FedEx Corp. Reports Solid Second Quarter Earnings Growth

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The FINANCIAL — FedEx Corp. on December 16 reported adjusted earnings of $2.58 per diluted share for the second quarter ended November 30, compared to adjusted earnings of $2.16 per diluted share a year ago. Without adjustments, FedEx reported earnings of $2.44 for the second quarter compared to $2.31 per diluted share last year.

This year’s quarterly consolidated earnings have been adjusted for expenses related to the settlement of certain independent contractor litigation matters involving FedEx Ground ($0.09 per diluted share) and the pending acquisition of TNT Express ($0.04 per diluted share).

“FedEx Corp. posted solid earnings despite continued weakness in industrial production and global trade, and we are making impressive progress toward our goals to increase margins, earnings per share, cash flows, and returns on invested capital,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “A record number of holiday shipments – fueled by the steady rise of e-commerce – are flowing through the FedEx global networks, and we greatly appreciate the dedication of our 340,000 team members around the world who are delivering outstanding service to our customers.”

Operating results rose year-over-year primarily due to higher base rates and the continued positive impacts from profit improvement initiatives. These benefits were partially offset by lower-than-anticipated volume at FedEx Freight and the modest negative net impact of fuel. The effective tax rate for the quarter was lowered to 34.5% due primarily to the resolution of a state tax matter, according to FedEx.

During the quarter, the company acquired 6.0 million shares of FedEx common stock.

Outlook

FedEx reaffirms its adjusted fiscal 2016 earnings outlook of $10.40 to $10.90 per diluted share before year-end mark-to-market pension accounting adjustments (“MTM adjustments”). The outlook assumes moderate economic growth and excludes the independent contractor legal settlements and any TNT-related costs or operating results. The effective tax rate for the full year is expected to be approximately 36% excluding any MTM adjustments and the impact of the TNT transaction. The capital spending forecast for the fiscal year remains $4.6 billion.

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“We expect our solid earnings growth to continue in the second half of our fiscal year despite weakness in industrial production,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “Our improved financial results are being driven by better revenue quality, e-commerce growth and the successful ongoing execution of our profit improvement initiatives.”

FedEx Express Segment

For the second quarter, the FedEx Express segment reported:

Revenue of $6.59 billion, down 6% from last year’s $7.02 billion
Operating income of $622 million, up 26% from $492 million a year ago
Operating margin of 9.4%, up from 7.0% the previous year

Revenue decreased 6%, as lower fuel surcharges and unfavorable currency exchange rates more than offset base yield growth. U.S. domestic package volume increased 1%, driven by growth in overnight package. U.S. domestic revenue per package decreased 2% due to lower fuel surcharges, partially offset by higher base rates. FedEx International Economy® volume grew 3%, while FedEx International Priority volume decreased 5%. International export revenue per package decreased 9% as lower fuel surcharges and unfavorable currency exchange rates more than offset higher base rates. Operating expenses decreased 9%, primarily driven by lower fuel prices and currency exchange rates. Base expenses, excluding the impacts of fuel price and exchange rate changes, continued to be constrained by profit improvement program initiatives.

Operating results improved due to higher base pricing and the benefits from profit improvement program initiatives. Fuel and currency exchange rate changes had a minimal combined net impact on the quarter, as the favorable net impact of currency exchange rate changes was partially offset by the slightly negative net impact of fuel.

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FedEx Ground Segment

For the second quarter, the FedEx Ground segment reported:

Revenue of $4.05 billion, up 32% from last year’s $3.06 billion
Operating income of $526 million, up 13% from $465 million a year ago
Operating margin of 13.0%, down from 15.2% the previous year

Revenue increased due to the inclusion of GENCO results, higher ground volume and base rates, and the recording of FedEx SmartPost revenues on a gross basis versus the previous net treatment. FedEx Ground average daily volume grew 9% in the second quarter, primarily driven by growth in e-commerce. FedEx Ground revenue per package increased 10% due to the recording of FedEx SmartPost revenues on a gross basis, and higher base rates, which include additional dimensional weight charges. These were partially offset by lower fuel surcharges.

Operating income improved primarily due to higher base rates and volume. Operating margin decreased primarily due to the change in FedEx SmartPost revenue reporting and the inclusion of GENCO results, which collectively reduced the operating margin year-over-year by 2.1 percentage points.

FedEx Freight Segment

For the second quarter, the FedEx Freight segment reported:

Revenue of $1.55 billion, down 2% from last year’s $1.59 billion
Operating income of $101 million, down 10% from $112 million a year ago
Operating margin of 6.5%, down from 7.1% the previous year

Revenue declined 2%, as lower fuel surcharges more than offset base rate and volume growth. Less-than-truckload (LTL) average daily shipments increased 1%, while weight per shipment decreased 1%. LTL revenue per shipment declined 3% due to lower fuel surcharges, partially offset by higher base rates.

Operating results declined primarily due to salaries and employee benefits expense significantly outpacing lower-than-anticipated volume.

 

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