FedEx Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended May 31, 2020, filed July 20, 2020. The request metadata says “2019 Q4,” but this filing reports FY2020; the filing’s fourth quarter is the three months ended May 31, 2020.
Business context
FedEx provides express, ground, and less-than-truckload freight transportation, alongside logistics and business services. Its principal reportable segments are FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The COVID-19 pandemic sharply weakened commercial shipping while driving residential package volumes to peak-season levels at FedEx Ground.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $69.217 billion | $69.693 billion | Down 1% |
| Operating income | $2.417 billion | $4.466 billion | Down 46% |
| Operating margin | 3.5% | 6.4% | Down 290 basis points |
| Net income | $1.286 billion | $540 million | Up 138% |
| Diluted EPS | $4.90 | $2.03 | Up 141% |
| Operating cash flow | $5.097 billion | $5.613 billion | Down $516 million |
| Capital expenditures | $5.868 billion | $5.490 billion | Up 7% |
| Cash and cash equivalents at year-end | $4.881 billion | $2.319 billion | Up $2.562 billion |
Net income and EPS comparisons were significantly affected by noncash pension mark-to-market losses: $794 million pre-tax ($583 million after tax, or $2.22 per diluted share) in FY2020 versus $3.9 billion pre-tax ($3.0 billion after tax, or $11.22 per diluted share) in FY2019. FY2020 operating income also included $435 million of goodwill and other asset impairment charges and $270 million of TNT integration expense.
Operating cash flow less capital expenditures was negative $771 million, compared with positive $123 million in FY2019. Cash provided by financing activities was $3.381 billion, including $6.556 billion of debt issuance proceeds and $2.548 billion of debt principal payments.
At May 31, 2020, long-term debt was $21.952 billion, excluding the current portion; total debt including current maturities and finance leases was approximately $22.0 billion. Senior unsecured debt was $21.518 billion, with a weighted-average interest rate of 3.6%. The company reported $21.5 billion of senior unsecured debt securities outstanding. Its amended credit agreements temporarily relaxed debt-to-adjusted-EBITDA covenant limits and restricted share repurchases and dividend increases through May 31, 2021. Debt to adjusted EBITDA was 3.0:1.0 at year-end. Standard & Poor’s and Moody’s both had negative outlooks on their investment-grade ratings.
The company reported total assets of $73.537 billion, current assets of $16.383 billion, and current liabilities of $10.344 billion. Adoption of the new lease standard added $14.118 billion of operating lease liabilities to the balance sheet. Management said cash, operating cash flow, and available financing were adequate for expected needs, while noting uncertainty from the pandemic.
Segment results
| Segment | FY2020 revenue | FY2020 operating income | Year-over-year change in operating income |
|---|---|---|---|
| FedEx Express | $35.513 billion | $996 million | Down 54% |
| FedEx Ground | $22.733 billion | $2.014 billion | Down 24% |
| FedEx Freight | $7.102 billion | $580 million | Down 6% |
FedEx Ground revenue rose 11% and average daily package volume rose 12%, but higher service-expansion, contractor, and self-insurance costs reduced operating margin to 8.9% from 13.0%. FedEx Express revenue fell 5%; FedEx Freight revenue fell 6%, while its margin edged up to 8.2% from 8.1%.
Material changes and unusual items
- Revenue declined due to weaker economic conditions, pandemic disruption, lower fuel surcharges, and the loss of business from a large customer. FedEx said no single customer represented more than 3% of consolidated revenue.
- Operating income fell substantially, reflecting weaker demand, mix shift toward lower-yield residential services, competitive pricing, higher self-insurance accruals, and costs to expand capacity. Lower incentive compensation expense of approximately $320 million partly offset these pressures.
- Goodwill impairment charges totaled $358 million, including $348 million at FedEx Office; goodwill at the FedEx Office and FedEx Supply Chain reporting units was fully impaired. FedEx also recorded $66 million of impairment charges after deciding to retire 10 Airbus A310-300 aircraft and 12 related engines.
- Fuel expense declined 19%; management said the net impact of fuel slightly benefited operating income overall. FedEx Freight’s net fuel impact was significantly negative as lower fuel surcharges exceeded the benefit from lower fuel prices.
- FY2020 included a $133 million tax benefit from reducing a valuation allowance and a $71 million CARES Act tax benefit, partly offset by a $51 million tax expense related to foreign tax credits and legal-entity forecasts. The effective tax rate was 23.0%, compared with 17.6%.
- Quarterly results show a fourth-quarter FY2020 net loss of $334 million, including impairment charges and the annual pension mark-to-market loss; FY2019 fourth-quarter net loss was $1.969 billion, also heavily affected by a pension mark-to-market loss.
Outlook, risks, and contingencies
FedEx did not provide conventional earnings guidance, citing uncertainty about the duration and economic effects of COVID-19. Management expected continued residential strength at Ground, weak commercial demand, and strong international priority and charter demand while commercial air capacity remained constrained. It expected pandemic-related costs and economic uncertainty to continue affecting FY2021 results, cash flows, and liquidity.
- FY2021 capital expenditures were expected to be approximately $4.9 billion, down $1.0 billion from FY2020; approximately 45% was expected to support growth initiatives. Management also suspended voluntary pension funding for FY2021 and reduced or deferred selected capital projects.
- FedEx expected approximately $175 million of TNT integration expenses in FY2021 and approximately $1.7 billion in aggregate integration program expenses through completion of physical network integration in 2022. COVID-19 delays shifted final international air network interoperability to early calendar 2022.
- Ground planned to extend seven-day residential delivery to more than 95% of the U.S. population and complete the SmartPost integration into standard Ground operations in the first half of FY2021.
- Liquidity measures included issuing $3.0 billion of senior debt in April 2020, amending credit agreements, deferring employer Social Security tax payments, and using temporary surcharges. The CARES Act tax deferral was expected to provide approximately $625 million of additional liquidity in 2020 and 2021.
- Key risks include prolonged pandemic disruption, economic and trade weakness, execution and cost risks in TNT integration, fuel-price volatility, competition and pricing pressure, cyberattacks, self-insurance and vehicle-accident costs, pension assumptions, and access to financing. The company also cited litigation regarding FedEx Ground service-provider driver classification, securities claims, and a China State Post Bureau investigation concerning package handling under U.S. export-control rules. The filing does not provide a clear estimated loss range for certain pending matters.
- Contractual obligations included $21.756 billion of scheduled debt principal payments, $16.581 billion of undiscounted operating lease payments, and $6.954 billion of aircraft and aircraft-related capital commitments. These amounts cover multiple future years and are not a forecast of total cash expenditures.
Most important facts for investors to verify
- Confirm the reporting period: this is FY2020, not a 2019 fourth-quarter filing; review the separate FY2020 fourth-quarter results and their unusual items.
- Assess underlying operating performance apart from pension mark-to-market adjustments, impairment charges, integration expenses, and tax benefits.
- Track commercial versus residential volume, yields, cost-to-serve, and whether Ground’s pandemic-era volume growth can sustain profitability.
- Review debt, covenant headroom, ratings outlook, and the effect of lease liabilities and aircraft commitments on liquidity and leverage.
- Monitor COVID-19 demand and cost effects, TNT integration milestones and spending, self-insurance accruals, and the status and potential exposure of legal and regulatory matters.