01—Abstract
Summary
Summary of the 10-K filed July 12, 2011. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2011 10-K (year ended May 31, 2011) shows a strong rebound from the recession.
Revenue rose 13% to $39.3 billiona, operating income climbed 19% to $2.38 billion, and operating margin improved to 6.1% from 5.8%. Diluted EPS was $4.57, versus $3.76 in fiscal 2010 and $0.31 in fiscal 2009, which was depressed by $1.2 billion in goodwill and aircraft impairments. Growth was broad-based, driven by yield increases and volume gains across FedEx Express, FedEx Ground and FedEx Freight.
FedEx Ground was the standout, with operating margin rising to 15.6%b. FedEx Freight returned to profitability in the fourth quarter after combining its LTL operations with FedEx National LTL. Costs rose meaningfully.
Salaries and benefits increased 9% on the reinstatement of merit raises, higher pension and medical costs, and restored 401(k) matching. Fuel expense jumped 34%, and severe second-half weather disrupted networks. The results also absorbed a $66 millionc ATA Airlines legal reserve and $133 million in LTL integration costs.
Cash from operations rose to $4.04 billion, and capital expenditures increased to $3.43 billiond. Management guided to significant earnings improvement in fiscal 2012, with FedEx Express as the primary driver, a $4.2 billion capex budget, and an effective tax rate of 36% to 38%. Investors should weigh several risks.
FedEx Ground's independent contractor model faces numerous lawsuits, and the company says an adverse outcome could be material. The company also has $1.5 billion of fixed-rate debt and $14 billion of undiscounted operating lease commitments.
Its large pension deficit grew to $1.5 billion, and its 777F aircraft purchase commitments total $5.97 billion. The dividend was raised to $0.13 per quarter, and no shares were repurchased in the fourth quarter.
02—Key points
Key Highlights
- Revenue grew 13% to $39.3 billion, driven by yield increases and volume growth across all transportation segments
- Operating income rose 19% to $2.38 billion, with operating margin expanding to 6.1% from 5.8%
- Diluted EPS of $4.57, up from $3.76 in fiscal 2010 and $0.31 in fiscal 2009, which included a $3.45 per share impairment charge
- FedEx Ground operating margin reached 15.6% (up from 13.8%) on 6% volume growth and yield gains, with FedEx SmartPost volume up 17%
- FedEx Freight returned to profitability in Q4 2011 after merging its LTL networks, though the full year still posted a $175 million operating loss
- Cost pressures included fuel expense up 34%, salaries up 9%, and a $66 million ATA Airlines legal reserve; cash from operations rose to $4.04 billion
- Fiscal 2012 outlook calls for significant earnings improvement, $4.2 billion in planned capex, and a 36%-38% effective tax rate
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed July 12, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $39.30B$34.73B | +13.2% |
| Operating Expenses | $36.93B— | — |
| Operating Income | $2.38B$2.00B | +19.0% |
| Interest Expense | $86.00M-$79.00M | +208.9% |
| Net Income | $1.45B$1.18B | +22.6% |
| EPS (Basic) | $4.61$3.78 | +22.0% |
| EPS (Diluted) | $4.57$3.76 | +21.5% |
| Shares Outstanding (Basic) | 315.00M312.00M | +1.0% |
| Shares Outstanding (Diluted) | 317.00M314.00M | +1.0% |
05—Questions
Frequently Asked Questions
How did FedEx perform financially in fiscal 2011?
FedEx reported revenue of $39.3 billion, up 13% from $34.7 billion, and operating income of $2.38 billion, up 19%. Net income was $1.45 billion, and diluted EPS was $4.57. The improvement reflected stronger global demand, yield increases, and a recovery from the fiscal 2009 impairment charges.
What are the main risks to FedEx's independent contractor model at FedEx Ground?
FedEx Ground faces numerous class actions and state proceedings claiming its owner-operators should be classified as employees. A December 2010 ruling favored FedEx in 20 of 28 certified cases, but those rulings are under appeal and eight other cases were remanded. New York and Kentucky attorneys general also sued in 2011. Management says an adverse outcome could be material and could force changes to the contractor model, though it believes the model will survive.
Is FedEx's balance sheet and debt load a concern?
Debt is modest. Long-term debt excluding capital leases is about $1.5 billion, all at fixed rates, and the leverage ratio under the revolving credit covenant is 0.5 against a 0.7 limit. The bigger obligations are off-balance-sheet operating leases of about $14 billion, $5.97 billion in aircraft purchase commitments, and a $1.5 billion underfunded pension and benefit position.
What is driving FedEx's capital spending and fleet investment?
Capital expenditures rose to $3.43 billion in 2011, and fiscal 2012 is planned at $4.2 billion. Much of this funds the Boeing 777 Freighter program (45 aircraft in total, 12 delivered by May 2011) and B757 replacements for older 727s. Management says these investments should produce long-term fuel and operating savings and support international growth at FedEx Express.
Are there any shareholder return or governance changes investors should note?
The quarterly dividend was $0.12 per share through fiscal 2011, and a $0.13 dividend was declared for July 2011. FedEx did not repurchase stock in Q4. The board proposed letting holders of 20% or more of common stock call special meetings, a vote set for the September 26, 2011 annual meeting.
06—Continue