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FedEx Corporation (FDX - Analyst Report) – the leader in global express delivery services – reported third quarter fiscal 2013 results, ending Feb 28.

Quarterly adjusted earnings of $1.23 per share missed the Zacks Consensus Estimate of $1.38 and decreased from the year-ago earnings of $1.55. Results were impacted by softness in the international air freight markets, industry overcapacity that resulted in low yields as well as inexpensive services chosen by customers.

Total revenue for the third quarter climbed 4% year over year to $10.95 billion, and surpassed the Zacks Consensus Estimate of $10.83 billion.

Segment Results

Quarterly revenues at FedEx Express were $6.70 billion, up 2% year over year. The growth was driven by acquisitions and growth in FedEx Trade Networks, offset by a drop in the core express revenues.

Operating income was down 66% year over year at $118.0 million, resulting in an operating margin of 1.8%, down 350 bps from 5.3% in the year-ago quarter. The negative impact of lower volumes due to demand shift toward international services with lower profitability continue to affect the segment’s operating income. In addition, lesser number of operating days, higher depreciation and pension expenses also aggravated the decline.

The FedEx International Priority (IP) average daily package volume increased 8% for the quarter, while revenue per package (yield) decreased 4% due to the unfavorable impact of lower rates. The U.S. domestic revenue per package rose 1% year over year supported by 1% growth in the U.S. domestic average daily package volume. The revenue growth was primarily attributable to higher freight rates that offset lower fuel surcharges.

FedEx Ground revenues increased 11% year over year to $2.74 billion attributable to volume growth. Although operating income remained flat year over year at $467 million, operating margin dropped 180 bps to 17.0%. The growth on higher volumes was negated by higher purchased transportation expenses and steeper network expansion costs.

FedEx Ground average daily package volume increased 10% driven by growth in B2B and FedEx Home Delivery services. Revenue per package grew 1% on increased freight rates and a hike in residential surcharges. FedEx SmartPost average daily volume expanded 26% on increased e-commerce and net revenue per package decreased 1% because of higher postal rates.

FedEx Freight revenues remained unchanged from the prior-year quarter at $1.23 billion, reflecting growth of 2% in LTL (less-than-truckload) yield and 1% hike in average daily LTL shipments. FedEx Freight recorded an operating income of $4 million compared to a loss of $1 million in the last-year quarter. The growth was powered by higher yield, volume and operational efficiencies. Operating margin was 0.3%.

FedEx Services revenues fell 5% year over year to $380.0 million in the third quarter.

Liquidity

FedEx exited the third quarter with cash and cash equivalents of $3.37 billion compared with $2.84 billion at the end of fiscal 2012. Long-term debt stood at $1.99 billion compared with $1.25 billion at the end of fiscal 2012. Capital expenditure amounted to $542.0 million compared with $729.0 million in third quarter fiscal 2012.

Guidance

For the fourth quarter of fiscal 2013, FedEx projected adjusted earnings per share in the range of $1.90 to $2.10. For fiscal 2013, the company guides its earnings per share in the range of $6.00 to $6.20. The company’s capital expenditure guidance is pegged at $3.6 billion, lower than $3.9 billion projected earlier.

In addition, the company expects to incur expenses under its voluntary buyout program. The company expects pre-tax expenses under this voluntary buyout program to range between approximately $450 million and $550 million, or 89 cents to $1.09 per diluted share.

Our Analysis

We believe that FedEx is poised to benefit from global expansion and increased e-commerce activity. The opening of more service centers and network realignment to match the current demand level are also expected to enhance the overall performance level of the company.

Last month, the company launched a new business tool to aid e-commerce customers in their shipping process. The new system, fedex.com Integration Manager is a Web-based tool that connects with platforms like eBay Inc. (EBAY - Analyst Report), Amazon.com Inc. (AMZN - Analyst Report) and Google Inc. . The seamless connection allows enterprises running multiple online stores to simplify their selling and shipment processes.

Nevertheless, the effects of the sluggish economic environment have cast a shadow over the near-term outlook of the company. Further, competitive threats, legal hassles, unionized workforce and rising pension headwinds will likely limit the upside potential of the stock. Currently, FedEx retains a Zacks Rank #3 (Hold).

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