FedEx Profits Up 3.7%, Earnings Forecast Misses Mark
FedEx Corp. reported that profits rose 11% year-over-year on higher revenue due to a rate hike last autumn, but lower operating income companywide due to higher fuel costs, one fewer operating day at FedEx Express and FedEx Ground, and higher costs to expand the Ground network.
The company, which ranks No. 2 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers, earned $562 million in profits on $15 billion in revenue in its fiscal third quarter, or $2.07 per share. The consensus forecast was $2.44, according to a Bloomberg News survey of analysts.
One year ago, the numbers were $507 million on $12.7 billion in revenue, or $1.84 per share.
“Jet fuel prices increased 30% year-over-year for the quarter,” Chief Financial Officer Alan Graf said. “[Also,] 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” and predicted the fiscal fourth quarter would be “excellent.”
FedEx Freight revenues 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. 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,” Graf said.
Chairman and CEO Fred Smith also took the opportunity to discuss 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 will 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, 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 possibly can do it.”
FedEx Express revenue grew to $6.78 billion from $6.56 billion on eyear ago, but operating income — the amount after deducting expenses — dropped 7% to $555 million. The company credited the higher revenues to the rate hike 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 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 whom 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 the fiscal year May 31.
