FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal 2019 second quarter and first half, ended November 30, 2018; comparisons are with the corresponding 2017 periods. FedEx provides express, ground, freight, and related transportation and business services. Amounts are in millions except per-share data and where noted.
Financial results and position
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $17,824; +9% | $34,876; +10% |
| Operating income | $1,168; +5% | $2,239; +7% |
| Operating margin | 6.6%, down 20 bps | 6.4%, down 20 bps |
| Net income | $935; +21% | $1,770; +29% |
| Diluted EPS | $3.51; +24% | $6.60; +31% |
| Operating cash flow | First half: $2,179, versus $1,498 | |
| Capital expenditures | First half: $2,634, versus $2,621 |
Cash and cash equivalents were $2,123 at November 30, down from $3,265 at May 31. Current assets were $13,438 and current liabilities $9,496. Long-term debt, excluding current maturities, was $16,399; short-term borrowings were $250 and current long-term debt was $642. FedEx had $1,696 available on its $2.0 billion revolving facility; debt-to-adjusted-EBITDA was 2.1x against a 3.5x covenant limit.
Performance changes and drivers
- Growth was broad-based: second-quarter revenue increased 6% at Express, 14% at Ground, and 15% at Freight. Their operating margins were 6.5%, 11.4%, and 7.7%, respectively. Express margin declined 10 bps; Ground improved 40 bps; Freight improved 120 bps.
- Management attributed operating-income growth to shipment and yield growth and fuel surcharges exceeding higher fuel costs. Higher labor, purchased transportation, maintenance, and a shift at Express from international packages toward freight pressured margins.
- International Express volume growth slowed amid weaker conditions in Europe and Asia. Ground growth continued to be supported by e-commerce and residential deliveries.
- Prior-year comparisons were affected by the NotPetya cyberattack: management estimated it reduced prior-year results by $100 million, or $0.31 per diluted share, in the quarter and $400 million, or $1.10 per diluted share, in the first half.
- Lower effective tax rates also boosted reported earnings: 20.6% for the quarter and 22.3% for the half, versus 32.0% and 35.4%. The TCJA contributed estimated tax benefits of $150 million and $285 million, respectively; accelerated deductions added an estimated $60 million benefit.
- Prior-year operating income was retrospectively adjusted for pension accounting guidance that moved non-service pension components outside operating income; the change did not affect net income or EPS.
Outlook, risks, and unusual items
- FedEx expected transportation-volume growth to support revenue and earnings growth in the second half of fiscal 2019, before retirement-plan mark-to-market adjustments and voluntary-buyout costs. Expectations depended on fuel prices, moderate U.S. growth, and no further deterioration in international conditions. The filing provides no specific full-year EPS guidance.
- Management said weakness in international markets and a changed Express service mix would delay expected TNT Express benefits beyond 2020; the Express operating-profit improvement goal of $1.2–$1.5 billion from 2017 would not be achieved in 2020. Integration costs were expected to total about $1.5 billion through 2020, including about $450 million in 2019.
- A U.S. voluntary employee buyout was expected to cost $450–$575 million pre-tax in cash, with annualized savings of $225–$275 million beginning in 2020. Cost controls and Express network-capacity reductions were also underway.
- Fiscal 2019 capital expenditures were forecast at approximately $5.6 billion. FedEx planned further pension contributions, including an expected additional $500 million in 2019 after contributing $500 million in the first half.
- FedEx recorded approximately $46 million of second-quarter and first-half charges for an agreement in principle to settle New York cigarette-shipment litigation, including a $35.4 million settlement and accrued attorney fees. Independent-contractor and joint-employer litigation remained unresolved; management could not estimate losses in all cases but did not expect a material aggregate loss.
- A $225 million tax benefit recognized in 2018 could be reversed if proposed transition-tax regulations are finalized as drafted or FedEx does not prevail in defending its interpretation. The company said it intended to defend its position.
- Other key risks include economic and trade conditions, fuel prices and surcharge recovery, cyber or technology disruption, integration and cost-reduction execution, labor classification and employee costs, and access to financing. Management reported effective disclosure controls; the interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- Whether international demand and Express margins stabilize, and how the service-mix shift affects profitability.
- Whether buyout costs, expected savings, TNT integration spending, and delayed integration benefits track management’s estimates.
- How much earnings growth reflects operating performance versus TCJA benefits and the prior-year NotPetya comparison.
- Cash generation relative to capital spending, share repurchases, pension contributions, and debt obligations; FedEx repurchased $1.3 billion of shares in the first half.
- Final outcomes and financial exposure from tax-rule uncertainty and outstanding litigation, including FedEx Ground contractor matters.