FedEx Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended February 28, 2021, compared with the periods ended February 29, 2020. This is FedEx fiscal third quarter 2021, notwithstanding the request metadata’s “2020 Q3” label. FedEx provides express, ground and freight transportation, alongside e-commerce and business services.
Financial performance
| Metric | Three months ended Feb. 28, 2021 | Three months ended Feb. 29, 2020 | Nine months ended Feb. 28, 2021 | Nine months ended Feb. 29, 2020 |
|---|---|---|---|---|
| Revenue | $21.510 billion | $17.487 billion | $61.394 billion | $51.859 billion |
| Operating income | $1.005 billion | $411 million | $4.060 billion | $1.942 billion |
| Operating margin | 4.7% | 2.4% | 6.6% | 3.7% |
| Net income | $892 million | $315 million | $3.363 billion | $1.620 billion |
| Diluted EPS | $3.30 | $1.20 | $12.55 | $6.17 |
Quarterly revenue rose 23% and operating income rose 145%; nine-month revenue rose 18% and operating income rose 109%. Growth was led by e-commerce-related residential delivery, international export shipments, and pricing initiatives. FedEx Ground revenue increased 37% in both periods; quarterly operating income rose 98%. FedEx Express quarterly revenue rose 21% and operating income rose to $463 million from $137 million. FedEx Freight quarterly revenue rose 6%, while operating income increased 5% to $119 million.
For the nine months, operating cash flow was $7.392 billion, compared with $3.278 billion. Capital expenditures were $4.202 billion versus $4.705 billion; operating cash flow less capital expenditures was approximately $3.190 billion (calculated). Cash and cash equivalents were $8.856 billion at February 28, 2021, versus $4.881 billion at May 31, 2020. Debt was $646 million current and $22.797 billion long term; the filing reports $22.9 billion of long-term debt including current maturities, excluding finance leases. The debt-to-adjusted-EBITDA ratio was 2.45x at quarter-end. Credit agreements provided $3.5 billion of available capacity.
Material changes and notable items
- Higher shipment volumes and yields lifted results, but FedEx also incurred higher labor, purchased transportation, network capacity, maintenance, safety and pandemic-related costs. Variable incentive compensation reduced year-over-year operating income comparisons by approximately $485 million for the quarter and $895 million for the nine months. Severe winter weather reduced comparisons by an estimated $350 million.
- Nine-month results included a $299 million tax benefit, or $1.12 per diluted share, including a $108 million quarterly benefit and a $191 million benefit primarily related to tax accounting-method changes and accelerated deductions. The company had also recorded a $233 million cumulative tax benefit tied to a disputed interpretation of the Tax Cuts and Jobs Act; an unsuccessful lawsuit could require reversal.
- FedEx acquired ShopRunner for $225 million in cash in December 2020; its results were not material in the period. The company recorded $10 million of business realignment costs in the quarter and expects total pre-tax costs of $300 million to $575 million through fiscal 2023 for a proposed European workforce reduction affecting 5,500 to 6,300 employees.
- FedEx issued $970 million of aircraft-secured pass-through certificates at a fixed 1.875% rate, due in 2034. It did not repurchase shares during the quarter. The quarterly dividend remained $0.65 per share.
Outlook, risks and contingencies
Management expected continued e-commerce demand, international export growth and pricing initiatives to improve fourth-quarter revenue and operating income. It also anticipated higher incentive compensation, labor, maintenance and pandemic-related costs. Fiscal 2021 capital expenditures were expected to be approximately $5.7 billion. Management cited ongoing TNT Express integration, with approximately $1.7 billion of aggregate integration expense expected through completion of physical network integration in 2022, plus about $55 million of integration expense expected in the fourth quarter. A separate $100 million expense related to a carbon-sequestration pledge was expected in the fourth quarter.
Management said liquidity and operating cash flow were expected to cover funding needs and capital expenditures, while prioritizing balance-sheet strengthening and debt repayment. The outlook depended on economic recovery, global trade, absence of additional COVID-19 restrictions and fuel-price assumptions. Principal risks include the pandemic and supply-chain disruption, severe weather, labor availability and costs, fuel and foreign-exchange volatility, competition, TNT integration and European restructuring execution, Brexit-related disruption, cybersecurity, regulation, and litigation. Ratings outlooks from S&P and Moody’s were negative. FedEx reported compliance with its credit covenants; the amended agreements effective March 16, 2021 set a maximum debt-to-adjusted-EBITDA ratio of 3.5x.
Contingencies include driver joint-employer lawsuits, a stockholder derivative case related to previously settled New York cigarette litigation, and ordinary-course legal matters. Management did not expect material losses from the driver cases or other ordinary-course matters, but could not estimate potential loss in some proceedings. The consolidated securities class action was dismissed with prejudice, and the plaintiff did not appeal by the deadline.
Important facts for investors to verify
- Whether volume and pricing gains persist as pandemic-related demand and constrained international air capacity change.
- Whether rising labor, incentive compensation, purchased transportation and network costs continue to pressure margins.
- Actual costs, savings and timing for the European workforce plan and TNT Express integration.
- The sustainability of reported earnings given the $299 million nine-month tax benefit and the unresolved $233 million tax position.
- Debt-reduction plans, capital spending, credit ratings and compliance with the amended 3.5x covenant.
- Potential outcomes of legal proceedings and the effect of pandemic, weather, Brexit and other operating risks.