FedEx Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2022; comparisons are with the corresponding 2021 periods. Financial amounts are in U.S. dollars. The interim financial statements are unaudited; the independent accountant conducted a review, not an audit.
Financial performance
| Metric | Three months ended Nov. 30, 2022 | Year-over-year change | Six months ended Nov. 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $22.814 billion | Down 3% | $46.056 billion | Up 1% |
| Operating income | $1.176 billion | Down 26% | $2.367 billion | Down 21% |
| Operating margin | 5.2% | 6.8% prior year | 5.1% | 6.6% prior year |
| Net income | $788 million | Down 25% | $1.663 billion | Down 23% |
| Diluted EPS | $3.07 | Down 21% | $6.41 | Down 20% |
Segment results, quarter: Express revenue was $10.864 billion, down 6%, with operating income of $341 million, down 64%, and a 3.1% margin. Ground revenue was $8.393 billion, up 2%, with operating income of $598 million, up 24%, and a 7.1% margin. Freight revenue was $2.454 billion, up 8%, with operating income of $440 million, up 32%, and a 17.9% margin. Higher yields and fuel surcharges supported revenue and profitability, while shipment volumes declined across transportation segments.
Cash flow and investment: Six-month operating cash flow was $3.125 billion, down from $4.082 billion. Capital expenditures were $3.142 billion, essentially unchanged. Cash at November 30 was $4.646 billion, versus $6.897 billion at May 31; the six-month net cash decrease was $2.251 billion. Financing cash use included $1.5 billion of treasury-stock purchases and $598 million of dividends paid.
Debt and liquidity: Long-term debt, including current maturities and excluding finance leases, had a carrying value of $19.7 billion. FedEx reported $3.5 billion of available liquidity under its credit agreements and no commercial paper outstanding. Its debt-to-adjusted-EBITDA covenant ratio was 1.93x against a maximum of 3.5x; the company stated it was in compliance. The annualized weighted-average interest rate on long-term debt was 3.5%.
Material changes and drivers
- Management attributed weaker results to global volume softness, weakening economic conditions, inflation, rising interest rates, and service challenges at Express. Express average daily package volume fell 12% and average daily freight pounds fell 14% in the quarter.
- Fuel expense increased 39% in the quarter and 59% in the first half, primarily due to higher prices. Management said yield management, including fuel surcharges, helped offset fuel and volume pressures.
- Express operating income and margin contracted sharply as volume declines outpaced capacity and cost adjustments. Ground and Freight operating income rose, supported by yield improvement and cost actions despite lower volumes.
- Receivables allowances and credit-loss expense rose: six-month credit losses were $425 million versus $211 million a year earlier; the allowance was $435 million at period-end.
- The prior-year comparison included a $260 million noncash retirement-plan mark-to-market loss. Six-month 2022 results also included $111 million in European workforce-realignment costs; first-half 2023 included $14 million of those costs and $60 million of business-optimization costs.
Outlook, risks and unusual items
- Management expected revenue and operating profit to continue declining during the remainder of fiscal 2023 as customer demand weakened. Planned responses included further capacity reductions, flight-frequency cuts, aircraft parking, sort and Sunday-operation reductions, overhead and vendor-cost actions, and continued focus on yield and revenue quality.
- Fiscal 2023 capital spending guidance was reduced by $400 million to approximately $5.9 billion. Management cited lower aircraft-modernization spending, partly offset by investment in replacement vehicles, technology, and network optimization.
- The DRIVE optimization program targets long-term profitability, including network and back-office efficiencies. Expected pretax optimization costs were approximately $2.0 billion through 2025. The separate European workforce-realignment program was expected to cost approximately $415 million through 2023, with annualized savings of $275–$350 million beginning in 2024; timing and savings depend on local consultations and other factors.
- Management cited uncertainty from economic weakness, inflation, interest rates, supply-chain disruption, fuel prices, foreign exchange, geopolitical conflict, and continued COVID-related disruption in parts of Asia. Services in Ukraine and Belarus were suspended; Russia operations were idled.
- FedEx disclosed a Texas employment-retaliation jury award against FedEx Services of $1.16 million compensatory and $365 million punitive damages. The company disputed the verdict, planned to seek judgment or a reduction and appeal if necessary, and said it expected the award to be reduced. It believed insurance would cover ultimate damages and interest up to $75 million, subject to a retention of up to $10 million; an immaterial reserve below the retention was recorded.
- A separate December 2022 lawsuit against FedEx Ground alleges negligent hiring and related claims arising from a service-provider driver’s alleged kidnapping and murder of a minor. The company said it could not estimate potential loss at this early stage, but a material loss was reasonably possible.
- Pilot contract negotiations continued, with the National Mediation Board beginning active mediation in November. FedEx said mediation had no operational impact. The company also disclosed a pending tax-position lawsuit and a cumulative $223 million tax benefit that could be reversed if its position is unsuccessful.
- FedEx declared a quarterly dividend of $1.15 per share. Its $1.5 billion accelerated share repurchase delivered about 7.9 million shares during the quarter, with final settlement expected in December 2022. Approximately $2.6 billion remained available under the repurchase authorization at November 30.
Most important facts for investors to verify
- Whether volume, Express service performance, and operating margins stabilize, and whether cost actions keep pace with demand declines.
- Actual DRIVE and European-realignment costs, delivery of projected savings, and execution of planned capacity and capital-spending reductions.
- Resolution and insurance recovery for the $365 million punitive-damages verdict, and developments in the separate FedEx Ground lawsuit.
- Receivables quality and credit-loss trends, alongside cash flow, capital expenditures, dividends, and share repurchases.
- Whether macroeconomic, fuel, currency, labor, geopolitical, and supply-chain conditions materially alter management’s outlook or liquidity assumptions.