FedEx Raises Fiscal 4Q Profitability by 20%, Helped by Results at Express, Ground Units
This story appears in the June 27 & July 4 print edition of Transport Topics.
Improved profits at the Express and Ground units of FedEx Corp. helped the package company raise fiscal fourth-quarter net income by 20%, excluding one-time costs. This sets the stage for continued Ground capital investment to support increased e-commerce and the initial integration of TNT N.V.
FedEx earnings, excluding charges, were $897 million, or $3.30 per share, in the period ended May 31. But pension accounting and costs relating to the acquisition of TNT, completed last month, resulted in a net loss of $70 million, or 26 cents.
Revenue rose 7% to $13 billion, with Ground accounting for nearly all of the increase in revenue announced on June 21.
“We had a great quarter,” Chief Financial Officer Alan Graf said on a conference call, citing the Express unit as “the most valuable player in the quarter.”
Earnings before interest and taxes at Express more than doubled to $757 million from $322 million due to improved pricing and an ongoing cost reduction program. Express revenue rose less than 1% to $6.72 billion. Ground operating income rose 9% to $656 million as revenue climbed by $718 million, or 20%, reflecting higher volume and better pricing.
FedEx Freight operating income was unchanged at $137 million, though revenue rose 2% to $1.61 billion. Profits were hurt by higher pay and benefits.
FedEx didn’t give a forecast for the financial impact of its integration of its largest acquisition. Graf also said there won’t be any additional earnings from operations at TNT until its 2018 fiscal year.
Instead, FedEx said, “We are in the very beginning of the process of integrating TNT Express with our FedEx Express operations, which will occur over several years. Fiscal year 2017 will be a year of transition as we obtain a full understanding of TNT Express’ businesses.”
For the full year, net income excluding charges was $3.02 billion, or $10.80 (and $1.82 billion including them) on revenue of $50.4 billion.
The company’s fiscal 2017 forecast was $11.75 per share to $12.25 per share.
That forecast excludes $200 million of TNT integration costs at TNT and one-time pension accounting or other charges.
FedEx plans $5.1 billion in capital spending this fiscal year, primarily for aircraft and increased capacity at the Ground unit. The Ground investments are designed to handle more e-commerce business.
In the quarter, FedEx Ground moved 10% more packages and improved revenue by 7%, despite a sluggish U.S. economy. Part of the revenue increase was attributed to counting gross revenue for SmartPost packages instead of net revenue, or the amount left after subtracting transport costs.
Stifel Nicolaus analyst David Ross said in a report that “e-commerce growth is driving significant investments near-term in the FedEx Ground network, which needs to handle more and more packages every year and does not want to choke on the volume. The company also continues to grow faster than UPS Ground on both a percentage and absolute basis.”
Analysts questioned how much profit improvement to expect at Ground this fiscal year.
Chairman and CEO Frederick Smith responded to that question via conference call by saying: “We don’t manage FedEx Corporation to maximize each segment’s margin each year. If we did that, we would never be able to take advantage of the broad portfolio. At Ground, we are doing six-day delivery and integrating SmartPost. It would be wonderful if we could have maximized operating margins at each company, but that isn’t the case.”
At the Freight unit, shipments grew 8%, outpacing revenue growth. Priority shipments increased 7%, while economy freight rose 10%. Revenue per 100 pounds of freight was down 3%, and the LTL unit’s operating ratio inched up to 91.5 from 91.3.
Its $65 million increase in wages and benefits outweighed a $29 million reduction in all other expenses.
Ross’ report said Freight “leads the LTL industry in market share gains right now, achieved partially via price, but also by targeting more small/mid-sized accounts.”
Earnings in the prior-year quarter were $753 million, or $2.66 excluding charges and a loss of $895 million, or $3.16, including one-time costs.
Memphis, Tennessee-based FedEx ranks No. 2 on the Transport Topics Top 100 list of the largest for-hire carriers in the United States and Canada.
