FedEx Corporation — Form 10-Q Summary
Business context and reporting period
FedEx provides express, ground and less-than-truckload transportation, along with related logistics and business services. This unaudited Form 10-Q covers the three months ended August 31, 2017, the first quarter of fiscal 2018; comparisons are with the three months ended August 31, 2016. TNT Express is included in the FedEx Express segment in both periods, with prior-year presentation revised accordingly.
Financial results and liquidity
- Revenue rose 4% to $15.297 billion. Operating income fell 12% to $1.117 billion; operating margin declined to 7.3% from 8.6%.
- Net income was $596 million, down 17%; diluted EPS was $2.19, down from $2.65. The effective tax rate was 39.3%, versus 37.4%.
- Operating cash flow was $590 million, compared with $971 million. Capital expenditures were $1.044 billion, compared with $1.215 billion. Cash declined to $3.503 billion from $3.969 billion.
- At August 31, cash was $3.503 billion and total debt was about $15.156 billion, including current debt. The current ratio was approximately 1.63x, based on current assets of $12.722 billion and current liabilities of $7.790 billion. Debt to adjusted EBITDA was 1.9x against a 3.5x covenant limit; no commercial paper was outstanding.
- Cash and cash equivalents, operating cash flow and available financing were described as adequate for liquidity needs. The company had a $1.75 billion revolving facility expiring in November 2020; $183 million of its letter-of-credit sublimit remained unused.
Material changes versus the prior comparable period
- FedEx Express revenue increased 2% to $8.652 billion, but operating income fell 29% to $433 million and margin contracted to 5.0% from 7.2%.
- FedEx Ground revenue rose 8% to $4.639 billion and operating income increased 3% to $626 million; margin eased to 13.5% from 14.2% as network, staffing and purchased-transportation costs grew.
- FedEx Freight revenue rose 6% to $1.752 billion; operating income increased 30% to $176 million and margin improved to 10.0% from 8.1%, mainly on higher base rates.
- The June 2017 NotPetya cyberattack significantly disrupted TNT Express. FedEx estimated a $300 million first-quarter negative impact, or $0.79 per diluted share, from lost revenue and recovery costs. TNT integration expenses were $112 million, versus $44 million a year earlier.
- Operating cash flow decreased $381 million, primarily due to the cyberattack and changes in working-capital items. Higher yields across transportation segments and lower incentive compensation partially offset cost pressures and the Express disruption.
Outlook, risks and unusual items
- Management expected yield and volume growth across transportation segments to support fiscal 2018 revenue and earnings growth, before any mark-to-market benefit-plan adjustment. Expectations depend on fuel prices and moderate economic growth.
- Management expected continuing, but diminishing, cyberattack impacts for the rest of fiscal 2018. TNT revenues, volumes and profits remained below pre-attack levels; restoration of specialized customer systems was a priority ahead of peak season. FedEx had no insurance covering the attack.
- Second-quarter and full-year results were expected to be affected by TNT integration and restructuring, and second-quarter results by Hurricanes Harvey and Irma. Lower incentive compensation was expected to partially offset these pressures.
- The TNT integration program was expected to cost approximately $800 million over four years, through completion targeted by the end of 2020; approximately $350 million was expected in fiscal 2018. FedEx targeted $1.2–$1.5 billion of FedEx Express operating-income improvement by 2020 versus 2017, subject to stated assumptions and continued recovery.
- Fiscal 2018 capital expenditures were expected to be approximately $5.9 billion. FedEx expected an additional $750 million contribution to U.S. pension plans during fiscal 2018, following $250 million contributed in the quarter.
- Major commitments include $13.987 billion of noncancelable purchase commitments and $18.541 billion of future minimum operating lease payments. The company anticipated recognizing lease liabilities and right-of-use assets exceeding $13 billion when the new lease standard takes effect.
- Legal matters include remaining independent-contractor and joint-employer litigation, New York cigarette-shipment lawsuits with losses not estimable at this stage, and a California hazardous-waste matter for which an immaterial loss was considered probable. Customs-related payments of $46.5 million were tendered in the quarter; resolution remained pending.
- The interim financial statements received an independent accountant’s review, not an audit. Management concluded disclosure controls were effective at August 31, 2017; TNT Express controls had been restored to pre-attack functioning levels by quarter-end.
Most important facts for investors to verify
- Progress in restoring TNT Express systems and customers, and whether further lost revenue, recovery costs or other cyberattack effects exceed management’s expectations.
- Whether FedEx Express margins recover and the company achieves its 2020 operating-income improvement target, while managing integration costs and the Ground margin pressure.
- Cash conversion, working-capital movements, capital spending and planned pension contributions relative to operating cash flow and liquidity.
- Developments in contractor-classification litigation, New York cigarette lawsuits and customs matters, including any change in estimated exposure or resolution status.
- The eventual balance-sheet effect of lease accounting and the execution, cost and timing of aircraft, lease and other purchase commitments.