FedEx Corporation — Q2 FY2013 Form 10-Q
Business context and period. FedEx provides express, ground, freight, logistics and related services. This unaudited quarterly report covers the three and six months ended November 30, 2012; comparisons are with the corresponding prior-year periods. The interim financial statements received an accountant’s review, not an audit.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 FY2013 | Q2 FY2012 | First half FY2013 | First half FY2012 |
|---|---|---|---|---|
| Revenue | $11,107 | $10,587 | $21,899 | $21,108 |
| Operating income | $718 | $780 | $1,460 | $1,517 |
| Operating margin | 6.5% | 7.4% | 6.7% | 7.2% |
| Net income | $438 | $497 | $897 | $961 |
| Diluted EPS | $1.39 | $1.57 | $2.84 | $3.02 |
- Revenue rose 5% in Q2 and 4% in the first half, while operating income fell 8% and 4%, respectively. Net income declined 12% and 7%.
- Segment results were mixed: Express operating income fell 33% in Q2 and 31% in the first half; Ground increased 4% and 6%; Freight increased 90% and 102%.
- Operating cash flow was $1,718 for the first half, down from $2,168. Capital expenditures were $1,888, versus $2,217; acquisitions used $483, versus $114. Cash flow after capital expenditures was negative $170 before acquisitions.
- Cash and cash equivalents were $2,517 at November 30, versus $2,843 at May 31. Current assets were $9,159 and current liabilities $4,828. Long-term debt, including its current portion, was $2,242, versus $1,667 at May 31.
- Dividends declared were $0.14 per share for Q2, versus $0.13 a year earlier. The company repurchased 2.7 million shares for $246 at an average $91 per share.
Material changes and management commentary
- Express revenue growth reflected acquisitions, freight-forwarding growth and higher international export volume, but profitability suffered from a shift toward lower-yield international services, weaker U.S. domestic package volumes, higher depreciation and pension costs, and fuel-surcharge timing.
- Ground revenue increased 11% in Q2, supported by volume growth and rate increases. Ground margin nevertheless fell to 15.9% from 17.0%, with higher purchased transportation costs and network expansion expenses.
- Freight revenue rose 4% in Q2; operating margin improved to 5.5% from 3.0%, with higher shipments and yield and better operating efficiencies.
- Superstorm Sandy reduced Q2 diluted EPS by an estimated $0.11, primarily through lost shipments and incremental costs, especially at Express.
- Three acquisitions—Brazil’s Rapidão Cometa, France’s TATEX and Poland’s Opek—cost a total of $507 and expanded Express’s international networks. Their reported results were not material to consolidated results.
Outlook, risks and unusual items
- Management expected weak global economic conditions, U.S. tax and spending uncertainty, and continued demand for lower-yield international services to constrain earnings growth; Ground and Freight strength was expected to partly offset this.
- FedEx announced programs targeting $1.7 billion in annual profitability improvement over three years. The voluntary employee buyout program was expected to cost $550–$650 pretax, depending on participation. Benefits were expected to begin in 2014, with significant benefits by the end of 2015.
- FY2013 capital expenditures were expected to be approximately $3.9 billion. Management said cash, operating cash flow and financing sources were adequate for liquidity needs.
- The company issued $1 billion of senior unsecured notes in July 2012, with maturities in 2022 and 2042. A $1 billion revolving facility was fully available; no commercial paper was outstanding. The leverage covenant limit was 70%; the reported ratio was 53%, and FedEx said it was compliant.
- FedEx made $280 million of required U.S. pension contributions in the first half and an additional $140 million in December; another $140 million was expected for the remainder of FY2013. Pension costs increased year over year.
- Important contingencies include numerous challenges to Ground’s independent-contractor model; the company said a material loss was reasonably possible but could not estimate a range, and did not believe a material loss was probable. Separate DOJ inquiries concern alleged antitrust conduct involving third-party shipping consultants and shipments for online pharmacies; the filing gives no estimable loss for the latter matter.
- The USPS air-transport agreement was scheduled to expire in September 2013, with a decision on the successor contract expected in calendar Q1 2013. Fuel-surcharge adjustments lag fuel-price changes by roughly six to eight weeks.
- Management expected an effective tax rate of approximately 37% for the remainder of FY2013. The filing states that operating results for the six-month period are not necessarily indicative of full-year results.
Key investor verification points
- Whether Express can stabilize margins amid weak U.S. domestic volumes and lower-yield international mix.
- Whether Ground and Freight volume, yield and margin trends continue, and how contractor-classification cases could affect Ground’s costs or operating model.
- Participation, timing, costs and realized savings from the $1.7 billion improvement program and employee buyouts.
- Operating cash generation relative to aircraft commitments, planned capital spending and pension contributions.
- Outcome and financial implications of the USPS contract process and the disclosed legal and regulatory matters.