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FedEx Update Presents Some Concerns

FreightWaves

In an 8-k filing with the U.S. Securities and Exchange Commission, FedEx Corporation (NYSE: FDX) provided an update on its business and announced several actions taken to reduce costs and preserve available liquidity amid the coronavirus outbreak.

In the April 3 filing, the logistics giant stated that the pandemic has resulted in "significantly weaker global economic conditions [that] have negatively impacted our results of operations and are expected to continue to impact our business, results of operations, cash flows and liquidity."

The company noted weakness in business-to-business demand across all of its transportation offerings globally, but said that its ground package segment has benefited from "sharp increases in ecommerce volume" given quarantine mandates. However, the change in mix to more business-to-consumer goods and household supplies, "is expected to negatively impact margins and operating results."

FedEx previously suspended its fiscal 2020 earnings guidance ending May 31 when it reported fiscal third quarter earnings on March 17 due to the disruptions caused by the outbreak.

Since the company's third quarter report, it has seen increased demand for services in Asia due to backlogs created when the virus first spread throughout the region causing widespread manufacturing outages. The problem is the airfreight capacity needed to relieve the current backlogs is scarce as passenger flights, which account for more than half of total airfreight capacity via lower deck belly space, have largely been grounded.

Further, the company has concerns that end markets in the U.S. and Europe may quell that demand given expanding shelter-in-place restrictions. "Due to weakening economic conditions in Europe and the United States and resulting decreases in demand for goods manufactured in Asia, there are no assurances that these increased levels of demand will be sustainable."

FedEx is also taking cost actions to maintain cash flow and liquidity. The efforts involve reductions in operating expenses as it has adjusted its network to better align volumes with operating conditions. The company also implemented temporary surcharges for international package and airfreight shipments and eliminated its money-back guarantees. Further, FedEx expects to realize "relief provisions" from recently enacted COVID-19 legislation, specifically referencing "relief from certain excise taxes and payroll tax deferrals in the United States."

Chairman and CEO Fred Smith's base pay will be reduced by 91% for a six-month period, which started April 1. The reduction to $10,728 in monthly base pay leaves Smith with $1 per pay period after taxes and deductions.

FedEx said that it will look to reduce and delay capital expenditures and is considering "alternative financing sources in addition to our credit facilities and access to public markets."

In the filing, FedEx disclosed that it notified lenders on March 18 that it would fully draw down its $1.5 billion credit agreement to "increase our cash position to preserve financial flexibility in light of disrupted access to commercial paper markets and current uncertainty in the global financial markets."

The company has another agreement in place for $2 billion.

Currently, FedEx has $1.64 billion outstanding under credit facilities, commercial paper and outstanding letters of credit with $1.86 billion remaining for future borrowings under existing agreements.

The company's financial covenants require it to maintain a debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of no more than 3.5 times. At the end of its fiscal third quarter, that ratio stood at 2.8x. Even with the increased leverage, the company expects to remain in compliance with the covenant. However, it warned it may have to seek an amendment to the covenant if it takes on more debt or if operations erode further.

The update came ahead of the company's prospectus amendment in which it plans to issue notes to refinance the $1.5 billion credit agreement and $136 million of commercial paper. Any remaining proceeds would be used for "general corporate purposes." Terms of the issuance were not disclosed.  

Lastly, the company warned that it may participate in government programs, which could require it to relinquish equity and suspend its dividends and share repurchase programs.

"While we are not able at this time to estimate the impact of the COVID-19 pandemic, an extended period of global supply chain and economic disruption could materially and adversely affect our business, results of operations, access to sources of liquidity and financial condition," the filing stated. "In addition, an extended global recession caused by the COVID-19 pandemic would have a further adverse impact on our financial condition and operations."

Shares of FDX are down more than 6% on the day compared to the S&P 500 which is down 2%.

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