01—Abstract
Summary
Summary of the 10-K filed July 16, 2008. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2008 10-K (year ended May 31, 2008) shows a sharply weaker year.
Revenue rose 8% to $37.95 billiona, but operating income fell 37% to $2.08 billion and diluted EPS dropped 44% to $3.60, from $6.48. The decline reflects a fourth-quarter charge of roughly $891 million, mostly noncash impairments tied to the decision to retire the Kinko's trade name (renamed FedEx Office) and to goodwill at that unit. Excluding the charge, management points to record fuel prices (fuel expense up about 30%), a weak U.S. economy that pushed domestic express volumes to pre-2000 levels by Q4, and fuel surcharges that lagged cost increases.
Cost-containment measures and lower incentive compensation cushioned the impact. Management's outlook for fiscal 2009 is cautious. It expects no significant U.S. economic recovery, nominal base revenue growth, and reduced earnings.
Capital expenditures are planned at roughly 2008 levels (under $3 billionb), with reductions possible if conditions worsen. The company also flagged material contingent exposure from FedEx Ground's independent contractor litigation, including an IRS tentative assessment of $319 million for 2002 and ongoing DOJ and foreign antitrust investigations.
Balance sheet metrics remain solid: $1.54 billionc in cash, a leverage ratio of 0.5 against a 0.7 covenant, a $1 billion undrawn revolver, and BBB/Baa2 credit ratings with stable outlooks. The dividend was raised to $0.11 per quarter.
02—Key points
Key Highlights
- Revenue grew 8% to $37.95 billion, driven by international Priority services at FedEx Express, FedEx Ground volume growth, and higher fuel surcharges.
- Operating income fell 37% to $2.08 billion (operating margin 5.5%, down from 9.3%), largely due to an approximately $891 million Q4 impairment charge tied to the Kinko's trade name and FedEx Office goodwill.
- Diluted EPS was $3.60 versus $6.48 in fiscal 2007; excluding the impairment charge ($2.23 per diluted share), EPS would have been roughly $5.83.
- Fuel expense rose about 30% to $4.6 billion, and management concluded fuel surcharges did not fully offset incremental fuel costs in 2008.
- U.S. domestic express volumes fell to pre-2000 levels in Q4 FY2008, and management expects continued pressure on U.S. domestic package and freight volumes in fiscal 2009.
- Liquidity remains strong: $1.54 billion cash, $1 billion undrawn revolver, operating cash flow of $3.48 billion, and a leverage ratio of 0.5 versus a 0.7 covenant limit.
- Material legal risk persists at FedEx Ground, including class actions over owner-operator status and a $319 million IRS tentative assessment for 2002, plus ongoing DOJ and foreign antitrust investigations.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed July 16, 2008Financial Statements
| Revenue | $37.95B |
| Operating Income | $2.08B |
| Interest Expense | $98.00M |
| Net Income | $1.13B |
| EPS (Basic) | $3.64 |
| EPS (Diluted) | $3.60 |
05—Questions
Frequently Asked Questions
What caused the sharp drop in FedEx's fiscal 2008 earnings?
Net income fell 44% to $1.125 billion, mainly because of an approximately $891 million fourth-quarter charge ($696 million after tax, or $2.23 per diluted share). The charge was predominantly noncash and tied to impairment of the Kinko's trade name and goodwill at FedEx Office. Underlying results were also pressured by record fuel prices, a weak U.S. economy, and higher operating costs at FedEx Office.
Is the Kinko's impairment a one-time event?
The charge itself is non-recurring, but it reflects strategic decisions. FedEx decided to phase out the Kinko's trade name over several years in favor of the FedEx brand, and it reduced its expansion plans for FedEx Office. The remaining trade name balance of $52 million is being amortized over four years, which will continue to create modest noncash expense.
What is the outlook for fiscal 2009?
Management expects nominal base revenue growth, with FedEx Express operating income and margin declining on weaker U.S. domestic volumes and high energy costs. FedEx Ground revenue is expected to grow, but its margin should decline slightly on rising purchased transportation costs. Overall earnings are expected to fall, and capital expenditures should be roughly flat at under $3 billion, with cuts possible if the economy worsens.
What are the biggest legal or contingent risks disclosed?
The largest risk is FedEx Ground's independent contractor litigation, including numerous class actions, a Kansas class certification, and an IRS tentative assessment of $319 million for 2002 (with similar audits for 2004–2006). Management believes the owner-operators are properly classified but acknowledges a reasonably possible material loss or required changes to its contractor model. Other matters include DOJ and foreign antitrust probes in air freight and freight forwarding, and a fuel surcharge price-fixing class action against LTL carriers.
Is FedEx's balance sheet and dividend at risk?
Based on this filing, the balance sheet looks sound. Long-term debt is about $1.5 billion, the leverage ratio is well within covenant, and credit ratings are investment grade with stable outlooks. Management expects to fund 2009 capital needs from operating cash flow. The quarterly dividend was raised to $0.11 per share in June 2008, and the board reviews dividends annually.
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