FedEx see drop in revenue and net income for Q2

FedEx revealed a drop in revenue of 10% and a drop in net income of 30% for its second quarter, in comparison to 2008 levels. The company reported earnings of $1.10 per diluted share for the second quarter ended 30 November, compared to $1.58 per diluted share a year ago.

“Positive momentum in the global economy and continued execution of our business strategy drove volume growth across all FedEx transportation segments, highlighted by increased international shipments,” said Frederick W. Smith, FedEx chairman, president and chief executive officer. “We have taken decisive actions during the economic downturn to reduce expenses while expanding our networks in growth markets. We are providing outstanding service levels during our busiest shipping season thanks to the dedication of our more than 275,000 team members.”

Second quarter results

FedEx reported the following consolidated results for the second quarter: Revenue of $8.60bn, down 10% from $9.54bn a year ago; operating income of $571m, down 27% from $784m last year; operating margin of 6.6%, down from 8.2% the previous year; and net income of $345m, down 30% from last year’s $493m.

Revenue and earnings declined as a result of lower yields, primarily due to a substantial decline in fuel surcharges year over year.  Shipment growth, particularly in international express and at FedEx Ground, and strict cost controls benefited results.

Outlook

FedEx expects earnings per share of $0.50 to $0.70 per diluted share in the third quarter, and $3.45 to $3.75 for fiscal 2010, which reflects the current market outlook for fuel prices and a continued modest recovery in the global economy.  The company earned $0.31 per share in last year’s third quarter.  The company’s capital spending forecast remains $2.6bn.

“Our balance sheet is strong, volumes are growing, and we are encouraged by our performance as we emerge from the worst economic downturn in FedEx history,” said Alan B. Graf Jr., FedEx  executive vice president and chief financial officer. “While there is some uncertainty regarding the sustainability of current demand trends after our peak shipping season, we expect our strong operating leverage to provide improved year-over-year profitability in the second half of our fiscal year.  Effective cost management remains a priority and should continue to benefit results.”

With an outlook for modestly improving economic conditions and business performance, FedEx will resume merit salary increases for calendar 2010 as well as a 50% resumption of the 401(k) company match for most US employees. These programs were suspended a year ago.  In addition, second quarter results reflect expenses to accrue for expected payouts under the company’s variable incentive compensation programs, which are designed to pay base incentives to most hourly, professional and manager-level employees prior to paying any amounts to senior management. These expected costs are included in the company’s earnings guidance.

FedEx Express segment

For the second quarter, the FedEx Express segment reported:

-Revenue of $5.31bn, down 13% from $6.10bn a year ago

-Operating income of $345m, down 36% from $540m last year

-Operating margin of 6.5%, down from 8.9% the previous year

US domestic average daily package volume increased 4%, while revenue per package dropped 19% due to lower fuel surcharges, rate per pound and weight per package.  FedEx International Priority (IP) average daily package volume increased 6%.  IP revenue per package declined 14% primarily due to lower fuel surcharges.

Operating income and margin declined year over year, as last year’s results significantly benefited from falling fuel prices and the related fuel surcharge timing lag. Continued reductions in network operating costs driven by fewer flight hours and improved route efficiencies, along with other aggressive actions to control spending, partially offset the negative impact of fuel price. A one-time adjustment to a self-insurance program also benefited the quarter, but was largely offset by incremental variable compensation accruals.

FedEx Ground segment

For the second quarter, the FedEx Ground segment reported:

-Revenue of $1.84bn, up 3% from last year’s $1.79bn

-Operating income of $238m, up 12% from $212m a year ago

-Operating margin of 13.0%, up from 11.9% the previous year

FedEx Ground average daily package volume was up 4%. Yield decreased 2% primarily due to lower fuel surcharges. FedEx SmartPost average daily volume grew 63%, aided by gains from DHL’s exit from the U.S. domestic package market. Operating income and margin grew primarily due to increased volume and improved productivity.

Earlier this month, FedEx Ground announced that it will be increasing FedEx Ground and FedEx Home Delivery rates by an average of 4.9%, effective 4 January 2010.  FedEx Ground is also making various changes to surcharges, including modifications to its fuel surcharge table.

FedEx Freight segment

For the second quarter, the FedEx Freight segment reported:

-Revenue of $1.07bn, down 11% from last year’s $1.20bn

-Operating loss of $12m, down from operating income of $32m a year ago

-Operating margin of (1.1%), down from 2.7% the previous year

Less-than-truckload (LTL) yield decreased 12% due to the continuing effects of a competitive pricing environment and lower fuel surcharges. Average daily LTL shipments increased 3% year over year and growth rates improved month over month throughout the quarter. Operating income and margin decreased in the quarter due to the competitive pricing environment, partially offset by higher shipments.

FedEx Services segment

FedEx Services segment revenue for the second quarter, which included the operations of FedEx Office, was down 12% year over year, due to declines in copy product revenues and the realignment of FedEx SupplyChain Systems to the FedEx Express reporting segment, effective 1 September 2009.  The financial impact of this realignment was immaterial.

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