Federal Express 1998 Annual Report Download - page 33

FDX CORPORATION P31
Company will carry out this task through a Company-
wide effort, assisted by consultants, to address internal
issues, and jointly with industry trade groups, to
address issues related to third parties which are com-
mon to transportation companies.
The Company has incurred approximately $50 million to
date, including consulting fees, internal staff costs and
other expenses. The Company expects to incur addi-
tional expenses of approximately $100 million in the
next two years to be Y2K compliant.
While the Company believes it is taking all appropriate
steps to achieve Y2K compliance, its Y2K issues and any
potential future business interruptions, costs, damages or
losses related thereto, are dependent, to a significant
degree, upon the Y2K compliance of third parties, both
domestic and international, such as government agencies,
customers, vendors and suppliers. The Y2K problem is
pervasive and complex, as virtually every computer opera-
tion will be affected in some way. Consequently, no assur-
ance can be given that Y2K compliance can be achieved
without significant additional costs.
Operating Income
The Company’s consolidated operating income
increased 99% in 1998 and decreased 35% in 1997.
Operating income for 1998 benefited from the effect of
the UPS strike; whereas, operating income for 1997
was reduced by the Viking asset impairment charge of
$225 million.
FedEx’s consolidated operating income increased 20%
and 12% in 1998 and 1997, respectively.
FedEx’s U.S. domestic operating income rose 35% and
3% in 1998 and 1997, respectively. In 1998, operating
income improved primarily due to increases in revenue
per package (3.9%) exceeding increases in cost per
package (2.9%) and due to a rise in average daily vol-
ume (11%). Also, as noted above, 1998 U.S. domestic
operating results were significantly impacted by the
UPS strike. Sales of engine noise reduction kits con-
tributed $127 million, $87 million and $63 million to
FedEx’s U.S. domestic operating income in 1998,1997
and 1996, respectively. In 1997, domestic operating
income included a $15 million pre-tax benefit from the
settlement of a Tennessee personal property tax mat-
ter. Increases in cost per package (1.4%) exceeded
increases in revenue per package (0.8%), while aver-
age daily volume rose 11%. U.S. domestic operating
margins were 7.8%, 6.7% and 7.3% in 1998, 1997
and 1996, respectively.
International operating income declined $57 million in
1998, compared with a $59 million increase in 1997.
International operating results declined in 1998 as a
result of slower growth of IP and IXF volumes during a
period of international network expansion. Lower air-
freight yields, higher salaries and employee benefits and
aircraft lease expense, additional start-up costs for sev-
eral new international flights and the net effect of foreign
currency fluctuations negatively impacted international
results. The increase in operating income in 1997 was
attributable to strong growth in the Company’s IP volumes
and airfreight pounds, partially offset by lower airfreight
yields. International operating margins were 2.3%, 4.4%
and 2.9% in 1998,1997 and 1996, respectively.
RPS reported operating income of $172 million, $136
million and $174 million for 1998, 1997 and 1996,
respectively. The increase in operating income for 1998
resulted from package volume growth and the positive
effect of the 12-day UPS strike. In 1997, despite a 4%
increase in revenues, higher fixed costs of RPS’s contin-
uing expansion and investment in technology and equip-
ment contributed to the decline in operating results.
Operating margins were 10.1%, 10.1% and 13.4% in
1998, 1997 and 1996, respectively.
Viking reported operating income of $28 million in
1998, an operating loss of $362 million in1997 and an
operating loss of $40 million in 1996. As discussed
above, operating results for 1998 include a $16 million
gain on the sale of certain Viking assets, and results for
1997 include a $225 million asset impairment charge.
Operating margins were 7.3%, (37.5%) and (4.8%) in
1998,1997 and 1996, respectively.
For additional information on the Company’s business
segments, see Note 12 of Notes to Consolidated
Financial Statements.
Other Income and Expense and Income Taxes
Net interest expense increased 19% for 1998, primar-
ily due to lower levels of capitalized interest at both
FedEx and Caliber. Interest is capitalized during the
modification of certain MD11 and DC10 aircraft from
passenger to freighter configuration, among other pro-
jects. For 1997, net interest expense increased 16%
due to higher debt levels at Caliber and the loss of
interest income from discontinued operations, partially
offset by lower effective interest rates at FedEx. The
level of capitalized interest in 1997 was comparable to
that of 1996.
Other, net for 1998 included a gain from an insurance
settlement for an MD11 aircraft destroyed in an acci-
dent in July 1997. Other, net for 1997 included a $17
million gain from an insurance settlement for a DC10
aircraft destroyed by fire in September 1996.
The Company’s effective tax rate was 44.6% in 1998,
53.9% in 1997 and 43.0% in 1996. Excluding non-
recurring items from the Caliber acquisition in 1998
and the Viking restructuring in 1997, the effective rate
would have been 41.5% in 1998 and 43.0% in 1997
and 1996. In each year, the effective tax rate (exclusive
of non-recurring items) was greater than the statutory
U.S. federal tax rate primarily because of state income
taxes and other factors as identified in Note 9 of Notes
to Consolidated Financial Statements. For 1999,
management expects the effective tax rate to remain
at a level similar to the 1998 rate (exclusive of non-
recurring items). The actual rate, however, is depen-
dent on a number of factors, including the amount and
source of operating income.