FedEx Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended August 31, 2011, compared with the three months ended August 31, 2010, unless noted. FedEx operates express, ground, freight and related transportation and business services. Interim statements were reviewed, not audited.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $10.521 billion | $9.457 billion | +11% |
| Operating income | $737 million | $628 million | +17% |
| Operating margin | 7.0% | 6.6% | +40 bps |
| Net income | $464 million | $380 million | +22% |
| Diluted EPS | $1.46 | $1.20 | +22% |
| Operating cash flow | $860 million | $796 million | +$64 million |
| Capital expenditures | $1.110 billion | $1.012 billion | +10% |
Fuel expense rose 40% to $1.244 billion; management said fuel surcharges more than offset incremental fuel costs in its static analysis. Cash at August 31 was $1.959 billion, down from $2.328 billion at May 31. Operating cash flow was below capital expenditures by $250 million. Cash used in investing activities totaled $1.216 billion, including $111 million net for an acquisition.
At August 31, long-term debt was $1.668 billion, including $301 million current and $1.367 billion long-term. The $1 billion revolving credit facility was fully available, no commercial paper was outstanding, and the company reported compliance with its leverage covenant. Its adjusted debt-to-capital ratio was 0.5 against a maximum of 0.7.
Segment results and material changes
- FedEx Express: Revenue increased 12% to $6.592 billion, but operating income fell 19% to $288 million and margin declined to 4.4% from 6.0%. Higher yields were outweighed by weaker package volumes, especially in premium services, and slower global growth.
- FedEx Ground: Revenue increased 16% to $2.278 billion; operating income rose 42% to $407 million and margin improved to 17.9% from 14.6%. Average daily volume rose 5% at Ground and 29% at SmartPost, alongside yield gains.
- FedEx Freight: Revenue increased 6% to $1.328 billion. The segment returned to profitability, with $42 million operating income versus a $16 million loss and a 3.2% margin versus negative 1.3%. Higher yield and network efficiencies offset 7% lower average daily LTL shipments.
Revenue and earnings growth reflected Ground strength, Freight’s improved performance and yield management, while Express profitability was pressured by slowing demand. Salaries and benefits rose 5%, reflecting wage increases, higher incentive compensation and restored full 401(k) matching; higher fuel and purchased transportation were also significant cost pressures.
Outlook, liquidity, risks and unusual items
- Management expected a weaker global economy for the rest of FY2012, but anticipated continued revenue and earnings growth in Q2, driven by yield increases across transportation segments. Growth later in the year was difficult to predict; FedEx planned to adjust costs and capacity to demand while continuing strategic investment.
- FY2012 capital expenditures were expected to be approximately $4.2 billion. FedEx cited aircraft, Ground network expansion and Freight equipment; it noted limited ability to delay aircraft commitments without significant costs. Remaining-year required U.S. pension contributions were $270 million, with $21 million voluntary; a $127 million contribution was made in September.
- FedEx planned to begin repurchases under existing authorizations covering up to 5.7 million shares, subject to market conditions. A 5.9% average list price increase for specified U.S. Express services was announced for January 2, 2012, alongside a two-percentage-point reduction in the fuel surcharge index. Freight announced a 6.75% general rate increase effective September 6, 2011.
- Liquidity risks include volatile fuel prices and surcharge adjustment lags, intense competition, economic and shipment-volume uncertainty, and potential financing or credit-rating changes. Management also identified USPS financial difficulties and possible resulting operational or pricing changes as a risk.
- FedEx acquired Mexican domestic express carrier MultiPack on July 25, 2011 for $128 million cash; substantially all of the purchase price was allocated to goodwill. The acquisition was not material to reported results or financial condition.
- FedEx accrued a $66 million loss for an ATA Airlines contract verdict and appealed; it did not accrue $5 million of awarded pre-judgment interest, stating loss was not probable. Independent-contractor litigation could have a material impact, but management said a material loss was not probable and could not estimate a range. A California paystub class action also carried a reasonably possible but not estimable material loss.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Express package-volume weakness persists and whether cost and capacity adjustments can protect margins.
- Whether Ground growth and Freight’s return to profitability continue, including the effects of yield actions on volume.
- Cash generation relative to the approximately $4.2 billion FY2012 capital plan, aircraft commitments and pension contributions.
- Developments and possible exposure in owner-operator classification and California paystub litigation, plus the ATA appeal outcome.
- The reported $0.26 dividends declared per share in the income statement versus the separately disclosed $0.13-per-share dividend declared by the board in August; confirm the declaration and payment-period details in the full filing.