FedEx Corporation — Form 10-Q Summary
Business context and reporting period. FedEx provides express, ground and freight transportation, logistics, and related services. This unaudited quarterly report covers the fiscal third quarter and nine months ended February 28, 2013; comparisons are with the corresponding prior-year periods. Dollar amounts are in millions unless noted. The independent accountant performed an interim review, not an audit.
Key financial results
| Metric | Three months ended Feb. 28, 2013 | Prior-year quarter | Nine months ended Feb. 28, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $10,953 | $10,564 | $32,852 | $31,672 |
| Operating income | $589 | $813 | $2,049 | $2,330 |
| Operating margin | 5.4% | 7.7% | 6.2% | 7.4% |
| Net income | $361 | $521 | $1,258 | $1,482 |
| Diluted EPS | $1.13 | $1.65 | $3.97 | $4.67 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $2,976 | $3,017 |
- Quarterly revenue grew 4%, but operating income fell 28%, net income fell 31%, and diluted EPS fell 32%. For the nine months, revenue rose 4%, while operating income and net income declined 12% and 15%, respectively.
- Quarterly operating expenses increased to $10,364 from $9,751. Purchased transportation rose 16% in the quarter and 15% year to date; depreciation and amortization rose 10% and 12%, respectively. The prior-year quarter included a $66 legal-accrual reversal, which also depressed comparisons.
- By segment in the quarter, Express revenue was up 2% but operating income fell to $118 from $349, with margin down to 1.8% from 5.3%. Ground revenue grew 11%; operating income was $467 versus $465, and margin was 17.0% versus 18.8%. Freight revenue was flat and operating income was $4 versus a $1 loss.
- Cash and cash equivalents were $3,372 at February 28, 2013, versus $2,843 at May 31, 2012. Current assets were $9,745 and current liabilities $5,099. Total reported debt was $2,242, including $251 current and $1,991 long-term, compared with $1,667 at May 31, 2012.
- Nine-month capital expenditures were $2,430, down from $2,946. Operating cash flow less capital expenditures was $546, compared with $71 in the prior period. Investing cash use was $2,868, including $483 for acquisitions.
Material changes and management commentary
- Management attributed the Express profit decline principally to customers shifting from higher-yielding international priority to lower-yielding economy services, weaker international export yields, higher pension costs, and higher depreciation. International export package yield declined 3% in the quarter and 4% year to date.
- Ground benefited from e-commerce-related volume growth and market-share gains: quarterly average daily Ground volume increased 10%, and SmartPost volume increased 26%. Freight reported improved results from yield growth, shipment growth, and operating efficiencies.
- FedEx acquired transportation and logistics businesses in Brazil, France, and Poland for a combined $507, primarily to expand Express networks and capabilities. Their results were not material to consolidated operations; purchase accounting remained preliminary.
- The company recorded $47 of business realignment costs in the quarter and $64 year to date. Management forecast approximately $450–$550 of 2013 cash expenditures for the voluntary buyout program, with actual costs dependent on employee acceptance. It targeted $1.6 billion of annual Express profitability improvement by the end of 2016, measured against the full-year 2013 base business; most program benefits were expected in 2015 and 2016.
Outlook, liquidity, risks and contingencies
- Management expected fiscal 2013 revenue to increase but earnings to decrease, reflecting realignment costs and the Express service-mix shift. It expected Ground and Freight performance to partly offset those pressures. The expected 2013 effective tax rate was approximately 37%.
- Management was evaluating additional Express network-capacity actions, potentially including temporarily or permanently grounding aircraft; such actions could trigger impairment or other charges. Fiscal 2013 capital expenditures were expected to be approximately $3.6 billion, including aircraft, facilities, vehicles, and equipment.
- Liquidity sources included cash, operating cash flow, and a fully available $1 billion revolving credit facility; no commercial paper was outstanding at quarter-end. The facility maturity was extended to March 1, 2018. The adjusted-debt-to-capital covenant limit was 70%; the reported ratio was 52%, and FedEx stated it was in compliance. The company reported stable outlooks from S&P and Moody’s, while noting that rating downgrades could raise borrowing costs or limit financing access.
- FedEx reported $14,913 of future minimum operating-lease payments and $9,925 of aircraft and aircraft-related capital commitments. The contractual-obligations table totaled $30,597, but excludes certain recorded liabilities and contingent obligations and is not a forecast of total cash expenditures.
- FedEx Ground faced numerous lawsuits and proceedings challenging the classification of owner-operators as independent contractors. The company said a material loss was reasonably possible but not probable, and it could not estimate a meaningful range of potential loss. Other disclosed matters included wage-and-hour claims, a pending antitrust case and related DOJ civil inquiry, and a DOJ criminal investigation concerning packages for online pharmacies; potential loss in the criminal matter could not be estimated.
- The FedEx Express pilots’ labor contract became amendable in March 2013 and negotiations were underway. The USPS air-transportation agreement was due to expire in September 2013, with a replacement-service decision pending. Fuel-surcharge adjustments lag fuel-price changes, creating potential near-term earnings exposure.
Important facts for investors to verify
- Whether the Express shift toward economy international services persists, and whether capacity changes or aircraft groundings lead to impairments.
- Actual buyout-program costs, employee participation, timing of cash payments, and delivery of the targeted savings and margin improvements.
- Progress in Ground contractor-classification litigation and any resulting operational, tax, benefit, or expense exposure.
- Renewal or replacement terms for the USPS agreement and developments in the pilot negotiations.
- Cash generation, pension funding, aircraft and lease commitments, and debt levels relative to the company’s liquidity and covenant headroom.