FedEx Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended May 31, 2010. Although the request identifies 2009 Q4, this filing is the FY2010 annual report; its quarterly table compares the fourth quarter of FY2010 with the fourth quarter of FY2009. Dollar amounts below are in millions unless stated otherwise.
Business context and performance
FedEx provides express, ground, less-than-truckload (LTL), trade, logistics and business services through four reportable segments: Express, Ground, Freight and Services. Management described a gradual economic recovery in the second half of FY2010, with particularly strong fourth-quarter international shipping volumes. Results remained affected by lower yields, fuel-surcharge changes and intense LTL price competition.
Key financial metrics
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $34,734 | $35,497 |
| Operating income | $1,998 | $747 |
| Operating margin | 5.8% | 2.1% |
| Net income | $1,184 | $98 |
| Diluted EPS | $3.76 | $0.31 |
| Cash from operations | $3,138 | $2,753 |
| Capital expenditures | $2,816 | $2,459 |
- Annual revenue fell 2%, while operating income improved substantially. FY2009 included $1.2 billion of impairment and other charges; FY2010 included an $18 million goodwill impairment charge.
- FY2010 segment results: Express revenue $21,555 and operating income $1,127; Ground revenue $7,439 and operating income $1,024; Freight revenue $4,321 and operating loss $153. Ground margin rose to 13.8%; Express margin was 5.2%; Freight margin was negative 3.5%.
- Fourth-quarter FY2010 revenue was $9,428, operating income $696, net income $419 and diluted EPS $1.33. In fourth-quarter FY2009, revenue was $7,852, operating loss $849, net loss $876 and diluted loss per share $2.82; the prior-year quarter included major impairment charges.
- Cash and cash equivalents were $1,952 at May 31, 2010, versus $2,292 a year earlier. Current assets were $7,284 and current liabilities $4,645.
- Total debt, including capital leases, was $1,930 ($262 current and $1,668 long-term). The $1 billion revolving credit facility was fully available, with no commercial paper outstanding; the company reported covenant compliance and a 0.5 adjusted-debt-to-capital ratio.
- Undiscounted operating-lease commitments totaled $13,771. The company reported $23,969 of contractual cash obligations in its schedule, which excludes certain balance-sheet liabilities and is not a forecast of total cash spending.
Material changes and drivers
- Revenue declined as lower fuel surcharges and competitive pricing reduced yields, especially in Express and Freight. Increased volumes partly offset this: Express international-priority package volume rose 10%, Ground volume rose 3%, SmartPost volume rose 48%, and average daily LTL shipments rose 11%.
- Ground operating income increased 27% to $1,024, supported by volume growth, productivity and lower self-insurance expense. Freight remained loss-making as LTL yield fell 10% amid excess capacity and discounting.
- Fuel expense fell 18% overall, but fuel-price increases and the six-to-eight-week lag in Express and Ground surcharge adjustments negatively affected FY2010 earnings year over year. The weighted-average U.S. domestic and outbound Express surcharge fell to 6.20% from 17.45%.
- Operating cash flow increased, partly due to $279 of income-tax refunds and higher income. Cash declined by $340 during the year after investing and financing activity.
- The pension funded deficit widened to $1,189 from $238, primarily reflecting a lower discount rate. FY2010 pension and postretirement plan obligations recognized on the balance sheet increased, and a $1.0 billion after-tax retirement-plan adjustment reduced equity through other comprehensive income.
Outlook, risks and contingencies
- Management expected stronger demand, revenue and earnings growth in FY2011 as the global economy improved, with better yields and margins anticipated. The outlook depended on continued economic recovery and fuel prices remaining near forecast levels; management cautioned that recovery sustainability was difficult to predict.
- FY2011 capital expenditures were expected to be about $3.2 billion, including approximately $1.7 billion for Express aircraft and related equipment. Planned investment included more fuel-efficient B777F and B757 aircraft; aircraft purchase commitments and timing flexibility are material.
- Management expected FY2011 pension and retiree medical expense to increase by approximately $260 million. Higher aircraft maintenance, restored compensation programs and healthcare costs were also expected to constrain earnings growth. The anticipated effective tax rate was 37%–38%.
- FedEx Ground’s independent-contractor classification is challenged in numerous lawsuits and administrative proceedings. The company said a material loss or changes to the contractor model were reasonably possible, though it did not consider a material loss probable and could not estimate a reasonable loss range.
- Other disclosed exposures include pilot contract negotiations, potential labor-law changes, wage-and-hour claims, fuel-price and surcharge timing risk, economic cyclicality, LTL competition, technology disruption, security and climate regulation, and foreign-currency movements. DOJ and Australian competition investigations remained ongoing; the Korean regulator found FedEx not culpable in May 2010. ATA Airlines asserted $94 million in damages in a pending contract claim; management did not consider a material loss probable.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the economic recovery and volume growth translated into sustainable yield improvement and margins, particularly in Freight.
- Actual FY2011 capital spending, aircraft commitments and the cash-flow impact of planned fleet expansion.
- Changes in pension assumptions, funded status, contributions and benefit expense, including the effect of discount-rate movements.
- Developments and potential financial consequences in contractor-classification and other material litigation.
- Debt maturities, lease commitments, available liquidity and credit ratings; distinguish reported debt from substantial operating-lease obligations.
- Actual fuel prices, surcharge recovery timing and any shift in demand from higher-yielding express services to lower-yielding alternatives.