Thursday, package delivery giant FedEx Corp. (FDX) reported a 75% fall in profit for the third quarter from the prior-year period, hurt by lower shipment volumes and a more competitive pricing environment due to the global recession. The company also said it will implement additional cost-cutting measures, including further reduction of personnel and work hours as well as reduction in network capacity. FedEx expects these actions to reduce expenses by about $1 billion in fiscal year 2010. For the fourth quarter, the company forecast earnings per share below analysts' consensus estimate and down sharply from the prior-year period.
Third Quarter Results
For the third quarter, the Memphis, Tennessee-based company's net income fell to $97 million, or $0.31 per share, from $393 million, or $1.26 per share, in the year-ago quarter. On average, fifteen analysts polled by Thomson Reuters expected the company to report earnings of $0.46 per share for the quarter. Analysts' estimates typically exclude special items.
Total revenues for the latest quarter were $8.14 billion, down 14% from $9.44 billion in the prior-year quarter. Seven analysts had a consensus revenue estimate for the quarter of $8.65 billion.
Operating income for the quarter was $182 million, down 72% from $641 million in the year-ago quarter.
Commenting on the results, Frederick Smith, chairman, president and chief executive officer of FedEx said, "Our financial performance was sharply lower during the quarter due to the global recession. While we are gaining market share in all of our transportation segments, the downturn in our industry and the severity and expected duration of the recession require that we take additional actions."
The company had not provided any guidance for the third quarter earlier due to the economic uncertainty and the difficulty in forecasting the impact of recently acquired DHL customers.
Peer Performance
FedEx and its peer, United Parcel Service Inc. (UPS) are seen as bellwethers of the U.S. economy based on the idea that package volumes would be impacted when there is a rise or fall in growth.
In February, United Parcel Service, Inc. reported a profit for the fourth quarter compared with a loss for the same period last year, which included a hefty charge related to a new pension plan. The company's fourth-quarter earnings were $254 million, or $0.25 per share, compared with a loss of $2.64 billion, or $2.52 per share, for the year-ago quarter. Revenue for the quarter dropped to $12.70 billion from $13.39 billion a year ago. United Parcel also said fiscal year 2009 would be one of the most difficult in its history. The company expects that first quarter to be weak, with slight improvements later in the year as initiatives take hold.
Segmental Results
FedEx Express
The segment's revenue for the latest quarter declined 18% from a year ago to $5.05 billion. U.S. domestic package revenue declined 15%, driven by a 12% drop in revenue per package due to lower fuel surcharges, weight per package and rate per pound. U.S. domestic package volume declined 3%, despite the benefit of DHL exiting the U.S. domestic package market. Operating income for the segment was $45 million, down 89% from $425 million in the same period last year, due to revenue decreases and despite a 12% decline in expenses driven by lower fuel prices, among others.
FedEx Ground
Revenue for the segment increased 4% from the prior-year quarter to $1.79 billion. Average daily package volume grew 2% year-over-year, due to continued growth in the FedEx Home Delivery service. Operating income for the segment increased 15% from a year ago to $196 million, due to lower fuel prices, higher revenue and improved performance at FedEx SmartPost.
FedEx Freight
The segment reported a 21% decline in revenue from the prior-year quarter to $914 million. Less-than-truckload, or LTL, average daily shipments decreased 13% from the previous year, as market share gains were more than offset by the worst LTL environment in decades. Operating loss for the segment was $59 million, compared to operating income of $46 million a year ago. The operating loss for the quarter reflects the extraordinary decline in demand for freight services, the continued competitive pricing environment, costs related to the consolidation of the company's freight regional offices and severance charges from personnel reductions.
FedEx Services
The segment's revenue, which includes the operations of FedEx Office and FedEx Global Supply Chain Services, declined 10% from a year ago due to declines in printing and document service revenues.
Cost-Cutting measures
FedEx said it will implement additional cost-reduction initiatives, both in the U.S. and internationally. These include further reduction of personnel and work hours, expansion of pay actions to include non-U.S. employees, reductions in network capacity at FedEx Express and FedEx Freight, streamlining of information technology systems and other internal processes, additional reductions in other spending categories and increased economies in the acquisition of goods and services. However, the company did not provide any figures for job cuts.
The company noted that the cost-reduction actions are expected to result in charges for the fourth quarter of approximately $100 million, excluding any potential asset impairment charges. For fiscal 2010, the company expects these actions to reduce expenses by about $1.0 billion.
The company had earlier said that it has taken measures to reduce over $1 billion of expenses for all of fiscal 2009. These steps include elimination of variable compensation payouts, hiring freeze, volume-related reductions in labor hours and line-haul expenses, discretionary spending cuts and personnel reductions at FedEx Freight as well as FedEx Office.
FedEx had also announced various actions to offset weak demand, protect its business, and minimize the loss of jobs, in light of declining shipping trends and the expectation that economic conditions will remain very difficult through calendar 2009.
While reporting its financial results for the second quarter in December 2008, FedEx announced several cost-cutting measures, including a 20% reduction in the salary of CEO Smith, a 7.5%-10% reduction for other senior FedEx executives and a 5% reduction for other salaried personnel. The company also said it would eliminate calendar 2009 merit-based salary increases for U.S. salaried personnel and suspend matching 401(k) contributions for at least a year, starting on February 1, 2009. At that time, the company said it expects these actions to reduce expenses by $200 million during the remainder of fiscal 2009 and about $600 million in fiscal 2010.
FedEx chose not to advertise in the 2009 Super Bowl for the first time in 12 years, saying it cold not justify such an ad spend. The company had earlier advertised in 18 Super Bowls since 1989.
In February, reports said that FedEx will slash 900 jobs at its freight unit due to a decline in demand as well as due to pricing competition. This would be in addition to the over 1,000 job cuts that the company announced in the recent past.
Year-To-Date Results
For the nine-month period, FedEx's net income was $974 million, or $3.12 per share, down 29% from $1.37 billion, or $4.37 per share, in the prior-year period.
Total revenue for the nine months declined 2% to $27.65 billion from $28.09 billion a year ago.
Outlook
For the fourth quarter, FedEx forecasts earnings in a range of $0.45-$0.70 per share, excluding one-time charges. For the year-ago quarter, the company reported earnings of $1.45 per share, excluding a charge of $696 million, net of tax, or $2.22 per share, related predominately to non-cash asset impairment charges associated with the decision to minimize the use of the Kinko's trade name and a reduction in the value of the goodwill resulting from Kinko's acquisition. Analysts expect the company to report earnings for the quarter of $0.72 per share.
On a GAAP basis, the company forecasts earnings for the fourth quarter in a range of $0.25-$0.50 per share. This compares to earnings of $0.78 per share in the same period of the prior year.
Stock Quotes
In Thursday's regular trading session, FDX is trading at $45.30, up $2.25 or 5.23% on a volume of 2.14 million shares. The stock has been trading in a range of $34.02-$99.46 in the past 52 weeks.
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