FedEx Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended May 31, 2019. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. FedEx provides express, ground, freight, logistics, and related services through its operating segments.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $69.693 billion | $65.450 billion |
| Operating income | $4.466 billion | $4.272 billion |
| Operating margin | 6.4% | 6.5% |
| Net income | $540 million | $4.572 billion |
| Diluted EPS | $2.03 | $16.79 |
| Cash from operations | $5.613 billion | $4.674 billion |
| Capital expenditures | $5.490 billion | $5.663 billion |
| Cash and cash equivalents at year-end | $2.319 billion | $3.265 billion |
| Total debt at year-end, including current portion | $17.581 billion | $16.585 billion |
- Revenue rose 6% and operating income rose 5%; consolidated operating margin edged down 10 basis points.
- Net income and EPS fell sharply, principally because FY2019 included a $3.9 billion noncash pension and postretirement-plan mark-to-market loss ($3.0 billion after tax, or $11.22 per diluted share). FY2018 included substantial tax benefits from the Tax Cuts and Jobs Act, including a $1.15 billion deferred-tax remeasurement benefit.
- Fourth-quarter FY2019 revenue was $17.807 billion, operating income $1.316 billion, and net loss $1.969 billion; the quarter included the annual pension mark-to-market loss.
- Segment results: Express revenue was $37.331 billion and operating income $2.123 billion (5.7% margin); Ground revenue was $20.522 billion and operating income $2.640 billion (12.9% margin); Freight revenue was $7.582 billion and operating income $615 million (8.1% margin). Freight operating income grew 26%; Express and Ground operating margins declined.
- Operating cash flow increased by $939 million. Cash generation was supported by lower pension contributions, while year-end cash declined by $946 million. Capital expenditures remained substantial at $5.490 billion.
- Long-term debt was $16.617 billion, plus $964 million current debt. The company reported a 2.25-to-1.0 debt-to-adjusted-EBITDA ratio against a 3.5-to-1.0 covenant limit and stated it was in compliance.
Changes, outlook, and material considerations
- FY2019 performance reflected volume growth across transportation segments and a favorable net fuel impact, offset in part by weakening global economic conditions, lower-yield service mix, higher Ground contractor costs, and six-day year-round Ground operations. Lower variable incentive compensation reduced costs by approximately $485 million.
- The 2017 NotPetya cyberattack reduced FY2018 earnings by approximately $400 million; critical TNT Express systems were restored by the second quarter of FY2018. FY2019 included $388 million of TNT integration expenses, down from $477 million in FY2018.
- FY2019 also included $320 million of business realignment costs, primarily employee buyouts, and $46 million related to settlement of a FedEx Ground legal matter. FY2018 included $380 million of goodwill and other asset impairment charges at FedEx Supply Chain.
- For FY2020, management expected volume-driven revenue growth at Express and Ground, improved operating income at Ground and Freight, and lower Express operating income due to macroeconomic weakness, trade uncertainty, lower-yield mix, and a decision not to renew a customer contract. Ground’s higher network and service costs were expected to pressure margin.
- Management forecast approximately $5.9 billion of FY2020 capital expenditures, approximately $350 million of FY2020 TNT integration expenses, and approximately $1.7 billion of aggregate integration expenses through FY2021. It expected a 23%–25% effective tax rate before any pension mark-to-market adjustment. These expectations assume, among other factors, stable fuel prices and no further deterioration in international economic or trade conditions.
- Liquidity outlook: management said cash, operating cash flow, and financing sources should cover operating needs, capital spending, debt service, pension funding, and integration costs. It expected a voluntary $1.0 billion U.S. pension contribution in FY2020, although no minimum contribution was then required. FY2019 cash included $1.1 billion held in foreign jurisdictions.
- Key risks include global economic and trade weakness, fuel-price volatility and surcharge effects, competition (including shippers developing in-house delivery networks), cyber and data-security threats, execution and cost risk in the TNT integration, labor and contractor-classification litigation, regulatory and tax uncertainty, and pension assumption and funding volatility.
- FedEx disclosed $18.1 billion of undiscounted future operating-lease commitments. On adopting the new lease standard in FY2020, it anticipated recognizing about $14 billion of lease liabilities and right-of-use assets.
- FedEx filed a June 2019 lawsuit seeking to prevent Commerce Department enforcement of export-control rules it says impose strict liability on common carriers. The filing also describes Ground contractor-classification cases and securities class actions filed in June and July 2019; outcomes and potential losses were not estimable for certain matters.
Important facts for investors to verify
- Review earnings excluding the $3.9 billion pension mark-to-market loss and compare recurring operating performance with the prior year’s tax and other unusual benefits.
- Track Express and Ground margins, service mix, contractor rates, and the cost and productivity effects of seven-day residential delivery and SmartPost integration.
- Assess whether the TNT integration meets cost, timing, and network-interoperability targets, including the expected $350 million of FY2020 integration expense.
- Compare expected capital spending and pension contributions with operating cash flow, debt maturities, and liquidity needs; evaluate the effect of lease capitalization.
- Monitor the resolution and financial exposure of contractor-classification, securities, export-control, and tax matters, and the sensitivity of pension obligations to discount rates and asset returns.