FedEx Corp. Reports Higher Second Quarter Results

FedEx Corp. (NYSE: FDX) today reported earnings of $2.84 per diluted share ($3.18 per diluted share on an adjusted basis) for the second quarter ended November 30, compared to earnings of $2.59 per diluted share ($2.77 per diluted share on an adjusted basis) a year ago.

Both as-reported and adjusted fiscal 2018 earnings reflect the estimated negative impact of the June 27 cyberattack affecting TNT Express ($0.31 per diluted share). This year's and last year's quarterly consolidated earnings have been adjusted for TNT Express integration expenses of $0.33 and $0.18 per diluted share, respectively.

"Strategic execution by the FedEx team and a stronger global economy drove improved financial results, and we are well positioned for profitable, long-term growth," said Frederick W. Smith, FedEx Corp. chairman and chief executive officer. "We are on track for another record holiday-shipping season, and customer-service levels have been outstanding. We thank our more than 400,000 dedicated team members around the world for their extraordinary dedication."

Second Quarter Results

FedEx Corp. reported the following consolidated results for the second quarter (adjusted measures exclude TNT Express integration expenses):
       

Fiscal 2018

Fiscal 2017

As Reported

(GAAP)
 

Adjusted

(non-GAAP)

As Reported

(GAAP)
 

Adjusted

(non-GAAP)
Revenue $16.3 billion $16.3 billion $14.9 billion $14.9 billion
Operating income $1.26 billion $1.38 billion $1.17 billion $1.23 billion
Operating margin 7.7% 8.5% 7.8% 8.2%
Net income $775 million $866 million $700 million $750 million
Diluted EPS $2.84 $3.18 $2.59 $2.77
 

Operating income increased due to higher base rates and increased volume at each transportation segment, partially offset by reduced revenue resulting from the TNT Express cyberattack and higher TNT Express integration expenses. Results also reflect a tax benefit of approximately $80 million ($0.29 per diluted share) from foreign tax credits associated with a dividend paid from foreign operations, and a favorable net impact from fuel.

Outlook

FedEx is unable to forecast the fiscal 2018 year-end mark-to-market (MTM) pension accounting adjustments. As a result, the company is unable to provide fiscal 2018 earnings or effective tax rate (ETR) guidance on a GAAP basis.

Before year-end MTM pension accounting adjustments, earnings are now projected to be $11.45 to $12.05 per diluted share for fiscal 2018. The fiscal 2018 earnings forecast before year-end MTM pension accounting adjustments and excluding expenses related to TNT Express integration and certain first quarter FedEx Trade Networks legal matters is now $12.70 to $13.30 per diluted share. These forecasts assume moderate economic growth and continued recovery from the cyberattack. The fiscal 2018 ETR forecast is now 33% to 34% before year-end MTM pension accounting adjustments. Each of these forecasts is based on current U.S. tax laws.

If the Tax Cuts and Jobs Act is enacted as set forth in the Joint Conference Report, earnings per share could increase by an estimated $4.40 to $5.50 per diluted share for fiscal 2018 before year-end MTM pension accounting adjustments, primarily due to the revaluation of net deferred tax liabilities. This range also includes an estimated $0.85 to $1.00 per diluted share due to a lower tax rate on fiscal 2018 earnings.

The capital spending forecast for fiscal 2018 remains $5.9 billion. The company is accelerating the integration process and increasing investments to move TNT Express information technology and operational infrastructure to FedEx infrastructure due to the recent cyberattack at TNT Express. As a result, the total TNT Express integration program expense through fiscal 2020 is now estimated to be approximately $1.4 billion, up from the previous $800 million estimate, of which $450 million is expected to be incurred in fiscal 2018.

"We are increasing our fiscal 2018 forecast, due to enhanced revenue quality, solid demand trends and our success in restoring business impacted by this summer's cyberattack," said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. "We expect to see improved results in our fiscal second half, and we reaffirm our commitment to improve operating income at the FedEx Express segment by $1.2 to $1.5 billion in fiscal 2020 versus fiscal 2017."

FedEx Express Segment

For the second quarter, the FedEx Express segment reported (adjusted measures exclude TNT Express integration expenses):
       

Fiscal 2018

Fiscal 2017

As Reported

(GAAP)
 

Adjusted

(non-GAAP)

As Reported

(GAAP)
 

Adjusted

(non-GAAP)
Revenue $9.35 billion $9.35 billion $8.64 billion $8.64 billion
Operating income $717 million $813 million $706 million $734 million

Operating income YOY change %

2%

11%

 

 
Operating margin 7.7% 8.7% 8.2% 8.5%
 

Revenue grew primarily due to higher base rates, strong growth in international services, higher fuel surcharges and favorable exchange rates, partially offset by the impact from the TNT Express cyberattack.

Operating income increased due to higher revenue, a favorable net impact from fuel and continued cost efficiencies, partially offset by an estimated $100 million impact from the cyberattack and the timing of aircraft maintenance events. As-reported results include $96 million of TNT Express integration expenses.

FedEx Ground Segment

For the second quarter, the FedEx Ground segment reported:
       

Fiscal 2018 Fiscal 2017 Change
Revenue $4.93 billion $4.42 billion 12%
Operating income $521 million $465 million 12%
Operating margin 10.6% 10.5% 0.1 pts
 

Revenue increased due to average daily package volume growth of 7% and higher base rates.

Operating results improved due to revenue growth, partially offset by higher purchased transportation, network expansion and staffing costs and increased self-insurance reserves.

FedEx Freight Segment

For the second quarter, the FedEx Freight segment reported:
       
Fiscal 2018 Fiscal 2017 Change
Revenue $1.76 billion $1.60 billion 10%
Operating income $118 million $88 million 34%
Operating margin 6.7% 5.5% 1.2 pts
 

Revenue increased due to less-than-truckload (LTL) revenue per shipment growth of 7% and average daily LTL shipment growth of 4%.

Operating results improved primarily due to the benefit from higher LTL revenue per shipment.

Corporate Overview

FedEx Corp. (NYSE: FDX) provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $62 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Consistently ranked among the world's most admired and trusted employers, FedEx inspires its more than 400,000 team members to remain "absolutely, positively" focused on safety, the highest ethical and professional standards and the needs of their customers and communities. To learn more about how FedEx connects people and possibilities around the world, please visit about.fedex.com.

Additional information and operating data are contained in the company's annual report, Form 10-K, Form 10-Qs, Form 8-Ks, Statistical Books and second quarter fiscal 2018 Earnings Presentation. These materials, as well as a webcast of the earnings release conference call to be held at 5:00 p.m. EST on December 19, are available on the company's website at investors.fedex.com. A replay of the conference call webcast will be posted on our website following the call.

The Investor Relations page of our website, investors.fedex.com, contains a significant amount of information about FedEx, including our Securities and Exchange Commission ("SEC") filings and financial and other information for investors. The information that we post on our Investor Relations website could be deemed to be material information. We encourage investors, the media and others interested in the company to visit this website from time to time, as information is updated and new information is posted.

Certain statements in this press release may be considered forward-looking statements, such as statements relating to management's views with respect to future events and financial performance. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, economic conditions in the global markets in which we operate, a significant data breach or other disruption to our technology infrastructure, the ongoing impact of the June 27 cyberattack affecting TNT Express, our ability to successfully integrate the businesses and operations of FedEx Express and TNT Express in the expected time frame or at the expected cost, changes in fuel prices or currency exchange rates, our ability to match capacity to shifting volume levels, new U.S. domestic or international government regulation, our ability to effectively operate, integrate and leverage acquired businesses, our ability to achieve our FedEx Express segment profit improvement goal, legal challenges or changes related to owner-operators engaged by FedEx Ground and the drivers providing services on their behalf, disruptions or modifications in service by, or changes in the business or financial soundness of, the U.S. Postal Service, the impact from any terrorist activities or international conflicts and other factors which can be found in FedEx Corp.'s and its subsidiaries' press releases and FedEx Corp.'s filings with the SEC. Any forward-looking statement speaks only as of the date on which it is made. We do not undertake or assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

The financial section of this release is provided on the company's website at investors.fedex.com.

 

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

TO GAAP FINANCIAL MEASURES
 

Second Quarter Fiscal 2018 and Fiscal 2017 Results

The company reports its financial results in accordance with accounting principles generally accepted in the United States ("GAAP" or "reported"). We have supplemented the reporting of our financial information determined in accordance with GAAP with certain non-GAAP (or "adjusted") financial measures, including our adjusted second quarter fiscal 2018 and 2017 consolidated operating income and margin, net income and diluted earnings per share, and adjusted second quarter fiscal 2018 and 2017 FedEx Express segment operating income and margin. These financial measures have been adjusted to exclude the impact of TNT Express integration expenses.

We expect to incur significant expenses over the next few years in connection with our integration of TNT Express. We have adjusted our second quarter fiscal 2018 and 2017 financial measures and the FedEx Express segment second quarter fiscal 2018 and 2017 financial measures to exclude TNT Express integration expenses because we generally would not incur such expenses as part of our continuing operations. The integration expenses are incremental costs directly associated with the integration of TNT Express, including professional and legal fees, salaries and wages, advertising expenses and travel. Internal salaries and wages are included only to the extent the individuals are assigned full-time to integration activities. The integration expenses also include any restructuring charges at TNT Express.

We believe these adjusted financial measures facilitate analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of, or are unrelated to, the company's and our business segments' core operating performance, and may assist investors with comparisons to prior periods and assessing trends in our underlying businesses. These adjustments are consistent with how management views our businesses. Management uses these non-GAAP financial measures in making financial, operating and planning decisions and evaluating the company's and each business segment's ongoing performance.

Our non-GAAP measures are intended to supplement and should be read together with, and are not an alternative or substitute for, and should not be considered superior to, our reported financial results. Accordingly, users of our financial statements should not place undue reliance on these non-GAAP financial measures. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. As required by SEC rules, the tables below present a reconciliation of our presented non-GAAP financial measures to the most directly comparable GAAP measures.

Fiscal 2018 Earnings Guidance

Our fiscal 2018 earnings guidance is a non-GAAP financial measure because it excludes the fiscal 2018 year-end MTM pension accounting adjustments, charges related to certain first quarter FedEx Trade Networks legal matters and projected fiscal 2018 TNT Express integration expenses, including any restructuring charges at TNT Express. Our fiscal 2018 ETR forecast is a non-GAAP financial measure because it excludes the fiscal 2018 year-end MTM pension accounting adjustments.

We have provided a non-GAAP earnings guidance measure for the same reasons that were outlined above for historical non-GAAP measures. The fiscal 2018 year-end MTM pension accounting adjustments are excluded from our fiscal 2018 earnings guidance because these non-cash items are unrelated to our core operating performance. Similarly, charges related to certain first quarter FedEx Trade Networks legal matters are excluded from our fiscal 2018 earnings guidance because they are unrelated to our core operating performance and to assist investors with assessing trends in our underlying business. TNT Express integration expenses are excluded from our fiscal 2018 earnings guidance for the same reasons described above for historical non-GAAP measures.

We are unable to predict the amount of the year-end MTM pension accounting adjustments, as they are significantly impacted by changes in interest rates and the financial markets, so such adjustments are not included in our fiscal 2018 earnings guidance or ETR forecast. For this reason, a full reconciliation of our fiscal 2018 earnings guidance or ETR forecast to the most directly comparable GAAP measure is impracticable. It is reasonably possible, however, that our fourth quarter fiscal 2018 MTM pension accounting adjustments could have a material impact on our fiscal 2018 consolidated financial results and ETR. The last table included below outlines the impact of the items that are excluded from our earnings guidance, other than the year-end MTM pension accounting adjustments.

Second Quarter Fiscal 2018

 

FedEx Corporation
Dollars in millions, except EPS  

Operating
 

Income
 

Net
 

Diluted Earnings

Income
 

Margin

Taxes 1

Income 2

Per Share 3
GAAP measure $1,262 7.7% $364 $775 $2.84
TNT Express integration expenses 4

122

0.8%

31

91

0.33
Non-GAAP measure $1,384 8.5% $395 $866 $3.18
 
 

FedEx Express Segment
Dollars in millions  

Operating

Income
 

Margin
GAAP measure $717 7.7%
TNT Express integration expenses 96 1.0%
Non-GAAP measure $813 8.7%
 

Second Quarter Fiscal 2017
 

FedEx Corporation
Dollars in millions, except EPS  

Operating
 

Income
 

Net
 

Diluted Earnings

Income
 

Margin

Taxes 1

Income 2

Per Share
GAAP measure $1,167 7.8% $378 $700 $2.59
TNT Express integration expenses 4

58

0.4%

8

50

0.18
Non-GAAP measure $1,225 8.2% $386 $750 $2.77
 
 

FedEx Express Segment
Dollars in millions  

Operating

Income
 

Margin
GAAP measure $706 8.2%
TNT Express integration expenses 28 0.3%
Non-GAAP measure $734 8.5%
 

Fiscal 2018 Earnings Outlook
       
Dollars in millions, except EPS

Adjustments

Diluted Earnings

Per Share

Earnings per diluted share before MTM pension accounting adjustments (non-GAAP) 5

 

$11.45 to $12.05

TNT Express integration expenses
$450

Income tax effect 1
(116)
Net of tax effect $334 1.23
FedEx Trade Networks legal matters $7

Income tax effect 1
(2)
Net of tax effect $ 5 0.02
Earnings per diluted share with adjustments 5

 

$12.70 to $13.30
 
 
Notes:
1 - Income taxes are based on the company's approximate statutory tax rates (under current U.S. tax laws) applicable to each transaction.
2 - Effect of "Total other (expense) income" on net income amount not shown.
3 - Does not sum to total due to rounding.
4 - These expenses were recognized at FedEx Corporate and FedEx Express.
5 - The year-end MTM pension accounting adjustments, which are impracticable to calculate at this time, are excluded.

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