01—Abstract
Summary
Summary of the 10-K filed July 16, 2019. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2019 10-K (fiscal year ended May 31, 2019) shows revenue growing 6% to $69.7 billiona and operating income rising 5% to $4.47 billion, but the headline net income collapsed to $540 million (diluted EPS $2.03, versus $16.79 in FY2018) because of a pre-tax, non-cash $3.9 billion mark-to-market pension loss recorded in the fourth quarter.
Excluding that item and the prior year's $1.15 billionb one-time U.S. deferred tax remeasurement benefit, the underlying picture is more balanced: volume growth, favorable fuel net impact, and yield gains at FedEx Ground and FedEx Freight offset softening international trade volumes and cost headwinds, including $320 million of business realignment costs and $388 million of TNT Express integration expenses. Segment performance diverged sharply. FedEx Ground operating income rose 4% to $2.64 billion on 7% volume growth driven by e-commerce, though its margin fell 80 basis points to 12.9% as purchased transportation costs climbed with the expansion to six-day operations.
FedEx Freight was the standout, with operating income up 26% to $615 millionc and margin up 90 basis points to 8.1%, driven by higher revenue per shipment. FedEx Express was roughly flat at $2.12 billion, with margin slipping to 5.7%, as international priority volumes weakened and mix shifted toward lower-yielding deferred and freight services. Management's 2020 outlook calls for lower Express operating income, improved Ground and Freight results, roughly $5.9 billion in capital expenditures, and an effective tax rate of 23% to 25% before any year-end pension adjustment.
For investors, the key watch items are the pension sensitivity to discount rates (a 50 basis point move changes the largest plan's obligation by about $1.7 to $1.9 billiond), the ongoing ground contractor litigation, the $233 million of TCJA transition-tax benefits that could be reversed if the IRS position prevails, the Securities class actions filed in June and July 2019, and the cost of the TNT Express integration, which management now expects to total about $1.7 billion through 2021. Leverage remains manageable, with debt to adjusted EBITDA at 2.25x against a 3.5x covenant, and the company continued to return cash through $1.48 billion of buybacks and $683 million of dividends.
02—Key points
Key Highlights
- Consolidated revenue rose 6% to $69.7 billion, and consolidated operating income rose 5% to $4.47 billion, with operating margin slightly down at 6.4%.
- Net income fell to $540 million (diluted EPS $2.03) from $4.57 billion, primarily due to a $3.9 billion pre-tax non-cash MTM pension loss in Q4 FY2019 ($11.22 per diluted share), compared with a $1.15 billion one-time TCJA tax benefit in FY2018.
- FedEx Freight operating income grew 26% to $615 million with margin up 90 bps to 8.1%, the strongest improvement among the segments.
- FedEx Ground operating income rose 4% to $2.64 billion on 7% volume growth, though margin declined 80 bps to 12.9% due to higher purchased transportation costs from six-day operations.
- FedEx Express operating income was roughly flat at $2.12 billion, with margin falling to 5.7% amid softer International Priority volumes, mix shift to lower-yielding services, and $388 million in TNT Express integration costs company-wide.
- Management guides to 2020 capex of about $5.9 billion, an effective tax rate of 23% to 25% before MTM adjustments, about $350 million of 2020 integration expenses, and about $1.0 billion of voluntary pension contributions.
- Balance sheet remains sound: cash of $2.3 billion, debt-to-adjusted-EBITDA of 2.25x versus a 3.5x covenant, and shareholder returns of $1.48 billion in buybacks and $683 million in dividends.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, FedEx kept $0.01.
- Revenue$69.69B100.0%
- Cost of revenue−$16.65B23.9%
- Gross profit$53.04B76.1%
- Operating costs−$48.57B69.7%
- Operating income$4.47B6.4%
- Interest, other & tax−$3.93B5.6%
- Net income$540.0M0.8%
Where FY2019 revenue went
$69.69B- Operating costs: $48.57B, 70% of revenue
- Cost of revenue: $16.65B, 24% of revenue
- Net income: $540.0M, 0.8% of revenue
- Interest, other & tax: $3.93B, 5.6% of revenue
Kept 0.8% as net incomeNet income $540.0M · 0.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed July 16, 2019Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $69.69B$65.45B | +6.5% |
| Cost of Revenue | $16.65B$15.10B | +10.3% |
| Gross Profit | $53.04B$50.35B | +5.3% |
| Operating Expenses | $65.23B$61.18B | +6.6% |
| Operating Income | $4.47B$4.27B | +4.5% |
| Interest Expense | $588.00M$558.00M | +5.4% |
| Net Income | $540.00M$4.57B | −88.2% |
| EPS (Basic) | $2.06$17.08 | −87.9% |
| EPS (Diluted) | $2.03$16.79 | −87.9% |
| Shares Outstanding (Basic) | 262.00M267.00M | −1.9% |
| Shares Outstanding (Diluted) | 265.00M272.00M | −2.6% |
05—Questions
Frequently Asked Questions
Why did FedEx's net income fall so sharply in fiscal 2019?
Net income dropped to $540 million from $4.57 billion mainly because of a pre-tax, non-cash $3.9 billion mark-to-market loss on retirement plans recorded in the fourth quarter, driven by a significantly lower discount rate and weaker-than-expected asset returns. Fiscal 2018 also benefited from a $1.15 billion one-time deferred tax remeasurement under the TCJA. The MTM loss does not reflect operating cash costs, and operating income actually increased 5%.
Which FedEx segment performed best, and which faced the most pressure?
FedEx Freight performed best, with operating income up 26% and margin improving to 8.1%, driven by higher revenue per shipment. FedEx Express faced the most pressure, with margin declining to 5.7% due to weakening global economic conditions, a mix shift from international package to freight volume, and continued integration costs from TNT Express.
What are the main outlook items for FedEx in fiscal 2020?
Management expects revenue growth at FedEx Express and FedEx Ground, improved operating income at FedEx Ground and FedEx Freight, and a decline in FedEx Express operating income due to macroeconomic weakness, trade uncertainty, and a strategic decision not to renew a customer contract. Capital expenditures are expected to be about $5.9 billion, and the effective tax rate is projected at 23% to 25% before any year-end pension adjustment.
How sensitive is FedEx's pension obligation to interest rates, and why does it matter?
The pension obligation is highly sensitive to the discount rate. For the largest plan, a 50 basis point increase would reduce the 2019 projected benefit obligation by about $1.7 billion, while a 50 basis point decrease would increase it by about $1.9 billion. Because these changes flow through the annual fourth-quarter MTM adjustment, earnings can swing materially, even though segment-level pension expense is far less sensitive.
What legal and regulatory risks should investors monitor?
Key risks include ongoing lawsuits and administrative proceedings challenging the independent contractor classification of FedEx Ground owner-operators, two securities class actions filed in June and July 2019 alleging misstatements from September 2017 to December 2018, and a possible reversal of $233 million of TCJA transition-tax benefits if the IRS interpretation prevails. The company also filed suit against the Commerce Department over export control strict-liability rules.
06—Continue