FedEx Corporation — Form 10-Q Summary
Business context and period: The filing covers the fiscal first quarter ended August 31, 2016, compared with the three months ended August 31, 2015. FedEx provides express, ground, freight, logistics and related services. Results include TNT Express, acquired May 25, 2016; its inclusion makes year-over-year comparisons less comparable.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $14.663 billion | $12.279 billion | +19% |
| Operating income | $1.264 billion | $1.144 billion | +10% |
| Operating margin | 8.6% | 9.3% | Down 70 basis points |
| Net income | $715 million | $692 million | +3% |
| Diluted EPS | $2.65 | $2.42 | +10% |
| Cash from operations | $971 million | $1.241 billion | Down $270 million |
| Capital expenditures | $1.215 billion | $1.209 billion | Approximately flat |
Cash from operations less capital expenditures was negative $244 million. Cash and cash equivalents were $2.989 billion at August 31, 2016, down from $3.534 billion at May 31, 2016. Long-term debt was $13.735 billion, with an annualized weighted-average interest rate of 3.6%. The debt-to-adjusted-EBITDA covenant ratio was 1.9:1, below the 3.5:1 limit; FedEx reported compliance and no commercial paper outstanding. Its $1.75 billion revolving credit facility had $189 million of letter-of-credit capacity unused.
Segments and year-over-year developments
- FedEx Express: Revenue rose 1% to $6.656 billion; operating income rose 14% to $624 million and margin improved to 9.4% from 8.3%. Management cited base-yield improvement, volume growth and cost management.
- TNT Express: Contributed $1.804 billion of revenue and an operating loss of $14 million, including restructuring and integration costs and acquired-intangible amortization.
- FedEx Ground: Revenue increased 12% to $4.290 billion; operating income increased 14% to $610 million and margin reached 14.2%. Package volume rose 10%, with growth in residential and commercial services; expansion costs and higher purchased-transportation rates were offsets.
- FedEx Freight: Revenue increased 4% to $1.658 billion and operating income increased 2% to $135 million. Higher shipment volume was partly offset by lower revenue per shipment; margin edged down to 8.1% from 8.2%.
Consolidated operating expenses rose 20%, faster than revenue, and purchased transportation increased 38%, partly reflecting TNT Express and FedEx Ground volume and rate increases. Lower fuel expense was offset by lower fuel-surcharge revenue, leaving fuel’s net operating-income impact minimal. Interest expense increased $50 million, primarily because of debt issued in fiscal 2016. The effective tax rate rose to 37.4% from 36.2%, partly because certain TNT Express local-country losses did not qualify for a tax benefit.
Outlook, risks and unusual items
- Management expected revenue and earnings growth in fiscal 2017 before any mark-to-market benefit-plan adjustment. The outlook remained dependent on fuel prices and global economic improvement; TNT integration and restructuring were expected to weigh on results.
- FedEx estimated approximately $275 million of TNT integration and Outlook restructuring costs in fiscal 2017, with total integration-program expense of $700–$800 million over four years. It estimated annual pretax synergies of $750 million after integration, expected in fiscal 2020, but said the path could evolve and it could not predict whether TNT would be GAAP-accretive in 2018.
- First-quarter TNT-related integration expenses were $68 million ($45 million after tax, or $0.17 per diluted share); increased acquired-intangible amortization was another $28 million ($0.08 per diluted share after tax).
- Management forecast fiscal 2017 capital expenditures of approximately $5.6 billion and said operating cash flow was expected to fund them. Required U.S. pension contributions of $616 million remained for the rest of fiscal 2017; a $250 million contribution was made in September 2016.
- FedEx recorded a $204 million liability for expected losses, net of recognized insurance recovery, related to independent-contractor proceedings and settlements. Multiple settlements remained subject to court approval; other contractor-model cases could involve material losses, but a reasonably possible loss range was not estimable.
- Other disclosed matters include New York litigation over alleged cigarette shipments, for which loss was reasonably possible but not estimable and management expected any loss to be immaterial, and a California hazardous-waste matter involving GENCO for which an immaterial loss was considered probable.
- Fuel-price volatility, foreign exchange, economic conditions, competition, labor and pension costs, litigation, technology disruption, and successful integration of TNT were identified as risks. FedEx stated there were no material changes to its previously disclosed risk factors or market-risk positions.
Important facts for investors to verify
- Whether TNT integration milestones, restructuring costs and anticipated synergies track management’s multiyear plan.
- Whether growth at Ground and Express can offset cost inflation and the consolidated margin decline.
- Cash generation relative to capital spending, debt service, share repurchases and remaining pension contributions; confirm the $5.6 billion capital-expenditure outlook.
- Progress and final court approval of the independent-contractor settlements, and any developments in other legal proceedings.
- Changes in fuel surcharges, fuel costs, exchange rates and global demand that could affect revenue, yields and margins.
The interim financial statements were reviewed by Ernst & Young, not audited; the review report stated that the firm was not aware of material modifications needed for conformity with U.S. GAAP.