Business context and reporting period
FedEx Corporation’s fiscal 2020 second quarter ended November 30, 2019. The filing compares the three and six months ended November 30, 2019 with the same periods in 2018. FedEx operates Express, Ground and Freight transportation businesses, alongside related services. Unless indicated otherwise, financial amounts below are in millions.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $17,324, down 3% from $17,824 | $34,372, down 1% from $34,876 |
| Operating income | $554, down 53% from $1,168 | $1,531, down 32% from $2,239 |
| Operating margin | 3.2%, versus 6.6% | 4.5%, versus 6.4% |
| Net income | $560, down 40% from $935 | $1,305, down 26% from $1,770 |
| Diluted EPS | $2.13, versus $3.51 | $4.97, versus $6.60 |
The second-quarter effective tax rate was 2.1% (20.6% prior year); the first-half rate was 16.8% (22.3% prior year). A $133 million benefit from reducing a valuation allowance on certain foreign tax loss carryforwards boosted fiscal 2020 results.
For the first half, operating cash flow was $2,074, versus $2,179; capital expenditures were $3,266, versus $2,634. Operating cash flow less capital expenditures was negative $1,192. Cash and equivalents were $2,031 at November 30, compared with $2,319 at May 31, 2019.
At November 30, long-term debt carrying value, including current maturities and excluding finance leases, was $18.6 billion; short-term borrowings were $150 million. Operating lease liabilities totaled $14.36 billion, following adoption of the new lease standard. The balance sheet also reported $3.30 billion available under credit agreements after outstanding commercial paper and letters of credit. Debt to adjusted EBITDA was 2.6x, against a 3.5x covenant limit; FedEx reported compliance.
Material changes versus prior year
- FedEx Express revenue fell 5% in the quarter and operating income fell 63%; the segment’s margin declined to 2.6% from 6.6%. Weak international freight demand, lower yields, the loss of a large customer and currency effects weighed on results.
- FedEx Ground revenue rose 3%, but operating income declined 42% and margin fell to 6.4% from 11.5%. Residential volume growth was offset by higher network expansion, staffing, contractor and insurance costs, and competitive pricing.
- FedEx Freight revenue declined 4% and quarterly operating income declined 5%; first-half operating income rose 3%, with higher revenue per shipment partly offsetting fewer shipments.
- Management cited weaker global economic conditions, trade uncertainty, lower fuel surcharges, a shift toward lower-yield services and the loss of a large customer. The later Thanksgiving holiday shifted Cyber Week revenue into December. One fewer operating day reduced first-half results.
- Lower variable incentive compensation provided offsets of approximately $65 million in the quarter and $365 million in the first half. Lower fuel prices reduced expense, but lower fuel surcharges slightly outweighed the benefit for consolidated operating income.
Outlook, risks and unusual items
- Management expected weak macroeconomic conditions and lower revenue growth at transportation segments to continue through the remainder of fiscal 2020, with competitive pricing and higher Ground costs pressuring operating income. The filing provides no specific earnings-per-share forecast.
- FedEx expected approximately $200 million of additional TNT Express integration expenses in the remainder of fiscal 2020 and about $1.7 billion of aggregate integration program expenses through 2021. European ground-network interoperability was expected to be substantially complete by the end of 2020; other integration milestones extend into 2021 and the first half of 2022.
- Expected fiscal 2020 capital expenditures were approximately $5.9 billion. FedEx said cash, operating cash flow and available financing should meet its liquidity needs, including capital spending, debt payments, pension contributions and integration costs.
- A $66 million noncash impairment charge ($50 million after tax, or $0.19 per diluted share) followed the decision to retire 10 Airbus A310 aircraft and 12 engines.
- FedEx adopted lease accounting effective June 1, 2019, recognizing approximately $14.2 billion of operating lease liabilities and $14.1 billion of right-of-use assets. The company said the change materially affected the balance sheet but had no material operating-results impact and no operating-cash-flow impact.
- Risks include trade tensions, continued weakness in Europe and Asia Pacific, fuel and pricing volatility, execution and costs of the TNT integration, capacity-cost mismatches, and regulatory or labor changes. FedEx Ground driver-classification cases and securities and derivative lawsuits remain pending; management could not estimate potential losses for certain cases. China’s State Post Bureau was investigating FedEx Express package handling. The filing also describes a U.S. legal challenge to export-control rules.
Important facts for investors to verify
- Whether demand, yields and competitive pricing stabilize, particularly at Express and Ground, and whether the lost large-customer volume is replaced.
- Whether Ground’s network expansion and seven-day operations deliver sufficient productivity and revenue to offset increased costs.
- Progress, expense timing and expected synergies from the TNT Express integration against the stated milestones and cost outlook.
- The durability of reported earnings given the $133 million tax benefit and the aircraft impairment charge.
- Capital spending, cash generation, pension funding, debt levels and the substantial operating lease commitments.
- Developments in the China inquiry, litigation and trade-policy risks; interim financial statements received an auditor review, not an audit.