The FINANCIAL — FedEx Corp. on March 20 reported the following consolidated results for the third quarter ended February 28 (adjusted measures exclude the items listed below for the applicable fiscal year):
Fiscal 2018 Fiscal 2017
As Reported
(GAAP) Adjusted
(non-GAAP) As Reported
(GAAP) Adjusted
(non-GAAP)
Revenue $16.5 billion $16.5 billion $15.0 billion $15.0 billion
Operating income $1.00 billion $1.11 billion $1.03 billion $1.10 billion
Operating margin 6.1% 6.7% 6.8% 7.4%
Net income $2.07 billion $1.02 billion $562 million $625 million
Diluted EPS $7.59 $3.72 $2.07 $2.30
This year’s quarterly consolidated earnings have been adjusted to exclude the benefit of an estimated $1.15 billion reduction in the company’s net U.S. deferred tax liability attributable to the lower statutory rate enacted as part of the Tax Cuts and Jobs Act (TCJA). Additionally, this year’s and last year’s quarterly consolidated earnings have been adjusted for TNT Express integration expenses. The adjustments are as follows:
Impact per diluted share Third Quarter
Fiscal 2018 Fiscal 2017
Net U.S. deferred tax liability remeasurement ($4.21)
TNT Express integration expenses 0.34 0.23
“Execution of our long-term growth strategies, customer demand for the unique value of our broad portfolio of solutions and healthy growth in the global economy are driving our performance,” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer. “We expect strong operating performance in each of our transportation segments in the fourth quarter.”
Operating results benefited from higher base rates, increased volume at FedEx Ground and FedEx Freight, and a favorable net impact from fuel. Results were negatively affected by significantly higher variable compensation accruals, increased peak-related costs at FedEx Express and the impact of adverse weather. Variable compensation increased in connection with the company’s pay actions that were announced following the passage of the TCJA. These variable compensation accruals include the year-to-date impact of the announced changes. TNT Express integration expenses were also higher, according to FedEx.
Net results include a tax benefit of $1.53 billion ($5.60 per diluted share) attributable to the TCJA, which has three primary components:
A provisional benefit of $1.15 billion ($4.21 per diluted share) from the remeasurement of the company’s net U.S. deferred tax liability for lower tax rates;
A benefit of approximately $200 million ($0.75 per diluted share) from an incremental pension contribution made in February and deductible against the company’s prior year taxes at 35%; and
A benefit of approximately $170 million ($0.60 per diluted share) attributable to the phase-in of the reduced tax rate applied to the company’s year-to-date earnings.
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-per-share guidance or projected fourth quarter fiscal 2018 consolidated operating income or margin on a GAAP basis.
Before year-end MTM pension accounting adjustments, earnings are now projected to be $17.90 to $18.30 per diluted share for fiscal 2018. The fiscal 2018 earnings forecast before year-end MTM pension accounting adjustments and excluding the estimate of the remeasurement of the company’s net U.S. deferred tax liability, expenses related to TNT Express integration and certain first quarter FedEx Trade Networks legal matters is now $15.00 to $15.40 per diluted share.
Before year-end MTM pension accounting adjustments, fourth quarter fiscal 2018 consolidated operating income and margin are projected to be $1.84 billion to $1.94 billion and 10.4% to 11.1%, respectively. Excluding year-end MTM pension accounting adjustments and TNT Express integration expenses, fourth quarter consolidated operating income and margin are projected to be $1.95 billion to $2.05 billion and 11.0% to 11.8%, respectively.
The projected fourth quarter fiscal 2018 operating margin for each transportation segment is as follows (the adjusted operating margin for the FedEx Express segment excludes TNT Express integration expenses):
Projected Fourth Quarter
Operating Margin
As Reported
(GAAP) Adjusted
(non-GAAP)
FedEx Express segment 9.1% to 9.6% 9.9% to 10.4%
FedEx Ground segment 17.0% to 17.5% N/A
FedEx Freight segment 8.0% to 9.0% N/A
These margin forecasts reflect the March 1, 2018 realignment of the company’s specialty logistics and e-commerce solutions into a new organizational structure within the FedEx Express segment. All of the above forecasts assume moderate economic growth.
The capital spending forecast for fiscal 2018 is now $5.8 billion, down $100 million from the prior forecast.
“We are increasing our fiscal 2018 earnings outlook due to foreign tax benefits from our international corporate structure, the benefits from U.S. tax reform and improved operating performance,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “We remain committed to improving 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 third 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 $9.37 billion $9.37 billion $8.57 billion $8.57 billion
Operating income $424 million $510 million $557 million $610 million
Operating income
YOY change % (24%) (16%)
Operating margin 4.5% 5.4% 6.5% 7.1%
Revenue increased due to improved base rates, currency exchange rates and higher fuel surcharges, despite a lingering impact from the June cyberattack affecting TNT Express. Total package volume declined 1%, as lower international domestic and U.S. domestic volumes offset international export package volume growth of 1%. Average daily freight pounds increased 3% on higher volume in both international and U.S. freight services.
As-reported results during the quarter were primarily affected by the estimated impacts of:
Higher variable compensation accruals
Increased peak-related costs
Higher TNT Express integration expenses
Adverse weather
Unfavorable currency exchange rates
Favorable net fuel
Combined, these six factors negatively affected the segment’s year-over-year results by approximately $170 million.
FedEx Ground Segment
For the third quarter, the FedEx Ground segment reported:
Fiscal 2018 Fiscal 2017 Change
Revenue $5.22 billion $4.69 billion 11%
Operating income $634 million $515 million 23%
Operating margin 12.1% 11.0% 1.1 pts
Strong revenue growth was driven by average daily package volume growth of 6% and higher base rates. During peak season, record volume was delivered with exceptional service through FedEx Ground’s highly automated and flexible network.
Operating results improved due to the benefits from strong revenue growth and ongoing cost management, partially offset by increased purchased transportation, seasonal staffing and network expansion costs as well as higher variable compensation accruals.
FedEx Freight Segment
For the third quarter, the FedEx Freight segment reported:
Fiscal 2018 Fiscal 2017 Change
Revenue $1.69 billion $1.49 billion 14%
Operating income $55 million $41 million 34%
Operating margin 3.2% 2.7% 0.5 pts
Revenue increased due to less-than-truckload (LTL) revenue per shipment growth of 8% and average daily LTL shipment growth of 6%.
Operating results improved primarily due to the benefit from higher LTL revenue per shipment, partially offset by higher variable compensation accruals.
