FedEx Corporation — Q1 FY2021 10-Q
Reporting period: Three months ended August 31, 2020, compared with the three months ended August 31, 2019. FedEx provides transportation, e-commerce and business services through its Express, Ground and Freight operations. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $19.321 billion | $17.048 billion | +13% |
| Operating income | $1.590 billion | $977 million | +63% |
| Operating margin | 8.2% | 5.7% | +250 basis points |
| Net income | $1.245 billion | $745 million | +67% |
| Diluted EPS | $4.72 | $2.84 | +66% |
| Operating cash flow | $2.651 billion | $565 million | +$2.086 billion |
| Capital expenditures | $1.424 billion | $1.418 billion | Approximately unchanged |
Operating expenses were $17.731 billion, up 10%. Purchased transportation rose 24% and salaries and benefits rose 13%, reflecting higher shipment volumes and operating support costs; fuel expense fell 35% with lower fuel prices. The effective tax rate was 22.5%, versus 25.2%, benefiting from changes in legal-entity structure and increased earnings in certain non-U.S. jurisdictions.
Segment results
| Segment | Revenue | Operating income | Operating margin |
|---|---|---|---|
| FedEx Express | $9.647 billion, +8% | $710 million, versus $285 million | 7.4%, versus 3.2% |
| FedEx Ground | $7.040 billion, +36% | $834 million, +30% | 11.8%, versus 12.4% |
| FedEx Freight | $1.826 billion, -4% | $274 million, +41% | 15.0%, versus 10.2% |
Ground’s average daily package volume increased 31%, driven largely by residential e-commerce demand, while its margin declined as costs grew faster than revenue. Freight shipments fell 9%, but cost alignment and yield initiatives lifted its margin. Express benefited from international export and U.S. domestic package growth; package yields were weaker in several categories.
Financial position and liquidity
- Cash and cash equivalents were $6.954 billion at August 31, 2020, up from $4.881 billion at May 31, 2020.
- Total assets were $77.648 billion and common stockholders’ investment was $19.462 billion. Balance-sheet debt was $23.291 billion, comprising $87 million current and $23.204 billion long term. Separately, the filing reports $22.8 billion of long-term debt carrying value excluding finance leases.
- Operating cash flow was $2.651 billion; cash used in investing was $1.418 billion, primarily capital expenditures; financing provided $825 million. Cash generation improved mainly due to lower pension contributions, CARES Act tax relief, lower incentive-compensation payments and higher net income.
- FedEx issued $970 million of aircraft-secured pass-through certificates at 1.875%, due February 2034. Debt-to-adjusted-EBITDA was 2.9x against a credit-agreement maximum of 4.75x. The company reported $3.5 billion available under its credit agreements and compliance with covenants.
- The board declared a quarterly dividend of $0.65 per share. Credit-agreement amendments prohibit share repurchases through May 31, 2021 and restrict increases to the quarterly dividend above $0.65 during that period.
Material changes, outlook and risks
COVID-19 drove unusually strong residential delivery demand, while commercial demand improved sequentially but remained exposed to economic weakness and supply-chain disruption. The company incurred about $100 million of pandemic-related safety, medical-supply, security and cleaning costs. Results also benefited by approximately $130 million from an additional operating day and about $65 million at Express from CARES Act aviation excise-tax relief. Higher variable incentive compensation reduced year-over-year comparisons by $195 million; approximately half reflected reversal of prior-year long-term incentive accruals. TNT Express integration costs were $49 million, or $0.14 per diluted share after tax.
Management anticipated higher revenue and operating income at Ground and Express for the remainder of FY2021 if current trends continued, and expected Freight gains from yield management and productivity. The company did not provide a specific consolidated earnings forecast; management cited substantial uncertainty from COVID-19. It expected FY2021 capital expenditures of approximately $5.1 billion and approximately $125 million of further TNT integration expenses in the remainder of the fiscal year. Total integration program expenses were expected to reach approximately $1.7 billion through physical network integration in 2022, with final international air-network interoperability expected in early calendar 2022.
Management said liquidity from cash, operations and financing sources should meet expected needs. Key dependencies include the course of the pandemic and the global economy, fuel prices, trade policy, shipment volumes, network capacity and successful TNT integration. Ratings outlooks from S&P and Moody’s were negative; a downgrade could increase borrowing costs or constrain financing access. Other disclosed risks include labor and driver-classification litigation, technology and cyber disruption, foreign exchange, fuel, regulatory changes and the ability to match capacity and costs to demand.
Contingencies include service-provider driver lawsuits for which losses could not be estimated in all cases; management did not expect a material loss. Securities and derivative claims remained pending, although a consolidated stockholder derivative suit was dismissed with prejudice and not appealed. FedEx also intended to appeal dismissal of its lawsuit challenging Commerce Department export-rule enforcement. The interim financial statements received an independent accountant’s review, not an audit; the reviewer reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether pandemic-driven residential volumes and improved operating margins persist, particularly given Ground’s higher purchased-transportation and labor costs.
- Whether projected FY2021 capital spending, cash generation and liquidity remain adequate as aircraft, hub and network investments proceed.
- Progress, cost and expected benefits of TNT Express integration, including the timing of remaining network integration.
- Changes in credit ratings, debt levels and compliance with credit-agreement covenants and dividend restrictions.
- Subsequent developments in COVID-19 impacts, driver-classification and other litigation, and the company’s appeal of the export-rule case.