Business context and reporting period
FedEx Corporation’s Form 10-K covers the fiscal year ended May 31, 2014, not calendar-year 2013 or a standalone 2013 fourth quarter. FedEx operates express, ground, freight and support businesses. The filing also reports quarterly results; the fourth quarter discussed below is the quarter ended May 31, 2014.
Financial highlights
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $45.567 billion | $44.287 billion |
| Operating income / margin | $3.446 billion / 7.6% | $2.551 billion / 5.8% |
| Net income | $2.097 billion | $1.561 billion |
| Diluted EPS | $6.75 | $4.91 |
| Cash from operations | $4.264 billion | $4.688 billion |
| Capital expenditures | $3.533 billion | $3.375 billion |
| Cash and cash equivalents at year-end | $2.908 billion | $4.917 billion |
| Long-term debt, excluding current portion | $4.736 billion | $2.739 billion |
FY2014 operating cash flow less capital expenditures was approximately $731 million. Cash fell by about $2.009 billion during the year, principally amid substantial share repurchases. Current assets were $9.683 billion and current liabilities $5.312 billion. The company reported a $1 billion revolving credit facility, entirely available at year-end, and no commercial paper outstanding. Long-term debt carried fixed interest rates; the leverage ratio under the revolver covenant was 57%, below its 70% limit.
Segment performance: FedEx Express revenue was $27.121 billion and operating income $1.172 billion (4.3% margin); FedEx Ground revenue was $11.617 billion and operating income $1.955 billion (16.8% margin); FedEx Freight revenue was $5.757 billion and operating income $319 million (5.5% margin).
Fourth-quarter FY2014 revenue was $11.839 billion, operating income $1.183 billion, net income $730 million and diluted EPS $2.46, compared with $11.435 billion, $502 million, $303 million and $0.95, respectively, in the prior-year quarter.
Material changes versus prior periods
- Annual revenue rose 3%, operating income 35%, net income 34% and diluted EPS 37% year over year. The comparison benefited from $560 million of business realignment costs and a $100 million aircraft impairment charge in FY2013.
- Ground revenue grew 10% and operating income 9%, supported by volume and yield growth. Freight revenue grew 7% and operating income 53%, reflecting shipment growth, revenue per shipment and efficiency gains.
- Express revenue was essentially flat, but operating income more than doubled from FY2013’s lower base. Results continued to face a shift from higher-yielding international priority services to economy services, alongside weaker freight revenue.
- Cash from operations declined $424 million, including effects from severance payments, higher tax payments and pension contributions. Debt increased after a $2 billion bond issuance; proceeds funded accelerated share repurchases. FedEx repurchased $4.857 billion of stock during FY2014.
- FY2014 expenses included no business realignment or impairment charge, compared with $660 million in FY2013. Fuel expense fell 4%, while purchased transportation rose 10% and depreciation and amortization rose 8%.
Outlook, management commentary and risks
- Management anticipated revenue and earnings growth in FY2015, assuming moderate global economic growth, improved volumes and yields, and continued execution of cost initiatives. The outlook assumed no year-over-year net fuel impact and depended on stable fuel pricing and economic conditions.
- FedEx targeted $1.6 billion of annual operating-profit improvement at FedEx Express versus its FY2013 base business, with the majority of benefits expected in FY2015 and FY2016 and a targeted exit-2016 run rate. Management cautioned that delivery depended on the economy and customer demand.
- FY2015 capital expenditures were expected to be approximately $4.2 billion, including aircraft modernization and Ground network expansion. Required U.S. pension-plan contributions were expected to be approximately $580 million; retirement-plan costs were expected to fall about $215 million.
- Key risks include economic cyclicality and fixed costs; fuel-price and surcharge timing effects; competition and customer shifts to lower-priced services; technology and cybersecurity disruptions; labor issues; and the substantial capital and lease commitments. Approximately $15.4 billion of undiscounted operating-lease payments and $10.1 billion of aircraft-related capital commitments were disclosed.
- FedEx Ground faced numerous lawsuits and administrative proceedings challenging owner-operator independent-contractor classification. The company said a material loss or changes to the model were reasonably possible, but it could not estimate a potential loss range and did not consider a material loss probable.
- Other disclosed matters included a DOJ criminal investigation concerning alleged asbestos-related violations at a Puerto Rico facility and a French competition-authority proceeding relating to alleged conduct before FedEx acquired TATEX. Potential losses were not estimable for the latter; the filing also described other investigations and litigation.
- The company reported an unqualified independent-auditor opinion on its financial statements and effective internal control over financial reporting as of May 31, 2014.
Most important facts for investors to verify
- Whether Express’s shift toward economy international shipments and the resulting yield pressure improves, and whether the $1.6 billion improvement target is achieved on schedule.
- Whether Ground volume and yield growth can offset network-expansion costs, and how contractor-classification litigation or regulatory changes may affect its operating model and costs.
- How FY2015 cash generation funds the planned $4.2 billion capital program, pension contributions, dividends and remaining repurchases, given lower year-end cash and higher debt.
- The sensitivity of earnings to fuel-price movements and surcharge adjustment lags, alongside demand effects from fuel surcharges.
- Developments in the disclosed legal and regulatory proceedings, aircraft commitments, operating leases and pension assumptions and funding requirements.