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, 2020 ("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 collaboratively and
innovating digitally, under the respected FedEx brand. Our primary operating
companies are Federal Express Corporation ("FedEx 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 the "Reportable Segments" section of this MD&A for further discussion.
Additional information on our businesses can be found in our Annual Report.
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, uniforms and professional fees. Except as otherwise specified, references to years indicate our fiscal year endingMay 31, 2021 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, theFedEx Express segment, the FedEx Ground segment and the FedEx Freight segment. - 21 - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS CONSOLIDATED RESULTS The following tables compare summary operating results and changes in revenue and operating income (loss) (dollars in millions, except per share amounts) for the periods endedNovember 30 : Three Months Ended Percent Six Months Ended Percent 2020 2019 Change 2020 2019 Change Revenue$ 20,563 $ 17,324 19$ 39,884 $ 34,372 16 Operating income (loss): FedEx Express segment 900 236 281 1,610 521 209 FedEx Ground segment 552 342 61 1,386 986 41 FedEx Freight segment 252 141 79 526 335 57
Corporate, other and eliminations (239 ) (165 ) (45 )
(467 ) (311 ) (50 )
Consolidated operating income 1,465 554 164 3,055 1,531 100
Operating margin:
FedEx Express segment 8.7 % 2.6 % 610 bp 8.0 % 2.9 % 510 bp
FedEx Ground segment 7.5 % 6.4 % 110 bp 9.6 % 9.4 % 20 bp
FedEx Freight segment 13.0 % 7.6 % 540 bp 14.0 % 8.9 % 510 bp
Consolidated operating margin 7.1 % 3.2 % 390 bp 7.7 % 4.5 % 320 bp
Consolidated net income $ 1,226 $ 560 119 $ 2,471 $ 1,305 89
Diluted earnings per share $ 4.55 $ 2.13 114 $ 9.26 $ 4.97 86
Change in Revenue Change in Operating Income (Loss)
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
FedEx Express segment $ 1,284 $ 1,986 $ 664 $ 1,089
FedEx Ground segment 2,029 3,890 210 400
FedEx Freight segment 92 13 111 191
FedEx Services segment 3 7 - -
Corporate, other and eliminations (169 ) (384 ) (74 ) (156 )
$ 3,239 $ 5,512 $ 911 $ 1,524
Overview
Elevated demand for our residential delivery services, resulting from the
ongoing impact of the coronavirus ("COVID-19") pandemic, continued during the
second quarter of 2021. In addition, demand for our business-to-business
delivery services strengthened relative to the first quarter of 2021 as
COVID-19-related restrictions moderated globally during the second quarter. As a
result, our revenue and operating income improved during the second quarter and
first half of 2021. We continued to incur increased operating expenses to
support elevated levels of demand for our services in the COVID-19 pandemic
environment, including additional labor expenses, costs of operating our
seven-day network at FedEx Ground and costs of operating our air network to
support higher demand in key international supply chains impacted by constrained
commercial air capacity. We also incurred increased operating expenses related
to personal protective equipment and medical/safety supplies, as well as
additional security and cleaning services, in order to protect our team members
and customers during the COVID-19 pandemic, of approximately $50 million in the
second quarter and $150 million in the first half of 2021. In addition, we
incurred costs associated with network contingencies, including additional
personnel to support operations through the peak season during the pandemic.
Our consolidated operating income improved during both the second quarter and
first half of 2021 due to international export and U.S. domestic package volume
growth at FedEx Express , residential volume growth at FedEx Ground and pricing
initiatives across all of our transportation segments. Higher purchased
transportation expenses at FedEx Ground are also driven by increased residential
product mix in both the second quarter and first half of 2021. Additionally,
higher variable incentive compensation expense negatively impacted
year-over-year second quarter comparisons by approximately $215 million and
first half comparisons by approximately $410 million .
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The loss of business from a large customer negatively impacted earnings in 2020.
In addition, 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 Note 1 of the accompanying unaudited condensed
consolidated financial statements for additional information.
We incurred integration expenses totaling $48 million ($36 million , net of tax,
or $0.13 per diluted share) in the second quarter and $97 million ($74 million ,
net of tax, or $0.28 per diluted share) in the first half of 2021, a $16 million
decrease from the second quarter and a $38 million decrease from the first half
of 2020. 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. 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.
Consolidated net income in the second quarter and first half of 2021 includes a
pre-tax, noncash mark-to-market ("MTM") net loss of $52 million ($41 million ,
net of tax, or $0.15 per diluted share) associated with freezing our TNT Express
Netherlands Pension Plan. See the "Retirement Plan MTM Adjustment" section of
this MD&A and Note 7 of the accompanying unaudited condensed consolidated
financial statements for additional information.
The comparison of net income between 2021 and 2020 is affected by a tax benefit
of $191 million ($0.71 per diluted share) recognized during the second quarter
of 2021, primarily attributable to guidance issued by the Internal Revenue
Service ("IRS") during the quarter, and a tax benefit of $133 million ($0.51 per
diluted share) from the reduction of a valuation allowance recognized during the
second quarter and first half of 2020. See the "Income Taxes" section of this
MD&A for further information.
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The following graphs for
[[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 relate to our international
priority, economy and airfreight services.
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The following graphs for
[[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 19% in the second quarter and 16% in the first half of 2021 primarily due to volume growth in residential delivery services at FedEx Ground andU.S. domestic package volume growth atFedEx Express , both reflecting increased e-commerce demand resulting from the ongoing impact of the COVID-19 pandemic. In addition, demand for our business-to-business delivery services strengthened relative to the first quarter of 2021 as COVID-19-related restrictions moderated globally during the second quarter. International export package volume growth atFedEx Express and pricing initiatives across all of our transportation segments also contributed to the increase in revenue during the second quarter and first half of 2021. Additionally, one additional operating day at all of our transportation segments positively impacted revenue in the first half of 2021. These positive factors were partially offset by lower fuel surcharges at all of our transportation segments during both the second quarter and first half of 2021. At FedEx Ground, revenue increased 38% in the second quarter and 37% in the first half of 2021 primarily due to residential delivery volume growth. This sharp increase in demand is the result of a shift in consumer shopping patterns accelerated by the COVID-19 pandemic. Revenue atFedEx Express increased 14% in the second quarter and 11% in the first half of 2021 due to international export andU.S. domestic package volume growth. FedEx Freight revenue increased 5% in the second quarter of 2021 primarily due to higher revenue per shipment. Revenue at FedEx Freight remained flat in the first half of 2021 due to higher revenue per shipment, partially offset by decreased average daily shipments.
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
2020 2019 Change 2020 2019 Change
Operating expenses:
Salaries and employee benefits $ 7,443 $ 6,235 19 $ 14,295 $ 12,322 16
Purchased transportation 5,407 4,328 25 10,384 8,356 24
Rentals and landing fees 1,006 924 9 1,942 1,844 5
Depreciation and amortization 936 901 4 1,862 1,780 5
Fuel 625 890 (30 ) 1,190 1,760 (32 )
Maintenance and repairs 815 774 5 1,621 1,542 5
Asset impairment charges - 66 NM - 66 NM
Other 2,866 2,652 8 5,535 5,171 7
Total operating expenses 19,098 16,770 14 36,829 32,841 12
Operating income $ 1,465 $ 554 164 $ 3,055 $ 1,531 100
Percent of Revenue
Three Months Ended Six Months Ended
2020 2019 2020 2019
Operating expenses:
Salaries and employee benefits 36.2 % 36.0 % 35.8 % 35.8 %
Purchased transportation 26.3 25.0 26.0 24.3
Rentals and landing fees 4.9 5.3 4.9 5.4
Depreciation and amortization 4.6 5.2 4.7 5.2
Fuel 3.0 5.1 3.0 5.1
Maintenance and repairs 4.0 4.5 4.0 4.5
Asset impairment charges - 0.4 - 0.2
Other 13.9 15.3 13.9 15.0
Total operating expenses 92.9 96.8 92.3 95.5
Operating margin 7.1 % 3.2 % 7.7 % 4.5 %
Volume growth, as discussed in the "Revenue" section of this MD&A, contributed
to a 25% increase in purchased transportation costs in the second quarter and a
24% increase in the first half of 2021, as well as an increase in salaries and
employee benefits expense of 19% in the second quarter and 16% in the first half
of 2021. Purchased transportation costs were also higher in both the second
quarter and first half of 2021 driven by increased residential product mix at
FedEx Ground. In addition, salaries and employee benefits expense increased in
both the second quarter and first half of 2021 due to higher variable incentive
compensation expense and merit increases.
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--------------------------------------------------------------------------------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 30% in the second quarter and 32% in the first half of
2021 due to lower 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 second quarters of 2021 and 2020 in the
accompanying discussion of each of our transportation segments.
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 on operating income described below and
for each segment below excludes the impact from these table changes.
The net impact of fuel had a slight benefit to operating income in the second quarter and first half of 2021 as decreased fuel prices outpaced lower fuel surcharges.
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 atFedEx 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 theFedEx Express segment in the second quarter of 2020. - 27 - --------------------------------------------------------------------------------
Retirement Plan MTM Adjustment
We incurred a pre-tax, noncash MTM net loss of$52 million ($41 million , net of tax, or$0.15 per diluted share) in the second quarter of 2021 related to amendments to the TNT Express Netherlands Pension Plan. Benefits for approximately 2,100 employees will be frozen effectiveDecember 31, 2020 . EffectiveJanuary 1, 2021 , these employees will begin earning pension benefits under a separate, multi-employer pension plan. See Note 7 of the accompanying unaudited condensed consolidated financial statements for additional information.
Income Taxes
Our effective tax rate was 12.8% for the second quarter and 18.0% for the first half of 2021, compared to 2.1% for the second quarter and 16.8% for the first half of 2020. The 2021 tax rates include a benefit of$191 million from an increase in our 2020 tax loss that the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") will allow to be carried back to 2015, when theU.S. federal income tax rate was 35%. The increase in our estimated 2020 tax loss is attributable to our Application for Change in Accounting Method filed with theIRS during the fourth quarter of 2020 discussed below and other accelerated deductions to be claimed on the 2020 tax return. The 2020 tax rates included a$133 million benefit from a valuation allowance reduction which, when combined with substantially lower consolidated earnings, produced a significantly lower rate for the second quarter of 2020 compared to the second quarter of 2021. We filed an application with theIRS in 2020 requesting approval to change our accounting method for depreciation to allow retroactive application of tax regulations issued during 2020 on certain assets placed in service during 2018 and 2019. During the second quarter of 2021, theIRS issued guidance granting automatic approval to change the method of accounting for these assets resulting in an income tax benefit of$130 million for the second quarter. We are subject to taxation inthe United States and variousU.S. state, local and foreign jurisdictions. We are currently under examination by theIRS 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. During the second quarter of 2021, we filed suit inU.S. District Court for the Western District of Tennessee challenging the validity of a tax regulation related to the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of the Tax Cuts and Jobs Act ("TCJA"). Our lawsuit seeks to have the court declare this regulation invalid and order the refund of overpayments ofU.S. federal income taxes for 2018 and 2019 attributable to the denial of foreign tax credits under the regulation. We have recorded a cumulative benefit of$233 million through 2019 attributable to our interpretation of the TCJA and the Internal Revenue Code. If we are ultimately unsuccessful in defending our position, we may be required to reverse the benefit previously recorded.
Business Acquisitions
OnDecember 2, 2020 , we agreed to acquireShopRunner, Inc. ("ShopRunner"), an e-commerce platform that directly connects brands and merchants with online shoppers. The cost of the acquisition will not be material and will be funded with cash from operations. This acquisition is expected to be completed inDecember 2020 , subject to customary conditions, including regulatory approval. The financial results ofShopRunner will be included in "Corporate, other and eliminations" from the date of acquisition and are not expected to be material to our results of operations in 2021. - 28 - --------------------------------------------------------------------------------
Outlook
We anticipate the continuing impacts of the COVID-19 pandemic will drive increased demand for our FedEx Ground andFedEx Express services in the second half of the fiscal year resulting in improved year-over-year revenue and operating income at those two segments for the remainder of 2021. In addition, yield management and improved productivity is anticipated to contribute to revenue and operating income growth at the FedEx Freight segment in 2021. However, the uncertainty concerning the COVID-19 pandemic, as well as the potential for additional government-related restrictions, continues to make any expectations for the second half of 2021 inherently less certain. If our current trends continue, we expect certain expenses, including higher variable incentive compensation accruals, rising labor costs and increased supply and other costs related to the COVID-19 pandemic, to continue to be incurred during the remainder of 2021. We also expect headwinds related to theDecember 31, 2020 expiration of the aviation excise tax holiday created by the CARES Act and a higher effective income tax rate for the second half of 2021. Government travel warnings as well as existing restrictions related to the COVID-19 pandemic are expected to continue to impact the demand for commercial air travel, thereby reducing available air freight capacity. As a result of these ongoing capacity constraints, we expect continued strong demand for international priority shipments for the remainder of 2021 to necessitate increased usage of our assets to support demand in key international supply chains. In addition, we anticipate a modest increase in volumes from the delivery of COVID-19 vaccines. We will continue managing network capacity, flexing our network and making adjustments as needed to align with volumes and operating conditions. In response to current business conditions, we are extending certain surcharges beyond the peak shipping period, although at a reduced rate. These surcharges will begin onJanuary 18, 2021 and may be adjusted in future periods as business or market conditions evolve. We have expanded FedEx Ground seven-day residential delivery coverage to nearly 95 percent of theU.S. population and will continue to optimize our network capacity to meet evolving customer needs. During the remainder of 2021, we will focus on last-mile residential delivery optimization, including by directing certainU.S. day-definite residentialFedEx Express shipments into the FedEx Ground network to increase efficiency and lower our cost-to-serve. We also are focused on improving revenue quality and lowering costs through advanced technology aimed at improving productivity and safety. We are continuing to execute our TNT Express integration plans and are scheduled to complete the integration of theFedEx Express and TNT Express linehaul and pickup-and-delivery operations and begin offering an enhanced portfolio of international services in 2021. We will leverage the capabilities that TNT Express adds to our portfolio, which are expected to improve our European revenue and profitability, which continue to underperform our expectations for that market. We expect to complete the final phase of international air network interoperability in early calendar 2022. We expect to incur approximately$80 million of integration expenses in the remainder of 2021 in the form of professional fees, outside service contracts, salaries and wages and other operating expenses. We expect the aggregate integration program expenses to be$1.7 billion through the completion of the physical network integration of TNT Express intoFedEx Express in 2022. As we approach the completion of the physical network integration of TNT Express in 2022, we are evaluating opportunities and pursuing initiatives in addition to the integration to continue to transform and optimize theFedEx Express international business, particularly inEurope . These actions are focused on reducing the complexity and fragmentation of our international business, improving efficiency to meet changing customer expectations and business dynamics, lowering costs, increasing profitability and improving service levels. We expect to incur additional costs, over multiple years, which may be material, including transformation costs and capital investments related to these actions.
Our expectations for the remainder of 2021 are dependent on key external factors, including no further weakening of global economic conditions or additional shut-downs related to the COVID-19 pandemic, current fuel price expectations, and no additional adverse developments in international trade policies and relations.
Other Outlook Matters. For details on key 2021 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 SegmentFedEx Express (express transportation, small-package ground delivery and freight transportation)FedEx Custom Critical, Inc. ("FedEx Custom Critical") (time-critical transportation)FedEx Cross Border Holdings, Inc. ("FedEx Cross Border") (cross-border e-commerce technology and e-commerce transportation solutions) 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 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, the results of theFedEx Logistics, Inc. ("FedEx Logistics") andFedEx Office and Print Services, Inc. ("FedEx Office") operating segments are included in corporate and other. FedEx Office provides an array of document and business services and retail access to our customers for our package transportation businesses.FedEx Logistics provides integrated supply chain management solutions, specialty transportation, customs brokerage and global ocean and air freight forwarding. In the second quarter and first half of 2021, the decrease in revenue in "Corporate, other and eliminations" was due to a significant decline in non-shipping revenue at FedEx Office resulting from the COVID-19 pandemic. The transfer ofFedEx Custom Critical and FedEx Cross Border into theFedEx Express segment contributed to the decrease in revenue in the second quarter and first half of 2021. Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment in order to optimize our resources. For example, during the second quarter and first half of 2021, FedEx Freight provided road and intermodal support for both FedEx Ground andFedEx Express and FedEx Ground provided delivery support for certainFedEx Express packages as part of our last-mile optimization efforts. 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. - 30 - --------------------------------------------------------------------------------
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 endedNovember 30 : Three Months Ended Percent Six Months Ended Percent 2020 2019 Change 2020 2019 Change Revenue: Package: U.S. overnight box$ 2,012 $ 1,864 8$ 3,873 $ 3,730 4 U.S. overnight envelope 435 457 (5 ) 861 936 (8 ) U.S. deferred 1,204 980 23 2,300 1,936 19 TotalU.S. domestic package revenue 3,651 3,301 11 7,034 6,602 7 International priority 2,510 1,817 38 4,827 3,634 33 International economy 658 873 (25 ) 1,274 1,728 (26 ) Total international export package revenue 3,168 2,690 18 6,101 5,362 14 International domestic(1) 1,206 1,165 4 2,294 2,241 2 Total package revenue 8,025 7,156 12 15,429 14,205 9 Freight: U.S. 799 698 14 1,632 1,393 17 International priority 737 473 56 1,390 937 48 International economy 408 541 (25 ) 779 1,057 (26 ) International airfreight 65 70 (7 ) 140 136 3 Total freight revenue 2,009 1,782 13 3,941 3,523 12 Other(2) 334 146 129 645 301 114 Total revenue 10,368 9,084 14 20,015 18,029 11 Operating expenses: Salaries and employee benefits 3,922 3,405 15 7,664 6,777 13 Purchased transportation 1,449 1,267 14 2,753 2,499 10 Rentals and landing fees 542 505 7 1,046 1,018 3 Depreciation and amortization 482 469 3 959 931 3 Fuel 529 754 (30 ) 1,025 1,497 (32 ) Maintenance and repairs 542 514 5 1,093 1,031 6 Asset impairment charges - 66 NM - 66 NM Intercompany charges 486 500 (3 ) 947 969 (2 ) Other 1,516 1,368 11 2,918 2,720 7 Total operating expenses 9,468 8,848 7 18,405 17,508 5 Operating income$ 900 $ 236 281$ 1,610 $ 521 209 Operating margin 8.7 % 2.6 % 610 bp 8.0 % 2.9 % 510 bp
(1) International domestic revenue relates to our international intra-country
operations.
(2) Includes the operations of
the periods ended November 30, 2020 .
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Percent of Revenue
Three Months Ended Six Months Ended
2020 2019 2020 2019
Operating expenses:
Salaries and employee benefits 37.8 % 37.5 % 38.3 % 37.6 %
Purchased transportation 14.0 13.9 13.8 13.9
Rentals and landing fees 5.2 5.6 5.2 5.6
Depreciation and amortization 4.7 5.2 4.8 5.1
Fuel 5.1 8.3 5.1 8.3
Maintenance and repairs 5.2 5.6 5.5 5.7
Asset impairment charges - 0.7 - 0.4
Intercompany charges 4.7 5.5 4.7 5.4
Other 14.6 15.1 14.6 15.1
Total operating expenses 91.3 97.4 92.0 97.1
Operating margin 8.7 % 2.6 % 8.0 % 2.9 %
The following table compares selected statistics (in thousands, except yield
amounts) for the periods ended
Three Months Ended Percent Six Months Ended Percent
2020 2019 Change 2020 2019 Change
Package Statistics
Average daily package volume (ADV):
U.S. overnight box 1,453 1,244 17 1,369 1,231 11
U.S. overnight envelope 512 547 (6 ) 497 554 (10 )
U.S. deferred 1,339 1,012 32 1,272 994 28
Total U.S. domestic ADV 3,304 2,803 18 3,138 2,779 13
International priority 748 565 32 722 548 32
International economy 296 315 (6 ) 277 304 (9 )
Total international export ADV 1,044 880 19 999 852 17
International domestic(1) 2,635 2,669 (1 ) 2,464 2,509 (2 )
Total ADV 6,983 6,352 10 6,601 6,140 8
Revenue per package (yield):
U.S. overnight box $ 21.98 $ 23.78 (8 ) $ 22.10 $ 23.86 (7 )
U.S. overnight envelope 13.50 13.26 2 13.53 13.29 2
U.S. deferred 14.27 15.39 (7 ) 14.12 15.34 (8 )
U.S. domestic composite 17.54 18.70 (6 ) 17.51 18.71 (6 )
International priority 53.26 51.03 4 52.24 52.25 -
International economy 35.29 43.94 (20 ) 35.84 44.71 (20 )
International export composite 48.17 48.49 (1 ) 47.69 49.55 (4 )
International domestic(1) 7.27 6.92 5 7.27 7.03 3
Composite package yield $ 18.24 $ 17.88 2 $ 18.26 $ 18.21 -
Freight Statistics
Average daily freight pounds:
U.S. 9,511 8,364 14 9,175 8,188 12
International priority 6,234 5,230 19 5,862 5,010 17
International economy 13,560 15,241 (11 ) 12,581 14,473 (13 )
International airfreight 1,605 1,726 (7 ) 1,590 1,640 (3 )
Total average daily freight pounds 30,910 30,561 1 29,208 29,311 -
Revenue per pound (yield):
U.S. $ 1.33 $ 1.32 1 $ 1.39 $ 1.34 4
International priority 1.88 1.43 31 1.85 1.47 26
International economy 0.48 0.56 (14 ) 0.48 0.57 (16 )
International airfreight 0.64 0.65 (2 ) 0.69 0.65 6
Composite freight yield $ 1.03 $ 0.93 11 $ 1.05 $ 0.95 11
(1) International domestic statistics relate to our international intra-country
operations.
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FedEx Express Segment Revenue
FedEx Express segment revenue increased 14% in the second quarter and 11% in the first half of 2021 due to international export andU.S. domestic package volume growth, partially offset by lower fuel surcharges. The demand for ourU.S. domestic residential service offerings continued to accelerate during the second quarter of 2021 due to the COVID-19 pandemic. Revenue was also positively impacted by pricing initiatives resulting from global air freight capacity constraints in the second quarter and first half of 2021 and one additional operating day in the first half of 2021.FedEx Express segment revenue includes a benefit from a reduction in aviation excise taxes on cargo provided by the CARES Act in the second quarter and first half of 2021. International export package average daily volumes increased 19% in the second quarter and 17% in the first half of 2021 led by volume growth fromAsia-Pacific andEurope . International export package yields decreased 4% in the first half of 2021 primarily due to lower fuel surcharges and base yield declines driven by lower weight per package, partially offset by favorable exchange rates and pricing initiatives resulting from global air freight capacity constraints.U.S. domestic package average daily volumes increased 18% in the second quarter and 13% in the first half of 2021 driven by growth in deferred service offerings, reflecting increased e-commerce demand resulting from the COVID-19 pandemic.U.S. domestic package yields decreased 6% in both the second quarter and first half of 2021 due to decreased base yields driven by lower weight per package, as well as lower fuel surcharges. Composite freight yields increased 11% in both the second quarter and first half of 2021 primarily due to improved base yields, partially offset by lower fuel surcharges. Other revenue increased 129% in the second quarter and 114% in the first half of 2021 due to the transfer ofFedEx Custom Critical and FedEx Cross Border into theFedEx Express segment.
Three Months Ended Six Months Ended
2020 2019 2020 2019
U.S. Domestic and Outbound Fuel
Surcharge:
Low 3.50 % 7.21 % 2.73 % 7.21 %
High 3.83 8.45 4.12 8.45
Weighted-average 3.64 7.53 3.54 7.54
International Export and Freight Fuel
Surcharge:
Low 1.17 6.74 0.28 6.74
High 16.52 18.56 17.00 18.56
Weighted-average 10.67 15.64 10.49 15.59
International Domestic Fuel Surcharge:
Low 2.62 3.20 2.62 3.20
High 19.21 19.40 20.33 19.47
Weighted-average 5.91 7.29 5.92 7.39
FedEx Express Segment Operating Income
FedEx Express segment operating income increased 281% in the second quarter and 209% in the first half of 2021 due to international export andU.S. domestic package volume growth.FedEx Express segment operating results include approximately$70 million in the second quarter and$135 million in the first half of 2021 related to a benefit from a reduction in aviation excise taxes provided by the CARES Act. Results for the second quarter and first half of 2020 were negatively impacted by$66 million of asset impairment charges associated with the decision to permanently retire certain aircraft and related engines atFedEx Express . These factors were partially offset by higher variable incentive compensation expense of approximately$120 million in the second quarter and$230 million in the first half of 2021. In addition, we continued to incur increased operating expenses to support elevated levels of demand for our services in the COVID-19 pandemic environment in the second quarter and first half of 2021, including costs of operating our global network to support higher demand, which is partially impacted by constrained commercial air capacity.FedEx Express segment results included$43 million of integration expenses in the second quarter and$80 million of such expenses in the first half of 2021, a$6 million decrease from the second quarter and a$26 million decrease from the first half of 2020. - 33 -
-------------------------------------------------------------------------------- Salaries and employee benefits expense increased 15% in the second quarter and 13% in the first half of 2021 primarily due to staffing to support volume growth and higher variable incentive compensation expense. In addition, increased costs associated with network contingencies as a result of the COVID-19 pandemic contributed to the increase in salaries and employee benefits expense in both the second quarter and first half of 2021. Purchased transportation expense increased 14% in the second quarter and 10% in the first half of 2021 primarily due to the transfer ofFedEx Custom Critical and FedEx Cross Border into theFedEx Express segment. Other operating expense increased 11% in the second quarter and 7% in the first half of 2021 primarily due to higher outside service contract expense and bad debt expense. Additionally, higher operating supplies, partially offset by decreased travel, both driven by the COVID-19 pandemic, negatively impacted other operating expense in both the second quarter and first half of 2021. Fuel expense decreased 30% in the second quarter and 32% in the first half of 2021 due to lower fuel prices. The net impact of fuel had a slightly negative impact to operating income in the second quarter and first half of 2021 as lower fuel surcharges outpaced 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. - 34 -
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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 endedNovember 30 : Three Months Ended Percent Six Months Ended Percent 2020 2019 Change 2020 2019 Change Revenue$ 7,344 $ 5,315 38$ 14,384 $ 10,494 37 Operating expenses: Salaries and employee benefits 1,557 971 60 2,831 1,842 54 Purchased transportation 3,488 2,561 36 6,779 4,864 39 Rentals 289 249 16 553 488 13 Depreciation and amortization 205 195 5 409 388 5 Fuel 5 4 25 9 7 29 Maintenance and repairs 124 98 27 231 185 25 Intercompany charges 446 394 13 878 769 14 Other 678 501 35 1,308 965 36 Total operating expenses 6,792 4,973 37 12,998 9,508 37 Operating income$ 552 $ 342 61$ 1,386 $ 986 41 Operating margin 7.5 % 6.4 % 110 bp 9.6 % 9.4 % 20 bp Average daily package volume 12,315 9,556 29 11,931 9,192 30 Revenue per package (yield)$ 9.42 $ 8.80 7$ 9.38 $ 8.96 5 Percent of Revenue Three Months Ended Six Months Ended 2020 2019 2020 2019 Operating expenses: Salaries and employee benefits 21.2 % 18.3 % 19.7 % 17.6 % Purchased transportation 47.5 48.2 47.1 46.3 Rentals 3.9 4.7 3.9 4.6 Depreciation and amortization 2.8 3.7 2.8 3.7 Fuel 0.1 0.1 0.1 0.1 Maintenance and repairs 1.7 1.8 1.6 1.8 Intercompany charges 6.1 7.4 6.1 7.3 Other 9.2 9.4 9.1 9.2 Total operating expenses 92.5 93.6 90.4 90.6 Operating margin 7.5 % 6.4 % 9.6 % 9.4 %
FedEx Ground Segment Revenue
FedEx Ground segment revenue increased 38% in the second quarter and 37% in the
first half of 2021 primarily due to residential delivery volume growth. This
sharp increase in demand resulted from a shift in consumer shopping patterns
accelerated by the COVID-19 pandemic. In addition, we experienced increased
demand for our business-to-business delivery services relative to the first
quarter of 2021 as COVID-19-related restrictions moderated during the second
quarter. Additionally, revenue was positively impacted by yield management in
the second quarter and first half of 2021 and one additional operating day in
the first half of 2021.
Average daily volume increased 29% in the second quarter and 30% in the first
half of 2021 primarily due to continued growth in residential services driven by
e-commerce. FedEx Ground yields increased 7% in the second quarter and 5% in the
first half of 2021 primarily due to yield improvement actions, partially offset
by lower fuel surcharges.
- 35 -
-------------------------------------------------------------------------------- The FedEx Ground fuel surcharge is based on a rounded average of the nationalU.S. on-highway 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 2020 2019 2020 2019 Low 5.50 % 6.75 % 5.50 % 6.75 % High 5.75 7.00 5.75 7.25 Weighted-average 5.73 6.92 5.74 6.98
FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 61% in the second quarter and
41% in the first half of 2021 primarily due to residential delivery volume
growth and yield improvement. These factors were partially offset by higher
purchased transportation contractor settlement rates resulting from residential
product mix, as well as additional labor expenses and higher self-insurance
accruals in the second quarter and first half of 2021.
Purchased transportation expense increased 36% in the second quarter and 39% in
the first half of 2021 due to higher volume and increased residential product
mix. Salaries and employee benefits expense increased 60% in the second quarter
and 54% in the first half of 2021 due to additional staffing to support volume
growth, including costs associated with operating our seven-day network, merit
increases and higher variable incentive compensation expense. In addition,
increased costs associated with network contingencies as a result of the
COVID-19 pandemic contributed to the increase in salaries and employee benefits
expense in both the second quarter and first half of 2021. Other operating
expense increased 35% in the second quarter and 36% in the first half of 2021
primarily due to higher self-insurance accruals and higher operating supplies
driven by the COVID-19 pandemic.
The net impact of fuel had a moderate benefit to operating income in the second
quarter and first half of 2021 as decreased fuel prices outpaced 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.
- 36 -
--------------------------------------------------------------------------------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 endedNovember 30 : Three Months Ended Percent Six Months Ended Percent 2020 2019 Change 2020 2019 Change Revenue$ 1,936 $ 1,844 5$ 3,762 $ 3,749 - Operating expenses: Salaries and employee benefits 915 900 2 1,773 1,819 (3 ) Purchased transportation 209 187 12 379 374 1 Rentals 59 52 13 115 104 11 Depreciation and amortization 105 97 8 211 191 10 Fuel 90 132 (32 ) 155 255 (39 ) Maintenance and repairs 57 68 (16 ) 110 133 (17 ) Intercompany charges 122 130 (6 ) 241 256 (6 ) Other 127 137 (7 ) 252 282 (11 ) Total operating expenses 1,684 1,703 (1 ) 3,236 3,414 (5 ) Operating income$ 252 $ 141 79$ 526 $ 335 57 Operating margin 13.0 % 7.6 % 540 bp 14.0 % 8.9 % 510 bp Average daily shipments (in thousands): Priority 78.1 77.4 1 74.6 78.0 (4 ) Economy 32.9 32.6 1 31.5 32.7 (4 ) Total average daily shipments 111.0 110.0 1 106.1 110.7 (4 ) Weight per shipment (lbs): Priority 1,106 1,139 (3 ) 1,101 1,147 (4 ) Economy 1,015 983 3 1,006 971 4 Composite weight per shipment 1,079 1,092 (1 ) 1,073 1,095 (2 ) Revenue per shipment: Priority$ 264.05 $ 258.90 2$ 262.02 $ 257.14 2 Economy 313.35 295.29 6 308.15 295.53 4 Composite revenue per shipment$ 278.66 $ 270.38 3$ 275.71 $ 268.83 3 Revenue per hundredweight: Priority$ 23.86 $ 22.74 5$ 23.79 $ 22.41 6 Economy 30.88 30.05 3 30.62 30.43 1 Composite revenue per hundredweight$ 25.82 $ 24.75 4$ 25.69 $ 24.54 5 Percent of Revenue Three Months Ended Six Months Ended 2020 2019 2020 2019 Operating expenses: Salaries and employee benefits 47.3 % 48.8 % 47.1 % 48.5 % Purchased transportation 10.8 10.1 10.1 10.0 Rentals 3.0 2.8 3.1 2.8 Depreciation and amortization 5.4 5.3 5.6 5.1 Fuel 4.7 7.2 4.1 6.8 Maintenance and repairs 2.9 3.7 2.9 3.6 Intercompany charges 6.3 7.1 6.4 6.8 Other 6.6 7.4 6.7 7.5 Total operating expenses 87.0 92.4 86.0 91.1 Operating margin 13.0 % 7.6 % 14.0 % 8.9 % - 37 -
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FedEx Freight Segment Revenue
FedEx Freight segment revenue increased 5% in the second quarter of 2021 primarily due to higher revenue per shipment. FedEx Freight segment revenue remained flat in the first half of 2021 due to higher revenue per shipment, partially offset by decreased average daily shipments.
Revenue per shipment increased 3% in both the second quarter and first half of 2021 primarily due to higher base rates reflecting our ongoing revenue quality initiatives, partially offset by lower fuel surcharges and lower weight per shipment. Average daily shipments increased 1% in the second quarter of 2021 due to volumes returning to pre-COVID-19 levels. Despite the increased demand in the second quarter of 2021, demand for our service offerings in the first half of 2021 was negatively impacted by the COVID-19 pandemic and related supply chain disruptions, resulting in a 4% decrease in average daily shipments. 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 2020 2019 2020 2019 Low 21.00 % 23.50 % 21.00 % 23.50 % High 21.40 24.00 21.40 24.40 Weighted-average 21.10 23.80 21.20 23.80
FedEx Freight Segment Operating Income
FedEx Freight segment operating income increased 79% in the second quarter and
57% in the first half of 2021 driven by continued focus on revenue quality
initiatives, aligning our cost structure with current business levels and
improving operational efficiencies. These positive factors more than offset the
negative impact on volumes from the COVID-19 pandemic and weaker economic
conditions for the first half of 2021.
Salaries and employee benefits expense increased only 2% in the second quarter
of 2021 primarily due to improved operational productivity, in spite of higher
variable incentive compensation expense, merit increases and higher volumes.
Salaries and employee benefits expense decreased 3% in the first half of 2021
primarily due to improved operational productivity and lower volumes, partially
offset by higher variable incentive compensation expense and merit increases.
Purchased transportation expense increased 12% in the second quarter of 2021
primarily due to higher utilization of third-party rail providers and increased
rates from third-party motor providers.
Fuel expense decreased 32% in the second quarter and 39% in the first half of
2021 primarily due to lower fuel prices. The net impact of fuel had a slightly
negative impact to operating income in the second quarter and first half of 2021
as lower fuel surcharges outpaced 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.
- 38 -
--------------------------------------------------------------------------------FINANCIAL CONDITION LIQUIDITY Cash and cash equivalents totaled$8.3 billion atNovember 30, 2020 , compared to$4.9 billion atMay 31, 2020 . The following table provides a summary of our cash flows for the six-month periods endedNovember 30 (in millions): 2020 2019 Operating activities: Net income$ 2,471 $ 1,305 Noncash charges and credits 3,808 3,322 Changes in assets and liabilities (1,049 ) (2,553 ) Cash provided by operating activities 5,230
2,074
Investing activities: Capital expenditures (2,826 ) (3,266 ) Proceeds from asset dispositions and other 14 4 Cash used in investing activities (2,812 ) (3,262 ) Financing activities: Proceeds from short-term borrowings, net - 150 Principal payments on debt (75 ) (1,021 ) Proceeds from debt issuances 970 2,093 Proceeds from stock issuances 431 26 Dividends paid (341 ) (339 ) Purchase of treasury stock - (3 ) Other, net (12 ) (5 ) Cash provided by financing activities 973
901
Effect of exchange rate changes on cash 67 (1 ) Net increase (decrease) in cash and cash equivalents$ 3,458 $ (288 ) Cash and cash equivalents at the end of period$ 8,339 $ 2,031 Cash flows from operating activities increased$3.2 billion in the first half of 2021 primarily due to higher net income and lower pension contributions. Capital expenditures decreased during the first half of 2021 primarily due to lower spending related to vehicles and facilities across all of our transportation segments. See the "Capital Resources" section of this MD&A for a discussion of capital expenditures during 2021 and 2020. DuringAugust 2020 ,FedEx Express issued$970 million of Pass Through Certificates, Series 2020-1AA (the "Certificates") with a fixed interest rate of 1.875% due inFebruary 2034 utilizing pass through trusts. The Certificates are secured by 19 Boeing aircraft. The payment obligations ofFedEx Express in respect of the Certificates are fully and unconditionally guaranteed by FedEx.FedEx Express is using the proceeds from the issuance for general corporate purposes. See Note 4 of the accompanying consolidated financial statements for additional information regarding the terms of the Certificates. - 39 - --------------------------------------------------------------------------------
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
2020/2019
Three Months Ended Six Months Ended Three Months Six Months
2020 2019 2020 2019 Ended Ended
Aircraft and related equipment $ 500 $ 587 $ 1,273 $ 1,128 (15 ) 13
Package handling and ground
support equipment 344 267 561 408 29 38
Vehicles and trailers 104 399 141 660 (74 ) (79 )
Information technology 177 243 371 465 (27 ) (20 )
Facilities and other 277 352 480 605 (21 ) (21 )
Total capital expenditures $ 1,402 $ 1,848 $ 2,826 $ 3,266 (24 ) (13 )
FedEx Express segment $ 804 $ 1,061 $ 1,832 $ 2,012 (24 ) (9 )
FedEx Ground segment 387 447 591 543 (13 ) 9
FedEx Freight segment 59 131 98 317 (55 ) (69 )
FedEx Services segment 129 154 247 305 (16 ) (19 )
Other 23 55 58 89 (58 ) (35 )
Total capital expenditures $ 1,402 $ 1,848 $ 2,826 $ 3,266 (24 ) (13 )
Capital expenditures decreased during the first half of 2021 primarily due to
lower spending related to vehicles and facilities across all of our
transportation segments, as well as decreased spending on information technology
at FedEx Services and FedEx Freight, partially offset by increased spending on
package handling equipment at FedEx Ground and higher spending related to
aircraft at FedEx Express .
GUARANTOR FINANCIAL INFORMATION
We are providing the following information in compliance with Rule 13-01 of Regulation S-X, "Financial Disclosures about Guarantors and Issuers ofGuaranteed Securities " with respect to our senior unsecured debt securities and the Certificates. As ofNovember 30, 2020 , we had outstanding$21.9 billion of senior unsecured debt securities and$970 million of Certificates. Substantially all of the senior unsecured notes were issued by FedEx under a shelf registration statement and are guaranteed by certain direct and indirect subsidiaries of FedEx ("Guarantor Subsidiaries"). FedEx owns, directly or indirectly, 100% of each Guarantor Subsidiary. The guarantees are (1) unsecured obligations of the respective Guarantor Subsidiary, (2) rank equally with all of their other unsecured and unsubordinated indebtedness, and (3) are full and unconditional and joint and several. If we sell, transfer or otherwise dispose of all of the capital stock or all or substantially all of the assets of a Guarantor Subsidiary to any person that is not an affiliate of FedEx, the guarantee of that Guarantor Subsidiary will terminate and holders of debt securities will no longer have a direct claim against such subsidiary under the guarantee. Additionally, FedEx fully and unconditionally guarantees the payment obligations ofFedEx Express in respect of the Certificates. See Note 6 to the financial statements included in our Annual Report for additional information regarding the terms of the senior unsecured debt securities and Note 4 of the accompanying consolidated financial statements for additional information regarding the terms of the Certificates. - 40 -
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The following tables present summarized financial information for FedEx (as Parent) and the Guarantor Subsidiaries on a combined basis after transactions and balances within the combined entities have been eliminated.
Parent and Guarantor Subsidiaries
The following table presents the summarized balance sheet information as of
November 30, May 31,
2020 2020
Current Assets $ 14,448 $ 11,014
Intercompany Receivable 3,866 3,985
Total Assets 81,975 62,089
Current Liabilities 8,392 7,030
Intercompany Payable - 519
Total Liabilities 53,505 49,844
The following table presents the summarized statement of income information for
the six-month period ended
Revenue$ 29,141 Intercompany Charges, net (1,434 ) Operating Income 2,206 Intercompany Charges, net 71 Income Before Income Taxes 2,354 Net Income$ 2,028
The following tables present summarized financial information for FedEx (as
Parent Guarantor) and
Parent Guarantor and Subsidiary Issuer
The following table presents the summarized balance sheet information as of
November 30, May 31,
2020 2020
Current Assets $ 7,065 $ 4,444
Intercompany Receivable 1,220 3,918
Total Assets 62,730 57,375
Current Liabilities 4,205 3,546
Intercompany Payable 6,233 7,853
Total Liabilities 46,161 45,140
The following table presents the summarized statement of income information for
the six-month period ended
Revenue$ 10,988 Intercompany Charges, net (575 ) Operating Income 667 Intercompany Charges, net 274 Income Before Income Taxes 1,773 Net Income$ 1,727 - 41 -
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LIQUIDITY OUTLOOK
In response to current business and economic conditions as referenced above in the "Outlook" section of this MD&A, we have and will continue to actively manage our cash flow, defer certain expenditures and seek to protect capital for unforeseen challenges from the ongoing pandemic. With over$8.3 billion in cash and$3.5 billion in available liquidity under our$2.0 billion five-year credit agreement (the "Five-Year Credit Agreement") and$1.5 billion 364-day credit agreement ("the 364-Day Credit Agreement" and together with the Five-Year Credit Agreement, the "Credit Agreements"), we believe that our cash and cash equivalents, cash flow from operations and available financing sources will be adequate to meet internal and external liquidity needs. As business and economic conditions improve, we will be evaluating our capital allocation strategy with a priority on strengthening our balance sheet. Our cash and cash equivalents balance atNovember 30, 2020 includes$1.9 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$5.1 billion in 2021, a$0.8 billion decrease from 2020. The slight increase in our expected capital expenditures from the estimate in our Annual Report is due to capital investment for additional capacity initiatives in support of increased volumes. Total capital expenditures will include aircraft modernization atFedEx Express and strategic investments to improve productivity and safety. We invested$1.3 billion in aircraft and related equipment in the first half of 2021 and expect to invest an additional$450 million for aircraft and related equipment during the remainder of 2021. In addition, we are making investments over multiple years of approximately$1.5 billion to significantly expand theFedEx Express Indianapolis hub and approximately$1.5 billion to modernize theFedEx Express Memphis World Hub. We expect these investments in hubs will provide productivity gains. We anticipate that our cash flow from operations will be sufficient to fund our capital expenditures for the remainder of 2021. 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 2021,FedEx Express executed a contract amendment rescheduling Boeing 767-300 Freighter aircraft deliveries as follows: 2021 - 18 aircraft; 2022 - 11 aircraft; 2023 - 13 aircraft; and 2024 - 4 aircraft. 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 and allows pass through trusts formed byFedEx Express to sell, in one or more future offerings, pass through certificates. The Five-Year Credit Agreement expires inMarch 2025 and includes a$250 million letter of credit sublimit. The 364-Day Credit Agreement expires inMarch 2021 . The Credit Agreements are available to finance our operations and other cash flow needs. See Note 1 and Note 4 of the accompanying unaudited condensed consolidated financial statements for a description of the terms and significant covenants of the Credit Agreements.
Contributions to our tax-qualified
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.
CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to the contractual commitments described in Part II, Item 7 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.
See Note 9 of the accompanying unaudited condensed consolidated financial statements for additional information on our purchase commitments.
- 42 -
--------------------------------------------------------------------------------OTHER BUSINESS MATTERS
On
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, 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 "Income Taxes," "Business Acquisitions," "Outlook" and "Liquidity Outlook" and the "General," "Financing Arrangements," "Income Taxes," "Retirement Plans," "Commitments" and "Contingencies" notes to our unaudited condensed 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:
• the negative impacts of the COVID-19 pandemic;
• 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 continue to transform and optimize the
international business, particularly inEurope ;
• 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;
• damage to our reputation or loss of brand equity;
• our ability to retain and attract employee talent and maintain our company
culture;
- 43 -
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• the impact of the
terms of their future trading relationship beyondDecember 31, 2020 ;
• the price and availability of jet and vehicle fuel;
• 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;
• 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 accounting, trade (such as protectionist measures or
restrictions on free trade), foreign exchange intervention in response to
currency volatility, labor (such as joint employment standards, changes to the
Railway Labor Act of 1926, as amended, affecting
increased minimum wage requirements), environmental (such as global climate
change legislation) or postal rules;
• future changes in tax laws and regulations, interpretations, challenges or
judicial decisions related to our tax positions;
• our ability to successfully complete the acquisition of
• 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, as
well as additional costs incurred in connection with the integration of acquired businesses;
• 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;
• increased insurance and claims expenses related to vehicle accidents, workers'
compensation claims and general business liabilities;
• 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 vendor and significant customer 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;
• increasing costs, the volatility of costs and funding requirements and other
legal mandates for employee benefits, especially pension and healthcare benefits;
• 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;
• constraints, volatility or disruption in the capital markets and our ability
to maintain our current credit ratings, commercial paper ratings, senior unsecured debt credit ratings and Credit Agreement financial covenants;
• widespread outbreak of an illness or any other communicable disease, or any
other public health crisis;
• human capital management risks, including changes in our ability to attract
and retain drivers, package and freight handlers, commercial pilots and other
employees, as well as health and safety issues;
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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;
• 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 unaudited condensed 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
FedEx Freight, Inc. facility in theU.S. ;
• 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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