FedEx Corp. Reports second quarter earnings

FedEx Corp. reported earnings of USD 1.54 per diluted share for the second quarter ended November 30, compared to USD 1.64 per diluted share a year ago.

Second Quarter Results

FedEx Corp. reported the following consolidated results for the second quarter:
• Revenue of USD 9.45 billion, up 6pct from USD 8.93 billion the previous year
• Operating income of USD 783 million, down 7pct from USD 839 million a year ago
• Operating margin of 8.3pct , down from 9.4pct the previous year
• Net income of USD 479 million, down 6pct from last year’s USD 511 million
Operating margin declined primarily due to the net impact of substantially higher fuel costs and continued weakness in the U.S. economy, which is limiting demand for the company’s U.S. domestic express package and lessthan-truckload (LTL) freight services. Last year's second quarter results included USD 0.25 per diluted share net impact of costs associated with the pilot labor contract, mostly offset by the benefits from the timing of net fuel impacts and Hurricane Katrina insurance proceeds.
Total combined average daily package volume in the FedEx Express and FedEx Ground segments grew 8pct year over year for the quarter, due to growth in ground and FedEx International Priority (IP) shipments and an increase in international domestic express shipments resulting primarily from recent international acquisitions.

Outlook
FedEx expects earnings to be USD 1.15 to USD 1.30 per diluted share in the third quarter compared to USD 1.35 a year ago. For the full year, the company expects earnings of USD 6.40 to USD 6.70 per diluted share. This outlook assumes relative stability in fuel prices and no additional weakening in the economy. The capital spending forecast has been reduced from USD 3.5 billion to USD 3.1 billion, with additional reductions possible as management continues to review the timing of capital outlays.
“As we noted last month, higher fuel prices and continued weak growth in the U.S. economy have hindered profitability,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “While we have indexed fuel surcharges in place, they cannot keep pace in the short-term with rapidly rising fuel prices. We are implementing cost-containment actions to manage near-term expenditures and have reduced our capital spending forecast. We will continue, however, to invest in strategic projects related to our long-term growth plans.”

FedEx Express Segment
For the second quarter, the FedEx Express segment reported:
• Revenue of USD 6.04 billion, up 6pct from last year’s USD 5.69 billion
• Operating income of USD 531 million, up 5pct from USD 508 million a year ago
• Operating margin of 8.8pct , down from 8.9pct the previous year
IP package revenue grew 13pct for the quarter, as IP average daily package volume grew 7pct , led by increases in volume from Asia and the United States. IP revenue per package grew 5pct , primarily due to favorable exchange rates, higher weight per package and higher fuel surcharges. U.S. domestic revenue per package increased 1pct due to higher rates, while package volume declined by 1pct . International domestic volume sharply increased and revenue per package declined, resulting primarily from recent international acquisitions.
Operating income and margin were negatively impacted by higher net fuel costs and continued softness in the U.S. economy. Continued investments in domestic express services in China also negatively impacted this quarter’s results. Last year’s second quarter results included upfront costs associated with the pilot labor contract.

FedEx Ground Segment
For the second quarter, the FedEx Ground segment reported:
• Revenue of USD 1.70 billion, up 12pct from last year’s USD 1.52 billion
• Operating income of USD 173 million, down 10pct from USD 193 million a year ago
• Operating margin of 10.2pct , down from 12.7pct the previous year
FedEx Ground average daily package volume grew 8pct year over year in the second quarter due to increased commercial business and the continued strong growth of its FedEx Home Delivery service. Yield improved 3pct primarily due to the impact of its general rate increase, including dimensional weight charges and extra service revenues.

Operating income and margin were lower due primarily to independent contractor incentive programs, higher net fuel costs and investments to expand capacity.
FedEx Ground faces increased regulatory and legal uncertainty with respect to its independent contractors. As part of its operations, FedEx Ground has made changes to its relationships with contractors that, among other things, provide incentives for improved service and enhanced regulatory and other compliance by our contractors. In September, FedEx Ground announced a nationwide program which provides greater incentives to certain of its 15,000contractors who choose to grow their businesses by adding routes.
Also, during the second quarter FedEx Ground offered special incentives to encourage California-based single-route contractors to transform their operations into multiple-route businesses or sell their routes to others. The response to the California-based single route contractor program has been exceptional, with virtually all contractors accepting the incentives.
FedEx Ground anticipates continuing changes to its relationships with its contractors, which are expected to increase the cost of operations, and it is reasonably possible that such cost increases could be material. However, management believes the FedEx Ground business remains fundamentally strong and will continue to grow market share and improve the customer experience.

FedEx Freight Segment
For the second quarter, the FedEx Freight segment reported:
• Revenue of USD 1.24 billion, up 1pct from last year’s USD 1.23 billion
• Operating income of USD 79 million, down 43pct from USD 138 million a year ago
• Operating margin of 6.4pct , down from 11.3pct the previous year
Less-than-truckload shipments declined 6pct year over year, as demand for services in the LTL sector has been restrained by the weak U.S. economy. LTL yield improved 4pct year over year, as higher rates and higher yields from longer-haul shipments more than offset the impact of FedEx Freight reducing its fuel surcharges on July 23, 2007.
Operating income and margin declined during the quarter due to the decline in LTL shipments. The net impact of higher fuel costs and the fuel surcharge reduction also negatively affected margins. Last year’s second quarter results included a gain related to the sale of an operating facility and insurance proceeds associated with Hurricane Katrina. While the reduction in the LTL fuel surcharge is expected to have a negative impact on revenue for the remainder of the fiscal year, this change is expected to strengthen FedEx Freight competitively and drive incremental shipments over the long term.
FedEx Services Segment
FedEx Services segment revenue, which includes the operations of FedEx Kinko’s and FedEx Global Supply Chain Services, was up 1pct year over year. The growth in package acceptance fees and revenue generated from new FedEx Kinko’s locations more than offset lower copy product revenues. FedEx Kinko’s opened 83 new centers during the second quarter as part of its plan to add 300 new centers this fiscal year. However, FedEx Kinko’s will slow the rate of expansion of new locations in fiscal 2009, and will balance store expansion efforts with initiatives to improve the customer experience at existing stores. FedEx remains committed to the long-term expansion of its retail network.