FedEx Corporation — Form 10-Q Summary
Business context and period. FedEx provides express, ground and less-than-truckload freight transportation, along with related services. This unaudited quarterly report covers the three months ended August 31, 2018, the first quarter of fiscal 2019; comparisons are with the three months ended August 31, 2017. The independent accountant performed an interim review, not an audit.
Key financial results
Amounts are in millions except per-share data and percentages.
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $17,052 | $15,297 | +11% |
| Operating income | $1,071 | $971 | +10% |
| Operating margin | 6.3% | 6.3% | Flat |
| Net income | $835 | $596 | +40% |
| Diluted EPS | $3.10 | $2.19 | +42% |
| Operating cash flow | $701 | $590 | +$111 |
| Capital expenditures | $1,179 | $1,044 | +13% |
- Segment performance: Express revenue was $9,222 million and operating income $367 million; Ground revenue was $4,799 million and operating income $667 million; Freight revenue was $1,959 million and operating income $176 million. Segment operating margins were 4.0% for Express, 13.9% for Ground and 9.0% for Freight.
- Cash and liquidity: Cash and cash equivalents were $2,369 million at August 31, down from $3,265 million at May 31, 2018. Operating cash flow was below capital spending, resulting in a $478 million shortfall before other investing and financing flows. The company reported $300 million of commercial paper outstanding and $1.646 billion available under its revolving facility after commercial paper and letters of credit.
- Debt: Balance-sheet debt included $299 million short-term borrowings, $1,404 million current long-term debt and $15,241 million long-term debt. The company reported a 2.0-to-1.0 debt-to-adjusted-EBITDA ratio, versus a 3.5-to-1.0 covenant maximum. Long-term debt’s annualized weighted-average interest rate was 3.6%.
- Tax and shareholder returns: The effective tax rate was 24.2%, compared with 39.3%; the fiscal 2019 rate included an approximately $135 million benefit primarily from the lower statutory tax rate under the TCJA. FedEx repurchased 2.6 million shares for $625 million and paid $173 million in dividends. The quarterly dividend declared was $0.65 per share.
Material changes and drivers
- Revenue grew across all transportation segments. Express benefited from recovery in international package and freight volumes following the prior-year NotPetya cyberattack, as well as higher domestic package volumes and yields. Ground benefited from volume and yield growth; Freight from higher shipments and revenue per shipment.
- Operating income rose, but consolidated operating margin was unchanged. Higher fuel prices, purchased transportation, staffing and compensation costs pressured results; higher fuel surcharges more than offset fuel-price increases and benefited operating income.
- Ground and Freight margins fell 40 and 90 basis points, respectively, while Express margin rose 20 basis points. Ground and Freight operating income nevertheless increased.
- Net income growth also reflected a lower tax rate. The prior-year comparison was affected by an estimated $300 million ($0.79 per diluted share) impact from NotPetya, including lost revenue and IT restoration costs.
- Management said compensation timing differences—including full variable-compensation accruals in the current quarter and earlier merit increases for certain hourly employees—reduced the year-over-year comparison by approximately $170 million pretax ($130 million after tax, or $0.48 per diluted share).
Outlook, risks and unusual items
- Management expected volume and yield growth across transportation segments to support fiscal 2019 revenue and earnings growth, before any mark-to-market retirement-plan adjustment. The outlook depends on factors including fuel prices, moderate economic growth and stable global trade.
- Fiscal 2019 capital expenditures were expected to be approximately $5.6 billion. Management said operating cash flow was expected to fund these expenditures.
- TNT Express integration expenses, including restructuring, were expected to total approximately $1.5 billion over the four years through 2020, with approximately $450 million expected in fiscal 2019. Integration was expected to be substantially completed by the end of 2020. FedEx targeted $1.2 billion to $1.5 billion of Express operating-income improvement in 2020 compared with 2017, subject to stated economic, trade, accounting and tax assumptions.
- FedEx Ground targeted completion of its U.S. Independent Service Provider transition during the second quarter of 2020; more than 60% of Ground volume was already delivered under that model.
- A proposed Treasury regulation could require reversal of a $225 million ($0.94 per diluted share) fiscal 2018 tax benefit if finalized as drafted. The company was still completing its TCJA accounting.
- Key disclosed risks include fuel-price and surcharge timing, economic and trade conditions, successful TNT integration, technology disruption, labor and independent-contractor litigation, and regulatory or tax changes. New York cigarette-shipment litigation was set for trial beginning October 9, 2018; the company said potential loss could not then be estimated, though it expected any loss to be immaterial. FedEx Ground classification and joint-employer cases also remained pending.
- FedEx disclosed $15.2 billion of purchase commitments as of August 31, 2018, and $17.9 billion of future minimum operating lease payments. It anticipated recognizing lease liabilities and right-of-use assets exceeding $13 billion upon adoption of the new lease standard in fiscal 2020; the estimated income-statement effect was immaterial.
Investor verification priorities
- Assess how much earnings growth reflects sustainable operating performance versus the prior-year NotPetya disruption, compensation timing and the current-period tax benefit.
- Monitor segment margins, especially Ground and Freight, and whether volume and yield gains can offset labor, purchased-transportation and fuel costs.
- Track operating cash flow against the $5.6 billion fiscal 2019 capital-spending plan, share repurchases and debt obligations.
- Follow final TCJA regulations and whether the potential $225 million tax-benefit reversal is required.
- Evaluate TNT integration costs and progress against the end-2020 completion timeline and 2020 Express operating-income target.
- Review developments in independent-contractor, joint-employer and New York cigarette-shipment litigation, as well as aircraft commitments and the future lease-accounting balance-sheet impact.