FedEx 3Q Profits Increase 11% but Fall Short of Analysts' Target
This story appears in the March 27 print edition of Transport Topics.
FedEx Corp. said its fiscal third-quarter profits rose 11% — despite the negative effects of fuel costs — and that rate increases helped to bolster revenue.
FedEx earned $562 million, or $2.07 per share, falling short of analysts’ consensus estimate of $2.44. That compared with $507 million, or $1.84, in the same period a year ago.
Revenue rose to $15 billion compared with $12.7 billion in the previous year.
Revenue was up because of rate increases imposed last autumn, leading to more money per package, FedEx said. But operating income was lower companywide because of higher fuel prices, one fewer day of service in the quarter and higher costs to expand the FedEx Ground network.
The company was able to come out ahead year-over-year because of $344 million in one-time legal expenses in 2016 related to lawsuits, including $204 million to settle a class-action lawsuit involving drivers who were labeled independent contractors.
“Jet fuel prices increased 30% year-over-year for the quarter,” said Alan Graf Jr., chief financial officer. “We began adjusting our fuel surcharge weekly instead of monthly for both Express and Ground. This should better match volatility of our fuel expenses to our surcharge.”
Nevertheless, the company pointed to yield growth in each division as a “bright spot.”
For the past nine months, FedEx profits rose 4.6% to $1.98 billion, or $7.31, on revenue that increased 19% to $44.6 billion.
The Memphis, Tennessee-based company ranks No. 2 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers.
FedEx Freight revenue grew 3% to $1.49 billion, but operating income plunged 27% to $41 million. The company credited the higher revenue to higher prices and blamed the lower operating income on higher salaries and information technology costs. Average daily less-than-truckload shipments and weight per shipment were flat year-over-year, but revenue per LTL shipment was up 4%. “We’re working toward a better balance of volume, pricing and capacity,” Graf said. “Those efforts, along with an expected improvement in the U.S. industrial environment, should lead to better operating results at FedEx Freight in coming quarters.”
Chairman and CEO Fred Smith also discussed expenses to install the latest safety technologies in tractors, which pushed down margins in the quarter. The company said that 80% of its fleet has the most recent safety features available, and it’ll complete the work by the end of 2018.
“It is simply unacceptable to have vehicles on the road that don’t have these modern technologies that can prevent so many accidents that take place historically because of the inability to stop in time or to change lanes precipitously and so forth,” Smith said. “So, [for] every truckload carrier in the United States, every LTL carrier and ground parcel, it should all be mandated and we’re trying as hard as we can to push this technology into every vehicle we have as fast as we have, as we possibly can do it.”
FedEx Express revenue grew to $6.78 billion from $6.56 billion a year ago, but the operating income — the amount after deducting expenses — dropped 7% to $555 million. The company credited the higher revenue to the rate increase instituted last year and an increase in package volume. It blamed the operating income drop on fuel prices and one fewer operating day in the quarter versus 2015.
Domestic package volume rose 1% year-over-year, and revenue and yield grew 3%. International package revenue increased 4%, international priority volume increased 5% and international economy volume grew 2%. Yield per international package increased 1%.
Domestic freight revenue rose 3.1% to $669 million, and international priority freight revenue increased 9.2% to $355 million in the Express division.
FedEx Ground revenue grew 6% to $4.69 billion year-over-year, but operating income fell 8% to $515 million. Average daily volume increased 2% year-over-year and yield per package rose 6%.
“While network expansion dampens Ground’s near-term profitability, we believe these investments will enhance long-term earnings, margins and cash flow,” Graf said.
The TNT Express division generated $1.79 billion in revenue and $2 million in operating income. There aren’t year-over-year comparisons because FedEx acquired Europe’s third-largest delivery company in May 2016. FedEx said it expects to incur “significant expenses” over the next few years to integrate TNT Express into FedEx Express, including $78 million this past quarter.
However, FedEx President David Bronczek said that TNT will add between $1.2 billion and $1.5 billion in operating income for the FedEx Express division in fiscal year 2020. He also told analysts that integration has been completed in 33 countries.
FedEx also announced plans to make pension payments in excess of $1 billion in the fiscal fourth quarter to former employees who elected to receive their benefits early.
“This payout will allow us to reduce future liabilities and administrative costs associated with our U.S. pension plans. Our U.S. pension plans continue to have ample funds to meet expected benefit payments,” Graf said.
FedEx contributed $2 billion to the pension fund this fiscal year but told industry analysts that it didn’t plan to make any more payments before the end of fiscal year on May 31.
