FedEx Corp. (NYSE:FDX) Chairman and CEO Frederick W. Smith leveled a strong attack on the Trump administration’s trade policies Tuesday night, saying the U.S. has become a “protectionist country” with a government that believes everything can be made within its borders and that exports are unimportant even though great opportunities exist outside the U.S. for the overwhelming majority of U.S. firms that sell only in the domestic market.
Smith’s comments came on an analyst call in response to a question from Brandon Oglenski of the investment firm Barclays, who asked if the company should pursue a more radical redesign of its FedEx Express air and international unit in the wake of the unit’s decline in returns and margins over the years. Most of FedEx Express’ recent problems have come from weak international growth, uncertainties over the imposition of tariffs by the U.S. and Chinese governments, an unfavorable mix of lower-yielding non-priority volumes from its TNT Express subsidiary, and the difficulties in integrating TNT. By contrast, FedEx Express U.S. operations are doing fine, the company said.
“We have been very disappointed with the assumptions we made with the growth of international trade, particularly in the Trump administration,” Smith said in his harshest comments about the administration policies since January 2017, when Trump scrapped the Transpacific Partnership (TPP), a 12-nation pact designed to reduce tariff and non-tariff barriers in trans-Pacific trade lanes, in January 2017. FedEx bitterly opposed the decision, and Smith went on the talk show circuit to express his disapproval. TPP, which excluded China and India, became defunct after the U.S. withdrew. It has since been reconstituted by the remaining nations.
Smith also had harsh words for the Chinese, whom he labelled as “mercantilists,” a term to describe a country that believes it can sell freely to its trading partners but is unwilling to give them the same freedoms in the opposite direction.
Smith’s comments came as the Memphis-based company reported late Tuesday a $1.97 billion net loss in its fiscal 2019 fourth quarter on revenue of $17.8 billion. Adjusted for various events, net income in the quarter came in at $1.32 billion.
Operating income in the fourth quarter fell to $1.32 billion, compared to $1.33 billion in the year-earlier quarter. On an adjusted basis, operating income declined to $1.72 billion from $1.85 billion, the company reported. Operating margin fell to 7.4 percent from 7.7 percent. On an adjusted basis, margins dropped to 9.6 percent from 10.7 percent. Net income came in at $1.13 billion, while on an adjusted basis net income was reported at $1.6 billion.
Adjusted earnings per share came in at $5.01 versus $5.91 per share in the fiscal 2018 fourth quarter.
In fiscal 2019, which ended May 31, 2019, FedEx revenue was more than $69 billion, up from $65.5 billion. Net income was $540 million, while on an adjusted basis it came in at $4.13 billion. In fiscal 2018, net income was $4.57 billion, while on an adjusted basis it came in at $4.17 billion. Operating income in the company’s fourth quarter was $4.47 billion, compared to $4.27 billion in the same quarter of fiscal 2018. On an adjusted basis, fiscal 2019 operating income was $5.22 billion compared with $5.14 billion in the prior fiscal year. Adjusted operating margins dropped to 7.5 percent from 7.8 percent.
Adjusted diluted earnings per share came in at $15.52, down from $15.31 in fiscal 2018.
The main adjustment was a fiscal fourth quarter non-cash mark-to-market charge of $3.9 billion related to the company’s retirement plan assumptions. There were smaller charges relating to ongoing costs of integrating its TNT Express unit, and for what the company called “business realignment” costs. The company expects $1.7 billion in TNT integration costs through fiscal 2021. About 20 percent of the costs will be incurred in the current fiscal year.
For fiscal 2020, FedEx projected a low-single-digit percentage point increase in diluted earnings per share. FedEx’s recent results have been buffeted by weakness in global demand and elevated costs to combine TNT Express. All of that has fallen on its FedEx Express air and international unit. The unit’s fiscal 2020 operating income will continue to be affected by macroeconomic weakness and trade uncertainty, shifts to lower-yielding non-priority air shipments and a decision not to renew the domestic air contract with Amazon.com, Inc. (NASDAQ:AMZN), business worth about $150 million to $200 million annually. Operating income at FedEx’s ground parcel and less-than-truckload units should rise year-over-year, the company said.
FedEx’s fiscal 2019 fourth quarter results were expected to be weak, with the question being how weak. In a statement announcing the results, Chairman and CEO Frederick W. Smith called the quarter and fiscal year periods of “challenge and change,” and said the company was making the needed investments to prepare itself for major changes in the domestic and international delivery landscapes.