FedEx Corporation — FY2012 Second-Quarter Form 10-Q
Business context and reporting period
FedEx provides express, ground, freight, and related transportation and business services. This unaudited quarterly filing covers the three and six months ended November 30, 2011; comparisons are with the periods ended November 30, 2010. The fiscal year ends May 31, 2012.
Financial performance and position
- Quarter: Revenue was $10.587 billion, up 10%; operating income was $780 million, up 66%; operating margin was 7.4%, versus 4.9%; net income was $497 million, up 76%; diluted EPS was $1.57, versus $0.89.
- Six months: Revenue was $21.108 billion, up 11%; operating income was $1.517 billion, up 38%; operating margin was 7.2%, versus 5.7%; net income was $961 million, up 45%; diluted EPS was $3.02, versus $2.09.
- Cash flow: Six-month operating cash flow was $2.168 billion, compared with $2.011 billion. Capital expenditures were $2.217 billion, versus $2.059 billion; investing cash outflow was $2.316 billion. Cash declined $432 million to $1.896 billion.
- Liquidity and debt: Current assets were $8.168 billion and current liabilities $5.380 billion. Long-term debt, including current portion, totaled $1.679 billion. The $1 billion revolving facility was fully available, no commercial paper was outstanding, and the leverage covenant ratio was 0.5 against a maximum of 0.7.
- Other metrics: Fuel expense rose 28% in the quarter and 34% in the first half. Dividends declared were $0.13 per share for the quarter. FedEx repurchased 2.8 million shares for $197 million.
Changes versus prior comparable periods
- Management attributed revenue growth primarily to higher yields across transportation segments, including higher fuel surcharges and pricing. FedEx Ground also benefited from volume gains.
- FedEx Ground revenue rose 13% for the quarter and operating income rose 34%; its operating margin increased to 17.0% from 14.3%. SmartPost volumes grew 17% in the quarter.
- FedEx Freight returned to profitability: quarterly operating income was $40 million versus a $91 million loss, and six-month income was $82 million versus a $107 million loss. Higher yields and efficiencies following the Freight/National LTL combination contributed.
- FedEx Express quarterly operating income rose 30%, but six-month operating income was nearly flat at $630 million versus $621 million; six-month margin declined to 4.8% from 5.2%. U.S. domestic and International Priority package volumes were weaker.
- Prior-year comparisons included $152 million of second-quarter 2011 charges: $86 million related to combining LTL operations and a $66 million ATA Airlines litigation reserve.
Outlook, risks, and unusual items
- Management anticipated revenue and earnings growth in the second half of FY2012, supported by pricing and yield trends, but said uncertain global economic conditions made demand difficult to predict, particularly for premium services.
- FY2012 capital expenditures were expected to be approximately $4.2 billion. Management said operating cash flow, existing cash, and financing sources should be adequate to meet liquidity needs.
- Fuel surcharge adjustments lag fuel-price changes, creating possible short-term earnings effects; surcharges may also affect demand and service mix. Management said surcharges more than offset incremental fuel costs in the reported periods under its static analysis.
- Independent-contractor classification cases involving FedEx Ground remain a material uncertainty. Management said a material loss was reasonably possible in some matters but not probable; it could not estimate a meaningful range of potential loss.
- FedEx appealed the $66 million ATA Airlines verdict and had not accrued $5 million of awarded pre-judgment interest, which it said was not probable. Separate wage-and-hour matters included settlements described as immaterial, subject to court approval.
- After quarter-end, FedEx Express agreed to buy 27 Boeing 767 freighters, with deliveries planned for 2014–2018, and deferred 11 Boeing 777 freighters in total to better align capacity with demand. The 767 agreement also includes an option for 30 additional aircraft.
- The interim financial statements received an independent accountant review, not an audit. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification priorities
- Assess whether revenue and margin gains persist if fuel surcharge benefits fade or fuel prices change faster than surcharge adjustments.
- Track Express package-volume trends and Ground and Freight yield, volume, and margin performance.
- Review the timing and funding of planned $4.2 billion FY2012 capital spending, aircraft commitments, and pension contributions.
- Monitor contractor-classification litigation and the ATA appeal for developments that could change potential liabilities.
- Confirm the impact of aircraft delivery deferrals and the post-quarter 767 purchase agreement on capital obligations and network capacity.