UPDATE 2-FedEx profits tumble, hiring freeze set
06/28/01 12:42 PM
Source: Reuters
URL: investor.cnet.com
By Michael Connor
MIAMI, June 28 (Reuters) - FedEx Corp., the world's No. 1 air-express package shipper, said on Thursday the weak economy knocked down its quarterly profits by 54 percent, announced spending cuts and a freeze on most hiring, and warned of disappointing first-quarter earnings.
Still, the results surpassed lowered Wall Street forecasts and helped lift FedEx shares amid an overall stock market rally.
FedEx, known for its overnight deliveries, said net income, including unusual charges, fell to $113 million, or 38 cents a share, for the fourth quarter ended May 31, from $245 million, or 85 cents a share, in the year-ago period.
Analysts surveyed by Thomson Financial/First Call had expected the Memphis, Tennessee-based company to earn 46 to 58 cents a share before charges, with a consensus of 52 cents.
Excluding the charges, Fedex earned 64 cents a share. Revenues rose 6 percent over the year to $5.12 billion in the fourth quarter.
Analysts slashed their estimates after FedEx twice cut its earnings guidance for the quarter.
Fedex's stock rose 5.7 percent, or $2.10, to $38.90 in late-afternoon trading on the New York Stock Exchange. Rival United Parcel Service also advanced, adding $1.17 to $57.41, also on the NYSE.
FedEx said profits were reduced by charges of $124 million for scaling down an aircraft conversion program and other matters, FedEx said.
The company said business conditions remain difficult and it expects fiscal first-quarter profits to be at the low end of Wall Street estimates of 25 to 49 cents a share. The consensus forecast is 38 cents, according to First Call.
"Continuing weak economic conditions, particularly in the high-tech and durable-goods sectors, sharply reduced demand for our express services," Executive Vice President and Chief Financial Officer Alan Graf Jr. said in a news release.
Graf said in an interview that current-quarter results would be hurt by higher medical, pension and other operational costs. He said FedEx expects U.S. economic recovery to kick in during early 2002.
The FedEx Express unit will stop making Sunday deliveries as of August 27, as it is being reconfigured.
The company also said it has reduced bonuses, imposed a freeze on most hiring, and cut discretionary spending at all its operating companies. Capital spending has been reduced by deferring aircraft deliveries and by cutting, deferring or eliminating various other projects, it said.
"The steps that we are taking to reduce expenses and capital spending, including the actions we announced today, will help match capacity with future volume. Most importantly, we expect to be cash flow positive in fiscal 2002, depending upon our ability to further cancel, defer or sell aircraft delivery and modification commitments," Graf said.
He said U.S. domestic daily volumes in the fourth quarter declined 6 percent year-over-year, and the growth rate of FedEx International, formerly a bright spot for the company, slowed to 2 percent.
Composite package yield, a measure of revenues per item delivered, rose 3 percent, a figure analyst Donald Broughton of AG Edwards & Sons said was remarkably strong when the U.S., Japanese and German economies were slowing.
"On declining volume, yield improvements are nothing short of phenomenal," said Broughton, who rates FedEx shares a "buy."
FedEx executives told institutional investors in a conference call following its earnings announcement that yields improved largely because of its new ground delivery service aimed at homes and small firms, which have long been UPS's main customers.
Graf told Reuters that FedEx expected to return to 10 to 15 percent year-over-year earnings growth when the economy starts to recover. He said a seven-year deal to carry air-packages for the U.S. Postal Service would begin benefiting the company in September.
Shippers such as FedEx and UPS are closely tied to overall economic performance and have complained for months that drooping economies at home and abroad were hurting demand for their services.
Analysts have said the U.S. economy may improve toward the end of the year or early next year but have sketched out continuing short-term business difficulties for the shipping giants.
For the full fiscal year, FedEx profits were $1.99 a share, down from $2.32 a year earlier, including charges. Without the charges, the company earned $2.26 a share. Forecasts had ranged from $2.08 to $2.20, according to First Call. The consensus forecast was $2.14.
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