FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2014; comparisons are with the corresponding 2013 periods. The filing is for fiscal 2014 Q3, notwithstanding the request metadata. Amounts are in millions unless stated otherwise. Interim financial statements were reviewed by Ernst & Young, 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. For the quarter, revenue rose 3% to $11.301 billion, operating income rose 9% to $641 million, net income rose 5% to $378 million, and diluted EPS rose 9% to $1.23. For the nine months, revenue increased 3% to $33.728 billion, operating income increased 10% to $2.263 billion, net income increased 9% to $1.367 billion, and diluted EPS increased 9% to $4.34.
| Metric | Quarter 2014 | Quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating margin | 5.7% | 5.4% | 6.7% | 6.2% |
| Basic EPS | $1.24 | $1.14 | $4.38 | $3.99 |
| Dividends declared per share | $0.15 | $0.14 | $0.60 | $0.56 |
Segment trends: Quarterly revenue was flat at Express ($6.674 billion), up 10% at Ground ($3.031 billion) and up 9% at Freight ($1.347 billion). Operating income was $135 million at Express, $477 million at Ground and $29 million at Freight. Ground and Freight revenue growth reflected increased volumes; Ground also benefited from yield increases. Express faced weaker freight revenue and a shift from higher-yielding priority to economy international services.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $2.578 billion, down from $2.976 billion. Capital expenditures were $2.554 billion, up from $2.430 billion; operating cash flow less capital expenditures was $24 million, compared with $546 million in the prior period.
- Cash and cash equivalents were $3.042 billion at February 28, 2014, down from $4.917 billion at May 31, 2013. Management attributed lower operating cash flow primarily to prior-year tax refunds, severance payouts and higher tax payments.
- Long-term debt, including current maturities, was approximately $4.736 billion, versus $2.990 billion at May 31, 2013. The company issued $2.0 billion of long-term notes and repaid $250 million of notes during the quarter. Net interest expense was $38 million for the quarter and $95 million for nine months.
- The $1 billion revolving credit facility was entirely available, with no commercial paper outstanding. Adjusted debt-to-capital leverage was 57%, below the 70% covenant ceiling; FedEx reported compliance with its covenants.
- Management expected operating cash flow to fund planned investment and stated liquidity was adequate. Expected fiscal 2014 capital expenditures were approximately $3.8 billion. Aircraft, lease and other purchase commitments are substantial; the filing reports $11.326 billion of purchase commitments and $15.056 billion of future minimum operating lease payments.
Material changes and management commentary
- Severe winter weather across transportation segments reduced quarterly earnings by an estimated $125 million year over year. Estimated segment impacts were $70 million at Express and $40 million at Ground. One additional operating day partly offset weather effects.
- Fuel had a significant negative net impact on operating income in the quarter and nine months, in part because fuel surcharge adjustments lag fuel-price movements. Reported fuel expense itself declined year over year.
- Lower pension expense, reduced incentive compensation, the voluntary employee severance program and the prior-year $47 million of business realignment costs supported comparisons. Benefits from the severance program were expected to continue as remaining departures occurred by May 31, 2014.
- Ground’s quarterly operating margin declined to 15.7% from 17.0%, despite revenue growth; higher network investment, weather and fuel effects weighed on margin. Express margin improved to 2.0% from 1.8%, and Freight margin improved to 2.2% from 0.3%.
- FedEx expected earnings growth in fiscal Q4, driven by continued improvement across transportation segments, but cited moderate global economic growth and the international priority-to-economy demand shift as constraints. Most benefits from profit-improvement programs were expected in 2015 and 2016.
- FedEx expected its fiscal 2014 effective tax rate to be 36.5%–37.0%. A planned acquisition of Supaswift operations in seven Southern African countries was expected to close in fiscal Q4, subject to customary conditions, and to have an immaterial impact on fiscal 2014 results.
Risks, contingencies and unusual items
- FedEx Ground faces numerous lawsuits and proceedings challenging the classification of owner-operators as independent contractors. The company said a material loss was reasonably possible but not probable; it could not estimate a loss range. Adverse outcomes could affect costs, liabilities and the operating model.
- California authorities alleged hazardous-waste regulatory violations by FedEx Ground and were negotiating a statewide settlement; any loss was expected to be immaterial. Other disclosed matters include a DOJ civil investigation concerning shipping consultants and a criminal investigation relating to packages for online pharmacies. The filing did not quantify possible loss for the criminal investigation.
- FedEx Express pilot contract negotiations were ongoing after the agreement became amendable in March 2013. Fuel-price volatility, demand, severe weather, competition, foreign exchange, labor and pension costs, financing access and regulatory changes were identified as risks.
- The company repurchased $3.984 billion of stock during the nine months, including a $2.0 billion accelerated share repurchase (ASR) arrangement; the initial ASR delivery was 11.4 million shares, with final share settlement still pending. Repurchases contributed to the decline in cash and stockholders’ investment.
Important facts for investors to verify
- Whether the expected Q4 earnings growth materialized, and how much the winter-weather and fuel-surcharge effects persisted or reversed.
- Whether Ground’s volume growth translated into margin recovery as network expansion costs and contractor-model litigation evolved.
- Actual cash generation after capital expenditures, the roughly $3.8 billion fiscal-year capex plan, and funding of aircraft commitments and pension contributions.
- Debt and interest-cost trends following the $2 billion issuance, alongside credit ratings, covenant headroom and the remaining share-repurchase authorization.
- Developments in the independent-contractor cases, DOJ investigations, California environmental matter, pilot negotiations and Supaswift acquisition closing.