FedEx Corp. : Reports Fourth Quarter and Full-Year Earnings

FedEx Corp. (NYSE: FDX) today reported the following consolidated results for the fourth quarter ended May 31 (adjusted measures exclude the items listed below for the applicable fiscal year):

This year’s and last year’s quarterly and full-year consolidated results have been adjusted for:

“I am proud of the financial and operational results FedEx delivered in fiscal 2018 and extend well-deserved congratulations to our more than 425,000 team members worldwide for their continued dedication to the Purple Promise, which simply states, ‘I will make every FedEx experience outstanding,’” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer. “It was a year of opportunities and challenges—anticipated and unexpected—and FedEx emerged more competitive than ever. In all my years at FedEx, I have never been so optimistic and so sure of our strategy and our ability to deliver an exciting future.”

Fourth quarter operating results benefited from higher base rates, increased volume and the favorable net impact of fuel at each transportation segment. Accelerated wage increases for certain hourly employees partially offset these benefits.

Fourth quarter net results include a $255 million net tax benefit ($0.94 per diluted share) from corporate structuring transactions as part of the ongoing integration of FedEx Express and TNT Express and a $133 million tax benefit ($0.49 per diluted share) from foreign tax credits associated with distributions to the U.S. from the company’s offshore operations.

Full-Year Results

FedEx Corp. reported the following consolidated results for the full year (adjusted measures exclude the items listed above for the applicable fiscal year):

Full-year net results include tax benefits of $2.1 billion ($7.71 per diluted share) attributable to:

• A $1.6 billion benefit from the Tax Cuts and Jobs Act (TCJA), which has three primary components:
  
  
  • A provisional benefit of $1.15 billion ($4.22 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 the third quarter and deductible against the company’s prior year taxes at 35%; and
  • A benefit of approximately $265 million ($0.97 per diluted share) attributable to the phase-in of the reduced tax rate applied to the company’s earnings.
• A net benefit of $255 million ($0.94 per diluted share) from corporate structuring transactions as part of the ongoing integration of FedEx Express and TNT Express; and
• A benefit of $225 million ($0.83 per diluted share) from foreign tax credits associated with distributions to the U.S. from the company’s offshore operations.

Capital spending for fiscal 2018 was $5.7 billion.

For the year, the company repurchased 4.3 million shares of FedEx common stock for approximately $1 billion.

Outlook

FedEx is unable to forecast the fiscal 2019 year-end MTM retirement plan accounting adjustments. As a result, the company is unable to provide a fiscal 2019 earnings per share or effective tax rate (ETR) outlook on a GAAP basis.

New pension accounting rules will be in effect starting in fiscal 2019 that will impact operating margin but not net income or earnings per share. For reference, comparable measures for fiscal 2018 that have been recast to reflect application of the new rules are provided below.

For fiscal 2019, FedEx is targeting:

• Revenue growth of approximately 9%;
• Operating margin of approximately 7.9% (compared to a recast fiscal 2018 operating margin of 6.5%);
• Operating margin of approximately 8.5% excluding TNT Express integration expenses (compared to a recast fiscal 2018 operating margin of 7.8% excluding TNT Express integration expenses and FedEx Supply Chain goodwill and other asset impairment charges);
• Earnings of $15.65 to $16.25 per diluted share before year-end MTM retirement plan accounting adjustments;
• Earnings of $17.00 to $17.60 per diluted share before year-end MTM retirement plan accounting adjustments and excluding TNT Express integration expenses;
• ETR of approximately 25% prior to year-end MTM retirement plan accounting adjustments, which is higher than the fiscal 2018 ETR due to tax benefits from transactions and TCJA impacts that will not reoccur during fiscal 2019; and
• Capital spending of $5.6 billion.

These forecasts assume moderate economic growth. The company’s ETR and earnings per share outlook is based on current TCJA interpretative guidance and is subject to change based on future guidance.

“Our fiscal 2019 results will benefit from our continued focus on revenue quality as well as from synergy realization as we make progress in combining TNT Express with FedEx Express,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “We expect improved earnings, cash flows and returns this fiscal year and remain committed to improving operating income at the FedEx Express segment by $1.2 to $1.5 billion in fiscal 2020 versus fiscal 2017.”

Aircraft Fleet Modernization

FedEx has ordered 12 incremental Boeing 777F aircraft and 12 incremental Boeing 767F aircraft as the next phase of the company’s ongoing fleet modernization program. The 777Fs will be delivered between fiscal 2021 and 2025. The 767Fs will be delivered between fiscal 2020 and 2022. These aircraft will be used to continue to improve the efficiency and reliability of the FedEx Express aircraft fleet and allow the company to take advantage of the capital expensing benefits of the TCJA.

FedEx Trade Networks Realignment

Effective in the fourth fiscal quarter, the company realigned the specialty services companies FedEx Custom Critical and FedEx Supply Chain under the management of FedEx Trade Networks. Prior period results for the transportation segments have been recast to reflect the new alignment. The FedEx Trade Networks operating segment results are included in “Corporate, other and eliminations.”

FedEx Express Segment

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

Revenue increased 9% due to higher yields across the global portfolio of package and freight services, as well as higher freight pounds. Operating results improved due to higher revenue, an $85 million gain on the sale of a non-core business of TNT Express and the favorable net impact of fuel and currency exchange. Results were partially offset by increased salaries and employee benefits. As-reported results include $110 million of TNT Express integration expenses.

FedEx Ground Segment

For the fourth quarter, the FedEx Ground segment reported:

Strong revenue growth was driven by average daily package volume growth of 6% and higher base rates. Operating results improved due to the benefits from revenue growth and ongoing cost management, partially offset by higher purchased transportation rates and increased staffing and network expansion costs.

FedEx Freight Segment

For the fourth quarter, the FedEx Freight segment reported:

Revenue increased due to revenue per shipment growth of 8% and average daily shipment growth of 8%. Operating results improved primarily due to higher 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 $65 billion, the company offers integrated business solutions 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 425,000 team members to remain 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 fourth 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. EDT on June 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, 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, future guidance and interpretations relating to the TCJA and our ability to realize the benefits of certain provisions of the TCJA, 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.

Fourth Quarter and Full-Year 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 fourth quarter and adjusted full-year fiscal 2018 and 2017 consolidated operating income and margin, net income and diluted earnings per share, and adjusted fourth quarter fiscal 2018 and 2017 FedEx Express segment operating income and margin. These financial measures have been adjusted to exclude the impact of the following items (as applicable):

• FedEx Supply Chain goodwill and other asset impairment charges incurred in fiscal 2018;
• TNT Express integration expenses incurred in fiscal 2018 and 2017;
• Fiscal 2018 and 2017 charges related to certain pending U.S. Customs and Border Protection matters involving FedEx Trade Networks;
• Fiscal 2018 and 2017 year-end MTM retirement plan accounting and other pension adjustments for our defined benefit pension and other postretirement plans;
• Net U.S. deferred tax liability remeasurement during fiscal 2018; and
• Expenses incurred in fiscal 2017 in connection with the settlement of (and certain expected losses relating to) independent contractor litigation matters involving FedEx Ground.

The goodwill and other asset impairment charges at FedEx Supply Chain, litigation- and legal-related matters and MTM retirement plan accounting and other pension adjustments are excluded from our fourth quarter and full-year fiscal 2018 and 2017 consolidated non-GAAP financial measures, as applicable, because they are unrelated to our core operating performance and to assist investors with assessing trends in our underlying businesses.

We have incurred and expect to incur significant expenses over the next few years in connection with our integration of TNT Express. We have adjusted our fourth quarter and full-year fiscal 2018 and 2017 consolidated financial measures and the FedEx Express segment fourth 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 predominantly 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.

The provisional benefit from the remeasurement of our net U.S. deferred tax liability as of the date of the enactment of the TCJA is excluded from our full-year fiscal 2018 consolidated non-GAAP financial measures because it results from the non-recurring impact of a significant change in the U.S. federal statutory tax rate due to the enactment of the TCJA on our overall deferred tax position, which accumulated over many reporting periods prior to enactment. The adjustment to our full-year fiscal 2018 consolidated financial measures related to the TCJA includes only this transitional impact.

We have not included the benefit from our incremental pension contribution made in February 2018 and deductible against our prior year taxes at 35% in the adjustment because the contribution was made in connection with our ongoing pension management strategy. Additionally, we have not included the benefit attributable to the phase-in of the reduced tax rate applied to our fiscal 2018 earnings in the adjustment because the impact of the reduced tax rate on current year earnings will be ongoing. Finally, we have not included the provisional benefit related to the one-time transition tax on previously deferred foreign earnings in the adjustment because the amount of this provisional benefit at the end of fiscal 2018 was not material to our overall tax position. The provisional benefits related to the remeasurement of our net U.S. deferred tax liability and the one-time transition tax on previously deferred foreign earnings are estimates subject to adjustment during a 12-month measurement period ending December 22, 2018.

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.

Recast Fiscal 2018 Operating Margin and Fiscal 2019 Operating Margin, Earnings Per Share and ETR Forecasts

Our recast fiscal 2018 operating margin (to reflect application of the new pension accounting rules that will be in effect starting in fiscal 2019) that excludes fiscal 2018 TNT Express integration expenses and FedEx Supply Chain goodwill and other asset impairment charges is a non-GAAP financial measure because of these exclusions. Our fiscal 2019 operating margin forecast is a non-GAAP financial measure because it excludes estimated fiscal 2019 TNT Express integration expenses. Our fiscal 2019 earnings per share (EPS) forecast is a non-GAAP financial measure because it excludes the fiscal 2019 year-end MTM retirement plan accounting adjustments and estimated fiscal 2019 TNT Express integration expenses. Our fiscal 2019 ETR forecast is a non-GAAP financial measure because it excludes the fiscal 2019 year-end MTM retirement plan accounting adjustments.

We have provided these non-GAAP financial measures for the same reasons that were outlined above for historical non-GAAP measures. These items are excluded from our recast fiscal 2018 operating margin and our fiscal 2019 operating margin, EPS and ETR forecasts, as applicable, for the same reasons described above for historical non-GAAP measures.

We are unable to predict the amount of the year-end MTM retirement plan 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 2019 EPS and ETR forecasts. For this reason, a full reconciliation of our fiscal 2019 EPS and ETR forecasts to the most directly comparable GAAP measures is impracticable. It is reasonably possible, however, that our fiscal 2019 year-end MTM retirement plan accounting adjustments could have a material impact on our fiscal 2019 consolidated financial results and ETR.

As discussed above, the provisional benefit from the remeasurement of our net U.S. deferred tax liability included in our fiscal 2018 earnings is an estimate subject to adjustment during a 12-month measurement period ending in fiscal 2019. Any adjustment to this provisional benefit will be excluded from our fiscal 2019 non-GAAP earning measures, which is consistent with our presentation of the effects of the initial provisional benefit in our fiscal 2018 non-GAAP earnings measures.

The table included below titled “Fiscal 2019 Earnings Per Share Outlook” outlines the impacts of the items that are excluded from our fiscal 2019 EPS forecast, other than the year-end MTM retirement plan accounting adjustments. Additionally, the tables below titled “Fiscal 2018 Recast Operating Margin for Pension Accounting Change” and “Fiscal 2019 Operating Margin Forecast” present reconciliations of our presented non-GAAP measures to the most directly comparable GAAP measures.

Fourth Quarter Fiscal 2018

Full-Year Fiscal 2018

Fourth Quarter Fiscal 2017

Full-Year Fiscal 2017

Fiscal 2018 Recast Operating Margin for Pension Accounting Change

Fiscal 2019 Operating Margin Forecast

Fiscal 2019 Earnings Per Share Outlook

Notes:

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