FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2015. The request metadata says “2014 Q3,” but the filing itself is for fiscal 2015 Q3.
Business context and performance
FedEx provides express, ground, freight, e-commerce and related services. Management attributed stronger results to higher transportation volumes, improved Ground and Freight yields, lower fuel costs net of fuel surcharges, profit-improvement initiatives, less severe winter-weather disruption, and lower pension expense.
Key financial metrics
Amounts below are in millions, except per-share data. Balance-sheet figures compare February 28, 2015 with May 31, 2014.
| Metric | Three months ended February 28 | Nine months ended February 28 | Balance sheet / cash flow |
|---|---|---|---|
| Revenue | $11,716, up 4% | $35,339, up 5% | |
| Operating income | $962, up 50% | $2,962, up 31% | |
| Operating margin | 8.2%, versus 5.7% | 8.4%, versus 6.7% | |
| Net income | $580, up 53% | $1,802, up 32% | |
| Diluted EPS | $2.01, versus $1.23 | $6.25, versus $4.34 | |
| Cash and cash equivalents | $3,478, versus $2,908 | ||
| Long-term debt | $7,228, versus $4,736 | ||
| Operating cash flow | $3,473, versus $2,578 | ||
| Capital expenditures | $2,969, versus $2,554 |
Operating cash flow less capital expenditures was approximately $504 million for the nine months. The company paid $171 million in dividends and repurchased $1,016 million of stock during that period. The quarterly dividend declared was $0.20 per share, versus $0.15 a year earlier.
Segment results and changes versus prior year
- FedEx Express: Third-quarter revenue was nearly flat at $6,656 million, while operating income rose to $384 million from $168 million and margin improved to 5.8% from 2.5%. Nine-month revenue rose 2% and operating income increased 55%. Lower fuel surcharges and unfavorable foreign exchange weighed on revenue; volumes and base yields, lower fuel costs and operating improvements supported earnings.
- FedEx Ground: Third-quarter revenue increased 12% to $3,393 million and operating income rose 14% to $558 million; margin was 16.4%. Growth reflected higher Ground volumes and yields, partly offset by lower SmartPost volume. Results include GENCO from its January 30 acquisition.
- FedEx Freight: Third-quarter revenue rose 6% to $1,428 million and operating income increased 94% to $68 million; margin was 4.8%. Higher shipments and revenue per shipment drove improvement.
Company-wide fuel expense fell 30% in the quarter and 12% for the nine months. Management said the net fuel impact was a significant operating-income benefit, after accounting for lower fuel-surcharge revenue. Share repurchases contributed $0.11 to year-over-year quarterly diluted EPS growth and $0.42 for the nine-month period.
Liquidity, debt and investment
FedEx issued $2.5 billion of senior unsecured notes during the quarter, with maturities from 2020 to 2065 and fixed coupons ranging from 2.30% to 4.50%. Proceeds funded the $1.4 billion GENCO acquisition, with the balance for working capital and general corporate purposes. The company reported a 59% adjusted debt-to-capital leverage ratio against a 70% covenant limit and compliance with its covenants. Its $1 billion revolving credit facility was fully available, with no commercial paper outstanding. Cash included $488 million held offshore.
Management expected fiscal 2015 capital expenditures of approximately $4.2 billion. It stated that cash, operating cash flow and available financing were adequate for anticipated needs. The filing also reports $10.5 billion of purchase commitments and $15.8 billion of future minimum operating lease payments; these are contractual obligations, not current balance-sheet debt.
Outlook, risks and unusual items
- Management expected revenue and earnings growth to continue in fiscal Q4, supported by moderate global economic growth, volume and yield improvement, profit-improvement programs, and lower pension expense. The outlook depends on fuel prices and the pace of global economic improvement; higher incentive-compensation accruals may constrain results. No specific Q4 EPS target is provided.
- FedEx acquired GENCO for approximately $1.4 billion and Bongo for $42 million. Their results were immaterial to reported-period results; purchase-price allocations were preliminary. GENCO added approximately $1.1 billion of goodwill, primarily expected to benefit Ground and Express.
- Management announced that SmartPost would merge into FedEx Ground effective September 1, 2015. No personnel reductions were planned and estimated merger costs were immaterial.
- Significant legal exposures include FedEx Ground independent-contractor classification cases. Accrued losses in the Kansas, California and Oregon matters were described as immaterial, but additional material exposure is reasonably possible; the company could not estimate a range of further losses. The DOJ internet-pharmacy indictment could result in a material loss if FedEx is convicted, but the amount could not be estimated. Other identified matters include New York cigarette-shipment litigation and environmental proceedings, for which expected losses were described as immaterial.
- FedEx Express pilots were in mediation over an amendable contract. The company also identified fuel-price, currency, economic, demand, competition, weather, labor, pension, regulatory, technology and financing risks. Foreign-currency translation reduced nine-month comprehensive income by $305 million, net of tax.
Important facts for investors to verify
- Whether operating-margin gains persist as fuel prices and fuel surcharges adjust, and as incentive compensation and aircraft maintenance costs evolve.
- GENCO integration, expected synergies, final purchase-price allocation and the recoverability of acquisition-related goodwill.
- Developments and potential financial consequences in independent-contractor litigation and the DOJ internet-pharmacy case.
- Capital spending, cash generation, debt growth, credit ratings and compliance with the leverage covenant.
- Whether management’s fiscal Q4 growth outlook is achieved; the filing gives no numerical EPS guidance.