FedEx Express' first quarter operating income was reduced by approximately $300 million due to the cyberattack on subsidiary TNT Express earlier this summer but the company reaffirmed its commitment to improve the express unit's operating income by $1.2-$1.5 billion by the 2020 financial year.
FedEx announced at the end of June that TNT had been significantly affected by the global ransomware virus, Petya, which had spread through a Ukrainian tax software product.
"The net impact of the cyberattack on [FedEx Express'] Q1 operating income was predominantly lost revenue, much of which dropped to the bottom line due to the fixed cost nature of the TNT network. Also we incurred incremental third-party costs related to the recovery effort," FedEx Corp. EVP and CFO, Alan Graf, explained at a conference call with analysts held yesterday.
"Reduced international earnings from the cyberattack also increased our effective tax rate for the quarter. Based on all these factors, we analytically determine the net impact on operating income to be approximately $300 million.”
Graf revealed that TNT's intra-European domestic businesses had recovered more quickly than others from the cyberattack, while the impact from lost revenues was and continued to be more heavily weighted towards higher-yielding international shipments, resulting in a more pronounced impact on profits.
"It is taking longer to restore our international business due to the complexity of clearance systems and business processes. We are now focused on finalizing the restoration of certain key customer specific, specialized solutions and systems in time for the peak season," he added.
Graf pointed out that incremental expenses were associated with IT infrastructure enhancements, additional staffing and over time to recover volumes, and additional provisions for service failures. They were partially offset by lower purchase transportation expenses due to lower volumes.
“While significant progress has been made on restoration of our operations and IT systems, TNT revenues, volumes and profits remained below pre-attack levels. As we look ahead to the remainder of FY18, we expect to experience ongoing but diminishing financial impacts from the cyberattack in the form of lower revenues and higher investments to further improve and strengthen our IT infrastructure.”
Also present at the conference call was FedEx Corp.EVP and CIO, Rob Carter, who noted that the cyberattack had been “completely contained to TNT” and had not impacted any FedEx systems or those of customers. In addition, he underlined that there had been no loss of customer data to third parties.
He revealed that at the time of the cyberattack, work was already underway to replace TNT legacy systems with FedEx technology.
“In the wake of the attack these efforts have been accelerated. We’ve hardened all of TNT servers and workstations, introduced additional network security controls, rebuilt active directory and have started enhancing the segmentation of the TNT network. The recovery and restorations of TNT Express’ global operations and IT systems has included every facility, hub and depot.”
He said that the many systems that were not impacted by the virus had also been fortified and rebuilt to ensure additional focus on security. “A diligent and purposeful approach” across a global network reaching more than 200 countries had added time to the recovery.
FedEx Corp. President and COO, Dave Bronczek, told the conference call that immediately following the attack, FedEx had implemented contingency plans to minimize the impact to customers, including transporting TNT Express packages within the FedEx Express network.
“Key assets in the recovery have been the FedEx air network and the TNT European road network which have allowed us to retain a significant portion of our TNT customer base. These networks are the cornerstones for growing our business and will be leveraged as we return our volumes to expected levels. I’m very pleased to announce that our core shipping services are back in place, with all TNT Express depots, hubs and operating facilities.”
With service levels and operations returning to near normal capabilities, Bronczek said the focus had now shifted to finalizing the restoration of certain key customer specific solutions and their systems.
“We expect these IT capabilities to be restored by the end of this month, enabling 'business as usual' operations with full capabilities across all customer segments, just in time for peak shipping.”
Planning and execution work on the integration of FedEx Express and TNT had continued in the first quarter despite the cyberattack, he added.
“Country integrations continued with executions launched in key markets around the world such as the UK, China and Poland.”
