FedEx 2Q Earnings Drop 18%, Reflecting LTL Integration Costs

This story appears in the Dec. 20 & 27 print edition of Transport Topics.

FedEx Corp.’s earnings fell 18% in the company’s fiscal second quarter to $283 million, reflecting one-time charges that included integration costs at the FedEx Freight less-than-truckload unit.

Companywide profit, excluding integration and legal costs, was $368 million, an improvement from $345 million in the year-earlier period. Total revenue rose 12% to $9.63 billion.

The operating loss at the LTL unit, excluding integration costs, was $5 million in the quarter ended Nov. 30, compared with $12 million in the year-earlier period.

While earnings growth, excluding the charges, was limited, FedEx officials gave an upbeat assessment of the economic outlook and raised their earnings forecast for the full year to $5 to $5.30 per share, from the earlier $4.80 to $5.25 range.

“We expect manufacturing and industrial production will continue to lead the economy forward in the near term and drive transportation volumes higher,” Frederick Smith, chief executive officer, said on a conference call, citing particularly strong growth in Asia and Latin America.

FedEx ranks No. 2 on the Transport Topics 100 list of the largest U.S. and Canadian for-hire carriers.

“It will be very surprising if the strength of the international traffic flows isn’t pretty good,” Smith said. “What happened at peak season leads us to more optimism on a go-forward basis.”

The freight unit’s operating loss was $91 million, including $86 million in integration-related charges.

The operating ratio was 107.5 including those charges for terminal closings, lease cancellation fees and severance pay.

“Though the [freight unit] has struggled to return to profitability following a flawed 2009 pricing strategy, we expect the restructuring of Freight’s operating model to return the segment to profitability,” said Robert W. Baird analyst Jon Langenfeld in an investor note. “This success should further diversify FedEx’s business and improve overall company capital returns.”

Excluding the integration costs, Freight’s operating ratio was 100.4, which is slightly better than LTL competitors ABF Freight System, which posted a 100.6 in its most recent quarter, and YRC Worldwide Inc., with an 101.3 OR.

FedEx Freight’s operating ratio was 101.2 a year earlier.

FedEx Freight’s 100.4 operating ratio improved by 0.9 in the second quarter from the prior quarter. Four of seven other public LTL carriers also did better sequentially in their most recent quarters.

Freight unit revenue rose 14% to $1.22 billion from the comparable year-earlier period, though it was $37 million below the fiscal first quarter.

Daily shipment volume and rates measured in dollars per 100 pounds of freight improved on a year-to-year basis. Compared with last year’s fiscal second quarter, shipments per day rose 7.8% and rates rose 7% to $18.27. Rates in the second quarter were 5% higher than in the first quarter of the fiscal year, but shipments per day dropped by 2% to 89,371.

The freight unit boosted margins on “lower-performing accounts,” the statement said.

William Logue, FedEx Freight’s president, said the integration “is going very, very well. The team has done a fabulous job.”

As a result, FedEx said it expects total integration costs to be reduced to as little as $140 million from an earlier estimate of as much as $200 million. The integration process is slated to be done by Jan. 31.

Profits improved from the year-earlier period at FedEx Ground, where operating income climbed to $296 million from $238 million. Revenue at the ground unit climbed 13% to $2.08 billion.

Average daily package volume rose 6.7% from the year-earlier period and revenue per package increased 35 cents, or nearly 5%, to $7.89.

In addition to a 4.9% rate increase at the Ground unit as of Jan. 3, a new pricing approach based on shipment weight and dimensions will result in increases.

The Express package-delivery unit saw its operating ratio erode to 95.6 from 93.5 as operating income fell 23% to $264 million from $345 million. Revenue at the unit climbed 13% to $5.99 billion.

Both operating income and operating ratio were hurt by $66 million that was set aside for a lawsuit. Higher maintenance and pension costs and reinstatement of some employee compensation also hurt the unit’s earnings, FedEx said.