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Release Date:
Release ID: 361

FedEx Reports Strong Revenue and Earnings Growth; Operating Margin Continues to Improve

FedEx Corporation (NYSE: FDX) reported earnings of $1.53 per diluted share for the first quarter ended August 31, compared to $1.10 per diluted share a year ago. Last year's first quarter included a one-time, noncash charge of $79 million to adjust the accounting for certain facility leases, primarily at FedEx Express. Excluding this charge, earnings in last year's first quarter would have been $1.25 per diluted share.

Press Release

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



-- Revenue of $8.54 billion, up 11% from $7.71 billion the previous year



-- Operating income of $784 million, up 34% from $584 million a year ago



-- Operating margin of 9.2%, up from last year's 7.6%



-- Net income of $475 million, up 40% from $339 million the previous year



Last year's first quarter operating margin would have been 8.5% excluding the one-time charge.



"We remain confident in our ability to achieve solid profitable growth by taking advantage of strong international trade trends, increased demand for fast-cycle logistics and the expansion of online purchasing," said Frederick W. Smith, chairman, president and chief executive officer. "The global economy is growing at a healthy pace with the U.S. economy growing at a moderate, sustainable rate."



Total combined average daily package volume at FedEx Express and FedEx Ground grew 5% year over year for the quarter, due to continued growth in ground and international express shipments.



During the quarter, FedEx Express announced two significant agreements. FedEx Express and the U.S. Postal Service entered into a new agreement for domestic air transportation of mail through 2013. The new agreement is expected to generate more than $8 billion in revenue over the life of the seven-year contract, which begins September 25, 2006.



Also, FedEx Express and the Air Line Pilots Association, Int'l. (ALPA), the collective bargaining representative for FedEx Express pilots, jointly announced that they reached a tentative agreement on a new labor contract. The tentative agreement will be subject to a ratification vote during the fiscal second quarter by the FedEx Express pilots and, if ratified, the four-year contract would become amendable in 2010.



Outlook



Management is revising the company's earnings guidance to reflect up-front costs related to the proposed pilot contract. If the contract is ratified, the resulting net impact to second quarter and full-year earnings is expected to be approximately $0.20 per diluted share due to signing bonuses and other up-front compensation. FedEx now expects second quarter earnings to be $1.45 to $1.60 per diluted share, and earnings for the year to be $6.30 to $6.65 per diluted share. Excluding the impact of the up-front pilot compensation, the fiscal 2007 earnings guidance range has been increased $0.05 per share from the company's initial guidance. The capital spending forecast for fiscal 2007 is up slightly to $3.0 billion.



FedEx Express Segment



For the first quarter, the FedEx Express segment reported:



-- Revenue of $5.64 billion, up 10% from last year's $5.12 billion



-- Operating income of $467 million, up 64% from $285 million a year ago



-- Operating margin of 8.3%, up from 5.6% the previous year



FedEx International Priority (IP) revenue grew 17% for the quarter, as IP revenue per package grew 11%, primarily due to fuel surcharges, an increase in package weights, a higher rate per pound and favorable exchange rates. IP average daily package volume grew 6%. U.S. domestic express package revenue increased 5%. U.S. domestic revenue per package increased 7%, driven by higher fuel surcharges, the January 2006 general rate increase and revenue management actions. U.S. domestic average daily package volume declined 2%, reflecting revenue management actions that began last year.



Operating income and margin during the quarter improved due to revenue growth, revenue management and effective cost controls. Last year's first quarter operating margin was negatively affected by a one-time, noncash charge of $75 million recorded primarily to adjust the accounting for rent escalation terms in certain facility leases, which reduced last year's first quarter operating margin by 1.4 percentage points.



FedEx Ground Segment



For the first quarter, the FedEx Ground segment reported:



-- Revenue of $1.42 billion, up 16% from last year's $1.22 billion



-- Operating income of $157 million, up 6% from $148 million a year ago



-- Operating margin of 11.1%, down from 12.1% the previous year



FedEx Ground average daily package volume grew 13% year over year in the first quarter due to increased commercial business and the continued growth in the FedEx Home Delivery service. Yield improved 3% primarily due to the January 2006 general rate increase and higher fuel surcharges. Operating margin was negatively affected by higher legal costs.



FedEx Freight Segment



For the first quarter, the FedEx Freight segment reported:



-- Revenue of $1.01 billion, up 14% from last year's $892 million



-- Operating income of $150 million, up 11% from $135 million a year ago



-- Operating margin of 14.8%, down slightly from 15.1% the previous year



Less-than-truckload (LTL) yield improved 8% year over year reflecting incremental fuel surcharges and higher rates. Average daily LTL shipments increased 8% year over year due to greater demand for FedEx Freight's regional and long-haul services.



On September 3, FedEx Corporation completed the $780 million cash purchase of the LTL assets of Watkins Motor Lines and certain affiliates. The operations of Watkins Motor Lines and Watkins Canada Express are being rebranded FedEx National LTL and FedEx Freight Canada, respectively. These strategic additions broaden the FedEx portfolio to provide a full range of complementary LTL solutions, and offer more flexibility and greater value to shippers in the heavy freight sector. The addition of Watkins is expected to add approximately $900 million to segment revenue in fiscal 2007, with no material effect on this year's earnings.



FedEx Kinko's Segment



For the first quarter, the FedEx Kinko's segment reported:



-- Revenue of $504 million, down 3% from last year's $517 million



-- Operating income of $10 million, down 38% from $16 million a year ago



-- Operating margin of 2.0%, down from 3.1% the previous year



FedEx Kinko's revenues decreased year over year primarily due to lower copy product revenues attributed to decreased demand and a continued competitive pricing environment for these services.



The operating margin decline was primarily due to the revenue decline, along with services enhancement costs and network expansion initiatives.



In August, FedEx Kinko's announced the details of a multi-year network expansion plan, including the model for new lower-cost centers which will be approximately one-third the size of a traditional center, and will include enhanced pack-and-ship stations and a doubling of the number of office products offered. FedEx Kinko's opened 31 new locations during the first quarter, and plans to open a total of approximately 200 new centers during the fiscal year.



RECONCILIATION OF NON-GAAP FINANCIAL MEASURES



TO GAAP FINANCIAL MEASURES



The company believes that meaningful analysis of our financial performance requires an understanding of the factors underlying that performance and our judgments about the likelihood that particular factors will repeat. Excluding the impact of the one-time, noncash lease accounting charge from last year's first quarter results will allow more accurate comparisons to fiscal 2007. Likewise, excluding the impact of the expected one-time, up-front compensation to the pilots from this year's guidance will allow more accurate comparisons to prior periods of our expected operating performance in fiscal 2007. As required by SEC rules, the tables below present a reconciliation of our presented non-GAAP measures to the most directly comparable GAAP measures.



Q1 FY06 Diluted Q1 FY06

Earnings Per Operating

Share Margin

--------------- ---------------

Non-GAAP Measure $1.25 8.5%

Lease Accounting Charge, Net of

Variable Compensation (0.15) (0.9%)

--------------- ---------------

GAAP Measure $1.10 7.6%

=============== ===============







FY07 Diluted

EPS Guidance

---------------

Prior Earnings Guidance (GAAP) $6.45 - $6.80

Improved Earnings Outlook 0.05 - 0.05

---------------

New Earnings Guidance Excluding Up-Front Pilot

Compensation Costs (Non-GAAP) 6.50 - 6.85

Net Impact of Up-Front Pilot Compensation Costs (0.20)- (0.20)

---------------

New Earnings Guidance (GAAP) $6.30 - $6.65

===============









FEDEX CORP. FINANCIAL HIGHLIGHTS





First Quarter Fiscal 2007

(In millions, except earnings per share and FTEs)

(Unaudited)



Three Months Ended

August 31

--------------------------------

2006 2005 %

---------- ---------- ----------

Revenue:

FedEx Express segment $5,640 $5,122 10%

FedEx Ground segment 1,417 1,219 16%

FedEx Freight segment 1,013 892 14%

FedEx Kinko's segment 504 517 (3%)

Other & eliminations (29) (43) NM

---------- ----------

Total Revenue 8,545 7,707 11%



Operating Expenses:

Salaries and employee benefits 3,285 3,062 7%

Purchased transportation 896 771 16%

Rentals and landing fees 570 665 (14%)

Depreciation and amortization 399 370 8%

Fuel 941 728 29%

Maintenance and repairs 515 468 10%

Other 1,155 1,059 9%

---------- ----------

Total Operating Expenses 7,761 7,123 9%



Operating Income:

FedEx Express segment 467 285 64%

FedEx Ground segment 157 148 6%

FedEx Freight segment 150 135 11%

FedEx Kinko's segment 10 16 (38%)

Other & eliminations - - NM

---------- ----------

Total Operating Income 784 584 34%



Other Income (Expense):

Interest, net (9) (24) NM

Other, net (5) (11) NM

---------- ----------

Total Other Income (Expense) (14) (35) NM

---------- ----------



Income Before Income Taxes 770 549 40%



Provision for Income Taxes 295 210 40%

---------- ----------



Net Income $475 $339 40%

========== ==========



Diluted Earnings Per Share $1.53 $1.10 39%

========== ==========



Weighted Average Common and Common

Equivalent Shares 310 308 1%



Capital Expenditures $699 $671 4%



Average Full-Time Equivalents (FTEs

in thousands) 225 217 4%









FEDEX CORP. CONDENSED CONSOLIDATED BALANCE SHEETS





First Quarter Fiscal 2007

(In millions)



ASSETS August 31, 2006 May 31, 2006

------ --------------- ---------------

(Unaudited)

Current Assets:

Cash and cash equivalents $2,690 $1,937

Other current assets 4,652 4,527

--------------- ---------------

Total Current Assets 7,342 6,464



Net Property and Equipment 11,115 10,770



Other Long-Term Assets 5,421 5,456

--------------- ---------------



$23,878 $22,690

=============== ===============





LIABILITIES AND STOCKHOLDERS' INVESTMENT

----------------------------------------



Current Liabilities:

Current portion of long-term debt $1,130 $850

Other current liabilities 4,493 4,623

--------------- ---------------

Total Current Liabilities 5,623 5,473



Long-Term Debt, Less Current Portion 2,090 1,592



Other Long-Term Liabilities 4,144 4,114



Total Common Stockholders' Investment 12,021 11,511

--------------- ---------------



$23,878 $22,690

=============== ===============









FEDEX CORP. CONDENSED CONSOLIDATED

STATEMENTS OF CASH FLOWS





First Quarter Fiscal 2007

(In millions)

(Unaudited)



Three Months Ended

August 31

---------------------

2006 2005

---------- ----------



Operating Activities:

Net income $475 $339

Noncash charges:

Depreciation and amortization 399 368

Other, net 42 77

Changes in operating assets and liabilities,

net (251) (1)

---------- ----------



Net cash provided by operating activities 665 783



Investing Activities:

Capital expenditures (699) (671)

Proceeds from asset dispositions 5 1

---------- ----------



Net cash used in investing activities (694) (670)



Financing Activities:

Proceeds from debt issuances 999 --

Dividends paid (28) (24)

Other, net (189) (77)

---------- ----------



Net cash provided by (used in) financing

activities 782 (101)

---------- ----------



Net increase in cash and cash equivalents 753 12



Cash and cash equivalents at beginning of period 1,937 1,039

---------- ----------

Cash and cash equivalents at end of period $2,690 $1,051

========== ==========









FEDEX EXPRESS SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS





First Quarter Fiscal 2007

(Dollars in millions)

(Unaudited)



Three Months Ended

August 31

--------------------------------

FINANCIAL HIGHLIGHTS 2006 2005 %

-------------------- ---------- ---------- ----------



Revenue $5,640 $5,122 10%



Operating Expenses:

Salaries and employee benefits 2,002 1,971 2%

Purchased transportation 263 241 9%

Rentals and landing fees 398 483 (18%)

Depreciation and amortization 205 193 6%

Fuel 798 628 27%

Maintenance and repairs 398 361 10%

Intercompany charges 510 358 42%

Other 599 602 (0%)

---------- ----------

Total Operating Expenses 5,173 4,837 7%

---------- ----------



Operating Income $467 $285 64%

========== ==========



Operating Margin 8.3% 5.6%





OPERATING STATISTICS

--------------------



Operating Weekdays 65 65 --



AVG DAILY VOLUME / POUNDS

-------------------------

Average Daily Package Volume (000s):

U.S. Overnight Box 1,166 1,180 (1%)

U.S. Overnight Envelope 703 711 (1%)

U.S. Deferred 855 897 (5%)

---------- ----------

Total U.S. Domestic Package 2,724 2,788 (2%)

International Priority 470 445 6%

---------- ----------

Total Average Daily Packages 3,194 3,233 (1%)

========== ==========



Average Daily Freight Pounds (000s):

U.S. 9,374 8,885 6%

International 1,899 2,039 (7%)

---------- ----------

Total Avg Daily Freight Pounds 11,273 10,924 3%

========== ==========



YIELD

-----

Revenue Per Package:

U.S. Overnight Box $21.83 $20.34 7%

U.S. Overnight Envelope 11.19 10.57 6%

U.S. Deferred 12.69 11.78 8%

---------- ----------

Total U.S. Domestic Package 16.21 15.10 7%

International Priority 62.58 56.54 11%

---------- ----------

Composite Package Yield $23.04 $20.80 11%

========== ==========



Revenue Per Freight Pound:

U.S. $1.00 $0.88 14%

International 0.84 0.79 6%

---------- ----------

Composite Freight Yield $0.97 $0.86 13%

========== ==========



Average Full-Time Equivalents (000s) 121 125 (3%)









FEDEX GROUND SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS





First Quarter Fiscal 2007

(Dollars in millions)

(Unaudited)



Three Months Ended

August 31

--------------------------------

2006 2005 %

---------- ---------- ----------

FINANCIAL HIGHLIGHTS

--------------------



Revenue $1,417 $1,219 16%



Operating Expenses:

Salaries and employee benefits 241 221 9%

Purchased transportation 553 466 19%

Rentals 36 31 16%

Depreciation and amortization 61 50 22%

Fuel 31 18 72%

Maintenance and repairs 31 29 7%

Intercompany charges 136 120 13%

Other 171 136 26%

---------- ----------

Total Operating Expenses 1,260 1,071 18%

---------- ----------



Operating Income $157 $148 6%

========== ==========



Operating Margin 11.1% 12.1%





OPERATING STATISTICS

--------------------



Operating Weekdays 65 65 --



Average Daily Package Volume (1)

(000s) 2,926 2,586 13%

Yield (Revenue Per Package) (1) $7.13 $6.92 3%



(1) Package statistics exclude FedEx SmartPost









FEDEX FREIGHT SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS





First Quarter Fiscal 2007

(Dollars in millions)

(Unaudited)



Three Months Ended

August 31

--------------------------------

2006 2005 %

---------- ---------- ----------

FINANCIAL HIGHLIGHTS

--------------------



Revenue $1,013 $892 14%



Operating Expenses:

Salaries and employee benefits 484 439 10%

Purchased transportation 83 72 15%

Rentals and landing fees 23 24 (4%)

Depreciation and amortization 31 30 3%

Fuel 112 82 37%

Maintenance and repairs 32 28 14%

Intercompany charges 14 9 56%

Other 84 73 15%

---------- ----------

Total Operating Expenses 863 757 14%

---------- ----------



Operating Income $150 $135 11%

========== ==========



Operating Margin 14.8% 15.1%





OPERATING STATISTICS

--------------------



LTL Operating Weekdays 65 65 --



LTL Shipments Per Day (000s) 70 65 8%

Weight Per LTL Shipment (lbs) 1,130 1,132 (0%)

LTL Revenue/CWT $17.90 $16.55 8%









FEDEX KINKO'S SEGMENT FINANCIAL HIGHLIGHTS





First Quarter Fiscal 2007

(Dollars in millions)

(Unaudited)



Three Months Ended

August 31

--------------------------------

2006 2005 %

---------- ---------- ----------

FINANCIAL HIGHLIGHTS

--------------------



Revenue $504 $517 (3%)



Operating Expenses:

Salaries and employee benefits 191 186 3%

Rentals 94 102 (8%)

Depreciation and amortization 34 36 (6%)

Maintenance and repairs 15 18 (17%)

Intercompany charges 11 4 NM

Other operating expenses:

Supplies, including paper and

toner 65 67 (3%)

Other 84 88 (5%)

---------- ----------

Total Operating Expenses 494 501 (1%)

---------- ----------



Operating Income $10 $16 (38%)

========== ==========



Operating Margin 2.0% 3.1%









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