FedEx Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended May 31, 2012, with comparisons to FY2011 and FY2010. The filing also reports fourth-quarter results. The request metadata says “2011 Q4,” but the filing itself is FY2012.
Business context
FedEx provides express, ground, less-than-truckload freight, e-commerce and business services through FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. Its results are sensitive to economic activity, shipment volumes and mix, pricing, fuel costs, and the ability to adjust a capital-intensive network.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $42.680 billion | $39.304 billion |
| Operating income | $3.186 billion | $2.378 billion |
| Operating margin | 7.5% | 6.1% |
| Net income | $2.032 billion | $1.452 billion |
| Diluted EPS | $6.41 | $4.57 |
| Cash from operations | $4.835 billion | $4.041 billion |
| Capital expenditures | $4.007 billion | $3.434 billion |
- Cash and cash equivalents were $2.843 billion at May 31, 2012, up from $2.328 billion. Total debt, including capital leases, was $1.667 billion; long-term debt excluding its current portion was $1.250 billion.
- A $1 billion revolving credit facility was fully available, with no commercial paper outstanding. The adjusted debt-to-capital covenant ratio was 53%, below its 70% limit.
- Cash from operations increased by $794 million, primarily on higher earnings, partly offset by increased pension contributions. Cash used in investing was $4.049 billion; cash used in financing was $244 million.
- Segment operating income: Ground $1.764 billion, up 33%; Express $1.260 billion, up 3%; Freight $162 million versus a $175 million loss. Ground’s operating margin was 18.4%, Express 4.8%, and Freight 3.1%.
- FY2012 fuel expense was $4.956 billion, up 19%, while FedEx Express jet fuel cost was $3.867 billion. Management said the fuel-surcharge timing lag significantly benefited FY2012 operating income; at then-current fuel prices, it expected that benefit to reverse in FY2013.
Changes versus FY2011
- Revenue grew 9%, operating income 34%, net income 40%, and diluted EPS 40%. Higher yields across transportation segments and particularly strong Ground results supported improvement.
- Ground revenue rose 13% on higher volume and yield, including 18% growth in SmartPost average daily volume. Express revenue increased 8%, although U.S. domestic and International Priority package volumes declined amid weaker economic conditions and customer shifts toward deferred services.
- Freight returned to profitability after FY2011 losses. Higher yield and efficiencies from the 2011 combination of FedEx Freight and FedEx National LTL helped; average daily LTL shipments declined 1% in FY2012.
- Comparisons also reflected a milder winter, the reversal of a $66 million ATA Airlines legal reserve recorded in FY2011, and the absence of FY2011’s $133 million LTL combination costs. These benefits were partly offset by a $134 million noncash aircraft impairment charge in FY2012.
- FY2012 pension-plan funded status deteriorated to a $4.853 billion deficit from $1.531 billion, largely due to the lower discount rate. Pension and postretirement obligations contributed to a $2.4 billion after-tax reduction in equity through other comprehensive income.
Outlook, risks and unusual items
- Management anticipated revenue and earnings growth in FY2013 despite modest global economic growth, citing Ground’s continued strength, improved Freight profitability, and international growth and efficiency at Express. No specific consolidated EPS target is stated in the provided filing text.
- Management expected FY2013 capital expenditures of approximately $3.9 billion and required U.S. pension contributions of approximately $550 million. Lower accelerated-depreciation tax benefits were expected to increase current federal tax expense; the expected effective tax rate was 37%–38%.
- FY2013 pension expense was expected to rise significantly because of the low measurement-date discount rate, including approximately $150 million of additional U.S. pension expense. Accelerated aircraft depreciation was expected to add $69 million in FY2013, partly offset by depreciation avoided on retired aircraft.
- FedEx retired 24 aircraft and related engines to align Express capacity with demand and was modernizing the fleet, including commitments for B767F aircraft. Aircraft delivery timing had been adjusted to better match capacity with demand.
- Material risks include economic weakness and service-mix shifts, fuel-price volatility and surcharge lags, intense competition, pension costs and funding, and litigation challenging Ground contractors’ independent-contractor status. The company said a material loss or required model changes were reasonably possible in contractor matters, but could not estimate a loss range and did not consider a material loss probable.
- FedEx Express’s USPS air-transport agreement was due to expire in September 2013; USPS intended to solicit proposals. Changes to USPS service could also affect SmartPost. Other risks include possible changes to cargo-pilot rules, labor organizing and the FedEx Express pilots’ contract becoming amendable in March 2013.
- Operating leases carried approximately $13.986 billion in undiscounted future minimum payments. Subsequent to year-end, FedEx completed acquisitions in Poland, France and Brazil for approximately $507 million in aggregate and repaid $300 million of notes that matured in June 2012.
Most important facts for investors to verify
- Whether FY2013 earnings growth was achieved after the expected fuel-surcharge reversal, pension-cost increase and aircraft depreciation headwind.
- Ground volume, yield and margin trends, and the outcomes and financial exposure of contractor-classification litigation.
- Freight’s sustained recovery in shipment volumes, yield and operating efficiency.
- Express demand and service mix, fleet-retirement and replacement timing, and aircraft-related capital commitments.
- The renewal or replacement terms of the USPS air-transport agreement and any resulting impact on network utilization and SmartPost.
- Pension funded status, required contributions, and the sensitivity of obligations and expense to discount rates and asset returns.