FedEx Corporation — Q1 FY2022 Form 10-Q
Reporting period: Three months ended August 31, 2021; comparisons are with the three months ended August 31, 2020. FedEx provides express, ground, freight, and related transportation and business services. Dollar amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $22,003 | $19,321 | +14% |
| Operating income | $1,398 | $1,590 | -12% |
| Operating margin | 6.4% | 8.2% | -180 basis points |
| Net income | $1,112 | $1,245 | -11% |
| Diluted EPS | $4.09 | $4.72 | -13% |
| Cash from operations | $2,084 | $2,651 | -$567 |
| Capital expenditures | $1,570 | $1,424 | +10% |
Revenue growth reflected higher volumes, improved yields, and increased fuel surcharges. Profitability was pressured by labor availability and cost challenges, network inefficiencies, higher purchased transportation costs, and increased healthcare utilization. Operating cash flow less capital expenditures was approximately $514 million, down from $1,227 million a year earlier.
Segment performance
| Segment | Revenue | Operating income | Operating margin | Year-over-year highlights |
|---|---|---|---|---|
| FedEx Express | $10,966 | $567 | 5.2% | Revenue +14%; operating income -20%; margin down 220 basis points |
| FedEx Ground | $7,677 | $671 | 8.7% | Revenue +9%; operating income -20%; margin down 310 basis points |
| FedEx Freight | $2,251 | $390 | 17.3% | Revenue +23%; operating income +42%; margin up 230 basis points |
Express and Ground results were particularly affected by constrained labor and network inefficiencies. Freight benefited from shipment growth, higher revenue per shipment, and revenue-quality initiatives, despite higher labor and purchased-transportation costs.
Financial position and liquidity
- Cash and cash equivalents were $6.853 billion at August 31, 2021, versus $7.087 billion at May 31, 2021.
- Long-term debt, including current maturities, totaled approximately $20.679 billion on the balance sheet. The company reported a 3.5% annualized weighted-average interest rate on long-term debt.
- FedEx reported $3.5 billion of available liquidity under its credit agreements and no commercial paper outstanding. Its debt-to-adjusted-EBITDA covenant ratio was 1.98x against a maximum of 3.5x; the company reported compliance.
- Current assets were $19.546 billion and current liabilities were $12.910 billion at quarter-end.
- The company repurchased 1.9 million shares for $549 million and paid $200 million in dividends during the quarter. The board declared a $0.75-per-share quarterly dividend payable October 1, 2021.
Material changes and unusual items
- Operating expenses rose 16%, faster than revenue growth of 14%. Fuel expense increased 79%, while salaries and employee benefits rose 13% and purchased transportation increased 14%.
- Q1 FY2022 included $67 million of business realignment costs, or $0.19 per diluted share after tax, related to the planned European workforce reduction. FedEx also recorded $29 million of TNT Express integration expenses.
- The prior-year Express comparison included an approximately $65 million pre-tax benefit from temporary CARES Act relief on aviation excise taxes; that relief expired in December 2020.
- Operating cash flow fell year over year, which management attributed principally to the timing of variable incentive compensation payments and lower income and other tax liabilities, partly offset by lower receivables.
- FedEx recorded a cumulative $215 million tax benefit through the quarter based on its interpretation of the transition-tax rules. The company is challenging a related regulation in court and could have to reverse the benefit if unsuccessful.
- The interim financial statements received an independent accountant’s review; the accountant stated it was not aware of material modifications needed for GAAP conformity. This review was substantially less extensive than an audit.
Outlook, commentary, and risks
Management anticipated yield and volume growth to support higher revenue and operating income across the transportation segments in FY2022, but expected labor-related costs and network inefficiencies to continue pressuring profit growth. It expected labor challenges to begin easing in the second half of FY2022, while noting forecasts depended on labor availability, fuel-price assumptions, economic conditions, and the pandemic’s course.
- Management expected FY2022 capital expenditures of approximately $7.2 billion, including aircraft modernization, capacity, productivity, and safety investments. It expected cash from operations to fund remaining-year capital expenditures.
- The European workforce plan affects an estimated 5,500–6,300 employees. Expected pre-tax costs through FY2023 are $300–$575 million; expected annualized savings are $275–$350 million beginning FY2024. Timing and amounts depend on local consultation and negotiated plans.
- FedEx expected approximately $120 million of additional TNT Express integration expenses in the remainder of FY2022 and about $1.8 billion of aggregate program expenses through completion of the physical network integration, expected in 2022.
- Risks highlighted include labor shortages and higher contractor costs, COVID-19 and supply-chain disruption, fuel prices, demand and e-commerce trends, trade and regulatory changes, competition, service-provider driver classification litigation, and execution of integration and cost-saving plans.
- FedEx expected to make $500 million in voluntary contributions to its U.S. pension plans during the remainder of FY2022. It stated no required contributions were expected for the year.
- The pilots’ collective bargaining agreement was scheduled to become amendable in November 2021; successor negotiations had begun in May 2021.
Most important facts for investors to verify
- Whether labor availability improves as management expected, and whether operating margins recover at Express and Ground.
- Whether pricing, yield, and fuel surcharges continue to offset higher fuel, labor, and purchased-transportation costs.
- Actual European workforce-reduction and TNT integration costs, execution timing, and realized savings against management’s estimates.
- Whether cash generation can support the planned $7.2 billion of FY2022 capital spending, dividends, repurchases, and pension contributions.
- The outcome and potential financial effect of the tax-benefit litigation, along with developments in driver-classification and other legal matters.