FedEx Corporation (FedEx Express) (Memphis) today reported earnings of $1.23 per diluted share for the third quarter ended February 28, excluding business realignment costs totaling $47 million primarily related to the company’s voluntary buyout program for eligible U.S. officers and managing directors. Including this year’s realignment costs, third quarter earnings were $1.13 per diluted share.

Last year’s third quarter earnings were $1.55 per diluted share, excluding a $0.10 per share reversal of a reserve associated with a legal matter at FedEx Express. Including last year’s reserve reversal, earnings were $1.65 per diluted share.

“The third quarter was very challenging due to continued weakness in international air freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit services,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “In response, beginning April 1, FedEx Express will decrease capacity to and from Asia and will aggressively manage traffic flows to place low yielding traffic in lower-cost networks. We are currently assessing how these actions may allow FedEx Express to retire more of its older, less-efficient aircraft. We remain focused on our strategic cost reduction programs, which are ramping up and on track.”

Third Quarter Results

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

• Revenue of $11.0 billion, up 4% from $10.6 billion the previous year

• Operating income of $589 million, down 28% from $813 million last year

• Operating margin of 5.4%, down from 7.7% the previous year

• Net income of $361 million, down 31% from $521 million a year ago

As discussed above, the quarter’s results reflect the decline in profitability at FedEx Express due to the accelerating demand shift toward lower-yielding international services and lower international export yields. The quarter’s results were also negatively impacted by the business realignment costs noted earlier and by fewer operating days in each transportation segment.

Outlook

FedEx projects earnings to be an adjusted $1.90 to $2.10 per diluted share in the fourth quarter and an adjusted $6.00 to $6.20 per diluted share for fiscal 2013 before charges related to the company’s business realignment. Costs of the benefits provided under the voluntary buyout program will be recognized in the period that eligible employees accept their offers, predominantly in the fourth fiscal quarter. Including the third quarter costs, the company now expects the fiscal 2013 pretax cost of the voluntary buyout program to range from approximately $450 million to $550 million in cash expenditures, or $0.89 to $1.09 per diluted share, with some additional costs expected in fiscal 2014. Actual costs will depend on employee acceptance rates. Including the business realignment costs, earnings are expected to be $0.94 to $1.34 per diluted share in the fourth quarter and $4.91 to $5.31 per diluted share for fiscal 2013. This guidance assumes the current market outlook for fuel prices. The capital spending forecast for fiscal 2013 is now $3.6 billion, compared to $3.9 billion in the company’s previous forecast.

In last year’s fourth quarter, the company reported earnings of $1.99 per diluted share, excluding a $0.26 per diluted share non-cash aircraft impairment charge at FedEx Express. Including this charge, earnings were $1.73 per diluted share.

“Our lower-than-expected results for the quarter and reduced full-year earnings outlook were driven by third quarter international revenues declining approximately $100 million versus our guidance primarily due to accelerating customer preference for lower-yielding international services, lower rate per pound and weight per shipment,” said Alan B. Graf Jr., FedEx Corp. executive vice president and chief financial officer. “We expect these international revenue trends to continue. We have other actions under way beyond those already included in our profit improvement program. Some of these additional actions may involve temporarily or permanently grounding aircraft, which could result in asset impairment or other charges in future periods.”

“In early February, a number of officers and managing directors, primarily at FedEx Services and FedEx Express, accepted voluntary buyouts, and on February 15, thousands more team members were notified of their eligibility for the buyout program. This program is one of the first steps in a process that will help FedEx Express achieve necessary cost structure reductions and improved efficiency. In addition to continued profit improvements in the base businesses at FedEx Ground and FedEx Freight, our profit improvement programs are targeting annual profitability improvement at FedEx Express of $1.6 billion by the end of fiscal 2016, from the fiscal year 2013 base business. Collectively, these initiatives are expected to increase margins, improve cash flows and increase our competitiveness,” said Graf.

Stock Repurchase Program Authorization Increase

The FedEx Corp. board of directors has authorized the repurchase of up to 10 million shares of FedEx Corp. common stock. These shares augment the remaining 188 thousand shares authorized for purchase under existing share repurchase programs. It is expected that the additional share authorization will primarily be utilized to offset equity compensation dilution over the next several years. Purchases may be made in the open market and in negotiated or block transactions. FedEx had 317 million shares outstanding as of February 28, 2013.

FedEx Express Segment

For the third quarter, the FedEx Express segment reported:

• Revenue of $6.70 billion, up 2% from last year’s $6.54 billion

• Operating income of $118 million, down 66% from $349 million a year ago

• Operating margin of 1.8%, down from 5.3% the previous year

Revenue increased due to this year’s business acquisitions and growth at FedEx Trade Networks, while core express revenue was constrained by continued demand shift toward lower-yielding international services. U.S. domestic revenue per package grew 1% as higher rate per pound and weight per package were offset by lower fuel surcharges, while average daily package volume increased 1%. Higher growth in international deferred services continued, with FedEx International Economy^® volume growing 12%, while FedEx International Priority^® volume increased 2% during the quarter. International export revenue per package fell 3% due to the demand shift to lower-yielding international services, lower rates and lower fuel surcharges.

Operating income and margin were significantly lower due to the demand shift to lower-yielding international services, the prior year reversal of a $66 million reserve associated with a legal matter, the negative impact of one fewer operating day, higher pension cost and increased depreciation expense. Costs associated with the business realignment program also negatively impacted operating results by $34 million.

Copyright Photo: Brian McDonough. Airbus A300F4-605R N689FE (msn 875) lands at Baltimore/Washington.

FedEx Express: