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| FDX > SEC Filings for FDX > Form 10-Q on 21-Dec-2007 | All Recent SEC Filings |
21-Dec-2007
Quarterly Report
• the volumes of transportation services provided through our networks, primarily measured by our average daily volume and shipment weight;
• the mix of services purchased by our customers;
• the prices we obtain for our services, primarily measured by yield (average price per shipment or pound or average price per hundredweight for FedEx Freight LTL Group shipments);
• our ability to manage our cost structure (capital expenditures and operating expenses) to match shifting volume levels; and
• the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.
Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2008 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following table compares revenues, operating income, operating margin, net
income and diluted earnings per share (dollars in millions, except per share
amounts) for the three- and six-month periods ended November 30:
Three Months Ended Percent Six Months Ended Percent
2007 2006(1) Change 2007 2006(1) Change
Revenues $ 9,451 $ 8,926 6 $ 18,650 $ 17,471 7
Operating income 783 839 (7 ) 1,597 1,623 (2 )
Operating margin 8.3 % 9.4 % (110 )bp 8.6 % 9.3 % (70 )bp
Net income $ 479 $ 511 (6 ) $ 973 $ 986 (1 )
Diluted earnings per share $ 1.54 $ 1.64 (6 ) $ 3.12 $ 3.17 (2 )
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(1) Operating expenses for the three and six months ended November 30, 2006 include a $143 million charge associated with upfront compensation and benefits under the new labor contract with our pilots, which was ratified in October 2006. The impact of this new contract on net income was approximately $78 million net of tax, or $0.25 per diluted share.
The following table shows changes in revenues and operating income by reportable segment for the three- and six-month periods ended November 30, 2007 compared to 2006 (in millions):
Change in Percent Change in Change in Percent Change in
Revenue Revenue Operating Income Operating Income
Three Six Three Six Three Six Three Six
Months Months Months Months Months Months Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
FedEx Express
segment(1) $ 344 593 6 5 $ 23 67 5 7
FedEx Ground
segment 178 379 12 13 (20 ) 11 (10 ) 3
FedEx Freight
segment (2) 11 231 1 10 (59 ) (104 ) (43 ) (36 )
FedEx Services
segment 7 5 1 - - - - -
Other and
Eliminations (15 ) (29 ) NM NM - - - -
$ 525 $ 1,179 6 7 $ (56 ) $ (26 ) (7 ) (2 )
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(1) FedEx Express operating expenses for the three and six months ended November 30, 2006 include a $143 million charge associated with upfront compensation and benefits under the new labor contract with our pilots, which was ratified in October 2006.
(2) FedEx Freight segment results for the six months ended include the results of FedEx National LTL from the date of its acquisition on September 3, 2006.
The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected volume statistics (in thousands) for the five most recent quarters:
[[Image Removed: (LINE GRAPH)]] [[Image Removed: (LINE GRAPH)]]
The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected yield statistics for the five most recent quarters:
[[Image Removed: (LINE GRAPH)]] [[Image Removed: (LINE GRAPH)]]
[[Image Removed: (LINE GRAPH)]]
(1) Package statistics do not include the operations of FedEx SmartPost.
The following graph for our transportation segments shows our average cost of
jet and vehicle fuel per gallon for the five most recent quarters:
Fuel surcharges were not sufficient to offset incremental fuel costs for the
second quarter and first half of 2008 based on a static analysis of the
year-over-year changes in fuel prices compared to changes in fuel surcharges.
Though fluctuations in fuel surcharge rates can be significant from period to
period, fuel surcharges represent one of the many individual components of our
pricing structure that impact our overall revenue and yield. Additional
components include the mix of services purchased, the base price and other extra
service charges we obtain for these services and the level of pricing discounts
offered. In order to provide information about the impact of fuel surcharges on
the trend in revenue and yield growth, we have included the comparative fuel
surcharge rates in effect for the second quarter and first half of 2008 and 2007
in the following discussions of each of our transportation segments.
Our effective tax rate was 37.6% for the second quarter of 2008 and 37.4% for
the first half of 2008, as compared to 37.9% for the second quarter of 2007 and
38.1% for the first half of 2007. The 2008 tax rate was lower than the 2007 rate
primarily due to a favorable tax audit adjustment in the first quarter of 2008
and to increased international earnings permanently reinvested in our global
network outside the United States. We expect the effective tax rate to be
between 37.5% and 38.0% for the remainder of 2008. The actual rate will depend
on a number of factors, including the amount and source of operating income.
Outlook
We expect our revenue growth rates to continue to moderate across all segments
for the second half of 2008, as the continued weak U.S. economy is expected to
further restrain demand for U.S. domestic express package and LTL freight
services. We anticipate modest earnings growth for the remainder of 2008, as
ongoing weakness in the U.S. economy and rising fuel costs will continue to
negatively impact our results. These factors will be partially mitigated by
revenue growth, primarily from IP services at FedEx Express and increased
volumes at FedEx Ground. We are employing cost containment initiatives across
all business segments to manage near-term expenditures, but continue to pursue
strategic projects related to our long-term growth plans. Accordingly, we
continue to expect our earnings in 2008 to be below our long-term goal of 10% to
15% annual earnings growth. However, we remain optimistic about the long-term
prospects for all of our business segments.
We expect to continue to make significant investments to expand our global
networks and broaden our service offerings, particularly through our
international investments. Our planned investments for 2008 are focused on
support for long-term volume growth, such as additional or expanded facilities
and new aircraft, improvements in service levels, and improvements to
productivity, including updates and enhancements to our technology capabilities.
However, in light of the impact of the weak U.S. economy on demand for domestic
package and LTL services, we have reduced our 2008 capital expenditure forecast
from $3.5 billion to $3.1 billion.
All of our businesses operate in a competitive pricing environment, exacerbated
by continuing volatile fuel prices. Historically, our fuel surcharges have
largely been sufficient to offset incremental fuel costs; however, volatility in
fuel costs may impact earnings because adjustments to our fuel surcharges lag
changes in actual fuel prices paid. Therefore, the trailing impact of
adjustments to our fuel surcharges can significantly affect our earnings in the
short-term.
See "Forward-Looking Statements" for a discussion of potential risks and
uncertainties that could materially affect our future performance.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting rules and disclosure requirements can significantly impact the
comparability of our financial statements. We believe the following new
accounting pronouncements are relevant to the readers of our financial
statements.
On June 1, 2007, we adopted Financial Accounting Standards Board ("FASB")
Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes."
This interpretation establishes new standards for the financial statement
recognition, measurement and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. The cumulative effect of adopting
FIN 48 was immaterial. For additional information on the impact of adoption of
FIN 48, refer to Note 1 to the accompanying unaudited condensed consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. ("SFAS") 157, "Fair Value Measurements," which provides a common definition
of fair value, establishes a uniform framework for measuring fair value and
requires expanded disclosures about fair value measurements. The requirements of
SFAS 157 are to be applied prospectively, and we anticipate that the primary
impact of the standard to us will be related to the measurement of fair value in
our recurring impairment test calculations (such as measurements of our recorded
goodwill and indefinite life intangible asset). We do not presently hold any
financial assets or liabilities that would require recognition under SFAS 157
other than investments held by our pension plans. SFAS 157 is effective for us
beginning June 1, 2008 (fiscal 2009); however, the FASB has proposed a one-year
deferral of the adoption of the standard as it relates to non-financial assets
and liabilities. Our evaluation of the impact of this standard is ongoing, and
we have not yet determined the impact of the standard on our financial condition
or results of operations.
In December 2007, the FASB issued SFAS 141R, "Business Combinations," and SFAS
160, "Accounting and Reporting Noncontrolling Interest in Consolidated Financial
Statements, an amendment of ARB No. 51." These new standards significantly
change the accounting for and reporting of business combination transactions and
noncontrolling interests (previously referred to as minority interests) in
consolidated financial statements. Both standards are effective for us beginning
June 1, 2009 (fiscal 2010) and are applicable only to transactions occurring
after the effective date.
REPORTABLE SEGMENTS
FedEx Express, FedEx Ground and FedEx Freight represent our major service lines
and, along with FedEx Services, form the core of our reportable segments. Our
reportable segments include the following businesses:
FedEx Express Segment FedEx Express (express transportation)
FedEx Trade Networks (global trade services)
FedEx Ground Segment FedEx Ground (small-package ground delivery)
FedEx SmartPost (small-parcel consolidator)
FedEx Freight Segment FedEx Freight LTL Group:
FedEx Freight (regional LTL freight transportation)
FedEx National LTL (long-haul LTL freight
transportation)
FedEx Custom Critical (time-critical transportation)
Caribbean Transportation Services (airfreight
forwarding)
FedEx Services Segment FedEx Services (sales, marketing and information
technology functions)
FedEx Kinko's (document and business services and
package acceptance)
FedEx Customer Information Services ("FCIS") (customer
service, billing and collections)
FedEx Global Supply Chain Services (logistics services)
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FEDEX SERVICES SEGMENT
The FedEx Services segment includes FedEx Services, which is responsible for our
sales, marketing and information technology functions, FCIS, which is
responsible for customer service, billings and collections for FedEx Express and
FedEx Ground, FedEx Global Supply Chain Services, which provides a range of
logistics services to our customers, and FedEx Kinko's.
During the first quarter of 2008, FedEx Kinko's was reorganized as a part of the
FedEx Services segment. FedEx Kinko's provides retail access to our customers
for our package transportation businesses and an array of document and business
services. FedEx Services provides access to customers, through digital channels
such as fedex.com. Under FedEx Services, FedEx Kinko's benefits from the full
range of resources and expertise of FedEx Services to continue to enhance the
customer experience, provide greater, more convenient access to the portfolio of
services at FedEx, and increase revenues through our retail network. With this
reorganization, the FedEx Services segment is now a reportable segment. Prior
year amounts have been revised to conform to the current year segment
presentation.
As part of this reorganization, we are pursuing synergies in sales, marketing,
information technology and administrative areas. During the third quarter of
2008, management decided to slow the rate of expansion for new locations in 2009
and balance the focus between store expansion and improving core services at
existing stores. However, we remain committed to the long-term expansion of our
retail network.
FedEx Kinko's will continue to be treated as a reporting unit for purposes of
goodwill and tradename impairment testing. A material change in our strategy or
long-range outlook for FedEx Kinko's could trigger the need to perform an
impairment test on these assets in advance of our regularly scheduled annual
tests in the fourth quarter.
The costs of providing the sales, marketing, and information technology
functions of FedEx Services and the customer service functions of FCIS, together
with the net operating costs of FedEx Global Supply Chain Services and FedEx
Kinko's, are allocated primarily to the FedEx Express and FedEx Ground segments
based on metrics such as relative revenues or estimated services provided. We
believe these allocations approximate the net cost of providing these functions.
FedEx Services segment revenues, which reflect the operations of FedEx Kinko's
and FedEx Global Supply Chain Services, increased slightly for the second
quarter and first half of 2008. Higher package acceptance fees and revenue
generated from new locations more than offset declines in copy product revenues
at FedEx Kinko's for the second quarter and first half of 2008. Capital
expenditures for the FedEx Services segment are primarily associated with
information technology investments and store expansion activities at FedEx
Kinko's. FedEx Kinko's continues to invest in a multi-year plan to open new
store locations, improving core services and enhancing its integrated digital
document service network, supporting the company's objective of being the back
office for local businesses and the remote office for traveling professionals.
FedEx Kinko's opened 173 new centers during the first half of 2008.
OTHER INTERSEGMENT TRANSACTIONS
Certain FedEx operating companies provide transportation and related services
for other FedEx companies outside their reportable segment. Billings for such
services are based on negotiated rates, which we believe approximate fair value,
and are reflected as revenues of the billing segment. These rates are adjusted
from time to time based on market conditions. Such intersegment revenues and
expenses are eliminated in the consolidated results and are not separately
identified in the following segment information, as the amounts are not
material.
The operating expenses line item "Intercompany charges" on the accompanying
unaudited financial summaries of our transportation segments includes the
allocations from the FedEx Services segment to the respective transportation
segments. The "Intercompany charges" caption also includes allocations for
administrative services provided between operating companies and certain other
costs such as corporate management fees related to services received for general
corporate oversight, including executive officers and certain legal and finance
functions. Management evaluates transportation segment financial performance
based on operating income.
FEDEX EXPRESS SEGMENT
The following table compares revenues, operating expenses, operating income and
operating margin (dollars in millions) for the three- and six-month periods
ended November 30:
Three Months Ended Percent Six Months Ended Percent
2007 2006 Change 2007 2006 Change
Revenues:
Package:
U.S. overnight box $ 1,615 $ 1,634 (1 ) $ 3,231 $ 3,288 (2 )
U.S. overnight envelope 481 488 (1 ) 992 1,000 (1 )
U.S. deferred 730 716 2 1,441 1,421 1
Total U.S. domestic
package revenue 2,826 2,838 - 5,664 5,709 (1 )
International Priority
(IP) 1,910 1,697 13 3,731 3,362 11
International domestic
(1) 174 57 NM 329 109 NM
Total package revenue 4,910 4,592 7 9,724 9,180 6
Freight:
U.S. 604 624 (3 ) 1,197 1,231 (3 )
International priority
freight 312 271 15 604 520 16
International airfreight 96 106 (9 ) 190 209 (9 )
Total freight revenue 1,012 1,001 1 1,991 1,960 2
Other (2) 115 100 15 211 193 9
Total revenues 6,037 5,693 6 11,926 11,333 5
Operating expenses:
Salaries and employee
benefits 2,059 2,116 (3 ) 4,119 4,118 -
Purchased transportation 299 269 11 579 532 9
Rentals and landing fees 417 392 6 828 790 5
Depreciation and
amortization 234 208 13 464 413 12
Fuel 872 716 22 1,672 1,514 10
Maintenance and repairs 376 365 3 778 763 2
Intercompany charges 536 520 3 1,051 1,022 3
Other 713 599 19 1,385 1,198 16
Total operating expenses
(3) 5,506 5,185 6 10,876 10,350 5
Operating income $ 531 $ 508 5 $ 1,050 $ 983 7
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Operating margin 8.8 % 8.9 % (10 )bp 8.8 % 8.7 % 10 bp
(1) International domestic revenues include our international domestic express operations, primarily in the United Kingdom, Canada, India and China.
(2) Other revenues includes FedEx Trade Networks.
(3) Operating expenses for the three and six months ended November 30, 2006 included a $143 million charge associated with upfront compensation and benefits under the labor contract with our pilots, which was ratified in October 2006.
The following table compares selected statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30:
Three Months Ended Percent Six Months Ended Percent
2007 2006 Change 2007 2006 Change
Package Statistics (1)
Average daily package
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