FedEx Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the three months ended August 31, 2014. Comparisons are with the three months ended August 31, 2013, unless otherwise noted. FedEx provides express, ground, freight, and related transportation and business services. The interim statements were reviewed by Ernst & Young, not audited.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $11.684 billion | $11.024 billion | +6% |
| Operating income | $987 million | $795 million | +24% |
| Operating margin | 8.5% | 7.2% | +130 basis points |
| Net income | $606 million | $489 million | +24% |
| Diluted EPS | $2.10 | $1.53 | +37% |
| Cash provided by operations | $982 million | $929 million | +$53 million |
| Capital expenditures | $720 million | $572 million | +26% |
- Operating margin improved as transportation-segment revenue growth and cost-management benefits outweighed higher aircraft maintenance and other costs. Management cited lower pension expense and profit-improvement initiatives as contributors.
- Express revenue rose 4% and operating income 35% to $369 million; Ground revenue rose 8% and operating income 13% to $545 million; Freight revenue rose 13% and operating income 70% to $168 million.
- Ground benefited from higher volume and yields. Freight benefited from 11% more average daily LTL shipments and higher revenue per shipment. Express package growth was partly offset by lower freight revenue.
- Cash and cash equivalents were $2.416 billion at August 31, down from $2.908 billion at May 31, 2014. Operating cash flow was partly absorbed by $720 million of capital spending and $791 million of share repurchases.
- Long-term debt was $4.735 billion, with $1 million current; total debt was approximately $4.736 billion. The $1 billion revolving credit facility was fully available, with no commercial paper outstanding. Adjusted debt-to-capital leverage was 58%, below the 70% covenant limit.
- Current assets were $9.250 billion and current liabilities $5.153 billion. The filing states management believes cash, operating cash flow, and financing sources are adequate for liquidity needs.
Material changes and capital allocation
- Revenue increased across all three transportation segments, led by Freight’s 13% growth. Consolidated operating income increased faster than revenue, and diluted EPS rose partly because share repurchases reduced weighted-average shares.
- FedEx repurchased 5.3 million shares for $791 million, at an average $148 per share; the authorized program was completed. Management estimated the buyback added $0.15 to year-over-year diluted EPS.
- Quarterly dividends declared increased to $0.40 per share from $0.30 a year earlier. The board declared a $0.20-per-share quarterly dividend payable October 1, 2014.
- Capital expenditures rose primarily due to aircraft spending. Management expected approximately $4.2 billion of FY2015 capital expenditures. Purchase commitments totaled $11.607 billion, including $9.860 billion for aircraft and aircraft-related items; future minimum operating lease payments totaled $15.543 billion.
Outlook, commentary, and risks
- Management expected revenue and earnings growth to continue in the second quarter and remainder of FY2015, supported by moderate global economic growth, volume and yield improvements, profit-improvement programs, and lower pension expense. The outlook depends in part on fuel prices and the pace of global economic improvement.
- Management forecast a FY2015 effective tax rate of 36%–37%. The first-quarter rate was 35.3%, versus 36.2% in the prior-year quarter.
- Fuel surcharges historically offset fuel-price changes over time, but adjustment lags can benefit or pressure near-term earnings. Management said fuel had a modest benefit to operating income in the quarter.
- FedEx Ground faces extensive litigation and proceedings over whether owner-operators should be classified as employees. The Ninth Circuit ruled against FedEx in California and Oregon cases; the company planned to seek reconsideration and further review. An accrual was recorded, described as immaterial, but material exposure above that accrual was reasonably possible; the company could not estimate a loss range.
- A DOJ criminal indictment alleges unlawful controlled-substance and misbranded-drug distribution and related conduct involving FedEx entities and online pharmacies. FedEx said it would vigorously defend itself. The company could not estimate a loss; a material loss was reasonably possible if convicted.
- Other disclosed matters include California hazardous-waste proceedings, an asbestos-related DOJ criminal investigation, and a French competition investigation. Potential loss in the French matter could be material; amounts for the other listed matters were expected to be immaterial. FedEx also noted potential material effects from owner-operator litigation and changes to that business model.
- The FedEx Express pilots’ collective bargaining agreement was amendable, and negotiations were ongoing. Management cited fuel, economic conditions, competition, labor and benefit costs, weather, foreign exchange, regulation, and legal proceedings among risks to results.
- Management reported effective disclosure controls as of August 31, 2014, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating growth and margin gains persist, particularly across Express, Ground, and Freight, and whether aircraft maintenance costs normalize.
- Progress against the $4.2 billion FY2015 capital-spending outlook and the effect of aircraft commitments, leases, and pension contributions on cash generation.
- Developments in owner-operator classification cases, including possible damages, business-model changes, and effects on FedEx Ground’s costs and operations.
- Developments and potential financial exposure in the DOJ pharmacy indictment and French competition investigation; the filing does not provide a clear loss estimate for these matters.
- Whether repurchases and dividends remain consistent with liquidity, leverage, and investment needs; the existing repurchase authorization was exhausted.