FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 28, 2019; filed March 19, 2019. The request metadata says “2018 Q3,” but the filing covers fiscal 2019 Q3.
Business context and financial performance
FedEx provides express, ground and freight transportation, along with related logistics and business services. Unless otherwise noted, financial amounts are in millions of dollars and comparisons are with the corresponding prior-year period.
| Metric | Three months ended Feb. 28 | Nine months ended Feb. 28 |
|---|---|---|
| Revenue | $17,010, up 3% | $51,886, up 8% |
| Operating income | $911, up 6% | $3,150, up 7% |
| Operating margin | 5.4%, versus 5.2% | 6.1%, unchanged |
| Net income | $739, down 64% | $2,509, down 27% |
| Diluted EPS | $2.80, versus $7.59 | $9.41, versus $12.63 |
Net income and EPS comparisons are heavily affected by prior-year tax benefits, including a $1.15 billion benefit from remeasuring U.S. deferred taxes under the Tax Cuts and Jobs Act (TCJA). Prior-year results were also affected by a pension contribution tax benefit and other tax items. Operating income comparisons reflect retrospectively adopted pension-accounting presentation changes; these affected operating income, but not net income or EPS.
Segments and material changes
- FedEx Express: Q3 revenue fell 1% to $9,005 while operating income rose 17% to $370; margin improved to 4.1% from 3.5%. International softness, lower yields and product mix were headwinds. Nine-month revenue rose 5% and operating income 10%.
- FedEx Ground: Q3 revenue increased 9% to $5,261, but operating income declined 6% to $577 and margin fell to 11.0% from 12.7%. Higher contractor rates, staffing and the year-round six-day network rollout pressured results. Nine-month operating income rose 7%.
- FedEx Freight: Q3 revenue rose 8% to $1,750 and operating income nearly doubled to $97; margin increased to 5.5% from 3.0%. Nine-month revenue grew 14% and operating income 31%, supported by shipment growth and higher revenue per shipment.
Management cited lower variable incentive compensation expense (about $350 million benefit across the third quarter and nine months), volume growth, favorable net fuel effects and improved yields at Ground and Freight as operating-income supports. Offsetting pressures included weakening international economic conditions, lower Express package weights and yields, and higher purchased transportation costs. The NotPetya cyberattack reduced first-half 2018 earnings by approximately $400 million, affecting nine-month comparisons.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $3,323, versus $1,162 in the prior-year period. Capital expenditures were $3,757, versus $3,994; operating cash flow less capital expenditures was therefore negative $434.
- Cash and cash equivalents were $2,872 at February 28, 2019, down from $3,265 at May 31, 2018. Cash declined $393 during the nine months.
- Long-term debt, including current maturities, was approximately $18.2 billion on the balance sheet; the company separately reported $18.1 billion carrying value excluding capital leases. Total debt increased from $16.5 billion at May 31, 2018. The annualized weighted-average interest rate on long-term debt was 3.4%.
- FedEx had $225 million of commercial paper outstanding and $1.722 billion available under its $2.0 billion revolving facility after outstanding letters of credit. Debt-to-adjusted-EBITDA was 2.2x, below the 3.5x covenant limit; the company reported covenant compliance.
- Financing included $2.463 billion of debt issuance, $874 million of principal payments, $514 million of dividends and $1.365 billion of share repurchases during the nine months. The declared quarterly dividend was $0.65 per share.
- Management expected fiscal 2019 capital expenditures of approximately $5.6 billion and stated that operating cash flow and available financing should cover liquidity needs. The company made $1.0 billion of voluntary U.S. pension contributions during the period and expected no additional contribution in Q4.
Outlook, risks and unusual items
- Management expected continued Freight revenue and earnings growth in Q4. Ground revenue growth was expected to remain strong, but six-day network costs were expected to remain a near-term headwind. Express earnings were expected to decline in Q4 due to lower yields and soft international package volumes, particularly amid slowing conditions in Asia and Europe.
- Cost-reduction initiatives include a U.S. employee voluntary buyout program, limited staff-function hiring and reduced discretionary spending. Expected fiscal 2019 pre-tax cash costs were $450–$575 million, subject to employee acceptance; management projected $225–$275 million of savings in 2020. The program’s benefits were expected to be recognized predominantly in Q4.
- TNT Express integration expenses were estimated to exceed $1.5 billion through 2021; approximately $435 million was expected in fiscal 2019. European network integration was ongoing, with work expected to continue into 2021.
- FedEx disclosed that an acquired U.K. business facilitated approximately 1,080 shipments into Iran from March 2018 through early February 2019. Aggregate revenue was about £16,067 and profit about £5,083. The company said the activity had stopped, enhanced controls were implemented, and an initial voluntary disclosure was made to OFAC; it intended to cooperate.
- A New York cigarette-shipment case was settled for $35.4 million, plus approximately $10 million of attorney fees; the settlement included no admission of liability and the lawsuits were dismissed. Independent-contractor and joint-employer proceedings involving FedEx Ground remain ongoing; the company said it cannot estimate potential losses in all cases, but does not expect a material loss overall.
- FedEx said it may need to reverse a $225 million tax benefit recorded in 2018 if it fails to defend its interpretation of the TCJA transition-tax rules. It intended to defend its position, including through litigation if necessary.
- Other significant risks include global economic weakness, fuel and foreign-exchange movements, trade and Brexit uncertainty, integration execution, labor and contractor classification issues, litigation, and technology or cybersecurity disruptions. The company also identified autonomous-delivery technology as subject to development, safety, regulatory and commercial-acceptance risks.
Investor verification priorities
- Confirm the requested “2018 Q3” period against the filing’s actual fiscal 2019 quarter ended February 28, 2019.
- Separate underlying operating trends from prior-year TCJA and pension-related tax benefits when assessing net-income and EPS declines.
- Track Ground’s six-day network costs and contractor rates against volume, yield and margin improvement.
- Monitor international Express demand, yields and the pace and cost of TNT integration, alongside the stated capital-spending and cost-reduction plans.
- Review the Iran-related OFAC matter, the unresolved TCJA tax position and FedEx Ground contractor litigation for subsequent developments.