FedEx executives remain bullish about long-term growth prospects despite several negative factors that combined to hit results for the June-August 2017 quarter.
The company’s Q1 financial results benefited from higher base rates in each of its transportation segments but this was more than offset by reduced revenue and increased expenses resulting from the TNT Express cyberattack, TNT Express integration expenses, higher costs at FedEx Ground, a higher tax rate, and the impact from Hurricane Harvey.
The Memphis-based giant posted an adjusted operating income of $1.24 billion for the June-August 2017 quarter, compared to $1.36 billion in the same period the previous year, with the group operating margin falling to 8.1% from 9.1% a year earlier. Adjusted net income decreased to $683 million from $760 million in contrast to revenue which reached $15.3 billion against $14.7 billion.
Commenting on the results, which were released on Wednesday, FedEx Corp. chairman and CEO Frederick W. Smith, said: “The first quarter posed significant operational challenges due to the TNT Express cyberattack and Hurricane Harvey, and I want to thank our team members for their extraordinary dedication and performance.”
He added: “We are confident of our prospects for long-term profitable growth, and we reaffirm our commitment to improve operating income at the FedEx Express segment by $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017.”
Looking at the Q1 results in more detail, FedEx Express' adjusted operating income dropped to $521 million compared to $652 million 12 months ago while revenue increased to $8.65 billion from $8.46 billion.
FedEx noted that revenue growth in the segment was primarily due to higher US domestic package base rates and strong international package growth, partially offset by the estimated $300 million impact from the TNT Express cyberattack. As-reported results include $88 million of TNT Express integration expenses.
Operating income in the FedEx Ground segment grew 3% in the quarter to $626 million due to revenue growth and lower incentive compensation accruals, which offset continued network expansion and staffing costs, higher purchased transportation expenses and increased self-insurance reserves. Revenue increased 8% to $4.64 billion primarily as a result of average daily package volume growth of 4% and higher commercial service base rates.
Q1 operating income at FedEx Freight was up by 30% to $176 million, benefiting from higher LTL revenue per shipment. Higher base rates, increased weight per shipment and higher fuel surcharges lifted revenue by 6% to $1.75 billion. Average daily less-than-truckload (LTL) shipments grew 1% as the company continued its focus on revenue quality.
As for FedEx's guidance, EVP and CFO, Alan B. Graf, told a conference call with analysts that the company was projecting adjusted earnings to be in the $12 to $12.80 per diluted share range for fiscal year 2018 “before year end mark-to-market pension accounting adjustments, TNT Express integration expenses and certain first quarter FedEx trade networks legal charges, driven by continued improvement in base pricing and volume growth.”
He underlined that without the cyberattack on TNT, annual guidance would probably have remained unchanged.
“During the remainder of FY18 we will continue to execute our TNT integration plans. The integration process is complex as it spans over 200 companies and involves combining our pickup and delivery operations at a local level, our global and regional air and ground networks and our extensive operations, customs clearance, sales and back office information technology system,” he explained. Graf said the integration was expected to be completed by the end of fiscal year 2020.
“We expect the aggregate integration program expense, including restructuring charges at TNT over the four years to be approximately $800 million and expect to incur approximately $350 million of these costs during FY18.”
FedEx continued to refine its integration plans, however, particularly in light of the cyberattack and as a result, the timing and amount of integration expenses and capital investments in any future period could change as the company implemented its plans.
“The expectations for FY18 that I’ve outlined are dependent on fuel prices, the pace of growth in the global economy, particularly in U.S. industrial production and the recovery of lost volumes resulting from the TNT Express cyberattack,” Graf added.
