FedEx Corp. Reports Second Quarter Earnings

Full-Year Earnings Outlook Increased

MEMPHIS, Tenn., December 16, 2010 … FedEx Corp. (NYSE: FDX) today reported earnings of $0.89 per diluted share for the second quarter ended November 30. Excluding certain charges described below, second quarter earnings were $1.16 per diluted share, compared to $1.10 per diluted share a year ago.

“Solid demand for our transportation solutions, outstanding customer service from FedEx team members and a healthier global economy helped drive second-quarter revenue higher,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “Our yield improvement strategy is working, holiday peak season volumes are exceeding our expectations and our economic forecast for calendar 2011 has improved. Accordingly, we have increased our earnings outlook for our current fiscal year.”

Reported results for the current quarter include costs related to the previously announced combination of the company’s FedEx Freight and FedEx National LTL operations and a reserve associated with a legal matter at FedEx Express, which together negatively impacted earnings by a net $0.27 per diluted share. Last year’s second quarter results included a benefit from plan design changes to a self-insurance program at FedEx Express, which increased earnings by a net $0.05 per diluted share.

Second Quarter Results

FedEx Corp. reported the following consolidated results for the second quarter:

  • Revenue of $9.63 billion, up 12% from $8.60 billion the previous year
  • Operating income of $469 million, down 18% from $571 million last year
  • Operating margin of 4.9%, down from 6.6% the previous year
  • Net income of $283 million, down 18% from $345 million a year ago

While shipments and yields grew in all transportation segments, earnings were reduced by costs related to the January 30, 2011 combination of FedEx Freight and FedEx National LTL operations, including severance costs associated with personnel reductions and non-cash asset impairment charges. Earnings were also reduced by a reserve for a legal matter at FedEx Express. The reinstatement of certain employee compensation programs, and higher pension and aircraft maintenance expenses, also impacted earnings.

Outlook

FedEx projects earnings to be $0.95 to $1.15 per diluted share in the third quarter and $5.00 to $5.30 per diluted share for fiscal 2011, up from the company’s previous estimate of $4.80 to $5.25 per diluted share. This guidance excludes any FedEx Freight combination costs and the second quarter legal reserve, and also assumes stable fuel prices and continued moderate growth in the global economy. Including costs from the FedEx Freight combination and the legal reserve, earnings are expected to be $0.78 to $1.04 per diluted share for the third quarter and $4.59 to $4.95 per diluted share for fiscal 2011. The company reported earnings of $0.76 per diluted share in last year’s third quarter. The capital spending forecast for fiscal 2011 remains $3.5 billion.

“Our operating performance in the quarter was impacted by strong compensation and benefits headwinds as we reinstated programs curtailed during the recession,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “During the quarter, we also realized more normalized growth in FedEx International Priority shipments and higher fuel prices than our earnings guidance had assumed. Yield improvement and cost management remain our focus. We expect margins to improve in the second half of fiscal 2011 and in fiscal 2012, as we continue to benefit from solid global demand for our differentiated services and as certain cost headwinds subside next fiscal year.”

FedEx Express Segment

For the second quarter, the FedEx Express segment reported:

  • Revenue of $5.99 billion, up 13% from last year’s $5.31 billion
  • Operating income of $264 million, down 23% from $345 million a year ago
  • Operating margin of 4.4%, down from 6.5% the previous year

FedEx International Priority (IP) average daily package volume increased 11%, led by exports from Asia. IP revenue per package grew 3% due to improved weight per package and higher fuel surcharges. IP Freight pounds increased 29%, with revenue per pound up 5%. U.S. domestic average daily package volume increased 3% and revenue per package grew 5% due to improved base pricing, higher fuel surcharges and improved weight per package.

Operating income and margin were negatively impacted by a $66 million reserve associated with an adverse jury decision in the ATA Airlines lawsuit. In addition, prior year results included a one time benefit from plan design changes for a self insurance program. The combination of these two items significantly impacted the year-over-year operating margin comparison. The reinstatement of certain employee compensation programs, increased aircraft maintenance costs and higher pension expenses also impacted operating income and margin.

Earlier today, FedEx announced an agreement to acquire Servicios Nacionales Mupa, SA de CV (MultiPack), a Mexican domestic express package delivery company. Last month, FedEx Express announced plans to acquire the logistics, distribution and express businesses of AFL Pvt. Ltd. and its affiliate, Unifreight India Pvt. Ltd. Once completed, these acquisitions will give FedEx more robust domestic transportation and related capabilities in these important global markets.

FedEx Ground Segment

For the second quarter, the FedEx Ground segment reported:

  • Revenue of $2.08 billion, up 13% from last year’s $1.84 billion
  • Operating income of $296 million, up 24% from $238 million a year ago
  • Operating margin of 14.3%, up from 13.0% the previous year

FedEx Ground average daily package volume grew 7% in the second quarter driven by increases in the business-to-business market and FedEx Home Delivery. Yield increased 5% primarily due to higher fuel surcharges and rate increases. FedEx SmartPost average daily volume increased 17% due to growth in e-commerce, gains in market share and the introduction of new service offerings. FedEx SmartPost yield increased 10% primarily due to lower postage costs as a result of increased deliveries 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 by adjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surcharge by one percentage point. FedEx Ground will make additional changes to dimensional weight charges and surcharges, and FedEx SmartPost rates will also increase.

FedEx Freight Segment

For the second quarter, the FedEx Freight segment reported:

  • Revenue of $1.22 billion, up 14% from last year’s $1.07 billion
  • Operating loss of $91 million, compared with an operating loss of $12 million a year ago
  • Operating margin of (7.5%), compared with (1.1%) the previous year

Less-than-truckload (LTL) average daily shipments increased 8%. LTL yield increased 7% year-over-year and 5% from the first quarter, primarily due to yield management programs that include targeted improvement from lower-performing accounts.

The operating loss in the quarter largely resulted from $86 million of costs associated with the combination of the FedEx Freight and FedEx National LTL operations, which will become effective January 30, 2011. These costs primarily relate to severance expenses, asset impairment charges and accelerated depreciation expenses. Additional costs associated with this program totaling $54 to $84 million are expected in the third quarter. The total expected cost of this program has been reduced to $140 to $170 million.

Corporate Overview

FedEx Corp. (NYSE: FDX) provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $37 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Consistently ranked among the world’s most admired and trusted employers, FedEx inspires its more than 285,000 team members to remain “absolutely, positively” focused on safety, the highest ethical and professional standards and the needs of their customers and communities. For more information, visit news.fedex.com .

Additional information and operating data are contained in the company’s annual report, Form 10-K, Form 10-Qs and second quarter fiscal 2011 Statistical Book. These materials, as well as a Webcast of the earnings release conference call to be held at 8:30 a.m. EST on December 16 are available on the company’s Web site at www.fedex.com/us/investorrelations . A replay of the conference call Webcast will be posted on our Web site following the call.

Certain statements in this press release may be considered forward-looking statements, such as statements relating to management’s views with respect to future events and financial performance. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, economic conditions in the global markets in which we operate, legal challenges or changes related to FedEx Ground’s owner-operators, new U.S. domestic or international government regulation, the impact from any terrorist activities or international conflicts, our ability to effectively operate, integrate and leverage acquired businesses, changes in fuel prices and currency exchange rates, our ability to match capacity to shifting volume levels and other factors which can be found in FedEx Corp.’s and its subsidiaries’ press releases and filings with the SEC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO GAAP FINANCIAL MEASURES

The company believes that meaningful analysis of our financial performance requires an understanding of the factors underlying that performance and our judgments about the likelihood that particular factors will repeat. Excluding a reserve associated with a legal matter and the costs of the combination of FedEx Freight and FedEx National LTL operations from our second quarter earnings and our earnings guidance, net of applicable incentive compensation impacts, will allow more accurate comparisons to prior periods of our second quarter operating performance and our expected operating performance in fiscal 2011. As required by SEC rules, the tables below present a reconciliation of our presented non-GAAP measures to the most directly comparable GAAP measures.

Fiscal 2011 Second Quarter Earnings
Q2 Diluted

Earnings Per Share

Non-GAAP Measure$1.16
FedEx Freight Combination Costs(0.17)
ATA Legal Reserve(0.10)
GAAP Measure$0.89
Fiscal 2011 Third Quarter and Full-Year Earnings Guidance
Q3 Diluted

EPS Guidance

FY 2011 Diluted

EPS Guidance

Non-GAAP Measure$0.95 to $1.15$5.00 to $5.30
FedEx Freight Combination Costs(0.17 to 0.11)(0.34 to 0.28)
ATA Legal Reserve(0.07)
GAAP Measure$0.78 to $1.04$4.59 to $4.95
FEDEX CORP. FINANCIAL HIGHLIGHTS
Second Quarter Fiscal 2011
(In millions, except earnings per share and FTEs)
(Unaudited)
Three Months EndedSix Months Ended
November 30November 30
20102009%20102009%
Revenue:
FedEx Express segment$5,992$5,31413%$11,904$10,23816%
FedEx Ground segment2,0771,83713%4,0383,56713%
FedEx Freight segment1,2211,06814%2,4792,05021%
FedEx Services segment434465(7%)849916(7%)
Other & eliminations(92)(88)NM(181)(166)NM
Total Revenue9,6328,59612%19,08916,60515%
Operating Expenses:
Salaries and employee benefits3,7793,42410%7,5826,80111%
Purchased transportation1,3901,15520%2,7172,20923%
Rentals and landing fees6285936%1,2291,1715%
Depreciation and amortization5024873%981982(0%)
Fuel93874426%1,8251,41029%
Maintenance and repairs47341015%99081122%
Impairment and other charges67NM67NM
Other1,3861,21214%2,6012,33511%
Total Operating Expenses9,1638,02514%17,99215,71914%
Operating Income (Loss):
FedEx Express segment264345(23%)62144938%
FedEx Ground segment29623824%58344730%
FedEx Freight segment(91)(12)NM(107)(10)NM
Total Operating Income469571(18%)1,09788624%
Other Expense:
Interest, net(23)(15)53%(41)(33)24%
Other, net(9)(9)(16)(12)33%
Total Other Expense(32)(24)33%(57)(45)27%
Pretax Income437547(20%)1,04084124%
Provision for Income Taxes154202(24%)37731520%
Net Income$283$345(18%)$663$52626%
Diluted Earnings Per Share$0.89$1.10(19%)$2.09$1.6824%
Weighted Average Common and Common Equivalent Shares3163141%3163131%
Capital Expenditures$1,047$66857%$2,059$1,54933%
Average Full-Time Equivalents (000s)2552445%2532415%
FEDEX CORP. CONDENSED CONSOLIDATED BALANCE SHEETS
Second Quarter Fiscal 2011
(In millions)
Nov. 30, 2010
ASSETS(Unaudited)May 31, 2010
Current Assets
Cash and cash equivalents$1,877$1,952
Receivables, less allowances4,2794,163
Spare parts, supplies and fuel, less allowances400389
Deferred income taxes540529
Prepaid expenses and other302251
Total current assets7,3987,284
Property and Equipment, at Cost32,72031,302
Less accumulated depreciation and amortization17,45416,917
Net property and equipment15,26614,385
Other Long-Term Assets
Goodwill2,2242,200
Other assets1,2051,033
Total other long-term assets3,4293,233
$26,093$24,902
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current Liabilities
Current portion of long-term debt$251$262
Accrued salaries and employee benefits1,2311,146
Accounts payable1,5611,522
Accrued expenses1,8201,715
Total current liabilities4,8634,645
Long-Term Debt, Less Current Portion1,6671,668
Other Long-Term Liabilities
Deferred income taxes976891
Pension, postretirement healthcare and other benefit obligations1,7311,705
Self-insurance accruals969960
Deferred lease obligations913804
Deferred gains, principally related to aircraft transactions257267
Other liabilities156151
Total other long-term liabilities5,0024,778
Commitments and Contingencies
Common Stockholders’ Investment
Common stock, $0.10 par value, 800 million shares authorized3131
Additional paid-in capital2,3432,261
Retained earnings14,51513,966
Accumulated other comprehensive loss(2,316)(2,440)
Treasury stock, at cost(12)(7)
Total common stockholders’ investment14,56113,811
$26,093$24,902
FEDEX CORP. CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
Second Quarter Fiscal 2011
(In millions)
(Unaudited)
Six Months Ended
November 30
20102009
Operating Activities:
Net income$663$526
Noncash charges:
Depreciation and amortization981982
Other, net262176
Changes in operating assets and liabilities, net105(327)
Net cash provided by operating activities2,0111,357
Investing Activities:
Capital expenditures(2,059)(1,549)
Proceeds from asset dispositions and other733
Net cash used in investing activities(2,052)(1,516)
Financing Activities:
Principal payments on debt(12)(625)
Dividends paid(76)(69)
Other, net2913
Net cash used in financing activities(59)(681)
Effect of exchange rate changes on cash2513
Net decrease in cash and cash equivalents(75)(827)
Cash and cash equivalents at beginning of period1,9522,292
Cash and cash equivalents at end of period$1,877$1,465
FEDEX EXPRESS SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS
Second Quarter Fiscal 2011
(Dollars in millions)
(Unaudited)
Three Months EndedSix Months Ended
November 30November 30
FINANCIAL HIGHLIGHTS20102009%20102009%
Revenue$5,992$5,31413%$11,904$10,23816%
Operating Expenses:
Salaries and employee benefits2,2532,03611%4,5114,07911%
Purchased transportation38828337%75753841%
Rentals and landing fees4273968%8307816%
Depreciation and amortization2652516%5205033%
Fuel80263826%1,5561,20929%
Maintenance and repairs32026720%67252827%
Intercompany charges5124709%1,0259399%
Other176162821%1,4121,21217%
Total Operating Expenses5,7284,96915%11,2839,78915%
Operating Income$264$345(23%)$621$44938%
Operating Margin4.4%6.5%(2.1 pts)5.2%4.4%0.8 pts
OPERATING STATISTICS
Operating Weekdays6363128128
AVG DAILY VOLUME / POUNDS
Average Daily Package Volume (000s):
U.S. Overnight Box1,1961,1544%1,1821,1414%
U.S. Overnight Envelope6266063%6256112%
U.S. Deferred8658581%8558402%
Total U.S. Domestic Package2,6872,6183%2,6622,5923%
International Priority58552911%57550215%
International Domestic3543385%3393158%
Total Average Daily Packages3,6263,4854%3,5763,4095%
Average Daily Freight Pounds (000s):
U.S.7,4597,1934%7,1796,8834%
International Priority3,3202,57129%3,1712,35335%
International Airfreight1,2431,2073%1,2421,253(1%)
Total Avg Daily Freight Pounds12,02210,97110%11,59210,48911%
YIELD
Revenue Per Package:
U.S. Overnight Box$19.75$18.875%$19.70$18.516%
U.S. Overnight Envelope10.5410.362%10.5910.273%
U.S. Deferred12.2411.586%12.1211.406%
Total U.S. Domestic Package15.1914.515%15.1314.266%
International Priority54.5452.883%54.1252.274%
International Domestic7.397.094%7.227.072%
Composite Package Yield$20.77$19.626%$20.65$19.198%
Revenue Per Freight Pound:
U.S.$1.13$1.085%$1.15$1.077%
International Priority2.081.985%2.071.937%
International Airfreight0.880.836%0.870.7713%
Composite Freight Yield$1.36$1.268%$1.37$1.2212%
Average Full-Time Equivalents (000s)1321265%1321265%
1 – Current year includes a $66 million reserve for a legal matter.
FEDEX GROUND SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS
Second Quarter Fiscal 2011
(Dollars in millions)
(Unaudited)
Three Months EndedSix Months Ended
November 30November 30
20102009%20102009%
FINANCIAL HIGHLIGHTS
Revenue$2,077$1,83713%$4,038$3,56713%
Operating Expenses:
Salaries and employee benefits31828810%62557010%
Purchased transportation84573315%1,6271,42614%
Rentals67636%1291217%
Depreciation and amortization8383165168(2%)
Fuel3250%4333%
Maintenance and repairs42405%867810%
Intercompany charges22719616%44838018%
Other1961941%371374(1%)
Total Operating Expenses1,7811,59911%3,4553,12011%
Operating Income$296$23824%$583$44730%
Operating Margin14.3%13.0%1.3 pts14.4%12.5%1.9 pts
OPERATING STATISTICS
Operating Weekdays6363128128
Average Daily Package Volume (000s)
FedEx Ground3,8433,6027%3,6863,4547%
FedEx SmartPost1,4841,26517%1,2871,13513%
Yield (Revenue Per Package)
FedEx Ground$7.89$7.545%$7.94$7.565%
FedEx SmartPost$1.72$1.5710%$1.70$1.5013%
FEDEX FREIGHT SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS
Second Quarter Fiscal 2011
(Dollars in millions)
(Unaudited)
Three Months EndedSix Months Ended
November 30November 30
20102009%20102009%
FINANCIAL HIGHLIGHTS
Revenue$1,221$1,06814%$2,479$2,05021%
Operating Expenses:
Salaries and employee benefits58451314%1,1841,02016%
Purchased transportation18516810%38928636%
Rentals312715%655616%
Depreciation and amortization624635%1101019%
Fuel13310428%26419833%
Maintenance and repairs453529%916932%
Intercompany charges1089810%21715045%
Impairment and other charges167NM67NM
Other97899%19918011%
Total Operating Expenses1,3121,08021%2,5862,06026%
Operating Loss($91)($12)NM($107)($10)NM
Operating Margin(7.5%)(1.1%)(6.4 pts)(4.3%)(0.5%)(3.8 pts)
OPERATING STATISTICS
LTL Operating Weekdays6262127127
LTL Shipments Per Day (000s)89.482.98%90.677.018%
Weight Per LTL Shipment (lbs)1,1151,128(1%)1,1251,1191%
LTL Revenue/CWT$18.27$17.097%$17.77$17.452%
1 – Current year includes charges associated with the combination of FedEx Freight and FedEx National LTL operations effective January 30, 2011.

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