other assets |
| 1,170 |
| 1,198 |
|
|
| 1,348 |
|
| 1,385 |
| ||||
|
|
|
|
|
| |||||||||||
Total other long-term assets |
| 5,016 |
| 5,127 |
|
|
| 5,360 |
|
| 5,492 |
| ||||
|
|
|
|
|
|
|
| $ | 20,586 |
|
| $ | 20,404 |
| ||
|
| $ | 19,379 |
| $ | 19,134 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
|
| August 31, |
| May 31, |
|
| August 31, |
|
|
| ||||||
|
| (Unaudited) |
|
|
|
| 2005 |
| May 31, |
| ||||||
|
|
|
|
|
|
| (Unaudited) |
| 2005 |
| ||||||
LIABILITIES AND STOCKHOLDERS’ INVESTMENT |
|
|
|
|
|
|
| |||||||||
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Current portion of long-term debt |
| $ | 830 |
| $ | 750 |
|
|
| $ | 295 |
|
| $ | 369 |
|
Accrued salaries and employee benefits |
| 887 |
| 1,062 |
|
|
| 935 |
|
| 1,275 |
| ||||
Accounts payable |
| 1,481 |
| 1,615 |
|
|
| 1,705 |
|
| 1,739 |
| ||||
Accrued expenses |
| 1,460 |
| 1,305 |
|
|
| 1,590 |
|
| 1,351 |
| ||||
|
|
|
|
|
| |||||||||||
Total current liabilities |
| 4,658 |
| 4,732 |
|
|
| 4,525 |
|
| 4,734 |
| ||||
|
|
|
|
|
| |||||||||||
LONG-TERM DEBT, LESS CURRENT PORTION |
| 2,744 |
| 2,837 |
|
|
| 2,408 |
|
| 2,427 |
| ||||
|
|
|
|
|
| |||||||||||
OTHER LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deferred income taxes |
| 1,198 |
| 1,181 |
|
|
| 1,149 |
|
| 1,206 |
| ||||
Pension, postretirement healthcare and other benefit obligations |
| 786 |
| 768 |
|
|
| 841 |
|
| 828 |
| ||||
Self-insurance accruals |
| 602 |
| 591 |
|
|
| 644 |
|
| 621 |
| ||||
Deferred lease obligations |
| 516 |
| 503 |
|
|
| 629 |
|
| 532 |
| ||||
Deferred gains, principally related to aircraft transactions |
| 422 |
| 426 |
|
|
| 393 |
|
| 400 |
| ||||
Other liabilities |
| 64 |
| 60 |
|
|
| 68 |
|
| 68 |
| ||||
|
|
|
|
|
| |||||||||||
Total other long-term liabilities |
| 3,588 |
| 3,529 |
|
|
| 3,724 |
|
| 3,655 |
| ||||
|
|
|
|
|
| |||||||||||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
| |||||||||||
COMMON STOCKHOLDERS’ INVESTMENT |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common stock, $0.10 par value; 800 million shares authorized, 301 million shares issued |
| 30 |
| 30 |
| |||||||||||
Common stock, $0.10 par value; 800 million shares |
|
|
|
|
|
|
| |||||||||
authorized; 303 million shares issued as of August 31, 2005 |
|
|
|
|
|
|
| |||||||||
and 302 million shares issued as of May 31, 2005 |
|
| 30 |
|
| 30 |
| |||||||||
Additional paid-in capital |
| 1,129 |
| 1,079 |
|
|
| 1,277 |
|
| 1,241 |
| ||||
Retained earnings |
| 7,310 |
| 7,001 |
|
|
| 8,678 |
|
| 8,363 |
| ||||
Accumulated other comprehensive loss |
| (38 | ) | (46 | ) |
|
| (12 | ) |
| (17 | ) | ||||
Deferred compensation and treasury stock, at cost |
| (42 | ) | (28 | ) |
|
| (44 | ) |
| (29 | ) | ||||
|
|
|
|
|
| |||||||||||
Total common stockholders’ investment |
| 8,389 |
| 8,036 |
|
|
| 9,929 |
|
| 9,588 |
| ||||
|
|
|
|
|
|
|
| $ | 20,586 |
|
| $ | 20,404 |
| ||
|
| $ | 19,379 |
| $ | 19,134 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| 2004 |
| 2003 |
|
| August 31, |
| ||||||||
|
|
|
|
|
|
| 2005 |
| 2004 |
| ||||||
REVENUES |
| $ | 6,975 |
| $ | 5,687 |
|
|
| $ | 7,707 |
|
| $ | 6,975 |
|
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
| 2,920 |
| 2,570 |
|
|
| 3,062 |
|
| 2,920 |
| ||||
Purchased transportation |
| 681 |
| 555 |
|
|
| 771 |
|
| 681 |
| ||||
Rentals and landing fees |
| 559 |
| 429 |
|
|
| 665 |
|
| 551 |
| ||||
Depreciation and amortization |
| 360 |
| 334 |
|
|
| 370 |
|
| 360 |
| ||||
Fuel |
| 469 |
| 322 |
|
|
| 728 |
|
| 483 |
| ||||
Maintenance and repairs |
| 420 |
| 364 |
|
|
| 468 |
|
| 428 |
| ||||
Business realignment costs |
| — |
| 132 |
| |||||||||||
Other |
| 987 |
| 781 |
|
|
| 1,059 |
|
| 973 |
| ||||
|
| 6,396 |
| 5,487 |
|
|
| 7,123 |
|
| 6,396 |
| ||||
|
|
|
|
|
| |||||||||||
OPERATING INCOME |
| 579 |
| 200 |
|
|
| 584 |
|
| 579 |
| ||||
|
|
|
|
|
| |||||||||||
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest, net |
| (39 | ) | (5 | ) |
|
| (24 | ) |
| (39 | ) | ||||
Other, net |
| (6 | ) | 1 |
|
|
| (11 | ) |
| (6 | ) | ||||
|
| (45 | ) | (4 | ) |
|
| (35 | ) |
| (45 | ) | ||||
|
|
|
|
|
| |||||||||||
INCOME BEFORE INCOME TAXES |
| 534 |
| 196 |
|
|
| 549 |
|
| 534 |
| ||||
|
|
|
|
|
| |||||||||||
PROVISION FOR INCOME TAXES |
| 204 |
| 68 |
|
|
| 210 |
|
| 204 |
| ||||
|
|
|
|
|
| |||||||||||
NET INCOME |
| $ | 330 |
| $ | 128 |
|
|
| $ | 339 |
|
| $ | 330 |
|
|
|
|
|
|
| |||||||||||
EARNINGS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 1.10 |
| $ | 0.43 |
|
|
| $ | 1.12 |
|
| $ | 1.10 |
|
|
|
|
|
|
| |||||||||||
Diluted |
| $ | 1.08 |
| $ | 0.42 |
|
|
| $ | 1.10 |
|
| $ | 1.08 |
|
|
|
|
|
|
| |||||||||||
DIVIDENDS DECLARED PER COMMON SHARE |
| $ | 0.07 |
| $ | 0.10 |
| |||||||||
DIVIDENDS DECLARED PER COMMON |
|
|
|
|
|
|
| |||||||||
SHARE |
|
| $ | 0.08 |
|
| $ | 0.07 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
|
| Three Months Ended |
| |||||||||||
|
| 2004 |
| 2003 |
|
| Three Months Ended |
| ||||||
|
|
|
|
|
|
| 2005 |
| 2004 |
| ||||
Operating Activities: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 330 |
| $ | 128 |
|
| $ | 339 |
| $ | 330 |
|
Noncash charges: |
|
|
|
|
| |||||||||
Adjustments to reconcile net income to cash |
|
|
|
|
| |||||||||
Lease accounting charge |
| 79 |
| — |
| |||||||||
Depreciation and amortization |
| 360 |
| 334 |
|
| 368 |
| 360 |
| ||||
Provision for uncollectible accounts |
| 29 |
| 25 |
| |||||||||
Deferred income taxes and other noncash items |
| (31 | ) | (20 | ) | |||||||||
Changes in operating assets and liabilities: |
|
|
|
|
| |||||||||
Receivables |
| (3 | ) | 72 |
| |||||||||
Spare parts and supplies |
| 7 |
| 8 |
| |||||||||
Accounts payable and other operating liabilities |
| (82 | ) | (109 | ) | |||||||||
Other, net |
| 5 |
| 43 |
|
| 77 |
| 71 |
| ||||
Changes in operating assets and liabilities, net |
| 42 |
| 68 |
| |||||||||
|
|
|
|
|
| |||||||||
Net cash provided by operating activities |
| 737 |
| 573 |
|
| 783 |
| 737 |
| ||||
|
|
|
|
|
| |||||||||
Investing Activities: |
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| (395 | ) | (300 | ) |
| (671 | ) | (395 | ) | ||||
Proceeds from asset dispositions |
| 4 |
| 9 |
|
| 1 |
| 4 |
| ||||
|
|
|
|
|
| |||||||||
Net cash used in investing activities |
| (391 | ) | (291 | ) |
| (670 | ) | (391 | ) | ||||
|
|
|
|
|
| |||||||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
| ||||
Principal payments on debt |
| (13 | ) | (31 | ) |
| (95 | ) | (13 | ) | ||||
Proceeds from stock issuances |
| 30 |
| 44 |
|
| 18 |
| 30 |
| ||||
Dividends paid |
| (21 | ) | (15 | ) |
| (24 | ) | (21 | ) | ||||
Purchase of treasury stock |
| — |
| (112 | ) | |||||||||
|
|
|
|
|
| |||||||||
Net cash used in financing activities |
| (4 | ) | (114 | ) |
| (101 | ) | (4 | ) | ||||
|
|
|
|
|
| |||||||||
Net increase in cash and cash equivalents |
| 342 |
| 168 |
|
| 12 |
| 342 |
| ||||
Cash and cash equivalents at beginning of period |
| 1,046 |
| 538 |
|
| 1,039 |
| 1,046 |
| ||||
|
|
|
|
|
| |||||||||
Cash and cash equivalents at end of period |
| $ | 1,388 |
| $ | 706 |
|
| $ | 1,051 |
| $ | 1,388 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States 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 our Annual Report on Form 10-K as amended, for the year ended May 31, 2004.2005. 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 (including normal recurring adjustments) necessary to present fairly our financial position as of August 31, 20042005 and the results of our operations and cash flows for the three-month periods ended August 31, 20042005 and 2003.2004. Operating results for the three-month period ended August 31, 20042005 are not necessarily indicative of the results that may be expected for the year ending May 31, 2005.
2006.
Except as otherwise specified, references to years indicate our fiscal year ending May 31, 20052006 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.
BUSINESS REALIGNMENT COSTS.During 2004, we incurred $435 million of business realignment costs relatedCertain prior period amounts have been reclassified to voluntary early retirement and severance programs ($132 million inconform to the first quarter). At May 31, 2004, we had remaining business realignment related accruals of $28 million. At August 31, 2004, these accruals totaled $16 million due to cash payments made in the first quarter of 2005. The remaining accruals relate to management severance agreements, which are payable over future periods.
current period’s presentation.
GUARANTEES.FedEx’s publicly held debt is guaranteed by our subsidiaries. The guarantees are full and unconditional, joint and several, and any subsidiaries that are not guarantors are minor as defined by Securities and Exchange Commission (“SEC”) regulations. FedEx, as the parent company issuer of this debt, has no independent assets or operations. There are no significant restrictions on our ability or the ability of any guarantor to obtain funds from its subsidiaries by such means as a dividend or loan.
EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS.The pilots of FederalFedEx Express, Corporation (“FedEx Express”), which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on May 31, 2004. Negotiations with the pilots’ union began in March 2004. In accordance with applicable labor law, we will continue to operate under our current agreement while we negotiate with our pilots. Contract negotiations with the pilots’ union began in March 2004. These negotiations are ongoing and have recently included private facilitation sessions in an effort to make progress. We cannot estimate the financial impact, if any, the results of these negotiations may have on our future results of operations.
DIVIDENDS DECLARED PER COMMON SHARE. On August 20, 2004,19, 2005, our Board of Directors declared a dividend of $0.07$0.08 per share of common stock. The dividend is payable on October 1, 20043, 2005 to stockholders of record as of the close of business on September 10, 2004. During 2004, the declaration of two of our quarterly dividends fell in the first quarter. In both instances, the dividend was $0.05 per common share.12, 2005. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.
LEASE ADJUSTMENT. During the first quarter of 2006, a one-time, non-cash charge of $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects) was recorded, which represented the impact on prior years, to adjust the accounting for certain facility leases, predominantly at FedEx Express. The charge related primarily to rent escalations in on-airport facility leases. Statement of Financial Accounting Standards No. (“SFAS”) 13, “Accounting for Leases” and Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” provides that rent expense under operating leases with rent escalation clauses
7
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
should be recognized evenly, on a straight-line basis over the lease term. Based on a more extensive review of our leases during the first quarter, we determined that a portion of our facility leases had rent escalation clauses that were not being recognized appropriately. Because the amounts involved were not material to our financial statements in any individual prior period and the cumulative amount is not expected to be material to 2006 results, we recorded the cumulative adjustment in the first quarter, which increased operating expenses by $79 million.
STOCK COMPENSATION. We currently apply Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,” and its related interpretations to measure compensation expense for stock-based compensation plans. See Note 4As a result, no compensation expense is recorded for a discussionstock options when the exercise price is equal to or greater than the market price of our common stock at the assumptions underlyingdate of grant. For awards of restricted stock and to determine the pro forma calculations below. effects of stock options set forth below, we recognize the fair value of the awards ratably over their explicit service period.
If compensation cost for stock-based compensation plans had been determined under Statement of Financial Accounting Standards No. (“SFAS”)SFAS 123, “Accounting for Stock-BasedStock Based Compensation,” stock option compensation expense, pro forma net income stock option compensation expense and basic and diluted earnings per common share, for the three-month periods ended August 31, 2004 and 2003, assuming all options granted in 1996 and thereafter were valued at fair value using the Black-Scholes method, would have been as follows (in millions, except per share amounts):
|
| Three Months Ended |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Net income, as reported |
| $ | 330 |
| $ | 128 |
|
Add: Stock compensation included in reported net income, net of tax |
| 1 |
| 9 |
| ||
Deduct: Total pro forma stock compensation expense, net of tax |
| 10 |
| 11 |
| ||
|
|
|
|
|
| ||
Pro forma net income |
| $ | 321 |
| $ | 126 |
|
Earnings per common share: |
|
|
|
|
| ||
Basic – as reported |
| $ | 1.10 |
| $ | 0.43 |
|
Basic – pro forma |
| $ | 1.07 |
| $ | 0.42 |
|
|
|
|
|
|
| ||
Diluted – as reported |
| $ | 1.08 |
| $ | 0.42 |
|
Diluted – pro forma |
| $ | 1.05 |
| $ | 0.42 |
|
(2) Comprehensive Income
The following table provides a reconciliation of net income reported in our financial statements to comprehensive income (in millions):
|
| Three Months Ended |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 330 |
| $ | 128 |
|
Other comprehensive income: |
|
|
|
|
| ||
Foreign currency translation adjustments, net of deferred taxes of $1 and deferred tax benefit of $4 |
| 8 |
| (10 | ) | ||
Comprehensive income |
| $ | 338 |
| $ | 118 |
|
|
| Three Months Ended |
| ||||
|
| 2005 |
| 2004 |
| ||
Net income, as reported |
| $ | 339 |
| $ | 330 |
|
Add: Stock compensation included in |
| (1 | ) | 1 |
| ||
Deduct: Total stock-based employee compensation |
| 11 |
| 10 |
| ||
Pro forma net income |
| $ | 327 |
| $ | 321 |
|
Earnings per common share: |
|
|
|
|
| ||
Basic—as reported |
| $ | 1.12 |
| $ | 1.10 |
|
Basic—pro forma |
| $ | 1.08 |
| $ | 1.07 |
|
Diluted—as reported |
| $ | 1.10 |
| $ | 1.08 |
|
Diluted—pro forma |
| $ | 1.06 |
| $ | 1.05 |
|
8
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(3) Financing Arrangements
From time to time, we finance certain operating and investing activities, including acquisitions, through the issuance of commercial paper. Our commercial paper program is backed by unused commitments under two revolving credit agreements totaling $1 billion and borrowings under the program reduce the amount available under these agreements. One revolver provides for $750 million through September 28, 2006. The second is a 364-day facility providing for $250 million through September 22, 2005. At August 31, 2004, no commercial paper borrowings were outstanding and the entire amount under the credit facilities was available. All of our credit agreements contain similar covenants and restrictions, none of which are expected to significantly affect our operations or ability to pay dividends.
(4) Stock Option Assumptions
We account for stock options using the intrinsic value method wherein compensation expense is recognized on stock options granted to employees only for the excess of the market price of our common stock at the date of grant over the option exercise price. No compensation expense is recorded at the date of grant, as all of our options have an exercise price equal to the fair value of our stock on that date.
Some companies recognize compensation expense for the fair value of the option right itself. We have elected not to adopt this accounting method because it requires the use of subjective valuation models, which we believe are not representative of the real value of the option to either FedEx or our employees. However, we are required to disclose the pro forma effect of accounting for stock options using such a valuation method for all options granted in 1996 and thereafter. We use the Black-Scholes option-pricing model to calculate the fair value of options for our pro forma disclosures. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, forfeiture rate and exercise price. Many of these assumptions are judgmental and highly sensitive in the determination of pro forma compensation expense. Following is a table of the key weighted-average assumptions used in the option valuation calculations for the options granted in the three-month periods ended August 31, 2004 and 2003, and a discussion of our methodology for developing each of the assumptions used in the valuation model:
|
| Three Months Ended |
| |||||||
|
| 2004 |
| 2003 |
|
| Three Months Ended |
| ||
|
|
|
|
|
|
| 2005 |
| 2004 |
|
Expected lives |
| 4 years |
| 4 years |
|
| 5 years |
| 4 years |
|
Expected volatility |
| 27.07 | % | 32.62 | % |
| 25 | % | 27 | % |
Risk-free interest rate |
| 3.55 | % | 2.05 | % |
| 3.68 | % | 3.55 | % |
Dividend yield |
| 0.328 | % | 0.310 | % |
| 0.323 | % | 0.328 | % |
Expected Lives. This is the period of time over which the options granted are expected to remain outstanding. Generally, options granted have a maximum term of ten years. We examine actual stock option exercises to determine the expected life of the options. An increase in the expected term will increase compensation expense.
ExpectedVolatility. Actual changes in the market value of our stock are used to calculate the volatility assumption. We calculate daily market value changes from the date of grant over a past period equal to the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.
Risk-Free Interest Rate. This is the U.S. Treasury Strip rate posted at the date of grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.
9
Dividend Yield. This is the annual rate of dividends per share over the exercise price of the option. An increase in the dividend yield will decrease compensation expense.
Forfeiture Rate. This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. This percentage is derived from historical experience. An increase in the forfeiture rate will decrease compensation expense. Our forfeiture rate is approximately 8%.
During the first quarter of 2005,2006, we made option grants of 2,311,6002,806,235 shares at a weighted-average exercise price of $73.05$89.66 per share, primarily in connection with our principal annual stock option grant. The weighted-average Black-Scholes value of these grants under the assumptions indicated above was $19.16$25.38 per option.
Total equity compensation shares outstanding or available for grant at August 31, 20042005 represented 6.8%6.6% of total outstanding common and equity compensation shares and equity compensation shares available for grant.
NEW ACCOUNTING PRONOUNCEMENTS. In December 2004, the FASB issued SFAS 123R, “Share-Based Payment.” SFAS 123R is a revision of SFAS 123 and supersedes APB 25. The new standard requires companies to record compensation expense for stock-based awards using a fair value method and is effective for annual periods beginning after June 15, 2005 (effective in the first quarter of 2007 for FedEx). Compensation expense will be recorded over the requisite service period, which is typically the vesting period of the award. We plan to adopt this standard using the modified prospective method.
9
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, as well as the assumptions and the fair value model used to value them, and the market value of our common stock. We anticipate that the impact of SFAS 123R will approximate the pro forma results under SFAS 123 presented above (reducing earnings per diluted share in the first quarter of 2006 and 2005 by $0.04 and $0.03, respectively). SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. Based on historical experience, we do not expect the impact of adopting SFAS 123R to be material to our reported cash flows.
In March 2005, the FASB issued Financial Accounting Standards Board Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143”. FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional upon future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. FIN 47 will be effective for FedEx no later than May 31, 2006. Management is in the process of evaluating the impact, if any, FIN 47 will have on FedEx.
(5) C(2)omputationComprehensive Income
The following table provides a reconciliation of net income reported in our financial statements to comprehensive income (in millions):
|
| Three Months Ended August 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
Net income |
| $ | 339 |
| $ | 330 |
|
Other comprehensive income: |
|
|
|
|
| ||
Foreign currency translation adjustments, net of deferred taxes of $1 for both 2005 and 2004 |
| 5 |
| 8 |
| ||
Comprehensive income |
| $ | 344 |
| $ | 338 |
|
(3)Financing Arrangements
From time to time, we finance certain operating and investing activities, including acquisitions, through borrowings under our $1.0 billion revolving credit facility or the issuance of commercial paper. In July 2005, we executed a new $1.0 billion five-year revolving credit facility, which replaced and consolidated our prior revolving credit facilities. Borrowings under the credit facility will bear interest at short-term interest rates (based on the London Interbank Offered Rate (LIBOR), the Prime Rate or the Federal Funds Rate) plus a margin dependent upon our senior unsecured long-term debt ratings.
10
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Our commercial paper program is backed by unused commitments under the revolving credit facility and borrowings under the program reduce the amount available under the credit facility. At August 31, 2005, no commercial paper borrowings were outstanding and the entire amount under the credit facility was available. The revolving credit agreement contains certain covenants and restrictions, none of which are expected to significantly affect our operations or ability to pay dividends.
(4)Computation of Earnings Per Share
The calculation of basic and diluted earnings per common share for the three-month periods ended August 31 2004 and 2003 was as follows (in millions, except per share amounts):
|
| Three Months Ended |
| |||||||||||
|
| 2004 |
| 2003 |
| |||||||||
|
|
|
|
|
|
| 2005 |
| 2004 |
| ||||
Net income applicable to common stockholders |
| $ | 330 |
| $ | 128 |
|
| $ | 339 |
| $ | 330 |
|
|
|
|
|
|
| |||||||||
Weighted-average shares of common stock outstanding |
| 300 |
| 298 |
|
| 303 |
| 300 |
| ||||
|
|
|
|
|
| |||||||||
Common equivalent shares: |
|
|
|
|
|
|
|
|
|
| ||||
Assumed exercise of outstanding dilutive options |
| 19 |
| 17 |
|
| 17 |
| 19 |
| ||||
Less shares repurchased from proceeds of assumed exercise of options |
| (14 | ) | (12 | ) |
| (12 | ) | (14 | ) | ||||
Weighted-average common and common equivalent shares outstanding |
| 305 |
| 303 |
|
| 308 |
| 305 |
| ||||
Basic earnings per share |
| $ | 1.10 |
| $ | 0.43 |
| |||||||
Diluted earnings per share |
| $ | 1.08 |
| $ | 0.42 |
| |||||||
Basic earnings per common share |
| $ | 1.12 |
| $ | 1.10 |
| |||||||
Diluted earnings per common share |
| $ | 1.10 |
| $ | 1.08 |
|
10
We have excluded from the calculation of diluted earnings per share approximately 3,195,035 antidilutive options for the three months ended August 31, 2005, as the exercise price of the options was greater than the average market price of common stock for the period.
(6)(5) Employee Benefit Plans
We sponsor defined benefit pension plans covering a majority of our employees. The largest plan covers certain U.S. employees age 21 and over, with at least one year of service. Certain of our subsidiaries offer medical, dental, and vision coverage to eligible U.S. retirees and their eligible dependents. Net periodic benefit cost of the pension and postretirement healthcare plans for the three-month periods ended August 31 was as follows (in millions):
|
|
|
| Postretirement |
| ||||||||||||
|
| Pension Plans |
| Healthcare Plans |
| ||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||||||
Service cost |
| $ | 119 |
| $ | 104 |
|
| $ | 10 |
|
|
| $ | 9 |
|
|
Interest cost |
| 161 |
| 145 |
|
| 8 |
|
|
| 8 |
|
| ||||
Expected return on plan assets |
| (203 | ) | (175 | ) |
| — |
|
|
| — |
|
| ||||
Recognized actuarial losses |
| 26 |
| 15 |
|
| — |
|
|
| — |
|
| ||||
Other amortization |
| 3 |
| 3 |
|
| — |
|
|
| — |
|
| ||||
|
| $ | 106 |
| $ | 92 |
|
| $ | 18 |
|
|
| $ | 17 |
|
|
|
| Pension Plans |
| Postretirement |
| ||||||||
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||
Service cost |
| $ | 104 |
| $ | 94 |
| $ | 9 |
| $ | 9 |
|
Interest cost |
| 145 |
| 123 |
| 8 |
| 6 |
| ||||
Expected return on plan assets |
| (175 | ) | (149 | ) | — |
| — |
| ||||
Net amortization and deferral |
| 18 |
| 19 |
| — |
| — |
| ||||
|
| $ | 92 |
| $ | 87 |
| $ | 17 |
| $ | 15 |
|
11
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
No contributions were made during the first quarter of 2006 or 2005 to our principal U.S. domestic pension plans, and none are expectedplans. However, on September 1, 2005, we made voluntary, tax deductible contributions of $456 million to be required during the remainder of 2005.our principal U.S. domestic pension plans. During 2004,2005, we made primarily voluntary contributions of $335$460 million to our qualified pension plans. Although not required, weWe may elect to make further voluntary contributions to our qualified pension plans in 2005.
2006.
(7)(6) Business Segment Information
We provide customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. We offer integrated business applicationsservices through operating companies that operate independentlycompete collectively and compete collectivelyare managed collaboratively under the respected FedEx brand.brands. Our operations are primarily represented by Federal Express Corporation (“FedEx Express,Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery service;services; FedEx Freight Corporation (“FedEx Freight”), the largesta leading U.S. provider of regional less-than-truckload (“LTL”) freight services; and FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”), a leading provider of document solutions and business services. These businesses form the core of our reportable segments. Other business units in the FedEx portfolio are FedEx Trade Networks, Inc. (“FedEx Trade Networks”), a global trade services company; FedEx Supply Chain Services, Inc. (“FedEx Supply Chain Services”), a contract logistics provider; FedEx Custom Critical, Inc. (“FedEx Custom Critical”), North America’s largest time-specific critical shipment carrier; Caribbean Transportation Services, Inc. (“Caribbean Transportation Services”), the leading provider of airfreight forwarding services between the U.S. and Puerto Rico, and FedEx Corporate Services, Inc. (“FedEx Services”), a provider of customer-facing sales, marketing and information technology functions, primarily for FedEx Express and FedEx Ground.
11
Our reportable segments include the following businesses:
FedEx Express Segment | FedEx Express (express transportation) | |
| FedEx Trade Networks | |
(global trade services) | ||
FedEx Ground Segment | FedEx Ground (small-package ground delivery) | |
| FedEx SmartPost (small-parcel consolidator) | |
| FedEx Supply Chain Services | |
(contract logistics) | ||
FedEx Freight Segment | FedEx Freight (LTL freight transportation) | |
| FedEx Custom Critical (time-critical transportation) | |
| Caribbean Transportation Services | |
(airfreight forwarding) | ||
FedEx Kinko’s Segment | FedEx Kinko’s (document solutions and business services) |
12
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table provides a reconciliation of reportable segment revenues and operating income to our consolidated financial statement totals (in millions):
|
| Three Months Ended |
| ||||
|
| 2005 |
| 2004 |
| ||
Revenue |
|
|
|
|
| ||
FedEx Express segment |
| $ | 5,122 |
| $ | 4,616 |
|
FedEx Ground segment |
| 1,219 |
| 1,073 |
| ||
FedEx Freight segment |
| 892 |
| 807 |
| ||
FedEx Kinko's segment |
| 517 |
| 490 |
| ||
Other and eliminations |
| (43 | ) | (11 | ) | ||
|
| $ | 7,707 |
| $ | 6,975 |
|
Operating Income |
|
|
|
|
| ||
FedEx Express segment(1) |
| $ | 285 |
| $ | 310 |
|
FedEx Ground segment |
| 148 |
| 147 |
| ||
FedEx Freight segment |
| 135 |
| 103 |
| ||
FedEx Kinko's segment |
| 16 |
| 19 |
| ||
Other and eliminations |
| — |
| — |
| ||
|
| $ | 584 |
| $ | 579 |
|
|
| Three Months Ended |
| ||||
|
| 2004 |
| 2003 |
| ||
Revenue |
|
|
|
|
| ||
FedEx Express segment |
| $ | 4,616 |
| $ | 4,137 |
|
FedEx Ground segment |
| 1,073 |
| 914 |
| ||
FedEx Freight segment |
| 807 |
| 637 |
| ||
FedEx Kinko’s segment (1) |
| 490 |
| — |
| ||
Other and eliminations |
| (11 | ) | (1 | ) | ||
|
| $ | 6,975 |
| $ | 5,687 |
|
|
|
|
|
|
| ||
Operating Income |
|
|
|
|
| ||
FedEx Express segment |
| $ | 310 |
| $ | 23 |
|
FedEx Ground segment |
| 147 |
| 116 |
| ||
FedEx Freight segment |
| 103 |
| 61 |
| ||
FedEx Kinko’s segment (1) |
| 19 |
| — |
| ||
Other and eliminations |
| — |
| — |
| ||
|
| $ | 579 |
| $ | 200 |
|
(1) The FedEx Kinko’s segment was formed followingFirst quarter 2006 includes a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the acquisition of Kinko’s, Inc. on February 12, 2004.accounting for certain facility leases.
12
(8)(7) Commitments
As of August 31, 2004,2005, our purchase commitments for the remainder of 20052006 and annually thereafter under various contracts were as follows (in millions):
|
|
|
| Aircraft- |
|
|
|
|
| ||||||||||
|
| Aircraft |
| Related(1) |
| Other(2) |
| Total |
| ||||||||||
2006 (remainder) |
|
| $ | 85 |
|
|
| $ | 150 |
|
|
| $ | 593 |
|
| $ | 828 |
|
2007 |
|
| 293 |
|
|
| 209 |
|
|
| 132 |
|
| 634 |
| ||||
2008 |
|
| 255 |
|
|
| 88 |
|
|
| 57 |
|
| 400 |
| ||||
2009 |
|
| 567 |
|
|
| 57 |
|
|
| 36 |
|
| 660 |
| ||||
2010 |
|
| 517 |
|
|
| 59 |
|
|
| 18 |
|
| 594 |
| ||||
Thereafter |
|
| 625 |
|
|
| 74 |
|
|
| 167 |
|
| 866 |
| ||||
|
| Aircraft |
| Aircraft- |
| Other (2) |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
2005 (remainder) |
| $ | 28 |
| $ | 123 |
| $ | 464 |
| $ | 615 |
|
2006 |
| — |
| 146 |
| 137 |
| 283 |
| ||||
2007 |
| 111 |
| 98 |
| 92 |
| 301 |
| ||||
2008 |
| 131 |
| 67 |
| 35 |
| 233 |
| ||||
2009 |
| 567 |
| 63 |
| 35 |
| 665 |
| ||||
Thereafter |
| 1,141 |
| 119 |
| 189 |
| 1,449 |
| ||||
(1)Primarily aircraft modifications.
(2) Primarily vehicles, facilities, computers, printing and other equipment and advertising and promotions contracts.
The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. Such contractsCommitments to purchase aircraft in passenger configuration do not include thosethe attendant costs to modify these aircraft for certain purchases of aircraft, aircraft modifications, vehicles, facilities, computers, printing and other equipment and advertising and promotions contracts.cargo transport unless we have entered into non-cancelable commitments. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes.
13
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
As of August 31, 2005, FedEx Express iswas committed to purchase 12 Airbus A300s, four Airbus A310s, four ATRsfive ATR-72s and ten Airbus A380s (a new high-capacity, long-range aircraft). The A310s and ATRs are expected to be delivered in 2005. FedEx Express expects to take delivery of three A300s, two A310s and all of the ATR-72s in 2006. Five A300s and two A310s are expected to be delivered in 2007. The four remaining A300s are expected to be delivered in 2008. Three of the ten A380 aircraft are scheduled to be delivered in each of 2009, 2010 and 2011 and the remaining one in 2012. Deposits and progress payments of $27$33 million have been made toward these purchases and other planned aircraft-related transactions. In addition, we have committed to modify our DC10 aircraft for passenger-to-freighter and two-man cockpit configurations. Payments related to all of these activities are included in the table above. Aircraft and aircraft-related contracts are subject to price escalations. Also, FedEx Express has entered into agreements to acquire eight MD11 aircraft, five Airbus A310s and one Airbus A300 to be received during 2005. Because delivery of these aircraft is subject to certain conditions, they are not included in the table above.
13
A summary of future minimum lease payments under capital leases andat August 31, 2005 is as follows (in millions):
2006 (remainder) |
| $ | 22 |
|
2007 |
| 22 |
| |
2008 |
| 99 |
| |
2009 |
| 10 |
| |
2010 |
| 95 |
| |
Thereafter |
| 130 |
| |
|
| 378 |
| |
Less amount representing interest |
| 72 |
| |
Present value of net minimum lease payments |
| $ | 306 |
|
A summary of future minimum lease payments under noncancelable operating leases (principally aircraft, retail locations and facilities) with an initial or remaining term in excess of one year at August 31, 20042005 is as follows (in millions):
|
| Capital |
| Operating |
|
| Aircraft and Related |
| Facilities and |
|
|
| |||||||||
|
|
|
|
|
|
| Equipment |
| Other |
| Total |
| |||||||||
2005 (remainder) |
| $ | 139 |
| $ | 1,255 |
| ||||||||||||||
2006 |
| 122 |
| 1,543 |
| ||||||||||||||||
2006 (remainder) |
|
| $ | 478 |
|
|
| $ | 719 |
|
| $ | 1,197 |
| |||||||
2007 |
| 22 |
| 1,420 |
|
|
| 606 |
|
|
| 857 |
|
| 1,463 |
| |||||
2008 |
| 99 |
| 1,314 |
|
|
| 585 |
|
|
| 721 |
|
| 1,306 |
| |||||
2009 |
| 11 |
| 1,151 |
|
|
| 555 |
|
|
| 586 |
|
| 1,141 |
| |||||
2010 |
|
| 544 |
|
|
| 470 |
|
| 1,014 |
| ||||||||||
Thereafter |
| 225 |
| 7,923 |
|
|
| 4,460 |
|
|
| 2,986 |
|
| 7,446 |
| |||||
|
| 618 |
| $ | 14,606 |
|
|
| $ | 7,228 |
|
|
| $ | 6,339 |
|
| $ | 13,567 |
| |
Less amount representing interest |
| 97 |
|
|
| ||||||||||||||||
Present value of future minimum lease payments |
| $ | 521 |
|
|
|
While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.
FedEx Express makes payments under certain leveraged operating leases that are sufficient to pay principal and interest on certain pass-through certificates. The pass-through certificates are not direct obligations of, or guaranteed by, FedEx or FedEx Express.
14
(9)FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(8) Contingencies
During 2002 we recognized $119 million of compensation under the Air Transportation Safety and System Stabilization Act (the “Act”), of which $101 million was received. In the fourth quarter of 2003, the Department of Transportation (“DOT”) asserted that we were overpaid by $31.6 million and has demanded repayment. We have filed requests for administrative and judicial review. We received an opinion from the District of Columbia U.S. Court of Appeals stating that most of the determinations that we requested were not yet ripe for decision and the Court will not rule prior to final determination by the DOT and exhaustion of administrative remedies.
We believe that we have complied with all aspects of the Act, that it is probable we will ultimately collect the remaining $18 million receivable and that we will not be required to pay any portion of the DOT’s $31.6 million demand. We cannot be assured of the ultimate outcome; however, it is reasonably possible that a material reduction to the $119 million of compensation we have previously recognized under the Act could occur. Based on the DOT’s assertion, the range for potential loss on this matter is zero to $49.6 million.
In light of our ongoing dispute with the DOT, we undertook a further review of our claim and amended our application in August 2004 to reclassify several items in our claim. This amendment did not have a material effect on the total compensation we claimed under the Act.
Wage-and-Hour. We are a defendant in a number of lawsuits filed in federal or California state courts containing various class-action allegations under California’s wage and hourfederal or California wage-and-hour laws. The plaintiffs in these lawsuits generally are hourly employees or contractors of FedEx operating companies who allege, among other things, that they were forced to work “off the clock” and were not provided work breaks or other benefits. The plaintiffs generally seek unspecified monetary damages, injunctive relief, or both.
To date, only one of these wage-and-hour cases, Foster v. FedEx Express, has been certified as a class action. We believeThe plaintiffs represent a class of hourly FedEx Express employees in California from October 14, 1998 to present. The plaintiffs allege that hourly employees are routinely required to work “off the claims in these casesclock” and are without merit. not paid for this additional work. The court issued a ruling on December 13, 2004 granting class certification on all issues. The ruling, however, does not address whether we will ultimately be held liable. Trial has been scheduled for April 2006.
We have denied any liability with respect to these claims and intend to vigorously defend ourselvesourself in these cases. InHowever, it is reasonably possible that material losses could be incurred on one or more of these matters as these cases develop.
Independent Contractor. FedEx Ground is involved in numerous purported class-action lawsuits and other proceedings in which the opinionthreshold issue is whether some or all of management,FedEx Ground’s owner-operators are in fact employees, rather than independent contractors. Adverse determinations in these matters could, among other things, entitle certain of our contractors to the aggregatereimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax liability if any, with respectfor FedEx Ground. On August 10, 2005, the Judicial Panel on Multi-District Litigation granted our motion to these claims will not materially adversely affect our financial position, resultstransfer and consolidate the majority of operations or cash flows.
During the first quarterclass-action lawsuits for administration of 2004, we receivedthe pre-trial proceedings by a favorable ruling fromsingle federal court – the U.S. District Court for the Northern District of Indiana.
We strongly believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that we will prevail in Memphis overthese proceedings. Given the tax treatmentnature and preliminary status of jet engine maintenance costs. The Court held thatthe claims, we cannot yet determine the amount or a reasonable range of potential loss in these costs were ordinary and necessary business expenses and properly deductible. As a result of this decision, we recognized a one-time benefit of $26 million, net of tax, in the first quarter of 2004, primarily related to the reduction of accruals related to this matter and the recognition of interest earned on amounts previously paid to the IRS. Thesematters, if any.
14
adjustmentsOther. affected both net interest expense ($30 million pre-tax) and income tax expense ($7 million). Future periods are not expected to be materially affected by the resolution of this matter. Although the IRS has appealed this ruling, we believe the District Court’s ruling will be upheld on appeal.
FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not materially adversely affect our financial position, results of operations or cash flows.
(10)(9) Supplemental Cash Flow Information
|
| Three Months Ended |
| ||||
|
| 2004 |
| 2003 |
| ||
|
| (In millions) |
| ||||
Cash payments for: |
|
|
|
|
| ||
Interest (net of capitalized interest) |
| $ | 55 |
| $ | 61 |
|
Income taxes |
| 138 |
| 75 |
| ||
FedEx Express amended two leases for MD11 aircraft during the first quarter of 2004, which required FedEx Express to record $110 million in both fixed assets and long-term liabilities.
(11) Subsequent Event
On September 12, 2004, we acquired Parcel Direct, a division of a privately held company, for approximately $120 million in cash. Parcel Direct is a leading parcel consolidator and will broaden our portfolio of services by allowing us to offer a cost effective option for delivering low-weight, less time-sensitive packages to U.S. residences through the U.S. Postal Service. The financial results of Parcel Direct will be included in the FedEx Ground segment from the date of acquisition. The transaction is not expected to materially affect our results of operations, financial position or cash flows.
|
| Three Months Ended |
| ||||||
|
| August 31, |
| ||||||
|
| 2005 |
| 2004 |
| ||||
|
| (In millions) |
| ||||||
Cash payments for: |
|
|
|
|
|
|
| ||
Interest (net of capitalized interest) |
|
| $ | 44 |
|
| $ | 55 |
|
Income taxes |
|
| 27 |
|
| 138 |
| ||
15
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of August 31, 2004,2005, and the related condensed consolidated statements of income and cash flows for the three-month periods ended August 31, 20042005 and 2003.2004. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2004,2005, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for the year then ended not presented herein, and in our report dated June 22, 2004,July 12, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2004,2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP | |||||||||||
Memphis, Tennesse |
| ||||||||||
September 20, 2005 |
| ||||||||||
| |||||||||||
| |||||||||||
16
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following Management’s Discussion and Analysis of Results of Operations and Financial Condition describes the principal factors affecting the results of operations, liquidity, capital resources and contractual cash obligations, as well as the critical accounting policies and estimates, of FedEx. This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and our Annual Report on Form 10-K as amended, for the year ended May 31, 20042005 (“Annual Report”), which include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.
FedEx provides a broad portfolio of transportation, e-commerce and business services withthrough operating companies that operate independentlycompete collectively and compete collectivelyare managed collaboratively under the respected FedEx brand.brands. These operating companies are primarily represented by FedEx Express, the world’s largest express transportation company; FedEx Ground, a leading provider of small-package ground delivery service;services; FedEx Freight, the largesta leading U.S. provider of regional LTL freight services; and FedEx Kinko’s, a leading provider of document solutions and business services, which was formed following the acquisition of Kinko’s, Inc. on February 12, 2004.services. These companies form the core of our reportable segments. See “Reportable Segments” for further discussion.
The key factors that affectindicators necessary to understand our operating results are as follows:include:
•· the overall customer demand for our various services;
•· the volumes of transportation and business services provided through our networks, primarily measured by our average daily volume and shipment weight;
•· the mix of services purchased by our customers;
•· the prices we obtain for our services, primarily measured by average price per shipment (yield);
•· our ability to manage our cost structure for capital expenditures and operating expenses such as salaries and employee benefits fuel and maintenance;maintenance and
• our ability repairs and to match operating costssuch expenses to shifting volume levels.levels; and
· the timing and amount of fluctuations in fuel prices and the availability of adequate fuel supplies.
Except as otherwise specified, references to years indicate our fiscal year endingended May 31, 20052006 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.
17
CONSOLIDATED RESULTS
DollarsThe following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in millions, except per share amounts
Three-month periodsamounts) for the three months ended August 31:
|
|
|
|
|
| Dollar |
| Percent |
| |||||||||||||||
|
| 2004 |
| 2003 |
| $ Change |
| Percent |
|
| 2005(1) |
| 2004 |
| Change |
| Change |
| ||||||
Revenues |
| $ | 6,975 |
| $ | 5,687 |
| 1,288 |
| 23 |
|
| $ | 7,707 |
| $ | 6,975 |
|
| 732 |
|
| 10 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating income |
| 579 |
| 200 | (1) | 379 |
| 190 |
|
| 584 |
| 579 |
|
| 5 |
|
| 1 |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating margin |
| 8.3 | % | 3.5 | % | NM |
| 480 | bp |
| 7.6 | % | 8.3 | % |
| NM |
|
| (72 bp | ) | ||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net income |
| $ | 330 |
| $ | 128 | (1)(2) | 202 |
| 158 |
|
| $ | 339 |
| $ | 330 |
|
| 9 |
|
| 3 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Diluted earnings per share |
| $ | 1.08 |
| $ | 0.42 | (1)(2) | 0.66 |
| 157 |
|
| $ | 1.10 |
| $ | 1.08 |
|
| 0.02 |
|
| 2 |
|
(1) Includes $132First quarter 2006 operating expenses include a $79 million ($8249 million net ofafter tax or $0.27$0.16 per diluted share) of business realignment costsshare before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases, predominately at FedEx Express, as described below.
(2) Includes a $26 million, net of tax, or $0.08 per diluted share benefit related to a favorable ruling on a tax case described below.17
The following table shows changes in revenues and operating income by reportable segment for the three-month periodsperiod ended August 31, 2005 compared to 2004 and 2003 (in millions):
|
| $ Change |
| Percent Change |
| $ Change |
| Percent Change |
|
| Revenues |
| Operating Income |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
| Dollar |
| Percent |
| Dollar |
| Percent |
| ||||||||
FedEx Express segment |
| 479 |
| 12 |
| 287 | (1) | NM |
| |||||||||||||||||
|
| Change |
| Change |
| Change |
| Change |
| |||||||||||||||||
FedEx Express segment(1) |
|
| 506 |
|
|
| 11 |
|
|
| (25 | ) |
|
| (8 | ) |
| |||||||||
FedEx Ground segment |
| 159 |
| 17 |
| 31 |
| 27 |
|
|
| 146 |
|
|
| 14 |
|
|
| 1 |
|
|
| 1 |
|
|
FedEx Freight segment |
| 170 |
| 27 |
| 42 |
| 69 |
|
|
| 85 |
|
|
| 11 |
|
|
| 32 |
|
|
| 31 |
|
|
FedEx Kinko’s segment (2) |
| 490 |
| NM |
| 19 |
| NM |
| |||||||||||||||||
FedEx Kinko’s segment |
|
| 27 |
|
|
| 6 |
|
|
| (3 | ) |
|
| (16 | ) |
| |||||||||
Other and Eliminations |
| (10 | ) | NM |
| — |
| NM |
|
|
| (32 | ) |
|
| NM |
|
|
| — |
|
|
| NM |
|
|
|
| 1,288 |
| 23 |
| 379 |
| 190 |
|
|
| 732 |
|
|
| 10 |
|
|
| 5 |
|
|
| 1 |
|
|
(1) Business realignment costsFirst quarter 2006 operating expenses for FedEx Express include a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases, as described below.
The following table shows selected operating statistics (in thousands, except yield amounts) for the three-month periods ended August 31, 2005 and 2004:
|
|
|
|
|
| Percent |
| ||||
|
| 2005 |
| 2004 |
| Change |
| ||||
Average daily package volume (ADV): |
|
|
|
|
|
|
|
|
| ||
FedEx Express |
| 3,233 |
| 3,093 |
|
| 5 |
|
| ||
FedEx Ground |
| 2,586 |
| 2,447 |
|
| 6 |
|
| ||
Total ADV |
| 5,819 |
| 5,540 |
|
| 5 |
|
| ||
Average daily LTL shipments: |
|
|
|
|
|
|
|
|
| ||
FedEx Freight |
| 65 |
| 64 |
|
| 2 |
|
| ||
Revenue per package (yield): |
|
|
|
|
|
|
|
|
| ||
FedEx Express |
| $ | 20.80 |
| $ | 19.78 |
|
| 5 |
|
|
FedEx Ground |
| 6.92 |
| 6.54 |
|
| 6 |
|
| ||
LTL yield (revenue per hundredweight): |
|
|
|
|
|
|
|
|
| ||
FedEx Freight |
| $ | 16.55 |
| $ | 14.98 |
|
| 10 |
|
|
Revenue growth for the first quarter of $132 million2006 was attributable to volume and yield improvements across all transportation segments and increased revenue at FedEx Kinko’s. Yield improvements in our transportation businesses were incurredprimarily due to significantly higher fuel surcharges during the quarter.
Operating income increased during the first quarter of 2004 as described below.
(2) The FedEx Kinko’s segment was formed following the acquisition of Kinko’s, Inc. on February 12, 2004.
Revenue growth of 23% during the first quarter of 2005 reflects improvements across all operating segments and the inclusion of FedEx Kinko’s. Transportation business revenue growth resulted from increased volumes of FedEx Express International Priority (IP), FedEx Ground and FedEx Freight shipments, as well as strong growth in yields at FedEx Express (both U.S. domestic and IP) and FedEx Freight. One additional operating day at each of our transportation companies also contributed to revenue growth.
Operating income increased substantially during the first quarter of 20052006 primarily due to the realization of savings from our 2004 business realignment programsrevenue growth in all transportation segments and improved margins at all our transportation companies. Also, the first quarter of 2004 included $132 million of business realignment costs.FedEx Freight. Although our fuel costs increased significantly during the first quarter of 2005,2006, higher revenues from our jet and diesel fuel surcharges at FedEx Express and FedEx Freightmore than offset these higher fuel costs.
18
Increased purchased transportation costs in the first quarter of 2006 were primarily driven by higher costs at FedEx Express to support IP volume growth requirements and proportionately higher costs at FedEx Ground due to the impact of rising fuel costs on contractor settlements, as well as the inclusion of the results of FedEx SmartPost, which was acquired in September 2004.
During the first quarter of 2004, we received2006, a favorable ruling fromone time, non-cash charge of $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects) was recorded, which represented the U.S. District Courtimpact on prior years, to adjust the accounting for certain facility leases, predominately at FedEx Express. The charge related primarily to rent escalations in Memphison-airport facility leases. The applicable accounting literature provides that rent expense under operating leases with rent escalation clauses should be
18
recognized evenly, on a straight-line basis over the tax treatmentlease term. Based on a more extensive review of jet engine maintenance costs. The Court heldour leases during the first quarter, we determined that these costsa portion of our facility leases had rent escalation clauses that were ordinarynot being recognized appropriately. Because the amounts involved were not material to our financial statements in any individual prior period and necessary business expenses and properly deductible. As a result of this decision,the cumulative amount is not expected to be material to 2006 results, we recognized a one-time benefit of $26 million, net of tax, or $0.08 per diluted share,have recorded the cumulative adjustment in the first quarter, which increased operating expenses by $79 million.
In August 2005, Hurricane Katrina devastated certain portions of 2004, primarily relatedthe Gulf Coast region where each of our business segments has operations. While we took precautions by relocating aircraft and equipment, we suffered damage to a limited number of facilities and some of our equipment. Because only three business days in the reduction of accruals related to this matter and the recognition of interest earned on amounts previously paid to the IRS. These adjustments affected both net interest expense ($30 million pre-tax) and income tax expense ($7 million). Future periods are not expected to be materiallyquarter were affected by the resolutionstorm, our results of this matter. Althoughoperations for the IRS has appealed this ruling, we believe the District Court’s ruling will be upheld on appeal.
first quarter were not significantly impacted.
Net interest expense increased $34decreased $15 million during the first quarter of 2005, as the favorable resolution of the tax case described above lowered2006. The decrease in net interest expense was primarily due to a reduction in 2004. Additional borrowings related to the FedEx Kinko’s acquisition contributed nominally to the increase.
level of outstanding debt and capital leases as a result of scheduled payments, additional capitalized interest and increased interest income.
Our effective tax ratesrate was 38.25% for the first quarter of 2005both 2006 and 2004 were 38.25% and 34.5%, respectively. The lower effective tax rate for the first quarter of 2004 was primarily related to the tax ruling described above.2005. We expect the effective tax rate to approximate 38.25%38% for the remainder of the fiscal year; however, the actual rate will depend on a number of factors, including the amount and source of operating income.
Outlook
Both net income and diluted earnings per share increased substantially during the first quarter of 2005. First quarter 2004 results included business realignment costs of $132 million ($82 million, net of tax, or $0.27 per diluted share), which were partially offset by the $26 million, net of tax, or $0.08 per diluted share benefit recognized due to the favorable ruling on the IRS tax case discussed above.
Business Realignment Costs
During 2004, voluntary early retirement incentives with enhanced pension and postretirement healthcare benefits were offered to certain groups of employees at FedEx Express who were age 50 or older. Voluntary cash severance incentives were also offered to eligible employees at FedEx Express. These programs, which commenced August 1, 2003 and expired during the second quarter of 2004, were limited to eligible U.S. salaried staff employees and managers and approximately 3,600 employees accepted offers under these programs. Costs were also incurred during the first quarter of 2004 for the elimination of certain management positions based on the staff reductions from the voluntary programs and other cost reduction initiatives. Costs for the benefits provided under the voluntary programs were recognized in the period that eligible employees accepted the offer. Other costs associated with business realignment activities were recognized in the period incurred.
During 2004, we incurred $435 million of business realignment costs related to these programs ($132 million in the first quarter). At May 31, 2004, we had remaining business realignment related accruals of $28 million. At August 31, 2004, these accruals totaled $16 million due to cash payments made in the first quarter of 2005. The remaining accruals relate to management severance agreements, which are payable over future periods.
Over the past few years, we have taken many steps to bring our expense growth in line with revenue growth, particularly at FedEx Express, while maintaining our industry-leading service levels. The business realignment programs were another step in this ongoing process of reducing our cost structure to increase our competitiveness, meet the future needs of our employees and provide the expected financial returns for our shareholders. WeWhile comparisons will continue to examine cost reduction opportunities and may identify additional actions that result in the recognition of charges inbe difficult against a very strong 2005, and beyond.
19
Airline Stabilization Compensation
During 2002 we recognized $119 million of compensation under the Air Transportation Safety and System Stabilization Act (the “Act”), of which $101 million was received. In the fourth quarter of 2003, the Department of Transportation (“DOT”) asserted that we were overpaid by $31.6 million and has demanded repayment. We have filed requests for administrative and judicial review. We received an opinion from the District of Columbia U.S. Court of Appeals stating that most of the determinations that we requested were not yet ripe for decision and the Court will not rule prior to final determination by the DOT and exhaustion of administrative remedies.
We believe that we have complied with all aspects of the Act, that it is probable we will ultimately collect the remaining $18 million receivable and that we will not be required to pay any portion of the DOT’s $31.6 million demand. We cannot be assured of the ultimate outcome; however, it is reasonably possible that a material reduction to the $119 million of compensation we have previously recognized under the Act could occur. Based on the DOT’s assertion, the range for potential loss on this matter is zero to $49.6 million.
In light of ourexpect ongoing dispute with the DOT, we undertook a further review of our claim and amended our application in August 2004 to reclassify several items in our claim. This amendment did not have a material effect on the total compensation we claimed under the Act.
Outlook
Our outlook anticipates continued revenue and earnings growth in all segments for the remainder of 2005 (particularly through the first half of the fiscal year), led by volume growth across all our transportationFedEx operating companies and continued yield improvements at FedEx Express and FedEx Freight.in 2006. Our view stems from expectations of strong customer demand for services across our operating companies a lower cost structure at FedEx Express and continued, albeit slower, growth in the worldwide economy. In addition,While our fuel surcharges have been sufficient to offset increased fuel prices, we cannot predict the impact on the overall economy (if any) if fuel costs remain at current levels or continue to increase.
We expect near term effects from Hurricane Katrina may impact second quarter earnings. For example, shipping services to and from the region (outside of relief efforts) and business services within the region will be impacted for at least the near term. We also provided cash contributions and shipping services to the American Red Cross and other agencies to aid in the relief effort, and we expect to make further contributions. While we maintain business interruption and other insurance, we cannot currently assess the amounts or timing of any recoverable losses associated with Hurricane Katrina.
We expect continued strong growth of international volumes and yields and modest growth in U.S. domestic revenue at FedEx Express. We anticipate improved volumes and yields at FedEx Ground and FedEx Freight, as FedEx Ground continues its multi-year capacity expansion plan and FedEx Freight continues to grow its regional and interregional business and enhance its portfolio of services. FedEx Kinko’s revenue during 2005 is projectedexpected to be approximately $2.1 billion, which is significantly higher than the partial year revenue of $621 million included in our 2004 results.
We also anticipate significant growth in both operating income and margins in 2005. These measures will be positively impacted by expectedgenerate revenue growth from the transition of FedEx World Service Centers to FedEx Kinko’s Ship Centers and expansion of its retail network.
Volatility in fuel costs may pressure quarterly earnings growth as the full-year savings from our business realignment initiatives discussed above. Our management teams continuetrailing impact of adjustments to examine additional cost reduction and operational productivity opportunities as we focus on optimizing our networks, improving our service offerings and enhancing the customer experience. This will position FedEx to increase cash flows and financial returns through improved operating margin.
While our jet and dieselExpress fuel surcharge revenuescan significantly affect earnings in the short term. Incremental costs associated with the new westbound and eastbound around-the-world flights at FedEx Express will be significant in 2006, and FedEx Freight offset significantly higher fuel costs during the first quarter of 2005, our future results could be negatively affecteda competitive pricing environment, heightened by prolongedcontinuing high fuel costs to the extent these costs negatively impact the worldwide economy. In addition, competitive pressuresprices, may limit base U.S. domestic yield growth, particularly in our ability to continue to maintain or increase our fuel surcharges in response to rising fuel prices.
On September 12, 2004 we acquired Parcel Direct, a division of a privately held company, for approximately $120 million in cash. Parcel Direct is a leading parcel consolidator and will broaden our portfolio of services by allowing us to offer a cost effective option for delivering low-weight, less time-sensitive packages to U.S. residences through the U.S. Postal Service. The financial results of Parcel Direct will be included in the FedEx Ground segment from the date of acquisition. The transaction is not expected to materially affect our results of operations, financial position or cash flows.
20
package businesses.
The pilots of FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on May 31, 2004. Negotiations with the pilots’ union began in March 2004. In accordance with applicable labor law, we will continue to operate under our current agreement while we negotiate with our pilots. Contract negotiations with the pilots’ union began in March 2004. These
19
negotiations are ongoing and have recently included private facilitation sessions in an effort to make progress. We cannot estimate the financial impact, if any, the results of these negotiations may have on our future results of operations.
Increased security requirements for air cargo carriers have been put in place and have not had a material impact on our operating results for the periods presented. TheIn November 2004, the Transportation Security Administration (“TSA”) proposed new rules enhancing many of the security requirements for air cargo on both passenger and all-cargo aircraft. Because the TSA’s proposed rules are subject to comment, any final rules may differ significantly from the proposed rules. Accordingly, it is not yet possible to estimate the impact, if any, that the adoption of new rules by the TSA or any other additional security requirements may have on our results of operations of any additionaloperations. However, it is possible that increased security requirements is unknown.
could impose substantial incremental costs on us and our competitors.
Future results will depend upon a number of factors, including U.S. and international economic conditions, the effect of Hurricane Katrina or other severe weather events on our operations and the economy, including the impact on fuel costs and availability, the impact from any terrorist activities or international conflicts, our ability to match our cost structure and capacity with shifting volume levels, our ability to effectively leverage our new service and growth initiatives and our ability to effectively operate, integratesuccessfully conclude contract negotiations with our pilots and leveragedefend against challenges to our independent contractor model described in Note 8 to the FedEx Kinko’s business.accompanying unaudited condensed consolidated financial statements. In addition, adjustments to our fuel surcharges at FedEx Express lag changes in actual jet fuel prices paid. Therefore, our operating income could be materially affected should the spot price of jet fuel suddenly changecontinue to fluctuate by a significant amount or should we be unable to further increase our fuel surcharges in response to rising fuel prices due to competitive pressures.amounts. See “Forward-Looking Statements” for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, “Share-Based Payment.” SFAS 123R is a revision of SFAS 123 and supersedes APB 25. The new standard requires companies to record compensation expense for stock-based awards using a fair value method and is effective for annual periods beginning after June 15, 2005 (effective in the first quarter of 2007 for FedEx). Compensation expense will be recorded over the requisite service period, which is typically the vesting period of the award. We plan to adopt this standard using the modified prospective method.
The impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, as well as the assumptions and the fair value model used to value them, and the market value of our common stock. We anticipate that the impact of SFAS 123R will approximate the pro forma results under SFAS 123 presented in Note 1 to the accompanying unaudited condensed consolidated financial statements. The effect of recording compensation expense under SFAS 123 for the periods ended August 31, 2005 and 2004 would have resulted in a reduction to earnings per diluted share of $0.04 and $0.03, respectively. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. Based on historical experience, we do not expect the impact of adopting SFAS 123R to be material to our reported consolidated cash flows.
In March 2005, the FASB issued Financial Accounting Standards Board Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143”. FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional upon future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to
20
reasonably estimate the fair value of the liability. FIN 47 will be effective for FedEx no later than May 31, 2006. Management is in the process of evaluating the impact, if any, FIN 47 will have on FedEx.
REPORTABLE SEGMENTS
FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s form the core of our reportable segments. Our reportable segments include the following businesses:
FedEx Express Segment | FedEx Express (express transportation) | |
FedEx Trade Networks (global trade services) | ||
FedEx Ground Segment | FedEx Ground (small-package ground delivery) | |
FedEx SmartPost (small-parcel consolidator) | ||
FedEx Supply Chain Services (contract logistics) | ||
FedEx Freight Segment | FedEx Freight (LTL freight transportation) | |
FedEx Custom Critical (time-critical transportation) | ||
| Caribbean Transportation Services (airfreight forwarding) | |
FedEx Kinko’s Segment | FedEx Kinko’s (document solutions and business services) |
FedEx Services provides customer-facing sales, marketing and information technology support, primarily for FedEx Express and FedEx Ground. The costs for these activities are allocated based on metrics such as relative revenues andor estimated services provided. TheseWe believe these allocations materially approximate the cost of providing these functions. The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our reportable segments includes the allocations from FedEx Services to FedEx Express, FedEx Ground, FedEx Freight and FedEx Freight,Kinko’s. The “Intercompany charges” caption also includes allocations for services provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain administrativelegal and finance functions. Management evaluates segment financial performance based on operating income.
In addition, certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. The FedEx Kinko’s segment revenues include package acceptance revenue, which represents the fee received by FedEx Kinko’s from FedEx Express and FedEx Ground for accepting and handling packages at FedEx Kinko’s locations on behalf of these operating companies. Package acceptance revenue does not include the external revenue associated with the actual shipments. Shipment revenues are reflected in the segment performing the transportation services. Such intersegment revenues and expenses are not separately identified in the following segment information as the amounts are not material and are eliminated in the consolidated results.
21
FEDEX EXPRESS SEGMENT
The following table compares revenues, operating expenses, and operating income and margin (dollars in millions) andfor the three-month periods ended August 31:
|
|
|
|
|
| Percent |
| ||||
|
| 2005 |
| 2004 |
| Change |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||
Package: |
|
|
|
|
|
|
|
|
| ||
U.S. overnight box |
| $ | 1,560 |
| $ | 1,449 |
|
| 8 |
|
|
U.S. overnight envelope |
| 489 |
| 439 |
|
| 11 |
|
| ||
U.S. deferred |
| 687 |
| 648 |
|
| 6 |
|
| ||
Total U.S. domestic package revenue |
| 2,736 |
| 2,536 |
|
| 8 |
|
| ||
International Priority (IP) |
| 1,634 |
| 1,440 |
|
| 13 |
|
| ||
Total package revenue |
| 4,370 |
| 3,976 |
|
| 10 |
|
| ||
Freight: |
|
|
|
|
|
|
|
|
| ||
U.S. |
| 505 |
| 421 |
|
| 20 |
|
| ||
International |
| 105 |
| 90 |
|
| 17 |
|
| ||
Total freight revenue |
| 610 |
| 511 |
|
| 19 |
|
| ||
Other(1) |
| 142 |
| 129 |
|
| 10 |
|
| ||
Total revenues |
| 5,122 |
| 4,616 |
|
| 11 |
|
| ||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||
Salaries and employee benefits |
| 1,971 |
| 1,889 |
|
| 4 |
|
| ||
Purchased transportation |
| 241 |
| 191 |
|
| 26 |
|
| ||
Rentals and landing fees |
| 483 |
| 383 |
|
| 26 |
|
| ||
Depreciation and amortization |
| 193 |
| 200 |
|
| (4 | ) |
| ||
Fuel |
| 628 |
| 422 |
|
| 49 |
|
| ||
Maintenance and repairs |
| 361 |
| 325 |
|
| 11 |
|
| ||
Intercompany charges |
| 358 |
| 362 |
|
| (1 | ) |
| ||
Other |
| 602 |
| 534 |
|
| 13 |
|
| ||
Total operating expenses(2) |
| 4,837 |
| 4,306 |
|
| 12 |
|
| ||
Operating income |
| $ | 285 |
| $ | 310 |
|
| (8 | ) |
|
Operating margin |
| 5.6 | % | 6.7 | % |
|
|
|
|
(1)Other revenues includes FedEx Trade Networks.
(2)First quarter 2006 operating expenses include a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases.
22
The following table compares selected statistics (in thousands, except yield amounts) for the three-month periods ended August 31:
|
|
|
|
|
| Percent |
| ||
|
| 2005 |
| 2004 |
| Change |
| ||
Package Statistics(1) |
|
|
|
|
|
|
|
|
|
Average daily package volume (ADV): |
|
|
|
|
|
|
|
|
|
U.S. overnight box |
| 1,180 |
| 1,150 |
|
| 3 |
|
|
U.S. overnight envelope |
| 711 |
| 662 |
|
| 7 |
|
|
U.S. deferred |
| 897 |
| 862 |
|
| 4 |
|
|
Total U.S. domestic ADV |
| 2,788 |
| 2,674 |
|
| 4 |
|
|
IP |
| 445 |
| 419 |
|
| 6 |
|
|
Total ADV |
| 3,233 |
| 3,093 |
|
| 5 |
|
|
Revenue per package (yield): |
|
|
|
|
|
|
|
|
|
U.S. overnight box |
| $ 20.34 |
| $ 19.37 |
|
| 5 |
|
|
U.S. overnight envelope |
| 10.57 |
| 10.21 |
|
| 4 |
|
|
U.S. deferred |
| 11.78 |
| 11.57 |
|
| 2 |
|
|
U.S. domestic composite |
| 15.10 |
| 14.59 |
|
| 3 |
|
|
IP |
| 56.54 |
| 52.93 |
|
| 7 |
|
|
Composite package yield |
| 20.80 |
| 19.78 |
|
| 5 |
|
|
Freight Statistics(1) |
|
|
|
|
|
|
|
|
|
Average daily freight pounds: |
|
|
|
|
|
|
|
|
|
U.S. |
| 8,885 |
| 8,213 |
|
| 8 |
|
|
International |
| 2,039 |
| 1,861 |
|
| 10 |
|
|
Total average daily freight pounds |
| 10,924 |
| 10,074 |
|
| 8 |
|
|
Revenue per pound (yield): |
|
|
|
|
|
|
|
|
|
U.S. |
| $ 0.88 |
| $ 0.79 |
|
| 11 |
|
|
International |
| 0.79 |
| 0.74 |
|
| 7 |
|
|
Composite freight yield |
| 0.86 |
| 0.78 |
|
| 10 |
|
|
|
| 2004 |
| 2003 |
| Percent |
| ||
Revenues: |
|
|
|
|
|
|
| ||
Package: |
|
|
|
|
|
|
| ||
U.S. overnight box |
| $ | 1,449 |
| $ | 1,348 |
| 7 |
|
U.S. overnight envelope |
| 439 |
| 432 |
| 2 |
| ||
U.S. deferred |
| 648 |
| 606 |
| 7 |
| ||
Total U.S. domestic package revenue |
| 2,536 |
| 2,386 |
| 6 |
| ||
International Priority (IP) |
| 1,440 |
| 1,155 |
| 25 |
| ||
Total package revenue |
| 3,976 |
| 3,541 |
| 12 |
| ||
Freight: |
|
|
|
|
|
|
| ||
U.S. |
| 421 |
| 365 |
| 15 |
| ||
International |
| 90 |
| 105 |
| (14 | ) | ||
Total freight revenue |
| 511 |
| 470 |
| 9 |
| ||
Other (1) |
| 129 |
| 126 |
| 2 |
| ||
Total revenues |
| 4,616 |
| 4,137 |
| 12 |
| ||
Operating expenses: |
|
|
|
|
|
|
| ||
Salaries and employee benefits |
| 1,889 |
| 1,834 |
| 3 |
| ||
Purchased transportation |
| 191 |
| 158 |
| 21 |
| ||
Rentals and landing fees |
| 383 |
| 370 |
| 4 |
| ||
Depreciation and amortization |
| 200 |
| 204 |
| (2 | ) | ||
Fuel |
| 422 |
| 293 |
| 44 |
| ||
Maintenance and repairs |
| 325 |
| 285 |
| 14 |
| ||
Business realignment costs |
| — |
| 132 |
| NM |
| ||
Intercompany charges |
| 362 |
| 342 |
| 6 |
| ||
Other |
| 534 |
| 496 |
| 8 |
| ||
Total operating expenses |
| 4,306 |
| 4,114 |
| 5 |
| ||
Operating income |
| $ | 310 |
| $ | 23 | (2) | NM |
|
|
|
|
|
|
|
|
| ||
Operating margin |
| 6.7 | % | 0.6 | %(2) |
|
| ||
|
|
|
|
|
|
|
| ||
Package Statistics (3) |
|
|
|
|
|
|
| ||
Average daily package volume (ADV): |
|
|
|
|
|
|
| ||
U.S. overnight box |
| 1,150 |
| 1,169 |
| (2 | ) | ||
U.S. overnight envelope |
| 662 |
| 682 |
| (3 | ) | ||
U.S. deferred |
| 862 |
| 871 |
| (1 | ) | ||
Total U.S. domestic ADV |
| 2,674 |
| 2,722 |
| (2 | ) | ||
IP |
| 419 |
| 370 |
| 13 |
| ||
Total ADV |
| 3,093 |
| 3,092 |
| — |
| ||
|
|
|
|
|
|
|
| ||
Revenue per package (yield): |
|
|
|
|
|
|
| ||
U.S. overnight box |
| $ | 19.37 |
| $ | 18.02 |
| 7 |
|
U.S. overnight envelope |
| 10.21 |
| 9.90 |
| 3 |
| ||
U.S. deferred |
| 11.57 |
| 10.87 |
| 6 |
| ||
U.S. domestic composite |
| 14.59 |
| 13.70 |
| 6 |
| ||
IP |
| 52.93 |
| 48.80 |
| 8 |
| ||
Composite package yield |
| 19.78 |
| 17.90 |
| 11 |
| ||
|
|
|
|
|
|
|
| ||
Freight Statistics (3) |
|
|
|
|
|
|
| ||
Average daily freight pounds: |
|
|
|
|
|
|
| ||
U.S. |
| 8,213 |
| 7,898 |
| 4 |
| ||
International |
| 1,861 |
| 2,276 |
| (18 | ) | ||
Total average daily freight pounds |
| 10,074 |
| 10,174 |
| (1 | ) | ||
|
|
|
|
|
|
|
| ||
Revenue per pound (yield): |
|
|
|
|
|
|
| ||
U.S. |
| $ | 0.79 |
| $ | 0.72 |
| 10 |
|
International |
| 0.74 |
| 0.72 |
| 3 |
| ||
Composite freight yield |
| 0.78 |
| 0.72 |
| 8 |
|
(1) Other includes FedEx Trade Networks.
(2) Includes $132 million of business realignment costs described herein, which reduced operating margin by 319 basis points.
(3) Package and freight statistics include only the operations of FedEx Express.
22
FedEx Express Segment Revenues
FedEx Express segment total revenues increased 12%11% in the first quarter of 2005,2006, principally due to higher IP revenues (particularly in Asia and U.S. outbound and Europe)outbound) and higher U.S. domestic yields.package revenues. During the first quarter, IP revenues grew 25% due to 13% volumeon yield growth of 7% and an 8% improvementa 6% increase in yield. Asiavolume. Outbound shipments from the United States experienced 21%solid average daily volume growth during the first quarter (led by China with 52% growth),of 2006, while outbound shipments from the United States,Asia and Europe and Latin America continued to improve. IP yield increased across all regionsduring the first quarter of 2006 due primarily to increaseshigher fuel surcharge revenue, an increase in international average weight per package higher fuel surcharge revenue and favorable exchange rate differences, partially offset by a decline in international average rate per pound.
differences.
U.S. domestic composite yield increased 6%3% during the first quarter of 20052006 due to higher fuel surcharge revenue and increasesan increase in average rate per pound, partially offset by a decrease in average weight per packagepackage. U.S. domestic volumes at FedEx Express increased 4% in the first quarter of 2006, continuing the momentum of improved quarterly growth from the second half of 2005. Freight revenue increased during 2006 due to higher yields and average rate per pound. Angrowth in freight volumes. As capacity is added to our international network, we may continue to realize higher international freight volume until higher yielding IP shipment traffic grows into the added capacity. In January 2005, we implemented an average list price
23
increase of 2.5%, along with certain surcharge increases, became effective in January 2004 for4.6% on FedEx Express U.S. domestic shipments and U.S. outbound international shipments. U.S. domestic volumes at FedEx Express decreased slightly during the first quarter. Freight revenue increased during the first quarter due to higher yields and domestic volumes, which more than offset the effect of lower international volumes. We expect continuing decreases in international freight volumes asshipments, while we prioritize sales efforts to fill space on international flights with higher yielding IP shipments.
lowered our fuel surcharge index by 200 basis points.
Fuel surcharge revenue was higher in the first quarter of 20052006 due to higher jet fuel prices. Our fuel surcharge is indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge ranged between 6.0% and 7.5% during the first quarter of 2005 and between 3.0% and 5.0% during the prior year period. Internationalinternational fuel surcharges ranged between 3.0% and 7.5% duringas follows for the first quarter of 2005 and between 2.0% and 4.0% during the prior year period.three-month periods ended August 31:
|
| 2005 |
| 2004 |
|
U.S. Domestic and Outbound Fuel Surcharge: |
|
|
|
|
|
Low |
| 10.50 | % | 6.00 | % |
High |
| 12.50 |
| 7.50 |
|
Average |
| 11.50 |
| 6.83 |
|
International Fuel Surcharges: |
|
|
|
|
|
Low |
| 10.00 |
| 5.00 |
|
High |
| 12.50 |
| 7.50 |
|
Average |
| 11.13 |
| 6.37 |
|
FedEx Express Segment Operating Income
Operating income at the FedEx Express segment increaseddecreased by $287$25 million during the first quarter of 2005.2006. The first quarter of 20042006 included $132a one-time, non-cash charge to adjust the accounting for certain facility leases of $75 million of costs related to our business realignment programs. The savings from these programs were reflected(before variable compensation effects), as well as increases in lower growth of salaries and employee benefits costs in the first quarter of 2005. Increases in revenues, savings from our business realignment programs and ongoing cost control efforts offset salary increases, higher incentive compensation and higher maintenancepurchased transportation costs. In addition, FedEx Express benefited from one additional operating day in the first quarter of 2005.
During the first quarter of 2005,2006, fuel costs were higher due to a 43%42% increase in the average price per gallon of aircraftjet fuel, while gallons consumed increased slightly. However, fuel surcharge revenue substantially offset higher jet fuel prices. Purchased transportation costs increased in the first quarter of 2005 as2006, led by IP volume growth led to an increase inwhich required a higher utilization of contract pick-uppickup and delivery services. Depreciation and amortization expense decreased, reflecting lower capital spending over the past several years. Higher maintenance costs duringThe increase in the first quarter of 2005 were2006 in rentals and landing fees is primarily due to the timing of scheduled aircraft maintenance events driven by a higher utilization of aircraft related to U.S. Postal Service volumes and a higher average age of certain types of our aircraft.one-time adjustment for leases described above.
24
23
FEDEX GROUND SEGMENT
The following table compares revenues, operating expenses, and operating income and margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three-month periods ended August 31:
|
|
|
|
|
| Percent |
| ||||
|
| 2005 |
| 2004 |
| Change |
| ||||
Revenues |
| $ | 1,219 |
| $ | 1,073 |
|
| 14 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
| ||
Salaries and employee benefits |
| 221 |
| 197 |
|
| 12 |
|
| ||
Purchased transportation |
| 466 |
| 410 |
|
| 14 |
|
| ||
Rentals |
| 31 |
| 26 |
|
| 19 |
|
| ||
Depreciation and amortization |
| 50 |
| 40 |
|
| 25 |
|
| ||
Fuel |
| 18 |
| 7 |
|
| 157 |
|
| ||
Maintenance and repairs |
| 29 |
| 26 |
|
| 12 |
|
| ||
Intercompany charges |
| 120 |
| 115 |
|
| 4 |
|
| ||
Other |
| 136 |
| 105 |
|
| 30 |
|
| ||
Total operating expenses |
| 1,071 |
| 926 |
|
| 16 |
|
| ||
Operating income |
| $ | 148 |
| $ | 147 |
|
| 1 |
|
|
Operating margin |
| 12.1 | % | 13.7 | % |
|
|
|
| ||
Average daily package volume(1) |
| 2,586 |
| 2,447 |
|
| 6 |
|
| ||
Revenue per package (yield)(1) |
| $ | 6.92 |
| $ | 6.54 |
|
| 6 |
|
|
|
| 2004 |
| 2003 |
| Percent |
| ||
Revenues |
| $ | 1,073 |
| $ | 914 |
| 17 |
|
Operating expenses: |
|
|
|
|
|
|
| ||
Salaries and employee benefits |
| 197 |
| 177 |
| 11 |
| ||
Purchased transportation |
| 410 |
| 342 |
| 20 |
| ||
Rentals |
| 26 |
| 20 |
| 30 |
| ||
Depreciation and amortization |
| 40 |
| 37 |
| 8 |
| ||
Fuel |
| 7 |
| 2 |
| 250 |
| ||
Maintenance and repairs |
| 26 |
| 23 |
| 13 |
| ||
Intercompany charges |
| 115 |
| 102 |
| 13 |
| ||
Other |
| 105 |
| 95 |
| 11 |
| ||
Total operating expenses |
| 926 |
| 798 |
| 16 |
| ||
|
|
|
|
|
|
|
| ||
Operating income |
| $ | 147 |
| $ | 116 |
| 27 |
|
|
|
|
|
|
|
|
| ||
Operating margin |
| 13.7 | % | 12.7 | % |
|
| ||
|
|
|
|
|
|
|
| ||
Average daily package volume (1) |
| 2,447 |
| 2,116 |
| 16 |
| ||
Revenue per package (yield) (1) |
| $ | 6.54 |
| $ | 6.44 |
| 2 |
|
(1) Package statistics include only the operations of FedEx Ground.
FedEx Ground Segment Revenues
Revenues increased during the first quarter of 20052006 principally due to higher volumes. While averagesolid volume and yield growth and the inclusion of the operations for FedEx SmartPost, which was acquired on September 12, 2004. Average daily volume growth was led byvolumes increased across virtually all of our services and were primarily attributable to the continued growth of our home delivery service, average daily volumes increased across most of our service lines. The 16% increase in average daily volumes continues FedEx Ground’s strong quarterly growth trend, up from 1% year-over-year growth in the first quarter of 2004 and 12% in the fourth quarter of 2004. Slight yield improvement, as well as one additional operating day, also contributed to revenue growth in the first quarter.
service.
Yield at FedEx Ground increased slightly during the first quarter of 20052006 primarily due to ahigher extra service revenue, the fuel surcharge and the January 2005 general rate increase, and higher extra services revenue, partially offset by higher incentives,customer discounts and a lower average weight per package andpackage. Gains in extra service revenue are attributable to the eliminationreinstatement of the fuel surcharge and increases in residential and commercial delivery surcharges. In January 2004. An2005, we implemented an average list price increase of 1.9% on FedEx Ground services became effective January 5, 2004. On that date, the2.9% and reintroduced an indexed fuel surcharge for all FedEx Ground shipments, was discontinued. Before its elimination ineffective January 2004, FedEx Ground utilized a dynamic3, 2005. No fuel surcharge based onwas in effect during the spot price for on-highway diesel fuel. During the first quarter of 2004, thisprior year period.
Our fuel surcharge ranged between 1.25% and 1.50%.as follows for the three-month period ended August 31:
2005 | |||
Low | 2.50 | % | |
High | 2.75 | ||
Average | 2.67 |
24
FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 27%1% during the first quarter of 20052006 as yield and volume growth and productivity more than offset higher operating expenses. Salaries and employee benefits costsPurchased transportation increased in the first quarter of
25
2006 primarily due to the impact of higher fuel costs on contractor settlements and the inclusion of operating costs related to FedEx SmartPost. Salaries and employee benefits, as well as other operating costs, increased in 2006 principally due to increases in staffing and facilities to support volume growth. OperatingDespite improved field productivity and aggressive cost control, the segment operating margin improved despite higher facility expensesdeclined due to expansion, slower yieldFedEx SmartPost and higher year-over-year expenses related to investment in new technology, as well as the opening of three new hubs in line with our long-term growth and losses at FedEx Supply Chain Services.
strategy.
FEDEX FREIGHT SEGMENT
The following table shows revenues, operating expenses, and operating income and margin (dollars in millions) and selected statistics for the three-month periods ended August 31:
|
|
|
|
|
| Percent |
| |||||||||||||
|
| 2004 |
| 2003 |
| Percent |
|
| 2005 |
| 2004 |
| Change |
| ||||||
Revenues |
| $ | 807 |
| $ | 637 |
| 27 |
|
| $ | 892 |
| $ | 807 |
|
| 11 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
| 410 |
| 340 |
| 21 |
|
| 439 |
| 410 |
|
| 7 |
|
| ||||
Purchased transportation |
| 84 |
| 56 |
| 50 |
|
| 72 |
| 84 |
|
| (14 | ) |
| ||||
Rentals and landing fees |
| 25 |
| 24 |
| 4 |
|
| 24 |
| 25 |
|
| (4 | ) |
| ||||
Depreciation and amortization |
| 24 |
| 21 |
| 14 |
|
| 30 |
| 24 |
|
| 25 |
|
| ||||
Fuel |
| 40 |
| 27 |
| 48 |
|
| 82 |
| 54 |
|
| 52 |
|
| ||||
Maintenance and repairs |
| 31 |
| 27 |
| 15 |
|
| 28 |
| 31 |
|
| (10 | ) |
| ||||
Intercompany charges |
| 6 |
| 6 |
| — |
|
| 9 |
| 6 |
|
| 50 |
|
| ||||
Other |
| 84 |
| 75 |
| 12 |
|
| 73 |
| 70 |
|
| 4 |
|
| ||||
Total operating expenses |
| 704 |
| 576 |
| 22 |
|
| 757 |
| 704 |
|
| 8 |
|
| ||||
|
|
|
|
|
|
|
| |||||||||||||
Operating income |
| $ | 103 |
| $ | 61 |
| 69 |
|
| $ | 135 |
| $ | 103 |
|
| 31 |
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating margin |
| 12.8 | % | 9.6 | % |
|
|
| 15.1 | % | 12.8 | % |
|
|
|
| ||||
|
|
|
|
|
|
|
| |||||||||||||
Average daily LTL shipments (in thousands) |
| 64 |
| 56 |
| 14 |
|
| 65 |
| 64 |
|
| 2 |
|
| ||||
Weight per LTL shipment (lbs) |
| 1,128 |
| 1,118 |
| 1 |
|
| 1,132 |
| 1,128 |
|
| — |
|
| ||||
LTL yield (revenue per hundredweight) |
| $ | 14.98 |
| $ | 13.97 |
| 7 |
|
| $ | 16.55 |
| $ | 14.98 |
|
| 10 |
|
|
|
|
|
|
|
|
|
|
Certain prior period amounts have been reclassified to conform to the current period presentation.
26
FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 27%11% during the first quarter of 2005 primarily2006 due to year-over-year growth in average daily LTL shipmentsyield and LTL yield. A stronger economy, as well as market-share gains, contributed to the significant increase in average daily LTL shipments. LTL yield grew 7% during the first quarter of 2006, reflecting incremental fuel surcharges, due to higher fuel prices,rates and growth in our interregional freight service,service. The LTL fuel surcharge, which applies to the majority of our revenue, is based on the national U.S. on-highway average prices for a 5.9% general rate increase in June 2004 and favorable contract renewals. Also,gallon of diesel fuel, as published by the first quarterDepartment of 2005 had one additional operating day thanEnergy. Using this index, the prior year.approximate LTL fuel surcharge ranged as follows for the three-month periods ended August 31:
|
| 2005 |
| 2004 |
| ||
Low |
| 12.5 | % |
| 7.6 | % |
|
High |
| 16.8 |
|
| 9.6 |
|
|
Average |
| 14.6 |
|
| 8.4 |
|
|
25
FedEx Freight Segment Operating Income
FedEx Freight segment operating income increased 69%31% during the first quarter of 20052006 primarily due to LTL revenue growth as well as our ability to manageand controlling costs during a period of substantialin line with volume growth. Higher fuel surcharges and productivity gainsIncreased LTL yield contributed to the improved operating margin in spite of higher salaries and employee benefits purchased transportationcosts, higher fuel and fuel costs.depreciation and amortization. Salaries and employee benefits costs increased in the first quarter principally due to increaseshigher wages and incentive compensation. Depreciation and amortization costs increased primarily due to the investment in staffing to support volume growth and higher incentive compensation and healthcare costs.our operating equipment. Purchased transportation costs decreased, reflecting increased due to growth inutilization of our equipment and drivers for interregional freight service and efforts to supplement our linehaul operations.
services.
FEDEX KINKO’S SEGMENT
The following table shows revenues, operating expenses, and operating income and margin (dollars in millions) for the three-month periods ended August 31:
|
|
|
|
|
| Percent |
| ||||
|
| 2005 |
| 2004 |
| Change |
| ||||
Revenues |
| $ | 517 |
| $ | 490 |
|
| 6 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
| ||
Salaries and employee benefits |
| 186 |
| 182 |
|
| 2 |
|
| ||
Rentals |
| 102 |
| 102 |
|
| — |
|
| ||
Depreciation and amortization |
| 36 |
| 32 |
|
| 13 |
|
| ||
Maintenance and repairs |
| 18 |
| 17 |
|
| 6 |
|
| ||
Intercompany charges |
| 4 |
| 3 |
|
| 33 |
|
| ||
Other operating expenses: |
|
|
|
|
|
|
|
|
| ||
Supplies, including paper and toner |
| 67 |
| 64 |
|
| 5 |
|
| ||
Other |
| 88 |
| 71 |
|
| 24 |
|
| ||
Total operating expenses |
| 501 |
| 471 |
|
| 6 |
|
| ||
Operating income |
| $ | 16 |
| $ | 19 |
|
| (16 | ) |
|
Operating margin |
| 3.1 | % | 3.8 | % |
|
|
|
|
Certain prior period amounts have been reclassified to conform to the current period presentation.
27
FedEx Kinko’s Segment Revenues
Revenues increased by 6% in the first quarter ended August 31, 2004:of 2006 due to continued growth in our revenues from FedEx Express and FedEx Ground package acceptance and the benefit of the conversion of certain FedEx World Service Centers to FedEx Kinko’s Ship Centers in 2005. Growth in these areas was partially offset by a decline in our copy product line revenues.
Revenues |
| $ | 490 |
|
Operating expenses: |
|
|
| |
Salaries and employee benefits |
| 182 |
| |
Rentals |
| 110 |
| |
Depreciation and amortization |
| 32 |
| |
Maintenance and repairs |
| 9 |
| |
Intercompany charges |
| 3 |
| |
Other operating expenses: |
|
|
| |
Supplies, including paper and toner |
| 77 |
| |
Other |
| 58 |
| |
Total operating expenses |
| 471 |
| |
|
|
|
| |
Operating income |
| $ | 19 |
|
|
|
|
| |
Operating margin |
| 3.8 | % |
FedEx Kinko’s Segment Operating ResultsIncome
Operating income decreased $3 million as the increase in revenues was offset by increases in other operating expenses and depreciation. The FedEx Kinko’s segmentincrease in other operating expenses was formed in the fourth quarter of 2004, following the acquisition of Kinko’s, Inc. on February 12, 2004. FedEx Kinko’s has focused on strengthening its current lines of business, which include copy, print and finishing services; facilities management and outsourcing; retail products and services, including high-speed Internet access and computer usage; and signs and graphics. First quarter 2005 revenue experienced strong demand from signs and graphics, finishing services and retail products. As in-home technological advances have impacted the traditional retail walk-up business, FedEx Kinko’s has expanded its effortsprimarily due to attract a larger share of the commercial document solutions and business service market.
FedEx Kinko’s revenues and operating margin during the first quarter of 2005 reflect a seasonal decline in business levels. Costsincreased costs related to professional fees associated with internal technology and product offering initiatives and higher administrative costs. Increased depreciation was driven by investments in new technology to replace legacy systems over the ramp up for new product offerings, including full integration of pack and ship capabilities, also impacted operating margin. Costs associated with the integration of FedEx Kinko’s will continue through the remainder of 2005.past twelve months.
26
LIQUIDITY
Cash and cash equivalents totaled $1.4$1.051 billion at August 31, 2004,2005, compared to $1.0$1.039 billion at May 31, 2004.2005. The following table provides a summary of our cash flows for the three-month periods ended August 31 (in millions):
|
| 2004 |
| 2003 |
|
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
| |||||||||
Operating Activities: |
|
|
|
|
| |||||||||
Net income |
| $ | 339 |
| $ | 330 |
| |||||||
Noncash charges and credits |
| 445 |
| 365 |
| |||||||||
Changes in operating assets and liabilities |
| (1 | ) | 42 |
| |||||||||
Net cash provided by operating activities |
| $ | 737 |
| $ | 573 |
|
| 783 |
| 737 |
| ||
|
|
|
|
|
| |||||||||
Investing Activities: |
|
|
|
|
| |||||||||
Capital expenditures and other investing activities |
| (670 | ) | (391 | ) | |||||||||
Net cash used in investing activities |
| (391 | ) | (291 | ) |
| (670 | ) | (391 | ) | ||||
|
|
|
|
|
| |||||||||
Financing activities: |
|
|
|
|
| |||||||||
Financing Activities: |
|
|
|
|
| |||||||||
Principal payments on debt |
| (13 | ) | (31 | ) |
| (95 | ) | (13 | ) | ||||
Repurchase of treasury stock |
| — |
| (112 | ) | |||||||||
Proceeds from stock issuances |
| 18 |
| 30 |
| |||||||||
Dividends paid |
| (21 | ) | (15 | ) |
| (24 | ) | (21 | ) | ||||
Proceeds from stock issuances |
| 30 |
| 44 |
| |||||||||
Net cash used in financing activities |
| (4 | ) | (114 | ) |
| (101 | ) | (4 | ) | ||||
|
|
|
|
|
| |||||||||
Net increase in cash and cash equivalents |
| $ | 342 |
| $ | 168 |
|
| $ | 12 |
| $ | 342 |
|
Cash Provided by Operating Activities. The $164$46 million increase in cash flows from operating activities in the first quarter of 20052006 was largely attributable to revenue growth,increased earnings and the collection of a refund payment of $59 million from the U.S. government relating to the tax treatment of jet engine maintenance costs. We expect to receive the remaining $21 million due to us from the U.S. government in 2006. The increase in cash flows from operating activities was partially offset by the payout of previously accrued amounts related to our 2004 annual2005 incentive compensation plans.
On September 1, 2005 we made voluntary, tax deductible contributions of $456 million to our principal U.S. domestic pension plans.
Cash Used for Capital Investments.Investments. Capital expenditures during the first quarter of 20052006 were 32%70% higher than the prior year period primarily due to planned aircraft expenditures at FedEx Express to support IP volume growth. See “Capital Resources” below for further discussion.
28
Debt Financing Activities.Activities From time. The increase in principal payments on debt primarily relates to time, wescheduled payments on our capital leases. A new $1.0 billion five-year revolving credit facility was executed in July 2005 and replaced our prior revolving credit facilities. The revolving credit facility is available to finance certain operatingour operations and investing activities throughother cash flow needs and to provide support for the issuance of commercial paper. OurAny commercial paper program is backed by unused commitments under two revolving credit agreements, totaling $1 billion, and reducesborrowings reduce the amount available under these agreements.the revolving credit facility. At August 31, 2004,2005, no commercial paper was outstanding and the entire $1$1.0 billion under the revolving credit agreementsfacility was available for future borrowings. See Note 3Borrowings under the revolving credit facility will bear interest at short-term interest rates (based on the London Interbank Offered Rate (LIBOR), the Prime Rate or the Federal Funds Rate) plus a margin dependent upon our senior unsecured long-term debt ratings.
Our revolving credit agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the accompanying unaudited financial statements for further discussioncurrent portion of thesesuch debt, plus six times rentals and landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 0.7 to 1.0. We are in compliance with this and all other restrictive covenants of our revolving credit facilities.agreement and do not expect the covenants to significantly affect our operations or ability to pay dividends.
Cash Used for Share Repurchases.We did not repurchase any shares during the first quarteralso use capital and operating leases to finance a portion of 2005. During the first quarter of 2004, we repurchased 1,725,000 shares at an average price of $64.81 per share, which decreased cash flows by approximately $112 million. Based on our current financing strategy,aircraft, facility, vehicles and equipment needs. In addition, we have significantly reduceda $1.0 billion shelf registration statement filed with the numberSEC to provide flexibility and efficiency when obtaining certain financing. Under this shelf registration statement we may issue, in one or more offerings, unsecured debt securities, common stock or a combination of shares we expect to repurchase and instead are issuing new shares in connection with our equity compensation programs. A total of 5.75 million shares remain under existing share repurchase authorizations.
27
such instruments. The entire $1.0 billion is available for future financings.
Dividends.Dividends paid in the first quarter of 2006 and 2005 and 2004 were $21$24 million and $15$21 million, respectively. On August 20, 2004,19, 2005, our Board of Directors declared a dividend of $0.07$0.08 per share of common stock. The dividend is payable on October 1, 20043, 2005 to stockholders of record as of the close of business on September 10, 2004.
12, 2005.
Other Liquidity Information.Information. We believe that our existing cash and cash equivalents, cash flow from operations, our commercial paper program, and revolving bank credit facilities and shelf registration statement with the SEC will adequately meet our working capital and capital expenditure needs for the foreseeable future.
CAPITAL RESOURCES
Our operations are capital intensive, characterized by significant investments in aircraft, vehicles, computer hardware and software and telecommunications equipment,technology, package-handling facilities and sort equipment. The amount and timing of capital additions depend on various factors, including preexistingpre-existing contractual commitments, anticipated 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.
29
The following table compares capital expenditures by asset category and reportable segment for the three-month periods ended August 31 (in millions):
|
| 2004 |
| 2003 |
| $ Change |
| Percent |
| ||
Aircraft and related equipment |
| $ | 134 |
| $ | 80 |
| 54 |
| 68 |
|
Facilities and sort equipment |
| 97 |
| 70 |
| 27 |
| 39 |
| ||
Information technology investments |
| 81 |
| 58 |
| 23 |
| 40 |
| ||
Vehicles and other equipment |
| 83 |
| 92 |
| (9 | ) | (10 | ) | ||
Total capital expenditures |
| $ | 395 |
| $ | 300 |
| 95 |
| 32 |
|
|
|
|
|
|
|
|
|
|
| ||
FedEx Express segment |
| $ | 165 |
| $ | 101 |
| 64 |
| 63 |
|
FedEx Ground segment |
| 89 |
| 76 |
| 13 |
| 17 |
| ||
FedEx Freight segment |
| 62 |
| 68 |
| (6 | ) | (9 | ) | ||
FedEx Kinko’s segment (1) |
| 29 |
| — |
| 29 |
| NM |
| ||
Other |
| 50 |
| 55 |
| (5 | ) | (9 | ) | ||
Total capital expenditures |
| $ | 395 |
| $ | 300 |
| 95 |
| 32 |
|
(1) The FedEx Kinko’s segment was formed following the acquisition of Kinko’s, Inc. on February 12, 2004.
|
|
|
|
|
| Dollar |
| Percent |
| ||||||
|
| 2005 |
| 2004 |
| Change |
| Change |
| ||||||
Aircraft and related equipment |
| $ | 276 |
| $ | 134 |
|
| 142 |
|
|
| 106 |
|
|
Facilities and sort equipment |
| 92 |
| 97 |
|
| (5 | ) |
|
| (5 | ) |
| ||
Information technology |
| 91 |
| 81 |
|
| 10 |
|
|
| 12 |
|
| ||
Vehicles |
| 176 |
| 57 |
|
| 119 |
|
|
| 209 |
|
| ||
Other equipment |
| 36 |
| 26 |
|
| 10 |
|
|
| 38 |
|
| ||
Total capital expenditures |
| $ | 671 |
| $ | 395 |
|
| 276 |
|
|
| 70 |
|
|
FedEx Express segment |
| $ | 388 |
| $ | 165 |
|
| 223 |
|
|
| 135 |
|
|
FedEx Ground segment |
| 116 |
| 89 |
|
| 27 |
|
|
| 30 |
|
| ||
FedEx Freight segment |
| 82 |
| 62 |
|
| 20 |
|
|
| 32 |
|
| ||
FedEx Kinko’s segment |
| 14 |
| 29 |
|
| (15 | ) |
|
| (52 | ) |
| ||
Other, principally FedEx Services |
| 71 |
| 50 |
|
| 21 |
|
|
| 42 |
|
| ||
Total capital expenditures |
| $ | 671 |
| $ | 395 |
|
| 276 |
|
|
| 70 |
|
|
Capital expenditures during the first quarter of 20052006 were 32%70% higher than the prior year period primarily due to the timing of planned aircraft expenditures at FedEx Express to support IP volume growth. The first quarter of 2005 also includes the capital expenditures of FedEx Kinko’s. For all of 2005, we expect capital expenditures of approximately $2.1 billion, compared to $1.3 billion in 2004. The expected year-over-year increase will fund additional aircraft capacity for FedEx Express, primarily to support IP volume growth. Also, additional investments will bewere made in the FedEx Ground and FedEx Freight networks.
networks to support growth in customer demand. For all of 2006, we expect capital expenditures of approximately $2.5 billion, compared to $2.2 billion in 2005. The expected year-over-year increase will fund planned aircraft and vehicle expenditures at FedEx Express to support future IP volume growth and replace vehicles. We also continue to invest in infrastructure upgrades and productivity-enhancing technologies, the multi-year capacity expansion of the FedEx Ground network and growth and replacement vehicle needs at FedEx Freight.
Because of substantial lead times associated with the manufacture or modification of aircraft, we must generally plan our aircraft orders or modifications three to eight years in advance. Therefore,While we also pursue market opportunities to purchase aircraft when they become available, we must make commitments regarding our airlift requirements years before aircraft are actually needed. We are closely managing our capital spending based on current and anticipated volume levels and will defer or limit capital additions where economically feasible, while continuing to invest strategically in growing business segments.service lines.
30
28
CONTRACTUAL CASH OBLIGATIONS
TheAs required under SEC rules and regulations, the following table sets forth a summary of our contractual cash obligations as of August 31, 2004.2005. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. ExcludingExcept for the current portion of long-term debt and capital lease obligations, this table does not include amounts already recorded on our balance sheet as current liabilities at August 31, 2004.2005. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.
|
| Payments Due by Fiscal Year |
| |||||||||||||||||||||
|
| 2006(1) |
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| Thereafter |
| Total |
| |||||||||
|
| (in millions) |
| |||||||||||||||||||||
Amounts reflected in Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Long-term debt |
| $ | 265 |
| $ | 844 |
| $ | — |
| $ | 499 |
| $ | — |
|
| $ | 789 |
|
| $ | 2,397 |
|
Capital lease obligations(2),(3) |
| 22 |
| 22 |
| 99 |
| 10 |
| 95 |
|
| 130 |
|
| 378 |
| |||||||
Other cash obligations not reflected in Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Unconditional purchase obligations(3) |
| 828 |
| 634 |
| 400 |
| 660 |
| 594 |
|
| 866 |
|
| 3,982 |
| |||||||
Interest on long-term debt |
| 99 |
| 108 |
| 83 |
| 83 |
| 65 |
|
| 1,664 |
|
| 2,102 |
| |||||||
Operating leases (3) |
| 1,197 |
| 1,463 |
| 1,306 |
| 1,141 |
| 1,014 |
|
| 7,446 |
|
| 13,567 |
| |||||||
Total |
| $ | 2,411 |
| $ | 3,071 |
| $ | 1,888 |
| $ | 2,393 |
| $ | 1,768 |
|
| $ | 10,895 |
|
| $ | 22,426 |
|
|
| Payments Due by Fiscal Year |
| |||||||||||||||||||
|
| (in millions) |
| |||||||||||||||||||
|
| 2005 (1) |
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| There- |
| Total |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Amounts reflected in Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Long-term debt (2) |
| $ | 613 |
| $ | 265 |
| $ | 844 |
| $ | — |
| $ | 499 |
| $ | 832 |
| $ | 3,053 |
|
Capital lease obligations (3) (4) |
| 139 |
| 122 |
| 22 |
| 99 |
| 11 |
| 225 |
| 618 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Other cash obligations not reflected in Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Unconditional purchase obligations (4) |
| 615 |
| 283 |
| 301 |
| 233 |
| 665 |
| 1,449 |
| 3,546 |
| |||||||
Operating leases (4) |
| 1,255 |
| 1,543 |
| 1,420 |
| 1,314 |
| 1,151 |
| 7,923 |
| 14,606 |
| |||||||
Total |
| $ | 2,622 |
| $ | 2,213 |
| $ | 2,587 |
| $ | 1,646 |
| $ | 2,326 |
| $ | 10,429 |
| $ | 21,823 |
|
(1) Cash obligations for the remainder of 2005.2006.
(2) Amounts do not include related interest. See our Annual Report for the applicable interest rates.
(3)Capital lease obligations represent principal and interest payments.
(4)(3)See Note 87 to the accompanying unaudited consolidated financial statements.
In accordance with accounting principles generally accepted in the United States, weWe have certain contingent liabilities that are not accrued in our balance sheet.sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table above.
Amounts Reflected in Balance Sheet
We have other commercialcertain financial instruments representing potential commitments, not reflected in the table above, that were incurred in the normal course of business to support our operations, including surety bonds and standby letters of credit. These instruments are generally required under certain U.S. self-insurance programs and are also used in the normal course of international operations. While the notional amounts of these instruments are material, there are no additional contingent liabilities associated with them because the underlying liabilities are already reflected in our balance sheet.
We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, non-qualified pension and postretirement healthcare liabilities and self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. Therefore, the timing of these payments cannot be determined, except for amounts estimated to be payable within twelve months that are included in current liabilities.
29
Other Cash Obligations Not Reflected in Balance Sheet
The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. Such contracts include those for certain purchases of aircraft, aircraft modifications, vehicles, facilities, computers, printing and other equipment and advertising and promotions contracts. In addition, we have committed to modify our DC10 aircraft for passenger-to-freighter and two-man cockpit configurations, which is reflected in the table above.
31
Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements.
The amounts reflected in the table above for interest on long-term debt represent future interest payments due on our long-term debt, which are primarily fixed rate.
The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at August 31, 2004.2005. In the past, we financed a significant portion of our aircraft needs (and certain other equipment needs) using operating leases (a type of “off-balance sheet financing”). At the time that the decision to lease was made, we determined that these operating leases would provide economic benefits favorable to ownership with respect to market values, liquidity andor after-tax cash flows.
In accordance with accounting principles generally accepted in the United States, our operating leases are not recorded in our balance sheet. Credit rating agencies routinely use this information concerning minimum lease payments required for our operating leases to calculate our debt capacity. In addition, we have guarantees under certain operating leases, amounting to $43$36 million as of August 31, 2004,2005, for the residual values of vehicles and facilities at the end of the respective operating lease periods. Based upon our expectationAlthough we expect that nonesome of these leased assets willmay have a residual value at the end of the lease term that is materially less than the value specified in the related operating lease agreement, we do not believe it is probable that we will be required to fund material amounts under the terms of these guarantee arrangements. Accordingly, no material accruals have been recognized for these guarantees.
In the future, other forms of secured financing and direct purchases may be used to obtain capital assets if we determine that they best suit our needs. We have been successful in obtaining investment capital, both domestic and international, for long-term leases on acceptable terms, although the marketplace for such capital can become restricted depending on a variety of economic factors. We believe the capital resources available to us provide flexibility to access the most efficient markets for financing capital acquisitions, including aircraft, and are adequate for our future capital needs.
We have a senior unsecured debt credit rating from Standard & Poor’s of BBB and a commercial paper rating of A-2. Moody’s Investors Service has assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. Moody’s and Standard and Poor’s both characterize our ratings outlook as “stable.” If our credit ratings drop, our interest expense may increase; similarly, we anticipate that our interest expense may decrease if our credit ratings are raised. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a large, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.
32
30
Information regarding our “Critical Accounting Policies and Estimates” can be found in our Annual Report. The four critical accounting policies that we believe are either the most judgmental, or involve the selection or application of alternative accounting policies, and are material to our financial statements are those relating to pension cost, self-insurance accruals, long-lived assets and revenue recognition. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm. In addition, Note 1 to the financial statements in our Annual Report contains a summary of our significant accounting policies.
Certain statements in this report, including (but not limited to) those contained in “Airline Stabilization Compensation,” “Outlook,” “Liquidity,” “Capital Resources,” “Contractual Cash Obligations” and “Critical Accounting Policies and Estimates,”the “Employee Benefit Plans” note to the consolidated financial statements, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, cash flows, plans, objectives, future performance and business of FedEx. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:
•· economic conditions in the domestic and international markets in which we operate;
· the effect of Hurricane Katrina or other severe weather events on our operations and the economy, including the impact on fuel costs and availability;
•· any impacts on our business resulting from new domestic or international government regulation, including regulatory actions affecting aviation rights, security requirements and labor rules;
•· the impact of any international conflicts or terrorist activities or related security measures on the United States and global economies in general, or the transportation industry of FedEx in particular, and what effects these events will have on our costs or the demand for our services;
•· our ability to manage our cost structure for capital expenditures and operating expenses and match them, especially those relating to aircraft, vehicle and sort capacity, to shifting customer volume levels;
•· our ability to effectively operate, integrate and leverage the FedEx Kinko’s business;
•· sudden changes in fuel prices or currency exchange rates;
•· our ability to maintain or increase our fuel surcharges in response to rising fuel prices due to competitive pressures;
•· significant changes in the volumes of shipments transported through our networks, customer demand for our various services or the prices we obtain for our services;
· our ability to successfully defend against challenges to our independent contractor model;
• the amount of compensation we are entitled to receive and retain under the Air Transportation Safety and System Stabilization Act;
•· the outcome of negotiations to reach a new collective bargaining agreement with the union that represents the pilots of FedEx Express;
•· market acceptance of our new service and growth initiatives;
•· competition from other providers of transportation, e-commerce and business services, including our ability to compete with new or improved services offered by our competitors;
33
•· the impact of technology developments on our operations and on demand for our services;
•· disruptions to our technology infrastructure, including our computer systems and Web site;
•· our ability to obtain and maintain aviation rights in important international markets;
31
•· adverse weather conditions or natural disasters;
•· availability of financing on terms acceptable to us and our ability to maintain our current credit ratings; and
•· other risks and uncertainties you can find in our press releases and SEC filings.
As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
34
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of August 31, 2004,2005, there had been no material changes in our market risk sensitive instruments and positions since the disclosure in our Annual Report. While we are a global provider of transportation, e-commerce and business services, the substantial majority of our transactions are denominated in U.S. dollars. The distribution of our foreign currency denominated transactions is such that foreign currency declines in some areas of the world are often offset by foreign currency gains of equal magnitude in other areas of the world. TheOur principal exposure to foreign currency exchange rate risks to which we are exposed areis in the Japanese yen, Taiwan dollar, Canadian dollar and euro. Foreign currency fluctuations during the three-month period ended August 31, 20042005 did not have a material effect on our results of operations.
We have market risk for changes in the price of jet and diesel fuel; however, this risk is largely mitigated by revenue from our fuel surcharges. However, our fuel surcharges have a lag that exists before they are adjusted for changes in fuel prices and fuel prices can fluctuate within certain ranges before resulting in a change in our fuel surcharges. Therefore, our operating income may be affected should the spot price of fuel continue to fluctuate by significant amounts or change by amounts that do not result in a change in our fuel surcharges.
Item 4. Controls and Procedures
The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective, as of August 31, 20042005 (the end of the period covered by this Quarterly Report on Form 10-Q).
During our fiscal quarter ended August 31, 2004,2005, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, we have made certain changes in our policies and procedures to ensure our accounting for leases is in accordance with generally accepted accounting principles.
35
33
Exhibit | Description of Exhibit |
|
| |||
|
|
| ||||
|
| |||||
|
| |||||
| 12.1 |
|
| |||
|
| Computation of Ratio of Earnings to Fixed Charges. | ||||
| 15.1 |
| ||||
|
| Letter re: Unaudited Interim Financial Statements. | ||||
| 31.1 |
| ||||
|
| Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 31.2 |
| ||||
|
| Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 32.1 |
| ||||
|
| Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||
| 32.2 |
| ||||
|
| Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
34
36
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: September 23, 2005 | /s/ JOHN L. MERINO |
JOHN L. MERINO | |
CORPORATE VICE PRESIDENT | |
PRINCIPAL ACCOUNTING OFFICER |
37
Exhibit | Description of Exhibit | |||||
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|
| ||||
|
|
| ||||
| 12.1 |
| ||||
|
|
| ||||
| ||||||
| ||||||
|
35
|
| |||
|
| |||
|
| |||
|
| Computation of Ratio of Earnings to Fixed Charges. | ||
| 15.1 |
| ||
|
| Letter re: Unaudited Interim Financial Statements. | ||
| 31.1 |
| ||
|
| Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31.2 |
| ||
|
| Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32.1 |
| ||
|
| Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32.2 |
| ||
|
| Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
E-1E-1