FedEx Corporation — Q1 FY2013 Form 10-Q
Reporting period: Three months ended August 31, 2012; comparisons are with the three months ended August 31, 2011. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. FedEx provides express, ground, freight, logistics and related business services. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $10,792 | $10,521 |
| Operating income | $742 | $737 |
| Operating margin | 6.9% | 7.0% |
| Net income | $459 | $464 |
| Diluted EPS | $1.45 | $1.46 |
| Cash from operating activities | $903 | $860 |
| Capital expenditures | $972 | $1,110 |
Revenue rose 3%, while operating income increased 1%; net income and diluted EPS each edged lower. Operating cash flow less capital expenditures was negative $69 million in the quarter, before acquisitions and financing activities.
Segments
- FedEx Express: Revenue $6,632, up 1%; operating income $207, down 28%, and margin 3.1% versus 4.4%. U.S. domestic package volume fell 5%; lower priority demand and higher depreciation and employee-benefit costs pressured results.
- FedEx Ground: Revenue $2,462, up 8%; operating income $445, up 9%, and margin 18.1% versus 17.9%. Growth reflected higher volume and yields.
- FedEx Freight: Revenue $1,399, up 5%; operating income $90 versus $42, and margin 6.4% versus 3.2%. Higher shipments, yields and network efficiencies supported improvement.
Financial position and liquidity
- At August 31, cash and cash equivalents were $2,743, compared with $2,843 at May 31. Current assets were $8,877 and current liabilities $4,809.
- Debt was approximately $2,359, including $117 current and $2,242 long-term, versus $1,667 at May 31. FedEx issued $1 billion of senior notes in July—$500 million at 2.625% due 2022 and $500 million at 3.875% due 2042—and repaid $300 million of notes that matured in June.
- The $1 billion revolving credit facility was entirely available, with no commercial paper outstanding. The adjusted debt-to-capital covenant ratio was 53%, below the 70% limit; the company reported compliance.
- Investing activities used $1,443, including $972 of capital expenditures and $483 for acquisitions. Financing activities provided $425, including the debt issuance; FedEx also repurchased 2.7 million shares for $246 million.
Material changes, outlook and risks
- Management attributed modest consolidated growth to Ground and Freight strength offsetting weaker demand for Express priority services amid weak global economic conditions and customer shifts toward economy services.
- FedEx acquired Brazilian Rapidão Cometa, French TATEX and Polish Opek for a combined stated purchase price of $507 million. The acquired businesses’ results were not material to the quarter; purchase-price allocations were preliminary.
- Management expected weak priority-service demand to persist into Q2 FY2013 and said economic uncertainty could constrain revenue and earnings into the second half. It described cost reduction, efficiency and network-adjustment actions, including a voluntary employee buyout plan. The filing gives no specific earnings or revenue forecast.
- FY2013 capital expenditures were expected to be approximately $3.9 billion. The expected effective tax rate was 37%–38%.
- Fuel-price volatility and the lag in fuel-surcharge adjustments can affect earnings. Other cited uncertainties include economic conditions, volumes, pricing, competition, currencies, pension and healthcare costs, labor matters, and integration of acquisitions.
- FedEx Ground faces litigation and proceedings challenging its owner-operator independent-contractor model. The company said a material loss is reasonably possible but not probable, and it could not estimate a meaningful loss range. Wage-and-hour cases, a DOJ investigation concerning third-party shipping consultants, and a separate DOJ investigation regarding online-pharmacy shipments were also disclosed.
- FedEx reported that its U.S. pension plans had ample funds for expected benefit payments; it made $140 million of required contributions during the quarter and another $140 million in September.
Important facts for investors to verify
- Whether Express volume and margin weakness persists, and whether planned cost actions can align capacity with demand.
- Whether Ground and Freight volume, yield and margin improvements continue.
- Execution and returns from the three international acquisitions, and the final purchase-price allocations.
- Cash generation relative to planned capital spending, pension contributions, aircraft commitments and debt obligations.
- Developments in independent-contractor litigation and the DOJ investigations, including any change in potential exposure.
- Future fuel prices and surcharge timing, and the effective tax rate relative to management’s stated range.