FedEx Corporation — Form 10-Q Summary
Business context and reporting period. FedEx provides express, ground and freight transportation, alongside related logistics and business services. This filing covers the fiscal second quarter and six months ended November 30, 2009; comparisons are with the corresponding 2008 periods. Dollar amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Quarter ended Nov. 30 | Six months ended Nov. 30 |
|---|---|---|
| Revenue | $8,596, down 10% from $9,538 | $16,605, down 15% from $19,508 |
| Operating income | $571, down 27% from $784 | $886, down 37% from $1,414 |
| Operating margin | 6.6%, versus 8.2% | 5.3%, versus 7.2% |
| Net income | $345, down 30% from $493 | $526, down 40% from $877 |
| Diluted EPS | $1.10, versus $1.58 | $1.68, versus $2.81 |
- Cash flow: Six-month operating cash flow was $1,357, compared with $1,455. Capital expenditures were $1,549, compared with $1,387; operating cash flow less capital expenditures was negative $192. Financing used $681, including $625 of debt principal payments and $69 of dividends. Cash declined by $827 to $1,465 from May 31.
- Liquidity and debt: At November 30, cash was $1,465 and current liabilities were $4,119. Long-term debt, including its current portion, totaled $1,958, down from $2,583 at May 31, following repayment of $500 of notes and other principal payments. The $1 billion revolving credit facility was fully available; no commercial paper was outstanding. The adjusted debt-to-capital covenant ratio was 0.5 against a maximum of 0.7.
- Segments: FedEx Express operating income fell 36% to $345 for the quarter and 49% to $449 for the six months. FedEx Ground income rose 12% to $238 and 10% to $447, respectively. FedEx Freight posted operating losses of $12 for the quarter and $10 for the six months, versus income of $32 and $121 in the prior-year periods.
Material changes and drivers
- Lower fuel surcharges and continued competitive pricing reduced yields across transportation businesses; improved volumes partly offset the pressure. Management said fuel-price and surcharge timing had benefited the prior-year comparison, but negatively affected current-period operating income.
- Quarterly FedEx Express package volume rose 4% overall, including 6% growth in International Priority volume; composite package yield fell 16%. FedEx Ground revenue increased 3%, with SmartPost volume up 63% but yield down 24%. FedEx Freight revenue fell 11% and LTL yield declined 12% for the quarter.
- Fuel expense fell 33% in the quarter and 46% for the six months. Cost actions—including salary reductions, a 401(k) match suspension, hiring controls and network adjustments—helped contain expenses. Pension-plan costs increased, partly offset by lower defined-contribution-plan expense.
- A $54 self-insurance liability remeasurement benefit increased second-quarter FedEx Express results; management said variable incentive compensation accruals largely offset it. The benefit added approximately $0.05 per diluted share to net income after the incentive accrual impact.
Outlook, risks and contingencies
- Management expected stronger demand in the second half of fiscal 2010 and aimed to improve yields, while anticipating continued intense price competition. Comparisons were expected to improve if economic recovery continued and fuel prices remained near forecast levels; recovery sustainability was uncertain.
- Management expected fiscal 2010 capital expenditures of approximately $2.6 billion and believed cash, operating cash flow and available financing would cover liquidity needs. Aircraft investment includes more fuel-efficient Boeing 757s and 777 freighters. Required U.S. pension contributions of $235 were expected for the remainder of fiscal 2010; $118 had been paid in December.
- Merit increases and partial 401(k) matching were to resume January 1, 2010. Incentive compensation accruals had resumed; these programs were expected to temper earnings benefits from recovery. Management projected a 38%–39% effective tax rate for the remainder of fiscal 2010.
- Material legal uncertainties include FedEx Ground contractor-classification litigation and proceedings, wage-and-hour class actions, and an ATA Airlines suit seeking $106 in damages. The company said losses were not probable in these matters; for contractor matters, a material loss or business-model changes were reasonably possible, but the amount could not be estimated.
- Risks include weak or volatile demand, fuel-price and surcharge timing, competitive pricing, pension and healthcare costs, credit-market access, foreign exchange, litigation and potential changes to contractor relationships. Moody’s outlook was negative; S&P’s was stable. The interim financial statements received an independent accountant’s review, not an audit.
Most important facts for investors to verify
- Whether volume recovery can translate into improved yields and operating margins despite persistent pricing competition and lower fuel surcharges.
- Whether the FedEx Freight segment returns to profitability and whether Ground’s SmartPost growth can offset lower yields.
- Cash generation relative to elevated capital spending, aircraft commitments, debt maturities and pension contributions.
- Developments in contractor-classification and wage-and-hour litigation, including potential costs or operational changes.
- Whether fuel prices, incentive and benefit costs, and the resumption of employee compensation programs affect management’s stated outlook.