FedEx Corporation — Form 10-Q Summary
Period: Fiscal third quarter and nine months ended February 28, 2022; filed March 17, 2022. The request metadata says “2021 Q3,” but the filing reports fiscal 2022 Q3.
Financial performance
Amounts are U.S. dollars. Quarterly and nine-month comparisons are with the periods ended February 28, 2021.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $23.641 billion, up 10% | $69.118 billion, up 13% |
| Operating income | $1.326 billion, up 32% | $4.321 billion, up 6% |
| Operating margin | 5.6%, versus 4.7% | 6.3%, versus 6.6% |
| Net income | $1.112 billion, up 25% | $3.268 billion, down 3% |
| Diluted EPS | $4.20, versus $3.30 | $12.17, versus $12.55 |
| Operating cash flow | Not provided for quarter | $6.330 billion, versus $7.392 billion |
| Capital expenditures | Not provided as a cash-flow measure for quarter | $4.379 billion, versus $4.202 billion |
- Nine-month operating cash flow less capital expenditures was approximately $1.951 billion.
- At February 28, cash and cash equivalents were $6.065 billion. Long-term debt, including current maturities and excluding finance leases, was approximately $20.0 billion; total balance-sheet debt was $20.509 billion. Operating lease liabilities totaled $16.845 billion.
- At March 15, the company reported $3.5 billion of available liquidity under its revolving credit agreements. The debt-to-adjusted-EBITDA covenant ratio was 1.87:1, below the 3.5:1 maximum.
Changes and operating drivers
- Quarterly operating income improved on yield management, fuel surcharge benefits, lower variable incentive compensation, and comparison with prior-year winter weather. Nine-month results also benefited from Ground and Freight volume growth.
- Higher labor and purchased-transportation costs, wage pressure, network inefficiencies, and Omicron-related staffing and operating disruption weighed on results. Fuel expense rose 59% in the quarter and 72% over nine months; management said higher fuel surcharges more than offset higher fuel prices during the periods.
- Segment operating income for the quarter: Express $520 million, up 12%; Ground $641 million, down 9%; Freight $337 million, up 183%. Nine-month operating income: Express $2.036 billion, down 2%; Ground $1.793 billion, down 14%; Freight $1.061 billion, up 64%.
- Ground’s quarterly margin fell to 7.3% from 8.8%, while Freight’s rose to 15.0% from 6.5%. Express quarterly margin increased to 4.6% from 4.3%.
- Nine-month earnings included a $260 million pre-tax, noncash pension mark-to-market loss. Comparisons also reflect tax benefits: $78 million in Q3 2022 from prior-year tax estimate revisions, versus $299 million in the prior-year nine months.
- Operating cash flow declined by $1.062 billion year over year, primarily reflecting changes in tax liabilities and incentive-payment timing, partly offset by higher net income excluding noncash items.
Outlook, risks and unusual items
- Management expected fourth-quarter revenue and operating income to improve, primarily from yield growth. It anticipated labor-market cost pressures to ease against the prior-year comparison and planned continued productivity, capacity, and network optimization.
- Management’s outlook depended on no further deterioration in global economic conditions, gradual labor-availability improvement, expected fuel prices, and no additional adverse geopolitical developments. The Russia-Ukraine conflict made the outlook more uncertain; services in Russia, Ukraine, and Belarus were suspended, with no material operating-results impact expected at filing.
- Fiscal 2022 capital expenditures were expected to be approximately $7.0 billion. The company also described multiyear investments of approximately $1.5 billion each to expand the Indianapolis hub and modernize the Memphis hub.
- The European workforce-reduction plan affects approximately 5,000 employees. Expected pre-tax costs were $380–$450 million through 2023; expected annualized savings were $275–$350 million beginning in 2024. Timing and amounts depend on local consultations and negotiated plans.
- Management expected approximately $1.8 billion of cumulative TNT integration expenses through completion of the physical network integration in 2022, including approximately $60 million in Q4 2022. Further transformation costs and capital investment were expected over multiple years.
- FedEx repurchased 8.9 million shares for $2.2 billion during the nine months and had approximately $4.1 billion remaining under its $5 billion repurchase authorization. The quarterly dividend declared was $0.75 per share.
- Material watch items include labor availability and costs, fuel prices and surcharge recovery, pandemic effects, supply-chain constraints, geopolitical developments, tax examinations and the company’s $215 million cumulative benefit from a disputed tax position, and litigation alleging FedEx Ground joint-employer responsibility. Management said it did not expect the disclosed legal matters to have a material adverse effect; some potential losses could not be estimated.
Important facts for investors to verify
- Whether yield gains and fuel surcharge recovery continue to offset wage, purchased-transportation, and other operating-cost inflation.
- Whether Ground’s margin pressure improves and Freight’s unusually strong margin performance is sustainable.
- Progress and actual costs, savings, and timing for the European workforce plan and TNT integration.
- Cash generation, capital spending, share repurchases, and liquidity needs against the company’s outlook.
- Developments in the disputed tax position, labor negotiations, and Russia-Ukraine-related business risks.