FEDEX CORP quarterly report, Q3 FY2018

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FedEx Corporation — Form 10-Q Summary

Period: Fiscal third quarter ended February 28, 2018, with nine-month results compared with the periods ended February 28, 2017. The filing metadata’s “2017 Q3” label does not match the reporting period shown in the filing.

Business context and financial performance

FedEx provides express, ground and freight transportation, alongside related logistics and business services. Amounts below are in millions of dollars except per-share data.

  • Revenue: Third-quarter revenue was $16,526, up 10%; nine-month revenue was $48,136, up 8%.
  • Operating performance: Third-quarter operating income was $1,001, down 2%, and operating margin was 6.1% versus 6.8%. Nine-month operating income was $3,380, down 2%, and margin was 7.0% versus 7.8%.
  • Segment trends: Third-quarter revenue increased across Express (9%), Ground (11%) and Freight (14%). Operating income fell 24% at Express, while it rose 23% at Ground and 34% at Freight. Nine-month Express operating income declined 16%; Ground and Freight increased 12% and 32%, respectively.
  • Net income and EPS: Third-quarter net income was $2,074 versus $562 and diluted EPS was $7.59 versus $2.07. Nine-month net income was $3,445 versus $1,977 and diluted EPS was $12.63 versus $7.31. The increases primarily reflect large tax-related benefits, not comparable growth in operating income.
  • Cash flow and investment: Nine-month operating cash flow was $1,162, down from $2,645. Capital expenditures were $3,994 versus $3,790. Cash and equivalents declined to $2,789 from $3,969 at May 31, 2017. The company attributed weaker operating cash flow primarily to pension contributions, a previously accrued legal settlement and NotPetya-related effects.
  • Debt and liquidity: At February 28, short-term borrowings were $799, current long-term debt $764, and long-term debt $16,017. FedEx had $800 of commercial paper outstanding and $1,146 available under its $2.0 billion revolving facility after letters of credit. Debt-to-adjusted-EBITDA was 2.2x against a 3.5x covenant limit.
  • Other key items: FedEx contributed $2,500 to U.S. pension plans during the nine months, including $2,478 voluntary contributions. It paid $402 in dividends and repurchased $558 of stock. The quarterly dividend declared was $0.50 per share.

Material changes and unusual items

  • The Tax Cuts and Jobs Act produced provisional benefits of $1,150 from remeasuring the net U.S. deferred tax liability and $36 from foreign tax credits exceeding the transition tax. FedEx also recorded a $204 benefit related to its February pension contribution and a $165 benefit from the lower statutory tax rate on year-to-date earnings. The initial TCJA accounting was incomplete and estimates could change.
  • NotPetya’s estimated negative impact was $400 for the first half of fiscal 2018, with lingering lower TNT Express volumes in the third quarter. Critical systems and services had been restored, but recovery and customer-volume risks remained.
  • Third-quarter TNT Express integration expenses were $106; nine-month expenses were $341. Higher incentive compensation, Express peak costs and winter weather also weighed on third-quarter operating results. Higher fuel surcharges more than offset higher fuel prices in the period.
  • FedEx issued $1.5 billion of fixed-rate notes due 2028 and 2048 and used the proceeds for an additional U.S. pension contribution. Aircraft and other noncancelable purchase commitments totaled $12,917; operating lease commitments totaled $17,921.

Outlook, commentary and risks

  • Management expected yield and volume growth to support fourth-quarter and full-year fiscal 2018 revenue and earnings growth, before any mark-to-market benefit-plan adjustment, assuming moderate economic growth. Higher compensation and TNT integration costs were expected to weigh on results.
  • FedEx forecast approximately $5.8 billion of fiscal 2018 capital expenditures. It expected about $450 million of TNT integration costs in fiscal 2018, within an approximately $1.4 billion four-year program, with integration substantially complete by the end of 2020.
  • The company targeted $1.2–$1.5 billion of FedEx Express operating-income improvement in 2020 versus 2017, assuming moderate economic growth and then-current accounting rules and tax laws.
  • Key risks include execution and cost of the TNT integration and cyber recovery, fuel-price and surcharge timing, economic and shipment-volume changes, labor and contractor-classification litigation, tax-law interpretation, foreign exchange, and technology or data-security disruptions.
  • FedEx reported independent-contractor and joint-employer proceedings involving FedEx Ground; it could not estimate losses in all such cases but did not expect a material loss overall. Loss in the New York cigarette-shipment litigation was considered reasonably possible, but the amount could not be estimated. Customs-related payments of $46.5 had been tendered, with final resolution pending.

Most important facts for investors to verify

  • How much of reported earnings and EPS growth came from the provisional TCJA and pension-related tax benefits, and whether those estimates changed after this filing.
  • Whether operating margins and cash generation recover as compensation, fuel and integration costs evolve.
  • Whether TNT Express customer volumes recover and integration spending and the 2020 Express improvement target remain on track.
  • How pension funding, planned capital expenditures and debt issuance affect liquidity and leverage.
  • Developments in contractor-classification, New York cigarette-shipment and customs matters, and the company’s cybersecurity recovery and controls.