Business context and reporting period
FedEx Corporation provides express, ground and freight transportation, logistics, e-commerce and related services. This Form 10-K covers the fiscal year ended May 31, 2017, including the fourth quarter; it is not a filing for fiscal 2016 Q4. TNT Express, acquired in May 2016, contributed a full year of results in fiscal 2017, making year-over-year comparisons less comparable.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $60.319 billion | $50.365 billion |
| Operating income | $5.037 billion | $3.077 billion |
| Operating margin | 8.4% | 6.1% |
| Net income | $2.997 billion | $1.820 billion |
| Diluted EPS | $11.07 | $6.51 |
| Cash from operations | $4.930 billion | $5.708 billion |
| Capital expenditures | $5.116 billion | $4.818 billion |
| Cash and cash equivalents at year-end | $3.969 billion | $3.534 billion |
| Long-term debt, including current portion | $14.931 billion | $13.762 billion |
Revenue rose 20%, mainly from TNT Express, alongside growth at the other transportation businesses. FedEx Ground revenue increased 9%; FedEx Express revenue rose 3%; and FedEx Freight revenue rose 4%. Segment operating margins were 9.8% for FedEx Express, 1.1% for TNT Express, 12.7% for Ground and 6.2% for Freight. Ground and Freight margins declined year over year.
Operating cash flow fell $778 million, largely due to higher pension contributions, partly offset by lower tax payments. Capital spending exceeded operating cash flow. Cash totaled $3.969 billion, including $1.2 billion held offshore under the company’s permanent-reinvestment strategy. The company reported a 1.9-to-1 debt-to-adjusted-EBITDA ratio, within its 3.5-to-1 revolving-credit covenant limit. It also had $17.874 billion of undiscounted operating-lease commitments.
Changes, unusual items and management commentary
- Reported earnings improved substantially versus 2016, when a $1.498 billion pension mark-to-market loss reduced results. FY2017 included a $24 million pension mark-to-market gain; these noncash adjustments make the comparison unusually sensitive to pension assumptions and asset returns.
- FY2017 included $327 million of TNT integration and restructuring costs and $74 million of acquisition-related intangible amortization. Other notable charges included $39 million for U.S. Customs and Border Protection matters and $22 million for Ground contractor litigation. A $55 million share-based-payment accounting benefit and $62 million benefit from new foreign-currency tax regulations also helped results.
- Cash contributions to U.S. pension plans were approximately $2.0 billion in FY2017. The plans paid about $1.3 billion in lump sums to former employees who elected an offered distribution.
- In June 2017, after fiscal year-end, the Petya cyberattack significantly disrupted TNT Express. FedEx said the financial impact was still being assessed but was likely material; it had no insurance covering the attack and could not estimate the restoration timeline or full recovery of encrypted data.
- For FY2018, management expected revenue and earnings growth at transportation segments, before pension mark-to-market adjustments, while warning that TNT integration and the cyberattack would weigh on results. It forecast about $275 million of FY2018 integration expense, approximately $800 million over four years, and targeted $1.2–$1.5 billion of FedEx Express group operating-income improvement by 2020 versus 2017. Expected FY2018 capital expenditures were $5.9 billion and the effective tax rate 32%–35%. The outlook assumed moderate economic growth and depended on fuel prices.
Risks, contingencies and liquidity
Key risks include the continuing cyberattack impact and integration execution; economic and trade weakness; fuel price and surcharge timing; intense competition, including potential customer entry into delivery; foreign exchange; and labor and regulatory changes. FedEx Ground contractor-classification cases remain a risk, with some potential losses not estimable. Customs matters and other litigation may also result in additional costs. Pension funding, substantial aircraft and network investment, and long-term leases are material cash commitments. Management said available cash, operating cash flow and financing sources should meet liquidity needs; the company reported no commercial paper outstanding and remained in covenant compliance.
Important facts for investors to verify
- Subsequent filings and disclosures on TNT’s cyber recovery, customer retention, revenue losses, remediation costs and any effects on controls or integration spending.
- Whether the projected $1.2–$1.5 billion 2020 Express-group operating-income improvement and integration timeline remain achievable.
- Underlying segment margins and cash generation, particularly Ground’s expansion costs and Freight’s margin decline, apart from acquisition and pension-accounting effects.
- Actual pension contributions, funded status and sensitivity to investment returns and discount rates.
- Developments in contractor-classification and customs proceedings, including any change in potential exposure.
- FY2018 capital spending, debt and lease obligations, and the assumptions behind management’s growth and tax-rate outlook.
The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting as of May 31, 2017.