01—Abstract
Summary
Summary of the 10-K filed July 15, 2013. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2013 (year ended May 31, 2013) was a year of divergent segment performance.
Consolidated revenue rose 4% to $44.3 billiona, but operating income fell 20% to $2.55 billion and diluted EPS dropped 23% to $4.91, with the decline driven largely by $560 million of business realignment costs (mostly a voluntary buyout program affecting roughly 3,600 employees), a $100 million aircraft impairment, and a shift in demand from priority to lower-yielding economy international services at FedEx Express. Express operating income fell 56% to $555 million, with its operating margin dropping to 2.0% from 4.8%. In contrast, FedEx Ground was the standout, with revenue up 10% to $10.6 billion and operating income up 1% to $1.79 billion, while FedEx Freight improved its operating income to $208 million on higher yields.
Management is pinning its near-term hopes on a $1.6 billionb annual profit improvement target at FedEx Express by the end of fiscal 2016, built on cost reductions, fleet modernization (including retiring aircraft and shortening depreciable lives on 76 more), and network adjustments. Management expects revenue and earnings growth in fiscal 2014, though it also flags continued pressure from the priority-to-economy shift and higher capital spending of about $4.0 billion. Balance sheet metrics remain solid: cash rose to $4.9 billion, the company issued $750 million of new senior notes, the leverage ratio was 51% against a 70% covenant, and the pension funded deficit narrowed to $3.2 billion from $4.9 billion.
Investors should also weigh ongoing legal risk around FedEx Ground's independent contractor model, which management says could lead to material loss or changes to the model, although it does not expect that to impair the business. The company also disclosed potential OFAC sanctions exposure from shipments tied to Dubai-based consolidators, though the identified revenue was small.
02—Key points
Key Highlights
- Revenue grew 4% to $44.3 billion, but operating income fell 20% to $2.55 billion and operating margin contracted to 5.8% from 7.5%.
- Diluted EPS declined 23% to $4.91; the company cites $1.31 per share of charges, including $560 million in business realignment costs and a $100 million aircraft impairment.
- FedEx Express operating income fell 56% to $555 million as the shift from priority to economy international services pressured yields; segment margin dropped to 2.0%.
- FedEx Ground was the growth engine, with revenue up 10% to $10.6 billion, operating income of $1.79 billion, and an 16.9% operating margin.
- Management targets $1.6 billion in annual profit improvement at FedEx Express by the end of 2016, and expects revenue and earnings growth in fiscal 2014.
- Capital expenditures fell 16% to $3.4 billion but are guided to rise to about $4.0 billion in 2014, largely for aircraft; cash ended at $4.9 billion after $750 million in new debt was issued.
- Ongoing litigation over FedEx Ground's independent contractor classification could result in material losses or changes to its operating model.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed July 15, 2013Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $44.29B$42.68B | +3.8% |
| Operating Expenses | $39.85B$39.49B | +0.9% |
| Operating Income | $4.43B$3.19B | +39.2% |
| Interest Expense | $82.00M$52.00M | +57.7% |
| Net Income | $2.72B$2.03B | +33.7% |
| EPS (Basic) | $8.61$6.44 | +33.7% |
| EPS (Diluted) | $8.55$6.41 | +33.4% |
| Shares Outstanding (Basic) | 315.00M315.00M | 0.0% |
| Shares Outstanding (Diluted) | 317.00M317.00M | 0.0% |
05—Questions
Frequently Asked Questions
Why did FedEx's operating income decline despite revenue growth?
Operating income fell 20% to $2.55 billion mainly because of $560 million in business realignment costs (largely severance from a voluntary buyout program), a $100 million impairment on retired aircraft, and $69 million of accelerated depreciation. Underlying demand also shifted toward lower-yielding economy international services at FedEx Express, which compressed margins.
What is management's plan to improve FedEx Express profitability?
Management announced profit improvement programs targeting $1.6 billion in annual profitability improvement at FedEx Express by the end of 2016. The plan includes headcount and overhead reductions, modernizing the aircraft fleet (retiring older planes and shortening lives on 76 more), adjusting the U.S. domestic network, reducing flights to Asia, and moving some slower freight to third-party carriers. Most of the benefit is expected in 2015 and 2016.
How strong is FedEx's balance sheet and liquidity?
Cash and equivalents rose to $4.9 billion from $2.8 billion, helped by $1.74 billion in debt proceeds. The leverage ratio (adjusted debt to capital) was 51% against a 70% covenant maximum, and the $1 billion revolver was undrawn. Pension underfunding narrowed to $3.2 billion from $4.9 billion, and the company expects to contribute about $650 million to U.S. pension plans in 2014.
What are the main legal and regulatory risks for investors?
The most significant risk is litigation challenging FedEx Ground's use of independent contractor owner-operators. Management says it believes the contractors are properly classified and that a court has ruled in its favor in 20 of 28 certified class actions, but adverse outcomes could be material and could force changes to the model. Other risks include the EU emissions trading scheme, TSA security requirements, a DOJ investigation related to pharmaceutical shipments, and an OFAC voluntary disclosure over shipments linked to Dubai-based consolidators (small in revenue terms).
06—Continue