FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2011; comparisons are with the corresponding 2010 periods. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $9.663 billion | $8.701 billion | $28.752 billion | $25.306 billion |
| Operating income | $393 million | $416 million | $1.490 billion | $1.302 billion |
| Operating margin | 4.1% | 4.8% | 5.2% | 5.1% |
| Net income | $231 million | $239 million | $894 million | $765 million |
| Diluted EPS | $0.73 | $0.76 | $2.82 | $2.43 |
Quarterly revenue rose 11%, but operating income fell 6% and diluted EPS fell 4%; severe winter weather and higher operating costs more than offset revenue growth. Management estimated winter weather reduced quarterly diluted EPS by approximately $0.12. For the nine months, revenue increased 14%, operating income 14%, net income 17%, and diluted EPS 16%.
Cash flow and liquidity: Nine-month cash from operations was $2.457 billion, versus $1.908 billion. Capital expenditures were $2.703 billion, versus $1.981 billion; cash used in investing was $2.784 billion. Cash declined $593 million to $1.359 billion from $1.952 billion at May 31, 2010. Dividends paid were $113 million.
Debt and balance sheet: Long-term debt, excluding capital leases, had a $1.5 billion carrying value; current and long-term debt on the balance sheet totaled $1.685 billion. The company repaid $250 million of notes at maturity during the quarter. Its $1 billion revolving facility was fully available, with no commercial paper outstanding. Adjusted-debt-to-capital covenant leverage was 0.5 against a maximum of 0.7; the company reported compliance. Total assets were $26.202 billion and stockholders’ investment was $14.880 billion at February 28.
Segments and material changes
- FedEx Express: Third-quarter revenue increased 11% to $6.049 billion, while operating income fell 33% to $178 million and margin declined to 2.9% from 4.9%. Higher maintenance, compensation and benefit costs, and weather weighed on results. Nine-month operating income increased 12% to $799 million.
- FedEx Ground: Third-quarter revenue rose 14% to $2.184 billion; operating income increased 26% to $325 million and margin improved to 14.9% from 13.5%. Volume and yield grew at both Ground and SmartPost.
- FedEx Freight: Third-quarter revenue increased 8% to $1.123 billion, but the segment recorded a $110 million operating loss. Nine-month operating loss was $217 million, compared with $117 million. The results included costs from combining FedEx Freight and FedEx National LTL operations.
The LTL combination was completed January 30, 2011. Related program costs were $43 million in the quarter and $130 million for nine months, including severance, lease terminations, impairments, accelerated depreciation, and other costs. Management expected the integrated network to improve efficiency and forecast a return to FedEx Freight profitability in the fourth quarter.
Retirement-plan costs increased to $629 million for nine months from $344 million, reflecting a lower discount rate and restored company matching contributions. Fuel expense increased 29% for the nine-month period, although management said fuel surcharges offset incremental fuel costs over that period. The company acquired Indian logistics and express businesses for $96 million in cash; a proposed Mexican acquisition was expected to close during 2011, subject to customary conditions.
Outlook, risks, and contingencies
- Management expected improving global economic conditions to support greater fourth-quarter demand and significant fourth-quarter earnings growth. It also anticipated higher compensation and benefits costs, including retirement and medical costs, and higher aircraft maintenance expense.
- Capital expenditures were expected to be approximately $3.5 billion for fiscal 2011. Management said operating cash flow was expected to fund the spending; planned investments included aircraft, network expansion, vehicles, and information technology.
- Management identified Middle East and North Africa political turmoil and the Japan earthquake and tsunami as sources of uncertainty for fuel prices, operations, shipping patterns, and global recovery. Fuel surcharge adjustments lag price changes, creating short-term earnings exposure.
- FedEx Express pilots had a tentative labor agreement; ratification was expected in the fourth quarter but was not assured.
- FedEx Ground contractor-classification litigation and proceedings remained unresolved. The company said potential losses or business changes could be material, but did not consider a material loss probable. Some class-action and state proceedings continued; a number of favorable summary judgments were under appeal.
- FedEx accrued a $66 million loss for an ATA Airlines verdict and appealed it; it did not accrue $5 million of awarded interest, which it said was not probable on the information then available. The company also disclosed a Department of Justice antitrust investigation concerning third-party shipping consultants and related litigation; it denied anticompetitive conduct and said it was cooperating.
The interim financial statements were reviewed by the independent registered public accounting firm, not audited; the review report expressed no audit opinion.
Important facts for investors to verify
- Whether the expected fourth-quarter earnings growth and FedEx Freight return to profitability materialized.
- How weather-related disruption, fuel prices and surcharge timing affected subsequent margins and volumes.
- Actual fiscal 2011 capital spending, aircraft commitments, and cash flow after capital expenditures and pension contributions.
- Developments, potential costs, and operational effects of FedEx Ground contractor-classification cases and the ATA appeal.
- Ratification and terms of the pilots’ tentative contract, and developments in the DOJ inquiry and related consultant litigation.