01—Abstract
Summary
Summary of the 10-K filed July 20, 2020. Cited figures are marked; the original filing is the authoritative source.
FedEx's fiscal 2020 (year ended May 31, 2020) was a sharply weaker year: revenue fell 1% to $69.2 billiona, while operating income dropped 46% to $2.4 billion and the operating margin compressed 290 basis points to 3.5%.
Net income rose to $1.29 billionb, but that figure is distorted by offsetting items, including a non-cash $794 million pension mark-to-market loss, $435 million of goodwill and asset impairments (mainly FedEx Office), $270 million of TNT Express integration expenses, and tax benefits of roughly $133 million (valuation allowance release) and $71 million (CARES Act). Diluted EPS was $4.90, versus $2.03 in 2019, which included a much larger $3.9 billion pension loss. The segment picture was split.
FedEx Ground was the bright spot, with revenue up 11% on residential e-commerce volume during the COVID-19 stay-at-home surge, though its operating income fell 24% on higher self-insurance accruals, expansion costs, and a more competitive pricing environment. FedEx Express had operating income down 54% to $996 millionc, reflecting weaker global trade, the loss of a large customer, and integration costs. FedEx Freight was relatively stable, with operating income down 6% to $580 million.
For investors, the outlook is the central concern. Management said the pace of economic recovery is the most significant uncertainty, and it guided to 2021 capital expenditures of about $4.9 billiond (down $1.0 billion), integration expenses of roughly $175 million, and a continued TNT integration into 2022.
Liquidity was strengthened through $6.6 billion of new debt, a $4.9 billion cash balance, suspended voluntary pension funding, and amended credit covenants that temporarily suspend share buybacks and dividend increases through May 2021. The company also maintained its $0.65 quarterly dividend, and its credit ratings (BBB / Baa2) carry negative outlooks.
02—Key points
Key Highlights
- Consolidated revenue fell 1% to $69.2B, but operating income dropped 46% to $2.4B and operating margin fell to 3.5% from 6.4%.
- Net income rose to $1.29B (diluted EPS $4.90) mainly because 2019 included a $3.9B non-cash pension MTM loss; 2020 still absorbed a $794M MTM loss.
- FedEx Ground revenue grew 11% to $22.7B on residential e-commerce demand, but segment operating income fell 24% due to self-insurance costs and expansion expenses.
- FedEx Express operating income fell 54% to $996M, with the loss of a large customer, weaker global trade, and TNT integration costs weighing on results.
- Non-recurring items totaled roughly $705M in operating charges, including $435M of goodwill and asset impairments (mainly FedEx Office and the retirement of 10 A310 aircraft).
- Liquidity was bolstered with $6.6B of debt issuance and a $4.9B cash balance, but the Credit Agreements temporarily bar share repurchases and dividend increases through May 31, 2021.
- 2021 guidance calls for capital expenditures of about $4.9B (down $1.0B) and roughly $175M of TNT integration expenses, with the pace of economic recovery cited as the key uncertainty.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2020filed July 20, 2020Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $69.22B$69.69B | −0.7% |
| Operating Expenses | $66.80B$65.23B | +2.4% |
| Operating Income | $2.42B$4.47B | −45.9% |
| Interest Expense | $672.00M$588.00M | +14.3% |
| Net Income | $1.29B$540.00M | +138.1% |
| EPS (Basic) | $4.92$2.06 | +138.8% |
| EPS (Diluted) | $4.90$2.03 | +141.4% |
| Shares Outstanding (Basic) | 261.00M262.00M | −0.4% |
| Shares Outstanding (Diluted) | 262.00M265.00M | −1.1% |
05—Questions
Frequently Asked Questions
Why did net income rise in fiscal 2020 even though operating income fell 46%?
The comparison is distorted by non-operating items. Fiscal 2019 included a $3.9 billion pre-tax pension mark-to-market loss ($3.0 billion after tax), compared with $794 million ($583 million after tax) in 2020. Income tax benefits of $133 million and $71 million also helped 2020 net income. Operating income, which excludes the pension MTM adjustment, is the better gauge of underlying performance, and it declined sharply.
Is the COVID-19 pandemic a net positive or negative for FedEx's business?
It was mixed. Business-to-business shipping, international trade, and FedEx Express volumes declined, and the company incurred about $125 million of PPE and safety costs. However, residential delivery at FedEx Ground surged to peak-season levels, and surcharges helped offset some costs. Management described the pandemic's full impact as still uncertain.
What are the main financial risks for investors going forward?
Key risks include the pace of global economic recovery, continued TNT Express integration costs (about $1.7B in total through 2022), the cost of self-insurance accruals and vehicle accidents, and credit metrics. Ratings are BBB (S&P) and Baa2 (Moody's), both with negative outlooks, and the debt-to-adjusted-EBITDA covenant rises to 4.9x before reverting to 3.5x in August 2021. Litigation over FedEx Ground's independent contractor model and a Congressional push to change labor laws are additional risks.
Will shareholders keep receiving dividends?
Yes, for now. The Board declared a $0.65 quarterly dividend in June 2020, and management said it expects to continue regular quarterly payments, though each payment is subject to Board review. The credit agreement amendments prevent increasing the dividend and repurchasing shares between May 27, 2020 and May 31, 2021. Total dividends paid were $679 million in fiscal 2020.
What is FedEx's capital spending plan for 2021?
Capital expenditures are expected to be about $4.9 billion, down $1.0 billion from 2020, mainly through delayed facility expansions, lower vehicle and trailer spending, and postponed IT projects. Spending continues on FedEx Express aircraft modernization (including B777F and B767F deliveries) and on the Indianapolis and Memphis hub expansions, each costing about $1.5 billion over multiple years. Roughly 45% is designated for growth initiatives.
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