FedEx Corporation — Form 10-Q Summary
Business context and reporting period
FedEx provides express, ground and less-than-truckload freight transportation, alongside related services. This report covers the fiscal second quarter and six months ended November 30, 2021; comparisons are with the corresponding periods in 2020. Dollar figures below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Three months ended Nov. 30, 2021 | Six months ended Nov. 30, 2021 |
|---|---|---|
| Revenue | $23,474 (+14%) | $45,477 (+14%) |
| Operating income | $1,597 (+9%) | $2,995 (-2%) |
| Operating margin | 6.8% (7.1% prior year) | 6.6% (7.7% prior year) |
| Net income | $1,044 (-15%) | $2,156 (-13%) |
| Diluted EPS | $3.88 (-15%) | $7.97 (-14%) |
Quarterly revenue growth reflected higher yields, fuel surcharges and volume. Operating expenses rose 15% in both periods; major pressures included salaries and benefits, purchased transportation, and fuel. Fuel expense rose 83% in the quarter and 81% in the half, though higher surcharges moderately benefited operating income. The prior-year comparisons also include a $191 million CARES Act tax benefit, while current-year results include a $260 million noncash retirement-plan mark-to-market loss in the quarter and first half.
Segment operating income for the quarter was $949 at Express (+5%), $481 at Ground (-13%) and $334 at Freight (+33%). For the first half it was $1,516 at Express (-6%), $1,152 at Ground (-17%) and $724 at Freight (+38%). Ground’s margin declined to 5.8% from 7.5% in the quarter; Freight’s rose to 14.7% from 13.0%.
For the six months, operating cash flow was $4,082, capital expenditures were $3,143, and cash flow after capital expenditures was $939 (calculated as operating cash flow less capital expenditures). Cash declined to $6,833 at November 30 from $7,087 at May 31. Cash used in financing was $1,109, including $748 of share repurchases and $400 of dividends paid.
Long-term debt, including current maturities, was approximately $20.5 billion at November 30; operating lease liabilities totaled $16.3 billion on the balance sheet. FedEx reported $3.5 billion of available liquidity under its credit agreements, no commercial paper outstanding, and a debt-to-adjusted-EBITDA ratio of 1.93x against a 3.5x covenant limit. Management said available cash, operating cash flow and financing sources should meet expected liquidity needs.
Material changes, outlook and risks
- Management cited constrained labor availability, wage inflation, network inefficiencies and higher purchased-transportation costs as significant pressures. The filing identifies labor challenges as a material adverse effect on business and results.
- Management expected revenue and operating profit to improve across transportation segments in fiscal 2022, supported by yield growth and U.S. domestic and international export volumes. It expected labor-related cost pressure to persist in the second half, with some easing as labor conditions improve. The outlook depends on assumptions including no further material deterioration in the global economy or pandemic-related shutdowns, improving labor availability, and current fuel-price expectations.
- The European workforce-reduction plan is expected to affect 5,500–6,300 employees. Expected pretax costs are $300–$575 million through fiscal 2023; annualized savings of $275–$350 million are expected beginning in fiscal 2024. Both timing and amounts depend on consultation processes and negotiated plans.
- FedEx expected approximately $85 million of additional TNT integration expenses in the remainder of fiscal 2022 and aggregate program expenses of about $1.8 billion through completion of physical network integration. The final phase of Express/TNT international air-network interoperability was expected in early calendar 2022.
- Fiscal 2022 capital expenditures were projected at approximately $7.2 billion. The company also expected $250 million of voluntary U.S. pension contributions in the second half of the fiscal year.
- In December 2021, after the reporting date, FedEx authorized a new $5 billion share-repurchase program, including a $1.5 billion accelerated share repurchase. It also entered a Delhivery alliance involving a $100 million investment and sale of certain India domestic-business assets; the transaction was expected to be recorded in the third quarter and not materially affect fiscal 2022 results.
- Other matters include a $215 million cumulative tax benefit tied to a contested tax interpretation, which may need to be reversed if FedEx loses its lawsuit. The IRS was examining tax years 2016–2019. FedEx said it did not expect material losses from the disclosed service-provider driver lawsuits or other pending legal proceedings.
- FedEx Express pilots’ collective bargaining agreement became amendable in November 2021, and successor negotiations were ongoing. Broader risks include pandemic and economic uncertainty, fuel-price movements, labor and purchased-transportation availability and cost, supply-chain disruption, competition, regulation, litigation, and execution of integration and restructuring plans.
Most important facts for investors to verify
- Whether labor availability, service levels and purchased-transportation costs improve as management anticipated, and the resulting effect on Ground and consolidated margins.
- Whether yield increases and fuel surcharges continue to offset fuel and operating-cost inflation, and how volumes and service mix develop.
- Actual costs, timing and savings from the European workforce reduction and TNT integration, including progress on network interoperability.
- Delivery of projected fiscal 2022 capital spending, cash generation, pension contributions and the new repurchase program while maintaining liquidity and covenant headroom.
- Outcome and potential financial effect of the tax litigation and IRS examinations, and developments in labor negotiations and legal contingencies.