How did FedEx perform financially in fiscal 2002?

Revenue increased 5% to $20.6 billion and operating income increased 23% to $1.32 billion. Net income rose 22% to $710 million, and diluted EPS was $2.34, up from $1.99. Part of the net income gain reflects the cessation of goodwill amortization, though net income was reduced by a $15 million after-tax goodwill impairment charge.

Why did FedEx Express results weaken, and what offset it?

FedEx Express revenue declined 1% to $15.3 billion as domestic package volumes fell 6% amid the economic slowdown and reduced demand for premium express services. Segment operating income dropped 4% to $811 million, or 15% excluding 2001 impairment charges. Revenue from the USPS air transportation agreement and tight cost management helped soften the impact.

Is FedEx's cash flow and balance sheet getting stronger?

Yes. Free cash flow was $616 million, compared with a deficit in 2001, and the company paid down over $300 million of debt and repurchased $177 million of stock. Long-term debt fell to $1.8 billion and stockholders' investment rose to $6.5 billion. However, about $14.8 billion of future operating lease commitments are off balance sheet and remain a significant obligation.

What are the main risks investors should watch?

Key risks include rising pension costs (about $90 million more expected in 2003), uncertainty over the September 11 airline compensation that the DOT could reduce materially, a pending $68 million class-action judgment that FedEx plans to appeal, a fuel surcharge class action, a $187 million IRS dispute over jet engine maintenance expensing, and sensitivity to a slow economic recovery in manufacturing and wholesale sectors.

What is management's outlook for fiscal 2003?

Management anticipates revenue and volume growth in all segments if economic stabilization occurs in the first half of 2003 and recovery follows. It expects operating margin to improve slightly due to cost controls and a narrower FedEx Home Delivery loss, which it expects to become profitable in 2004. Capital expenditures are projected at about $1.9 billion, including delivery of 17 committed aircraft.

FDX 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed July 19, 2002. Cited figures are marked; the original filing is the authoritative source.

FedEx Corporation's fiscal 2002 10-K (year ended May 31, 2002) shows a company recovering from a weak economy and the aftermath of September 11, with earnings growing even as revenue was only modestly higher.

Revenue rose 5% to $20.6 billion^a and operating income rose 23% to $1.32 billion, while net income climbed 22% to $710 million (diluted EPS $2.34, versus $1.99). Much of the improvement came from FedEx Ground, whose operating income nearly doubled to $337 million, and from the first full year of FedEx Freight. FedEx Express, the largest segment, saw package volumes fall 6% and operating income drop 4% to $811 million, though U.S. Postal Service transportation contracts and cost controls cushioned the decline.

Cash generation strengthened materially. Operating cash flow reached $2.2 billion, capital expenditures fell to $1.6 billion^b, and free cash flow turned positive at $616 million, the first year after investing activities that the company generated positive cash flow. Management used this to retire over $300 million of debt and repurchase $177 million of stock.

The board also declared FedEx's first-ever cash dividend of $0.05^c per share, signaling confidence in sustained cash flow. Investors should weigh several risks: pension costs are expected to rise about $90 million in 2003 due to lower discount rates and weaker asset returns, and the company's rapidly growing operating lease commitments total about $14.8 billion off balance sheet.

The company also faces a potential material reduction in $119 million^d of September 11 airline stabilization compensation, a $68 million class-action judgment it plans to appeal, and an IRS dispute over jet engine maintenance deductions. Management guided to revenue and volume growth in 2003, contingent on an economic recovery in the second half of the year.

02—Key points

Key Highlights

Revenue grew 5% to $20.6 billion; operating income rose 23% to $1.32 billion and diluted EPS rose 18% to $2.34.
FedEx Ground operating income nearly doubled (+93%) to $337 million on volume growth and the expanding FedEx Home Delivery service, which narrowed its loss to $32 million.
FedEx Express package revenue fell 6% amid weak U.S. and global demand, and segment operating income declined 4% to $811 million, partly offset by USPS contract revenue.
Free cash flow turned positive at $616 million, versus a $69 million deficit in 2001, as operating cash flow reached $2.23 billion and capex fell to $1.6 billion.
Board declared the company's first-ever cash dividend of $0.05 per share and authorized repurchase of 5 million additional shares.
Pension cost is expected to rise roughly $90 million in 2003, and the effective tax rate is projected at about 38%.
Key contingencies include a possible reduction of the $119 million Air Transportation Safety Act compensation, a $68 million class-action judgment under appeal, and a $187 million IRS deficiency claim on engine maintenance costs.

03—Questions

Frequently Asked Questions

How did FedEx perform financially in fiscal 2002?
Revenue increased 5% to $20.6 billion and operating income increased 23% to $1.32 billion. Net income rose 22% to $710 million, and diluted EPS was $2.34, up from $1.99. Part of the net income gain reflects the cessation of goodwill amortization, though net income was reduced by a $15 million after-tax goodwill impairment charge.
Why did FedEx Express results weaken, and what offset it?
FedEx Express revenue declined 1% to $15.3 billion as domestic package volumes fell 6% amid the economic slowdown and reduced demand for premium express services. Segment operating income dropped 4% to $811 million, or 15% excluding 2001 impairment charges. Revenue from the USPS air transportation agreement and tight cost management helped soften the impact.
Is FedEx's cash flow and balance sheet getting stronger?
Yes. Free cash flow was $616 million, compared with a deficit in 2001, and the company paid down over $300 million of debt and repurchased $177 million of stock. Long-term debt fell to $1.8 billion and stockholders' investment rose to $6.5 billion. However, about $14.8 billion of future operating lease commitments are off balance sheet and remain a significant obligation.
What are the main risks investors should watch?
Key risks include rising pension costs (about $90 million more expected in 2003), uncertainty over the September 11 airline compensation that the DOT could reduce materially, a pending $68 million class-action judgment that FedEx plans to appeal, a fuel surcharge class action, a $187 million IRS dispute over jet engine maintenance expensing, and sensitivity to a slow economic recovery in manufacturing and wholesale sectors.
What is management's outlook for fiscal 2003?
Management anticipates revenue and volume growth in all segments if economic stabilization occurs in the first half of 2003 and recovery follows. It expects operating margin to improve slightly due to cost controls and a narrower FedEx Home Delivery loss, which it expects to become profitable in 2004. Capital expenditures are projected at about $1.9 billion, including delivery of 17 committed aircraft.

04—Continue

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