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VOL. 124 | NO. 118 | Thursday, June 18, 2009

FedEx Takes Hits But Comes Out Swinging

By Eric Smith

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BUSINESS AND COMMERCE: In this file photo, packages pass along a conveyor belt before being loaded onto delivery trucks at the FedEx Express Station in New York. FedEx reported Wednesday it posted a bigger fourth quarter loss, weighed down by one-time charges, but adjusted results came in well above Wall Street expectations. -- AP FILE PHOTO/MARK LENNIHAN

The end of fiscal year 2009 brought good news and bad news to FedEx Corp., which released its fourth quarter and full-year earnings report Wednesday.

After enacting a host of pay cuts, job cuts and other money-saving measures, the shipping giant was able to announce a profit of $98 million for the year ending May 31. However, the sputtering economy resulted in an $876 million, or $2.82 per share, loss for the fourth quarter. The company’s loss in Q4 2008 was $241 million, or 78 cents per share.

Also, though FedEx’s expectation for first quarter 2010 (June-August) is a profit of 30 cents to 45 cents per share, that number is far below analysts’ forecast of 68 cents per share. The lower prediction stems from a rise in oil prices and slowdown in manufacturing as the economic outlook remains bleak.

“The operating environment for our first two quarters in fiscal 2010 is expected to be extremely difficult,” executive vice president and chief financial officer Alan B. Graf Jr. said in a statement.

Building on the back end

FedEx, which employs about 290,000 people worldwide and 33,000 in Memphis, booked about $1.2 billion in charges in the fourth quarter as it wrote down the value of two acquisitions.

The company took a $900 million writedown from its 2004 purchase of Kinko’s (now FedEx Office), $90 million in charges related to the purchase of a trucking company and other charges related to severance pay and facility cutbacks.

FedEx late last year and earlier this year implemented a host of cost-saving measures that will save the company $1 billion, from executive pay cuts in December to a reduction of 1,000 salaried managers in April.

Although revenue in the fourth quarter fell 20 percent to $7.85 billion, analysts remain optimistic that the company is taking the right steps to remain on solid ground amid trying times.

“I saw a company that’s managed the downturn well, taking advantage of weaker competitors and building its long-term strategic position in the downturn,” said Dan Ortwerth, a FedEx analyst at Edward Jones. “There’s really no question in my mind that they’ve done enough to be stable, solid, survivable (and) take advantage of the weakness of competitors that can’t match what they’ve already done.”

Time for a redesign

Donald Broughton, a FedEx analyst at Avondale Partners, noted that company CEO Fred Smith has called this recession the worst since the Great Depression, but the company has remained profitable as a result of efforts to reduce costs and “redesign the business.”

“They have taken $2.6 billion out of their costs in the last year,” Broughton said, “and even for a company as big as FedEx, $2.6 billion is a lot of money.”

Broughton expects the company to “do what FedEx does, and that is to be flexible and adapt to the marketplace as it changes and adapt to the economy as it changes.” Broughton said it’s impressive that Alan Graf said the company should remain cash-flow positive in fiscal year 2010.

“For a company that is as asset-intensive as FedEx is with a global network of airplanes and trucks and terminals, to remain cash-flow positive in what is a dismal economy is quite an accomplishment,” Broughton said.

For the full fiscal year, FedEx posted a profit of $3.76 per share, compared to $5.83 a year ago. Excluding charges in both years, earnings were 31 cents per share in fiscal 2009 and $3.60 in fiscal 2008. Revenue fell 6 percent to $35.5 billion.

The Associated Press contributed to this report.

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