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 revenue 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 revenue 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. - 33 - --------------------------------------------------------------------------------
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 endedFebruary 29, 2020 andFebruary 28, 2019 : Three Months Ended Percent Nine Months Ended Percent 2020 2019 Change 2020 2019 Change Revenue$ 17,487 $ 17,010 3$ 51,859 $ 51,886 - Operating income (loss): FedEx Express segment 137 389 (65 ) 658 1,407 (53 ) FedEx Ground segment 355 586 (39 ) 1,341 1,852 (28 ) FedEx Freight segment 113 97 16 448 421 6
Corporate, other and eliminations (194 ) (161 ) (20 )
(505 ) (530 ) 5
Consolidated operating income 411 911 (55 ) 1,942 3,150 (38 )
Operating margin:
FedEx Express segment 1.5 % 4.3 % (280 ) bp 2.4 % 5.1 % (270 ) bp
FedEx Ground segment 6.1 % 11.1 % (500 ) bp 8.2 % 12.2 % (400 ) bp
FedEx Freight segment 6.5 % 5.5 % 100 bp 8.2 % 7.5 % 70 bp
Consolidated operating margin 2.4 % 5.4 % (300 ) bp 3.7 % 6.1 % (240 ) bp
Consolidated net income $ 315 $ 739 (57 ) $ 1,620 $ 2,509 (35 )
Diluted earnings per share $ 1.20 $ 2.80 (57 ) $ 6.17 $ 9.41 (34 )
Change in Revenue Change in Operating Income (Loss)
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
FedEx Express segment $ (81 ) $ (878 ) $ (252 ) $ (749 )
FedEx Ground segment 584 1,137 (231 ) (511 )
FedEx Freight segment (12 ) (140 ) 16 27
FedEx Services segment 2 (2 ) - -
Corporate, other and eliminations (16 ) (144 ) (33 ) 25
$ 477 $ (27 ) $ (500 ) $ (1,208 )
Overview
Weaker global economic conditions, including the impact of the COVID-19
pandemic, negatively impacted our results in the third quarter and nine months
of 2020. The COVID-19 pandemic had a negative impact on the demand for our
services due to its disruption of global manufacturing, supply chains and
consumer spending during the third quarter of 2020. In addition, our results for
the third quarter and nine months of 2020 were negatively impacted by higher
self-insurance accruals, the loss of business from a large customer, increased
costs to expand services, the continued mix shift to lower-yielding services and
an increased competitive pricing environment. These factors were partially
offset by residential delivery volume growth at FedEx Ground and increased
yields at FedEx Freight. Our third quarter 2020 results were positively impacted
by approximately $100 million due to one additional operating weekday. The
year-over-year comparison of variable incentive compensation expense negatively
impacted our results by approximately $115 million in the third quarter of 2020,
but positively impacted our results by approximately $250 million in the nine
months of 2020. The year-over-year comparison of variable incentive compensation
expense was impacted by the elimination of our variable incentive compensation
payout in the third quarter of 2019 due to cost containment actions. 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).
Consolidated net income for the nine months 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. Consolidated net income for
the third quarter of 2019 included tax benefits of $90 million ($0.34 per
diluted share) from the reduction of a valuation allowance on certain tax loss
carryforwards. This was partially offset by tax expense of $50 million ($0.19
per diluted share) in the third quarter of 2019 related to a lower enacted tax
rate in the Netherlands applied to our deferred tax balances. See the "Income
Taxes" section below for more information.
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We incurred TNT Express integration expenses totaling $72 million ($56 million ,
net of tax, or $0.21 per diluted share) in the third quarter and $207 million
($161 million , net of tax, or $0.61 per diluted share) in the nine months of
2020, a $3 million increase from the third quarter and a $97 million decrease
from the nine months 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
Revenue increased 3% in the third quarter of 2020 primarily due to residential delivery volume growth at FedEx Ground. Revenue decreased slightly in the nine months of 2020 primarily due to the loss of business from a large customer and the impact from macroeconomic weakness. In addition, one additional operating weekday at all of our transportation segments positively impacted revenue in the third quarter of 2020. At FedEx Ground, revenue increased 11% in the third quarter and 7% in the nine months of 2020 due to residential delivery volume growth, partially offset by the loss of business from a large customer. Revenue at FedEx Express decreased 1% in the third quarter and 3% in the nine months of 2020 primarily due to the loss of business from a large customer and lower freight revenue as a result of macroeconomic weakness and trade uncertainty, as well as decreased international export package yields. In addition, unfavorable exchange rates and lower fuel surcharges negatively impacted revenue at FedEx Express in the nine months of 2020. These factors were partially offset by international export package volume growth in both the third quarter and nine months of 2020. FedEx Freight revenue decreased 1% in the third quarter and 2% in the nine months 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 endedFebruary 29, 2020 andFebruary 28, 2019 : Three Months Ended Percent Nine Months Ended Percent 2020 2019 Change 2020 2019 Change Operating expenses: Salaries and employee benefits$ 6,382 $ 6,069 5$ 18,704 $ 18,589 1 Purchased transportation 4,558 4,253 7 12,914 12,566 3 Rentals and landing fees 964 874 10 2,808 2,533 11 Depreciation and amortization 908 851 7 2,688 2,487 8 Fuel 879 907 (3 ) 2,639 2,945 (10 ) Maintenance and repairs 684 658 4 2,226 2,144 4 Asset impairment charges - - - 66 - NM Business realignment costs - 4 NM - 4 NM Other 2,701 2,483 9 7,872 7,468 5 Total operating expenses 17,076 16,099 6 49,917 48,736 2 Operating income$ 411 $ 911 (55 )$ 1,942 $ 3,150 (38 ) Percent of Revenue Three Months Ended Nine Months Ended 2020 2019 2020 2019 Operating expenses: Salaries and employee benefits 36.5 % 35.7 % 36.1 % 35.8 % Purchased transportation 26.1 25.0 24.9 24.2 Rentals and landing fees 5.5 5.1 5.4 4.9 Depreciation and amortization 5.2 5.0 5.2 4.8 Fuel 5.0 5.3 5.1 5.7 Maintenance and repairs 3.9 3.9 4.3 4.1 Asset impairment charges - - 0.1 - Business realignment costs - - - - Other 15.4 14.6 15.2 14.4 Total operating expenses 97.6 94.6 96.3 93.9 Operating margin 2.4 % 5.4 % 3.7 % 6.1 % - 38 -
-------------------------------------------------------------------------------- Our results declined in the third quarter and nine months of 2020 primarily due to weaker global economic conditions, including the impact of the COVID-19 pandemic, higher self-insurance accruals, the loss of business from a large customer and increased costs to expand services. In addition, continued mix shift to lower-yielding services and an increased competitive pricing environment negatively impacted our results during the third quarter and nine months of 2020. These factors were partially offset by residential delivery volume growth at FedEx Ground and increased yields at FedEx Freight in the third quarter and nine months of 2020. Our results were also positively impacted by an additional operating weekday at all of our transportation segments in the third quarter of 2020. The year-over-year variable incentive compensation expense negatively impacted operating income comparisons in the third quarter of 2020 as discussed above; however, the operating income comparisons were benefited in the nine months 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). The adoption of the new lease accounting standard during the first quarter of 2020 resulted in a reclassification from other operating expense to rentals and landing fees expense of$45 million in the third quarter and$136 million in the nine months of 2020 and maintenance and repairs expense to rentals and landing fees expense of$11 million in the third quarter and$33 million in the nine months 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 9% in the third quarter and 5% in the nine months of 2020 primarily due to higher self-insurance accruals and higher outside service contract expense, including costs associated with cloud computing services. Purchased transportation costs increased 7% in the third quarter and 3% in the nine months of 2020 primarily due to higher volumes and increased contractor settlement rates at FedEx Ground, including expanding residential delivery to seven days per week year-round. Depreciation and amortization expense increased 8% in the nine months of 2020 primarily due to continued strategic investment programs at all of our transportation segments. Salaries and employee benefits expense increased 5% in the third quarter of 2020 primarily due to the year-over-year variable incentive compensation expense comparison discussed above, higher staffing to support volume growth and merit increases. Salaries and employee benefits expense increased 1% in the nine months of 2020 primarily due to merit increases and higher staffing to support volume growth, partially offset by lower variable incentive compensation expense.
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 3% in the third quarter of 2020 primarily due to lower
usage. Fuel expense decreased 10% in the nine months of 2020 primarily due to
decreased fuel prices. 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 third quarters of 2020 and 2019 in the
accompanying discussion of each of our transportation segments.
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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.
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.
We routinely review our fuel surcharges. On March 2, 2020 , we updated the tables
used to determine our fuel surcharges at all of our transportation segments. 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 had a slightly negative impact to operating income in the
third quarter and nine months of 2020 due to lower fuel surcharges, partially
offset by decreased fuel prices in the nine months of 2020.
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 25.0% for the third quarter and 18.5% for the nine months of 2020 compared with 20.6% for the third quarter and 21.8% for the nine months of 2019. The tax rate for the nine months of 2020 includes a benefit of$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 tax rates for the third quarter and nine months of 2019 included a benefit of$90 million from the reduction of a valuation allowance on certain tax loss carryforwards, partially offset by an expense of$50 million from the impact on our deferred taxes attributable to the enactment of a lower tax rate inthe Netherlands . The tax rate for the nine months of 2019 was also 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 for the 2016 and 2017 tax years. 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. - 40 -
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Outlook
While we expect continued revenue growth at FedEx Ground during the fourth quarter of 2020, we expect weaker global economic conditions to negatively impact our results at FedEx Express and FedEx Freight. In addition, we anticipate that higher operating costs at FedEx Ground from our expansion to year-round seven-day residential delivery will negatively impact our results in the fourth quarter of 2020. We anticipate that weak global economic conditions will be exacerbated in the fourth quarter of 2020 by the impacts of the COVID-19 pandemic, including the disruption of manufacturing operations and supply chains around the world. While the global economy may recover quickly from repercussions linked to the COVID-19 pandemic, we cannot currently predict if or when the economic recovery will occur. 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 will continue 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. We will continue to manage network capacity at FedEx Express by reducing international flight hours in the fourth quarter of 2020 if global economic conditions deteriorate further. However, if global airfreight demand increases as the world recovers from the COVID-19 pandemic, we have the ability to flex our network to meet the needs of our customers. In theU.S. domestic package market, 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 expect that our investments in ourU.S. domestic package operations will ultimately result in higher revenue and increased productivity that more than offsets the implementation costs associated with these programs. We have made adjustments to our FedEx ExpressU.S. domestic air network to better match capacity with demand by accelerating retirement of certain aircraft in the second quarter of 2020. In addition, we are focused on optimizing the cost of last-mile residential deliveries by directing certainU.S. day-definite, residential FedEx Express shipments into the FedEx Ground network beginning inMarch 2020 . We expect last-mile optimization will allow us to increase efficiency and lower our cost-to-serve as e-commerce growth continues to impact our service mix. We also are focused on improving revenue quality and lowering costs through investments in technology aimed at improving productivity. For the fourth quarter 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 the fourth quarter 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 synergies from the combined FedEx Express/TNT Express network will accelerate 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$100 million of integration expenses in the fourth quarter 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 fourth quarter of 2020 are dependent on key external factors, including no further weakening in economic conditions, including the impact of the COVID-19 pandemic, from our current forecast, current fuel price expectations 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)
Effective
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 revenue 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. In the nine months of 2020, the decrease in revenue in "Corporate, other and eliminations" was driven primarily by lower transportation volumes due to weakness in the international economy as a result of trade uncertainty, including the impact of the COVID-19 pandemic. 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 revenue of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenue and expenses are eliminated in our consolidated results and are not separately identified in the following segment information because the amounts are not material. - 42 - --------------------------------------------------------------------------------
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 revenue, operating expenses, operating income (dollars in millions), operating margin and operating expenses as a percent of revenue for the periods endedFebruary 29, 2020 andFebruary 28, 2019 : Three Months Ended Percent Nine Months Ended Percent 2020 2019 Change 2020 2019 Change Revenue: Package: U.S. overnight box$ 1,865 $ 1,844 1$ 5,595 $ 5,678 (1 ) U.S. overnight envelope 459 433 6 1,395 1,345 4 U.S. deferred 1,127 1,119 1 3,063 3,131 (2 ) TotalU.S. domestic package revenue 3,451 3,396 2 10,053 10,154 (1 ) International priority 1,710 1,738 (2 ) 5,344 5,508 (3 ) International economy 810 806 - 2,538 2,541 - Total international export package revenue 2,520 2,544 (1 ) 7,882 8,049 (2 ) International domestic(1) 1,075 1,078 - 3,316 3,412 (3 ) Total package revenue 7,046 7,018 - 21,251 21,615 (2 ) Freight: U.S. 739 772 (4 ) 2,132 2,294 (7 ) International priority 439 477 (8 ) 1,376 1,574 (13 ) International economy 499 495 1 1,556 1,568 (1 ) International airfreight 61 76 (20 ) 197 244 (19 ) Total freight revenue 1,738 1,820 (5 ) 5,261 5,680 (7 ) Other 140 167 (16 ) 441 536 (18 ) Total revenue 8,924 9,005 (1 ) 26,953 27,831 (3 ) Operating expenses: Salaries and employee benefits 3,520 3,389 4 10,297 10,303 - Purchased transportation 1,212 1,267 (4 ) 3,711 3,928 (6 ) Rentals and landing fees 538 504 7 1,556 1,448 7 Depreciation and amortization 478 456 5 1,409 1,341 5 Fuel 744 771 (4 ) 2,241 2,515 (11 ) Maintenance and repairs 429 433 (1 ) 1,460 1,449 1 Asset impairment charges - - - 66 - NM Intercompany charges 500 486 3 1,469 1,521 (3 ) Other 1,366 1,310 4 4,086 3,919 4 Total operating expenses 8,787 8,616 2 26,295 26,424 - Operating income$ 137 $ 389 (65 )$ 658 $ 1,407 (53 ) Operating margin 1.5 % 4.3 % (280 ) bp 2.4 % 5.1 % (270 ) bp
(1) International domestic revenue relates to our international intra-country
operations.
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Percent of Revenue
Three Months Ended Nine Months Ended
2020 2019 2020 2019
Operating expenses:
Salaries and employee benefits 39.5 % 37.6 % 38.2 % 37.0 %
Purchased transportation 13.6 14.1 13.8 14.1
Rentals and landing fees 6.0 5.6 5.8 5.2
Depreciation and amortization 5.4 5.1 5.2 4.8
Fuel 8.3 8.6 8.3 9.0
Maintenance and repairs 4.8 4.8 5.4 5.2
Asset impairment charges - - 0.2 -
Intercompany charges 5.6 5.4 5.5 5.5
Other 15.3 14.5 15.2 14.1
Total operating expenses 98.5 95.7 97.6 94.9
Operating margin 1.5 % 4.3 % 2.4 % 5.1 %
The following table compares selected statistics (in thousands, except yield
amounts) for the periods ended
Three Months Ended Percent Nine Months Ended Percent
2020 2019 Change 2020 2019 Change
Package Statistics
Average daily package volume (ADV):
U.S. overnight box 1,258 1,307 (4 ) 1,240 1,282 (3 )
U.S. overnight envelope 536 524 2 548 536 2
U.S. deferred 1,215 1,224 (1 ) 1,067 1,071 -
Total U.S. domestic ADV 3,009 3,055 (2 ) 2,855 2,889 (1 )
International priority 542 530 2 546 537 2
International economy 293 289 1 300 289 4
Total international export ADV 835 819 2 846 826 2
International domestic(1) 2,405 2,410 - 2,475 2,491 (1 )
Total ADV 6,249 6,284 (1 ) 6,176 6,206 -
Revenue per package (yield):
U.S. overnight box $ 23.54 $ 22.75 3 $ 23.75 $ 23.32 2
U.S. overnight envelope 13.59 13.31 2 13.39 13.21 1
U.S. deferred 14.73 14.76 - 15.11 15.38 (2 )
U.S. domestic composite 18.21 17.93 2 18.53 18.50 -
International priority 50.07 52.95 (5 ) 51.53 54.01 (5 )
International economy 43.88 44.94 (2 ) 44.44 46.28 (4 )
International export composite 47.90 50.12 (4 ) 49.01 51.31 (4 )
International domestic(1) 7.09 7.21 (2 ) 7.05 7.21 (2 )
Composite package yield $ 17.90 $ 18.01 (1 ) $ 18.11 $ 18.33 (1 )
Freight Statistics
Average daily freight pounds:
U.S. 8,356 8,905 (6 ) 8,244 8,705 (5 )
International priority 4,752 5,030 (6 ) 4,924 5,326 (8 )
International economy 13,806 14,067 (2 ) 14,252 14,292 -
International airfreight 1,422 1,615 (12 ) 1,567 1,697 (8 )
Total average daily freight pounds 28,336 29,617 (4 ) 28,987 30,020 (3 )
Revenue per pound (yield):
U.S. $ 1.40 $ 1.40 - $ 1.36 $ 1.39 (2 )
International priority 1.47 1.53 (4 ) 1.47 1.56 (6 )
International economy 0.57 0.57 - 0.57 0.58 (2 )
International airfreight 0.68 0.76 (11 ) 0.66 0.76 (13 )
Composite freight yield $ 0.97 $ 0.99 (2 ) $ 0.96 $ 1.00 (4 )
(1) International domestic statistics relate to our international intra-country
operations.
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FedEx Express Segment Revenue
FedEx Express segment revenue decreased 1% in the third quarter and 3% in the nine months of 2020 primarily due to the loss of business from a large customer, lower freight revenue and decreased international export package yields. In addition, unfavorable exchange rates and lower fuel surcharges negatively impacted revenue in the nine months of 2020. These factors were partially offset by international export package volume growth in both the third quarter and nine months of 2020. One additional operating weekday benefited revenue in the third quarter of 2020. Average daily freight pounds decreased 4% in the third quarter and 3% in the nine months of 2020 primarily due to lower volume in freight services as a result of macroeconomic weakness and trade uncertainty. Freight yields decreased 2% in the third quarter and 4% in the nine months of 2020 primarily due to base yield declines, lower fuel surcharges and unfavorable exchange rates. International export package average daily volumes increased 2% in both the third quarter and nine months of 2020 led by volume growth inEurope . International export package yields decreased 4% in both the third quarter and nine months of 2020 primarily driven by base yield declines and unfavorable exchange rates.U.S. domestic package average daily volumes decreased 2% in the third quarter and 1% in the nine months of 2020 driven by the loss of business from a large customer.U.S. domestic package yields increased 2% in the third quarter of 2020 driven by higher base yields and higher fuel surcharges. International domestic package average daily volumes decreased 1% in the nine months of 2020 primarily due to targeted yield management actions. International domestic package yields decreased 2% in both the third quarter and nine months of 2020 as base yield improvement was more than offset by unfavorable exchange rates. FedEx Express'sU.S. domestic and outbound fuel surcharge and international fuel surcharge ranged as follows for the periods endedFebruary 29, 2020 andFebruary 28, 2019 : Three Months Ended Nine Months Ended 2020 2019 2020 2019U.S. Domestic and Outbound Fuel Surcharge: Low 7.25 % 5.47 % 7.21 % 5.47 % High 8.00 8.23 8.45 10.80 Weighted-average 7.38 6.21 7.48 7.32 International Export and Freight Fuel Surcharge: Low 6.66 5.75 6.66 5.75 High 18.09 15.57 18.56 18.09 Weighted-average 15.23 12.74 15.47 14.11 International Domestic Fuel Surcharge: Low 2.98 2.69 2.98 2.25 High 19.18 20.63 19.47 20.63 Weighted-average 7.32 5.89 7.36 5.88 OnMarch 2, 2020 , we updated the tables used to determine our fuel surcharges at FedEx Express. OnJanuary 6, 2020 , FedEx Express implemented a 4.9% average list price increase forU.S. domestic,U.S. export andU.S. import services. OnMarch 18, 2019 , we updated the tables used to determine our fuel surcharges for FedEx ExpressU.S. domestic services. OnJanuary 7, 2019 , FedEx Express implemented a 4.9% average list price increase forU.S. domestic,U.S. export andU.S. import services. OnSeptember 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 65% in the third quarter and 53% in the nine months of 2020 primarily due to weaker global economic conditions, including the impact of the COVID-19 pandemic, continued mix shift to lower-yielding services and an increased competitive pricing environment. In addition, the loss of business from a large customer negatively impacted our results during the nine months of 2020. Operating income and operating margin were positively impacted by one additional operating weekday in the third quarter of 2020. The year-over-year variable incentive compensation expense negatively impacted operating income comparisons by approximately$65 million in the third quarter of 2020 as discussed above; however, the operating income comparisons were benefited by approximately$135 million in the nine months 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). FedEx Express segment results included$62 million of TNT Express integration expenses in the third quarter and$168 million of such expenses in the nine months of 2020, a$6 million increase from the third quarter and an$89 million decrease from the nine months of 2019. - 45 - -------------------------------------------------------------------------------- The lease standard reclassification discussed in the "Overview" section above is excluded from the following year-over-year expense change discussion. Other operating expense increased 4% in both the third quarter and nine months of 2020 primarily due to higher outside service contract expense, including costs associated with cloud computing services. Purchased transportation expense decreased 6% in the nine months of 2020 primarily due to lower freight volumes, resulting in lower utilization of third-party transportation providers, and favorable exchange rates. Depreciation and amortization expense increased 5% in the nine months of 2020 primarily due to continued investment in aircraft and related equipment. Salaries and employee benefits expense increased 4% in the third quarter of 2020 primarily due to the year-over-year variable incentive compensation expense comparison discussed above, higher staffing to support peak-related volume growth and merit increases. Fuel expense decreased 4% in the third quarter of 2020 primarily due to lower usage. Fuel expense decreased 11% in the nine months of 2020 primarily due to decreased fuel prices. The net impact of fuel had a slightly negative impact to operating income in the third quarter and nine months of 2020 due to lower fuel surcharges, partially offset by 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. - 46 -
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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 revenue, 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 endedFebruary 29, 2020 andFebruary 28, 2019 : Three Months Ended Percent Nine Months Ended Percent 2020 2019 Change 2020 2019 Change Revenue$ 5,845 $ 5,261 11$ 16,339 $ 15,202 7 Operating expenses: Salaries and employee benefits 1,046 874 20 2,888 2,570 12 Purchased transportation 2,908 2,466 18 7,772 6,870 13 Rentals 256 204 25 744 595 25 Depreciation and amortization 197 185 6 585 538 9 Fuel 4 4 - 11 11 - Maintenance and repairs 101 86 17 286 247 16 Intercompany charges 405 362 12 1,174 1,140 3 Other 573 494 16 1,538 1,379 12 Total operating expenses 5,490 4,675 17 14,998 13,350 12 Operating income$ 355 $ 586 (39 )$ 1,341 $ 1,852 (28 ) Operating margin 6.1 % 11.1 % (500 ) bp 8.2 % 12.2 % (400 ) bp Average daily package volume 10,536 9,550 10 9,637 8,992 7 Revenue per package (yield)$ 8.78 $ 8.87 (1 )$ 8.90 $ 8.88 - Percent of Revenue Three Months Ended Nine Months Ended 2020 2019 2020 2019 Operating expenses: Salaries and employee benefits 17.9 % 16.6 % 17.7 % 16.9 % Purchased transportation 49.7 46.9 47.6 45.2 Rentals 4.4 3.9 4.5 3.9 Depreciation and amortization 3.4 3.5 3.6 3.5 Fuel 0.1 0.1 0.1 0.1 Maintenance and repairs 1.7 1.6 1.7 1.6 Intercompany charges 6.9 6.9 7.2 7.5 Other 9.8 9.4 9.4 9.1 Total operating expenses 93.9 88.9 91.8 87.8 Operating margin 6.1 % 11.1 % 8.2 % 12.2 %
FedEx Ground Segment Revenue
FedEx Ground segment revenue increased 11% in the third quarter and 7% in the
nine months of 2020 due to residential delivery volume growth, partially offset
by the loss of business from a large customer. Revenue was also positively
impacted by the timing of Cyber Week, as well as one additional operating
weekday in the third quarter of 2020.
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Average daily volume increased 10% in the third quarter and 7% in the nine
months of 2020 primarily due to continued growth in residential services driven
by e-commerce, as well as the timing of Cyber Week in the third quarter of 2020.
FedEx Ground yields decreased 1% in the third quarter and remained flat in the
nine months of 2020 primarily due to continued mix shift to lower-yielding
services.
The FedEx Ground fuel surcharge is based on a rounded average of the national
U.S. on-highway average price for a gallon of diesel fuel, as published by the
Department of Energy . The fuel surcharge ranged as follows for the periods ended
February 29, 2020 and February 28, 2019 :
Three Months Ended Nine Months Ended
2020 2019 2020 2019
Low 6.50 % 6.50 % 6.50 % 6.25 %
High 7.00 7.50 7.25 7.75
Weighted-average 6.91 6.84 6.96 6.86
On March 2, 2020 , we updated the tables used to determine our fuel surcharges at
FedEx Ground. On January 6, 2020 , FedEx Ground implemented a 4.9% average list
price increase. On March 18, 2019 , we updated the tables used to determine our
fuel surcharges at FedEx Ground. On January 7, 2019 , FedEx Ground implemented a
4.9% average list price increase. On September 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 39% in the third quarter and 28% in the nine months of 2020 due to higher self-insurance accruals, increased costs to expand services 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 third quarter and nine months of 2020. These items were partially offset by residential delivery volume growth in both the third quarter and nine months of 2020, as well as the timing of Cyber Week and one additional operating weekday in the third quarter 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 18% in the third quarter and 13% in the nine months of 2020 due to higher volumes and increased contractor settlement rates, including expanding operations to seven days per week year-round. Salaries and employee benefits expense increased 20% in the third quarter and 12% in the nine months of 2020 due to additional staffing to support volume growth, including expansion of seven day per week year-round operations, merit increases and network expansion. In addition, the year-over-year comparison of variable incentive compensation expense negatively impacted our results in the third quarter of 2020 as discussed above, but positively impacted our results in the nine months of 2020. Other operating expense increased 16% in the third quarter and 12% in the nine months of 2020 primarily due to higher self-insurance accruals of approximately$110 million and$200 million , respectively. The net impact of fuel had a slightly negative impact to operating income in the third quarter of 2020 due to lower fuel surcharges and increased fuel prices. The net impact of fuel had a slightly negative impact to operating income in the nine months of 2020 due to lower fuel surcharges, partially offset by decreased fuel prices. See the "Fuel" section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results. - 48 - --------------------------------------------------------------------------------
FEDEX FREIGHT SEGMENT
FedEx Freight LTL service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following tables compare revenue, operating expenses, operating income (dollars in millions), operating margin, selected statistics and operating expenses as a percent of revenue for the periods endedFebruary 29, 2020 andFebruary 28, 2019 : Three Months Ended Percent Nine Months Ended Percent 2020 2019 Change 2020 2019 Change Revenue$ 1,738 $ 1,750 (1 )$ 5,487 $ 5,627 (2 ) Operating expenses: Salaries and employee benefits 846 865 (2 ) 2,665 2,712 (2 ) Purchased transportation 176 213 (17 ) 550 722 (24 ) Rentals 54 45 20 158 129 22 Depreciation and amortization 92 88 5 283 242 17 Fuel 130 131 (1 ) 385 418 (8 ) Maintenance and repairs 59 53 11 192 178 8 Intercompany charges 133 128 4 389 403 (3 ) Other 135 130 4 417 402 4 Total operating expenses 1,625 1,653 (2 ) 5,039 5,206 (3 ) Operating income$ 113 $ 97 16$ 448 $ 421 6 Operating margin 6.5 % 5.5 % 100 bp 8.2 % 7.5 % 70 bp Average daily shipments (in thousands): Priority 70.5 73.2 (4 ) 75.5 78.7 (4 ) Economy 29.8 32.7 (9 ) 31.8 34.3 (7 ) Total average daily shipments 100.3 105.9 (5 ) 107.3 113.0 (5 ) Weight per shipment (lbs): Priority 1,137 1,210 (6 ) 1,144 1,211 (6 ) Economy 1,000 1,106 (10 ) 980 1,050 (7 ) Composite weight per shipment 1,096 1,178 (7 ) 1,096 1,162 (6 ) Revenue per shipment: Priority$ 265.17 $ 253.35 5$ 259.61 $ 249.78 4 Economy 308.65 308.44 - 299.59 299.17 - Composite revenue per shipment$ 279.40 $ 270.82 3$ 272.09 $ 264.89 3 Revenue per hundredweight: Priority$ 23.33 $ 20.94 11$ 22.69 $ 20.63 10 Economy 30.85 27.89 11 30.57 28.48 7 Composite revenue per hundredweight$ 25.49 $ 22.99 11$ 24.84 $ 22.79 9 Percent of Revenue Three Months Ended Nine Months Ended 2020 2019 2020 2019 Operating expenses: Salaries and employee benefits 48.7 % 49.4 % 48.6 % 48.2 % Purchased transportation 10.1 12.2 10.0 12.8 Rentals 3.1 2.6 2.9 2.3 Depreciation and amortization 5.3 5.0 5.1 4.3 Fuel 7.5 7.5 7.0 7.4 Maintenance and repairs 3.4 3.0 3.5 3.2 Intercompany charges 7.6 7.3 7.1 7.2 Other 7.8 7.5 7.6 7.1 Total operating expenses 93.5 94.5 91.8 92.5 Operating margin 6.5 % 5.5 % 8.2 % 7.5 % - 49 -
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FedEx Freight Segment Revenue
FedEx Freight segment revenue decreased 1% in the third quarter and 2% in the nine months of 2020 primarily due to decreased average daily shipments, partially offset by higher revenue per shipment. Revenue was also positively impacted by one additional operating weekday in the third quarter of 2020. Average daily shipments decreased 5% in both the third quarter and nine months of 2020 due to lower demand for our service offerings as a result of softer economic conditions. Revenue per shipment increased 3% in both the third quarter and nine months of 2020 primarily due to higher base rates reflecting our ongoing revenue quality initiatives, partially offset by lower weight per shipment. 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 endedFebruary 29, 2020 andFebruary 28, 2019 : Three Months Ended Nine Months Ended 2020 2019 2020 2019 Low 23.00 % 23.40 % 23.00 % 23.40 % High 24.00 24.60 24.40 25.60 Weighted-average 23.70 23.77 23.80 24.62 OnMarch 2, 2020 , we updated the tables used to determine our fuel surcharges at FedEx Freight. OnJanuary 6, 2020 , FedEx Freight implemented a 5.9% average list price increase in certainU.S. and other shipping rates. 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 increased 16% in the third quarter and 6%
in the nine months of 2020 driven by continued focus on yield management and
aligning our cost structure with current and anticipated business levels,
enabling FedEx Freight to improve profit and more than offset the impact of
lower volumes from softer economic conditions.
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 17% in the third quarter and 24% in the nine
months of 2020 primarily due to lower utilization of third-party transportation
providers, lower weight per shipment and lower volumes. Salaries and employee
benefits expense decreased 2% in the nine months of 2020 primarily due to lower
volumes and improving productivities driven by the alignment of our cost
structure, partially offset by merit increases. Depreciation and amortization
expense increased 17% in the nine months of 2020 primarily due to investments in
vehicles and trailers, as well as facility expansion. Other operating expense
increased 4% in both the third quarter and nine months of 2020 primarily due to
a favorable adjustment in prior year self-insurance accruals, as well as
increased bad debt expense.
Fuel expense decreased 1% in the third quarter of 2020 primarily due to lower
usage. Fuel expense decreased 8% in the nine months of 2020 primarily due to
decreased fuel prices. The net impact of fuel had a moderately negative impact
to operating income in the third quarter of 2020 and a significantly negative
impact in the nine months of 2020 due to lower fuel surcharges, partially offset
by 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.
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--------------------------------------------------------------------------------FINANCIAL CONDITION LIQUIDITY Cash and cash equivalents totaled$1.8 billion atFebruary 29, 2020 , compared to$2.3 billion atMay 31, 2019 . The following table provides a summary of our cash flows for the nine-month periods endedFebruary 29, 2020 andFebruary 28, 2019 (in millions): 2020 2019 Operating activities: Net income$ 1,620 $ 2,509 Noncash charges and credits 4,944 3,099 Changes in assets and liabilities (3,286 ) (2,285 ) Cash provided by operating activities 3,278 3,323 Investing activities: Capital expenditures (4,705 ) (3,757 ) Proceeds from asset dispositions and other 15 62 Cash used in investing activities (4,690 ) (3,695 ) Financing activities: Proceeds from short-term borrowings, net 298 220 Principal payments on debt (1,045 ) (874 ) Proceeds from debt issuances 2,093 2,463 Proceeds from stock issuances 38 58 Dividends paid (509 ) (514 ) Purchase of treasury stock (3 ) (1,365 ) Other, net (5 ) 5 Cash provided by (used in) financing activities 867 (7 ) Effect of exchange rate changes on cash (8 ) (14 )
Net decrease in cash and cash equivalents
Cash flows from operating activities decreased$45 million in the nine months of 2020 primarily due to lower net income, partially offset by lower variable incentive compensation payments. Capital expenditures increased during the nine months of 2020 primarily due to higher spending related to facilities at FedEx Express, increased spending on vehicles and trailers at our transportation segments and increased spending on information technology at FedEx Express, FedEx Services 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 third quarter of 2020, we issued commercial paper to provide us with additional short-term liquidity. As ofFebruary 29, 2020 , we had$300 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 third quarter of 2020. During the nine months 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 ofFebruary 29, 2020 , 5.1 million shares remained under the stock repurchase authorization. - 51 -
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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 endedFebruary 29, 2020 andFebruary 28, 2019 (in millions): Percent Change 2020/2019 Three Months Ended Nine Months Ended Three Months Nine Months 2020 2019 2020 2019 Ended Ended
Aircraft and related equipment
$ 1,472 1 4 Package handling and ground support equipment 228 167 636 584 37 9 Vehicles and trailers 260 206 920 640 26 44 Information technology 239 182 704 515 31 37 Facilities and other 313 171 918 546 83 68
Total capital expenditures
$ 3,757 28 25 FedEx Express segment$ 929 $ 672 $ 2,941 $ 2,364 38 24 FedEx Ground segment 275 137 818 566 101 45 FedEx Freight segment 97 176 414 403 (45 ) 3 FedEx Services segment 110 112 415 336 (2 ) 24 Other 28 26 117 88 8 33
Total capital expenditures
$ 3,757 28 25 Capital expenditures increased during the nine months of 2020 primarily due to higher spending related to facilities at FedEx Express, increased spending on vehicles and trailers at our transportation segments and increased spending on information technology at FedEx Express, FedEx Services 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 atFebruary 29, 2020 includes$930 million 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$1.5 billion in aircraft and related equipment in the nine months of 2020 and expect to invest an additional$0.2 billion for aircraft and related equipment during the fourth quarter 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 for the remainder of 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 Boeing 767-300 Freighter ("B767F") aircraft for delivery in 2022.
During the third quarter of 2020, FedEx Express executed two contract amendments
rescheduling two Boeing 777 Freighter aircraft deliveries from 2023 to 2022 and
two B767F aircraft deliveries from 2022 to 2023.
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We have a shelf registration statement filed with the Securities 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.
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 in March 2025 and includes
a $250 million letter of credit sublimit. The 364-Day Credit Agreement expires
in March 2021 . 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 nine months of 2020, we made voluntary contributions totaling $1.0
billion to our U.S. Pension Plans. We do not expect to make any additional
contributions to our U.S. Pension Plans during the fourth quarter of 2020. Our
U.S. Pension Plans have ample funds to meet expected benefit payments.
Standard & Poor's has assigned us a senior unsecured debt credit rating of BBB,
a commercial paper rating of A-2 and a ratings outlook of "negative." Moody's
Investors Service has assigned us an unsecured debt credit rating of Baa2, a
commercial paper rating of P-2 and a ratings outlook of "negative." If our
credit ratings drop, our interest expense may increase. If our commercial paper
ratings drop below current levels, we may have difficulty utilizing the
commercial paper market. If our senior unsecured debt credit ratings drop below
investment grade, our access to financing may become limited.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.
CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following table sets forth a summary of our contractual cash obligations as ofFebruary 29, 2020 . Payments Due by Fiscal Year (Undiscounted) (in millions) 2020 (1) 2021 2022 2023 2024 Thereafter Total Operating activities: Operating leases$ 451 $ 2,430 $ 2,175 $ 1,931 $ 1,614 $ 8,071 $ 16,672 Non-capital purchase obligations and other 451 1,037 805 609 455 3,711 7,068 Interest on long-term debt 134 648 648 619 598 10,181 12,828 Investing activities: Aircraft and related capital commitments 101 2,019 2,371 1,818 469 227 7,005 Other capital purchase obligations 38 26 24 23 1 5 117 Financing activities: Debt - - 1,194 1,563 750 15,228 18,735 Finance leases 31 26 26 25 24 728 860 Total$ 1,206 $ 6,186 $ 7,243 $ 6,588 $ 3,911 $ 38,151 $ 63,285
(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 ($100 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 ($35 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.
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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.
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 ofFebruary 29, 2020 , 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 and the assumptions underlying such statements. 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;
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• our ability to successfully implement our business strategy, effectively
respond to changes in market dynamics and achieve the anticipated benefits and
associated cost savings of such strategies and actions;
• widespread outbreak of an illness or any other communicable disease, or any
other public health crisis, including the COVID-19 pandemic;
• the impact of the
• 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 revenue 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;
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• 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;
• 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,
derivative 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;
• 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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