01—Abstract
Summary
Summary of the 10-K filed July 15, 2010. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2010 10-K (fiscal year ended May 31, 2010) shows a company recovering from the global recession, with revenue down 2% to $34.7 billion but net income rising to $1.18 billiona (diluted EPS $3.76) from $1.13 billion in 2009, which was depressed by $1.2 billion in goodwill and aircraft impairment charges.
Operating income fell to $2.0 billionb from $2.1 billion on an operating margin of 5.8% versus 2.1% a year earlier, but the 2010 comparison is distorted by the prior-year charges. Management points to a strong second half of the year, with volume growth across all transportation segments, particularly higher-margin international priority package and freight shipments at FedEx Express. Operating cash flow rose to $3.1 billion, while capital expenditures of $2.8 billion were concentrated on new B777 Freighter and B757 aircraft.
Segment performance was uneven. FedEx Ground was the standout, with operating income exceeding $1 billionc for the first time on market share gains and FedEx SmartPost volume growth of 48%. FedEx Express improved operating income to $1.1 billion on volume growth and lower fuel costs, though revenue fell 4% on lower fuel surcharges.
FedEx Freight swung to an operating loss of $153 milliond amid excess LTL industry capacity and a 10% decline in yield. Management expects stronger revenue and earnings growth in fiscal 2011, though it flagged a roughly $260 million increase in pension and retiree medical expense from a lower discount rate, reinstated employee compensation programs, and higher aircraft maintenance costs. Key investor risks in the filing include the ongoing legal challenge to FedEx Ground's independent contractor model, with multiple class actions in which the company says a material loss is reasonably possible; a possible Congressional change that could remove most FedEx Express employees from Railway Labor Act protections; and the October 2010 expiration of the pilots' collective bargaining agreement.
The company also remains exposed to fuel price volatility because surcharges lag spot prices by six to eight weeks, and to pension funding requirements. Its balance sheet is solid, with an adjusted debt-to-capital ratio of 0.5 against a covenant ceiling of 0.7, and no commercial paper outstanding.
02—Key points
Key Highlights
- Revenue declined 2% to $34.7 billion, driven by lower fuel surcharges and competitive yield pressure, while volumes rebounded in the second half of fiscal 2010.
- Net income rose to $1.18 billion (diluted EPS $3.76) from $1.13 billion, though the prior year included $1.2 billion of goodwill and aircraft impairment charges that depressed the comparison.
- FedEx Ground posted its first annual operating income above $1 billion, with an operating margin of 13.8%, and SmartPost volumes grew 48%.
- FedEx Freight swung to a $153 million operating loss as LTL pricing stayed irrational amid excess industry capacity, with yield down 10%.
- Operating cash flow increased to $3.1 billion, while capital expenditures of $2.8 billion were focused on B777 Freighter and B757 aircraft; 2011 capex is guided to about $3.2 billion.
- Management expects higher fiscal 2011 pension and retiree medical expense of about $260 million, which will constrain earnings growth despite expected yield and volume gains.
- The FedEx Ground independent contractor litigation and a possible Congressional change to Railway Labor Act coverage for FedEx Express employees are flagged as material risks.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed July 15, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $34.73B$35.50B | −2.1% |
| Operating Income | $2.00B$747.00M | +167.5% |
| Interest Expense | -$79.00M-$85.00M | +7.1% |
| Net Income | $1.18B$98.00M | +1108.2% |
| EPS (Basic) | $3.78$0.31 | +1119.4% |
| EPS (Diluted) | $3.76$0.31 | +1112.9% |
| Shares Outstanding (Basic) | 312.00M311.00M | +0.3% |
| Shares Outstanding (Diluted) | 314.00M312.00M | +0.6% |
05—Questions
Frequently Asked Questions
Why did FedEx's net income rise in fiscal 2010 even though revenue fell?
Fiscal 2009 included a $1.2 billion charge for goodwill and aircraft impairments, so the prior-year base was depressed. Fiscal 2010 operating income of $2.0 billion was roughly flat year over year on lower revenue, so the improvement in net income mainly reflects the absence of that charge rather than stronger underlying operations. Operating margin improved to 5.8% from 2.1%, but this comparison is distorted by the impairment.
What is the biggest legal risk to FedEx's business model?
The most significant risk is the challenge to whether FedEx Ground's owner-operators are independent contractors rather than employees. The company faces roughly 50 class-action lawsuits, about 40 state tax and administrative proceedings, and a multidistrict litigation in Indiana with pending summary judgment motions. Management says a material loss is reasonably possible and that the contractor model could be required to change, though it does not believe these changes would impair its ability to operate the business.
How exposed is FedEx to fuel price swings?
Fuel is largely passed through via indexed fuel surcharges, and the company says a hypothetical 10% change in fuel prices would not materially affect earnings. However, surcharges adjust with a lag of about six to eight weeks, so rapid price moves can significantly affect operating income in a given period. Fuel costs fell 18% in fiscal 2010, and the filing notes that high surcharges can also push customers toward cheaper ground services.
What should investors watch in the coming year?
Key items include whether FedEx Express can sustain international package and freight volume growth and improve yields, the outcome of pilot contract negotiations after the agreement becomes amendable on October 31, 2010, and any legislative change that would remove FedEx Express employees from Railway Labor Act coverage. Investors should also watch FedEx Freight's path back to profitability amid excess LTL capacity, and the pension expense increase of about $260 million expected in fiscal 2011.
How strong is FedEx's balance sheet and liquidity position?
The company had $2.0 billion in cash at May 31, 2010, and operating cash flow of $3.1 billion. Long-term debt was about $1.8 billion, and the adjusted debt-to-capital ratio was 0.5 against a covenant maximum of 0.7. The $1 billion revolving credit facility was fully available with no commercial paper outstanding. Standard & Poor's rated the company BBB, and Moody's rated it Baa2 with a stable outlook.
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