FedEx Corporation (NYSE:FDX) got back on form by delivering a solid set of second-quarter earnings on Wednesday, and guidance was maintained in the face of weaker-than-expected economic conditions. Moreover, management commentary confirmed FedEx is successfully handling surging e-commerce demand during the holiday season. Let's take a closer look at FedEx's second-quarter results.

FedEx Corporation's results: The raw numbers
Compared to the same period last year, revenue grew 4.3% in the quarter, with non-GAAP operating income growing 17% to $1.2 billion in the quarter. Meanwhile, adjusted non-GAAP diluted EPS came in at $2.58, an increase of 19.4% compared to the same period last year. Reported diluted EPS came in only 5.6% ahead, at $2.44.

The difference between reported and adjusted EPS came down to $0.13 of legal expenses and costs associated with the planned acquisition of TNT Express, while last year's second quarter had a $0.15 contribution from a segment reporting change. Whichever way you cut it, FedEx had a good quarter.

On a segmental level, Express and Ground had strong quarters while Freight was affected by the weaker industrial economy. A breakout of segment earnings:

Segment Revenue
($ million)
Revenue GrowthOperating Income
($ million)
Operating Income Growth
Express 6,588 (6.2%) 622 26%
Ground 4,050 32% 526 13%

 Freight

1,547 (2.4%) 101 (10%)

DATA SOURCE: FEDEX CORPORATION PRESENTATION. 

Turning to guidance, management maintained expectations for full-year 2016 adjusted diluted EPS of $10.40 to $10.90.

What happened with FedEx Corporation this quarter
The key points, with all growth figures are on a year-on-year basis, starting with Express:

  • Margin improvement at Express partly due to exceeding expectations on its profit improvement program and aircraft fleet modernization
  • Lower fuel surcharges and currency effects offset positive yield growth, resulting in Express revenue decline of 6%
  • Excluding fuel, domestic Express package yield grew 3%

Ground:

  • "Record-breaking demand" during holiday season, with peak demand exceeding forecast at more than double FedEx's average daily volume
  • Revenue growth driven by GENCO acquisition
  • Ground average daily volume grew 9% in the quarter, driven by business-to-consumer (B2C) e-commerce deliveries
  • Normalized Ground yield excluding fuel impacts increased 3.9%

Freight:

  • Management blamed revenue decline on lower levels of industrial production
  • Less-than-truckload, or LTL, revenue per shipment fell 3%
  • Freight yield per shipment, excluding fuel impact, increased 2%

In short, lower fuel surcharges caused by lower jet fuel prices are creating headwinds that mask underlying yield improvements. Express is generating good underlying yield expansion and operating margin is being helped by the successful implementation of its profit improvement program.

Meanwhile, Ground is benefiting from a stronger-than-expected peak demand season. Equally as important is that its network is dealing with capacity demand. Freight is being challenged by slower industrial growth, but as you can see above, it's a relatively small contributor to operating income.

What management said
Along with affirming full-year guidance, CFO Alan Graf confirmed the company was seeing "weaker-than-anticipated industrial production and global trade" -- a sign that it is dealing well with economic headwinds. Moreover, on the earnings call, Chairman Fred Smith answered a question from Citibank analyst Chris Wetherbee by stating, "Express margins are going up." Shortly afterward, CEO of FedEx Express David Bronczek went on to laud the benefits of the profit improvement program:

So, yes, we are very optimistic about our profit improvement going forward. It continues to increase the profits. It doesn't stop... And Fred is right, I mean, we had a nine-year high of our margins at Express and those will continue to grow as well with our profits.

In fact, as noted above, underlying yield growth is good at Express and Ground, and CEO of FedEx Services Mike Glenn confirmed that rates at Express, Ground, and Freight would rise in January by an average of 4.9%.

Glenn also outlined how Ground "recently increased surcharges for unauthorized packages in the FedEx Ground network" and then announced that surcharges on oversize home delivery packages (accounting for 10% of deliveries during peak) would increase in January. 

Looking ahead
Strong B2C e-commerce demand alongside margin and underlying yield improvements more than helped to offset headwinds such as weaker global trade, lower fuel prices, and adverse currency movements. In addition, good B2C demand is allowing FedEx to increase surcharges on certain packages, and management's affirmation that its network has adequately dealt with strong peak demand will help to soothe concerns on peak season. Overall, a solid quarter.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.