FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2015; compared with the same periods in 2014. Dollar amounts are in millions unless stated otherwise. Interim financial statements were reviewed, not audited.
Business context and financial performance
FedEx provides express, ground, freight, e-commerce and related services through its Express, Ground, Freight and Services segments.
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $12,453; up 4% | $24,732; up 5% |
| Operating income | $1,137; up 5% | $2,281; up 6% |
| Operating margin | 9.1%; unchanged | 9.2%, versus 9.1% |
| Net income | $691; up 4% | $1,383; up 5% |
| Diluted EPS | $2.44; up 6% | $4.86; up 6% |
For the quarter, Express operating income rose 26% to $622 and margin improved to 9.4% from 7.0%. Ground operating income rose 13% to $526, but margin fell to 13.0% from 15.2%. Freight operating income declined 10% to $101 and margin fell to 6.5% from 7.1%. For the six months, Express income rose 34% to $1,167; Ground rose 5% to $1,063; Freight fell 17% to $233.
Cash flow, liquidity and debt
- Six-month operating cash flow was $2,454, versus $2,151 a year earlier. Capital expenditures were $2,562, versus $1,890; operating cash flow less capital expenditures was negative $108.
- Cash was $3,647 at November 30, down from $3,763 at May 31. Current assets were $11,152 and current liabilities $5,951.
- Long-term debt, excluding its current portion, was $8,481, up from $7,249 at May 31. FedEx issued $1.25 billion of 4.75% senior unsecured notes due 2045 during the quarter.
- A new $1.75 billion revolving credit facility runs to November 2020. The company reported debt-to-EBITDA of 1.2x against a 3.5x covenant limit and said it was in compliance. No commercial paper was outstanding.
- Capital expenditures are forecast at approximately $4.6 billion for fiscal 2016. Management said cash, operating cash flow and available financing should cover liquidity needs.
Material changes and management outlook
- Ground revenue growth includes acquired GENCO and a prospective change from net to gross recognition of FedEx SmartPost revenue and postal fees. The SmartPost change added approximately $300 million to quarterly revenue and $540 million for the half year, with corresponding expenses; it limits comparability and is not equivalent to organic growth.
- Management attributed improved results mainly to Express and Ground performance and profit-improvement initiatives. Weaker-than-expected Freight volume, higher incentive compensation, Ground self-insurance costs and litigation-related charges partly offset gains. Lower fuel prices reduced fuel expense, but lower fuel surcharges meant fuel had a modest negative net earnings impact.
- Management expects fiscal 2016 earnings growth before any year-end pension and postretirement mark-to-market adjustment, supported by Express and Ground volume and base-yield growth. The outlook assumes moderate global economic growth and remains exposed to fuel prices. It excludes the proposed TNT acquisition and related costs or operating results.
- FedEx expected to complete its €4.4 billion TNT Express acquisition in the first half of calendar 2016, subject to customary approvals and competition clearances. The company also completed GENCO and Bongo acquisitions.
- FedEx repurchased 6.0 million shares during the quarter for $911 million; 5.1 million shares remained authorized at November 30. The quarterly dividend declared was $0.25 per share.
Risks, contingencies and unusual items
- FedEx Ground contractor-classification litigation remains a significant uncertainty. Several settlements were reached or accrued, including a $228 million California settlement pending court approval and $47 million of aggregate settlements in the quarter; the related quarterly accrual increase was $41 million. The company said it could not estimate a range of potential losses in certain remaining cases and that adverse outcomes could materially affect costs or operating arrangements.
- Customs and Border Protection advised FedEx Trade Networks it may be liable for an estimated $76 million to $210 million in uncollected duties and fees. Management considered a loss probable but could not yet estimate a loss range.
- The DOJ criminal case concerning internet-pharmacy shipments could result in a material loss if FedEx is convicted; the company said it could not estimate a loss range and intends to defend the case.
- Other disclosed matters include a €17 million French competition fine, which FedEx was evaluating for possible appeal, and environmental and asbestos proceedings that management described as reasonably possible but expected to be immaterial.
- Other key risks cited include economic and shipment-demand changes, competition and pricing, fuel and currency movements, acquisition execution, labor and pension costs, cybersecurity, regulation, weather and financing access. Credit ratings were BBB/stable at S&P and Baa1/negative at Moody’s.
Important facts for investors to verify
- How much of reported Ground and consolidated revenue growth reflects GENCO and SmartPost gross presentation rather than underlying volume, pricing and yield.
- Whether Express operating gains and Ground volume growth persist, and whether Ground and Freight margins recover from cost pressure and weaker demand.
- The eventual cash and earnings impact of contractor litigation, including settlement approvals and remaining cases, and the CBP customs matter.
- Capital spending, free cash flow, debt levels and funding needs as FedEx pursues share repurchases and the proposed TNT acquisition.
- Whether fiscal 2016 earnings growth is achieved, given management’s stated dependencies on fuel prices, moderate global growth and the potential pension mark-to-market adjustment.