FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended November 30, 2017; comparisons are with the same periods of 2016. Dollar amounts are in millions unless otherwise noted. FedEx operates Express, Ground, Freight and related services. TNT Express is reported within the Express segment, with prior-period segment figures conformed to that presentation.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $16,313, up 9% | $31,610, up 7% |
| Operating income | $1,262, up 8% | $2,379, down 2% |
| Operating margin | 7.7%, versus 7.8% | 7.5%, versus 8.2% |
| Net income | $775, up 11% | $1,371, down 3% |
| Diluted EPS | $2.84, up 10% | $5.03, down 4% |
- Quarterly revenue and earnings benefited from volume growth, higher yields and fuel surcharges. First-half operating income and earnings declined, principally reflecting the NotPetya cyberattack and higher TNT integration costs.
- Segment operating income, quarter / first half: Express $717 / $1,150 (up 2% / down 13%); Ground $521 / $1,147 (up 12% / 7%); Freight $118 / $294 (up 34% / 32%). First-half margins were 6.4% for Express, 12.0% for Ground and 8.4% for Freight.
- Cash flow, first half: Operating cash flow was $1,498, down from $2,635. Capital expenditures were $2,621, making operating cash flow less capital expenditures negative $1,123, compared with negative $46 in the prior period. Cash declined $1,201 to $2,768.
- Liquidity and debt: Current assets were $12,881 and current liabilities $8,227. Long-term debt, including current portion, was approximately $15.2 billion; an additional $250 of commercial paper was outstanding. The $1.75 billion revolver had $1.245 billion available after commercial paper and letters of credit. Debt-to-adjusted-EBITDA was 1.9x against a 3.5x covenant limit; FedEx reported compliance.
- Net cash income-tax payments were $598, versus $203 in the prior first half. FedEx contributed $750 to U.S. pension plans, including $482 voluntary contributions.
Material changes and notable items
- NotPetya’s impact was estimated at $100, or $0.31 per diluted share, in the quarter and $400, or $1.10 per diluted share, in the first half. The effects included lost TNT Express shipments and recovery-related IT costs. Critical systems and data were restored, but some customers had not returned to pre-attack shipping volumes.
- TNT Express integration expenses were $122 in the quarter and $234 in the first half. The quarter also included an approximately $80 tax benefit from foreign tax credits associated with a foreign dividend.
- Higher fuel prices increased fuel expense, but fuel surcharges more than offset the increase at the consolidated level in the quarter and first half. Higher purchased transportation, labor, maintenance and other costs contributed to expense growth.
- FedEx acquired Northwest Research for $50 cash; the acquisition was not material to results. FedEx paid a previously accrued $228 settlement in an owner-operator case and paid $46.5 to U.S. Customs and Border Protection for customs-entry matters, recognizing an additional $7.2 expense.
Outlook, risks and commitments
- Management expected yield and volume growth across transportation segments to support second-half fiscal 2018 revenue and earnings growth, before any pension mark-to-market adjustment. It expected ongoing but diminishing cyberattack-related revenue effects and continued negative effects from TNT integration in the third quarter and full year.
- FedEx targeted Express operating-income improvement of $1.2 billion to $1.5 billion in 2020 versus 2017, assuming moderate economic growth and continued recovery from the cyberattack. It estimated up to $1.4 billion of integration-program expenses over four years, including about $450 in fiscal 2018; the estimate increased as integration was accelerated and IT and infrastructure investments expanded. Integration was expected to be substantially complete by the end of 2020.
- At filing time, Congress had passed the Tax Cuts and Jobs Act and the President was expected to sign it. FedEx estimated a potential fiscal 2018 tax benefit of $1.2 billion to $1.5 billion, primarily from deferred-tax-liability revaluation and a lower tax rate on 2018 earnings.
- Fiscal 2018 capital expenditures were expected to be about $5.9 billion. FedEx disclosed $13.6 billion of purchase commitments and $18.3 billion of future minimum operating lease payments. It anticipated recognizing lease liabilities and right-of-use assets exceeding $13 billion upon adoption of the new lease standard.
- Key risks include continued customer losses or costs from NotPetya, successful and timely TNT integration, fuel prices and surcharge timing, shipment demand and pricing, foreign exchange, labor and owner-operator classification litigation, and pension and other benefit costs. New York cigarette-shipment lawsuits remained pending; the company said loss was reasonably possible but not estimable and expected any loss to be immaterial. Other legal proceedings and contingencies are described in the filing.
Most important facts for investors to verify
- Whether TNT Express shipment volumes and customer retention recover, and whether further cyberattack-related costs or effects exceed management’s estimates.
- Progress, costs and timing of the TNT integration against the revised expense estimate and the 2020 Express operating-income target.
- Whether first-half operating cash flow weakness, working-capital movements, pension funding and planned capital spending affect liquidity or financing needs.
- Enactment and actual financial impact of the tax legislation, including the estimated tax benefit and any effect on capital spending.
- Developments in owner-operator, New York cigarette, customs and other legal matters, as well as the effect of lease-accounting adoption on reported balance-sheet obligations.