FedEx beats 4Q expectations

FedEx turned in a strong fiscal fourth quarter, capping a strong year. The company reported net income up 141% in its fiscal fourth quarter (ended 31 May 2014) to $730 million, as revenue rose 3.5% to $11.84 billion. Operating income for the quarter was up 136% to $1.18 billion, and operating margin was a solid 10.0%, up from 4.4% in 4QFY13. For the full fiscal year FedEx reported net income up 34.3% to $2.10 billion, and revenue up 2.9% to $45.57 billion.

However, in last year’s fourth quarter, FedEx booked a massive one-time charge of well over half a billion dollars connected with a profit improvement initiative. The charge was in two parts – $496 million for a “business realignment program.” and a $100 million impairment charge for the early retirement of older aircraft. All of the impairment charge, and $360 million of the realignment charge, a total of $460 million, was booked against the company’s Express segment, while $93 million was charged against FedEx ground and $43 million was charged against the FedEx Freight segment.

Adjusting for these charges, the gains – particularly in the Express segment – are not so spectacular, but still reflect a very strong performance, with net income up 7.5% and operating income up 7.7% (the chart below shows financial results as reported). It is also worth noting that the fourth quarter had one less working day than the comparison quarter, which has a negative impact of between 1% and 2% on financial result comparisons.

FedEx 4QFY14FedEx’s core Express segment reported operating income of $475 million. In the previous year’s quarter, reported operating income was $0, but absent the one-time business realignment and aircraft impairment charges, 4QFY13 operating income was $460 million, so on an adjusted basis FedEx Express saw operating income up 3.3%. Revenue in the quarter was up slightly (0.3%) to $7.00 billion.

As can be seen in the chart at right, average daily package volumes were up 2.8% in the US domestic market, led by 6.5% growth in Deferred and 5.7% growth in Overnight Box. Overnight Envelope volumes, however, declined 8.0%. Discussing its US Domestic performance, FedEx said: revenue per package was flat, as lower fuel surcharges offset higher weight per package and a favorable service mix.

Volumes were up for all of the company’s International Package products, and per-package revenue was also up as gains from increased rates, higher weight per package and favorable service mix outweighed revenue lost due to lower fuel surcharges.

While Express may be FedEx’s core segment, it was the Ground and Freight segments the turned in the best performance in the quarter. Ground operating income was up 5.2% on an adjusted basis to $586 million, as revenue rose 8.3% to $3.01 billion. Average daily Ground package volume climbed 8.3% in the quarter, primarily driven by growth in e-commerce, and per-package revenue was up 2.4% as the impact of lower fuel surcharges was offset by rate increases and higher residential surcharges. Volumes for SmartPost (an economy product with last-mile delivery provided by the US Postal Service) were down 7.6%, but per-package revenue was up 8% as rate increases and “improved customer mix” offset higher postage costs.

The FedEx Freight segment turned in an even stronger performance, with operating income up 50.6% on an adjusted basis to $122 million as revenue rose 11.8% to %1.55 billion. Average daily LTL shipments were up 13.9%.

Looking ahead FedEx said it expected the global economy to grow 2.7% in 2014 and 3.1% in 2015. Based on this, and excluding the impact of changes in fuel price, FedEx predicted solid growth for its 2015 fiscal year, with earnings per share to be between $8.50 and $9.00.


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