FedEx bridges the GAAP

FedEx reported a net loss of $70 million in the fourth quarter of its recently completed 2016 fiscal year.

Or perhaps a net profit of $897 million.

As is increasingly the case, not just with FedEx, but with many companies in the air freight and express industry, the gap between GAAP and non-GAAP financial results is significant. Almost a billion dollars for FedEx in the current quarter. Some of the difference is caused by the usual suspects – one-time charges for aircraft impairment, legal matters, changes in reporting methodology. But these are relatively minor, and the big difference between FedEx’s reported and adjusted results is the mark-to-market pension accounting charge every year in the fourth fiscal quarter. In 4QFY15 that charge was $2.19 billion, whereas in 2016 it was only (only?) $1.50 billion.

The chart at right shows FedEx’s results as reported, but after adjusting for the one-time charges the numbers are much better. Net income up 19.1% y-o-y to $897 million, and operating income up 18.1% to $1.51 billion. Revenue, which is not affected by one-time charges, was up 6.9% in the quarter to $12.98 billion.

Looking specifically at the Express segment, total package volume was up very slightly (0.2%). Interestingly, when asked whether the 6.4% decline in US Deferred packages indicated that customers were shifting business to Ground, FedEx said no. That in fact, “what we saw during the quarter was a shift in mix from deferred actually to overnight from a couple large customers.” Per-package revenue was negatively impacted by lower fuel surcharges. Adjusting for that impact, US Package yield was up 2.3%, and International Package yield was “slightly positive.”

Express segment operating income as reported was up 135% to $757 million. And even after adjusting for the impact of a large one-time aircraft impairment charge in 4QFY15, the year-over-year gain was still a very strong 27%. Commenting on this strong performance FedEx said Express operating results improved due to “yield management efforts, the ongoing benefits from profit improvement program initiatives, and one additional operating day.”

Turning from the numbers, which are readily apparent in the chart, to some larger issues, FedEx executives had some interesting comments during a conference call following publication of the quarterly results.

Of particular interest, was a focus on the current and future impact of e-commerce. As an example of FedEx’s response to this shift in retail buying patterns, Mike Glenn, President and CEO, FedEx Services, pointed to the introduction of FedEx CrossBorder. In his words: “FedEx CrossBorder offers e-commerce technology solutions that enables e-tailers to navigate common CrossBorder selling challenges such as regulatory compliance, secure payment processing, multiple currency pricing, credit card fraud protection, and also offers access to e-commerce shoppers around the world.“

And, of course, there was some discussion of the “threat” from Amazon. Again, quoting Mike Glenn: “Amazon continues to be a valuable customer and they’re among the large e-tailers that we stay in close dialogue with throughout the year to understand their transportation needs as they continue to experience significant growth and generate demand for FedEx transportation. Because of our close relationship with Amazon and close collaboration, we have a very clear and specific understanding of their needs across the FedEx portfolio during FY17, and further we expect them to be a significant customer for many years to come.”

There was also considerable discussion of the acquisition of TNT, which became final late in the quarter. In financial terms, FedEx reiterated its belief that the acquisition would be accretive in 2018. On the operational side, FedEx Express boss Dave Bronczek was extremely optimistic: “They have the best road network in Europe by far. When you layer all of our international businesses around the world coming in to Europe at that efficient productive, low-cost network and you add it to the European network on its own, all of a sudden you start multiplying the benefits in there, they’re very high.”

And finally, on the equipment side, FedEx confirmed that it is indeed the “unidentified customer” that last week ordered six 767-300Fs from Boeing. Fred Smith provided some background, saying that last year’s order for fifty freighters called for ten deliveries per year for five years, with options allowing the company to add up to six more per year. The six just added are the result of FedEx exercising the first of those options. However, as Dave Bronczek pointed out: “We are not adding capacity. And I think that’s an important point. We’re replacing the older planes that have less fuel efficiency and higher maintenance costs with these new more modern better planes.”