01—Abstract
Summary
Summary of the 10-K filed July 15, 2009. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2009 (year ended May 31, 2009) was a sharply weaker year driven by the global recession.
Revenue fell 6% to $35.5 billiona from $37.95 billion, operating income dropped 37% to $2.08 billion, and operating margin compressed to 2.1% from 5.5%. Diluted EPS fell to $0.31 from $3.60, reflecting a $1.2 billion fourth-quarter charge (about $3.45 per diluted share) for goodwill impairments at FedEx Office (Kinko's, $810 million) and FedEx National LTL (Watkins, $90 million), plus aircraft-related asset impairments at FedEx Express. Excluding these charges, the decline was primarily volume-driven: FedEx Express revenue fell 8%, FedEx Freight revenue fell 11% on a 7% drop in LTL shipments, and FedEx Express's jet fuel costs fell 8%-9% in dollar terms as fuel prices collapsed.
FedEx Ground was the bright spot, with revenue up 4% and operating margin improving to 11.5%, as it gained share (including volume from DHL's exit from the U.S. domestic market). Cash generation and liquidity remained solid. Operating cash flow was $2.75 billionb, capital expenditures were $2.46 billion (down 17%), and cash rose to $2.29 billion.
FedEx issued $1 billionc of senior unsecured notes in January 2009 and has an undrawn $1 billion revolver. Management is cautious for fiscal 2010, expecting flat volumes at FedEx Express, lower fuel surcharges reducing revenue, continued LTL weakness, and a 2010 capex plan of about $2.6 billion, with pension contributions of roughly $850 million. Investors should also note ongoing legal risk tied to FedEx Ground's independent contractor model, which management says could be material, and a potential congressional change to the Railway Labor Act that would affect FedEx Express labor relations.
02—Key points
Key Highlights
- Revenue declined 6% to $35.5 billion; operating income fell 37% to $2.08 billion, and operating margin dropped to 2.1% from 5.5%.
- Diluted EPS was $0.31 versus $3.60 in fiscal 2008, mainly due to a $1.2 billion ($3.45 per diluted share) fourth-quarter impairment charge tied to Kinko's/FedEx Office goodwill, FedEx National LTL goodwill, and aircraft.
- FedEx Ground was the standout segment: revenue rose 4% to $7.0 billion and operating margin improved to 11.5%, aided by market share gains and the DHL exit from U.S. domestic.
- FedEx Express revenue fell 8% to $22.4 billion on lower IP and domestic volumes; operating margin compressed to 3.6% from 7.8%, though fuel surcharges offset fuel costs on a static basis.
- FedEx Freight swung to an operating loss (margin of -1.0%) as LTL shipments fell 7% in the weakest LTL environment in decades.
- Operating cash flow of $2.75 billion and cash of $2.29 billion, with a $1 billion bond issuance in January 2009 and an undrawn $1 billion revolver; leverage covenant ratio of 0.6 to 1.0 versus a 0.7 maximum.
- Outlook for fiscal 2010 calls for continued revenue pressure from lower fuel surcharges and flat volumes, with capex of about $2.6 billion and pension contributions of roughly $850 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed July 15, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $35.50B$37.95B | −6.5% |
| Operating Income | $747.00M$2.08B | −64.0% |
| Interest Expense | -$85.00M$98.00M | −186.7% |
| Net Income | $98.00M$1.13B | −91.3% |
| EPS (Basic) | $0.31$3.64 | −91.5% |
| EPS (Diluted) | $0.31$3.60 | −91.4% |
| Shares Outstanding (Basic) | 311.00M— | — |
| Shares Outstanding (Diluted) | 312.00M— | — |
05—Questions
Frequently Asked Questions
Why did FedEx's earnings collapse in fiscal 2009?
Most of the drop reflects a $1.2 billion fourth-quarter charge ($1.1 billion after tax, or $3.45 per diluted share), mainly goodwill impairments at FedEx Office (formerly Kinko's, $810 million) and FedEx National LTL (formerly Watkins Motor Lines, $90 million), along with aircraft impairments at FedEx Express. Underlying results also weakened due to the global recession, which cut shipping volumes and pressured yields at FedEx Express and FedEx Freight.
Which FedEx segment performed best, and why?
FedEx Ground performed best. Revenue rose 4% to $7.0 billion and operating margin improved to 11.5%, helped by market share gains, growth in FedEx Home Delivery, volume gained from DHL's exit from the U.S. domestic market, and a timing benefit from rapidly falling fuel costs relative to lagged fuel surcharges.
How is FedEx positioned financially to weather the downturn?
FedEx ended the year with $2.29 billion in cash and generated $2.75 billion in operating cash flow. It raised $1 billion in unsecured debt in January 2009, has a fully available $1 billion revolving credit facility, and its leverage ratio of 0.6 to 1.0 is within its 0.7 covenant limit. Management also cut capex 17% and deferred aircraft purchases to match lower demand.
What are the main risks investors should watch?
Key risks include ongoing litigation over whether FedEx Ground's owner-operators are independent contractors, which management says could result in material losses or changes to its contractor model; potential congressional legislation removing most FedEx Express employees from the Railway Labor Act, which could expose the network to labor disruptions; rising pension funding needs after investment losses; and continued weakness in LTL freight and aggressive industry pricing. Fuel price volatility can also affect results because surcharges lag actual fuel costs.
What does management expect for fiscal 2010?
Management expects continued softness in demand, with flat volumes at FedEx Express, LTL shipment declines, and revenue pressure from lower fuel surcharges and competitive pricing. FedEx Ground is expected to grow revenue, though yields may be limited. Management says that cost reductions from 2009 will partly offset revenue declines, and it plans capital expenditures of about $2.6 billion, including investments in fuel-efficient Boeing 757 and 777 Freighter aircraft.
06—Continue