FedEx reports a 3 percent decline in net income for fiscal third quarter

Despite rising oil prices, the fallout from the earthquake in Japan, and slow economic growth, fiscal third quarter performance for FedEx was relatively strong.

Net income for the quarter—at $231 million—was down 3 percent from last year’s $239 million, but quarterly revenue at $9.66 billion was up 11 percent from last year’s $8.70 billion. Operating income—at $393 million—was down 6 percent year-over-year.

Earnings per share came in at $0.73, down from $0.76 a year ago. This was on the low end of the company’s revises $0.70-to$0.90 guidance and below the Wall Street estimate of $0.83 per share. FedEx said that excluding costs related to its late January integration of FedEx Freight and FedEx National LTL operations earnings were $0.81 per share.

“Strong demand for our services drove revenue higher as volumes increases across our businesses,” said FedEx Chairman, President and CEO Frederick W. Smith on an earnings conference call today. “Yields increased as we continued to focus sharply on managing FedEx for profitable growth. Particularly efficient was the performance of FedEx Ground, with faster delivery times and other innovative solutions continuing to win customers.”

Looking to the future, Smith said that the company is optimistic about earnings, noting that global trade dynamics remain solid, although the impact of volatile fuel prices and other global events remains uncertain. FedEx’ optimism, said Smith, is based on various factors, including its strategy to profitably grow its international business, improve yield, manage cost structure, and make sound investments, which he said is working; and global macroeconomic trends driving growth in markets where FedEx has unique competitive advantages like long non-stop flights flown on its Boeing 777 freighters, among others.

Individual unit quarterly performances: FedEx Express quarterly revenue was up 11 percent at $6.05 billion, with an operating margin of 2.9 percent, down from last year’s 4.9 percent and an operating income of $178 million, a 33 percent increase. Revenue at FedEx Ground was up 14 percent at $2.18 billion, with an operating margin of 14.9 percent, compared to 13.5 percent last year, and an operating income of $325 million for a 26 percent annual gain. FedEx Freight revenue at $1.12 billion was up 8 percent from $1.04 billion last year, with an operating margin at -9.8 percent compared to -10.3 percent a year ago.

Yield at FedEx Freight increased 11 percent, while average daily LTL shipments dipped 6 percent, due to yield management efforts and the harsh weather conditions on top of its LTL network integration, which now offers shippers a unified LTL network, with two service levels—FedEx Freight Priority and FedEx Freight Economy. These network changes resulted in $43 million in one-time costs during the quarter and $130 million in the fiscal year-to-date, due to lease termination costs and severance expenses. Smith praised the LTL network integration, saying that it expects FedEx Freight to return to profitability in the fiscal fourth quarter.

Package volumes and yields were solid in the fiscal third quarter, with total average daily packages at 3,696 up 3 percent. Total U.S. domestic packages averaged 2,801 per day for a 2 percent gain, and International Priority and International Domestic at 558 and 337 were up 5 and 6 percent, respectively. Total revenue per package averaged $21.01 for a 6 percent gain, with total U.S. Domestic Package revenue at $15.45 for a 3 percent gain. International Priority and International Domestic at $57.07 and $7.54 were up 7 and 4 percent, respectively.

At FedEx Ground, average daily package volume—at 3,882—was up 6 percent, and FedEx SmartPost was up 17 percent with a daily average of 1,736.

“Considering what the weather did to the USA in the last few months FedEx performed remarkably well,” said Jerry Hempstead, principal of Hempstead Consulting. “Bad weather makes volume go down and costs go up, however, the great news was even in light of this, the air network was up 2 percent and the ground network was up 6 percent. The prior quarter had been up 3 percent in air and 7 percent in ground but I don’t read this as some sort of sign the economy is slowing but a reality of what Mother Nature can do to one’s earnings.”

Hempstead added that shippers need to be cautious when it comes to FedEx stated ambitions for pricing. He explained that FedEx is lowering discounts when customers come up for renegotiations, but is pricing new business higher.

FedEx CFO Alan B. Graf, Jr, said that the company’s yield improvement program continues to be very effective as base yields, excluding fuel surcharges, are rising nicely.

Looking ahead, FedEx is calling for earnings to be between $1.66-to-$1.83 per share in the fiscal fourth quarter and an adjusted $4.83-to-$5.00 per share for fiscal 2011. CEO Smith said FedEx remains committed to its goals of increasing revenue, achieving a ten-plus percent operating margin, increasing earnings-per-share and cash flows, and increasing returns on invested capital.