FedEx Corporation — Form 10-K summary
Reporting period: Fiscal year ended May 31, 2018. The filing is an FY2018 annual report, not a standalone “2017 Q4” report; it also presents unaudited quarterly results. Filed July 16, 2018.
Business context and reporting period
FedEx provides express, ground and less-than-truckload transportation, alongside logistics, e-commerce and business services. Its principal reportable segments are FedEx Express (including TNT Express), FedEx Ground, FedEx Freight and FedEx Services. FedEx combined Express and TNT Express reporting as integration progressed; prior-period segment results were recast.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $65.45 billion | $60.32 billion |
| Operating income | $4.87 billion | $5.04 billion |
| Operating margin | 7.4% | 8.4% |
| Net income | $4.57 billion | $3.00 billion |
| Diluted EPS | $16.79 | $11.07 |
| Cash from operations | $4.67 billion | $4.93 billion |
| Capital expenditures | $5.66 billion | $5.12 billion |
| Cash and cash equivalents at year-end | $3.27 billion | $3.97 billion |
| Total debt, including current portion | $16.59 billion | $14.93 billion |
Cash from operations less capital expenditures was approximately negative $989 million. Management said liquidity, operating cash flow and available financing were adequate for expected needs. The revolving credit facility was increased to $2.0 billion; debt to adjusted EBITDA was 2.0x versus a 3.5x covenant maximum. The filing reports $18.1 billion of undiscounted operating-lease payments, not recognized as a balance-sheet liability under the then-current accounting rules.
Net income and EPS benefited substantially from tax items: the effective tax rate was negative 5.0%, including a provisional $1.15 billion deferred-tax remeasurement benefit under the Tax Cuts and Jobs Act (TCJA), a $204 million pension-contribution-related benefit, about $265 million from the lower tax rate on FY2018 earnings, a $255 million corporate-structuring benefit and $225 million in foreign tax credits. These items make the increase in reported net income unlike the decline in operating income.
Segments and material changes
| Segment | FY2018 revenue | Operating income | Operating margin | Change versus FY2017 |
|---|---|---|---|---|
| FedEx Express | $36.17 billion | $2.58 billion | 7.1% | Revenue +7%; income -7%; margin down 110 basis points |
| FedEx Ground | $18.40 billion | $2.61 billion | 14.2% | Revenue +11%; income +14%; margin up 40 basis points |
| FedEx Freight | $6.81 billion | $517 million | 7.6% | Revenue +12%; income +33%; margin up 120 basis points |
Revenue rose 9%, supported by shipment and yield growth, higher fuel surcharges and favorable exchange rates. Consolidated operating income fell 3% and margin declined 100 basis points. Express results were pressured by the NotPetya cyberattack, higher TNT integration costs and increased expenses; Ground and Freight operating income improved with volume and yield gains. Freight’s results also benefited from improved revenue per shipment.
Reported net income rose 53%, while operating income declined. Besides the tax benefits, FY2018 included $477 million of TNT Express integration expenses, $380 million of FedEx Supply Chain goodwill and other asset impairment charges, and a $10 million retirement-plan mark-to-market gain. The Supply Chain impairment reflected underperformance, erosion of base business and lower-than-expected synergies and growth. FY2017 included $327 million of TNT integration expenses.
Outlook, commentary, risks and contingencies
- For FY2019, management expected revenue and earnings growth, excluding any retirement-plan mark-to-market adjustment, based on yield and volume growth across transportation segments. Expectations depended on fuel prices, moderate economic growth and stable global trade.
- Management forecast approximately $5.6 billion of FY2019 capital expenditures and about $450 million of TNT integration expenses. Total integration-program expense through 2020 was estimated at approximately $1.5 billion; integration was expected to be substantially complete by the end of 2020.
- FedEx targeted $1.2–$1.5 billion of Express operating-income improvement in 2020 versus 2017, subject to economic, trade, integration, accounting and tax assumptions. It expected an approximately 25% FY2019 effective tax rate before any mark-to-market adjustment.
- FY2018 operating results were estimated to have been reduced by about $400 million in the first half by NotPetya, primarily through lost TNT shipments and IT recovery costs. TNT services and critical systems were reported restored by the second quarter of FY2018.
- Cash from operations declined $256 million, in part due to $500 million of additional voluntary pension contributions and $500 million of payments on previously accrued legal settlements. Total pension contributions were $2.5 billion in FY2018; management expected materially lower contributions in FY2019.
- Principal risks include economic and trade-policy changes, fuel-price volatility and surcharge limitations, cyberattacks and data-protection compliance, execution of the TNT integration, competition (including customers building delivery networks), labor and independent-contractor litigation, and regulatory, climate, currency and weather-related risks.
- FedEx Ground independent-contractor and joint-employer cases remained pending; the company said it could not estimate losses in all matters but did not expect a material aggregate loss. New York cigarette-shipment lawsuits had reasonably possible but unquantifiable exposure, which the company expected to be immaterial. Customs-related matters included payments to CBP and an additional demand being challenged; an immaterial accrual was recorded for that demand.
For the unaudited fourth quarter of FY2018, revenue was $17.31 billion, operating income $1.49 billion, net income $1.13 billion and diluted EPS $4.15. Quarterly net income included material tax benefits and should not be viewed as a measure of recurring operating performance.
Important facts for investors to verify
- How much of FY2018 net income and EPS reflected nonrecurring tax benefits, and whether TCJA accounting estimates were later finalized or adjusted.
- Whether TNT Express integration costs, the end-2020 timetable and the $1.2–$1.5 billion 2020 Express improvement target remained on track.
- The lasting operational and financial effects of NotPetya, including any residual service, customer or IT costs.
- Whether FedEx Supply Chain’s impairment signals further operating weakness or additional impairment risk.
- How capital spending, aircraft purchase commitments, debt maturities, operating leases and pension funding affect future cash generation and liquidity.
- Developments in independent-contractor, joint-employer, customs and other legal matters, including potential cash exposure.