01—Abstract
Summary
Summary of the 10-K filed July 16, 2012. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2012 10-K (fiscal year ended May 31, 2012) shows a strong year driven by yield growth and the outperformance of FedEx Ground.
Revenue rose 9% to $42.7 billiona and operating income rose 34% to $3.19 billion, lifting operating margin 140 basis points to 7.5%. Diluted EPS was $6.41, up 40% from $4.57. Results were helped by a timing lag in fuel surcharges, a milder winter versus 2011, and a $66 million reversal of the ATA Airlines legal reserve, partly offset by a $134 million non-cash impairment on retired aircraft.
Management attributes about $0.15b per diluted share of net favorable items to these charges and credits. Segment performance was uneven but encouraging. FedEx Ground was the standout, with operating income up 33% and margin expanding 280 basis points to 18.4%.
FedEx Freight swung to a $162 millionc operating profit from a loss a year earlier, and FedEx Express operating income rose only 3% as U.S. domestic and international priority package volumes declined amid weaker global demand. Cash flow from operations rose to $4.8 billion, but capital expenditures climbed to $4.0 billion, leaving free cash flow of roughly $828 million. Pension obligations are a notable headwind: the funded status deficit widened to $4.9 billion after a 4.44% discount rate, and management expects pension expense to rise by about $150 million in fiscal 2013.
Looking ahead, management guides to revenue and earnings growth in fiscal 2013 despite modest global growth, with capital expenditures expected to fall to about $3.9 billiond. The effective tax rate is expected to rise to 37% to 38%.
Key risks include the ongoing independent-contractor litigation at FedEx Ground (the outcome could be material), the USPS air contract expiring in September 2013, fuel price volatility, and the pilot contract becoming amendable in March 2013. The company has a $1 billion undrawn revolving credit facility and a BBB/Baa1 credit profile.
02—Key points
Key Highlights
- Revenue grew 9% to $42.68 billion, driven by yield increases across all transportation segments despite softer package volumes at FedEx Express.
- Operating income rose 34% to $3.19 billion, and operating margin expanded 140 basis points to 7.5%, aided by fuel surcharge timing and a $66 million legal reserve reversal, partly offset by a $134 million aircraft impairment.
- Diluted EPS was $6.41, up 40% from $4.57 in fiscal 2011; net income was $2.03 billion.
- FedEx Ground was the standout segment, with operating income up 33% and operating margin of 18.4%, while FedEx Freight returned to a $162 million operating profit.
- FedEx Express operating income rose only 3% as U.S. domestic and international priority package volumes declined with weaker global demand.
- Pension funded status deficit widened to $4.9 billion, and pension expense is expected to rise by about $150 million in fiscal 2013 due to a historically low discount rate.
- Fiscal 2013 guidance calls for revenue and earnings growth, capital expenditures of about $3.9 billion, and an effective tax rate of 37% to 38%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed July 16, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $42.68B$39.30B | +8.6% |
| Operating Expenses | $39.49B$36.93B | +7.0% |
| Operating Income | $3.19B$2.38B | +34.0% |
| Interest Expense | $52.00M$86.00M | −39.5% |
| Net Income | $2.03B$1.45B | +39.9% |
| EPS (Basic) | $6.44$4.61 | +39.7% |
| EPS (Diluted) | $6.41$4.57 | +40.3% |
| Shares Outstanding (Basic) | 315.00M315.00M | 0.0% |
| Shares Outstanding (Diluted) | 317.00M317.00M | 0.0% |
05—Questions
Frequently Asked Questions
What drove the strong improvement in FedEx's fiscal 2012 earnings?
Earnings were driven mainly by higher yields across all transportation segments, including higher fuel surcharges and yield management programs. FedEx Ground's volume and yield growth and FedEx Freight's profitability improvement were key contributors. Results also benefited from a milder winter versus 2011, the fuel surcharge timing lag, and a $66 million reversal of the ATA Airlines reserve, which was partly offset by a $134 million aircraft impairment.
Is FedEx's fiscal 2012 profitability sustainable given one-time items?
Management stated that the net one-time items favorably affected results by about $0.15 per diluted share. The fuel surcharge timing benefit is expected to reverse if fuel prices stay at current levels. Underlying operating improvement at FedEx Ground and FedEx Freight appears more durable, though FedEx Express faces weaker volumes and rising pension costs.
What are the biggest risks to FedEx's business identified in the filing?
Key risks include the outcome of lawsuits challenging FedEx Ground's independent contractor model, which could be material and force changes to the contractor model. Other risks include fuel price volatility, the USPS deciding to solicit proposals for air transportation after September 2013, the FedEx Express pilot contract becoming amendable in March 2013, possible labor law changes, and global economic weakness. Pension funding and expense are also a growing concern.
How strong is FedEx's balance sheet and liquidity position?
FedEx had $2.8 billion in cash at May 31, 2012, and $1 billion of undrawn capacity under its revolving credit facility, which expires in April 2016. Its adjusted debt-to-capital ratio was 53% against a 70% covenant. Debt is modest at $1.7 billion in total, including capital leases. Cash from operations of $4.8 billion covered capital expenditures of $4.0 billion. Standard & Poor's rates the company BBB and Moody's rates it Baa1. Pension underfunding of $4.9 billion and about $14 billion of operating lease commitments are significant off-balance-sheet obligations.
What does FedEx expect for fiscal 2013?
FedEx expects revenue and earnings growth despite only modest global economic growth. It anticipates FedEx Freight operating income to increase significantly and FedEx Ground operating income to keep growing. FedEx Express operating income is expected to rise modestly. Headwinds include about $150 million in higher pension expense and $69 million in accelerated aircraft depreciation. Capital expenditures are expected to decline to about $3.9 billion, and the effective tax rate is expected to be 37% to 38%.
06—Continue