UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Commission File Number: 1-15829 FEDEX CORPORATION (Exact name of registrant as specified in its charter)
(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 |
| ||
Common Stock, par value $0.10 per share | 303,038,948 |
| PART I. FINANCIAL INFORMATION |
|
FEDEX CORPORATION
INDEX
2
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
ASSETS
|
| February 28, |
| May 31, |
|
| August 31, |
|
|
| ||||||
|
| (Unaudited) |
|
|
|
| 2005 |
| May 31, |
| ||||||
|
|
|
|
|
|
| (Unaudited) |
| 2005 |
| ||||||
ASSETS |
|
|
|
|
|
|
| |||||||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 1,084 |
| $ | 1,046 |
|
|
| $ | 1,051 |
|
| $ | 1,039 |
|
Receivables, less allowances of $132 and $151 |
| 3,188 |
| 3,027 |
| |||||||||||
Spare parts, supplies and fuel, less allowances of $138 and $124 |
| 245 |
| 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 |
| 554 |
| 489 |
|
|
| 510 |
|
| 510 |
| ||||
Prepaid expenses and other |
| 201 |
| 159 |
|
|
| 164 |
|
| 173 |
| ||||
|
|
|
|
|
| |||||||||||
Total current assets |
| 5,272 |
| 4,970 |
|
|
| 5,246 |
|
| 5,269 |
| ||||
|
|
|
|
|
| |||||||||||
PROPERTY AND EQUIPMENT, AT COST |
| 21,537 |
| 20,311 |
|
|
| 22,650 |
|
| 22,017 |
| ||||
Less accumulated depreciation and amortization |
| 12,146 |
| 11,274 |
|
|
| 12,670 |
|
| 12,374 |
| ||||
|
|
|
|
|
| |||||||||||
Net property and equipment |
| 9,391 |
| 9,037 |
|
|
| 9,980 |
|
| 9,643 |
| ||||
|
|
|
|
|
| |||||||||||
OTHER LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| 2,835 |
| 2,802 |
|
|
| 2,835 |
|
| 2,835 |
| ||||
Prepaid pension cost |
| 1,348 |
| 1,127 |
|
|
| 1,177 |
|
| 1,272 |
| ||||
Intangible and other assets |
| 1,529 |
| 1,198 |
|
|
| 1,348 |
|
| 1,385 |
| ||||
|
|
|
|
|
| |||||||||||
Total other long-term assets |
| 5,712 |
| 5,127 |
|
|
| 5,360 |
|
| 5,492 |
| ||||
|
|
|
|
|
|
|
| $ | 20,586 |
|
| $ | 20,404 |
| ||
|
| $ | 20,375 |
| $ | 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
|
| February 28, |
| May 31, |
|
| August 31, |
|
|
| ||||||
|
| (Unaudited) |
|
|
|
| 2005 |
| May 31, |
| ||||||
|
|
|
|
|
|
| (Unaudited) |
| 2005 |
| ||||||
LIABILITIES AND STOCKHOLDERS’ INVESTMENT |
|
|
|
|
|
|
| |||||||||
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Current portion of long-term debt |
| $ | 973 |
| $ | 750 |
|
|
| $ | 295 |
|
| $ | 369 |
|
Accrued salaries and employee benefits |
| 1,099 |
| 1,062 |
|
|
| 935 |
|
| 1,275 |
| ||||
Accounts payable |
| 1,685 |
| 1,615 |
|
|
| 1,705 |
|
| 1,739 |
| ||||
Accrued expenses |
| 1,423 |
| 1,305 |
|
|
| 1,590 |
|
| 1,351 |
| ||||
|
|
|
|
|
| |||||||||||
Total current liabilities |
| 5,180 |
| 4,732 |
|
|
| 4,525 |
|
| 4,734 |
| ||||
|
|
|
|
|
| |||||||||||
LONG-TERM DEBT, LESS CURRENT PORTION |
| 2,441 |
| 2,837 |
|
|
| 2,408 |
|
| 2,427 |
| ||||
|
|
|
|
|
| |||||||||||
OTHER LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deferred income taxes |
| 1,216 |
| 1,181 |
|
|
| 1,149 |
|
| 1,206 |
| ||||
Pension, postretirement healthcare and other benefit obligations |
| 820 |
| 768 |
|
|
| 841 |
|
| 828 |
| ||||
Self-insurance accruals |
| 626 |
| 591 |
|
|
| 644 |
|
| 621 |
| ||||
Deferred lease obligations |
| 493 |
| 503 |
|
|
| 629 |
|
| 532 |
| ||||
Deferred gains, principally related to aircraft transactions |
| 407 |
| 426 |
|
|
| 393 |
|
| 400 |
| ||||
Other liabilities |
| 70 |
| 60 |
|
|
| 68 |
|
| 68 |
| ||||
|
|
|
|
|
| |||||||||||
Total other long-term liabilities |
| 3,632 |
| 3,529 |
|
|
| 3,724 |
|
| 3,655 |
| ||||
|
|
|
|
|
| |||||||||||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
| |||||||||||
COMMON STOCKHOLDERS’ INVESTMENT |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common stock, $0.10 par value; 800 million shares authorized, 302 million shares issued as of February 28, 2005 and 300 million shares issued as of May 31, 2004 |
| 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 |
| 1,193 |
| 1,079 |
|
|
| 1,277 |
|
| 1,241 |
| ||||
Retained earnings |
| 7,939 |
| 7,001 |
|
|
| 8,678 |
|
| 8,363 |
| ||||
Accumulated other comprehensive loss |
| (6 | ) | (46 | ) |
|
| (12 | ) |
| (17 | ) | ||||
Deferred compensation and treasury stock, at cost |
| (34 | ) | (28 | ) |
|
| (44 | ) |
| (29 | ) | ||||
|
|
|
|
|
| |||||||||||
Total common stockholders’ investment |
| 9,122 |
| 8,036 |
|
|
| 9,929 |
|
| 9,588 |
| ||||
|
|
|
|
|
|
|
| $ | 20,586 |
|
| $ | 20,404 |
| ||
|
| $ | 20,375 |
| $ | 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 |
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||||||
|
| February 28, |
| February 29, |
| February 28, |
| February 29, |
|
| August 31, |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| 2005 |
| 2004 |
| ||||||||
REVENUES |
| $ | 7,339 |
| $ | 6,062 |
| $ | 21,648 |
| $ | 17,669 |
|
|
| $ | 7,707 |
|
| $ | 6,975 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Salaries and employee benefits |
| 3,026 |
| 2,649 |
| 8,876 |
| 7,778 |
|
|
| 3,062 |
|
| 2,920 |
| ||||||
Purchased transportation |
| 748 |
| 602 |
| 2,176 |
| 1,755 |
|
|
| 771 |
|
| 681 |
| ||||||
Rentals and landing fees |
| 585 |
| 474 |
| 1,728 |
| 1,350 |
|
|
| 665 |
|
| 551 |
| ||||||
Depreciation and amortization |
| 368 |
| 340 |
| 1,091 |
| 1,010 |
|
|
| 370 |
|
| 360 |
| ||||||
Fuel |
| 570 |
| 402 |
| 1,645 |
| 1,088 |
|
|
| 728 |
|
| 483 |
| ||||||
Maintenance and repairs |
| 413 |
| 380 |
| 1,248 |
| 1,114 |
|
|
| 468 |
|
| 428 |
| ||||||
Business realignment costs |
| — |
| 14 |
| — |
| 429 |
| |||||||||||||
Airline Stabilization Act charge |
| — |
| — |
| 48 |
| — |
| |||||||||||||
Other |
| 1,077 |
| 829 |
| 3,105 |
| 2,390 |
|
|
| 1,059 |
|
| 973 |
| ||||||
|
| 6,787 |
| 5,690 |
| 19,917 |
| 16,914 |
|
|
| 7,123 |
|
| 6,396 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
OPERATING INCOME |
| 552 |
| 372 |
| 1,731 |
| 755 |
|
|
| 584 |
|
| 579 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest, net |
| (34 | ) | (36 | ) | (111 | ) | (76 | ) |
|
| (24 | ) |
| (39 | ) | ||||||
Other, net |
| (4 | ) | (2 | ) | (18 | ) | (3 | ) |
|
| (11 | ) |
| (6 | ) | ||||||
|
| (38 | ) | (38 | ) | (129 | ) | (79 | ) |
|
| (35 | ) |
| (45 | ) | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
INCOME BEFORE INCOME TAXES |
| 514 |
| 334 |
| 1,602 |
| 676 |
|
|
| 549 |
|
| 534 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
PROVISION FOR INCOME TAXES |
| 197 |
| 127 |
| 601 |
| 250 |
|
|
| 210 |
|
| 204 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
NET INCOME |
| $ | 317 |
| $ | 207 |
| $ | 1,001 |
| $ | 426 |
|
|
| $ | 339 |
|
| $ | 330 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
EARNINGS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic |
| $ | 1.05 |
| $ | 0.69 |
| $ | 3.33 |
| $ | 1.43 |
|
|
| $ | 1.12 |
|
| $ | 1.10 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Diluted |
| $ | 1.03 |
| $ | 0.68 |
| $ | 3.26 |
| $ | 1.40 |
|
|
| $ | 1.10 |
|
| $ | 1.08 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
DIVIDENDS DECLARED PER COMMON SHARE |
| $ | 0.07 |
| $ | 0.12 |
| $ | 0.21 |
| $ | 0.22 |
| |||||||||
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)
|
| Nine Months Ended |
| |||||||||||
|
| February 28, |
| February 29, |
|
| Three Months Ended |
| ||||||
|
|
|
|
|
|
| 2005 |
| 2004 |
| ||||
Operating Activities: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 1,001 |
| $ | 426 |
|
| $ | 339 |
| $ | 330 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Lease accounting charge |
| 79 |
| — |
| |||||||||
Depreciation and amortization |
| 1,091 |
| 1,010 |
|
| 368 |
| 360 |
| ||||
Provision for uncollectible accounts |
| 76 |
| 83 |
|
| 29 |
| 25 |
| ||||
Deferred income taxes and other noncash items |
| (47 | ) | (6 | ) |
| (31 | ) | (20 | ) | ||||
Changes in operating assets and liabilities, net of the effect of businesses acquired: |
|
|
|
|
| |||||||||
Changes in operating assets and liabilities: |
|
|
|
|
| |||||||||
Receivables |
| (160 | ) | (250 | ) |
| (3 | ) | 72 |
| ||||
Spare parts and supplies |
| (41 | ) | (45 | ) |
| 7 |
| 8 |
| ||||
Accounts payable and other operating liabilities |
| 250 |
| 470 |
|
| (82 | ) | (109 | ) | ||||
Other, net |
| (210 | ) | 44 |
|
| 77 |
| 71 |
| ||||
|
|
|
|
|
| |||||||||
Net cash provided by operating activities |
| 1,960 |
| 1,732 |
|
| 783 |
| 737 |
| ||||
|
|
|
|
|
| |||||||||
Investing Activities: |
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| (1,661 | ) | (892 | ) |
| (671 | ) | (395 | ) | ||||
Business acquisitions, net of cash acquired |
| (122 | ) | (2,410 | ) | |||||||||
Proceeds from asset dispositions |
| 10 |
| 14 |
|
| 1 |
| 4 |
| ||||
|
|
|
|
|
| |||||||||
Net cash used in investing activities |
| (1,773 | ) | (3,288 | ) |
| (670 | ) | (391 | ) | ||||
|
|
|
|
|
| |||||||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings, net |
| — |
| 1,929 |
| |||||||||
Principal payments on debt |
| (173 | ) | (300 | ) |
| (95 | ) | (13 | ) | ||||
Proceeds from stock issuances |
| 88 |
| 90 |
|
| 18 |
| 30 |
| ||||
Dividends paid |
| (63 | ) | (48 | ) |
| (24 | ) | (21 | ) | ||||
Purchase of treasury stock |
| — |
| (179 | ) | |||||||||
Other, net |
| (1 | ) | 1 |
| |||||||||
|
|
|
|
|
| |||||||||
Net cash (used in) provided by financing activities |
| (149 | ) | 1,493 |
| |||||||||
|
|
|
|
|
| |||||||||
Net increase (decrease) in cash and cash equivalents |
| 38 |
| (63 | ) | |||||||||
Net cash used in financing activities |
| (101 | ) | (4 | ) | |||||||||
Net increase in cash and cash equivalents |
| 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 |
| $ | 1,084 |
| $ | 475 |
|
| $ | 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 February 28,August 31, 2005 and the results of our operations for the three- and nine-month periods ended February 28, 2005 and February 29, 2004 and our cash flows for the nine-monththree-month periods ended February 28,August 31, 2005 and February 29, 2004. Operating results for the three- and nine-month periodsthree-month period ended February 28,August 31, 2005 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.
Certain prior period amounts have been reclassified to conform to the current period’s presentation.
BUSINESS REALIGNMENT COSTS. During the third quarter and nine months of 2004 we incurred $14 million and $429 million, respectively, of business realignment costs related to voluntary early retirement and severance programs. At May 31, 2004, we had remaining business realignment related accruals of $28 million. At February 28, 2005, these accruals had decreased to $10 million due predominantly to cash payments made in the first nine months of 2005. The remaining accruals relate to management severance agreements, which are payable over future periods.
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 and are ongoing. 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 February 18,August 19, 2005, our Board of Directors declared a dividend of $0.07$0.08 per share of common stock. The dividend is payable on April 1,October 3, 2005 to stockholders of record as of the close of business on March 11,September 12, 2005. A dividend of $0.07 per common share also was declared during both the first and second quarters of 2005. During 2004, the declaration of two of our quarterly dividends fell in the third quarter. In both instances, the dividend was $0.06 per common share.
7
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.
AIRLINE STABILIZATION ACT CHARGELEASE ADJUSTMENT. During the secondfirst quarter of 2005,2006, 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 United States Departmentimpact 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 TransportationFinancial Accounting Standards No. (“DOT”SFAS”) issued13, “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 final order in its administrativestraight-line basis over the lease term. Based on a more extensive review of our leases during the FedEx Express claim for compensation under the Air Transportation Safety and System Stabilization Act (“Act”). Under their interpretation of the Act, the DOTfirst quarter, we determined that FedEx Express was entitleda portion of our facility leases had rent escalation clauses that were not being recognized appropriately. Because the amounts involved were not material to $72 million of compensation, an increase of $3 million from its initial determination. Because we had previously received $101 million underour financial statements in any individual prior period and the Act, the DOT demanded repayment of $29 million which was made in December 2004. While we will vigorously contest this determination judicially and will continuecumulative amount is not expected to aggressively pursue our compensation claim, we could no longer conclude that collection of the entire $119 million recorded in fiscal 2002 was probable. Accordingly,be material to 2006 results, we recorded a charge of $48 millionthe cumulative adjustment in the secondfirst quarter, of 2005, representing the DOT’s repayment demand of $29 million and the write-off of a $19 million receivable. Should any additional amounts ultimately be recoveredwhich increased operating expenses by FedEx Express on this matter, they will be recognized in the period that they are realized.$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. Accordingly,As a result, no compensation expense wasis recorded for stock options when the exercise price is equal to or greater than the market price of our common stock at the date of grant. For awards of restricted stock and to determine the pro forma 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 and basic and diluted earnings per common share, for the three- and nine-month periods ended February 28, 2005 and February 29, 2004, 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 |
| Nine Months Ended |
| ||||||||
|
| February 28, |
| February 29, |
| February 28, |
| February 29, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income, as reported |
| $ | 317 |
| $ | 207 |
| $ | 1,001 |
| $ | 426 |
|
Add: Stock compensation included in reported net income, net of tax |
| 1 |
| — |
| 4 |
| 9 |
| ||||
Deduct: Total pro forma stock compensation expense, net of tax |
| 10 |
| 9 |
| 30 |
| 30 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Pro forma net income |
| $ | 308 |
| $ | 198 |
| $ | 975 |
| $ | 405 |
|
Earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic – as reported |
| $ | 1.05 |
| $ | 0.69 |
| $ | 3.33 |
| $ | 1.43 |
|
Basic – pro forma |
| $ | 1.02 |
| $ | 0.66 |
| $ | 3.24 |
| $ | 1.36 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted – as reported |
| $ | 1.03 |
| $ | 0.68 |
| $ | 3.26 |
| $ | 1.40 |
|
Diluted – pro forma |
| $ | 1.00 |
| $ | 0.65 |
| $ | 3.18 |
| $ | 1.33 |
|
|
| 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)
Following is a table of the key weighted-average assumptions used in the option valuation calculations for the options granted in the three- and nine-month periods ended February 28, 2005 and February 29, 2004, and a discussion of our methodology for developing each of the assumptions used in the valuation model:
|
| Three Months Ended |
| Nine Months Ended |
| |||||||||
|
| February 28, |
| February 29, |
| February 28, |
| February 29, |
|
| Three Months Ended |
| ||
|
|
|
|
|
|
|
|
|
|
| 2005 |
| 2004 |
|
Expected lives |
| 5 years |
| 4 years |
| 4 years |
| 4 years |
|
| 5 years |
| 4 years |
|
Expected volatility |
| 27.01 | % | 29.52 | % | 27.02 | % | 32.38 | % |
| 25 | % | 27 | % |
Risk-free interest rate |
| 3.72 | % | 2.94 | % | 3.55 | % | 2.11 | % |
| 3.68 | % | 3.55 | % |
Dividend yield |
| 0.271 | % | 0.308 | % | 0.322 | % | 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.
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 thirdfirst quarter of 2005,2006, we made option grants of 246,4052,806,235 shares at a weighted-average exercise price of $96.76$89.66 per share.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 $29.18$25.38 per option. For the nine months ended February 28, 2005, 2,663,530 shares were granted at a weighted average exercise price of $75.72 per share. The weighted-average Black-Scholes value of these grants under the assumptions indicated above was $20.17 per option.
Total equity compensation shares outstanding or available for grant at February 28,August 31, 2005 represented 6.9%6.6% of total outstanding common stock plusand equity compensation shares granted and equity compensation shares available for grant.
OnNEW ACCOUNTING PRONOUNCEMENTS. In December 16, 2004, the Financial Accounting Standards Board (“FASB”)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 optionsstock-based awards using a fair value method and is effective for interim or annual periods beginning after June 15, 2005. SFAS 123R allows several adoption alternatives, including retroactively applying2005 (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 or applying it prospectively.using the modified prospective method.
9
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
We are currently assessing SFAS 123R to determine which transition method to adopt. 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
9
assumptions and the fair value model used to value them, and the market value of our common stock. If applied to the three- and nine- month periods ended February 28, 2005 and February 29, 2004,We anticipate that the impact of that standard would have approximated that ofSFAS 123R will approximate the pro forma results under SFAS 123 as presented above.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.
(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 |
| ||||
|
| February 28, |
| February 29, |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 317 |
| $ | 207 |
|
Other comprehensive income: |
|
|
|
|
| ||
Foreign currency translation adjustments, net of deferred taxes of $1 and $2 |
| (3 | ) | 3 |
| ||
Comprehensive income |
| $ | 314 |
| $ | 210 |
|
|
| Nine Months Ended |
| |||||||||||
|
| February 28, |
| February 29, |
|
| Three Months Ended August 31, |
| ||||||
|
|
|
|
|
|
| 2005 |
| 2004 |
| ||||
Net income |
| $ | 1,001 |
| $ | 426 |
|
| $ | 339 |
| $ | 330 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments, net of deferred taxes of $9 and $4 |
| 40 |
| 13 |
| |||||||||
Foreign currency translation adjustments, net of deferred taxes of $1 for both 2005 and 2004 |
| 5 |
| 8 |
| |||||||||
Comprehensive income |
| $ | 1,041 |
| $ | 439 |
|
| $ | 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 twothe revolving credit agreements totaling $1 billionfacility 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.the credit facility. At February 28,August 31, 2005, no commercial paper borrowings were outstanding and the entire amount under the credit facilitiesfacility was available. The agreements containrevolving credit agreement contains certain covenants requiring us to maintain certain fixed charge coverage and leverage ratios. Werestrictions, none of which are in compliance with all covenants of our credit agreements and do not expect the covenantsexpected to significantly affect our operations or ability to pay dividends.
10
(4) Computation of Earnings Per Share
The calculation of basic and diluted earnings per common share for the three- and nine-monththree-month periods ended February 28, 2005 and February 29, 2004August 31 was as follows (in millions, except per share amounts):
|
| Three Months Ended |
| Nine Months Ended |
| |||||||||||||||
|
| February 28, |
| February 29, |
| February 28, |
| February 29, |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| 2005 |
| 2004 |
| ||||||
Net income applicable to common stockholders |
| $ | 317 |
| $ | 207 |
| $ | 1,001 |
| $ | 426 |
|
| $ | 339 |
| $ | 330 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Weighted-average shares of common stock outstanding |
| 302 |
| 299 |
| 301 |
| 298 |
|
| 303 |
| 300 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Common equivalent shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Assumed exercise of outstanding dilutive options |
| 18 |
| 18 |
| 18 |
| 19 |
|
| 17 |
| 19 |
| ||||||
Less shares repurchased from proceeds of assumed exercise of options |
| (12 | ) | (14 | ) | (12 | ) | (13 | ) |
| (12 | ) | (14 | ) | ||||||
Weighted-average common and common equivalent shares outstanding |
| 308 |
| 303 |
| 307 |
| 304 |
|
| 308 |
| 305 |
| ||||||
Basic earnings per share |
| $ | 1.05 |
| $ | 0.69 |
| $ | 3.33 |
| $ | 1.43 |
| |||||||
Diluted earnings per share |
| $ | 1.03 |
| $ | 0.68 |
| $ | 3.26 |
| $ | 1.40 |
| |||||||
Basic earnings per common share |
| $ | 1.12 |
| $ | 1.10 |
| |||||||||||||
Diluted earnings per common share |
| $ | 1.10 |
| $ | 1.08 |
|
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.
(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. In addition, certainCertain 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- and nine-monththree-month periods ended February 28, 2005 and February 29, 2004August 31 was as follows (in millions):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
Pension Plans |
| February 28, |
| February 29, |
| February 28, |
| February 29, |
| ||||
Service cost |
| $ | 104 |
| $ | 94 |
| $ | 312 |
| $ |
282 |
|
Interest cost |
| 145 |
| 122 |
| 435 |
| 367 |
| ||||
Expected return on plan assets |
| (177 | ) | (149 | ) | (530 | ) | (448 | ) | ||||
Net amortization and deferral |
| 18 |
| 18 |
| 54 |
| 55 |
| ||||
|
| $ | 90 |
| $ | 85 |
| $ | 271 |
| $ | 256 |
|
|
| Three Months Ended |
| Nine Months Ended |
|
|
|
| Postretirement |
| ||||||||||||||||||||
Postretirement Healthcare Plans |
| February 28, |
| February 29, |
| February 28, |
| February 29, |
| |||||||||||||||||||||
|
| Pension Plans |
| Healthcare Plans |
| |||||||||||||||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| |||||||||||||||||||||
Service cost |
| $ | 9 |
| $ | 9 |
| $ | 27 |
| $ |
27 |
|
| $ | 119 |
| $ | 104 |
|
| $ | 10 |
|
|
| $ | 9 |
|
|
Interest cost |
| 8 |
| 6 |
| 24 |
| 19 |
|
| 161 |
| 145 |
|
| 8 |
|
|
| 8 |
|
| ||||||||
Expected return on plan assets |
| — |
| — |
| — |
| — |
|
| (203 | ) | (175 | ) |
| — |
|
|
| — |
|
| ||||||||
Net amortization and deferral |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||
Recognized actuarial losses |
| 26 |
| 15 |
|
| — |
|
|
| — |
|
| |||||||||||||||||
Other amortization |
| 3 |
| 3 |
|
| — |
|
|
| — |
|
| |||||||||||||||||
|
| $ | 17 |
| $ | 15 |
| $ | 51 |
| $ | 46 |
|
| $ | 106 |
| $ | 92 |
|
| $ | 18 |
|
|
| $ | 17 |
|
|
11
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
VoluntaryNo contributions of $460 million were made during the first quarter of 2006 or 2005 to our principal U.S. domestic pension plan during the first nine monthsplans. However, on September 1, 2005, we made voluntary, tax deductible contributions of 2005 ($160$456 million during the third quarter).to 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 no material contributions are expected to be required during the remainder of 2005, weWe may elect to continue to make further voluntary contributions to our qualified pension plans.
plans in 2006.
(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 compete collectively and are 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 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.
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 |
| Nine Months Ended |
| ||||||||
|
| February 28, |
| February 29, |
| February 28, |
| February 29, |
| ||||
Revenue |
|
|
|
|
|
|
|
|
| ||||
FedEx Express segment |
| $ | 4,915 |
| $ | 4,374 |
| $ | 14,365 |
| $ | 12,790 |
|
FedEx Ground segment |
| 1,200 |
| 960 |
| 3,447 |
| 2,852 |
| ||||
FedEx Freight segment |
| 747 |
| 630 |
| 2,374 |
| 1,931 |
| ||||
FedEx Kinko’s segment (1) |
| 499 |
| — |
| 1,513 |
| — |
| ||||
Other and eliminations |
| (22 | ) | 98 |
| (51 | ) | 96 |
| ||||
|
| $ | 7,339 |
| $ | 6,062 |
| $ | 21,648 |
| $ | 17,669 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Income (Loss) |
|
|
|
|
|
|
|
|
| ||||
FedEx Express segment (2) |
| $ | 340 |
| $ | 218 |
| $ | 983 |
| $ | 222 |
|
FedEx Ground segment |
| 149 |
| 112 |
| 431 |
| 363 |
| ||||
FedEx Freight segment |
| 54 |
| 37 |
| 259 |
| 164 |
| ||||
FedEx Kinko’s segment (1) |
| 11 |
| — |
| 59 |
| — |
| ||||
Other and eliminations |
| (2 | ) | 5 |
| (1 | ) | 6 |
| ||||
|
| $ | 552 |
| $ | 372 |
| $ | 1,731 |
| $ | 755 |
|
|
| |
|
|
(1) First quarter 2006 includes a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases.
(7) Commitments
As of February 28,August 31, 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-Related(1) |
| Other(2) |
| Total |
|
|
|
|
|
|
|
|
|
|
|
2005 (remainder) |
| $18 |
| $38 |
| $177 |
| $233 |
|
2006 |
| 48 |
| 242 |
| 286 |
| 576 |
|
2007 |
| 115 |
| 94 |
| 99 |
| 308 |
|
2008 |
| 131 |
| 68 |
| 38 |
| 237 |
|
2009 |
| 567 |
| 61 |
| 35 |
| 663 |
|
Thereafter |
| 1,142 |
| 111 |
| 188 |
| 1,441 |
|
(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. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for
13
cargo transport.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 February 28,August 31, 2005, FedEx Express was committed to purchase five12 Airbus A300s, fivefour Airbus A310s, five ATR-72s and ten Airbus A380s (a new high-capacity, long-range aircraft). Three A310s and one A300 are expected to be delivered in 2005. FedEx Express expects to take delivery of fourthree A300s, two A310s and all of the ATR-72s in 2006. Five A300s and one A310two A310s are expected to be delivered in 2006, one A3102007. The four remaining A300s are expected to be delivered in 2007 and three2008. Three of the ten A380sA380 aircraft are scheduled to be delivered in each of 2009, 2010 and 2011 and the remaining one in 2012. Deposits and progress payments of $29$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.
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 February 28,August 31, 2005 is as follows (in millions):
|
| Aircraft and Related |
| Facilities and |
|
|
| |||||||
|
| Equipment |
| Other |
| Total |
| |||||||
2006 (remainder) |
|
| $ | 478 |
|
|
| $ | 719 |
|
| $ | 1,197 |
|
2007 |
|
| 606 |
|
|
| 857 |
|
| 1,463 |
| |||
2008 |
|
| 585 |
|
|
| 721 |
|
| 1,306 |
| |||
2009 |
|
| 555 |
|
|
| 586 |
|
| 1,141 |
| |||
2010 |
|
| 544 |
|
|
| 470 |
|
| 1,014 |
| |||
Thereafter |
|
| 4,460 |
|
|
| 2,986 |
|
| 7,446 |
| |||
|
|
| $ | 7,228 |
|
|
| $ | 6,339 |
|
| $ | 13,567 |
|
|
| Capital |
| Operating |
| ||
|
|
|
|
|
| ||
2005 (remainder) |
| $ | 14 |
| $ | 423 |
|
2006 |
| 122 |
| 1,587 |
| ||
2007 |
| 22 |
| 1,450 |
| ||
2008 |
| 99 |
| 1,330 |
| ||
2009 |
| 11 |
| 1,158 |
| ||
Thereafter |
| 225 |
| 8,203 |
| ||
|
| 493 |
| $ | 14,151 |
| |
Less amount representing interest |
| 83 |
|
|
| ||
Present value of future minimum lease payments |
| $ | 410 |
|
|
|
The weighted average remaining lease term of all operating leases outstanding at February 28, 2005 was approximately 6 years. 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
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(8) Contingencies
Wage-and-Hour. 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’sfederal or California wage-and-hour laws. The plaintiffs in these lawsuits are employees 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, one of these wage-and-hour cases, Foster v. FedEx Express, has been certified as a class action. The 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 clock” and are 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 ourself in these cases. However, it is reasonably possible that material losses could be incurred on one or more of these matters as these cases develop.
14
Independent Contractor. Contractor. FedEx Ground is involved in a number ofnumerous purported class-action lawsuits and other proceedings in which the threshold issue is whether some or all of 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 reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax liability for FedEx Ground. On August 10, 2005, the Judicial Panel on Multi-District Litigation granted our motion to transfer and consolidate the majority of the class-action lawsuits for administration of the pre-trial proceedings by a single 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 these proceedings. Given the nature and preliminary status of the claims, however, we cannot yet determine the amount or a reasonable range of potential loss in these matters, if any.
Jet Engine Maintenance. In February 2005, the Sixth Circuit Court of Appeals reaffirmed the favorable ruling from the U.S. District Court in Memphis regarding the tax treatment of jet engine maintenance costs previously received during the first quarter of 2004. The Sixth Circuit’s decision did not have any impact on our financial condition, results of operations or tax rate during the third quarter of 2005. During the first quarter of 2004, we recognized a one-time benefit of $26 million, net of tax, primarily related to the reduction of accruals 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).
Other. 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.
(9) Supplemental Cash Flow Information
|
| Nine Months Ended |
| ||||
|
| February 28, |
| February 29, |
| ||
|
| (In millions) |
| ||||
Cash payments for: |
|
|
|
|
| ||
Interest (net of capitalized interest) |
| $ | 138 |
| $ | 136 |
|
Income taxes |
| 630 |
| 309 |
| ||
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.
(10) Income Taxes
As a result of the passage of the American Jobs Creation Act of 2004, we recognized an $11 million tax benefit in the nine months of 2005. This was principally due to the reduction of a valuation allowance previously established against certain foreign tax credits arising from our non-Express international operations. Our effective tax rates were 38% for the third quarter and 37.5% for the nine months of 2005. Our effective tax rates for the third quarter and nine months of 2004 were 38% and 37%, respectively. The lower effective tax rate for the nine months of 2004 was primarily related to the above-described jet engine maintenance tax ruling received in the first quarter of 2004 (see Note 8) and lower pre-tax income.
|
| 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 February 28,August 31, 2005, and the related condensed consolidated statements of income for the three-month and nine-month periods ended February 28, 2005 and February 29, 2004 and the condensed consolidated statements of cash flows for the nine-monththree-month periods ended February 28,August 31, 2005 and February 29, 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 compete collectively and are 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 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); and
•· our ability to manage our cost structure for capital expenditures and operating expenses such as salaries and employee benefits fuel and maintenance and repairs and to match such 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- and nine-month periodsamounts) for the three months ended February 28, 2005 and February 29, 2004:August 31:
|
|
|
|
|
| Dollar |
| Percent |
| ||||
|
| 2005(1) |
| 2004 |
| Change |
| Change |
| ||||
Revenues |
| $ | 7,707 |
| $ | 6,975 |
|
| 732 |
|
| 10 |
|
Operating income |
| 584 |
| 579 |
|
| 5 |
|
| 1 |
| ||
Operating margin |
| 7.6 | % | 8.3 | % |
| NM |
|
| (72 bp | ) | ||
Net income |
| $ | 339 |
| $ | 330 |
|
| 9 |
|
| 3 |
|
Diluted earnings per share |
| $ | 1.10 |
| $ | 1.08 |
|
| 0.02 |
|
| 2 |
|
|
| Three Months Ended |
| Percent |
| Nine Months Ended |
| Percent |
| ||||||||
|
| 2005 |
| 2004 (1) |
|
| 2005 (2) |
| 2004 (3) |
|
| ||||||
Revenues |
| $ | 7,339 |
| $ | 6,062 |
| 21 |
| $ | 21,648 |
| $ | 17,669 |
| 23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| 552 |
| 372 |
| 48 |
| 1,731 |
| 755 |
| 129 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating margin |
| 7.5 | % | 6.1 | % | 140bp |
| 8.0 | % | 4.3 | % | 370bp |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 317 |
| $ | 207 |
| 53 |
| $ | 1,001 |
| $ | 426 |
| 135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share |
| $ | 1.03 |
| $ | 0.68 |
| 51 |
| $ | 3.26 |
| $ | 1.40 |
| 133 |
|
(1) First quarter 2006 operating expenses include a $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases, predominately at FedEx Express, as described below.
| |
|
17 |
|
|
The following table shows changes in revenues and operating income by reportable segment for the three- and nine-month periodsthree-month period ended February 28,August 31, 2005 and February 29,compared to 2004 (dollars in(in millions):
|
| Change in |
| Percent Change |
| Change in |
| Percent Change in |
| ||||||||||||
|
| Three |
| Nine |
| Three |
| Nine |
| Three |
| Nine |
| Three |
| Nine |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FedEx Express segment |
| $ | 541 |
| $ | 1,575 |
| 12 |
| 12 |
| $ | 122 | (1) | $ | 761 | (2)(3) | 56 |
| 343 |
|
FedEx Ground segment |
| 240 |
| 595 |
| 25 |
| 21 |
| 37 |
| 68 |
| 33 |
| 19 |
| ||||
FedEx Freight segment |
| 117 |
| 443 |
| 19 |
| 23 |
| 17 |
| 95 |
| 46 |
| 58 |
| ||||
FedEx Kinko’s segment (4) |
| 499 |
| 1,513 |
| NM |
| NM |
| 11 |
| 59 |
| NM |
| NM |
| ||||
Other and eliminations |
| (120 | ) | (147 | ) | NM |
| NM |
| (7 | ) | (7 | ) | NM |
| NM |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 1,277 |
| $ | 3,979 |
| 21 |
| 23 |
| $ | 180 |
| $ | 976 |
| 48 |
| 129 |
|
|
|
|
|
|
|
|
|
|
| Revenues |
| Operating Income |
| ||||||||||||
|
| Dollar |
| Percent |
| Dollar |
| Percent |
| ||||||||
|
| Change |
| Change |
| Change |
| Change |
| ||||||||
FedEx Express segment(1) |
|
| 506 |
|
|
| 11 |
|
|
| (25 | ) |
|
| (8 | ) |
|
FedEx Ground segment |
|
| 146 |
|
|
| 14 |
|
|
| 1 |
|
|
| 1 |
|
|
FedEx Freight segment |
|
| 85 |
|
|
| 11 |
|
|
| 32 |
|
|
| 31 |
|
|
FedEx Kinko’s segment |
|
| 27 |
|
|
| 6 |
|
|
| (3 | ) |
|
| (16 | ) |
|
Other and Eliminations |
|
| (32 | ) |
|
| NM |
|
|
| — |
|
|
| NM |
|
|
|
|
| 732 |
|
|
| 10 |
|
|
| 5 |
|
|
| 1 |
|
|
18
(1) First 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- and nine-monththree-month periods ended February 28,August 31, 2005 and February 29, 2004:
|
| Three Months Ended |
| Percent |
| Nine Months Ended |
| Percent |
|
|
|
|
|
| Percent |
| ||||||||||||
|
| 2005 |
| 2004 |
|
| 2005 |
| 2004 |
|
|
| 2005 |
| 2004 |
| Change |
| ||||||||||
Average daily package volume (ADV): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FedEx Express |
| 3,419 |
| 3,221 |
| 6 |
| 3,243 |
| 3,152 |
| 3 |
|
| 3,233 |
| 3,093 |
|
| 5 |
|
| ||||||
FedEx Ground |
| 2,660 |
| 2,296 |
| 16 |
| 2,609 |
| 2,250 |
| 16 |
|
| 2,586 |
| 2,447 |
|
| 6 |
|
| ||||||
Total ADV |
| 6,079 |
| 5,517 |
| 10 |
| 5,852 |
| 5,402 |
| 8 |
|
| 5,819 |
| 5,540 |
|
| 5 |
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Average daily LTL shipments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FedEx Freight |
| 60 |
| 55 |
| 9 |
| 63 |
| 56 |
| 13 |
|
| 65 |
| 64 |
|
| 2 |
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Revenue per package (yield): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FedEx Express |
| $ | 19.86 |
| $ | 18.43 |
| 8 |
| $ | 19.97 |
| $ | 18.23 |
| 10 |
|
| $ | 20.80 |
| $ | 19.78 |
|
| 5 |
|
|
FedEx Ground |
| 6.79 |
| 6.52 |
| 4 |
| 6.60 |
| 6.44 |
| 2 |
|
| 6.92 |
| 6.54 |
|
| 6 |
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
LTL yield (revenue per hundredweight): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FedEx Freight |
| $ | 15.58 |
| $ | 14.35 |
| 9 |
| $ | 15.36 |
| $ | 14.21 |
| 8 |
|
| $ | 16.55 |
| $ | 14.98 |
|
| 10 |
|
|
Revenue growth for the thirdfirst quarter and nine months of 20052006 was attributable to volume and yield improvements across all transportation segments and the inclusion ofincreased revenue at FedEx Kinko’s. One additional operating day at FedEx Ground contributedYield improvements in our transportation businesses were primarily due to revenue growth forsignificantly higher fuel surcharges during the third quarter of 2005. One additional operating day at FedEx Freight and two additional operating days at FedEx Ground also contributed to revenue growth for the nine months of 2005.
quarter.
Operating income increased substantially during the thirdfirst quarter of 2005,2006 primarily due to revenue growth in all transportation segments and improved margins at FedEx Express. During the third quarter of 2005, operating income also benefited from the timing of adjustments to our indexed fuel surcharges, as fuel costs declined from second quarter levels. However, should the recent trend of fuel cost increases continue, 2005 fourth quarter margins could be negatively impacted. Operating income also increased substantially during the nine months of 2005 primarily due to these factors and margin improvement at FedEx Freight. FedEx Express benefited from the realization of savings from our 2004 business realignment programs. Also, the third quarter and nine months of 2004 included $14 million and $429 million, respectively, of business realignment costs. Although our fuel costs increased significantly during the thirdfirst quarter and nine months of 2005,2006, higher revenues from our jet and diesel fuel surcharges at FedEx Express and FedEx Freight more than offset these higher fuel costs. Reinstatement of a fuel surcharge at FedEx Ground during the third quarter of 2005 partially mitigated the impact of higher fuelIncreased purchased transportation costs during the period.
During the second quarter of 2005, the United States Department of Transportation (“DOT”) issued a final order in its administrative review of the FedEx Express claim for compensation under the Air Transportation Safety and System Stabilization Act (“Act”). Under its interpretation of the Act, the DOT determined that FedEx Express was entitled to $72 million of compensation, an increase of $3 million from its initial determination. Because we had previously received $101 million under the Act, the DOT demanded repayment of $29 million which was made in December 2004. While we will vigorously contest this determination judicially and will continue to aggressively pursue our compensation claim, we could no longer conclude that collection of the entire $119 million recorded in fiscal 2002 was probable. Accordingly, we recorded a charge of $48 million in the second quarter of 2005 ($31 million net of tax, or $0.10 per diluted share), representing the DOT’s repayment demand of $29 million and the write-off of a $19 million receivable. Should any additional amounts ultimately be recovered by FedEx Express on this matter, they will be recognized in the period that they are realized.
Net interest expense increased $35 million during the nine months of 2005, as the favorable resolution of the tax case described below lowered net interest expense in the nine months of 2004. Additional borrowings related to the FedEx Kinko’s acquisition that have been outstanding for all nine months of 2005 also contributed to the increase.
19
As a result of the passage of the American Jobs Creation Act of 2004, we recognized an $11 million tax benefit in the nine months of 2005. This was principally due to the reduction of a valuation allowance previously established against certain foreign tax credits arising from our non-Express international operations. Our effective tax rates were 38% for the third quarter and 37.5% for the nine months of 2005. Our effective tax rates for the third quarter and nine months of 2004 were 38% and 37%, respectively. The lower effective tax rate for the nine months of 2004 was primarily related to the jet engine maintenance tax ruling described below, which was received in the first quarter of 2004,2006 were primarily driven by higher costs at FedEx Express to support IP volume growth requirements and lower pre-taxproportionately 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 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, predominately at FedEx Express. The charge related primarily to rent escalations in on-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 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 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 the 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 quarter were affected by the storm, our results of operations for the first quarter were not significantly impacted.
Net interest expense decreased $15 million during the first quarter of 2006. The decrease in net interest expense was primarily due to a reduction in the level of outstanding debt and capital leases as a result of scheduled payments, additional capitalized interest and increased interest income. For 2005, we
Our effective tax rate was 38.25% for the first quarter of both 2006 and 2005. We expect the effective tax rate to be inapproximate 38% for the 37% to 38% range;remainder of the fiscal year; however, the actual rate will depend on a number of factors, including the amount and source of operating income and the timing and nature of discrete income tax events.income.
Outlook
In February 2005, the Sixth Circuit Court of Appeals reaffirmed the favorable ruling from the U.S. District Court in Memphis regarding the tax treatment of jet engine maintenance costs, previously received during the first quarter of 2004. The Sixth Circuit’s decision did not have any impact on our financial condition, results of operations or tax rate during the third quarter of 2005. During the first quarter of 2004, we recognized a one-time benefit of $26 million, net of tax, or $0.08 per diluted share, primarily related to the reduction of accruals 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).
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 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 the third quarter and nine months of 2004 we incurred $14 million and $429 million, respectively, of business realignment costs related to these programs. At May 31, 2004, we had remaining business realignment related accruals of $28 million. At February 28, 2005, these accruals had decreased to $10 million due predominantly to cash payments made in the nine months 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.
Outlook
Our outlook anticipates continuedwe expect ongoing revenue and earnings growth across all FedEx operating companies in our transportation segments for the remainder of 2005, led by volume growth, productivity gains and continued yield improvements.2006. Our view stems from expectations of strong customer demand for services across our transportation operating companies a lower cost structure at FedEx Express and continued, albeit slower, growth in the
20
worldwide economy. 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 revenuesU.S. domestic revenue at FedEx Kinko’s in the fourth quarter of 2005, with continuing integration costs negatively impacting margins.
Our management teams continue to examine additional cost reductionExpress. We anticipate improved volumes and operational productivity opportunities as we focus on optimizing our networks, improving our service offerings and enhancing the customer experience. These opportunities include initiatives to improve pick-up and delivery route optimization, increased cross-operating company collaboration and managing the growth of employee salaries and benefits. This will position FedEx to increase cash flows and financial returns through improved operating margin.
In January 2005 we implemented average list price increases of 2.9%yields at FedEx Ground and 4.6%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 is expected to generate 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 trailing impact of adjustments to the FedEx Express fuel surcharge can significantly affect earnings in the short term. Incremental costs associated with the new westbound and eastbound around-the-world flights at FedEx Express onwill be significant in 2006, and a competitive pricing environment, heightened by continuing high fuel prices, may limit base U.S. domestic and U.S. outbound international shipments, re-introduced an indexed fuel surcharge for FedEx Ground and implemented an approximate 2% fuel surcharge decrease at FedEx Express. Whileyield growth, particularly in our jet and diesel fuel surcharge revenues at FedEx Express and FedEx Freight more than offset significantly higher fuel costs during the third quarter and nine months of 2005, our future results could be negatively affected by prolonged high fuel costs to the extent these costs negatively impact the worldwide economy. In addition, should the recent trend of fuel cost increases continue, margins for the remainder of 2005 could be negatively impacted. Competitive pressures may also limit our ability to continue to maintain or increase our fuel surcharges in response to rising fuel prices.
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 and are ongoing. 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 not had a material impact on our operating results for the periods presented. In 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.
However, it is possible that increased security requirements 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 lag changes in actual fuel prices paid. Therefore, our operating income could be materially affected should the price of fuel suddenly changecontinue to fluctuate by a significant amount.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
21In 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.
2221
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- and nine-monththree-month periods ended February 28, 2005 and February 29, 2004: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 |
|
|
|
| Three Months Ended |
| Percent |
| Nine Months Ended |
| Percent |
| ||||||||
|
| 2005 |
| 2004 |
|
| 2005 |
| 2004 |
|
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Package: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. overnight box |
| $ | 1,493 |
| $ | 1,385 |
| 8 |
| $ | 4,413 |
| $ | 4,080 |
| 8 |
|
U.S. overnight envelope |
| 444 |
| 398 |
| 12 |
| 1,315 |
| 1,238 |
| 6 |
| ||||
U.S. deferred |
| 759 |
| 686 |
| 11 |
| 2,089 |
| 1,918 |
| 9 |
| ||||
Total U.S. domestic package revenue |
| 2,696 |
| 2,469 |
| 9 |
| 7,817 |
| 7,236 |
| 8 |
| ||||
International Priority (IP) |
| 1,514 |
| 1,271 |
| 19 |
| 4,491 |
| 3,684 |
| 22 |
| ||||
Total package revenue |
| 4,210 |
| 3,740 |
| 13 |
| 12,308 |
| 10,920 |
| 13 |
| ||||
Freight: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. |
| 474 |
| 419 |
| 13 |
| 1,366 |
| 1,186 |
| 15 |
| ||||
International |
| 94 |
| 97 |
| (3) |
| 275 |
| 299 |
| (8) |
| ||||
Total freight revenue |
| 568 |
| 516 |
| 10 |
| 1,641 |
| 1,485 |
| 11 |
| ||||
Other (1) |
| 137 |
| 118 |
| 16 |
| 416 |
| 385 |
| 8 |
| ||||
Total revenues |
| 4,915 |
| 4,374 |
| 12 |
| 14,365 |
| 12,790 |
| 12 |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
| 1,961 |
| 1,855 |
| 6 |
| 5,723 |
| 5,495 |
| 4 |
| ||||
Purchased transportation |
| 216 |
| 177 |
| 22 |
| 613 |
| 504 |
| 22 |
| ||||
Rentals and landing fees |
| 411 |
| 388 |
| 6 |
| 1,193 |
| 1,142 |
| 4 |
| ||||
Depreciation and amortization |
| 199 |
| 203 |
| (2) |
| 598 |
| 610 |
| (2) |
| ||||
Fuel |
| 498 |
| 356 |
| 40 |
| 1,433 |
| 959 |
| 49 |
| ||||
Maintenance and repairs |
| 307 |
| 300 |
| 2 |
| 954 |
| 878 |
| 9 |
| ||||
Business realignment costs |
| — |
| 12 |
| NM |
| — |
| 423 |
| NM |
| ||||
Airline Stabilization Act charge |
| — |
| — |
| NM |
| 48 |
| — |
| NM |
| ||||
Intercompany charges |
| 382 |
| 350 |
| 9 |
| 1,118 |
| 1,039 |
| 8 |
| ||||
Other |
| 601 |
| 515 |
| 17 |
| 1,702 |
| 1,518 |
| 12 |
| ||||
Total operating expenses |
| 4,575 |
| 4,156 |
| 10 |
| 13,382 |
| 12,568 |
| 6 |
| ||||
Operating income |
| $ | 340 |
| $ | 218 | (2) | 56 |
| $ | 983 |
| $ | 222 | (3) | 343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating margin |
| 6.9 | % | 5.0 | %(2) |
|
| 6.8 | % | 1.7 | %(3) |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Package Statistics (4) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Average daily package volume (ADV): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. overnight box |
| 1,217 |
| 1,197 |
| 2 |
| 1,182 |
| 1,178 |
| — |
| ||||
U.S. overnight envelope |
| 681 |
| 628 |
| 8 |
| 668 |
| 655 |
| 2 |
| ||||
U.S. deferred |
| 1,086 |
| 1,003 |
| 8 |
| 961 |
| 933 |
| 3 |
| ||||
Total U.S. domestic ADV |
| 2,984 |
| 2,828 |
| 6 |
| 2,811 |
| 2,766 |
| 2 |
| ||||
IP |
| 435 |
| 393 |
| 11 |
| 432 |
| 386 |
| 12 |
| ||||
Total ADV |
| 3,419 |
| 3,221 |
| 6 |
| 3,243 |
| 3,152 |
| 3 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue per package (yield): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. overnight box |
| $ | 19.79 |
| $ | 18.37 |
| 8 |
| $ | 19.66 |
| $ | 18.23 |
| 8 |
|
U.S. overnight envelope |
| 10.51 |
| 10.06 |
| 4 |
| 10.35 |
| 9.95 |
| 4 |
| ||||
U.S. deferred |
| 11.26 |
| 10.85 |
| 4 |
| 11.44 |
| 10.82 |
| 6 |
| ||||
U.S. domestic composite |
| 14.57 |
| 13.86 |
| 5 |
| 14.63 |
| 13.77 |
| 6 |
| ||||
IP |
| 56.14 |
| 51.41 |
| 9 |
| 54.73 |
| 50.19 |
| 9 |
| ||||
Composite package yield |
| 19.86 |
| 18.43 |
| 8 |
| 19.97 |
| 18.23 |
| 10 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Freight Statistics (4) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Average daily freight pounds: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. |
| 9,331 |
| 9,082 |
| 3 |
| 8,842 |
| 8,540 |
| 4 |
| ||||
International |
| 1,868 |
| 2,060 |
| (9) |
| 1,867 |
| 2,143 |
| (13) |
| ||||
Total average daily freight pounds |
| 11,199 |
| 11,142 |
| 1 |
| 10,709 |
| 10,683 |
| — |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue per pound (yield): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. |
| $ | 0.82 |
| $ | 0.73 |
| 12 |
| $ | 0.81 |
| $ | 0.73 |
| 11 |
|
International |
| 0.81 |
| 0.75 |
| 8 |
| 0.78 |
| 0.74 |
| 5 |
| ||||
Composite freight yield |
| 0.82 |
| 0.74 |
| 11 |
| 0.81 |
| 0.73 |
| 11 |
|
(1)Other includes FedEx Trade Networks.
(2) Includes $12 million of business realignment costs, described herein, which reduced operating margin by 28 basis points.
(3) Includes $423 million of business realignment costs, described herein, which reduced operating margin by 330 basis points.
(4) Package and freight statistics include only the operations of FedEx Express.
23
FedEx Express segment total revenues increased 11% in the thirdfirst 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 package revenues. FedEx Express segment total revenues increased in the nine months of 2005, principally due to higher IP revenues (particularly in Asia, U.S. outbound and Europe) and higher U.S. domestic yields. During the thirdfirst quarter, IP revenues experienced solidgrew 13% on yield growth of 19% on volume growth of 11%7% and a 9%6% increase in yield. During the nine months of 2005, IP revenues experienced strong growth of 22% on volume growth of 12% and a 9% increase in yield. Asia experienced substantial average daily volume growth during both the third quarter and nine months of 2005.volume. Outbound shipments from the United States Europeexperienced solid average daily volume growth during the first quarter of 2006, while Asia and Latin America alsoEurope continued to improve. IP yield increased across all regions during the thirdfirst quarter and nine months of 20052006 due primarily to higher fuel surcharge revenue, increasesan increase in international average weight per package and favorable exchange rate differences, partially offset by a decline in international average rate per pound.
differences.
U.S. domestic composite yield increased 5% in3% during the thirdfirst quarter and 6% for the nine months of 2005,2006 due to higher fuel surcharge revenue and increasesan increase in average rate per pound, partially offset by a decrease in average weight per package and average rate per pound.package. U.S. domestic volumes at FedEx Express increased 6%4% in the thirdfirst quarter and 2% forof 2006, continuing the nine monthsmomentum of improved quarterly growth from the second half of 2005. Freight revenue increased during the third quarter and nine months of 20052006 due to higher yields and growth in U.S. domestic freight volumes, which more than offset the effect of lowervolumes. As capacity is added to our international volumes. We expect continuing decreases innetwork, we may continue to realize higher international freight volumes as we prioritize sales efforts to fill space on international flights withvolume until higher yielding IP shipments.shipment traffic grows into the added capacity. In January 2005, we implemented an average list price
23
increase of 4.6% on FedEx Express U.S. domestic shipments and U.S. outbound international shipments, while we lowered our fuel surcharge index by 2%.
200 basis points.
Fuel surcharge revenue was higher in the thirdfirst quarter and nine months 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 13.0% during the nine months of 2005 and between 3.0% and 5.0% during the prior year period. Internationalinternational fuel surcharges ranged between 3.0% and 13.0% duringas follows for the nine months of 2005 and between 2.0% and 5.0% 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 $25 million during the thirdfirst quarter and nine months of 2005.2006. The thirdfirst quarter and nine months of 20042006 included $12a one-time, non-cash charge to adjust the accounting for certain facility leases of $75 million and $423 million, respectively, 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 third quarter and nine months of 2005. During the nine months of 2005, increases in revenues, savings from our business realignment programs, the timing of adjustments to fuel surcharges and ongoing cost control efforts more than offset salary increases, higher incentive compensation, purchased transportation maintenance costs and an Airline Stabilization Act charge.
costs.
During the thirdfirst quarter and nine months of 2005,2006, fuel costs were higher due to ana 42% increase in the average price per gallon of aircraftjet fuel, while gallons consumed increased slightly. However, fuel surcharge revenue more thansubstantially offset higher jet fuel prices. Purchased transportation costs increased forin the thirdfirst quarter and nine months of 2005 as2006, led by IP volume growth led to an increase in contract pick-up and delivery services. Depreciation and amortization expense decreased, reflecting lower capital spending over the past several years. Higher maintenance costs during the third quarter and nine months of 2005 were driven bywhich required a higher utilization of aircraftcontract pickup and a higher average agedelivery services. The increase in the first quarter of certain types of our aircraft.
2006 in rentals and landing fees is primarily due to the one-time adjustment for leases described above.
24
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- and nine-monththree-month periods ended February 28, 2005 and February 29, 2004: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 |
|
|
|
| Three Months Ended |
| Percent Change |
| Nine Months Ended |
| Percent Change |
| ||||||||
|
| 2005 |
| 2004 |
|
| 2005 |
| 2004 |
|
| ||||||
Revenues |
| $ | 1,200 |
| $ | 960 |
| 25 |
| $ | 3,447 |
| $ | 2,852 |
| 21 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
| 214 |
| 183 |
| 17 |
| 624 |
| 547 |
| 14 |
| ||||
Purchased transportation |
| 464 |
| 367 |
| 26 |
| 1,330 |
| 1,076 |
| 24 |
| ||||
Rentals |
| 31 |
| 26 |
| 19 |
| 89 |
| 72 |
| 24 |
| ||||
Depreciation and amortization |
| 47 |
| 38 |
| 24 |
| 130 |
| 114 |
| 14 |
| ||||
Fuel |
| 11 |
| 4 |
| 175 |
| 31 |
| 9 |
| 244 |
| ||||
Maintenance and repairs |
| 28 |
| 22 |
| 27 |
| 80 |
| 69 |
| 16 |
| ||||
Business realignment costs |
| — |
| 1 |
| NM |
| — |
| 1 |
| NM |
| ||||
Intercompany charges |
| 124 |
| 107 |
| 16 |
| 358 |
| 312 |
| 15 |
| ||||
Other |
| 132 |
| 100 |
| 32 |
| 374 |
| 289 |
| 29 |
| ||||
Total operating expenses |
| 1,051 |
| 848 |
| 24 |
| 3,016 |
| 2,489 |
| 21 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| $ | 149 |
| $ | 112 |
| 33 |
| $ | 431 |
| $ | 363 |
| 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating margin |
| 12.4 | % | 11.6 | % |
|
| 12.5 | % | 12.7 | % |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Average daily package volume (1) |
| 2,660 |
| 2,296 |
| 16 |
| 2,609 |
| 2,250 |
| 16 |
| ||||
Revenue per package (yield) (1) |
| $ | 6.79 |
| $ | 6.52 |
| 4 |
| $ | 6.60 |
| $ | 6.44 |
| 2 |
|
(1) Package statistics include only the operations of FedEx Ground.
FedEx Ground Segment Revenues
Revenues increased during the thirdfirst quarter and nine months of 20052006 principally due to higher volumes. While average dailysolid volume and yield growth and the inclusion of the operations for FedEx SmartPost, which was led by continued growth of our home delivery service, averageacquired on September 12, 2004. Average daily volumes increased across virtually all of our service lines. The resultsservices and were primarily attributable to the continued growth of operations of FedEx SmartPost have been included from the date of its acquisition, September 12, 2004, and contributed nominally to revenue growth in the three and nine months of 2005. Yield improvement, as well as one additional day in the third quarter and two additional operating days in the nine months of 2005, also contributed to revenue growth.
our home delivery service.
Yield at FedEx Ground increased during the thirdfirst quarter and nine months of 20052006 primarily due to higher extra service revenue, the fuel surcharge and the January 2005 general rate increases,increase, partially offset by higher incentivescustomer discounts and a lower average weight per package. Gains in extra service revenue are attributable to the reinstatement of the fuel surcharge and increases in residential and commercial delivery surcharges. In January 2005, we implemented an average list price increase of 2.9% on FedEx Ground services. In addition, FedEx Groundand reintroduced an indexed fuel surcharge for all shipments, effective January 3, 2005. ThisNo fuel surcharge was 2.0% in both January and February of 2005. Theeffect during the prior year period.
Our fuel surcharge had been discontinued on January 5, 2004.ranged as follows for the three-month period ended August 31:
2005 | |||
Low | 2.50 | % | |
High | 2.75 | ||
Average | 2.67 |
25
FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 33%1% during the thirdfirst quarter of 2006 as yield and 19% for the nine months of 2005 as revenuevolume growth and productivity more than offset higher operating expenses. Purchased transportation increased at a higher rate than revenuein the first quarter of
25
2006 primarily due to the impact of higher fuel costs on contractor settlements and the acquisitioninclusion of operating costs related to FedEx SmartPost and a change in the mix of business at FedEx Supply Chain Services.SmartPost. Salaries and employee benefits, as well as other operating costs, increased in the third quarter and nine months of 20052006 principally due to increases in staffing and facilities to support volume growth. Also, duringDespite improved field productivity and aggressive cost control, the nine monthssegment operating margin declined due to FedEx SmartPost and higher year-over-year expenses related to investment in new technology, as well as the opening of 2005, FedEx Supply Chain Services incurred a $10 million chargethree new hubs in other operating expenses for the termination of a vendor agreement.
line with our long-term growth 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- and nine-monththree-month periods ended February 28, 2005 and February 29, 2004:August 31:
|
| Three Months Ended |
| Percent |
| Nine Months Ended |
| Percent |
|
|
|
|
|
| Percent |
| ||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
|
| 2005 |
| 2004 |
| Change |
| |||||||||||
Revenues |
| $ | 747 |
| $ | 630 |
| 19 |
| $ | 2,374 |
| $ | 1,931 |
| 23 |
|
| $ | 892 |
| $ | 807 |
|
| 11 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Salaries and employee benefits |
| 404 |
| 346 |
| 17 |
| 1,220 |
| 1,031 |
| 18 |
|
| 439 |
| 410 |
|
| 7 |
|
| ||||||
Purchased transportation |
| 71 |
| 59 |
| 20 |
| 243 |
| 179 |
| 36 |
|
| 72 |
| 84 |
|
| (14 | ) |
| ||||||
Rentals and landing fees |
| 25 |
| 25 |
| — |
| 76 |
| 74 |
| 3 |
|
| 24 |
| 25 |
|
| (4 | ) |
| ||||||
Depreciation and amortization |
| 25 |
| 24 |
| 4 |
| 75 |
| 69 |
| 9 |
|
| 30 |
| 24 |
|
| 25 |
|
| ||||||
Fuel |
| 61 |
| 43 |
| 42 |
| 180 |
| 121 |
| 49 |
|
| 82 |
| 54 |
|
| 52 |
|
| ||||||
Maintenance and repairs |
| 33 |
| 28 |
| 18 |
| 95 |
| 84 |
| 13 |
|
| 28 |
| 31 |
|
| (10 | ) |
| ||||||
Intercompany charges |
| 6 |
| 5 |
| 20 |
| 19 |
| 15 |
| 27 |
|
| 9 |
| 6 |
|
| 50 |
|
| ||||||
Other |
| 68 |
| 63 |
| 8 |
| 207 |
| 194 |
| 7 |
|
| 73 |
| 70 |
|
| 4 |
|
| ||||||
Total operating expenses |
| 693 |
| 593 |
| 17 |
| 2,115 |
| 1,767 |
| 20 |
|
| 757 |
| 704 |
|
| 8 |
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating income |
| $ | 54 |
| $ | 37 |
| 46 |
| $ | 259 |
| $ | 164 |
| 58 |
|
| $ | 135 |
| $ | 103 |
|
| 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating margin |
| 7.2 | % | 5.9 | % |
|
| 10.9 | % | 8.5 | % |
|
|
| 15.1 | % | 12.8 | % |
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Average daily LTL shipments (in thousands) |
| 60 |
| 55 |
| 9 |
| 63 |
| 56 |
| 13 |
|
| 65 |
| 64 |
|
| 2 |
|
| ||||||
Weight per LTL shipment (lbs) |
| 1,129 |
| 1,121 |
| 1 |
| 1,129 |
| 1,119 |
| 1 |
|
| 1,132 |
| 1,128 |
|
| — |
|
| ||||||
LTL yield (revenue per hundredweight) |
| $ | 15.58 |
| $ | 14.35 |
| 9 |
| $ | 15.36 |
| $ | 14.21 |
| 8 |
|
| $ | 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 19% in11% during the thirdfirst quarter and 23% in the nine months of 20052006 due to year-over-year growth in average daily LTL shipmentsyield and LTL yield. Market share gains driven in part by brand awareness, along with a stronger economy, contributed to the significant increase in average daily LTL shipments. LTL yield grew during the thirdfirst quarter and nine months of 2005,2006, reflecting incremental fuel surcharges, due to higher fuel prices,rates and growth in our interregional freight service and higher rates. Also,service. The LTL fuel surcharge, which applies to the nine monthsmajority of 2005 had one additionalour revenue, is based on the national U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. Using this index, the approximate LTL operating day thanfuel surcharge ranged as follows for the prior year.three-month periods ended August 31:
|
| 2005 |
| 2004 |
| ||
Low |
| 12.5 | % |
| 7.6 | % |
|
High |
| 16.8 |
|
| 9.6 |
|
|
Average |
| 14.6 |
|
| 8.4 |
|
|
26
FedEx Freight Segment Operating Income
FedEx Freight segment operating income increased 31% during the thirdfirst quarter and nine months 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 the third quarter and nine months of 2005 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 thirdfirst quarter and nine months of 2005 principally due to increases in staffing to support volume growthhigher wages and higher incentive compensation. Depreciation and amortization costs increased primarily due to the investment in our operating equipment. Purchased transportation costs decreased, reflecting increased due to growth inutilization of our equipment and drivers for interregional freight service.
services.
FEDEX KINKO’S SEGMENT
The following table shows revenues, operating expenses, and operating income and margin (dollars in millions) for the three- and nine-monththree-month periods ended February 28, 2005:August 31:
|
| Three |
| Nine |
|
|
|
|
|
| Percent |
| ||||||
|
|
|
|
|
|
| 2005 |
| 2004 |
| Change |
| ||||||
Revenues |
| $ | 499 |
| $ | 1,513 |
|
| $ | 517 |
| $ | 490 |
|
| 6 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
| 185 |
| 553 |
|
| 186 |
| 182 |
|
| 2 |
|
| ||||
Rentals |
| 103 |
| 327 |
|
| 102 |
| 102 |
|
| — |
|
| ||||
Depreciation and amortization |
| 36 |
| 100 |
|
| 36 |
| 32 |
|
| 13 |
|
| ||||
Maintenance and repairs |
| 17 |
| 36 |
|
| 18 |
| 17 |
|
| 6 |
|
| ||||
Intercompany charges |
| (1 | ) | 5 |
|
| 4 |
| 3 |
|
| 33 |
|
| ||||
Other operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Supplies, including paper and toner |
| 70 |
| 232 |
|
| 67 |
| 64 |
|
| 5 |
|
| ||||
Other |
| 78 |
| 201 |
|
| 88 |
| 71 |
|
| 24 |
|
| ||||
Total operating expenses |
| 488 |
| 1,454 |
|
| 501 |
| 471 |
|
| 6 |
|
| ||||
|
|
|
|
|
| |||||||||||||
Operating income |
| $ | 11 |
| $ | 59 |
|
| $ | 16 |
| $ | 19 |
|
| (16 | ) |
|
|
|
|
|
|
| |||||||||||||
Operating margin |
| 2.2 | % | 3.9 | % |
| 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 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.
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. During the nine months of 2005, FedEx Kinko’s focused its efforts on integrating a full range of FedEx service offerings and attracting a larger share of the commercial document solutions and business services market.
FedEx Kinko’s revenues and operating margin during the third quarter of 2005 reflect a decrease in business levels as compared to the second quarter of 2005primarily due to the slower winter months. During the third quarter and the nine months of 2005, revenues reflect continued international expansion and a strong demand for signs and graphics and retail services, while the demand for domestic copy products has weakened.
The operating margins for the third quarter and nine months of 2005 were adversely impacted by integration activities, including facility rebranding expenses, ramp-upincreased 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 offering of packaging and shipping services at its U.S. locations, and the centralization of the FedEx Kinko’s corporate support operations. Costs associated with the integration of FedEx Kinko’s will continue throughout the remainder of 2005.past twelve months.
27
LIQUIDITY
Cash and cash equivalents totaled $1.1$1.051 billion at February 28,August 31, 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 nine-monththree-month periods ended February 28, 2005 and February 29, 2004August 31 (in millions):
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Operating activities: |
|
|
|
|
| ||
Net income |
| $ | 1,001 |
| $ | 426 |
|
Noncash charges and credits |
| 1,120 |
| 1,087 |
| ||
Changes in operating assets and liabilities |
| (161 | ) | 219 |
| ||
Net cash provided by operating activities |
| 1,960 |
| 1,732 |
| ||
|
|
|
|
|
| ||
Investing activities: |
|
|
|
|
| ||
Business acquisitions, net of cash acquired |
| (122 | ) | (2,410 | ) | ||
Capital expenditures and other investing activities |
| (1,651 | ) | (878 | ) | ||
Net cash used in investing activities |
| (1,773 | ) | (3,288 | ) | ||
|
|
|
|
|
| ||
Financing activities: |
|
|
|
|
| ||
Proceeds from short-term borrowings, net |
| — |
| 1,929 |
| ||
Principal payments on debt |
| (173 | ) | (300 | ) | ||
Repurchase of treasury stock |
| — |
| (179 | ) | ||
Dividends paid |
| (63 | ) | (48 | ) | ||
Other financing activities |
| 87 |
| 91 |
| ||
Net cash (used in) provided by financing activities |
| (149 | ) | 1,493 |
| ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| $ | 38 |
| $ | (63 | ) |
|
| 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 |
| 783 |
| 737 |
| ||
Investing Activities: |
|
|
|
|
| ||
Capital expenditures and other investing activities |
| (670 | ) | (391 | ) | ||
Net cash used in investing activities |
| (670 | ) | (391 | ) | ||
Financing Activities: |
|
|
|
|
| ||
Principal payments on debt |
| (95 | ) | (13 | ) | ||
Proceeds from stock issuances |
| 18 |
| 30 |
| ||
Dividends paid |
| (24 | ) | (21 | ) | ||
Net cash used in financing activities |
| (101 | ) | (4 | ) | ||
Net increase in cash and cash equivalents |
| $ | 12 |
| $ | 342 |
|
Cash Provided by Operating Activities. CashThe $46 million increase in cash flows from operating activities for the nine months of 2005 improved 13% versus the comparable 2004 period. Increased earnings in the nine monthsfirst quarter of 2005 were partially offset by higher voluntary contributions2006 was largely attributable to ourincreased earnings and the collection of a refund payment of $59 million from the U.S. domestic pension plan, angovernment 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 receivables driven by revenue growth andcash flows from operating activities was partially offset by the payout of previously accrued amounts related to our 2004 annual2005 incentive compensation plans.
Pension Contributions. Net cash provided by operating activities reflect On September 1, 2005 we made voluntary, tax deductible contributions of $456 million to our principal U.S. domestic pension plan contributions of $460 million in the nine months of 2005 ($160 million during the third quarter) and $320 million in the nine months of 2004.
plans.
Cash Used for Investing Activities.Capital Investments Investing activities reflect the $122 million of cash used to acquire FedEx SmartPost in the second quarter of 2005.. Capital expenditures during the nine monthsfirst quarter of 20052006 were 86%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 February 28,August 31, 2005, no commercial paper was outstanding and the entire $1$1.0 billion under the revolving credit agreements werefacility was available for future borrowings. The agreements contain covenants requiringBorrowings 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 certain fixed charge coveragea leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times rentals and leverage ratios.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 agreementsagreement and do not expect the covenants to significantly affect our operations or ability to pay dividends. See Note 3
We also use capital and operating leases to finance a portion of our aircraft, facility, vehicles and equipment needs. In addition, we have a $1.0 billion shelf registration statement filed with the accompanying unaudited financial statementsSEC 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 such instruments. The entire $1.0 billion is available for further discussion of these credit facilities.
28
Cash Used for Share Repurchases. We did not repurchase any shares during the nine months of 2005. During the nine months of 2004, we repurchased 2,625,000 shares at an average price of $68.14 per share, which decreased cash flows by approximately $179 million. Based on our current financing strategy, we are issuing new shares in connection with our equity compensation programs rather than utilizing treasury shares. A total of 5.75 million shares remain under existing share repurchase authorizations.
future financings.
Dividends.Dividends paid in the nine monthsfirst quarter of 2006 and 2005 and 2004 were $63$24 million and $48$21 million, respectively. On February 18,August 19, 2005, our Board of Directors declared a dividend of $0.07$0.08 per share of common stock. The dividend is payable on April 1,October 3, 2005 to stockholders of record as of the close of business on March 11,September 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- and nine-monththree-month periods ended February 28, 2005 and February 29, 2004August 31 (in millions):
|
| Three Months Ended |
| Percent |
| Nine Months Ended |
| Percent |
|
|
|
|
|
| Dollar |
| Percent |
| ||||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
|
| 2005 |
| 2004 |
| Change |
| Change |
| |||||||||||||
Aircraft and related equipment |
| $ | 215 |
| $ | 126 |
| 71 |
| $ | 769 |
| $ | 303 |
| 154 |
|
| $ | 276 |
| $ | 134 |
|
| 142 |
|
|
| 106 |
|
|
Facilities and sort equipment |
| 124 |
| 75 |
| 65 |
| 345 |
| 220 |
| 57 |
|
| 92 |
| 97 |
|
| (5 | ) |
|
| (5 | ) |
| ||||||
Information and technology investments |
| 59 |
| 50 |
| 18 |
| 226 |
| 160 |
| 41 |
| |||||||||||||||||||
Information technology |
| 91 |
| 81 |
|
| 10 |
|
|
| 12 |
|
| |||||||||||||||||||
Vehicles |
| 44 |
| 16 |
| 175 |
| 214 |
| 152 |
| 41 |
|
| 176 |
| 57 |
|
| 119 |
|
|
| 209 |
|
| ||||||
Other equipment |
| 44 |
| 17 |
| 159 |
| 107 |
| 57 |
| 88 |
|
| 36 |
| 26 |
|
| 10 |
|
|
| 38 |
|
| ||||||
Total capital expenditures |
| $ | 486 |
| $ | 284 |
| 71 |
| $ | 1,661 |
| $ | 892 |
| 86 |
|
| $ | 671 |
| $ | 395 |
|
| 276 |
|
|
| 70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
FedEx Express segment |
| $ | 255 |
| $ | 160 |
| 59 |
| $ | 898 |
| $ | 422 |
| 113 |
|
| $ | 388 |
| $ | 165 |
|
| 223 |
|
|
| 135 |
|
|
FedEx Ground segment |
| 111 |
| 73 |
| 52 |
| 335 |
| 231 |
| 45 |
|
| 116 |
| 89 |
|
| 27 |
|
|
| 30 |
|
| ||||||
FedEx Freight segment |
| 36 |
| 12 |
| 200 |
| 180 |
| 98 |
| 84 |
|
| 82 |
| 62 |
|
| 20 |
|
|
| 32 |
|
| ||||||
FedEx Kinko’s segment (1) |
| 40 |
| — |
| NM |
| 101 |
| — |
| NM |
| |||||||||||||||||||
Other |
| 44 |
| 39 |
| 13 |
| 147 |
| 141 |
| 4 |
| |||||||||||||||||||
FedEx Kinko’s segment |
| 14 |
| 29 |
|
| (15 | ) |
|
| (52 | ) |
| |||||||||||||||||||
Other, principally FedEx Services |
| 71 |
| 50 |
|
| 21 |
|
|
| 42 |
|
| |||||||||||||||||||
Total capital expenditures |
| $ | 486 |
| $ | 284 |
| 71 |
| $ | 1,661 |
| $ | 892 |
| 86 |
|
| $ | 671 |
| $ | 395 |
|
| 276 |
|
|
| 70 |
|
|
(1) The FedEx Kinko’s segment was formed in the fourth quarter of 2004 following the acquisition of Kinko’s, Inc. on February 12, 2004.
Capital expenditures during the thirdfirst quarter and nine months of 20052006 were 70% higher than the prior year period primarily due to the timing of planned aircraft expenditures at FedEx Express to support IP volume growth. FedEx Ground continues to expand its network and is on track to increase daily package processing capacity to 4.9 million by 2010. For all of 2005, we expect capital expenditures of approximately $2.3 billion, compared to $1.3 billion in 2004. The expected year-over-year increase will fund additional aircraft capacity for FedEx
29
Express, primarily to support IP volume growth. Also, additional investments will bewere made in the FedEx Ground and FedEx Freight 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. 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
CONTRACTUAL CASH OBLIGATIONS
TheAs required under SEC rules and regulations, the following table sets forth a summary of our contractual cash obligations as of February 28,August 31, 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. Other thanExcept 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 February 28,August 31, 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 |
| |||||||||||||||||||
|
| 2005 (1) |
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| There- |
| Total |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Amounts reflected in Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Long-term debt |
| $ | 609 |
| $ | 265 |
| $ | 844 |
| $ | — |
| $ | 499 |
| $ | 788 |
| $ | 3,005 |
|
Capital lease obligations (2) (3) |
| 14 |
| 122 |
| 22 |
| 99 |
| 11 |
| 225 |
| 493 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Other cash obligations not reflected in Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Unconditional purchase obligations (3) |
| 233 |
| 576 |
| 308 |
| 237 |
| 663 |
| 1,441 |
| 3,458 |
| |||||||
Interest on long-term debt |
| 33 |
| 134 |
| 107 |
| 83 |
| 83 |
| 1,729 |
| 2,169 |
| |||||||
Operating leases (3) |
| 423 |
| 1,587 |
| 1,450 |
| 1,330 |
| 1,158 |
| 8,203 |
| 14,151 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total |
| $ | 1,312 |
| $ | 2,684 |
| $ | 2,731 |
| $ | 1,749 |
| $ | 2,414 |
| $ | 12,386 |
| $ | 23,276 |
|
(1) Cash obligations for the remainder of 2005.2006.
(2)Capital lease obligations represent principal and interest payments.
(3)See Note 7 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
30
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.
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 February 28,August 31, 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 or 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 $40$36 million as of February 28,August 31, 2005, for the residual values of vehicles and facilities at the end of the respective operating lease periods. Although we expect that some of these leased assets willmay have a residual value at the end of the lease term that is 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
31
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 “Outlook,” “Reportable Segments,” “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 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 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;
•· adverse weather conditions or natural disasters;
32
•· 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
33
As of February 28,August 31, 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- and nine-month periodsthree-month period ended February 28,August 31, 2005 and February 29, 2004, 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 February 28,August 31, 2005 (the end of the period covered by this Quarterly Report on Form 10-Q).
During our fiscal quarter ended February 28,August 31, 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.
34
Poison Pill Policy
As part of its annual review of However, we have made certain changes in our Corporate Governance Guidelines,policies and procedures to ensure our Board of Directors adopted a shareholder rights plan ("poison pill") policy on March 14, 2005. Under the terms of the policy, the Board must obtain stockholder approval prior to adopting a poison pill unless the Board, including a majority of the independent members of the Board,accounting for leases is in the exercise of its fiduciary responsibilities, determines that, under the circumstances then existing, it would be in the best interests of FedEx and its stockholders to adopt a poison pill without prior stockholder approval. If a poison pill is adopted by the Board without prior stockholder approval, the poison pill must provide that it will expire within one year of adoption unless ratified by stockholders.
The poison pill policy has been incorporated into FedEx's Corporate Governance Guidelines, which are available in the corporate governance section of the Investor Relations page of our Web site at http://www.fedex.com/us/investorrelations. The information on our Web site, however, does not form part of this Report.
Retirement of FedEx Executive Vice President, General Counsel and Secretary
On March 14, 2005, FedEx announced that Kenneth R. Masterson, FedEx's Executive Vice President, General Counsel and Secretary, will retire effective June 1, 2005. Mr. Masterson will serve as a consultant to FedEx after his retirement. Mr. Masterson will be succeeded by Christine P. Richards, who is currently FedEx's Corporate Vice President of Customer and Business Transactions and the General Counsel of FedEx Services. Ms. Richards, age 50, has served in various capacitiesaccordance with FedEx since 1984.
generally accepted accounting principles.
35
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. |
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 | |||||
|
|
| ||||
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. | |||
| ||||||
|
| |||||
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.
| |||
|
|
| |
| |||
| |||
| |||
37
|
| ||||
|
| ||||
|
| ||||
|
| ||||
|
| ||||
|
| ||||
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