Business News

FedEx Corp. Reports Second Quarter Earnings

Friday 19. December 2008 - Announces Broad Cost Reduction Actions Due to Weak Economy

FedEx Corp. (NYSE: FDX) today reported earnings of $1.58 per diluted share for the second quarter ended November 30, compared to $1.54 per diluted share a year ago.

“Our financial performance is increasingly being challenged by some of the worst economic conditions in the company’s 35-year operating history,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “We are managing our costs and taking full advantage of market opportunities, and our team members are delivering every day on our promise to ‘make every customer experience outstanding’. However, with the decline in shipping trends during our second quarter and the expectation that economic conditions will remain very difficult through calendar 2009, we are taking additional actions necessary to help offset weak demand, protect our business and minimize the loss of jobs.”

Cost Reductions

FedEx has already taken actions to reduce over $1 billion of expenses for all of fiscal 2009, including:

Elimination of variable compensation payouts
Hiring freeze
Volume-related reductions in labor hours and line-haul expenses
Discretionary spending cuts
Personnel reductions at FedEx Freight and FedEx Office

FedEx is now implementing a number of additional cost reduction initiatives to mitigate the effects of deteriorating business conditions, including:

Base salary decreases, effective January 1, 2009:
20% reduction for FedEx Corp. CEO Frederick W. Smith
7.5%-10.0% reduction for other senior FedEx executives
5.0% reduction for remaining U.S. salaried exempt personnel
Elimination of calendar 2009 merit-based salary increases for U.S.salaried exempt personnel
Suspension of 401(k) company matching contributions for a minimumof one year, effective February 1, 2009

Outlook

FedEx reaffirms last week’s earnings estimate of $3.50 to $4.75 per diluted share for fiscal 2009, which assumes weak global macroeconomic conditions, anticipated volume gains from DHL and stable fuel prices. The company’s earnings estimate for the second half of fiscal 2009 is $0.69 to $1.94 per diluted share. FedEx will not provide third quarter guidance due to significant economic uncertainty and the difficulty in forecasting the impact of recently acquired DHL customers. Capital spending is now expected to be $2.4 billion for fiscal 2009, down from $3.0 billion at the start of the year.

“While the departure of DHL from the U.S. domestic package market presents a rare opportunity, significant uncertainty exists in the global economy,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “Our latest earnings outlook reflects that uncertainty and incorporates the expected savings from our cost reduction actions.”

Second Quarter Results

FedEx Corp. reported the following consolidated results for the second quarter:

Revenue of $9.54 billion, up 1% from $9.45 billion the previous year
Operating income of $784 million, up from $783 million a year ago
Operating margin of 8.2%, down from 8.3% the previous year
Net income of $493 million, up 3% from last year’s $479 million
Total combined average daily package volume in the FedEx Express and FedEx Ground segments was down 2% year over year, as the weak economy reduced demand for shipping services.

Operating income was essentially flat, as the company significantly benefited from rapidly declining fuel prices and from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust. These benefits and the cost reduction activities were offset by the negative impact of lower shipping volumes resulting from the weak global economy.

FedEx Express Segment

For the second quarter, the FedEx Express segment reported:

Revenue of $6.10 billion, up 1% from last year’s $6.04 billion
Operating income of $540 million, up 2% from $531 million a year ago
Operating margin of 8.9%, up from 8.8% the previous year

Volume and revenue growth were significantly impacted by global economic weakness. Operating income and margin reflect the benefits of rapidly decreasing fuel prices during the quarter and of the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust. Results also include benefits from cost-containment activities, such as volume-related reductions in flight hours, labor hours and fuel consumption.

FedEx International Priority (IP) package revenue grew 1% for the quarter, driven by 8% growth in revenue per package due to higher fuel surcharges. IP average daily package volume declined 7%. FedEx International Priority Freight revenue grew 4%. U.S. domestic express package volume declined 8%, while revenue per package increased 9% due to higher fuel surcharges.

FedEx Ground Segment

For the second quarter, the FedEx Ground segment reported:

Revenue of $1.79 billion, up 5% from last year’s $1.70 billion
Operating income of $212 million, up 23% from $173 million a year ago
Operating margin of 11.9%, up from 10.2% the previous year

FedEx Ground average daily package volume was down 1% year over year,as continued growth in the FedEx Home Delivery service was more than offset by a decline in commercial volume. Yield improved 6% primarily due to higher fuel surcharges. FedEx SmartPost revenue increased 11% with one fewer operating day, while average daily volume grew 16% largely due to DHL’s discontinuation of its @Home service at the beginning of the quarter. Operating income was higher primarily due to the timing impact of fuel surcharges.

FedEx Freight Segment

For the second quarter, the FedEx Freight segment reported:

Revenue of $1.20 billion, down 3% from last year’s $1.24 billion
Operating income of $32 million, down 59% from $79 million a year ago
Operating margin of 2.7%, down from 6.4% the previous year

Less-than-truckload (LTL) average daily shipments decreased 2% year over year, as market share gains were more than offset by the weakening U.S. economy. LTL yield declined 1%, as higher fuel surcharges were offset by the effects of a competitive pricing environment.

Operating income and margin decreased in the quarter due to the competitive pricing environment and lower average daily shipments, partially offset by the benefits from lower variable incentive compensation and continued cost containment initiatives, including the alignment of staffing to current volume levels.

FedEx Services Segment

FedEx Services segment revenue, which includes the operations of FedEx Office and FedEx Global Supply Chain Services, was down 4% year over year, as declines in copy revenues exceeded revenue generated from FedEx Office locations opened in the last year. The company expects continued deterioration in the core FedEx Office business, and has announced staffing reductions and location closures so that expenses are in line with revenue.

Corporate Overview

FedEx Corp. (NYSE: FDX) provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $39 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Consistently ranked among the world’s most admired and trusted employers, FedEx inspires its more than 290,000 employees and contractors to remain “absolutely, positively” focused on safety, the highest ethical and professional standards and the needs of their customers and communities.