FedEx Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2014 (fiscal 2015). FedEx provides transportation, e-commerce and business services through Express, Ground, Freight and Services. Financial amounts below are in millions of dollars except per-share data. Interim statements were reviewed by Ernst & Young; the review is not an audit.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $11,939; +5% year over year | $23,623; +5% |
| Operating income | $1,013; +22% | $2,000; +23% |
| Operating margin | 8.5%, versus 7.3% | 8.5%, versus 7.2% |
| Net income | $616; +23% | $1,222; +24% |
| Diluted EPS | $2.14, versus $1.57; +36% | $4.24, versus $3.10; +37% |
EPS growth exceeded net income growth partly because share repurchases reduced the weighted-average diluted share count. Repurchases contributed $0.16 to quarterly and $0.31 to first-half year-over-year diluted EPS, according to management.
- Segment performance, quarter / six months: Express revenue was $7,024 / $13,886 and operating income $484 / $853; Ground revenue was $3,063 / $6,023 and operating income $465 / $1,010; Freight revenue was $1,585 / $3,194 and operating income $112 / $280.
- Cash flow: First-half operating cash flow was $2,151, up from $1,609. Capital expenditures were $1,890, versus $1,690; operating cash flow less capital expenditures was $261, compared with negative $81 in the prior period. Cash declined $642 to $2,266, including $60 of adverse exchange-rate effects.
- Liquidity and debt: Current assets were $9,212 and current liabilities $5,173 at November 30. Long-term debt was $4,735, with no material current portion. The $1 billion revolving facility was fully available; the company reported a 57% adjusted-debt-to-capital leverage ratio against a 70% covenant limit and compliance with covenants.
- Capital returns and investment: First-half dividends paid were $114. FedEx repurchased 1.0 million shares for $156 at an average $156 per share during the quarter. Fiscal 2015 capital spending was expected to be about $4.2 billion.
Material changes versus prior comparable periods
- All three transportation segments grew revenue and operating income. Freight had the strongest reported revenue growth (11% for the quarter; 12% for the half), while Express operating income rose 36% and 35%, respectively.
- Ground’s quarterly operating income increased 6%, but its margin eased to 15.2% from 15.4%; first-half operating income rose 10% and margin improved to 16.8% from 16.5%.
- Management attributed improved results to higher shipment volumes and yields, profit-improvement initiatives, lower pension expense and a modestly favorable net fuel impact. Higher aircraft maintenance expense partly offset these benefits. First-half maintenance and repairs rose 15% overall.
- Fuel expense fell 7% in the quarter and 3% for the half, but lower fuel surcharges partly offset the benefit. The company said the net fuel impact was a slight benefit for the quarter and a modest benefit for the half.
- First-half pension-plan costs declined to $361 from $458. A $165 contribution to U.S. pension plans was made in December, after quarter-end.
Outlook, risks and unusual items
- Management expected revenue and earnings growth to continue through the third quarter and remainder of fiscal 2015, based on moderate global economic growth, continued volume and yield improvement, profit-improvement programs and lower pension expense. No specific earnings or revenue guidance figure was provided. Management noted that reinstated incentive compensation could constrain results if performance exceeded plan; fuel prices and global economic conditions were key uncertainties.
- FedEx expected an effective tax rate of 36.0%–37.0% for fiscal 2015. It announced average list-price increases of 4.9% for Express, Ground/Home Delivery and Freight effective January 5, 2015; Ground also planned to apply dimensional-weight pricing to all shipments from that date. Fuel-surcharge tables were to be updated February 2, 2015.
- After quarter-end, FedEx agreed to acquire GENCO Distribution Systems, subject to customary conditions, and acquired Bongo International. Both were expected to have immaterial effects on fiscal 2015 results.
- Legal and labor exposures: FedEx Ground faces owner-operator classification litigation. Appellate decisions in Kansas and Ninth Circuit cases found drivers to be employees under the applicable tests; recorded accruals were described as immaterial, but material additional exposure was reasonably possible and not estimable. The company also faced a federal criminal indictment concerning online-pharmacy shipments; a conviction could result in material loss, but the amount could not be estimated. Other disclosed matters include New York cigarette-shipment litigation, California hazardous-waste proceedings, a DOJ asbestos matter, and a French competition investigation. FedEx Express pilot negotiations were in mediation; the filing said this had no operational impact.
- Contractual commitments included $9,868 of aircraft and aircraft-related purchases and $15,892 of future minimum operating-lease payments. Management said existing cash, operating cash flow and financing sources were adequate for liquidity needs. Cash included $469 held offshore under a permanent-reinvestment strategy.
- Management identified exposure to economic conditions, shipment demand and pricing, fuel prices, foreign exchange, competition, service disruptions, labor relations, pension costs, regulation and litigation. The company reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether volume and yield growth, particularly in Ground and Freight, can continue while network expansion and purchased-transportation costs rise.
- Whether the margin improvement persists after lower fuel benefits, aircraft maintenance timing and incentive compensation effects change.
- Cash generation relative to the approximately $4.2 billion fiscal-year capital-spending plan, aircraft commitments, pension contributions, dividends and share repurchases.
- Developments and potential financial consequences in owner-operator classification litigation and the DOJ online-pharmacy criminal case, for which the company could not estimate a loss range.
- Progress and integration costs for GENCO and Bongo, and any effect of the planned pricing changes on shipment volumes, customer mix and yields.