FedEx Corporation — Form 10-Q Summary
Business context and reporting period
FedEx provides transportation, e-commerce and business services through its Express, Ground, Freight and Services segments. This filing covers the three months ended August 31, 2013, the first quarter of fiscal 2014, and compares results with the prior-year quarter. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance and position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $11.024 billion | $10.792 billion | +2% |
| Operating income | $795 million | $742 million | +7% |
| Operating margin | 7.2% | 6.9% | +30 bps |
| Net income | $489 million | $459 million | +7% |
| Diluted EPS | $1.53 | $1.45 | +6% |
| Operating cash flow | $929 million | $903 million | +$26 million |
| Capital expenditures | $572 million | $972 million | −41% |
Cash from operations less capital expenditures was approximately $357 million. Cash and cash equivalents were $5.096 billion at August 31, 2013, versus $4.917 billion at May 31, 2013. Total debt was approximately $2.993 billion, including $254 million current and $2.739 billion long-term. The $1 billion revolving credit facility was unused and fully available; adjusted-debt-to-capital covenant leverage was 51%, below the 70% maximum. The company reported compliance with its covenants.
Segment results: Express revenue was $6.605 billion (approximately flat) and operating income was $236 million, up 14%; Ground revenue rose 11% to $2.730 billion and operating income rose 5% to $468 million, while margin declined to 17.1% from 18.1%; Freight revenue rose 2% to $1.424 billion and operating income was $91 million, up 1%, with margin unchanged at 6.4%.
Material changes versus the prior comparable period
- Ground was the main revenue growth driver, with higher package volumes and yields; SmartPost volume rose 26%, aided by e-commerce growth.
- Express operating income improved despite slightly lower revenue. Priority international demand continued shifting toward lower-yielding economy services; international export package yield fell 4%.
- Management cited a net negative fuel impact, including a lag between fuel-price changes and surcharge adjustments, and one fewer operating day. Lower pension expense and aircraft maintenance, plus delayed or absent merit increases for many employees, partly offset these pressures.
- Purchased transportation expense increased 12% overall, reflecting Ground volume growth and greater third-party transportation use. Depreciation and amortization rose 12%, partly due to accelerated depreciation on aircraft.
- Cash used for investment fell to $562 million from $1.443 billion, mainly because prior-year capital spending and acquisitions were higher. Financing used $181 million, including $278 million of share repurchases and $48 million of dividends.
Outlook, commentary, risks and contingencies
- Management expected revenue and earnings growth to continue in the second quarter and remainder of FY2014, led by Ground and improved Express and Freight results. Moderate global economic growth and the mix shift from priority to economy international services remained constraints.
- Expected FY2014 capital expenditures were approximately $4.0 billion. The company expected operating cash flow to fund planned spending; approximately $1.2 billion of aircraft-related investment was expected during the remainder of FY2014.
- Management expected an effective tax rate of 36.5%–37.0% for FY2014. The reported first-quarter rate was 36.2%, versus 36.8% a year earlier.
- Profit-improvement programs focused primarily on Express and Services were underway; most expected benefits were not anticipated until FY2015 and FY2016. Of 3,600 employees accepting voluntary cash buyouts, about 45% had departed by August 31; most remaining departures were expected during the rest of FY2014.
- FedEx had agreements to acquire its Southern African service provider’s businesses in five countries and later agreed to add two more. Completion was expected in the second half of 2014, subject to customary conditions; management expected an immaterial effect on FY2014 results.
- Material risk areas include litigation challenging Ground’s independent-contractor model, fuel-price volatility and surcharge timing, global demand, labor relations, pensions, competition, currency movements and access to financing. The company said a material loss was reasonably possible in some contractor cases but could not estimate a range; it did not consider a material loss probable. Other disclosed matters include wage-and-hour claims, a civil antitrust investigation, and a DOJ criminal investigation concerning shipments for online pharmacies; outcomes and potential losses were uncertain.
- Required U.S. pension contributions were $150 million in the quarter; an additional $165 million was contributed in September, with $330 million of required contributions remaining for FY2014. Management said the plans had ample funds for expected benefit payments.
- The pilot collective bargaining agreement became amendable in March 2013, and negotiations were ongoing. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether Ground’s strong volume growth can persist and improve margins, given the 100-basis-point margin decline and continuing network investment.
- Whether Express can manage the priority-to-economy mix shift, international yield pressure and fuel-surcharge timing effects.
- Execution and timing of the $4.0 billion capital plan, aircraft commitments and pension contributions, and the resulting impact on cash and liquidity.
- Developments in Ground contractor-classification litigation, the pharmacy-related DOJ investigation, and the FedEx Express pilot negotiations.
- Progress and realized savings from cost-reduction programs, including employee departures and anticipated benefits in FY2015–FY2016.