FedEx Reaps Benefit from TNT Acquisition in Q1 FY17

TNT Express contributed $1.8 billion of overall revenue during the reporting quarter

f1Giant delivery company FedEx Corp. (NYSE: FDX) announced its Q1 FY17 financial results on September 20th, 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 services. Read more about FedEx’s financial details below.

Q1 FY17 financial highlights

During Q1 FY17, FedEx’s revenue jumped 19.4% Y-o-Y to $14.7 billion, of which TNT Express contributed $1.8 billion of revenue. On an organic basis, FedEx’s revenue grew by a modest 4.7% during the reporting quarter. The results reflect the higher base yields at FedEx Express and FedEx Ground, volume growth at FedEx Ground, and ongoing cost efficiencies at FedEx Express. These gains were partially offset by integration and restructuring costs and intangible asset amortization at TNT Express, and network expansion costs at FedEx Ground.

f2FedEx’s adjusted operating margin remained roughly flat Y-o-Y at 9.3%, but declined to 8.6% on a GAAP basis. Margins were hurt by the inclusion of TNT Express’ results, which clocked a meager 1.9% adjusted operating margin. GAAP net income grew to $715 million in Q1 FY17 from $692 million in the year-ago period, while GAAP diluted EPS jumped to $2.65 from $2.42 during the reporting quarter.

Segmental highlights

f3FedEx Express Segment: During Q1 FY17, this segment’s revenue increased to $6.66 billion from $6.59 billion in the year-ago period, as improved base yields, higher package volume and increased freight pounds more than offset lower fuel surcharges and unfavorable currency exchange rates. U.S. domestic package volume rose 1% due to growth in overnight box and envelope volumes. FedEx International Economy volume grew 1%, while FedEx International Priority volume decreased 1%. Average daily freight pounds jumped 8% due to higher U.S. Postal Service volume. This segment’s results include $22 million of expenses related to the integration of TNT Express.

TNT Express Segment: During Q1 FY17, this segment’s revenue amounted to $1.8 billion, and include $28 million of intangible asset amortization expense and $20 million of integration and Outlook restructuring program costs.

FedEx Ground Segment: During Q1 FY17, this segment’s revenue jumped 12% to $4.29 billion from $3.83 billion in the year-ago period, due to higher volume and revenue per package. FedEx Ground average daily volume grew 10% in the reporting quarter, driven by e-commerce and commercial package growth. FedEx Ground yield grew 2% due to higher base yields partially offset by lower fuel surcharges.

f4FedEx Freight Segment: During Q1 FY17, this segment’s revenue rose 4% to $1.66 billion from $1.60 billion in the year-ago period. Revenue increased as less-than-truckload (LTL) average daily shipment growth of 8% more than offset the impact of lower fuel surcharges and weight per shipment.

Other highlights

Reorganization of top brass: On September 26th, 2016, FedEx announced that T. Michael Glenn, executive vice president, market development and corporate communications, will retire effective December 31st, 2016. Robert B. Carter, currently Chief Information Officer and Co-CEO of FedEx Services with Glenn, will become the CEO of FedEx Services effective January 1st, 2017, and will oversee the administration of common information technology, sales, solutions, marketing and corporate communications for our operating companies.

In addition, David J. Bronczek, CEO of FedEx Express, will become President and Chief Operating Officer of FedEx Corp. from January 1st, 2018. Beginning January 1st, 2017, Bronczek will become the Chairman of the Revenue Management Committee, replacing Glenn.

In addition, Rajesh Subramaniam, executive vice president of marketing and corporate communications, and Donald Colleran, executive vice president of sales, both at FedEx Services, will become members of the Strategic Management Committee effective January 1st, 2017.

TNT acquisition and integration: 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. The integration of TNT Express with FedEx’s operations is proceeding smoothly. During Q1 FY17, FedEx incurred TNT Express integration and Outlook restructuring program costs of $68 million ($45 million, net of tax, or $0.17 per diluted share). In addition, the company incurred $28 million ($21 million, net of tax, or $0.08 per diluted share) of intangible asset amortization expense for TNT Express.

Share repurchases: During Q1 FY17, the company bought back 1.4 million shares of FedEx common stock.

f52017 rate increases: Effective January 2nd, 2017, FedEx Express will hike shipping rates by an average of 3.9%, while FedEx Ground, FedEx Home Delivery and FedEx Freight will rise shipping rates by an average of 4.9%. The FedEx Express and FedEx Ground U.S. domestic dimensional weight divisor will also change from 166 to 139. Effective February 6th, 2017, FedEx Express and FedEx Ground fuel surcharges will be adjusted on a weekly basis compared to the current monthly adjustment.

Guidance for FY17

For FY17, adjusted diluted EPS is projected to be in the range of $10.85 to $11.35 before year-end mark-to-market pension accounting adjustments. This forecast includes TNT Express results and assumes moderate economic growth. Excluding TNT Express related integration and Outlook restructuring program costs and TNT Express intangible asset amortization, FedEx forecasts FY17 diluted EPS of $11.85 to $12.35. The capital spending forecast for FY17, which includes TNT Express, remains at $5.6 billion. FedEx expects TNT Express to start making a positive contribution to FedEx’s financial results by FY18.

Stock Performance

f6FedEx’s stock stood at $173.60, slipping 0.40%, at the close on Tuesday, October 4th, 2016, having vacillated between an intraday high of $175.12 and a low of $172.86 during the session. The stock’s trading volume was at 1,492,142 for the day. The Company’s market cap was at $46.25 billion as of Tuesday’s close.

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