FedEx improved profits strongly in the December 2014 – February 2015 third quarter with muchbetter Express results thanks to lower costs along with higher profits at its Ground and Freight
divisions.The US group beat analysts’ expectations by announcing Q3 earnings of $2.01 per diluted sharecompared to $1.23 per share last year. Q3 consolidated revenues rose by 4% to $11.7 billion andoperating profit improved by 50% to $962 million, which pushed up the operating margin to 8.2%, upfrom 5.7% the previous year. Net income was 53% higher at $580 million.
Operating results improved due to volume and base yield growth in all three transportationsegments, a significant net benefit from fuel, benefits from profit improvement programmeinitiatives, a lower year-over-year weather impact and reduced pension expense. These improvementswere partially offset by higher variable incentive compensation accruals, the company noted.
“We had a very successful peak season as volumes grew across all transportation segments, andour profit improvement programs are moving ahead as scheduled,” stated Frederick W. Smith, FedExCorp. chairman, president and chief executive officer. “We believe our strategy is sound, ourculture is unique, and our customers value our broad portfolio of business solutions.”
FedEx Express reported much improved operating profits of $384 million, up 129% from $168million a year ago, and its operating margin more than doubled to 5.8%, up from 2.5% the previousyear. Key drivers were a significant net benefit from lower fuel costs and a lower year-over-yearweather impact together with profit improvement programme initiatives, partially offset byincreased variable incentive compensation accruals and aircraft maintenance expenses.
Revenue, however, was flat at $6.66 billion, compared to last year’s $6.67 billion, as lowerfuel surcharges and unfavorable currency exchange rates more than offset volume and base yieldgrowth. In the US domestic business, package volume grew by 4%, including 5% growth in overnightbox volumes, but domestic revenue per package decreased 2% due to lower fuel surcharges, partiallyoffset by higher base rates.
FedEx International Economy volume grew 4%, while FedEx International Priority volume was flat.International export revenue per package decreased 4%, as lower fuel surcharges and unfavourablecurrency exchange rates were partially offset by favourable service mix and higher rates.
The US ground package business FedEx Ground continued its growth driven mostly by e-commercevolumes. Revenue increased by 12% to $3.39 billion, operating profits improved by 14% to $558million and the already high operating margin rose to 16.4%, up from 16.2% the previous year.Operating results increased due to higher revenue per package, volume growth, a net benefit fromfuel and a lower year-over-year weather impact, partially offset by network expansion costs.
FedEx Ground average daily volume grew 7% due to growth in both B2B and home delivery services.Revenue per package increased 3% due to base rate increases and higher dimensional weight charges.The B2C service FedEx SmartPost, which uses USPS for final mile delivery, suffered a 7% drop inaverage daily volume due to the reduction in volume from an unnamed major customer. But SmartPostrevenue per package increased 8% due to rate increases and an improved customer mix, partiallyoffset by higher postage costs.
FedEx completed the acquisition of third-party logistics provider GENCO Distribution System,Inc. on January 30, 2015. The new subsidiary’s financial results are included within the FedExGround segment.
The US trucking subsidiary FedEx Freight also improved its financial results in the thirdquarter. It increased revenue by 6% to $1.43 billion, and operating income rose by 94% to $68million. Less-than-truckload (LTL) average daily shipments increased 3%, while LTL revenue pershipment grew 3% due to higher rates.
Looking ahead, FedEx projects earnings for its full 2014-15 year ending in May to be $8.80 to$8.95 per diluted share, assuming continued moderate global economic growth.
“We expect continued revenue and earnings growth this year, driven by ongoing improvements inall of our transportation segments,” said Alan B. Graf, Jr., FedEx Corp. executive vice presidentand chief financial officer. “Variable incentive compensation accruals will continue to increase asour financial performance improves, and we expect to deliver record fourth quarter and fiscal yearearnings.”
