01—Abstract
Summary
Summary of the 10-K filed July 16, 2018. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2018 (year ended May 31, 2018) 10-K shows a year of contrasting results.
Consolidated revenue rose 9% to $65.45 billiona, driven by yield and volume growth at FedEx Ground and FedEx Freight, higher fuel surcharges, and the consolidation of TNT Express. However, operating income fell 3% to $4.87 billion and operating margin contracted 100 basis points to 7.4%. The decline reflects the NotPetya cyberattack at TNT Express (estimated $400 million hit in the first half), $477 million of TNT Express integration expenses, and a $380 million goodwill and asset impairment at FedEx Supply Chain.
Diluted EPS was $16.79b, up 52%, but this was inflated by a $1.15 billion provisional benefit from the Tax Cuts and Jobs Act, which drove an effective tax rate of (5.0%). Investors should therefore treat net income of $4.57 billion as non-recurring in large part. Cash flow and capital allocation were heavy.
Operating cash flow fell to $4.67 billionc from $4.93 billion, mainly because of $2.5 billion in U.S. pension contributions, including a voluntary $1.5 billion funded in February 2018. Capital expenditures rose to $5.66 billion, largely for FedEx Express aircraft fleet modernization. Free cash flow was therefore negative at roughly $1.0 billion.
Management nonetheless returned capital, repurchasing $1.0 billiond of stock and paying $535 million in dividends, and raised the quarterly dividend to $0.65 from $0.50. Total debt, including the current portion, reached about $16.6 billion. The company stated that its debt-to-adjusted-EBITDA ratio was 2.0x against a 3.5x covenant, and it holds BBB (S&P) and Baa2 (Moody's) ratings with stable outlooks.
Looking ahead, management guided to yield and volume growth at all transportation segments in fiscal 2019, with capital expenditures of about $5.6 billion and roughly $450 million of integration expenses. It targets $1.2 to $1.5 billion of incremental operating income at FedEx Express by 2020, measured against 2017, with TNT Express integration expected to be substantially complete by the end of 2020. Key risks disclosed include fuel price volatility, trade policy and tariffs, labor and independent-contractor classification litigation at FedEx Ground, the GDPR compliance burden, and the execution risk of the TNT integration.
Also noteworthy is the upcoming accounting change in fiscal 2019 that moves non-service pension costs below operating income. This will reduce reported operating income and margin but leave net income and EPS unaffected.
02—Key points
Key Highlights
- Revenue grew 9% to $65.45B, with FedEx Ground up 11%, FedEx Freight up 12%, and FedEx Express up 7% (including TNT Express for the full year).
- Operating income declined 3% to $4.87B and operating margin fell 100 bp to 7.4%, due to the NotPetya cyberattack (~$400M impact), $477M of TNT integration costs, and a $380M FedEx Supply Chain goodwill and asset impairment.
- Diluted EPS of $16.79 (up 52%) and net income of $4.57B were inflated by a $1.15B provisional TCJA deferred-tax remeasurement benefit and other one-time tax items; the effective tax rate was (5.0%).
- Operating cash flow fell to $4.67B because of $2.5B in U.S. pension contributions; capex rose 11% to $5.66B, which implies negative free cash flow of about $1.0B for the year.
- Shareholder returns continued: $1.0B of buybacks (4.3M shares at about $237) and $535M of dividends, with the quarterly dividend raised to $0.65 from $0.50.
- Balance sheet remains investment grade (BBB / Baa2, stable); debt was $16.6B, with debt-to-adjusted-EBITDA of 2.0x versus a 3.5x covenant.
- FY2019 outlook calls for yield and volume growth, ~$5.6B capex, ~$450M of integration expenses, and a $1.2–1.5B FedEx Express operating income improvement target by 2020; a new pension accounting rule will reduce reported operating income from FY2019 without affecting net income.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, FedEx kept $0.07.
- Revenue$65.45B100.0%
- Cost of revenue−$15.10B23.1%
- Gross profit$50.35B76.9%
- Operating costs−$46.08B70.4%
- Operating income$4.27B6.5%
- Interest, other & tax$300.0M0.5%
- Net income$4.57B7.0%
Where FY2018 revenue went
$65.45B- Operating costs: $46.08B, 70% of revenue
- Cost of revenue: $15.10B, 23% of revenue
- Operating income: $4.27B, 6.5% of revenue
Kept 6.5% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed July 16, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $65.45B$60.32B | +8.5% |
| Cost of Revenue | $15.10B$13.63B | +10.8% |
| Gross Profit | $50.35B$46.69B | +7.8% |
| Operating Expenses | $61.18B$55.75B | +9.7% |
| Operating Income | $4.27B$4.57B | −6.4% |
| Interest Expense | $558.00M$512.00M | +9.0% |
| Net Income | $4.57B$3.00B | +52.6% |
| EPS (Basic) | $17.08$11.24 | +52.0% |
| EPS (Diluted) | $16.79$11.07 | +51.7% |
| Shares Outstanding (Basic) | 267.00M266.00M | +0.4% |
| Shares Outstanding (Diluted) | 272.00M270.00M | +0.7% |
05—Questions
Frequently Asked Questions
Why did operating income decline in FY2018 even though revenue grew 9%?
Operating income fell 3% to $4.87B because of several one-time or integration-related charges. These were the NotPetya cyberattack at TNT Express (estimated at $400M in the first half), $477M of TNT Express integration expenses, and a $380M goodwill and asset impairment at FedEx Supply Chain. Yield and volume growth, along with favorable net fuel impact, partly offset these negatives.
How much of FY2018 EPS growth is attributable to the tax reform benefit?
A large share. The company recorded a provisional $1.15B benefit from remeasuring its net U.S. deferred tax liability, which equals about $4.22 per diluted share. Other tax benefits included $204M from a pension contribution ($0.75/share), roughly $265M from the lower 2018 statutory rate ($0.97/share), $255M from corporate structuring ($0.94/share), and $225M from foreign tax credits ($0.83/share). Together these lift FY2018 EPS well above what core operations alone would produce, so the underlying earnings trend is much weaker than the headline 52% increase suggests.
Is FedEx generating enough free cash flow to fund its dividend and buybacks?
Not in FY2018 on a simple basis. Operating cash flow was $4.67B against capex of $5.66B, leaving about -$1.0B of free cash flow. Dividends ($535M) and buybacks ($1.0B) were funded partly by $1.48B of new debt, and the company made $2.5B of pension contributions, of which $1.5B was a voluntary incremental payment funded from debt. Management expects 2019 pension contributions to be much lower, and the company said it has adequate liquidity with $3.3B of cash and a $2.0B revolver.
What are the main risks and near-term catalysts for investors?
Key risks include macro and trade-policy exposure (tariffs and retaliation), fuel price volatility, execution of the TNT Express integration (targeted for completion by end-2020), independent-contractor and joint-employer litigation at FedEx Ground, labor-organizing and RLA-related legislative risk, data-protection compliance under GDPR, and continued cyber risk after NotPetya. Catalysts include the FY2019 outlook for revenue and earnings growth, realization of the $1.2–1.5B FedEx Express profit improvement target, the FedEx Ground ISP model transition (targeted for Q2 2020), and the fiscal 2019 pension accounting change that will lower reported operating income.
06—Continue