FedEx builds up cash reserves as Fred Smith takes 91% pay cut
FedEx has borrowed $1.5 billion to build up its cash reserves and is stepping up cost reductions, including a voluntary 91% pay reduction for chairman and CEO Fred Smith, as worsening worldwide economic conditions hit financial results.
The transportation and delivery giant revealed its latest financial moves in a downbeat filing to the U.S. Stock Exchange on Friday (April 3), just three weeks after presenting weak quarterly results and suspending profit forecasts for the current financial year (ending May 2020).
“The COVID-19 pandemic and resulting significantly weaker global economic conditions have negatively impacted our results of operations and are expected to continue to impact our business, results of operations, cash flows and liquidity,” FedEx stated.
“Globally, business-to-business (B2B) demand across all of our transportation businesses has been negatively impacted by the COVID-19 pandemic,” the company said. In addition, FedEx Ground had seen higher demand for B2C deliveries but this shift in mix “is expected to negatively impact margins and operating results”.
Moreover, the current boom in shipments from Asia may not last, FedEx warned. “Since March 17, 2020, business demand in Asia remains elevated due to backlogs caused by the COVID-19 pandemic and the impact of responsive measures in Asia in early calendar 2020, as well as decreases in cargo capacity on passenger airlines.
“However, 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. Demand in Europe has been negatively impacted by shelter-in-place and other responsive measures taken in response to the COVID-19 pandemic in many European countries.”
In response, FedEx said it has undertaken various measures to protect its cashflow and liquidity. On March 18, the company borrowed $1.5 billion under a one-year credit agreement, leaving it with a further $1.86 billion available under existing credit agreements for future borrowings.
In addition, chairman and CEO Fred Smith will take a 91% reduction in his base salary, from $115,402 per month to $10,728 per month, for six months from April 1, 2020 to September 30, 2020. This will result in net pay of $1 per pay period after tax withholding and other deductions.
FedEx emphasised that it is taking further actions “to manage our cash flow and improve our liquidity”, including possible reductions and delays in capital expenditure. These include temporary surcharges on all international package and airfreight shipments, suspending the money-back guarantee for all FedEx Express, FedEx Ground and FedEx Freight services.
The company also expects to benefit from the U.S. government’s suspension of air cargo and aviation fuel taxes from March 28 to December 31, 2020, as part of the CARES Act announced on March 27. (This would have amounted to a $250 million positive effect on operating profits in the fiscal year ending May 2019.)
