FedEx Plunges to Loss on TNT Acquisition

Delivery giant to focus on TNT Express integration with increased CAPEX in FY17

Source: Company's Website
Source: Company’s Website

Giant delivery company FedEx Corp. (NYSE: FDX) announced its Q4 FY16 and full year FY16 financial results on June 21st, 2016. The Memphis, Tennessee-based Company is the world’s third-largest delivery company after United Parcel Service Inc. (NYSE: UPS) and Deutsche Post AG. FedEx provides transportation, e-commerce, and business services in the U.S. and international markets through four main segments. The Company’s FedEx Express segment provides shipping services for delivering packages and freight, and ocean and air freight forwarding services. Its FedEx Ground segment provides ground package delivery services. The company’s FedEx Freight segment offers less-than-truckload freight services, as well as freight-shipping services. As of May 31st, 2015, this segment operated approximately 65,000 vehicles and trailers from a network of approximately 370 service centers. The FedEx Services segment provides sales, marketing, information technology, communications, customer service, and other back-office support services. Read more about the financial details about FedEx below.

Q4 FY16 financial performance

In Q4 FY16, FedEx’s overall revenue grew 7.4% to $13 billion, up from $12.1 billion in the year-ago quarter and beating estimates of $12.77 billion. The FedEx Express segment remained the Company’s biggest growth driver, accounting for a major part of the revenue during the quarter under review. The Q4 FY16 results were boosted by two extra operating days, e-commerce growth, and lower fuel prices. However, these increases were partially offset by lower revenue from the FedEx Freight segment and unfavorable currency exchange rates.

The FedEx Express segment was the largest contributor to profit growth. While revenue remained almost flat, the segment’s adjusted operating margin improved to 11.3% from 8.9% a year earlier. As a result, the segment’s adjusted operating income jumped to $757 million in Q4 FY16 from $598 million in the year-ago quarter.

Source: Company's Website
Source: Company’s Website

The FedEx Ground segment posted a 20% jump in revenue in Q4 FY16, mainly due to an accounting change. This increase was offset by a1.6-percentage-point decline in operating margin. Operating income grew 9% to $656 million in Q4 FY16 from $603 million in the year-ago quarter.

Finally, the FedEx Freight segment’s operating income remained flat at $137 million in Q4 FY16. This was mainly because of a slight revenue increase that was offset by a 0.2-percentage-point decline in operating margins.

It is noteworthy that FedEx improved its overall operating margin by 2.4 percentage points to 11.7% during Q4 FY16. Despite the increase in revenues and margins, FedEx swung to a net loss of $0.26 per share for Q4 FY16 on account of a $1.5 billion pre-tax charge related to changes in the Company’s pension liability and the TNT acquisition. However, on an adjusted basis, FedEx’s earnings per share soared 24% to $3.30 for Q4, slightly more than estimates of $3.28.F3

Full year FY16 financial performance

For the full year FY16, revenue rose to $50.4 billion from $47.5 billion in the previous year. FedEx’s adjusted operating margins improved by a full percentage point. Additionally, operating income benefited from profit improvement program initiatives at FedEx Express, e-commerce growth, lower fuel prices, and two additional operating days. These increases were partially offset by a revenue decline at the FedEx Freight segment. Costs related to network expansion and self-insurance expenses at FedEx Ground as well as higher incentive compensation accruals also weighed in on the full-year results. Capital spending for FY16 was at $4.8 billion. Despite the higher costs, FedEx’s adjusted EPS jumped 21% to $10.80 in FY16, compared to $8.95 in the previous year.

Acquisition of TNT Express

FedEx finalized its acquisition of European delivery service TNT Express in a deal worth close to $5 billion on May 25th, 2016. The merger, which combines the best resources of both companies – the world’s largest air express network and a comprehensive European road network, will significantly improve FedEx’s positioning in Europe.

Share repurchases

F4During Q4 FY16, FedEx acquired 3.8 million shares of its common stock at an average price of $156.21. For full year FY16, FedEx acquired 18.2 million shares of its common stock at an average price of $149.35 for a total of $2.7 billion.

Guidance for FY17

During FY17, FedEx expects adjusted EPS to range between $11.75 and $12.25, excluding the results of the TNT Express business. FedEx will focus on integrating TNT Express with its operations in FY17. Excluding TNT, FedEx plans to increase CAPEX to $5.1 billion in FY17. As a result, the Company expects free cash flow is likely to turn negative in FY17.

Stock Performance

F5FedEx’s stock stood at $163.95 at the close on Tuesday, June 21st, 2016, having reached an intraday high of $164.78 and a low of $163.21 during the session. The stock’s trading volume was at 1,909,122 for the day. The Company’s market cap was at $43.91 billion as of Tuesday’s close.

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