CORRECTED: FedEx profit up, but cuts costs

By Nick Carey

DETROIT (Reuters) - Package delivery giant FEDEX (FDX.NY)orp reported a higher profit for its fiscal second quarter, meeting expectations, but announced a 20 percent pay cut for CEO Fred Smith and said it was suspending retirement plan contributions as the U.S. economy's outlook looks bleak.

FedEx said it has a hiring freeze in place and has cut staff levels at its FedEx Freight and FedEx Office units.

FedEx said new measures include a 20 percent base salary decrease for Smith and pay cuts of between 7.5 and 10 percent for other senior executives as of January 1. All other U.S. salaried personnel will have a 5 percent pay cut.

According to a company filing with the U.S. Securities and Exchange Commission in July, Smith's base salary for the company's fiscal 2009 year was set at around $1.48 million.

The company also announced the suspension of matching contributions to FedEx's 401(k) retirement plan for a minimum of one year as of February 1.

FedEx said the cost-cutting measures would reduce expenses by $800 million by the end of its fiscal 2010 year.

FedEx shares were up 94 cents or 1.47 percent at $64.91, off an earlier high at $65.30, on the New York Stock Exchange late on Thursday morning.

"Our financial performance is increasingly being challenged by some of the worst economic conditions in the company's 35-year operating history," Smith said in a statement.

FedEx also gave a broad earnings outlook range for the second half of its fiscal 2009 year and said it would not provide an outlook for the third quarter because of "significant economic uncertainty."

"It's tough, but it's a sign of the times," Al Meyers, portfolio manager of the AHA Diversified Equity Fund, which owns FedEx shares, said of the pay cuts. "The fact that executives including Fred Smith are taking pay cuts sends a message to employees that 'we're all in the same boat,' which is a positive."

"As long as we have confidence in the management at FedEx and in the overall business model, we'll stick with them," he added.

The Memphis, Tennessee-based company, which like United Parcel Service Inc is considered a bellwether of U.S. economic health, reported that net income for its fiscal second quarter ended November 30 rose to $493 million, or $1.58 per share.

That compared with the $479 million, or $1.54 per share, the company reported a year earlier.

"I am very pleased with the results," said Dan Ortwerth, a research analyst at Edward Jones. "FedEx is getting better and better at managing its cost structure."

Edward Jones has a "buy" rating for both FedEx and UPS.

The company reported revenue for the quarter of $9.54 billion, compared with $9.45 billion a year earlier. Analysts expected $9.78 billion.

FedEx gave a broad profit range of between 69 cents and $1.94 per share for the second half of its fiscal 2009 year and said that apart from economic uncertainty, the recently announced departure of DHL from the United States made it difficult to provide a forecast for the third quarter.

"FedEx has been taking action for some time to offset the effects of a downturn," said Sandeep Kar, a transportation analyst at consulting company Frost & Sullivan. "They have done the right things to navigate them through these troubled waters."

Deutsche Post AG said in November that its DHL express unit would end U.S. domestic service on January 30 with the loss of 9,500 jobs, citing the U.S. slowdown and DHL's uphill struggle to compete against FedEx and UPS on their home turf.

FedEx and UPS have seen package volumes hit by the slowing U.S. economy. UPS said in November the uncertain economic environment had made it too difficult to give its usual peak-season package volume forecast.

(Editing by Steve Orlofsky and Matthew Lewis)

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