Unpacking FedEx’s annual report…

July 19, 2010

At 198 pages, there was a lot of information in the annual report that FedEx (FDX) filed last week. By now, the stock analysts have parsed the financial data, but here are a few nuggets that caught our attention for various reasons:

Plan for take-off: FedEx has an upbeat take on near-term economic growth, expecting —stronger demand for our services in 2011 and continued growth in revenue and earnings as global economic conditions continue to improve. That should lead to —a more stable pricing environment, which — in turn — will lead to greater profitability and improved margins. Challenges exist in the form of —a significant increase in pension and retiree medical expenses” largely thanks to accounting technicalities — the discount rate used to value its obligations fell, pushing up the present value. Other factors that will hamper improved margins include higher aircraft maintenance expenses, employee compensation programs, and continued inflation in employee medical costs.

Map to success: In 2011, FedEx plans to invest about $3.2 billion in Boeing 777 Freighter and Boeing 757 planes, which are —substantially more fuel-efficient than its old planes. The company stated it is committed to investing in —critical long-term strategic projects that will enable it to enhance and broaden its services. In addition to new planes, the capital investments will be made in —related equipment at FedEx Express, network expansion at FedEx Ground and revenue equipment at the FedEx Freight segment. It estimates that about 65 percent of the capital expenditures will go towards growth initiatives and 35 percent towards regular maintenance activities, a slight tilt in favor of growth.

New pilots’ contract scheduled for arrival: Finally, the collective bargaining agreement with FedEx’s pilots— union becomes —amendable on October 31, 2010, and the company will soon start renegotiating that agreement. The current contract will remain in effect while FedEx negotiates the new agreement. On this matter, the company stated:

—We cannot predict the outcome of these negotiations. The terms of any new collective bargaining agreement could increase our operating costs and adversely affect our ability to compete with other providers of express delivery services. On the other hand, if we are unable to reach agreement on a new collective bargaining agreement, we may be subject to a strike or work stoppages by our pilots, subject to the requirements of the RLA. These actions could have a negative impact on our ability to operate our express transportation network and ultimately cause us to lose customers.

A majority of analysts appear to be bullish on the stock, which is down nearly just over 10 percent for the year. Hopefully they’re right and FedEx’s stock price will be flying high again soon.

Image source: wbaiv via Flickr

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