FedEx delivers ‘strong’ Q3 results, not fazed by Amazon plans

The Memphis, Tenn.-based integrator reported a net income of $507 million on revenues of $12.7 billion for the third quarter of fiscal year 2016, which ended Feb. 29.    FedEx Corp. posted a net income of $507 million for the third quarter of fiscal year 2016, which ended Feb. 29, a 19 percent year-over-year decline, according to the company’s most recent financial statements.
   During the quarter, FedEx Ground reached agreements to settle the 19 independent contract lawsuits on appeal, with FedEx Corp. recognizing a liability of $204 million to cover legal settlements and other contractor-related proceedings.
   The company’s adjusted net income for the quarter totaled $692 million, an 18 percent increase from the same fiscal 2015 period. FedEx said quarterly consolidated earnings this year have been adjusted for expenses related to legal matters and the pending $4.8 billion acquisition of Netherlands-based global express carrier TNT Express.
   FedEx reported earnings per share (EPS) of $1.84 per diluted share for the quarter in comparison to $2.18 per diluted share for the same quarter in fiscal 2015. Meanwhile, the company reported adjusted earnings of $2.51 per share for the quarter, beating analyst expectations by $0.17 per share. The adjusted EPS figures represent a sharp increase from the $2.03 per share earned in the corresponding fiscal 2015 period.
   Reported and adjusted revenues for the third quarter of fiscal 2016 totaled $12.7 billion, a 9 percent year-over-year increase.
   Operating income stood at $864 million for the quarter, up 17 percent year-over-year. Adjusted operating income, however, grew 19 percent year-over-year to $1.16 billion, due to improved yield management and the positive impacts from profit improvement program initiatives at FedEx Express, along with the net impact of fuel and currency exchange rates.
   The FedEx Express Segment saw operating income surge 51 percent year-over-year to $595 million for the fiscal third quarter of 2016, with operating results improving due to yield management efforts, U.S. domestic volume growth, continuous benefits from profit improvement program initiatives and fuel and currency exchange rate changes. The Express segment’s revenues fell 1 percent year-over-year to $6.6 billion.
   Meanwhile, the FedEx Ground unit posted an operating income of $557 million for the quarter, down less than 1 percent from the same quarter in fiscal 2015. Ground revenues surged 30 percent year-over-year to $4.4 billion.
   The FedEx Freight Segment saw a 16 percent decline in its operating income to $56 million, primarily due to salaries and employee benefits expenses outpacing volumes growth. The segment’s revenues, however, inched up 1 percent year-over-year to $1.5 billion.
   Last week, Air Transport Services Group confirmed it established agreements with Amazon Fulfillment Services, an affiliate of Amazon.com, to operate an air-cargo network to serve the giant online retailer’s customers in the United States.
   In regards to suggestions that Amazon would be able to build a network to compete with FedEx and UPS, FedEx Chief Executive Fred Smith said on a conference call with analysts he does not view this move as a threat to FedEx’s network for deliveries.
   “The concerns about industry disruption continue to be fueled by fantastical, and let me emphasize I chose this word carefully, articles and reports which are devoid of in-depth knowledge of logistics systems and the markets which FedEx serves,” said Smith.
   Just this week, investment and financial services firm Moody’s downgraded FedEx’s long-term debt ratings. Much of the company’s expansion has been funded with debt, according to a report in the Wall Street Journal.
   “Reliance on debt to fund share repurchases well in excess of free cash flow since fiscal 2013 has increased debt and financial leverage, and that is in addition to the debt issued to complete the GENCO acquisition,” Moody’s Senior Credit Officer Jonathan Root said.
   Moody’s said it believes FedEx faces significant risk in acquiring TNT and that it will not reap any financial or operational benefits from the deal for several years at least.
   “The target has a low single-digit EBIT margin and a high-single digit EBITDA margin that meaningfully trails those of FedEx, so FedEx’s consolidated margins are likely to weaken,” Moody’s said.
   However, FedEx Chief Financial Officer Alan Graf said the downgrade has been expected and the company is preparing to refinance and pay off debt.
   “We’re a company with a strong cash flow,” Graf said in an interview with WSJ. “We built a very strong balance sheet so we could leverage it at a time like this.”
    Regarding FedEx’s pending acquisition of TNT Express, the company said it has received approval from the United States Federal Trade Commission and the European Union. Last month, FedEx’s approval from Brazil’s Conselho Administrativo de Defesa Econômica  was appealed, and the deal still needs approval from regulators in China.
   Looking ahead, FedEx is tightening its overall adjusted earnings forecast for fiscal 2016 to be between $10.70 per diluted share and $10.90 per diluted share, before year-end mark-to market pension accounting adjustments, compared to the prior forecast of $10.40 per diluted share and $10.90 per diluted share.
   This outlook assumes moderate economic growth and does not include certain legal matters and any TNT-related costs or operating results.
   “We now expect our fiscal 2016 adjusted earnings to be up 20% to 22% over last year, as we continue to benefit from our execution of the profit improvement program,” said Graf. “Our positive financial momentum should continue into our upcoming fiscal 2017, where we expect solid growth in earnings and cash flow.”