In the report submitted on April 3, the logistics giant stated that the pandemic had resulted in “significantly weaker global economic conditions” [that] have had a negative impact on our earnings and are expected to continue to impact our business, earnings, cash flow and liquidity. “
The company noted weakness in business-to-business demand for all transportation offerings worldwide, but said that its floor pack segment had benefited from a “sharp increase in e-commerce volume” given the quarantine mandates. However, the change in the mix to more business-to-consumer goods and household goods is likely to “negatively impact margins and operating income”.
FedEx previously suspended its earnings forecast for fiscal year 2020 as of May 31 when it reported earnings for the third quarter of the fiscal year on March 17 due to the disruption caused by the outbreak.
Since the company’s third-quarter report, demand for services in Asia has increased due to backlogs that arose when the virus first spread to the region, leading to widespread loss of production. The problem is that the air cargo capacity needed to relieve the current backlog is low because passenger flights that make up more than half of the total air cargo capacity through the abdominal cavity of the lower deck are largely grounded.
The company is also concerned that end markets in the U.S. and Europe may suppress this demand as accommodation restrictions increase. “Given the weakening economic conditions in Europe and the United States and the resulting drop in demand for goods made in Asia, there is no guarantee that this increased demand will be sustainable.”
FedEx also takes cost measures to maintain cash flow and liquidity. Efforts include a reduction in operating costs as the network has been adjusted to better match volume to operating conditions. The company also introduced temporary surcharges for international parcel and air freight shipments and removed its money-back guarantees. In addition, FedEx believes that “relief provisions” from the recent COVID-19 laws will be implemented, specifically referring to “relief from certain excise duties and US income tax deferrals.”
Chairman and CEO Fred Smith’s base salary will be reduced by 91% for a six-month period that began on April 1. By reducing the basic monthly salary to $ 10,728, Smith remains $ 1 per wage period after taxes and deductions.
FedEx said it will try to reduce and delay capital spending and is considering “alternative sources of finance in addition to our credit facilities and access to public markets.”
In the filing, FedEx announced on March 18 that it announced to lenders that it would fully utilize its $ 1.5 billion credit agreement to “increase our liquidity position to provide financial flexibility in the face of the maintain disrupted access to commercial paper markets and current uncertainty in the global financial world. ” Markets. “
The company has signed another $ 2 billion agreement.
FedEx currently has $ 1.64 billion outstanding on credit facilities, commercial paper, and outstanding letters of credit, with $ 1.86 billion remaining for future loans under existing agreements.
The company’s financial covenants require that the ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) be no more than 3.5 times. At the end of the third quarter, this rate was 2.8x. Despite the increased leverage, the company expects the agreement to be met. However, it warned of the need to request a change to the pact if it took on more debt or if operations continued to decrease.
The update was made prior to the change to the company’s prospectus, which is expected to issue $ 1.5 billion in debt refinancing debt and $ 136 million in commercial paper. The remaining proceeds would be used for “general corporate purposes”. The terms of the issue have not been announced.
Finally, the company warned that it could participate in government programs that may require it to give up equity and suspend its dividend and share buyback programs.
“Although we are currently unable to assess the impact of the COVID-19 pandemic, a longer period of the global supply chain and economic disruptions could significantly and adversely affect our business, earnings, access to liquidity sources and financial position,” said it in the file. “In addition, an extended global recession caused by the COVID-19 pandemic would have a further negative impact on our financial position and operations.”
FDX shares fell more than 6% on the day compared to the S&P 500, which fell 2%.
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