FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended August 31, 2009; comparisons are with the three months ended August 31, 2008 unless noted. FedEx provides express, ground and freight transportation, along with related services. The interim financial statements were reviewed by the independent accountant, not audited.
Financial performance
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Revenue | $8.009 billion | $9.970 billion | Down 20% |
| Operating income | $315 million | $630 million | Down 50% |
| Operating margin | 3.9% | 6.3% | Down 240 basis points |
| Net income | $181 million | $384 million | Down 53% |
| Diluted EPS | $0.58 | $1.23 | Down 53% |
| Cash provided by operating activities | $898 million | $698 million | Up $200 million |
| Capital expenditures | $880 million | $636 million | Up 38% |
Cash from operations less capital expenditures was approximately $18 million, versus $77 million in the prior-year quarter. Operating cash flow benefited substantially from a $263 million federal income tax refund; net cash taxes were a $213 million inflow. Cash and equivalents fell to $1.789 billion from $2.292 billion at May 31, 2009.
At August 31, total debt was approximately $2.076 billion, including $158 million current and $1.918 billion long-term. FedEx repaid $500 million of notes at maturity during the quarter. The company had a $1 billion revolving credit facility, fully available with no commercial paper outstanding. Its adjusted-debt-to-capital covenant ratio was 0.5, against a maximum of 0.7. Current assets were $6.388 billion and current liabilities $3.886 billion.
Segments and material changes
- FedEx Express: Revenue fell 23% to $4.924 billion; operating income declined 70% to $104 million and margin fell to 2.1% from 5.4%. Composite package yield declined 23%; freight pounds fell 13% and composite freight yield declined 19%.
- FedEx Ground: Revenue decreased 2% to $1.730 billion, but operating income rose 7% to $209 million and margin improved to 12.1% from 11.1%. SmartPost average daily volume grew 73%, while its yield fell 34%.
- FedEx Freight: Revenue declined 27% to $982 million; operating income was $2 million, down from $89 million, and margin fell to 0.2% from 6.6%. Average daily LTL shipments declined 14% and yield fell 13%.
Lower fuel surcharges, weak global demand, lower volumes in Express and Freight, and aggressive discounting—especially amid LTL overcapacity—drove the broad revenue and earnings decline. In Express, the weighted-average U.S. domestic and outbound fuel surcharge fell to 3.3% from 31.7%. Lower fuel expense and cost reductions helped offset some pressure, but the prior-year quarter had benefited from a lag between falling fuel prices and surcharge adjustments.
Cost actions included salary reductions, a hiring freeze, suspended 401(k) matching, reduced hours, network and facility adjustments, and tighter discretionary spending. Pension-plan expense increased to $75 million from $44 million, while total retirement-plan costs declined to $108 million from $142 million, principally reflecting lower defined-contribution costs. In September, after quarter-end, FedEx contributed $613 million to U.S. retirement plans, including $495 million voluntary and $118 million minimum-required contributions.
Outlook, risks and unusual items
- Management expected weak yields and comparatively soft demand into fiscal Q2. It reported some sequential volume improvement and anticipated somewhat better year-over-year comparisons in the second half, assuming a modest economic recovery and fuel prices near forecast levels; the timing and pace of recovery remained uncertain.
- Management said further deterioration could require additional network reductions, while stating it would not sacrifice service levels or customer experience for short-term savings. It expected fiscal 2010 capital expenditures of approximately $2.6 billion, including aircraft investment; cash flow from operations was expected to exceed capital expenditures.
- On September 17, FedEx announced a 5.9% average list-price increase for U.S. domestic and outbound Express shipments effective January 4, 2010, alongside surcharge changes, including a 2% reduction in its fuel surcharge index.
- FedEx identified fuel-price volatility and surcharge timing lags, intense pricing competition, economic weakness, credit-market access, pension and benefit costs, and foreign exchange as risks. S&P rated senior unsecured debt BBB with a stable outlook; Moody’s rated it Baa2 with a negative outlook.
- FedEx Ground faced approximately 50 independent-contractor classification class actions, including 29 certified, and about 40 state administrative proceedings. The company said a material loss or business-model changes were reasonably possible but not probable; it could not estimate a loss range. The IRS proposed $14 million plus interest for 2002 concerning Home Delivery contractors, substantially below its previously withdrawn tentative $319 million proposal; FedEx planned to contest the proposed assessment. Audits for 2004–2008 continued.
- Other proceedings include wage-and-hour class actions, for which management did not consider a loss probable, and an ATA Airlines contract lawsuit for which the potential loss could not yet be estimated; management did not consider a loss probable. The filing states there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether sequential volume improvements persisted and translated into stronger yields, revenue and margins, particularly in Express and Freight.
- Whether pricing pressure and reduced fuel surcharges continued to outweigh cost savings, and whether the announced Express price increase improved realized yields.
- Cash generation excluding the tax refund, the ability to fund planned capital spending, aircraft commitments and pension contributions, and the effect on cash balances.
- Developments in owner-operator classification litigation and IRS audits, including potential costs or operational changes.
- Credit-rating outlooks, access to financing, and compliance with the revolving-credit covenant.