FedEx: improved third quarter results

FedEx Corp. has reported financial results for the quarter ended February 28 with operating income of $1.3 Billion, up 32% Year Over Year.

“The continued execution of our strategies drove improved third quarter results,” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer. “I am proud of our team members around the world, who are constantly proving their resilience amidst a rapidly evolving global environment. FedEx is supporting our team members and others affected by the ongoing conflict in Ukraine as we hope to soon see a return to peace.”

Third quarter operating income improved due to higher revenue per shipment and a net fuel benefit at all transportation segments. The quarter’s results also benefited from lower variable compensation expense and less severe winter weather, resulting in favorable year-over-year comparisons. The improved results were partially offset by the effects of the Omicron variant, as well as higher purchased transportation costs and wage rates.

“We successfully executed during the holiday peak season, resulting in record December operating income,” said Michael C. Lenz, FedEx Corp. executive vice president and chief financial officer. “Our strong quarterly operating income increase was dampened by the surge of the Omicron variant which caused disruptions to our networks and diminished customer demand in January and into February. We remain focused on revenue quality and operational efficiency initiatives to mitigate inflationary pressures and drive earnings improvement.”

Third quarter net income included a tax benefit of $78 million ($0.29 per diluted share) related to revisions of prior year estimates for actual tax return results. Last year’s net income included discrete tax benefits of $108 million ($0.40 per diluted share).

FedEx Express operating results increased, driven by higher yields, a net fuel benefit, and lower variable compensation expense. The improved results were partially offset by the negative effects of the Omicron variant, which constrained near-term economic growth, labor availability, and shipping demand. These effects also resulted in lower express freight revenue, as air capacity limitations drove a temporary suspension of International Economy Express Freight services and certain U.S. Domestic Express Freight services during the quarter. These negative effects on third quarter results fully offset the estimated benefit from less severe winter weather.

FedEx Ground operating results declined primarily due to increased rates for purchased transportation and employee wages, network inefficiencies, and expansion-related costs. These costs were partially offset by higher revenue per package, a boost from two additional ground commercial operating weekdays, and a net fuel benefit. Average daily volume was flat, as Ground Economy declined and growth in commercial and FedEx Home Delivery services was constrained by the effects of the Omicron variant.

FedEx Freight third quarter operating income nearly tripled, driven by a continued focus on revenue quality and profitable growth. Revenue per shipment increased 19% and average daily shipments grew 2% during the quarter, while the operating margin increased 850 basis points to 15.0%.

The previously announced accelerated share repurchase program (ASR) was completed during the quarter and 6.1 million shares were delivered under the ASR agreement. The decrease in outstanding shares benefited third quarter results by $0.06 per diluted share. Cash on-hand as of February 28, 2022 was $6.1 billion.

Outlook

FedEx is unable to forecast the year-end fiscal 2022 mark-to-market (MTM) retirement plans accounting adjustment. As a result, FedEx is unable to provide a fiscal 2022 earnings per share or effective tax rate (ETR) outlook on a GAAP basis.

FedEx now expects for the fiscal year:

• Earnings per diluted share of $18.60 to $19.60 before the year-end MTM retirement plans accounting adjustment, compared to the prior forecast of $18.25 to $19.25 per diluted share;
• Earnings per diluted share of $20.50 to $21.50 before (i) the year-end MTM retirement plans accounting adjustment, and excluding (ii) estimated TNT Express integration expenses, (iii) estimated costs associated with business realignment activities, and (iv) the second quarter fiscal 2022 MTM retirement plans accounting adjustments, unchanged from the prior forecast;
• ETR of 22% to 23% prior to the year-end MTM retirement plans accounting adjustment, compared to the prior forecast of 24%; and
• Capital spending of $7.0 billion, compared to the prior forecast of $7.2 billion.

These forecasts assume continued growth in U.S. industrial production and global trade, a continued gradual improvement in labor availability, no new COVID-19 related business restrictions, current fuel price expectations and no additional adverse geopolitical developments. FedEx’s ETR and earnings per share forecasts are based on current law and related regulations and guidance.

“Our strategic investments are fundamentally changing the way we perform and execute in e-commerce, demonstrated by our strong performance during the peak month of December,” said Raj Subramaniam, FedEx Corp. president and chief operating officer. “We are committed to delivering for our customers, and remain focused on our strategic initiatives to increase productivity, lower our cost to serve and create shareholder value.”