Cyberattack lowers Q1 results at FedEx 19 September 2017

FedEx has reported earnings of US$2.19 per diluted share for Q1 ended August 31, compared to earnings of US$2.65 per diluted share a year ago. The impact of the cyberattack on TNT Express and lower-than-expected results at FedEx Ground reduced first quarter earnings and the Company is currently executing plans to mitigate the full-year impact of these issues.

The Q1 performance reflects the estimated negative impact of the June 27 cyberattack affecting TNT Express (US$0.79 per diluted share) and Hurricane Harvey (US$0.02 per diluted share).

Results for the first quarter showed revenue of US$15.3 billion, up 4.1%, as operating income declined 11.1% to US$1.12 billion. The operating margin slipped to 7.3% from 8.6% a year earlier. Net income dropped 16.6% to US$596.0 million.

Financial results during the quarter benefited from higher base rates at each transportation segment, which 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. Results also benefited from lower incentive compensation accruals.

The worldwide operations of TNT Express were significantly affected during Q1 by the June 27 NotPetya cyberattack. Most TNT Express services resumed during the quarter and substantially all TNT Express critical operational systems have been restored. However, TNT Express volume, revenue and profit still remain below previous levels.

For Q1, the FedEx Express segment (which includes TNT Express) reported revenue of US$8.65 billion, up 2.2% as operating income decreased 29.0% to US$433.0 million. The operating margin slipped to 5.0% from 7.2%. Revenue grew primarily due to higher US domestic package base rates and strong international package growth, partially offset by the impact from the TNT Express cyberattack. Operating results declined due to an estimated US$300.0 million impact from the cyberattack, which was partially offset by the benefits from revenue growth, lower incentive compensation accruals and ongoing cost management initiatives. As-reported results include US$88.0 million of TNT Express integration expenses.

For Q1, the FedEx Ground segment reported revenue of US$4.64 billion, up 8.0% as operating income increased 3.0% to US$626.0 million. The operating margin slipped to 13.5% from 14.2%. Revenue increased primarily due to average daily package volume growth of 4.0% and higher commercial service base rates. Operating income grew 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.

For Q1, the FedEx Freight segment reported revenue of US$1.75 billion, up 6.0% as operating income increased 30.0% to US$176.0 million. The operating margin climbed to 10.0% from 8.1%. Revenue increased primarily due to higher base rates, increased weight per shipment and higher fuel surcharges. Average daily less-than-truckload (LTL) shipments grew 1.0% as the Company continues its focus on revenue quality. Operating results improved primarily due to the benefit from higher LTL revenue per shipment.

FedEx is unable to forecast the fiscal 2018 year-end mark-to-market (MTM) pension accounting adjustments. As a result, the company is unable to provide fiscal 2018 earnings guidance on a GAAP basis. The Company stated that it remains confident of prospects for long-term profitable growth, and reaffirmed a commitment to improve operating income at the FedEx Express segment by US$1.2 billion to US$1.5 billion in fiscal 2020 versus fiscal 2017.

The Company is lowering its fiscal 2018 forecast due to the estimated full-year impacts of the TNT Express cyberattack. Before year-end MTM pension accounting adjustments, earnings are now projected to be US$11.05 to US$11.85 per diluted share for fiscal 2018. The earnings forecast before year-end MTM pension accounting adjustments and excluding expenses related to TNT Express integration and certain first quarter FedEx Trade Networks legal matters is now US$12.00 to US$12.80 per diluted share for fiscal 2018. These forecasts assume moderate economic growth and continued recovery from the cyberattack. The capital spending forecast for fiscal 2018 remains US$5.9 billion.