How Cyberattacks Crippled FedEx’s Fiscal 1Q18 Earnings

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Part 6
How Cyberattacks Crippled FedEx’s Fiscal 1Q18 Earnings PART 6 OF 10

Why FedEx’s Fiscal 1Q18 Operating Margins Declined

FedEx’s fiscal 1Q18 operating margins

FedEx’s (FDX) fiscal 1Q18 overall operating margin fell to 7.3% from 8.6% in fiscal 1Q17 on a reported basis. These two margins are comparable due to lack of mark-to-market adjustments related to retirement plans in both the quarters. While revenues rose 4.3% YoY (year-over-year) in 1Q18, operating expenses grew 5.8%.

Why FedEx’s Fiscal 1Q18 Operating Margins Declined

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FedEx’s purchased transportation expenses rose 6.3% on a YoY basis. Fuel expenses shot up 8.2%, whereas maintenance and repair expenses jumped ~13% in fiscal 1Q18.

Segmental margins

FedEx’s Express segment results included the TNT Express financial performance in its fiscal 1Q18 earnings. This segment’s operating margin contracted by 2.2% from 7.2% in fiscal 1Q17 to 5% in fiscal 1Q18.

Notably, the operating income for the segment fell 71% to $433.0 million, compared with $610.0 million in fiscal 1Q17. FedEx anticipated a $300.0-million decline in the Express segment’s operating income due to the cyberattacks on TNT.

The Ground segment reported a fall of 70 basis points in its operating margin in fiscal 1Q18. From 14.2% in 1Q17, the margin fell to 13.5%, but the segment reported a 2.6% rise (or $16.0 million higher) in its operating income of $626.0 million in 1Q18 due to higher revenues and lower incentive compensation.

The Freight segment’s operating margin expanded 1.9% in fiscal 1Q18 to 10%, compared with 8.1% in fiscal 1Q17. This segment’s operating income rose to $176.0 million, up from $135.0 million in fiscal 1Q17, due to higher less-than-truckload revenues per shipment.

Management outlook

Despite the cyberattacks on TNT Express and the impact of Hurricane Harvey, FDX reiterated its objective of a $1.2 billion–$1.5 billion improvement of the Express division’s operating income by fiscal 2020. The company anticipates that the Ground segment’s fiscal 2018 operating income and cash flows to exceed the fiscal 2017 levels, and it intends to focus on raising volumes from small- and medium-sized customers. FDX has also stated that it will work on its mix of residential and commercial packages to improve margins.

ETF investment

The transportation and logistics sector is a subgroup of the industrial sector. You can always consider the iShares US Industrials ETF (IYJ) for exposure to General Electric (GE), Boeing (BA), and 3M (MMM).

Now, let’s examine FedEx’s capital expenditure and outlook for fiscal 2018.


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