FEDEX CORPORATION GENERAL
The following Management's Discussion and Analysis of Results of Operations and
Financial Condition ("MD&A") describes the principal factors affecting the
results of operations, liquidity, capital resources, contractual cash
obligations and critical accounting estimates of FedEx Corporation ("FedEx").
This discussion should be read in conjunction with the accompanying quarterly
unaudited condensed consolidated financial statements and our Annual Report on
Form 10-K for the year ended May 31, 2019 ("Annual Report"). Our Annual Report
includes additional information about our significant accounting policies,
practices and the transactions that underlie our financial results, as well as a
detailed discussion of the most significant risks and uncertainties associated
with our financial condition and operating results.
We provide a broad portfolio of transportation, e-commerce and business services
through companies competing collectively, operating independently and managed
collaboratively, under the respected FedEx brand. Our primary operating
companies are Federal Express Corporation ("FedEx Express"), including TNT
Express B.V . ("TNT Express"), the world's largest express transportation
company; FedEx Ground Package System, Inc. ("FedEx Ground"), a leading North
American provider of small-package ground delivery services; and FedEx Freight
Corporation ("FedEx Freight"), a leading North American provider of
less-than-truckload ("LTL") freight transportation services. These companies
represent our major service lines and, along with FedEx Corporate Services, Inc.
("FedEx Services"), constitute our reportable segments.
Our FedEx Services segment provides sales, marketing, information technology,
communications, customer service, technical support, billing and collection
services, and certain back-office functions that support our operating segments.
See "Reportable Segments" for further discussion. Additional information on our
businesses can be found in our Annual Report.
As discussed in our Annual Report, as of June 1, 2019 the results of the FedEx
Office and Print Services, Inc. ("FedEx Office") operating segment are included
in "Corporate, other and eliminations." This change was made to reflect our
internal management reporting structure. Prior year amounts have been revised to
conform to the current year presentation.
The key indicators necessary to understand our operating results include:
• the overall customer demand for our various services based on macroeconomic
factors and the global economy;
• the volumes of transportation services provided through our networks,
primarily measured by our average daily volume and shipment weight and size;
• the mix of services purchased by our customers;
• the prices we obtain for our services, primarily measured by yield (revenue
per package or pound or revenue per shipment or hundredweight for LTL freight
shipments);
• our ability to manage our cost structure (capital expenditures and operating
expenses) to match shifting volume levels; and
• the timing and amount of fluctuations in fuel prices and our ability to
recover incremental fuel costs through our fuel surcharges.
Many of our operating expenses are directly impacted by revenue and volume levels, and we expect these operating expenses to fluctuate on a year-over-year basis consistent with changes in revenues and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than those factors strictly related to changes in revenues and volumes. The line item "Other operating expense" includes costs associated with outside service contracts (such as facility services and cargo handling, temporary labor and security), insurance, professional fees and uniforms. Except as otherwise specified, references to years indicate our fiscal year endingMay 31, 2020 or endedMay 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, the FedEx Express segment, the FedEx Ground segment and the FedEx Freight segment. - 32 - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS CONSOLIDATED RESULTS The following tables compare summary operating results and changes in revenue and operating income (dollars in millions, except per share amounts) for the periods endedNovember 30 : Three Months Ended Percent Six Months Ended Percent 2019 2018 Change 2019 2018 Change Revenues$ 17,324 $ 17,824 (3 )$ 34,372 $ 34,876 (1 ) Operating income (loss): FedEx Express segment 236 630 (63 ) 521 1,018 (49 ) FedEx Ground segment 342 590 (42 ) 986 1,266 (22 ) FedEx Freight segment 141 148 (5 ) 335 324 3
Corporate, other and eliminations (165 ) (200 ) 18
(311 ) (369 ) 16
Consolidated operating income 554 1,168 (53 ) 1,531 2,239 (32 )
Operating margin:
FedEx Express segment 2.6 % 6.6 % (400 ) bp 2.9 % 5.4 % (250 ) bp
FedEx Ground segment 6.4 % 11.5 % (510 ) bp 9.4 % 12.7 % (330 ) bp
FedEx Freight segment 7.6 % 7.7 % (10 ) bp 8.9 % 8.4 % 50 bp
Consolidated operating margin 3.2 % 6.6 % (340 ) bp 4.5 % 6.4 % (190 ) bp
Consolidated net income $ 560 $ 935 (40 ) $ 1,305 $ 1,770 (26 )
Diluted earnings per share $ 2.13 $ 3.51 (39 ) $ 4.97 $ 6.60 (25 )
Change in Revenue Change in Operating Income (Loss)
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
FedEx Express segment $ (520 ) $ (797 ) $ (394 ) $ (497 )
FedEx Ground segment 173 553 (248 ) (280 )
FedEx Freight segment (74 ) (128 ) (7 ) 11
FedEx Services segment 1 (4 ) - -
Corporate, other and eliminations (80 ) (128 ) 35 58
$ (500 ) $ (504 ) $ (614 ) $ (708 )
Overview
Consolidated operating income declined during both the second quarter and first
half of 2020 primarily due to weaker global economic conditions, increased costs
to expand services, the loss of business from a large customer and the later
timing of the Thanksgiving holiday, which shifted Cyber Week into December.
Continued mix shift to lower-yielding services and an increased competitive
pricing environment negatively impacted our results during the second quarter
and first half of 2020. During the second quarter of 2020, we recorded asset
impairment charges of $66 million ($50 million , net of tax, or $0.19 per diluted
share) associated with the decision to permanently retire certain aircraft and
related engines at FedEx Express (see "Asset Impairment Charges" below for more
information). These factors were partially offset by lower variable incentive
compensation expenses and increased yields at FedEx Freight. Lower variable
incentive compensation expenses benefited the comparison of our results by
approximately $65 million in the second quarter and $365 million in the first
half of 2020. Our first half 2020 results were negatively impacted by
approximately $100 million due to one fewer operating day.
Consolidated net income for the second quarter and first half of 2020 includes a
tax benefit of $133 million ($0.51 per diluted share) from the reduction of a
valuation allowance on certain foreign tax loss carryforwards. See the "Income
Taxes" section below for more information.
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We incurred TNT Express integration expenses totaling $64 million ($50 million ,
net of tax, or $0.19 per diluted share) in the second quarter and $135 million
($105 million , net of tax, or $0.40 per diluted share) in the first half of
2020, a $50 million decrease from the second quarter and a $100 million decrease
from the first half of 2019. The integration expenses are predominantly
incremental costs directly associated with the integration of TNT Express,
including professional and legal fees, salaries and employee benefits, travel
and advertising expenses, and include any restructuring charges at TNT Express.
Internal salaries and employee benefits are included only to the extent the
individuals are assigned full-time to integration activities. These costs were
incurred at FedEx Express and FedEx Corporate. The identification of these costs
as integration-related expenditures is subject to our disclosure controls and
procedures.
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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) over the five most recent quarters:
[[Image Removed]](1) International domestic average daily package volume relates to our
international intra-country operations. International export average daily
package volume relates to our international priority and economy services.
(2) International average daily freight pounds relates to our international
priority, economy and airfreight services.
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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends over the five most recent quarters:
[[Image Removed]](1) International export revenue per package relates to our international
priority and economy services. International domestic revenue per package
relates to our international intra-country operations.
(2) International revenue per pound relates to our international priority,
economy and airfreight services.
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Revenue
Revenues decreased 3% in the second quarter and 1% in the first half of 2020 primarily due to the loss of business from a large customer, macroeconomic weakness and lower fuel surcharges at all of our transportation segments, partially offset by residential delivery volume growth at FedEx Ground. In addition, one fewer operating day at all of our transportation segments negatively impacted revenue in the first half of 2020. Revenues at FedEx Express decreased 5% in the second quarter and 4% in the first half of 2020 primarily due to the loss of business from a large customer, macroeconomic weakness and trade uncertainty driving lower freight revenue and unfavorable exchange rates. At FedEx Ground, revenues increased 3% in the second quarter of 2020 due to residential delivery volume growth. Revenues at FedEx Ground increased 6% in the first half of 2020 due to residential delivery volume growth and increased yields. Additionally, the timing of peak-related revenue shifting to the third quarter this year, as well as the loss of business from a large customer, negatively impacted revenue comparisons during the second quarter and first half of 2020. FedEx Freight revenues decreased 4% in the second quarter and 3% in the first half of 2020 due to decreased average daily shipments, partially offset by higher revenue per shipment. Operating Expenses
The following tables compare operating expenses expressed as dollar amounts (in
millions) and as a percent of revenue for the periods ended
Three Months Ended Percent Six Months Ended Percent
2019 2018 Change 2019 2018 Change
Operating expenses:
Salaries and employee benefits $ 6,235 $ 6,260 - $ 12,322 $ 12,520 (2 )
Purchased transportation 4,328 4,346 - 8,356 8,313 1
Rentals and landing fees 924 836 11 1,844 1,659 11
Depreciation and amortization 901 828 9 1,780 1,636 9
Fuel 890 1,052 (15 ) 1,760 2,038 (14 )
Maintenance and repairs 774 751 3 1,542 1,486 4
Asset impairment charges 66 - NM 66 - NM
Other 2,652 2,583 3 5,171 4,985 4
Total operating expenses 16,770 16,656 1 32,841 32,637 1
Operating income $ 554 $ 1,168 (53 ) $ 1,531 $ 2,239 (32 )
Percent of Revenue
Three Months Ended Six Months Ended
2019 2018 2019 2018
Operating expenses:
Salaries and employee benefits 36.0 % 35.1 % 35.8 % 35.9 %
Purchased transportation 25.0 24.4 24.3 23.8
Rentals and landing fees 5.3 4.7 5.4 4.8
Depreciation and amortization 5.2 4.6 5.2 4.7
Fuel 5.1 5.9 5.1 5.8
Maintenance and repairs 4.5 4.2 4.5 4.3
Asset impairment charges 0.4 - 0.2 -
Other 15.3 14.5 15.0 14.3
Total operating expenses 96.8 93.4 95.5 93.6
Operating margin 3.2 % 6.6 % 4.5 % 6.4 %
Our results declined in the second quarter and first half of 2020 primarily due
to weaker global economic conditions, increased costs to expand services, the
loss of business from a large customer and the later timing of the Thanksgiving
holiday, which shifted Cyber Week into December. In addition, continued mix
shift to lower-yielding services and an increased competitive pricing
environment negatively impacted our results during the second quarter and first
half of 2020. Our results were also negatively impacted by one fewer operating
day at all of our transportation segments in the first half of 2020. These items
were partially offset by lower variable incentive compensation expenses and
increased yields at FedEx Freight. During the second quarter of 2020, we
recorded asset impairment charges of $66 million ($50 million , net of tax, or
$0.19 per diluted share) associated with the decision to permanently retire
certain aircraft and related engines at FedEx Express (see "Asset Impairment
Charges" below for more information).
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The adoption of the new lease accounting standard during the second quarter and
first half of 2020 resulted in a reclassification from other operating expense
to rentals and landing fees expense of $44 million in the second quarter and $91
million in the first half of 2020 and maintenance and repairs expense to rentals
and landing fees expense of $10 million in the second quarter and $22 million in
the first half of 2020. These amounts were reclassified in order to properly
align the lease and rental expenses to the appropriate line items in accordance
with the new standard and are excluded from the following year-over-year expense
change discussion.
Other operating expense increased 3% in the second quarter and 4% in the first
half of 2020 primarily due to higher self-insurance accruals at FedEx Ground and
higher outside service contract expense, including technology upgrades and
regulatory and clearance cost increases at FedEx Express. Salaries and employee
benefits expense decreased 2% in the first half of 2020 primarily due to lower
variable incentive compensation expenses, partially offset by merit increases.
Depreciation and amortization expense increased 9% in both the second quarter
and first half of 2020 primarily due to continued strategic investment programs
at all of our transportation segments. Maintenance and repairs expense increased
4% in the first half of 2020 primarily due to higher aircraft maintenance
expense at FedEx Express. Rentals and landing fees increased 11% in the first
half of 2020 primarily due to facility expansion at all of our transportation
segments. Purchased transportation costs increased 1% in the first half of 2020
primarily due to increased contractor settlement rates and higher volumes at
FedEx Ground, including expanding to six-day-per-week operations year-round in
January 2019 . These items were partially offset by favorable exchange rates at
FedEx Express, lower utilization of third-party transportation providers at
FedEx Freight and FedEx Express and decreased fuel costs at FedEx Ground and
FedEx Freight.
Fuel
The following graph for our transportation segments shows our average cost of jet and vehicle fuel per gallon for the five most recent quarters:
[[Image Removed]]
Fuel expense decreased 15% in the second quarter and 14% in the first half of
2020 primarily due to decreased fuel prices. However, fuel prices represent only
one component of the factors we consider meaningful in understanding the impact
of fuel on our business. Consideration must also be given to the fuel surcharge
revenue we collect. Accordingly, we believe discussion of the net impact of fuel
on our results, which is a comparison of the year-over-year change in these two
factors, is important to understand the impact of fuel on our business. In order
to provide information about the impact of fuel surcharges on the trend in
revenue and yield growth, we have included the comparative weighted-average fuel
surcharge percentages in effect for the second quarters of 2020 and 2019 in the
accompanying discussion of each of our transportation segments.
Most of our fuel surcharges are adjusted on a weekly basis. The fuel surcharge
is based on a weekly fuel price from two weeks prior to the week in which it is
assessed. Some FedEx Express international fuel surcharges incorporate a timing
lag of approximately six to eight weeks.
The manner in which we purchase fuel also influences the net impact of fuel on
our results. For example, our contracts for jet fuel purchases at FedEx Express
are tied to various indices, including the U.S. Gulf Coast index. While many of
these indices are aligned, each index may fluctuate at a different pace, driving
variability in the prices paid for jet fuel. Furthermore, under these
contractual arrangements, approximately 70% of our jet fuel is purchased based
on the index price for the preceding week, with the remainder of our purchases
tied to the index price for the preceding month and preceding day, rather than
based on daily spot rates. These contractual provisions mitigate the impact of
rapidly changing daily spot rates on our jet fuel purchases.
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Because of the factors described above, our operating results may be affected
should the market price of fuel suddenly change by a significant amount or
change by amounts that do not result in an adjustment in our fuel surcharges,
which can significantly affect our earnings either positively or negatively in
the short-term.
The net impact of fuel had a slightly negative impact to operating income in the
second quarter and first half of 2020 as lower fuel surcharges more than offset
decreased fuel prices.
We routinely review our fuel surcharges. On March 18, 2019 , we updated the
tables used to determine our fuel surcharges for FedEx Express U.S. domestic
services and at FedEx Ground. On September 10, 2018 , we updated the tables used
to determine our fuel surcharges at FedEx Express and FedEx Ground. The net
impact of fuel on operating income described above and for each segment below
excludes the impact from these table changes.
The net impact of fuel on our operating results does not consider the effects
that fuel surcharge levels may have on our business, including changes in demand
and shifts in the mix of services purchased by our customers. In addition, our
purchased transportation expense may be impacted by fuel costs. While
fluctuations in fuel surcharge percentages can be significant from period to
period, fuel surcharges represent one of the many individual components of our
pricing structure that impact our overall revenue and yield. Additional
components include the mix of services sold, the base price and extra service
charges we obtain for these services and the level of pricing discounts offered.
Asset Impairment Charges
During the second quarter of 2020, we made the decision to permanently retire from service 10 Airbus A310-300 aircraft and 12 related engines at FedEx Express to align with the needs of theU.S. domestic network and modernize its aircraft fleet. As a consequence of this decision, noncash impairment charges of$66 million ($50 million , net of tax, or$0.19 per diluted share) were recorded in the FedEx Express segment in the second quarter. Seven of these aircraft were temporarily idled. Income Taxes Our effective tax rate was 2.1% for the second quarter and 16.8% for the first half of 2020, compared with 20.6% for the second quarter and 22.3% for the first half of 2019. The 2020 tax rates were favorably impacted by$133 million from the reduction of a valuation allowance on certain foreign tax loss carryforwards due to operational changes which impacted the determination of the realizability of the deferred tax asset in that jurisdiction. The 2020 tax rates were negatively impacted by decreased earnings in certain non-U.S. jurisdictions. The 2019 tax rates were favorably impacted by the Tax Cuts and Jobs Act ("TCJA"), which resulted in an approximate$60 million tax benefit from accelerated deductions claimed on our 2018 tax return filed in 2019. We are subject to taxation inthe United States and variousU.S. state, local and foreign jurisdictions. We are currently under examination by the Internal Revenue Service ("IRS") for the 2016 and 2017 tax years. In addition, during the second quarter of 2020, we reached an agreement in principle with theIRS Office of Appeals for the 2014 and 2015 tax years. As a result, we recorded an immaterial reduction to our liabilities for uncertain tax positions during the quarter. It is reasonably possible that certain income tax return proceedings will be completed during the next twelve months and could result in a change in our balance of unrecognized tax benefits. The impact of any changes is not expected to be material to our consolidated financial statements.
Outlook
We expect continued weak macroeconomic conditions to result in lower revenue growth for the remainder of 2020 at our transportation segments. In addition, a more competitive pricing environment and higher operating costs at FedEx Ground are anticipated to contribute to operating income declines for the remainder of 2020. We anticipate that continued trade tensions, softness in European andAsia Pacific markets and declines in industrial production will continue to negatively impact our results for the remainder of 2020. Our international operations are much more sensitive to changes in global trade than ourU.S. domestic operations because of the higher concentration of business-to-business shipments internationally. The softer economic outlook is expected to create an ongoing revenue shortfall from planned levels, particularly inEurope andAsia Pacific . Furthermore, the cost of maintaining two separate networks inEurope while we execute the TNT Express integration is expected to compound the impact of the revenue shortfall on our near-term results. In theU.S. domestic package market, incremental costs associated with modernizing our FedEx Express network and permanently expanding our FedEx Ground network operations to seven days per week year-round, combined with volume declines from the loss of a large customer, has created a near-term cost-to-volume disparity. In addition, an increasingly competitive pricing environment is expected to continue pressuring our margins. However, we are confident that our investments in ourU.S. domestic package operations will ultimately result in higher revenue that more than offsets the implementation costs associated with these programs. - 39 - -------------------------------------------------------------------------------- In response to the current economic conditions, we have made adjustments to our FedEx ExpressU.S. domestic air network to better match capacity with demand, as discussed in the "Asset Impairment Charges" section above. Throughout the remainder of 2020, we will make further network capacity changes at FedEx Express by reducing international flight hours. If global economic conditions deteriorate further, we may take additional actions to reduce the size of our FedEx Express network.
At FedEx Ground, we are focused on improving revenue quality through rate increases that will go into effect in January and through surcharges on oversized and additional handling shipments. We are also making investments in technology aimed at improving productivity and lowering costs.
For the remainder of 2020, we will continue to execute our TNT Express integration plans and are focused on completing projects across our European hub and station locations that will allow interoperability between the ground networks for both FedEx Express and TNT Express packages. In addition, we continue to focus on integrating the FedEx Express and TNT Express linehaul and pickup-and-delivery operations for the key countries inEurope , which represent a significant percentage of international revenue, workforces and facilities. Integration activities inEurope are complex and require consultations with works councils and employee representatives in a number of countries. By the end of 2020, we expect European ground network interoperability to be substantially completed. The next key integration milestones include completing the integration of the FedEx Express and TNT Express linehaul and pickup-and-delivery operations and completing a single portfolio of services during 2021. We expect to complete international air network interoperability during the first half of 2022. We expect to begin realizing synergies from the combined FedEx Express/TNT Express network during 2021 once the linehaul and pickup-and-delivery networks are optimized, and expect synergy realization to increase significantly after international air network interoperability is completed. We expect to incur approximately$200 million of integration expenses in the remainder of 2020 in the form of professional fees, outside service contracts, salaries and wages and other operating expense. We expect the aggregate integration program expenses, including restructuring charges at TNT Express, to be approximately$1.7 billion through 2021, and we may incur additional costs, including investments that will further transform and optimize the combined businesses. The timing and amount of integration expenses and capital investments in any future period may change as we revise and implement our plans. Our expectations for the remainder of 2020 are dependent on key external factors, including moderateU.S. economic growth, current fuel price expectations, no further weakening in international economic conditions from our current forecast and no additional adverse developments in international trade policies and relations.
Other Outlook Matters. For details on key 2020 capital projects, refer to the "Liquidity Outlook" section of this MD&A.
See "Forward-Looking Statements" and Part II, Item 1A "Risk Factors" for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.
RECENT ACCOUNTING GUIDANCE
See Note 1 of the accompanying unaudited condensed consolidated financial statements for a discussion of recent accounting guidance.
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--------------------------------------------------------------------------------REPORTABLE SEGMENTS
FedEx Express, FedEx Ground and FedEx Freight represent our major service lines and, along with FedEx Services, constitute our reportable segments. Our reportable segments include the following businesses:
FedEx Express Segment FedEx Express (express transportation)
TNT Express (international express transportation,
small-package ground delivery and freight
transportation)
FedEx Ground Segment FedEx Ground (small-package ground delivery)
FedEx Freight Segment FedEx Freight (LTL freight transportation)
FedEx Services Segment FedEx Services (sales, marketing, information
technology, communications, customer service, technical
support, billing and collection services and back-office
functions)
FEDEX SERVICES SEGMENT
The operating expense line item "Intercompany charges" on the accompanying unaudited condensed consolidated financial statements of our transportation segments reflects the allocations from the FedEx Services segment to the respective operating segments. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided.
The FedEx Services segment provides direct and indirect support to our operating segments, and we allocate all of the net operating costs of the FedEx Services segment to reflect the full cost of operating our businesses in the results of those segments. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance is evaluated based on the impact of its total allocated net operating costs on our operating segments. We believe these allocations approximate the net cost of providing these functions. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.
CORPORATE, OTHER AND ELIMINATIONS
Corporate and other includes corporate headquarters costs for executive officers and certain legal and finance functions, as well as certain other costs and credits not attributed to our core business. These costs are not allocated to the other business segments. Also included in corporate and other is the FedEx Office operating segment, which provides an array of document and business services and retail access to our customers for our package transportation businesses, and theFedEx Logistics, Inc. operating segment, which provides integrated supply chain management solutions, specialty transportation, cross-border e-commerce technology and e-commerce transportation solutions, customs brokerage and global ocean and air freight forwarding. Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results and are not separately identified in the following segment information because the amounts are not material. - 41 - --------------------------------------------------------------------------------
FEDEX EXPRESS SEGMENT
FedEx Express offers a wide range ofU.S. domestic and international shipping services for delivery of packages and freight including priority, deferred and economy services, which provide delivery on a time-definite or day-definite basis. The following tables compare revenues, operating expenses, operating income (dollars in millions), operating margin and operating expenses as a percent of revenue for the periods endedNovember 30 : Three Months Ended Percent Six Months Ended Percent 2019 2018 Change 2019 2018 Change Revenues: Package: U.S. overnight box$ 1,864 $ 1,948 (4 )$ 3,730 $ 3,834 (3 ) U.S. overnight envelope 457 444 3 936 912 3 U.S. deferred 980 1,060 (8 ) 1,936 2,012 (4 ) TotalU.S. domestic package revenue 3,301 3,452 (4 ) 6,602 6,758 (2 ) International priority 1,817 1,896 (4 ) 3,634 3,770 (4 ) International economy 873 885 (1 ) 1,728 1,735 - Total international export package revenue 2,690 2,781 (3 ) 5,362 5,505 (3 ) International domestic(1) 1,165 1,203 (3 ) 2,241 2,334 (4 ) Total package revenue 7,156 7,436 (4 ) 14,205 14,597 (3 ) Freight: U.S. 698 792 (12 ) 1,393 1,522 (8 ) International priority 473 564 (16 ) 937 1,097 (15 ) International economy 541 554 (2 ) 1,057 1,073 (1 ) International airfreight 70 83 (16 ) 136 168 (19 ) Total freight revenue 1,782 1,993 (11 ) 3,523 3,860 (9 ) Other 146 175 (17 ) 301 369 (18 ) Total revenues 9,084 9,604 (5 ) 18,029 18,826 (4 ) Operating expenses: Salaries and employee benefits 3,405 3,441 (1 ) 6,777 6,914 (2 ) Purchased transportation 1,267 1,354 (6 ) 2,499 2,661 (6 ) Rentals and landing fees 505 474 7 1,018 944 8 Depreciation and amortization 469 449 4 931 885 5 Fuel 754 899 (16 ) 1,497 1,744 (14 ) Maintenance and repairs 514 514 - 1,031 1,016 1 Asset impairment charges 66 - NM 66 - NM Intercompany charges 500 517 (3 ) 969 1,035 (6 ) Other 1,368 1,326 3 2,720 2,609 4 Total operating expenses 8,848 8,974 (1 ) 17,508 17,808 (2 ) Operating income$ 236 $ 630 (63 )$ 521 $ 1,018 (49 ) Operating margin 2.6 % 6.6 % (400 ) bp 2.9 % 5.4 % (250 ) bp
(1) International domestic revenues relate to our international intra-country
operations.
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Percent of Revenue
Three Months Ended Six Months Ended
2019 2018 2019 2018
Operating expenses:
Salaries and employee benefits 37.5 % 35.8 % 37.6 % 36.7 %
Purchased transportation 13.9 14.1 13.9 14.1
Rentals and landing fees 5.6 4.9 5.6 5.0
Depreciation and amortization 5.2 4.7 5.1 4.7
Fuel 8.3 9.4 8.3 9.3
Maintenance and repairs 5.6 5.3 5.7 5.4
Asset impairment charges 0.7 - 0.4 -
Intercompany charges 5.5 5.4 5.4 5.5
Other 15.1 13.8 15.1 13.9
Total operating expenses 97.4 93.4 97.1 94.6
Operating margin 2.6 % 6.6 % 2.9 % 5.4 %
The following table compares selected statistics (in thousands, except yield
amounts) for the periods ended
Three Months Ended Percent Six Months Ended Percent
2019 2018 Change 2019 2018 Change
Package Statistics
Average daily package volume (ADV):
U.S. overnight box 1,244 1,308 (5 ) 1,231 1,269 (3 )
U.S. overnight envelope 547 532 3 554 541 2
U.S. deferred 1,012 1,082 (6 ) 994 998 -
Total U.S. domestic ADV 2,803 2,922 (4 ) 2,779 2,808 (1 )
International priority 565 555 2 548 540 1
International economy 315 302 4 304 289 5
Total international export ADV 880 857 3 852 829 3
International domestic(1) 2,669 2,670 - 2,509 2,530 (1 )
Total ADV 6,352 6,449 (2 ) 6,140 6,167 -
Revenue per package (yield):
U.S. overnight box $ 23.78 $ 23.63 1 $ 23.86 $ 23.60 1
U.S. overnight envelope 13.26 13.24 - 13.29 13.16 1
U.S. deferred 15.39 15.54 (1 ) 15.34 15.75 (3 )
U.S. domestic composite 18.70 18.75 - 18.71 18.80 -
International priority 51.03 54.25 (6 ) 52.25 54.52 (4 )
International economy 43.94 46.45 (5 ) 44.71 46.92 (5 )
International export composite 48.49 51.50 (6 ) 49.55 51.87 (4 )
International domestic(1) 6.92 7.15 (3 ) 7.03 7.21 (2 )
Composite package yield $ 17.88 $ 18.30 (2 ) $ 18.21 $ 18.49 (2 )
Freight Statistics
Average daily freight pounds:
U.S. 8,364 8,917 (6 ) 8,188 8,608 (5 )
International priority 5,230 5,684 (8 ) 5,010 5,469 (8 )
International economy 15,241 15,373 (1 ) 14,473 14,401 -
International airfreight 1,726 1,759 (2 ) 1,640 1,738 (6 )
Total average daily freight pounds 30,561 31,733 (4 ) 29,311 30,216 (3 )
Revenue per pound (yield):
U.S. $ 1.32 $ 1.41 (6 ) $ 1.34 $ 1.38 (3 )
International priority 1.43 1.57 (9 ) 1.47 1.57 (6 )
International economy 0.56 0.57 (2 ) 0.57 0.58 (2 )
International airfreight 0.65 0.75 (13 ) 0.65 0.75 (13 )
Composite freight yield $ 0.93 $ 1.00 (7 ) $ 0.95 $ 1.00 (5 )
(1) International domestic statistics relate to our international intra-country
operations.
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FedEx Express Segment Revenues
FedEx Express segment revenues decreased 5% in the second quarter and 4% in the first half of 2020 primarily due to the loss of business from a large customer, macroeconomic weakness and trade uncertainty resulting in lower freight revenue, lower fuel surcharges and unfavorable exchange rates. In addition, one fewer operating day contributed to the decline in the first half of 2020. Freight yields decreased 7% in the second quarter and 5% in the first half of 2020 primarily due to base yield declines, lower fuel surcharges and unfavorable exchange rates. Average daily freight pounds decreased 4% in the second quarter and 3% in the first half of 2020 primarily due to lower volume in freight services as a result of macroeconomic weakness and trade uncertainty.U.S. domestic package yields remained flat in both the second quarter and first half of 2020 as base rate improvement was offset by lower package weights and lower fuel surcharges.U.S. domestic package average daily volumes decreased 4% in the second quarter and 1% in the first half of 2020 driven by the loss of business from a large customer, partially offset by growth in overnight and deferred volume from other customers. International export package yields decreased 6% in the second quarter and 4% in the first half of 2020 driven by base yield declines, lower fuel surcharges and unfavorable exchange rates. International export package average daily volumes increased 3% in both the second quarter and first half of 2020 led by volume growth inEurope . However, international package volume growth has slowed across most regions as a result of macroeconomic weakness and trade uncertainty. International domestic package yields decreased 3% in the second quarter and 2% in the first half of 2020 as base yield improvement was more than offset by unfavorable exchange rates. International domestic package average daily volumes remained flat in the second quarter and decreased 1% in the first half of 2020 primarily due to targeted yield management actions.
FedEx Express's
Three Months Ended Six Months Ended
2019 2018 2019 2018
U.S. Domestic and Outbound Fuel
Surcharge:
Low 7.21 % 7.90 % 7.21 % 7.02 %
High 8.45 10.80 8.45 10.80
Weighted-average 7.53 8.60 7.54 7.87
International Export and Freight Fuel
Surcharge:
Low 6.74 8.32 6.74 8.12
High 18.56 17.81 18.56 18.09
Weighted-average 15.64 14.87 15.59 14.74
International Domestic Fuel Surcharge:
Low 3.20 2.57 3.20 2.25
High 19.40 19.40 19.47 19.40
Weighted-average 7.29 6.07 7.39 5.88
On September 16, 2019 , FedEx Express announced a 4.9% average list price
increase for U.S. domestic, U.S. export and U.S. import services effective
January 6, 2020 . On March 18, 2019 , we updated the tables used to determine our
fuel surcharges for FedEx Express U.S. domestic services. On January 7, 2019 ,
FedEx Express implemented a 4.9% average list price increase for U.S. domestic,
U.S. export and U.S. import services. On September 10, 2018 , we updated the
tables used to determine our fuel surcharges at FedEx Express.
FedEx Express Segment Operating Income
FedEx Express segment operating income decreased 63% in the second quarter and 49% in the first half of 2020 primarily due to weaker global economic conditions and the loss of business from a large customer. In addition, continued mix shift to lower-yielding services and an increased competitive pricing environment negatively impacted our results during the second quarter and first half of 2020. Operating income and operating margin were negatively impacted by one fewer operating day in the first half of 2020. During the second quarter of 2020, we recorded asset impairment charges of$66 million associated with the decision to permanently retire certain aircraft and related engines (see "Asset Impairment Charges" above for more information). Lower variable incentive compensation expenses benefited operating income comparisons by approximately$35 million in the second quarter and$200 million in the first half of 2020. FedEx Express segment results included$49 million of TNT Express integration expenses in the second quarter and$106 million of such expenses in the first half of 2020, a$50 million decrease from the second quarter and a$95 million decrease from the first half of 2019. - 44 - -------------------------------------------------------------------------------- The lease standard reclassification discussed in the "Overview" section above is excluded from the following year-over-year expense change discussion. Purchased transportation expense decreased 6% in both the second quarter and first half of 2020 primarily due to favorable exchange rates and lower international freight volumes, resulting in lower utilization of third-party transportation providers. Other operating expense increased 3% in the second quarter and 4% in the first half of 2020 primarily due to higher outside service contract expense, including technology upgrades and regulatory and clearance cost increases. Salaries and employee benefits expense decreased 2% in the first half of 2020 primarily due to lower variable incentive compensation expenses, favorable exchange rates and the inclusion of certain TNT Express restructuring expenses in the first quarter of 2019, partially offset by merit increases. Fuel expense decreased 16% in the second quarter and 14% in the first half of 2020 due to decreased fuel prices. The net impact of fuel had a slightly negative impact to operating income in the second quarter and first half of 2020 as lower fuel surcharges more than offset decreased fuel prices. See the "Fuel" section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results. - 45 - --------------------------------------------------------------------------------
FEDEX GROUND SEGMENT
FedEx Ground service offerings include day-certain delivery to businesses in theU.S. andCanada and to 100% ofU.S. residences. The following tables compare revenues, operating expenses, operating income (dollars in millions), operating margin, selected package statistics (in thousands, except yield amounts) and operating expenses as a percent of revenue for the periods endedNovember 30 : Three Months Ended Percent Six Months Ended Percent 2019 2018 Change 2019 2018 Change Revenues$ 5,315 $ 5,142 3$ 10,494 $ 9,941 6 Operating expenses: Salaries and employee benefits 971 891 9 1,842 1,696 9 Purchased transportation 2,561 2,342 9 4,864 4,404 10 Rentals 249 200 25 488 391 25 Depreciation and amortization 195 180 8 388 353 10 Fuel 4 4 - 7 7 - Maintenance and repairs 98 84 17 185 161 15 Intercompany charges 394 390 1 769 778 (1 ) Other 501 461 9 965 885 9 Total operating expenses 4,973 4,552 9 9,508 8,675 10 Operating income$ 342 $ 590 (42 )$ 986 $ 1,266 (22 ) Operating margin 6.4 % 11.5 % (510 ) bp 9.4 % 12.7 % (330 ) bp Average daily package volume 9,556 9,237 3 9,192 8,721 5 Revenue per package (yield)$ 8.80 $ 8.81 -$ 8.96 $ 8.88 1 Percent of Revenue Three Months Ended Six Months Ended 2019 2018 2019 2018 Operating expenses: Salaries and employee benefits 18.3 % 17.3 % 17.6 % 17.1 % Purchased transportation 48.2 45.5 46.3 44.3 Rentals 4.7 3.9 4.6 3.9 Depreciation and amortization 3.7 3.5 3.7 3.6 Fuel 0.1 0.1 0.1 0.1 Maintenance and repairs 1.8 1.6 1.8 1.6 Intercompany charges 7.4 7.6 7.3 7.8 Other 9.4 9.0 9.2 8.9 Total operating expenses 93.6 88.5 90.6 87.3 Operating margin 6.4 % 11.5 % 9.4 % 12.7 %
FedEx Ground Segment Revenues
FedEx Ground segment revenues increased 3% in the second quarter of 2020 due to residential delivery volume growth. Revenues increased 6% in the first half of 2020 due to residential delivery volume growth and increased yields, partially offset by one fewer operating day. In addition, the later timing of theThanksgiving holiday, which shifted Cyber Week into December, as well as the loss of business from a large customer, negatively impacted revenue comparisons during the second quarter and first half of 2020. Average daily volume increased 3% in the second quarter and 5% in the first half of 2020 primarily due to continued growth in residential services driven by e-commerce. FedEx Ground yields remained flat in the second quarter of 2020 as higher base yields were offset by lower fuel surcharges. FedEx Ground yields increased 1% in the first half of 2020 primarily due to higher base yields. The FedEx Ground fuel surcharge is based on a rounded average of the nationalU.S. on-highway average price for a gallon of diesel fuel, as published by theDepartment of Energy . The fuel surcharge ranged as follows for the periods endedNovember 30 : Three Months Ended Six Months Ended 2019 2018 2019 2018 Low 6.75 % 6.25 % 6.75 % 6.25 % High 7.00 7.75 7.25 7.75 Weighted-average 6.92 7.40 6.98 6.87 - 46 -
-------------------------------------------------------------------------------- OnSeptember 16, 2019 , FedEx Ground announced a 4.9% average list price increase effectiveJanuary 6, 2020 . OnMarch 18, 2019 , we updated the tables used to determine our fuel surcharges at FedEx Ground. OnJanuary 7, 2019 , FedEx Ground implemented a 4.9% average list price increase. OnSeptember 10, 2018 , we updated the tables used to determine our fuel surcharges at FedEx Ground.
FedEx Ground Segment Operating Income
FedEx Ground segment operating income decreased 42% in the second quarter and 22% in the first half of 2020 due to increased costs to expand services, higher self-insurance accruals and the later timing of theThanksgiving holiday, which shifted Cyber Week into December. In addition, the loss of business from a large customer, as well as continued mix shift to lower-yielding services and an increased competitive pricing environment, negatively impacted our results during the second quarter and first half of 2020. These items were partially offset by residential delivery volume growth in both the second quarter and first half of 2020, as well as increased base yields in the first half of 2020. Additionally, lower variable incentive compensation expenses benefited operating income comparisons by approximately$10 million in the second quarter and$60 million in the first half of 2020. The lease standard reclassification discussed in the "Overview" section above is excluded from the following year-over-year expense change discussion. Purchased transportation expense increased 9% in the second quarter and 10% in the first half of 2020 due to increased contractor settlement rates and higher volumes, including expanding to six-day per week operations year-round, partially offset by decreased fuel costs. Other operating expense increased 9% in both the second quarter and first half of 2020 primarily due to higher self-insurance accruals and increased bad debt expense. Salaries and employee benefits expense increased 9% in both the second quarter and first half of 2020 due to additional staffing to support volume growth, including current and anticipated expansion of year-round operations, network expansion and merit increases, partially offset by lower variable incentive compensation expenses. The net impact of fuel had a slightly negative impact to operating income in the second quarter of 2020 as lower fuel surcharges more than offset decreased fuel prices. The net impact of fuel had a slight benefit to operating income in the first half of 2020 as decreased fuel prices more than offset lower fuel surcharges. See the "Fuel" section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results.
Service Provider Transition
During the second quarter of 2020, FedEx Ground completed the previously
announced transition to the Independent Service Provider agreement throughout
its entire
- 47 -
--------------------------------------------------------------------------------FEDEX FREIGHT SEGMENT
FedEx Freight LTL service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following tables compare revenues, operating expenses, operating income (dollars in millions), operating margin, selected statistics and operating expenses as a percent of revenue for the periods endedNovember 30 : Three Months Ended Percent Six Months Ended Percent 2019 2018 Change 2019 2018 Change Revenues$ 1,844 $ 1,918 (4 )$ 3,749 $ 3,877 (3 ) Operating expenses: Salaries and employee benefits 900 919 (2 ) 1,819 1,847 (2 ) Purchased transportation 187 250 (25 ) 374 509 (27 ) Rentals 52 42 24 104 84 24 Depreciation and amortization 97 76 28 191 154 24 Fuel 132 150 (12 ) 255 287 (11 ) Maintenance and repairs 68 63 8 133 125 6 Intercompany charges 130 137 (5 ) 256 275 (7 ) Other 137 133 3 282 272 4 Total operating expenses 1,703 1,770 (4 ) 3,414 3,553 (4 ) Operating income$ 141 $ 148 (5 )$ 335 $ 324 3 Operating margin 7.6 % 7.7 % (10 ) bp 8.9 % 8.4 % 50 bp Average daily shipments (in thousands): Priority 77.4 81.7 (5 ) 78.0 81.4 (4 ) Economy 32.6 35.4 (8 ) 32.7 35.0 (7 ) Total average daily shipments 110.0 117.1 (6 ) 110.7 116.4 (5 ) Weight per shipment (lbs): Priority 1,139 1,203 (5 ) 1,147 1,211 (5 ) Economy 983 1,043 (6 ) 971 1,026 (5 ) Composite weight per shipment 1,092 1,155 (5 ) 1,095 1,155 (5 ) Revenue per shipment: Priority$ 258.90 $ 249.76 4$ 257.14 $ 248.24 4 Economy 295.29 297.73 (1 ) 295.53 295.00 - Composite revenue per shipment$ 270.38 $ 264.27 2$ 268.83 $ 262.29 2 Revenue per hundredweight: Priority$ 22.74 $ 20.76 10$ 22.41 $ 20.50 9 Economy 30.05 28.55 5 30.43 28.76 6 Composite revenue per hundredweight$ 24.75 $ 22.89 8$ 24.54 $ 22.71 8 Percent of Revenue Three Months Ended Six Months Ended 2019 2018 2019 2018 Operating expenses: Salaries and employee benefits 48.8 % 47.9 % 48.5 % 47.6 % Purchased transportation 10.1 13.0 10.0 13.1 Rentals 2.8 2.2 2.8 2.2 Depreciation and amortization 5.3 4.0 5.1 4.0 Fuel 7.2 7.8 6.8 7.4 Maintenance and repairs 3.7 3.3 3.6 3.2 Intercompany charges 7.1 7.2 6.8 7.1 Other 7.4 6.9 7.5 7.0 Total operating expenses 92.4 92.3 91.1 91.6 Operating margin 7.6 % 7.7 % 8.9 % 8.4 % - 48 -
--------------------------------------------------------------------------------
FedEx Freight Segment Revenues
FedEx Freight segment revenues decreased 4% in the second quarter and 3% in the first half of 2020 due to decreased average daily shipments, partially offset by higher revenue per shipment. In addition, one fewer operating day contributed to the decline in the first half of 2020. Average daily shipments decreased 6% in the second quarter and 5% in the first half of 2020 due to lower demand for our service offerings as a result of softening economic conditions. Revenue per shipment increased 2% in both the second quarter and first half of 2020 primarily due to higher base rates reflecting our ongoing yield management initiatives, partially offset by lower weight per shipment and lower fuel surcharges. The weekly indexed fuel surcharge is based on the average of theU.S. on-highway prices for a gallon of diesel fuel, as published by theDepartment of Energy . The indexed FedEx Freight fuel surcharge ranged as follows for the periods endedNovember 30 : Three Months Ended Six Months Ended 2019 2018 2019 2018 Low 23.50 % 24.90 % 23.50 % 24.60 % High 24.00 25.60 24.40 25.60 Weighted-average 23.80 25.19 23.80 24.97 OnSeptember 16, 2019 , FedEx Freight announced a 5.9% average list price increase in certainU.S. and other shipping rates effectiveJanuary 6, 2020 . OnJanuary 7, 2019 , FedEx Freight implemented a 5.9% average list price increase in certainU.S. and other shipping rates.
FedEx Freight Segment Operating Income
FedEx Freight segment operating income decreased 5% in the second quarter of 2020, driven by decreased volumes resulting from softening economic conditions. FedEx Freight continues to focus on yield management, improving profit and aligning its cost structure with current and anticipated business levels, enabling FedEx Freight to significantly offset the impact of lower volumes from softening economic conditions. FedEx Freight segment operating income increased 3% in the first half of 2020 primarily due to higher revenue per shipment, despite moderating volumes. In addition, lower variable incentive compensation expenses benefited operating income comparisons by approximately$5 million in the second quarter and$35 million in the first half of 2020. The lease standard reclassification discussed in the "Overview" section above is excluded from the following year-over-year expense change discussion. Purchased transportation expense decreased 25% in the second quarter and 27% in the first half of 2020 primarily due to lower utilization of third-party transportation providers. Depreciation and amortization expense increased 28% in the second quarter and 24% in the first half of 2020 due to investments in vehicles and trailers, as well as facility expansion. Fuel expense decreased 12% in the second quarter and 11% in the first half of 2020 primarily due to decreased fuel prices. The net impact of fuel had a moderately negative impact to operating income in the second quarter and first half of 2020 as lower fuel surcharges more than offset decreased fuel prices. See the "Fuel" section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results. - 49 - --------------------------------------------------------------------------------
FINANCIAL CONDITION LIQUIDITY Cash and cash equivalents totaled$2.0 billion atNovember 30, 2019 , compared to$2.3 billion atMay 31, 2019 . The following table provides a summary of our cash flows for the six-month periods endedNovember 30 (in millions): 2019 2018 Operating activities: Net income$ 1,305 $ 1,770 Noncash charges and credits 3,322 2,140 Changes in assets and liabilities (2,553 ) (1,731 ) Cash provided by operating activities 2,074 2,179 Investing activities: Capital expenditures (3,266 ) (2,634 ) Proceeds from asset dispositions and other 4 53 Cash used in investing activities (3,262 ) (2,581 ) Financing activities: Proceeds from short-term borrowings, net 150 248 Proceeds from debt issuances 2,093 1,233 Principal payments on debt (1,021 ) (785 ) Proceeds from stock issuances 26 45 Dividends paid (339 ) (173 ) Purchase of treasury stock (3 ) (1,271 ) Other, net (5 ) 1
Cash provided by (used in) financing activities 901 (702 ) Effect of exchange rate changes on cash
(1 ) (38 )
Net decrease in cash and cash equivalents
Cash flows from operating activities decreased$105 million in the first half of 2020 primarily due to higher pension contributions and lower net income, partially offset by lower variable incentive compensation payments. Capital expenditures increased during the first half of 2020 primarily due to higher spending related to facilities and aircraft at FedEx Express, increased spending on vehicles and trailers at our transportation segments and increased spending on information technology at FedEx Services, FedEx Express and FedEx Freight. See "Capital Resources" for a discussion of capital expenditures during 2020 and 2019. During the first quarter of 2020, we issued$2.1 billion of senior unsecured debt under our current shelf registration statement, comprised of$1.0 billion of 3.10% fixed-rate notes due inAugust 2029 , €500 million of 0.45% fixed-rate notes due inAugust 2025 and €500 million of 1.30% fixed-rate notes due inAugust 2031 . We used the net proceeds to make voluntary contributions to our tax-qualifiedU.S. domestic pension plans ("U.S. Pension Plans") during the first quarter of 2020 and to redeem the$400 million aggregate principal amount of 2.30% notes dueFebruary 1, 2020 and the €500 million aggregate principal amount of 0.50% notes dueApril 9, 2020 . The remaining net proceeds are being used for general corporate purposes. During the second quarter of 2020, we issued commercial paper to provide us with additional short-term liquidity. As ofNovember 30, 2019 , we had$150 million of commercial paper outstanding. See Note 3 of the accompanying unaudited condensed consolidated financial statements for further discussion. InJanuary 2016 , our Board of Directors approved a stock repurchase program of up to 25 million shares. Shares under this repurchase program may be repurchased from time to time in the open market or in privately negotiated transactions. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of FedEx common stock and general market conditions. No time limit was set for the completion of the program, and the program may be suspended or discontinued at any time. We did not repurchase any shares of FedEx common stock during the second quarter of 2020. During the first half of 2020, we repurchased 0.02 million shares of FedEx common stock at an average price of$156.90 per share for a total of$3 million . As ofNovember 30, 2019 , 5.1 million shares remained under the stock repurchase authorization. - 50 -
--------------------------------------------------------------------------------
CAPITAL RESOURCES
Our operations are capital intensive, characterized by significant investments in aircraft, vehicles and trailers, technology, facilities, and package handling and sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, availability of satisfactory financing and actions of regulatory authorities.
The following table compares capital expenditures by asset category and
reportable segment for the periods ended
Percent Change
2019/2018
Three Months Ended Six Months Ended Three Months Six Months
2019 2018 2019 2018 Ended Ended
Aircraft and related equipment
$ 1,075 (3 ) 5 Package handling and ground support equipment 267 223 408 417 20 (2 ) Vehicles and trailers 399 275 660 435 45 52 Information technology 243 157 465 332 55 40 Facilities and other 352 196 605 375 80 61
Total capital expenditures
$ 2,634 27 24 FedEx Express segment$ 1,061 $ 932 $ 2,012 $ 1,692 14 19 FedEx Ground segment 447 253 543 429 77 27 FedEx Freight segment 131 137 317 227 (4 ) 40 FedEx Services segment 154 99 305 224 56 36 Other 55 34 89 62 62 44
Total capital expenditures
$ 2,634 27 24 Capital expenditures increased during the first half of 2020 primarily due to higher spending related to facilities and aircraft at FedEx Express, which included the delivery of seven Boeing 767-300 Freighter ("B767F") aircraft and five Boeing 777 Freighter aircraft, increased spending on vehicles and trailers at our transportation segments and increased spending on information technology at FedEx Services, FedEx Express and FedEx Freight.
LIQUIDITY OUTLOOK
We believe that our cash and cash equivalents, cash flow from operations and available financing sources will be adequate to meet our liquidity needs, including working capital, capital expenditure requirements, debt payment obligations, pension contributions and TNT Express integration expenses. Our cash and cash equivalents balance atNovember 30, 2019 includes$1.1 billion of cash in foreign jurisdictions associated with our permanent reinvestment strategy. We are able to access the majority of this cash without a material tax cost, as the enactment of the TCJA significantly reduced the cost of repatriating foreign earnings from aU.S. tax perspective. We do not believe that the indefinite reinvestment of these funds impairs our ability to meet ourU.S. domestic debt or working capital obligations. Our capital expenditures are expected to be approximately$5.9 billion in 2020, and include spending for aircraft and hub modernization at FedEx Express, investments that increase our efficiency in handling large packages at FedEx Ground and investments in technology across all transportation segments that will further optimize our networks and enhance our capabilities. We invested$1.1 billion in aircraft and related equipment in the first half of 2020 and expect to invest an additional$0.4 billion for aircraft and related equipment during the remainder of 2020. In addition, we are making investments over multiple years in our facilities of approximately$1.5 billion to significantly expand the FedEx Express Indianapolis hub and approximately$1.5 billion to modernize the FedEx Express Memphis World Hub. Despite our declining capacity needs, these investments in hubs will provide productivity gains in a competitive labor environment. We anticipate that our cash flow from operations will be sufficient to fund our capital expenditures in 2020. Historically, we have been successful in obtaining unsecured financing, from both domestic and international sources, although the marketplace for such investment capital can become restricted depending on a variety of economic factors.
During the first quarter of 2020, FedEx Express exercised options to purchase an additional six B767F aircraft for delivery in 2022.
We have a shelf registration statement filed with theSecurities and Exchange Commission ("SEC") that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock. - 51 - -------------------------------------------------------------------------------- We have a$2.0 billion five-year credit agreement (the "Five-Year Credit Agreement") and a$1.5 billion 364-day credit agreement (the "364-Day Credit Agreement" and, together with the Five-Year Credit Agreement, the "Credit Agreements"). The Five-Year Credit Agreement expires inMarch 2024 and includes a$250 million letter of credit sublimit. The 364-Day Credit Agreement expires inMarch 2020 . The Credit Agreements are available to finance our operations and other cash flow needs. See Note 3 of the accompanying unaudited condensed consolidated financial statements for a description of the terms and significant covenants of the Credit Agreements.
During the first half of 2020, we made voluntary contributions totaling
Standard & Poor's has assigned us a senior unsecured debt credit rating of BBB, a commercial paper rating of A-2 and a ratings outlook of "stable." Moody's Investors Service has assigned us an unsecured debt credit rating of Baa2, a commercial paper rating of P-2 and a ratings outlook of "negative." If our credit ratings drop, our interest expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt credit ratings drop below investment grade, our access to financing may become limited.
CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following table sets forth a summary of our contractual cash obligations as ofNovember 30, 2019 . Payments Due by Fiscal Year (Undiscounted) (in millions) 2020 (1) 2021 2022 2023 2024 Thereafter Total Operating activities: Operating leases$ 1,249 $ 2,355 $ 2,105 $ 1,866 $ 1,559 $ 7,841 $ 16,975 Non-capital purchase obligations and other 697 979 777 593 460 3,761 7,267 Interest on long-term debt 338 649 649 620 598 10,183 13,037 Investing activities: Aircraft and related capital commitments 449 2,337 2,324 1,550 468 228 7,356 Other capital purchase obligations 20 25 24 23 1 5 98 Financing activities: Debt - - 1,205 1,577 750 15,271 18,803 Finance leases 13 14 14 13 11 78 143 Total$ 2,766 $ 6,359 $ 7,098 $ 6,242 $ 3,847 $ 37,367 $ 63,679
(1) Cash obligations for the remainder of 2020.
Included in the table above within the caption entitled "Non-capital purchase obligations and other" is our estimate of the current portion of the liability ($99 million ) for uncertain tax positions. We cannot reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time; therefore, the long-term portion of the liability ($36 million ) is excluded from the table.
We had
The amounts reflected in the table above for finance leases represent
undiscounted future minimum lease payments under noncancelable finance leases
with an initial or remaining term in excess of one year at
Additional information on amounts included within the operating, investing and financing activities captions in the table above can be found in our Annual Report.
We do not have any guarantees or other off-balance sheet financing arrangements,
including variable interest entities, which we believe could have a material
impact on our financial condition or liquidity.
- 52 -
--------------------------------------------------------------------------------OTHER BUSINESS MATTERS
During the first quarter of 2020, FedEx filed suit inU.S. District Court in theDistrict of Columbia seeking to enjoin theU.S. Department of Commerce from enforcing prohibitions contained in the Export Administration Regulations (the "EARs") against FedEx. FedEx believes that the EARs violate common carriers' rights to due process under the Fifth Amendment of theU.S. Constitution as they unreasonably hold common carriers strictly liable for shipments that may violate the EARs without requiring evidence that the carriers had knowledge of any violations.The China State Post Bureau is currently conducting an investigation into the operations of FedEx Express regarding its handling of certain packages while attempting to comply with the EARs. FedEx Express has and will continue to fully cooperate with the Chinese authorities on the investigation.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States requires management to make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.GOODWILL .Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that the fair value of a reporting unit has fallen below its carrying value. We do not believe there has been any other change of events or circumstances that would indicate that a reevaluation of the goodwill of our reporting units is required as ofNovember 30, 2019 , nor do we believe the goodwill of our reporting units is at risk of failing impairment testing. For additional details on goodwill impairment testing, refer to Note 1 to the financial statements included in our Annual Report.
Information regarding our critical accounting estimates can be found in our Annual Report, including Note 1 to the financial statements therein. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including (but not limited to) those contained in "Fuel," "Income Taxes," "Outlook," "Liquidity Outlook," "Contractual Cash Obligations and Off-Balance Sheet Arrangements" and "Critical Accounting Estimates," and the "Financing Arrangements," "Retirement Plans," "Leases," "Commitments" and "Contingencies" notes to the consolidated financial statements, are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words "will," "may," "could," "would," "should," "believes," "expects," "anticipates," "plans," "estimates," "targets," "projects," "intends" or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements because of, among other things, potential risks and uncertainties, such as:
• economic conditions in the global markets in which we operate;
• significant changes in the volumes of shipments transported through our
networks, customer demand for our various services or the prices we obtain for
our services;
• anti-trade measures and additional changes in international trade policies and
relations;
• a significant data breach or other disruption to our technology
infrastructure;
• our ability to successfully integrate the businesses and operations of FedEx
Express and TNT Express in the expected time frame and at the expected cost
and to achieve the expected benefits from the combined businesses;
• our ability to successfully implement our business strategy and effectively
respond to changes in market dynamics;
• the impact of the
Union;
- 53 -
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• our ability to manage our network capacity and cost structure for capital
expenditures and operating expenses, and match it to shifting and future customer volume levels;
• damage to our reputation or loss of brand equity;
• the price and availability of jet and vehicle fuel;
• the impact of intense competition on our ability to maintain or increase our
prices (including our fuel surcharges in response to rising fuel costs) or to
maintain or grow our revenues and market share;
• any impacts on our businesses resulting from evolving or new
international government regulations, laws, policies and actions, which could
be unfavorable to our business, including regulatory or other actions
affecting data privacy and sovereignty, global aviation or other
transportation rights, increased air cargo, pilot flight and duty time and
other security or safety requirements, export controls, the use of new
technology and tax, accounting, trade (such as protectionist measures or
restrictions on free trade), foreign exchange intervention, labor (such as
card-check legislation, joint employment standards or changes to the Railway
Labor Act of 1926, as amended, affecting FedEx Express employees),
environmental (such as global climate change legislation) or postal rules;
• future guidance, regulations, interpretations, or challenges to our tax
positions relating to the TCJA and our ability to defend our interpretations
and realize the benefits of certain provisions of the TCJA;
• our ability to execute and effectively operate, integrate, leverage and grow
acquired businesses, and to continue to support the value we allocate to these
acquired businesses, including their goodwill and other intangible assets;
• our ability to maintain good relationships with our employees and avoid
attempts by labor organizations to organize groups of our employees, which
could significantly increase our operating costs and reduce our operational
flexibility;
• the impact of costs related to lawsuits in which it is alleged that FedEx
Ground should be treated as an employer of drivers employed by service providers engaged by FedEx Ground;
• any impact on our business from disruptions or modifications in service by, or
changes in the business or financial soundness of, the
which is a significant customer and vendor of FedEx; • the impact of any international conflicts or terrorist activities on the
us in particular, and what effects these events will have on our costs or the
demand for our services;
• our ability to attract and retain employee talent and maintain our company
culture;
• increasing costs, the volatility of costs and funding requirements and other
legal mandates for employee benefits, especially pension and healthcare benefits;
• a shortage of pilots caused by a higher than normal number of pilot
retirements across the industry, increased flight hour requirements to achieve
a commercial pilot's license, reductions in the number of military pilots
entering the commercial workforce and other factors;
• our ability to quickly and effectively restore operations following adverse
weather or a localized disaster or disturbance in a key geography; • our ability to successfully mitigate unique technological, operational and regulatory risks related to our autonomous delivery strategy; • volatility or disruption in the debt capital markets and our ability to
maintain our current credit ratings and commercial paper ratings;
• changes in our ability to attract and retain drivers and package and freight
handlers;
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• the increasing costs of compliance with federal, state and foreign
governmental agency mandates (including the Foreign Corrupt Practices Act and
theU.K. Bribery Act) and defending against inappropriate or unjustified enforcement or other actions by such agencies;
• changes in foreign currency exchange rates, especially in the euro, Chinese
yuan, British pound, Canadian dollar, Australian dollar and Mexican peso,
which can affect our sales levels and foreign currency sales prices;
• market acceptance of our new service and growth initiatives;
• any liability resulting from and the costs of defending against class-action
and other litigation, such as wage-and-hour, joint employment, securities and
discrimination and retaliation claims, and any other legal or governmental
proceedings, including the matters discussed in Note 10 of the accompanying
consolidated financial statements;
• the outcome of future negotiations to reach new collective bargaining
agreements - including with the union that represents the pilots of FedEx
Express (the current pilot agreement is scheduled to become amendable in
represent owner-drivers at aFedEx Freight Canada, Corp. facility;
• the impact of technology developments on our operations and on demand for our
services, and our ability to continue to identify and eliminate unnecessary
information-technology redundancy and complexity throughout the organization;
• widespread outbreak of an illness or any other communicable disease, or any
other public health crisis;
• the alternative interest rates we are able to negotiate with counterparties
pursuant to the relevant provisions of our credit agreements in the event the
London Interbank Offered Rate or the euro interbank offered rate cease to
exist and we make borrowings under the agreements; and • other risks and uncertainties you can find in our press releases andSEC
filings, including the risk factors identified under the heading "Risk
Factors" in "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in our Annual Report, as updated by our quarterly reports
on Form 10-Q.
As a result of these and other factors, no assurance can be given as to our
future results and achievements. Accordingly, a forward-looking statement is
neither a prediction nor a guarantee of future events or circumstances and those
future events or circumstances may not occur. You should not place undue
reliance on the forward-looking statements, which speak only as of the date of
this report. We are under no obligation, and we expressly disclaim any
obligation, to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise.
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