FedEx Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended May 31, 2016, compared principally with fiscal 2015. Although the request metadata says “2015 Q4,” this filing reports FY2016; it is not a standalone 2015 fourth-quarter filing. Dollar amounts are in U.S. dollars unless noted.
Business context
FedEx provides express, ground and less-than-truckload transportation, logistics, e-commerce and business services. Its major operations include FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. FedEx acquired TNT Express on May 25, 2016; TNT’s results were immaterial in FY2016 and were included in “Eliminations, corporate and other.”
Key financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $50.365 billion | $47.453 billion | Up 6% |
| Operating income | $3.077 billion | $1.867 billion | Up 65% |
| Operating margin | 6.1% | 3.9% | Up 220 basis points |
| Net income | $1.820 billion | $1.050 billion | Up 73% |
| Diluted EPS | $6.51 | $3.65 | Up 78% |
| Cash from operating activities | $5.708 billion | $5.366 billion | Up $342 million |
| Capital expenditures | $4.818 billion | $4.347 billion | Up 11% |
Margins and segments: FedEx Express operating income rose 59% to $2.519 billion and margin improved to 9.5% from 5.8%. FedEx Ground operating income rose 5% to $2.276 billion, while margin declined to 13.7% from 16.7%. FedEx Freight operating income fell 12% to $426 million and margin declined to 6.9% from 7.8%.
Cash, liquidity and debt: Cash and cash equivalents were $3.534 billion at year-end, down from $3.763 billion. Long-term debt, including its current portion, was $13.867 billion, versus $7.268 billion a year earlier. FY2016 debt proceeds were $6.519 billion; the company used financing for the TNT acquisition, share repurchases and other corporate purposes. FedEx reported a 1.9-to-1.0 debt-to-adjusted-EBITDA ratio, below its 3.5-to-1.0 revolving-credit covenant limit, and said it was in compliance. It cited a $1.75 billion revolving credit facility, with no commercial paper outstanding.
Operating cash flow exceeded capital expenditures by $890 million, before acquisitions and financing. Investing activities used $9.446 billion, including $4.618 billion for acquisitions. FY2016 share repurchases totaled $2.722 billion; dividends paid were $277 million. Undiscounted operating lease commitments totaled $17.813 billion.
Material changes versus FY2015
- Reported earnings improved substantially, but both years included large pension mark-to-market losses: $1.498 billion in FY2016 versus $2.190 billion in FY2015. These noncash charges materially affect the year-over-year comparison.
- FY2016 included $256 million of FedEx Ground independent-contractor litigation provisions and $69 million related to a U.S. Customs and Border Protection matter. FY2015 included $197 million of additional legal reserve and $276 million of aircraft impairment and related charges.
- FedEx Express revenue declined 3%, reflecting lower fuel surcharges and unfavorable foreign exchange, while operating income increased with cost controls, the profit-improvement program and lower fuel costs.
- FedEx Ground revenue increased 28%, reflecting volume and yield growth, a full year of GENCO results and a change to gross presentation of SmartPost revenue. The SmartPost accounting change added about $1.2 billion to reported revenue and expenses; it also affected margin comparability.
- FedEx Freight revenue was essentially flat; higher shipment volumes were offset by lower revenue per shipment and weaker-than-expected industrial production.
- Fuel expense fell 36% company-wide. Management said the net fuel impact modestly benefited operating income in FY2016, as lower fuel costs were partly offset by lower fuel-surcharge revenue.
Acquisition, outlook and risks
FedEx paid approximately $4.9 billion for TNT Express, financing the purchase with debt proceeds and existing cash. The preliminary purchase-price allocation included $2.964 billion of goodwill and $920 million of identifiable intangible assets, and remained subject to change. Management expected intensive integration activity and costs in FY2017, with TNT Express not expected to be earnings-accretive until FY2018. Longer-term benefits are expected from greater European network density, revenue growth and tax synergies.
For FY2017, management expected revenue and earnings growth from improved performance across transportation segments, assuming continued moderate economic growth. It expected capital expenditures of approximately $5.6 billion, including aircraft and FedEx Ground network investment, and U.S. pension contributions of $1.0 billion, of which approximately $615 million were required. The filing does not provide a specific consolidated EPS target.
Key risks include economic and trade weakness, fuel-price volatility and the lag in fuel surcharges, foreign-exchange movements, competition and customer insourcing, successful integration of TNT Express, cyber or technology disruption, and labor and independent-contractor litigation. The company also disclosed exposure to climate and regulatory requirements, USPS service changes, and operational disruption from localized disasters. FedEx said TNT Express, representing approximately 16% of consolidated assets at year-end, was excluded from management’s and the auditor’s internal-control assessment; controls integration could affect future periods.
Important facts for investors to verify
- How much of FY2016 earnings growth reflects recurring operating improvements versus the smaller pension mark-to-market loss and other unusual items.
- Whether FedEx Ground can sustain volume and yield growth while containing network expansion, purchased-transportation and self-insurance costs; assess the effect of SmartPost gross revenue presentation on comparisons.
- Actual TNT Express integration spending, purchase-price allocation changes, operating performance and progress toward the expected FY2018 accretion.
- Debt, lease and pension funding demands against cash generation and the $5.6 billion FY2017 capital-spending plan.
- Resolution and cash impact of contractor-classification matters and other disclosed legal contingencies; some potential losses were not estimable.