FedEx reaps benefits of tax cuts in 3Q18

FedEx reported operating income down 2.3% y-o-y, to $1.01 billion in the third quarter of its 2018 fiscal year, despite revenues that were up 10.2% to $16.53 billion.

The charts at right and below show FedEx’s results as reported, with net income up 269% to $2.07 billion, thanks in part to a $1.15 billion remeasurement of the company’s tax liability, due to the Tax Cuts and Jobs Act (TCJA). Package and freight yields were unanimously up across the board for FedEx’s Express, Freight and Ground units – as were volumes for each of the units, except Express. Adjusting for the impact of the TNT acquisition (in both years) and lower deferred tax liability in FY18, net income was up 63.2%, and operating income was up slightly.

Turning to the FedEx Express segment, Express segment operating income dropped 23.9% to $424 million. Adjusting for the above-mentioned factors, Express operating income was 16% lower, at $510 million.

Total US domestic package volume fell slightly (down 0.5%), and despite a slight (0.9%) increase in Total International Export packages, overall package volumes were 0.5% lower. For the first quarter in some time, FedEx’s high-yield US Overnight Envelope product also posted a 1.5% drop in average daily volume. Lower volumes however, were offset by higher yields. Composite US Package yields were up 5.4%, and International Export Package yields were up 9.4%.

Turning from the numbers to some larger issues, during a conference call following publication of the quarterly results FedEx EVP & CFO Alan Graf noted the company’s ability to handle this fiscal year’s peak, “Service levels of Express were excellent during peak; however, costs were impacted by lower-than-expected volumes during the first part of December and higher peak -related costs.”

FedEx Chairman and CEO Fred Smith told investors that lower volumes were partially the result of the NotPetya cyberattack. “The reality is that FedEx Express volumes are growing, but the TNT volumes were adversely affected by NotPetya, and we are now going back up to where we would have been had this attack not happening.”

With the NotPetya issues having been mostly resolved, FedEx President & COO, Dave Bronczek said the company was on track to integrate FedEx and TNT during the first half of 2018. “A key element of our acceleration plan was to enable the flow of packages between the legacy TNT and FedEx systems prior to full integration. This allows us to direct volumes to the highest service but the lowest-cost networks. This capability is expected to be in place by May 31st of this year.”

Beyond financials, FedEx also told investors that it had reached an agreement with Boeing to accelerate the delivery of a 777F to FY2019.