Strategic and Financial Analysis: FedEx Corporation - Research Paper Example

 Strategic and Financial Analysis: FedEx Corporation Introduction Federal Express Corporation (FedEx Corporation) is engaged in the business of providing a wide range of products delivery related services for business entities and individual customers, which include global transportation services, IT related services, and other business services. All these operations are individually operated, however managed collectively by the FedEx Corporation. This report presents a comprehensive analysis of the financial and risk management strategies of FedEx Corporation. For the purpose of collecting information pertaining to the operations and strategies of the company and then analyzing it, the information contained in annual reports and other filings made by the company with Securities and Exchange Commission have been considered. The report covers different aspects of the operations and financial and investing activities of the FedEx Corporation in the United States and internationally. Apart from this, based on the discussion presented in the report, recommendations are also presented at the end for improvement in the company’s operating efficiency. Global Ambit of FedEx FedEx Corporation provides its services within in the United States and globally through four different business segments. All of the four business segments are represented by their respective brands, which include: FedEx Express Segment: Being amongst the largest transportation service providers, FedEx Express is involved in the provision of services to its customers related to delivery of packages all around the globe. This segment is the largest segment of the company under which both, “FedEx Trade Networks, Inc.” and “FedEx Supply Chain Systems, Inc.” operate, which offer worldwide trade related services and services related to supply chains respectively (FedEx Corporation, 2012). FedEx Ground Segment: “FedEx Ground Package System, Inc.” FedEx Ground has its principal operations in the United States and Canada. This business segment offers services related to delivery of small and medium sized packages through its on-ground delivery network. FedEx Ground is amongst the mainstream service providers in the region and offers cheap and swift services (FedEx Corporation, 2012). FedEx Freight Segment: For speedy services and meeting the supply chain requirements of the business all over North American region, “FedEx Freight, Inc.” FedEx Freight is regarded as the prime service provider. This business sector offers delivery of large packages swiftly. This segment also includes the “FedEx Custom Critical, Inc.” (FedEx Corporation, 2012). FedEx Services Segment: This segment of FedEx is regarded as the backbone of the whole business setup, since it provides on the move assistance to other segments which include provision of information relating to sales, provision of IT services, up keeping communication between segments and with the customers and provision of other back end services. FedEx Tech Connect, Inc. also comes under the FedEx Services, which is mainly responsible for ensuring the efficiency and effectiveness in delivering the services to customers, bill collection and online assistance and for fulfilling other back end needs of different segments (FedEx Corporation, 2012). Subsidiaries FedEx Corporation operates through a number of subsidiaries. The list of subsidiaries as published by the company in its annual report, states the following companies as it’s subsidiaries as of May 31, 2012 (FedEx Corporation, 2012). FedEx Corporation holds 100 percent voting rights in its subsidiary companies listed below: No. Subsidiary Name Region of Incorporation 1 Federal Express Corporation Delaware 2 Federal Express Canada Ltd. Canada 3 Federal Express International, Inc. Delaware 4 Federal Express Pacific, Inc. Delaware 5 Federal Express Europe, Inc. Delaware 6 Federal Express Holdings S.A. Delaware 7 FedEx Trade Networks, Inc. Delaware 8 FedEx Trade Networks Trade Services, Inc. Delaware 9 World Tariff, Limited California 10 FedEx Trade Networks Transport & Brokerage, Inc. New York 11 FedEx Trade Networks Transport & Brokerage (Canada), Inc. Canada 12 FedEx Ground Package System, Inc. Delaware 13 FedEx Ground Package System, Ltd. Wyoming 14 FedEx Smart Post, Inc. Delaware 15 FedEx Freight Corporation Delaware 16 FedEx Freight, Inc. Arkansas 17 FedEx Custom Critical, Inc. Ohio 18 FedEx Corporate Services, Inc. Delaware 19 FedEx Tech Connect, Inc. Delaware 20 FedEx Supply Chain Systems, Inc. Ohio 21 FedEx Office and Print Services, Inc Texas Source: (FedEx Corporation, 2012) Note: Some of the subsidiaries have been omitted from this list on the basis that they do not form significant subsidiaries of the Corporation (FedEx Corporation, 2012). The geographical distribution of FedEx Corporation’s sales, assets and income, and their involvement in international trade is presented as under: Revenue from Different Services (in millions) 2012 2011 2010  FedEx Express segment:        Package:        U.S. overnight box    $ 6,546     $ 6,128     $ 5,602   U.S. overnight envelope      1,747       1,736       1,640   U.S. deferred      3,001       2,805       2,589                            Total U.S. domestic package revenue      11,294       10,669       9,831   International priority      8,708       8,228       7,087   International domestic      853       653       578                            Total package revenue      20,855       19,550       17,496   Freight:        U.S.      2,498       2,188       1,980   International priority      1,827       1,722       1,303   International airfreight      307       283       251                            Total freight revenue      4,632       4,193       3,534   Other      1,028       838       525                            Total FedEx Express segment      26,515       24,581       21,555     FedEx Ground segment:        FedEx Ground      8,791       7,855       6,958   FedEx Smart Post      782       630       481                            Total FedEx Ground segment      9,573       8,485       7,439     FedEx Freight segment      5,282       4,911       4,321   FedEx Services segment      1,671       1,684       1,770   Other and eliminations      (361 )      (357 )      (351 )                              $ 42,680     $ 39,304     $ 34,734   Source: (FedEx Corporation, 2012) The above table shows that the revenue generated from the activities and operations of FedEx in the United States is more than that of the revenue generated by it through its international operations (FedEx Corporation, 2012). Geographical Distribution of Revenues and Assets (in millions) Revenues:    2012   2011   2010 U.S.    $ 29,837     $ 27,461     $ 24,852   International:        FedEx Express segment      12,370       11,437       9,547   FedEx Ground segment      216       177       140   FedEx Freight segment      101       84       60   FedEx Services segment      156       145       135                            Total international revenue      12,843       11,843       9,882                               $ 42,680     $ 39,304     $ 34,734   Noncurrent assets:        U.S.    $ 18,874     $ 17,235     $ 16,089   International      1,973       1,865       1,529                               $         20,847     $         19,100     $         17,618   Source: (FedEx Corporation, 2012) The above table shows an overall distribution of revenue of FedEx from U.S. and international operations along with the total non-current assets held offshore and in the U.S. Similar to the previous table, this table also shows that the revenue from U.S. based operations is higher than that of the international operations and the U.S. based operations share a much larger proportion of the total non-current assets as compared to international operations. However, the efficiency of the operations cannot be determined by simply looking at the figures presented in the table above; in this regard it is pertinent to determine the asset turnover ratio for both U.S. based operations and international operations (FedEx Corporation, 2012). Asset Turnover Ratio for U.S. and International Operations (in millions) 2012 2011 2010 Asset Turnover from Operations in U.S. Revenue (U.S.) / Non-Current Assets (U.S.) 1.58 1.59 1.54 Asset Turnover from International Operations Revenue (International) / Non-Current Assets (International) 6.51 6.35 6.46 The calculations for the asset turnover show that the company has more turnover on its assets from international operations as compared to the turnover obtained on the assets placed in the U.S. This significant difference between the asset turnover ratios reflects the efficiency and effectiveness of its services in the international market as compared to the U.S. market (FedEx Corporation, 2012). Translational, Transactional or Operating Exposure – Measurement and Management Owing to its large operational ambit all over the globe, the company faces risks related to fluctuations in the foreign currency exchange rates. These risks are generally related to transactions which are denominated by “Chinese Yuan”, “Canadian Dollar”, “Great Britain Pound”, “Euro” and “Japanese Yen”. Although the company has a significant proportion of its operations carried out internationally, but majority of the transactions of FedEx are denominated in USD (FedEx Corporation, 2012). Traditionally, the exposure of the company’s transactions to foreign exchange fluctuations has been more significant for revenue transactions as compared to the expense related transactions of the company. This trend has been in place due to the fact that a significant proportion of the company’s expenses are denominated under USD. These include costs of aircrafts, maintenance costs and their fueling expenses; and therefore, these costs and fuel expenses are not exposed to currency fluctuation trends in the international market. Considering the fluctuations in foreign currencies, the impact on the operating income of the company has been positive during the past two years. But on the other hand, due to non quantification of the changes in the demand of services provided by the company, these foreign currency rate fluctuations may have posed a contrary impact on the demand of services and prices offered by the company (FedEx Corporation, 2012). In order to manage these foreign currency exchange rates fluctuations, the company makes use of a theoretical calculation, according to which, if there is a uniform improvement in the dollar at 10 per cent in relation to the currencies in which FedEx transacts internationally, it would result in a decline in the operating income of the company (FedEx Corporation, 2012). As discussed in the previous section, the company faces translational risks due to changes in the foreign currency rates. The company measures these changes resulting from translational exposure against the US dollars, since the company needs to report these changes in consolidated financial statements. Moreover, the measurement of changes against US currency is also reflective of a centralized risk management policy (FedEx Corporation, 2012). The company also faces risks related to changes in the market prices of the commodities. The commodities which affect the company’s operations most include jet and vehicle fuel prices. Since these commodities are highly volatile in terms of their prices, the fluctuations in them result in significant variations in the company’s financial results. In order to mitigate these risks, FedEx applies fuel surcharges, since these are related to the market prices of jet and vehicle fuel. As a result, as the company claims, “a hypothetical 10% change in the price of fuel would not be expected to materially affect our earnings (FedEx Corporation, 2012)”. However, these risk management policies also carry some shortcomings with them, as for instance, the fuel surcharge policy of the company carries a time lag with it (ranging from 6 to 8 weeks) before any adjustments can be made in the prices of jet and vehicle fuel prices. In consequence to this, the earnings of the company at operational level may be substantially influenced, in a given period, when there is a sudden and significant change in the spot price of commodities like jet or vehicle fuel, such that the fuel surcharge is rendered insufficient to adjust the price shifts consequently (FedEx Corporation, 2012). Apart from the fact that the company posses financial instruments which are highly volatile in nature due to consistent changes in their value in the market, there is no significant exposure of the company to such risks as the interest rates applicable on the long term debts of the company are fixed at particular rates (FedEx Corporation, 2012). Changes in Other Comprehensive Income / Loss The company accumulates gains or losses reported on foreign currency translations under other comprehensive income, which is shown under the common stock head of the balance sheet. During the fiscal year 2012, the total gains resulted from foreign currency translation are USD 60 million, which were USD 156 million and USD 30 million for the fiscal years 2011 and 2010 respectively (FedEx Corporation, 2012). Use of Derivatives for Funding, Investing and Other Price Risks at FedEx The investment strategy of FedEx allows a limited application of derivatives at rare instances where the need to improve the returns from investment is felt or when there is a need for managing the market risk exposure. The policy of the company does not allow its financial experts to make use of derivatives, merely for speculative purposes and in a similar manner the financial managers of the company are also not granted permission for using derivative financial instruments for leveraging portfolios (FedEx Corporation, 2012). Moreover, with regard to holding or using derivative financial instruments, the company has expressly stated in its annual report that “We do not purchase or hold any derivative financial instruments for trading purposes” (FedEx Corporation, 2011). Apart from this, as discussed earlier, the commodity price risks which the company faces are largely mitigated by the fuel surcharges because they are linked with the fuel prices prevailing in the international market, therefore, there is no potential requirement felt by the company for using derivate financial instruments (FedEx Corporation, 2012). Offshore Investments and Funding The company follows a reinvestment offshore strategy, according to which cash and cash equivalents of the company are reinvested after maturity. As mentioned in the annual report, the company sees no risk of impairing its ability to fulfill its local obligations relating to debt financing or needs for working capital and other liquidity requirements. As at May 31, 2012 the total amount of offshore investment amounts to USD 410 million which is included as part of cash and cash equivalents (FedEx Corporation, 2012). Apart from this, as part of its expansion program, the company has taken several strategic steps to ensure its smooth expansion in European market, the justification of which is the acquisition of the “Polish domestic express package delivery company Opek Sp. Z O. O.”, and the “French express transportation company TATEX”. These investment strategies are aimed at strengthening the presence of the company in the European market. In addition to these acquisitions made in the year 2012, the company also launched 38 new branches in Euro zone so as to further penetrate and capture local demand for services (FedEx Corporation, 2012). Similarly, FedEx is also expanding its business in Latin America and the recent strategic moves in this regard include acquisition of the “Mexican domestic express package delivery company Servicios Nacionales Mupa, S.A. de C.V. (Multipack)”, and the “Brazilian transportation and logistics company Rapidão Cometa Logística e Transportes S.A” (FedEx Corporation, 2012). Conclusion and Recommendations The international strategy of FedEx, which comprises of reinvestment and acquisition or expansion strategies, has certainly paid back to the company. As for instance, there has been a consistent increase in the revenues generated by the company through its international operations as compared to the operations of the company in the United States. This reflects that the company’s strategies are effective and the plan to expand further, as stated in the annual report, are justified on these grounds. Moreover, the company has also benefited from the fluctuations in the currency exchange rates, since its revenues are denominated in foreign currencies whereas expenses are denominated in the USD (FedEx Corporation, 2012). However, on the other hand, keeping in view the intense competition faced by FedEx in its business, it is pertinent that the company concentrate on managing the risks related to its business. This requires the company to introduce usage of derivatives and other hedging instruments in order to mitigate risks related to its operational, financing and investing activities. Adopting such measures will also render the strategies of the company more flexible and open. Apart from this, it is also recommended that the company shall concentrate further on its international expansion, which is certainly paying back significantly. Works Cited FedEx Corporation. (2011). Annual Report 2011. Memphis: FedEx Corporation. Print FedEx Corporation. (2012, May 31). Form 10 - K, FedEx Corporation. Web. Retrieved August 08, 2012, from Securities and Exchange Commission: http://www.sec.gov/Archives/edgar/data/1048911/000119312512303558/d375407d10k.htm#tx375407_2 Read More