FedEx today released lower Q2 profit figures due to one-off charges and despite continuinggrowth in its main business units, and raised its forecasts for the full 2010/11 year.
The company’s revenue grew 12% to $9.63 billion between September and November 2010. Butoperating income dropped 18% to $469 million, leaving the operating margin at 4.9%, down from 6.6%the previous year. Net profits also declined 18% to $283 million.
Shipments and yields grew in all transportation segments but earnings were reduced by costsrelated to the January 30, 2011 merger of FedEx Freight and FedEx National LTL operations,including severance costs associated with personnel reductions and non-cash asset impairmentcharges. Earnings were also reduced by a reserve for a legal matter at FedEx Express. Thereinstatement of certain employee compensation programs, and higher pension and aircraftmaintenance expenses, also impacted earnings.
“Solid demand for our transportation solutions, outstanding customer service from FedEx teammembers and a healthier global economy helped drive second-quarter revenue higher,” said FredSmith, FedEx Corp. chairman, president and chief executive officer. “Our yield improvementstrategy is working, holiday peak season volumes are exceeding our expectations and our economicforecast for calendar 2011 has improved. Accordingly, we have increased our earnings outlookfor our current fiscal year.”
For the full 2010/11 year, the company now projects earnings to be $0.95 to $1.15 per dilutedshare in the third quarter and $5.00 to $5.30 per diluted share for fiscal 2011, up from thecompany’s previous estimate of $4.80 to $5.25 per diluted share. This guidance excludes anyFedEx Freight combination costs and the second quarter legal reserve, and also assumes stable fuelprices and continued moderate growth in the global economy. Including costs from the FedExFreight combination and the legal reserve, earnings are expected to be $0.78 to $1.04 per dilutedshare for the third quarter and $4.59 to $4.95 per diluted share for fiscal 2011. The companyreported earnings of $0.76 per diluted share in last year’s third quarter.
“Our operating performance in the quarter was impacted by strong compensation and benefitsheadwinds as we reinstated programs curtailed during the recession,” said Alan B. Graf, Jr., FedExCorp. executive vice president and chief financial officer. “During the quarter, we alsorealised more normalized growth in FedEx International Priority shipments and higher fuel pricesthan our earnings guidance had assumed. Yield improvement and cost management remain ourfocus. We expect margins to improve in the second half of fiscal 2011 and in fiscal 2012, aswe continue to benefit from solid global demand for our differentiated services and as certain costheadwinds subside next fiscal year.”
FedEx Express reported Q2 revenue of $5.99 billion, up 13%. FedEx International Priority (IP)average daily package volume increased 11%, led by exports from Asia. IP revenue per packagegrew 3% due to improved weight per package and higher fuel surcharges. IP Freight poundsincreased 29%, with revenue per pound up 5%. US domestic average daily package volumeincreased 3% and revenue per package grew 5% due to improved base pricing, higher fuel surchargesand improved weight per package.
But its operating income dropped 23% to $264 million, leaving the operating margin at 4.4%,down from 6.5% the previous year. Operating income and margin were negatively impacted by a $66million reserve associated with an adverse jury decision in the ATA Airlines lawsuit. Inaddition, prior year results included a one-time benefit from plan design changes for a selfinsurance program. The combination of these two items significantly impacted theyear-over-year operating margin comparison. The reinstatement of certain employee compensationprograms, increased aircraft maintenance costs and higher pension expenses also impacted operatingincome and margin.
For the second quarter, FedEx Ground revenue grew 13% to $2.08 billion. Its operating incomerose 24% to $296 million and the operating margin improved from 13% to 14.3%. FedEx Ground averagedaily package volume grew 7% in the second quarter driven by increases in the business-to-businessmarket and FedEx Home Delivery. Yield increased 5% primarily due to higher fuel surcharges andrate increases. FedEx SmartPost average daily volume increased 17% due to growth ine-commerce, gains in market share and the introduction of new service offerings. FedExSmartPost yield increased 10% primarily due to lower postage costs as a result of increaseddeliveries to U.S. Postal Service final destination facilities and increased fuel surcharges.Operating income and margin increased primarily due to higher package yield and volume.
FedEx Ground and FedEx Home Delivery will increase shipping rates by a net average of 4.9%effective January 3, 2011. The full average rate increase of 5.9% will be partially offset byadjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surchargeby one percentage point. FedEx Ground will make additional changes to dimensional weightcharges and surcharges, and FedEx SmartPost rates will also increase.
FedEx Freight Q2 revenue rose 14% to $1.22 billion. Less-than-truckload (LTL) average dailyshipments increased 8%. LTL increased 7% year-over-year and 5% from the first quarter,primarily due to yield management programs that include targeted improvement from lower-performingaccounts.
But its operating loss soared to $91 million from $12 million a year ago. This largely resultedfrom $86 million of costs associated with the combination of the FedEx Freight and FedEx NationalLTL operations, which will become effective January 30, 2011. These costs primarily relate toseverance expenses, asset impairment charges and accelerated depreciation expenses. Additional costs associated with this program totaling $54 to $84 million are expected in thethird quarter. The total expected cost of this program has been reduced to $140 to $170million.
