01—Abstract
Summary
Summary of the 10-K filed July 14, 2014. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2014 (year ended May 31, 2014) results show revenue growth and a sharp rebound in operating income.
Revenues rose 3% to $45.6 billiona, and operating income increased 35% to $3.4 billion, with operating margin improving to 7.6% from 5.8%. Net income reached $2.1 billion and diluted EPS was $6.75, up 37%. The comparison is flattered by the prior year, which absorbed $560 million of business realignment costs and a $100 million aircraft impairment, worth $1.31 per diluted share.
Excluding those items, the improvement was more modest, and management cited a significant negative net fuel impact, severe weather, and one fewer operating day as headwinds. The business mix was uneven. FedEx Ground was the standout, with revenue up 10% to $11.6 billionb, operating income up 9% to $1.96 billion, and average daily volume up 9%.
FedEx Freight also improved, with operating income up 53%. FedEx Express was essentially flat on revenue at $27.1 billion, and its operating income rose to $1.17 billionc from $555 million, mainly because of the prior-year charges. Management continues to target $1.6 billion of additional annual operating profit at FedEx Express by the end of fiscal 2016 through its profit improvement programs, and it expects revenue and earnings growth in fiscal 2015.
Capital allocation was aggressive. FedEx repurchased $4.9 billiond of stock in fiscal 2014, including a $2.0 billion accelerated share repurchase, and funded it partly with $2.0 billion of new senior unsecured debt. Long-term debt rose to $4.7 billion from $2.7 billion, and cash fell to $2.9 billion from $4.9 billion.
Capital expenditures were $3.5 billion, and fiscal 2015 spending is guided to about $4.2 billion. The company also flagged material unresolved risks, including the FedEx Ground independent contractor litigation, the California and New York environmental and cigarette matters, a French Competition Authority investigation that could be material, and a pilot labor contract still under negotiation.
02—Key points
Key Highlights
- Revenue grew 3% to $45.6 billion, and operating income rose 35% to $3.4 billion, with operating margin up 180 basis points to 7.6%.
- Diluted EPS was $6.75, up 37% from $4.91, though the prior year included about $1.31 per share of realignment costs and impairment charges.
- FedEx Ground was the strongest segment: revenue up 10%, operating income up 9% to $1.96 billion, and average daily volume up 9%.
- FedEx Express revenue was flat at $27.1 billion, with operating income up to $1.17 billion; management targets $1.6 billion of annual profit improvement by the end of fiscal 2016.
- Fuel had a significant negative net impact on operating income in fiscal 2014 because surcharges lag fuel price changes, and severe weather and one fewer operating day also weighed on results.
- FedEx returned capital aggressively, repurchasing $4.9 billion of stock including a $2.0 billion ASR, financed in part by $2.0 billion of new senior notes; long-term debt rose to $4.7 billion and cash fell to $2.9 billion.
- Fiscal 2015 capital expenditures are guided to about $4.2 billion, and management expects revenue and earnings growth, supported by a roughly $0.45 per diluted share benefit from the buyback and lower pension expense.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed July 14, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $45.57B$44.29B | +2.9% |
| Operating Expenses | $41.75B$39.85B | +4.8% |
| Operating Income | $3.81B$4.43B | −14.0% |
| Interest Expense | $160.00M$82.00M | +95.1% |
| Net Income | $2.32B$2.72B | −14.4% |
| EPS (Basic) | $7.56$8.61 | −12.2% |
| EPS (Diluted) | $7.48$8.55 | −12.5% |
| Shares Outstanding (Basic) | 307.00M315.00M | −2.5% |
| Shares Outstanding (Diluted) | 310.00M317.00M | −2.2% |
05—Questions
Frequently Asked Questions
How much of the fiscal 2014 earnings improvement was driven by one-time items in the prior year?
A significant part. Fiscal 2013 included $560 million of business realignment costs and a $100 million aircraft impairment, which together reduced EPS by $1.31. Lapping those charges mechanically boosts the year-over-year comparison, so the underlying improvement is smaller than the headline 37% EPS growth.
Is FedEx Express turning around?
Partially. Operating income more than doubled to $1.17 billion, but that is largely due to the absence of prior-year charges. Revenue was flat, the shift from priority to lower-yielding economy international services continued, and management is still executing a multi-year $1.6 billion profit improvement plan.
What are the main risks to the FedEx Ground business model?
The biggest is the ongoing litigation over whether its owner-operators are independent contractors or employees. Adverse outcomes could create employment and withholding tax liabilities, expense reimbursement claims, and forced changes to the contractor model. Management says the outcome could be material but does not expect it to impair the business's ability to operate.
How is FedEx funding its share buybacks and capital spending?
Largely with debt and operating cash flow. In fiscal 2014 it issued $2.0 billion of senior notes, and operating cash flow was $4.3 billion against $3.5 billion of capital expenditures. Cash fell by $2.0 billion over the year, and the company retains a $1 billion undrawn revolver. The leverage covenant was 57% against a 70% limit.
06—Continue