01—Abstract
Summary
Summary of the 10-K filed August 14, 1998. Cited figures are marked; the original filing is the authoritative source.
FDX Corporation's inaugural 10-K (fiscal year ended May 31, 1998) reports the formation of a holding company that combined FedEx and the Caliber System companies (RPS, Viking Freight, Roberts Express, Caliber Logistics) through a pooling-of-interests transaction completed January 27, 1998.
Because pooling accounting restates prior periods, the reported figures are comparable across years. FY1998 revenue rose 11% to $15.87 billion, operating income nearly doubled to $1.01 billiona (including an $88 million merger charge), and net income reached $503 million, or $3.37 per diluted share. Excluding non-recurring items, net income was $583 million, or $3.91 per share, up about 55% from the prior-year comparable figure.
Management attributed much of the strength to the August 1997 UPS strike, which added substantial one-time volume, and to yield-management actions at FedEx's U.S. domestic business. The business is growing, but several pressures are visible. International operating margins fell to 2.3%b from 4.4% amid Asian economic weakness and lower airfreight yields, and management expects airfreight volumes and yields to decline in 1999.
FedEx's engine noise-reduction kit sales, a meaningful source of profit, peaked in 1998 and are expected to fall. Viking Freight's daily shipments dropped 60% after its 1997 restructuring. The company also carries a large off-balance-sheet aircraft lease commitment (roughly $12.4 billionc in future operating lease payments) and substantial aircraft purchase obligations, and it has never paid a cash dividend.
Pilot labor negotiations at FedEx were unresolved at filing, and class-action suits over the air-transportation excise tax remain pending with no reserve recorded. For investors, the filing presents a strong earnings base with clear growth drivers in express package volume and RPS ground small-package volume, but the 1998 figures are flattered by strike-related and non-recurring gains. The sustainability of the margin improvement, especially in international operations and in the face of rising aircraft lease and maintenance costs, is the key question going forward.
02—Key points
Key Highlights
- Revenue of $15.87 billion in FY1998, up 11% on a like-calendar basis, with operating income up 99% to $1.01 billion
- Net income of $503 million ($3.37 per diluted share); excluding $88 million of Caliber merger expenses, $583 million ($3.91 per share)
- Formation of FDX Corporation completed January 27, 1998 via pooling-of-interests merger of FedEx and Caliber System; Caliber holders received 0.8 FDX shares per Caliber share, with no goodwill charges
- FedEx average daily express package volume grew 11% to about 3.0 million; RPS daily package volume grew 24% to about 1.3 million
- International operating margin fell to 2.3% from 4.4%, reflecting Asian weakness, lower airfreight yields, and new-route start-up costs; management expects airfreight to decline in 1999
- Strike-related and other one-time gains (UPS strike, aircraft insurance settlement, $16 million Viking asset sale) flatter 1998 results; engine noise-kit profits peaked in 1998 and are expected to decline
- Cash from operations of $1.7 billion and cash of $230 million at year-end; long-term debt reduced to $1.39 billion; the company has never paid a cash dividend and does not intend to start
03—Questions
Frequently Asked Questions
What is FDX Corporation and how was it formed?
FDX is a holding company formed in 1997 that became the parent of FedEx and the Caliber System companies on January 27, 1998. Caliber shareholders received 0.8 FDX shares for each Caliber share, and FedEx shareholders received one FDX share for each FedEx share. The transaction was accounted for as a pooling of interests, so prior periods were restated and no goodwill was recorded.
How much did the 1998 results benefit from one-time items?
Results were boosted by several non-recurring items. The UPS strike in August 1997 added large volumes, which management estimated contributed about $0.25 per share in the first quarter alone. Other gains included a $17 million MD11 insurance settlement and a $16 million Viking asset sale. Offsetting these were $88 million of merger expenses. Excluding the merger charge, net income was $583 million, or $3.91 per share.
What are the main risks to future earnings?
Key risks include weakening international airfreight yields and volumes, particularly from Asian economic difficulties; the expected decline in engine noise-kit income; rising aircraft lease and maintenance expense as the fleet grows and ages; and possible competitive pricing pressure from UPS and others. Pending legal claims over the air-transportation excise tax and unresolved FedEx pilot labor negotiations also add uncertainty, though no reserve was recorded for the tax claims.
Does FDX pay dividends, and how is it financing its growth?
FDX does not pay cash dividends and does not intend to, as its policy is to reinvest earnings in the businesses. Growth is funded mainly through cash from operations ($1.7 billion in 1998), leasing, and debt. Management has historically financed wide-body aircraft through long-term operating leases, which kept about $12.4 billion of future minimum operating lease payments off the balance sheet. Capital expenditures were $1.9 billion in 1998.
04—Continue