FEDEX CORP quarterly report, Q2 FY2014

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FedEx Corporation — Form 10-Q Summary

Business context and reporting period

FedEx provides express, ground and freight transportation, alongside related business services. This unaudited quarterly report covers the three and six months ended November 30, 2013 (fiscal 2014 second quarter and first half), compared with the corresponding 2012 periods. The interim financial statements received an independent accountants’ review, not an audit.

Financial performance and liquidity

  • Second quarter: Revenue was $11.403 billion, up 3%; operating income was $827 million, up 15%; operating margin was 7.3%, versus 6.5%; net income was $500 million, up 14%; diluted EPS was $1.57, up 13%.
  • First half: Revenue was $22.427 billion, up 2%; operating income was $1.622 billion, up 11%; operating margin was 7.2%, versus 6.7%; net income was $989 million, up 10%; diluted EPS was $3.10, up 9%.
  • Cash flow: Six-month operating cash flow was $1.609 billion, compared with $1.718 billion. Capital expenditures were $1.690 billion, versus $1.888 billion; operating cash flow less capital expenditures was negative $81 million, compared with negative $170 million. Cash and cash equivalents declined to $3.935 billion from $4.917 billion at May 31, 2013.
  • Balance sheet and funding: Total debt was approximately $2.990 billion, including $251 million current; cash exceeded reported debt by approximately $945 million. Current assets were $10.866 billion and current liabilities $5.406 billion. The $1 billion revolving facility was fully available, with no commercial paper outstanding. Adjusted debt-to-capital covenant leverage was 51%, below the 70% limit.
  • Capital returns: FedEx repurchased 10 million shares in the first half for $1.2 billion at an average $122 per share and paid $95 million in dividends. A new authorization covers up to 32 million additional shares; 32.2 million shares remained authorized at quarter-end. Quarterly dividend declared was $0.15 per share.

Material changes versus the prior comparable period

  • FedEx Express operating income rose 42% in the quarter to $326 million and 29% in the first half to $562 million, although segment revenue was essentially flat. Management cited profit-improvement actions, fleet modernization, lower aircraft maintenance and pension costs; the quarter also compared against the prior-year impact of Superstorm Sandy.
  • FedEx Ground revenue rose 10% in both periods, supported by volume and yield growth. Operating income increased 3% in the quarter and 4% in the first half, while operating margin declined 1 percentage point in each period to 14.9% and 16.0%, respectively, amid network investment and costs. Management noted that holiday Cyber Week shifted into the third quarter this year.
  • FedEx Freight revenue rose 4% in the quarter and 3% in the first half; operating income increased 1% in both periods. Margins edged down 0.1 percentage point to 5.4% for the quarter and 5.9% for the first half.
  • Consolidated operating costs rose 2% in the quarter and 2% in the first half. Purchased transportation and depreciation increased, while fuel and maintenance costs declined. Lower pension expense and voluntary buyout departures helped moderate labor costs.
  • First-half operating cash flow decreased, partly because the prior-year period included a larger income-tax refund. First-half results also faced fuel-surcharge timing effects and one fewer operating day.

Outlook, management commentary, risks and contingencies

  • Management expected revenue and earnings growth to continue into the third quarter and remainder of fiscal 2014, driven by improvement across transportation segments. It cited moderate global economic growth and continued migration from higher-yielding international priority to economy services as constraints.
  • Management expected a fiscal 2014 effective tax rate of 36.5%–37.0% and approximately $4.0 billion of fiscal-year capital expenditures. It expected share repurchases to add $0.04 to full-year diluted EPS. Most benefits from profit-improvement programs were expected in fiscal 2015 and 2016.
  • Fuel prices and surcharge adjustments create earnings exposure: surcharge changes lag fuel-price changes by approximately six to eight weeks for FedEx Express and Ground. Management said fuel had a significant negative operating-income impact in the first half, but no impact in the second quarter on its static analysis.
  • FedEx Ground faces numerous proceedings challenging the classification of owner-operators as independent contractors. The company said a material loss was reasonably possible in some matters, but it could not estimate a loss range and did not believe a material loss was probable. Adverse outcomes or required changes to the model could have material effects.
  • Other disclosed matters include wage-and-hour lawsuits, an antitrust lawsuit and related DOJ civil investigation, and a DOJ criminal investigation concerning packages for online pharmacies. The company said it would defend itself; potential consequences of the criminal investigation could include fines, penalties, forfeiture or compliance conditions, but loss could not be estimated.
  • FedEx Express pilots were in contract negotiations after their agreement became amendable in March 2013. The company also had approximately $10.3 billion of aircraft and aircraft-related purchase commitments and $15.0 billion of future minimum operating-lease payments disclosed at quarter-end. The Supaswift Southern Africa acquisition was expected to close in the second half of 2014, subject to customary conditions, and was expected to be immaterial to fiscal 2014 results.

Most important facts for investors to verify

  • Whether Express margin improvement and Ground volume growth continue, and whether Ground’s margin pressure eases after the holiday-season timing shift.
  • Whether fuel-price and surcharge timing, international service mix, and broader economic conditions affect revenue, yield and earnings as management anticipated.
  • Actual cash generation relative to capital spending, aircraft commitments, pension contributions and the planned share repurchases.
  • Developments in owner-operator classification cases and the DOJ investigations, including any change in the company’s ability to estimate exposure.
  • Progress and realized savings from cost-reduction and fleet-modernization programs, particularly the timing of benefits expected in fiscal 2015–2016.