FedEx revenue up 12%

FedEx has reported a revenue growth of 12%, according to the company’s second quarter results. Second quarter revenue stood at $9.63bn, up from $8.6bn the previous year. The company recorded operating income of $469m, down 18% from $571m last year.

Meanwhile, FedEx’s operating margin was announced at 4.9%, a decrease from 6.6% the previous year. Net income for the quarter was also down 18% from $345m to $283m.

FedEx reported earnings of $0.89 per diluted share for the second quarter, ended November 30. Excluding certain charges, 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 programme at FedEx Express, which increased earnings by a net $0.05 per diluted share.

While shipments and yields grew in all transportation segments, earnings were reduced by costs related to the 30 January 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 programmemes, and higher pension and aircraft maintenance expenses, also impacted earnings.

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 $3.5bn.

“Our operating performance in the quarter was impacted by strong compensation and benefits headwinds as we reinstated programmes 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 $5.99bn, up 13% from last year’s $5.31bn
• Operating income of $264m, down 23% from $345m 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 $66m 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 programme. The combination of these two items significantly impacted the year-over-year operating margin comparison. The reinstatement of certain employee compensation programmes, 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 $2.08bn, up 13% from last year’s $1.84bn
• Operating income of $296m, up 24% from $238m 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 $1.22bn, up 14% from last year’s $1.07bn
• Operating loss of $91m, compared with an operating loss of $12m 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 programmes that include targeted improvement from lower-performing accounts.

The operating loss in the quarter largely resulted from $86m 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 programme totaling $54 to $84m are expected in the third quarter. The total expected cost of this programme has been reduced to $140 to $170m.