Legal victory, decent fourth-quarter results cap solid week for FedEx

At FedEx Corp., the past five days have brought vindication and affirmation.

Vindication came late Friday when a federal district judge in San Francisco granted the Justice Department's move to dismiss all charges against FedEx alleging the Memphis-based company shipped prescription drugs on behalf of two illegal Internet pharmacies for about 10 years, despite being notified starting in 2004 that the pharmacies were breaking the law.

Affirmation came yesterday when FedEx reported fiscal 2016 fourth-quarter results that came in slightly better than analysts expected—and included a solid performance from its "FedEx Express" air and international unit and strong numbers from its FedEx Ground division—all in the face of sluggish U.S. and international economic growth. FedEx also said it achieved a goal set four years ago to boost the Express division's annual operating profit by $1.6 billion by the end of the 2016 fiscal year.

Case dismissed

Judge Charles Breyer's ruling ended a two-year criminal investigation into FedEx's alleged activities, and came just as the trial had gotten underway. Last July, a grand jury returned a 15-count indictment against the parent, its Express unit, and its "FedEx Services" division for participation in a scheme involving the transport of prescription drugs and controlled substances for Chhabra-Smoley Organization and for Superior Drugs, online pharmacies that allegedly filled and distributed medications without a doctor's prescription, a physical exam, a diagnosis, or a visit by the recipient to a physician. The government sought to levy a $1.6 billion fine on FedEx or have the company placed on five years' probation and pay a lesser fine.

FedEx vowed to fight the government tooth and nail, arguing it had no business invading its customers' privacy or taking on a law-enforcement role to police the millions of packages it carries each day. FedEx said it would have immediately shut off shipping privileges to illegal pharmacies had the government provided it with a list of those companies. Though the company asked for a list, none was ever provided, it said.

Judge Breyer, who was reportedly critical of the government's position from the start, swiftly granted the motion to dismiss. A legal website called Overlawyered quoted the judge on Friday as calling FedEx "factually innocent," and said the withdrawal of charges was "entirely consistent with the government's overarching obligation to seek justice even at the expense of some embarrassment."

FedEx did not spare the rhetoric rod following the court's action. "The case should never have been brought," said Patrick Fitzgerald, a company spokesman, in a statement Friday. "The government should take a very hard look at how they made the tremendously poor decision to file these charges. Many companies would not have had the courage or the resources to defend themselves against false charges."

Fitzgerald said the "power of the government was greatly misused when the case was initiated," but added that the "government's integrity was redeemed" by its move to dismiss the charges.

A spokesman for the U.S. Attorney's Office for the Northern District of California, the unit of the Justice Department that prosecuted the case, declined to explain why the office suddenly dropped the case after two years of preparation.

On its site, "Overlawyered" wrote that FedEx defied the conventional wisdom held by big companies by challenging the authorities rather than cutting a deal and avoiding the full force the government can bring to bear in a prosecution.

In March 2013, Atlanta-based UPS Inc., FedEx's chief rival, paid $40 million in what is known as a non-prosecution agreement and agreed to beef up its compliance and training programs to settle government allegations similar to those levied against FedEx.

The company's fiscal fourth-quarter results were powered by FedEx Ground, which reported a 20-percent gain in year-over-year revenue and a 9-percent increase in operating margin. The revenue gain came on the back of a 10-percent volume increase and a 7-percent increase in revenue per package, the result of higher rates and a change in the way the unit records revenues from its "SmartPost" last-mile delivery product, operated in conjunction with the U.S. Postal Service.

At FedEx Express, operating income soared year-over-year by 135 percent, to $757 million, while revenue increased slightly to $6.72 billion. FedEx attributed the strong operating results to the success of an ambitious program launched publicly in late 2012 to jump start income at Express through a mix of cost cuts, efficiency enhancements, and yield-boosting measures.

Though Express remains FedEx's largest unit, company executives have made clear that it will not be the driver of the parent's future fortunes as it was in the past. That mantle will fall to the FedEx Ground division, which is reaping the fruits of strong business-to-consumer ground-delivery growth fueled by e-commerce. By contrast, demand for airfreight in the U.S. has fallen off considerably as businesses have retooled their distribution nodes to support lower-cost ground services.

FedEx has projected $5.1 billion in fiscal year 2017 capital expenditures, with about $2 billion allocated to the ground division.

For the historically minded, FedEx in its 2016 year cracked the $50 billion annual revenue barrier for the first time. The fiscal 2016 fourth-quarter numbers include adjustments for pension accounting and for costs associated with FedEx's US$4.8 billion acquisition of Dutch Delivery firm TNT Express. The transaction closed May 25.

Despite seemingly good numbers from its two largest operating units, the equity market yesterday pushed down FedEx stock nearly $7.50 a share over concerns about the company's inability to give guidance to analysts on the costs, time frame, and other specifics on the TNT Express acquisition. The integration of TNT Express' European, Chinese, and Brazilian operations into FedEx is likely to take several years.