FedEx Corporation — Q3 FY2020 Form 10-Q
Reporting period: Fiscal third quarter ended February 29, 2020; comparisons are with the quarter ended February 28, 2019. Financial figures below are in millions of dollars except per-share data. The filing also reports year-to-date results for the nine months ended February 29, 2020.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $17,487 | $17,010 | $51,859 | $51,886 |
| Operating income | $411 | $911 | $1,942 | $3,150 |
| Operating margin | 2.4% | 5.4% | 3.7% | 6.1% |
| Net income | $315 | $739 | $1,620 | $2,509 |
| Diluted EPS | $1.20 | $2.80 | $6.17 | $9.41 |
| Cash from operations | Not presented for quarter | $3,278 | $3,323 |
Q3 revenue increased 3%, but operating income and net income each fell 55% and diluted EPS fell 57%. Nine-month revenue was approximately flat, while operating income declined 38% and net income declined 35%. The nine-month effective tax rate was 18.5%, versus 21.8% a year earlier; the 2020 rate included a $133 million tax benefit from reducing a valuation allowance on certain foreign tax-loss carryforwards.
By segment, Q3 revenue and operating income were: Express $8,924 million and $137 million; Ground $5,845 million and $355 million; Freight $1,738 million and $113 million. Ground revenue grew 11%, but operating income fell 39%; Express operating income fell 65%. Freight operating income rose 16% despite a 1% revenue decline.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $3.278 billion. Capital expenditures were $4.705 billion, leaving operating cash flow less capital expenditures of negative $1.427 billion, compared with negative $434 million in the prior-year period.
- Cash and cash equivalents were $1.766 billion at February 29, down from $2.319 billion at May 31, 2019. Current assets were $12.541 billion and current liabilities $10.325 billion.
- Balance-sheet short-term borrowings were $300 million; current and long-term debt were $35 million and $18.973 billion. The company separately reported $14.134 billion of operating lease liabilities following adoption of the lease accounting standard.
- FedEx issued $2.1 billion of senior unsecured notes during the first quarter, used proceeds in part for pension contributions and debt redemptions, and had $300 million of commercial paper outstanding at quarter-end. It reported $3.2 billion available under its credit agreements and a debt-to-adjusted-EBITDA covenant ratio of 2.8x against a 3.5x maximum.
- Dividends paid during the nine months were $509 million. Capital expenditures were expected to total approximately $5.9 billion for FY2020.
Material changes and management commentary
- Management attributed weaker results to softer global economic conditions, COVID-19-related disruption, loss of business from a large customer, higher self-insurance accruals, costs to expand services, a shift toward lower-yielding services and competitive pricing. One additional operating weekday benefited Q3 results by approximately $100 million.
- Ground benefited from residential and e-commerce volume growth, but its costs rose as it expanded to year-round seven-day residential delivery. Express was affected by weak freight demand and lower international export yields. Freight shipment volumes declined, while higher revenue per shipment and cost alignment supported its operating income.
- The company recorded a $66 million noncash impairment charge in Q2 after deciding to retire 10 Airbus A310-300 aircraft and 12 engines; the after-tax impact was $50 million, or $0.19 per diluted share. Q3 included $72 million of TNT Express integration expenses; nine-month integration expenses were $207 million.
- Adoption of the lease standard added operating lease right-of-use assets of $14.1 billion and lease liabilities of $14.2 billion at transition, with no material effect on operating results and no effect on operating cash flows.
Outlook, risks and contingencies
Management expected continued Ground revenue growth in Q4 FY2020, but anticipated that weak global conditions would pressure Express and Freight and that Ground’s seven-day delivery expansion would add costs. The filing provides no clear full-year earnings or EPS guidance. Management said its outlook depended on assumptions including no further economic weakening beyond its forecast, current fuel-price expectations and no additional adverse trade developments. It stated that the duration and economic effects of COVID-19 were uncertain.
FedEx expected approximately $100 million of TNT integration expense in Q4 and approximately $1.7 billion of aggregate integration program expenses through 2021, including restructuring charges. It expected European ground-network interoperability to be substantially complete by the end of Q4 FY2020, with further network integration milestones in 2021 and international air-network interoperability expected in the first half of 2022. Management noted that timing and costs could change.
- Risks highlighted include prolonged COVID-19 and supply-chain disruption, trade-policy changes, Brexit, fuel-price and surcharge timing, competition, service-provider driver classification litigation, integration execution, and access to financing. Ratings outlooks from S&P and Moody’s were negative.
- Pending matters include securities and derivative lawsuits, FedEx Ground driver-related cases and an investigation by China’s State Post Bureau concerning package handling. Management said it could not estimate potential losses for certain lawsuits; it did not expect other described matters to have a material adverse effect.
- FedEx said it was cooperating with Chinese authorities and had filed suit seeking to prevent enforcement of certain U.S. export-control rules against the company. It also identified possible impacts from proposed cargo-pilot flight and duty time requirements.
Important facts for investors to verify
- Whether COVID-19 disruption, global trade weakness and customer volume trends materially worsen beyond the assumptions underlying management’s Q4 outlook.
- Whether Ground’s seven-day delivery expansion and competitive pricing continue to pressure margins, and whether residential growth offsets the added costs.
- Progress, costs and expected synergies from TNT Express integration, including the timing of network interoperability milestones.
- Capital spending, pension funding, cash generation and borrowing needs, given capital expenditures exceeded operating cash flow in the nine-month period.
- Developments in the disclosed litigation, regulatory matters, China investigation and credit ratings outlook.