FedEx Corporation — Form 10-Q Summary
Business context and reporting period. This quarterly report covers the three and six months ended November 30, 2020, FedEx’s fiscal 2021 second quarter and first half. FedEx provides express, ground and less-than-truckload transportation and related services. Comparisons below are with the corresponding 2019 periods. The interim financial statements were reviewed, not audited; management cautioned that results may not indicate full-year performance.
Financial performance
| Metric | Three months ended Nov. 30 | Six months ended Nov. 30 |
|---|---|---|
| Revenue | $20.563 billion, up 19% | $39.884 billion, up 16% |
| Operating income | $1.465 billion, versus $554 million | $3.055 billion, versus $1.531 billion |
| Operating margin | 7.1%, versus 3.2% | 7.7%, versus 4.5% |
| Net income | $1.226 billion, versus $560 million | $2.471 billion, versus $1.305 billion |
| Diluted EPS | $4.55, versus $2.13 | $9.26, versus $4.97 |
Results benefited from strong residential and e-commerce package demand, growth in international exports, pricing initiatives and lower fuel prices. FedEx also cited a prior-year large-customer business loss and $66 million of prior-year aircraft impairment charges as factors in the comparison. Higher variable incentive compensation reduced year-over-year operating income comparisons by approximately $215 million for the quarter and $410 million for the half.
Segments and operating trends
- FedEx Ground: quarterly revenue rose 38% to $7.344 billion; operating income rose 61% to $552 million. Average daily package volume increased 29%, while operating margin improved to 7.5% from 6.4%. Higher staffing, contractor costs and residential mix partly offset growth.
- FedEx Express: quarterly revenue rose 14% to $10.368 billion; operating income increased to $900 million from $236 million, with margin of 8.7% versus 2.6%. International priority and U.S. domestic package growth supported results. CARES Act aviation excise tax relief contributed about $70 million to quarterly operating results.
- FedEx Freight: quarterly revenue rose 5% to $1.936 billion and operating income rose 79% to $252 million; margin increased to 13.0% from 7.6%. First-half revenue was approximately flat, while average daily shipments declined 4%.
Cash flow, liquidity and debt
- First-half cash from operations was $5.230 billion, compared with $2.074 billion a year earlier. Management attributed the increase mainly to higher net income and lower pension contributions.
- Capital expenditures were $2.826 billion, down from $3.266 billion. Cash and cash equivalents were $8.339 billion at November 30, versus $4.881 billion at May 31, 2020.
- Reported current and long-term debt totaled $23.318 billion at November 30; the filing separately reports long-term debt, excluding finance leases, of $22.8 billion. The company issued $970 million of aircraft-secured pass-through certificates at 1.875%, due in 2034.
- FedEx had $3.5 billion available under its revolving credit agreements and no commercial paper outstanding. Its debt-to-adjusted-EBITDA covenant ratio was 2.6:1, below the 4.9:1 limit; the company reported covenant compliance.
- Management expected fiscal 2021 capital expenditures of approximately $5.1 billion and believed available cash, operating cash flow and financing sources would cover liquidity needs. The 364-day credit agreement was due to expire in March 2021.
Material changes, outlook and key risks
- COVID-19 and demand: Pandemic-related e-commerce demand drove elevated residential volumes, while business-to-business demand strengthened from the first quarter. FedEx incurred about $50 million of protective-equipment, safety, security and cleaning costs in the quarter and $150 million in the first half. Network contingencies and constrained commercial air capacity also raised costs.
- Management outlook: FedEx expected COVID-related demand to support year-over-year revenue and operating income improvement at Ground and Express for the remainder of fiscal 2021; it anticipated Freight growth from yield management and productivity. These expectations remained uncertain, dependent on pandemic developments, economic conditions, fuel prices and trade conditions. Management anticipated higher labor, incentive and pandemic-related costs, a higher second-half tax rate, and a headwind from the December 31, 2020 expiration of the aviation excise tax holiday.
- Network and integration: FedEx planned to keep optimizing capacity, extend certain surcharges beyond peak at reduced rates, and direct some U.S. day-definite residential Express shipments through Ground. TNT Express integration was expected to continue, with approximately $80 million of additional integration costs in the rest of fiscal 2021 and total program costs of $1.7 billion through physical integration in 2022. Further international transformation costs and capital investment could be material.
- Tax items: The first-half effective tax rate was 18.0%, versus 16.8%. The 2021 rate included a $191 million benefit associated with an increased estimated tax loss eligible for carryback; IRS guidance on a depreciation accounting-method change generated a $130 million second-quarter tax benefit. FedEx had recorded a cumulative $233 million tax benefit through 2019 related to its interpretation of the transition-tax rules and could have to reverse it if unsuccessful in its lawsuit challenging a related regulation.
- Other unusual items: A $52 million noncash pension mark-to-market loss was recorded in the quarter following changes to the TNT Netherlands pension plan. The board temporarily restricted share repurchases through May 31, 2021, and restricted increases to the quarterly dividend above $0.65 per share during that period. FedEx made no repurchases in the first half.
- Risks and contingencies: Key risks include pandemic disruption, changing shipment volumes and yields, fuel and capacity volatility, labor availability and costs, cyber or operating disruptions, Brexit and trade developments, and successful TNT integration. FedEx disclosed service-provider-driver, securities and derivative litigation; loss estimates were unavailable for certain matters, although management did not expect material losses from the service-provider cases or other ordinary-course matters overall.
- Other developments: FedEx agreed to acquire ShopRunner in December 2020; the cost was expected to be immaterial, subject to customary closing conditions. The FedEx Express pilots’ collective bargaining agreement was scheduled to become amendable in November 2021.
Important facts for investors to verify
- Whether residential volume growth, pricing and segment margins remain durable as pandemic-driven demand and shipping mix change.
- How wage, incentive, contractor, safety and network-contingency costs develop relative to revenue and volume.
- Progress and total costs of TNT integration and the additional European transformation program.
- Cash generation, planned capital spending, debt levels, credit-agreement renewal and rating outlooks; the two major agencies had negative outlooks.
- Resolution of the $233 million tax-position dispute and the sustainability of tax benefits included in reported earnings.
- Developments in disclosed litigation, COVID-19 and Brexit risks, and the outcome of the ShopRunner acquisition.