FedEx Corporation — Form 10-Q Summary
Business context and reporting period
FedEx reported its fiscal first quarter ended August 31, 2022, compared with the three months ended August 31, 2021. Its principal transportation businesses are FedEx Express, FedEx Ground, and FedEx Freight. Figures below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $23,242 | $22,003 | +6% |
| Operating income | $1,191 | $1,398 | -15% |
| Operating margin | 5.1% | 6.4% | -130 basis points |
| Net income | $875 | $1,112 | -21% |
| Diluted EPS | $3.33 | $4.09 | -19% |
| Cash from operations | $1,607 | $2,084 | -$477 |
| Capital expenditures | $1,284 | $1,570 | -18% |
- Revenue increased mainly on higher yields, including fuel surcharges, despite weaker shipment volumes. Fuel expense rose 81% to $1,822; operating expenses increased 7%, faster than revenue.
- Segment operating income: Express $174 million, down 69% (margin 1.6%, versus 5.2%); Ground $694 million, up 3% (margin 8.5%, versus 8.7%); Freight $651 million, up 67% (margin 23.9%, versus 17.3%).
- Cash and cash equivalents were $6,850 million at August 31, 2022. Cash declined $47 million during the quarter. Operating cash flow less capital expenditures was approximately $323 million, compared with $514 million a year earlier.
- Balance-sheet debt was $20,057 million, including current maturities; long-term debt excluding finance leases was reported at $19.5 billion. The debt-to-adjusted-EBITDA covenant ratio was 1.83 to 1.0, against a maximum of 3.5 to 1.0. FedEx reported $3.5 billion of available liquidity under its credit agreements and no commercial paper outstanding.
- Dividends declared were $2.30 per share, versus $1.50 a year earlier. No shares were repurchased in the quarter; $4.1 billion remained available under the repurchase authorization.
Material changes and management commentary
Management said global volume softness accelerated in the final weeks of the quarter as economic conditions weakened. Inflation, elevated fuel prices, labor and purchased-transportation costs, supply-chain disruption, and service challenges at Express weighed on results. Cost actions lagged the decline in volumes. Higher yields and fuel surcharges supported revenue and partly offset cost and volume pressures.
Express average daily package volume fell 11%, Ground volume fell 3%, and Freight average daily shipments fell 5%. Freight’s yield-driven revenue growth and margin expansion contrasted with the pronounced Express operating-income decline.
Outlook, risks, and unusual items
- Management expected fiscal 2023 revenue growth from higher yields, partly offset by lower volumes, particularly at Express. Lower volumes and higher operating expenses were expected to pressure operating income. The filing provides no specific full-year revenue, operating-income, or EPS guidance.
- FedEx planned capacity and cost reductions, including fewer Express flights and temporarily parked aircraft, reduced Ground Sunday operations and select sort closures, and reductions in overhead, vendor use, and certain projects.
- A newly announced optimization program includes consolidating sortation facilities and equipment, reducing pickup and delivery routes, and optimizing the linehaul network. Expected pretax costs are approximately $2.0 billion through 2025. Management also expected to reduce FY2023 capital expenditures by $500 million to approximately $6.3 billion.
- The separate Europe workforce-reduction plan affects approximately 5,000 employees. Expected pretax costs are approximately $420 million through 2023, with annualized savings of $275 million to $350 million beginning in 2024; timing and savings depend on consultations and negotiated plans.
- FedEx paid approximately $370 million in July 2022 to resolve a vehicle-accident judgment. Insurers funded the base judgment above FedEx Ground’s retention and deductible; FedEx was pursuing approximately $210 million of pre- and post-judgment interest from insurers.
- FedEx had recorded a cumulative $223 million tax benefit based on its position in litigation challenging a tax regulation; if unsuccessful, it may have to reverse that benefit. The IRS was examining tax years 2016–2019.
- Other risks include weakening global trade and demand, inflation and fuel volatility, geopolitical conflict, ongoing COVID-related disruption, labor and purchased-transportation availability and costs, litigation, and execution risk on cost-saving plans. Pilot collective bargaining negotiations were ongoing.
Important facts for investors to verify
- Whether volume declines, especially at Express, continue and whether yield increases can offset the impact on revenue and margins.
- Progress and realized savings from the $2.0 billion optimization program and the Europe workforce plan, including implementation costs and timing.
- Achievement of the approximately $6.3 billion FY2023 capital expenditure outlook and planned share repurchases.
- Cash-flow and working-capital trends, including pension contributions and the ability to maintain liquidity amid lower earnings.
- Developments in the insurer reimbursement dispute, tax litigation, IRS examination, and labor negotiations.
The interim financial statements were reviewed by Ernst & Young LLP; the review was not an audit. Management stated that disclosure controls were effective as of August 31, 2022.