FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 28, 2010, with results also reported for the nine months ended that date. Comparisons are with the corresponding 2009 periods. The filing describes FedEx’s express, ground, freight and related services businesses.
Financial results and condition
| Metric | Three months ended Feb. 28, 2010 | Nine months ended Feb. 28, 2010 |
|---|---|---|
| Revenue | $8.701 billion, up 7% | $25.306 billion, down 8% |
| Operating income | $416 million, versus $182 million | $1.302 billion, down 18% |
| Operating margin | 4.8%, versus 2.2% | 5.1%, versus 5.8% |
| Net income | $239 million, versus $97 million | $765 million, down 21% |
| Diluted EPS | $0.76, versus $0.31 | $2.43, versus $3.12 |
- Cash flow: Nine-month operating cash flow was $1.908 billion, down from $2.221 billion. Capital expenditures were $1.981 billion; cash used in investing was $1.950 billion. Cash declined $743 million to $1.549 billion.
- Liquidity and debt: Current assets were $6.683 billion and current liabilities $4.372 billion. Long-term debt, including current maturities, was $1.951 billion. The $1 billion revolver was entirely available, with no commercial paper outstanding. Adjusted debt-to-capital covenant ratio was 0.5 against a 0.7 maximum; FedEx reported compliance.
- Dividends: $0.11 per share declared for the quarter; nine-month dividends paid were $103 million.
Material changes and operating drivers
- Quarterly revenue and profit improved with higher volumes across transportation businesses, recovery in global demand and continued cost controls. Quarterly operating income rose 129%; net income rose 146%.
- Nine-month revenue and operating income fell, principally reflecting much lower fuel surcharges and yields, competitive pricing, and weaker freight results. Prior-year fuel-price and surcharge timing had benefited earnings; fuel volatility was a significant negative comparison in 2010.
- Express: Quarterly revenue rose 8% and operating income was $265 million versus $45 million. Nine-month revenue fell 11% and operating income fell 23% to $714 million. International Priority package volume rose 18% in the quarter; nine-month yields remained pressured.
- Ground: Quarterly revenue rose 7% and operating income rose 32% to $258 million. SmartPost volume grew 46% in the quarter and 58% year to date, partly offset by lower SmartPost yields over nine months.
- Freight: Quarterly revenue rose 14%, but the segment had a $107 million operating loss, compared with a $59 million loss. Nine-month revenue fell 11% and the segment recorded a $117 million loss versus $62 million income. Discounted pricing lifted quarterly shipments but depressed yields amid excess LTL capacity.
- Employee compensation costs began rising as merit increases and 401(k) matching were partly reinstated in January 2010; variable incentive compensation also increased. Pension costs rose year to date, while pension-plan contributions totaled $731 million through February and another $117 million was contributed in March.
Outlook, risks and contingencies
- Management expected stronger fourth-quarter demand and continued revenue and earnings growth, assuming continued economic recovery and fuel prices near forecast levels. It anticipated a more stable pricing environment and sought improved yields.
- Management forecast approximately $2.9 billion in fiscal 2010 capital expenditures, including aircraft, Ground network expansion and Freight equipment. It expected operating cash flow to exceed capital spending and said liquidity was adequate.
- Management warned that restored compensation programs would dampen earnings growth in the fourth quarter and fiscal 2011; higher network utilization could increase maintenance costs. A stalled recovery could require further network reductions.
- FedEx identified increased risk of a fourth-quarter noncash goodwill impairment at Freight; the segment carried $621 million of goodwill. Management did not consider an interim reassessment necessary as of February 28.
- Legal exposures include approximately 50 contractor-classification class actions and about 40 state administrative proceedings involving FedEx Ground owner-operators. Potential loss or business-model changes could be material, but management said a material loss was not probable and could not estimate a reasonable range. Other matters include wage-and-hour class actions and ATA Airlines’ $106 million contract-damages claim; management did not consider losses probable.
- Other principal risks include economic and shipment-demand uncertainty, competition and pricing, fuel-price/surcharge timing, pension expense and funding, foreign exchange, credit access, regulation, and litigation. The filing reported no material change in stated risk factors or market-risk positions.
- The interim financial statements received an independent accountant’s review, not an audit; the accountant reported no material modifications known to be needed for GAAP conformity.
Important facts for investors to verify
- Whether recovery, shipment growth and pricing improvements continued after February 28, particularly in Freight and international services.
- How fuel costs and surcharge timing affected subsequent margins and cash generation.
- Whether the Freight goodwill test resulted in an impairment and whether LTL excess capacity or discounting persisted.
- Developments in Ground contractor-classification litigation, related proceedings and any operational or financial consequences.
- Actual capital spending, pension contributions and pension expense compared with management’s outlook, as well as liquidity and covenant headroom.