FedEx’s 3Q Profit Increases 5%, Slowed by Weather Disruptions

This story appears in the March 24 print edition of Transport Topics.

Hampered by what CEO Frederick Smith described as the worst winter weather in company history, FedEx Corp. last week reported quarterly profit growth of 5% to $378 million, or $1.23 a share.

Results for the fiscal third quarter ended Feb. 28 were hurt by snow, ice and cold that disrupted operations, shaving $125 million off income before interest and taxes, FedEx said March 18. Net income in the prior-year period was $361 million, or $1.13 per share. Revenue rose nearly 3% to $11.3 billion and earnings improved at all three units — Express, Ground and Freight.

“Historically severe winter weather significantly affected our third-quarter earnings,” said Smith, who founded the company in 1971. “On days when the weather was closer to normal seasonal conditions, our volumes were solid, and service levels were high.”

The report was the first indicator of the financial effect on publicly traded companies of bad weather east of the Rocky Mountains. Results at FedEx, based in Memphis, Tenn., trailed the earnings estimate of $1.46 per share.

“The investment community will give the company some slack in terms of the lower-than-expected results as weather is clearly out of the company’s hands,” Helane Becker, an analyst at Cowen & Co., wrote in a note to clients.

FedEx Freight’s results improved as a result of higher shipments handled in both its priority and economy lines of business. Operating income increased to $29 million from $4 million.

As a result, the operating ratio was 97.8, better than the 99.7 in the prior year period. That ratio places FedEx on a par with less-than-truckload fleet ABF Freight System for its most recent quarter that ended Dec. 31.

Revenue at FedEx Freight rose 9% to $1.35 billion. Shipments handled rose 6.6%, reflecting a 7.7% jump in priority freight and a 4.2% increase on the economy side. Weight increased 2% to 1,195 pounds.

However, pricing, as measured by revenue per 100 pounds of freight, slipped 2% to $19.67.

FedEx Freight President Bill Logue described the weather effects as “large” on a conference call, without specifying an amount.

“It wasn’t one big event here, one big event there; it was weekly,” Logue said. “It was always some event every week, which makes it very challenging to run a linehaul network.”

Noting “great improvement at Freight,” Chief Financial Officer Alan Graf said the company “expects great things from them over the next couple of years.”

Profit was helped by more use of lower-cost truck/rail service for LTL cargo.

FedEx Ground eked out a 2% improvement in operating in-come to $477 million, despite weather hindrances. Profit was cut by an estimated $40 million because of weather as well as network expansion and fuel costs.

Revenue at the ground package unit rose 10% to $3.03 billion, but the operating ratio worsened to 84.3 from 83.

An 8% volume increase was linked to more Home Delivery business, as well as business-to-business deliveries and the timing of the online holiday shipping season. That shipping period fell in FedEx’s third quarter, and in the second quarter in the prior year.

Express unit results, excluding taxes and interest, rose 14% to $135 million, as weather dragged down profit by $70 million.

Revenue was little changed at $6.67 billion, compared with $6.7 billion.

Cost cuts at Express offset a reduction in freight revenue, the company said.

Company earnings in the prior-year period were reduced by $47 million in one-time charges such as buyout expense. Excluding those expenses, earnings on a per-share basis were $1.23, matching the most recent quarter.

FedEx ranks No. 2 on Transport Topics Top 100 list of the largest for-hire carriers in the United States and Canada.

Weather prompted FedEx to lower its full-year profit guidance to a range of $6.55 per share to $6.80 per share. Previously, the upper end of its guidance topped $7 a share. Capital spending plans for the current fiscal year were scaled back by 5% to $3.8 billion.

After three quarters, net income was 9% higher at $1.37 billion, or $4.34 per share as revenue gained 3% to $33.7 billion.