FedEx Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended May 31, 2015, with comparisons to fiscal 2014. Although the request references “2014 Q4,” this filing is an annual report for FY2015; fourth-quarter figures are identified separately below. Dollar amounts are in U.S. dollars.
Business context
FedEx provides express, ground and less-than-truckload freight transportation, alongside logistics, e-commerce and business services. Its reportable segments are FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. During FY2015 it acquired GENCO and Bongo, and agreed to acquire TNT Express, subject to approvals.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $47.453 billion | $45.567 billion |
| Operating income / margin | $1.867 billion / 3.9% | $3.815 billion / 8.4% |
| Net income | $1.050 billion | $2.324 billion |
| Diluted earnings per share | $3.65 | $7.48 |
| Cash from operating activities | $5.366 billion | $4.264 billion |
| Capital expenditures | $4.347 billion | $3.533 billion |
| Cash and cash equivalents at year-end | $3.763 billion | $2.908 billion |
| Long-term debt, less current portion | $7.249 billion | $4.736 billion |
FY2015 total assets were $37.069 billion; current assets were $10.941 billion and current liabilities $5.957 billion. The company had no commercial paper outstanding and its $1 billion revolving credit facility was fully available. Its adjusted debt-to-capital leverage ratio was 61%, against a 70% covenant limit. Future minimum operating lease payments totaled $16.385 billion and are not included as balance-sheet debt under the accounting rules then in effect.
Material changes and operating performance
- Revenue rose 4%, with growth in Ground and Freight partly offset by flat Express revenue. Express revenue was held back by lower fuel surcharges and unfavorable foreign exchange.
- Ground revenue increased 12% to $12.984 billion, including $416 million from acquired GENCO. Ground operating income rose 7% to $2.172 billion, while its margin declined to 16.7% from 17.4%, reflecting network expansion and GENCO’s inclusion.
- Freight revenue increased 8% to $6.191 billion and operating income rose 38% to $484 million; margin improved to 7.8% from 6.1%.
- Express revenue was essentially flat at $27.239 billion, while operating income rose 11% to $1.584 billion and margin improved to 5.8% from 5.3%. Management cited volume and base-yield growth, cost improvements and lower fuel costs.
- Operating cash flow increased by about $1.1 billion. Capital spending increased 23%, principally for aircraft and Ground network expansion. FedEx repurchased $1.254 billion of shares in FY2015, versus $4.857 billion in FY2014, and paid $227 million in dividends.
Unusual items and accounting change
- FedEx adopted mark-to-market accounting for pension and postretirement plan actuarial gains and losses, retrospectively recasting prior periods. FY2015 included a $2.190 billion pre-tax pension mark-to-market loss, principally reflecting demographic assumption changes and lower discount rates; the after-tax impact was $1.4 billion, or $4.81 per diluted share. FY2014 included a $15 million loss and FY2013 a $1.368 billion gain. These adjustments substantially distort year-to-year reported earnings.
- FY2015 included $276 million of aircraft impairment and related charges ($175 million after tax; $0.61 per diluted share) following fleet retirements and revised retirement schedules.
- FedEx recorded a $197 million charge ($133 million after tax; $0.46 per diluted share) to increase its reserve for a California FedEx Ground independent-contractor case to the $228 million settlement amount, which was subject to court approval. Fourth-quarter FY2015 operating loss was $1.321 billion and net loss was $895 million, reflecting these and other charges.
Outlook, commentary and risks
Management expected FY2016 revenue and earnings growth before any year-end pension mark-to-market adjustment, based on moderate global economic growth, volume and yield improvement, and continued execution of profit-improvement plans. The goal was $1.6 billion of annualized additional FedEx Express operating profit by the end of FY2016 compared with the 2013 base business; management reported Express operating income had improved about 70% from 2013 with essentially flat revenue. FY2016 capital expenditures were forecast at approximately $4.6 billion. The outlook excluded effects of the proposed TNT acquisition.
Management expected the TNT Express acquisition, valued at approximately $4.9 billion, to close in the first half of calendar 2016, subject to customary approvals. It anticipated FY2016 pension contributions of $660 million, approximately $500 million of which were required. The quarterly dividend was increased to $0.25 per share after year-end.
- Legal and labor exposure: Numerous proceedings challenge FedEx Ground’s independent-contractor model. The filing notes material reasonably possible exposure in Oregon and other cases, but says a range of potential losses could not be estimated. FedEx Express pilot contract negotiations remained in mediation; four FedEx Freight facilities had voted for union representation.
- Other proceedings: A federal criminal indictment related to online pharmacy shipments could result in material loss if FedEx is convicted; the company could not estimate a loss range. The filing also describes environmental, competition and other litigation.
- Operating and financial risks: Economic cyclicality, customer shifts toward slower services, fuel-price changes and fuel-surcharge timing, foreign exchange, intense competition, cybersecurity disruption, regulation, climate-related requirements, and execution or integration of acquisitions.
- Other sensitivities: Pension obligations are sensitive to discount rates, asset returns and demographic assumptions. FedEx reported an aggregate pension funded deficit of $4.007 billion at year-end. Credit ratings were BBB (S&P, stable outlook) and Baa1 (Moody’s, negative outlook).
Most important facts for investors to verify
- Reconcile FY2015 earnings and margins with the retrospective pension-accounting change and the $2.190 billion mark-to-market loss; assess underlying segment performance separately from corporate items.
- Track Ground contractor litigation, including court approval and payment of the California settlement and developments in Oregon and other jurisdictions.
- Check TNT acquisition completion, financing, integration costs and realized operating benefits against management’s stated expectations.
- Compare FY2016 capital spending, cash generation, debt and pension contributions with the $4.6 billion capex outlook and liquidity assumptions.
- Monitor Ground margin and GENCO integration, fuel-surcharge lag, volume and yield trends, and whether the Express profit-improvement target is achieved.