Edgar Filing: FEDEX CORP

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED February 29, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 1-15829

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		62-1721435
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

942 South Shady Grove Road Memphis, Tennessee		38120
(Address of principal executive offices)		(ZIP Code)

(901) 818-7500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock

Common Stock, par value $0.10 per share

Outstanding Shares at March 21, 2012

315,367,909

FEDEX CORPORATION

INDEX


	PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

Condensed Consolidated Balance Sheets February 29, 2012 and May 31, 2011		3

Condensed Consolidated Statements of Income Three and Nine Months Ended February 29, 2012 and February 28, 2011		5

Condensed Consolidated Statements of Cash Flows Nine Months Ended February 29, 2012 and February 28, 2011		6

Notes to Condensed Consolidated Financial Statements		7

Report of Independent Registered Public Accounting Firm		22

ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition		23

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		46

ITEM 4. Controls and Procedures		46

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		47

ITEM 1A. Risk Factors		47

ITEM 6. Exhibits		47

Signature		49

Exhibit Index		E-1

Exhibit 10.1

Exhibit 10.2

Exhibit 10.3

Exhibit 10.4

Exhibit 12.1

Exhibit 15.1

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

EX-101 INSTANCE DOCUMENT

EX-101 SCHEMA DOCUMENT

EX-101 CALCULATION LINKBASE DOCUMENT

EX-101 LABELS LINKBASE DOCUMENT

EX-101 PRESENTATION LINKBASE DOCUMENT

EX-101 DEFINITION LINKBASE DOCUMENT

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

		September 30,		September 30,
	February 29,
	2012		May 31,
	(Unaudited)		2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,040	$	2,328
Receivables, less allowances of $180 and $182		4,635		4,581
Spare parts, supplies and fuel, less allowances of $181 and $169		447		437
Deferred income taxes		617		610
Prepaid expenses and other		459		329


Total current assets		8,198		8,285

PROPERTY AND EQUIPMENT, AT COST		35,933		33,686
Less accumulated depreciation and amortization		19,090		18,143


Net property and equipment		16,843		15,543

OTHER LONG-TERM ASSETS
Goodwill		2,419		2,326
Other assets		1,292		1,231


Total other long-term assets		3,711		3,557


	$	28,752	$	27,385

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

		September 30,			September 30,
	February 29,
	2012			May 31,
	(Unaudited)			2011
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	419		$	18
Accrued salaries and employee benefits		1,444			1,268
Accounts payable		1,687			1,702
Accrued expenses		1,602			1,894


Total current liabilities		5,152			4,882

LONG-TERM DEBT, LESS CURRENT PORTION		1,251			1,667

OTHER LONG-TERM LIABILITIES
Deferred income taxes		2,030			1,336
Pension, postretirement healthcare and other benefit obligations		1,654			2,124
Self-insurance accruals		960			977
Deferred lease obligations		750			779
Deferred gains, principally related to aircraft transactions		244			246
Other liabilities		142			154


Total other long-term liabilities		5,780			5,616

COMMITMENTS AND CONTINGENCIES

COMMON STOCKHOLDERS’ INVESTMENT
Common stock, $0.10 par value; 800 million shares authorized; 317 million shares issued as of February 29, 2012 and May 31, 2011		32			32
Additional paid-in capital		2,574			2,484
Retained earnings		16,584			15,266
Accumulated other comprehensive loss		(2,483	)		(2,550	)
Treasury stock, at cost		(138	)		(12	)


Total common stockholders’ investment		16,569			15,220


	$	28,752		$	27,385

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

		September 30,			September 30,			September 30,			September 30,
	Three Months Ended						Nine Months Ended
	February 29,			February 28,			February 29,			February 28,
	2012			2011			2012			2011
REVENUES	$	10,564		$	9,663		$	31,672		$	28,752

OPERATING EXPENSES:
Salaries and employee benefits		4,021			3,828			12,007			11,410
Purchased transportation		1,619			1,446			4,713			4,163
Rentals and landing fees		628			621			1,871			1,850
Depreciation and amortization		543			493			1,570			1,474
Fuel		1,233			1,049			3,677			2,874
Maintenance and repairs		456			480			1,518			1,470
Impairment and other charges		—			21			—			88
Other		1,251			1,332			3,986			3,933

		9,751			9,270			29,342			27,262


OPERATING INCOME		813			393			2,330			1,490

OTHER INCOME (EXPENSE):
Interest, net		(12	)		(24	)		(30	)		(65	)
Other, net		(9	)		(9	)		(7	)		(25	)

		(21	)		(33	)		(37	)		(90	)


INCOME BEFORE INCOME TAXES		792			360			2,293			1,400

PROVISION FOR INCOME TAXES		271			129			811			506


NET INCOME	$	521		$	231		$	1,482		$	894


EARNINGS PER COMMON SHARE:
Basic	$	1.66		$	0.73		$	4.69		$	2.84


Diluted	$	1.65		$	0.73		$	4.67		$	2.82


DIVIDENDS DECLARED PER COMMON SHARE	$	0.13		$	0.12		$	0.52		$	0.48

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

		September 30,			September 30,
	Nine Months Ended
	February 29,			February 28,
	2012			2011
Operating Activities:
Net income	$	1,482		$	894
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		1,570			1,474
Provision for uncollectible accounts		123			108
Stock-based compensation		83			78
Deferred income taxes and other noncash items		694			476
Changes in assets and liabilities:
Receivables		(87	)		(284	)
Other assets		(153	)		(212	)
Accounts payable and other liabilities		(660	)		(60	)
Other, net		(35	)		(17	)


Cash provided by operating activities		3,017			2,457

Investing Activities:
Capital expenditures		(2,946	)		(2,703	)
Business acquisitions, net of cash acquired		(114	)		(96	)
Proceeds from asset dispositions and other		20			15


Cash used in investing activities		(3,040	)		(2,784	)

Financing Activities:
Principal payments on debt		(28	)		(262	)
Proceeds from stock issuances		83			64
Excess tax benefit on the exercise of stock options		7			11
Dividends paid		(123	)		(113	)
Purchase of treasury stock		(197	)		—


Cash used in financing activities		(258	)		(300	)


Effect of exchange rate changes on cash		(7	)		34

Net decrease in cash and cash equivalents		(288	)		(593	)
Cash and cash equivalents at beginning of period		2,328			1,952


Cash and cash equivalents at end of period	$	2,040		$	1,359

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2011 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of February 29, 2012, the results of our operations for the three- and nine-month periods ended February 29, 2012 and February 28, 2011 and cash flows for the nine-month periods ended February 29, 2012 and February 28, 2011. Operating results for the three- and nine-month periods ended February 29, 2012 are not necessarily indicative of the results that may be expected for the year ending May 31, 2012.

BUSINESS ACQUISITION. On July 25, 2011, we completed our acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million in cash from operations. The financial results of the acquired business are included in the Federal Express Corporation (“FedEx Express”) segment from the date of acquisition and were not material to our results of operations or financial condition. Substantially all of the purchase price was allocated to goodwill, which was entirely attributed to our FedEx Express reporting unit.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of FedEx Express, which represent a small number of FedEx Express’s total employees, are employed under a collective bargaining agreement. During the fourth quarter of 2011 the pilots ratified a new labor contract that includes safety initiatives, increases in hourly pay rates and travel per diem rates, and provisions for opening a European crew base. The new contract becomes amendable in March 2013 as the pilot’s union determined, during the third quarter of 2012, not to exercise its option to shorten the contract. In addition to our pilots at FedEx Express, certain of FedEx’s non-U.S. employees are unionized.

STOCK-BASED COMPENSATION. We have two types of equity-based compensation: stock options and restricted stock. The key terms of the stock option and restricted stock awards granted under our incentive stock plans and all financial disclosures about these programs are set forth in our Annual Report.

Our stock-based compensation expense was $22 million for the three-month period ended February 29, 2012 and $83 million for the nine-month period ended February 29, 2012. Our stock-based compensation expense was $21 million for the three-month period ended February 28, 2011 and $78 million for the nine-month period ended February 28, 2011. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

NEW ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. See our Annual Report for a discussion of the impact of new accounting guidance issued but not yet effective as of May 31, 2011. We believe that no new accounting guidance was adopted or issued during the nine months of 2012 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

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TREASURY SHARES. During the second quarter of 2012, we repurchased 2.8 million FedEx common shares at an average price of $70 per share for a total of $197 million. As of February 29, 2012, 2.9 million shares remained under existing share repurchase authorizations.

DIVIDENDS DECLARED PER COMMON SHARE. On February 17, 2012, our Board of Directors declared a dividend of $0.13 per share of common stock. The dividend will be paid on April 2, 2012 to stockholders of record as of the close of business on March 12, 2012. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

(2) Comprehensive Income

The following tables provide a reconciliation of net income reported in our financial statements to comprehensive income for the periods ended February 29, 2012 and February 28, 2011 (in millions):

		September 30,		September 30,
	Three Months Ended
	2012		2011
Net income	$	521	$	231
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $17 in 2012 and $4 in 2011		65		34
Amortization of unrealized pension actuarial gains/losses and other, net of tax of $19 in 2012 and $16 in 2011		33		26


Comprehensive income	$	619	$	291

		September 30,			September 30,
	Nine Months Ended
	2012			2011
Net income	$	1,482		$	894
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $5 in 2012 and $21 in 2011		(27	)		106
Amortization of unrealized pension actuarial gains/losses and other, net of tax of $55 in 2012 and $46 in 2011		94			78


Comprehensive income	$	1,549		$	1,078

(3) Financing Arrangements

We have a shelf registration statement filed with the SEC that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock.

A $1 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper. The revolving credit agreement expires in April 2016. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our last four fiscal quarters’ rentals and landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 50% at February 29, 2012. We believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of February 29, 2012, no commercial paper was outstanding, and the entire $1 billion under the revolving credit facility was available for future borrowings.

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Long-term debt, exclusive of capital leases, had a carrying value of $1.5 billion compared with an estimated fair value of $1.9 billion at February 29, 2012 and May 31, 2011. The estimated fair values were determined based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

(4) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the periods ended February 29, 2012 and February 28, 2011 was as follows (in millions, except per share amounts):

		Septemr 30,		Septemr 30,		Septemr 30,		Septemr 30,
	Three Months Ended				Nine Months Ended
	2012		2011		2012		2011
Basic earnings per common share:
Net earnings allocable to common shares⁽¹⁾	$	521	$	231	$	1,479	$	892
Weighted-average common shares		314		315		315		314

Basic earnings per common share	$	1.66	$	0.73	$	4.69	$	2.84


Diluted earnings per common share:
Net earnings allocable to common shares⁽¹⁾	$	521	$	231	$	1,479	$	892


Weighted-average common shares		314		315		315		314
Dilutive effect of share-based awards		2		2		2		2

Weighted-average diluted shares		316		317		317		316
Diluted earnings per common share	$	1.65	$	0.73	$	4.67	$	2.82


Anti-dilutive options excluded from diluted earnings per common share		12.7		7.3		13.4		10.0

⁽¹⁾	Net earnings available to participating securities were immaterial in all periods presented.

(5) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended February 29, 2012 and February 28, 2011 were as follows (in millions):

		September 30,		September 30,		September 30,		September 30,
	Three Months Ended				Nine Months Ended
	2012		2011		2012		2011
U.S. domestic and international pension plans	$	133	$	136	$	397	$	411
U.S. domestic and international defined contribution plans		82		68		249		173
Postretirement healthcare plans		17		15		52		45

	$	232	$	219	$	698	$	629

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The three- and nine-month periods ended February 29, 2012 reflect the full restoration on January 1, 2011 of company-matching contributions for our 401(k) plans.

Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended February 29, 2012 and February 28, 2011 included the following components (in millions):

		September 30,			September 30,			September 30,			September 30,
	Three Months Ended						Nine Months Ended
	2012			2011			2012			2011
Pension Plans
Service cost	$	148		$	130		$	445		$	390
Interest cost		245			224			733			673
Expected return on plan assets		(311	)		(266	)		(929	)		(796	)
Recognized actuarial losses and other		51			48			148			144

	$	133		$	136		$	397		$	411

		September 30,		September 30,			September 30,			September 30,
	Three Months Ended					Nine Months Ended
	2012		2011			2012			2011
Postretirement Healthcare Plans
Service cost	$	8	$	8		$	26		$	23
Interest cost		9		8			27			25
Recognized actuarial gains and other		—		(1	)		(1	)		(3	)

	$	17	$	15		$	52		$	45

Contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the nine-month periods ended February 29, 2012 and February 28, 2011 were as follows (in millions):

		September 30,		September 30,
	2012		2011
Required	$	484	$	259
Voluntary		226		121

	$	710	$	380

Our U.S. Pension Plans have ample funds to meet expected benefit payments.

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(6) Business Segment Information

Our reportable segments include the following businesses:


FedEx Express Segment		FedEx Express (express transportation)
		FedEx Trade Networks (global trade services)
		FedEx SupplyChain Systems (logistics services)

FedEx Ground Segment		FedEx Ground (small-package ground delivery)
		FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment		FedEx Freight (LTL freight transportation)
		FedEx Custom Critical (time-critical transportation)

FedEx Services Segment		FedEx Services (sales, marketing and information technology functions)
		FedEx TechConnect (customer service, technical support, billings and collections)
		FedEx Office (document and business services and package acceptance)

FedEx Services Segment

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis by FedEx Express and reported in the FedEx Express segment in expense line items outside of intercompany charges. The FedEx Services segment includes: FedEx Services, which provides sales, marketing and information technology support to our other companies; FedEx TechConnect, which is responsible for customer service, technical support, billings and collections for U.S. customers of our major business units; and FedEx Office, which provides an array of document and business services and retail access to our customers for our package transportation businesses.

The FedEx Services segment provides direct and indirect support to our transportation businesses, and we allocate all of the net operating costs of the FedEx Services segment (including the net operating results of FedEx Office) to reflect the full cost of operating our transportation businesses in the results of those segments. Within the FedEx Services segment allocation, the net operating results of FedEx Office are allocated to FedEx Express and FedEx Ground. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of providing these functions. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance is evaluated based on the impact of its total allocated net operating costs on our transportation segments.

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments in Management’s Discussion and Analysis of Results of Operations and Financial Condition reflects the allocations from the FedEx Services segment to the respective transportation segments. The “Intercompany charges” caption also includes charges and credits for administrative services provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe these allocations approximate the net cost of providing these functions.

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Other Intersegment Transactions

Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results and are not separately identified in the following segment information because the amounts are not material.

The following table provides a reconciliation of reportable segment revenues and operating income (loss) to our unaudited condensed consolidated financial statement totals for the periods ended February 29, 2012 and February 28, 2011 (in millions):

		September 30,			September 30,			September 30,			September 30,
	Three Months Ended						Nine Months Ended
	2012			2011			2012			2011
Revenues
FedEx Express segment	$	6,543		$	6,049		$	19,718		$	17,953
FedEx Ground segment		2,480			2,184			7,097			6,222
FedEx Freight segment		1,234			1,123			3,887			3,602
FedEx Services segment		401			397			1,239			1,246
Other and eliminations		(94	)		(90	)		(269	)		(271	)

	$	10,564		$	9,663		$	31,672		$	28,752

Operating Income (Loss)
FedEx Express segment	$	349		$	178		$	979		$	799
FedEx Ground segment		465			325			1,270			908
FedEx Freight segment		(1	)		(110	)		81			(217	)

	$	813		$	393		$	2,330		$	1,490

(7) Commitments

As of February 29, 2012, our purchase commitments under various contracts for the remainder of 2012 and annually thereafter were as follows (in millions):

		September 30,		September 30,		September 30,
	Aircraft and Aircraft Related		Other⁽¹⁾		Total
2012 (remainder)	$	279	$	80	$	359
2013		743		169		912
2014		540		119		659
2015		734		74		808
2016		749		77		826
Thereafter		6,415		182		6,597

⁽¹⁾	Primarily vehicles, facilities, advertising and promotions contracts, and for the remainder of 2012, a total of $12 million of required quarterly contributions to our U.S. Pension Plans.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. Our obligation to purchase 13 Boeing 777 Freighters (“B777F”) is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended (“RLA”). Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

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In December 2011, FedEx Express entered into an agreement to acquire 27 new Boeing 767-300 Freighter (“B767F”) aircraft, with the first three arriving in 2014 followed by six per year from 2015 to 2018. In conjunction with the execution of the B767F aircraft purchase agreement, FedEx Express also delayed the delivery of nine B777F aircraft, five of which were deferred from 2014 and one per year from 2015 to 2018, to better align air network capacity to demand. FedEx Express also removed the RLA condition from two of the 15 B777F aircraft (bringing the number of purchase obligations subject to the condition to 13) and exercised two B777F options for aircraft to be delivered at the end of the delivery schedule.

We had $734 million in deposits and progress payments as of February 29, 2012 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our condensed consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of February 29, 2012, with the year of expected delivery:

		September 30,		September 30,		September 30,		September 30,
	B777F		B767F		B757		Total
2012 (remainder)		2		—		5		7
2013		4		—		8		12
2014		2		3		—		5
2015		2		6		—		8
2016		2		6		—		8
Thereafter		18		12		—		30

Total		30		27		13		70

A summary of future minimum lease payments under capital leases and noncancelable operating leases with an initial or remaining term in excess of one year at February 29, 2012 is as follows (in millions):

		September 30,		September 30,		September 30,		September 30,
			Operating Leases
			Aircraft				Total
	Capital		and Related		Facilities		Operating
	Leases		Equipment		and Other		Leases
2012 (remainder)	$	3	$	84	$	346	$	430
2013		120		486		1,341		1,827
2014		2		462		1,183		1,645
2015		2		448		1,049		1,497
2016		2		453		871		1,324
Thereafter		13		1,541		5,515		7,056

Total		142	$	3,474	$	10,305	$	13,779

Less amount representing interest		11

Present value of net minimum lease payments	$	131

While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

- 13 -

(8) Contingencies

Wage-and-Hour. We are a defendant in a number of lawsuits containing various class-action allegations of wage-and-hour violations. The plaintiffs in these lawsuits allege, among other things, that they were forced to work “off the clock,” were not paid overtime or were not provided work breaks or other benefits. The complaints generally seek unspecified monetary damages, injunctive relief, or both. We do not believe that a material loss is reasonably possible with respect to any of these matters.

In September 2009, in Taylor v. FedEx Freight, a California state court granted class certification, certifying a class of all current and former drivers employed by FedEx Freight in California who performed linehaul services since June 2003. The plaintiffs alleged, among other things, that they were forced to work “off the clock” and were not provided with required rest or meal breaks. We entered into a tentative settlement agreement with the plaintiffs in June 2011 for an immaterial amount. The order of preliminary approval of settlement was entered by the court in September 2011. Class notices were mailed in October 2011. The court granted final approval of the settlement in January 2012.

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 30 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the company’s owner-operators should be treated as employees, rather than independent contractors.

Most of the class-action lawsuits were consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. The multidistrict litigation court granted class certification in 28 cases and denied it in 14 cases. On December 13, 2010, the court entered an opinion and order addressing all outstanding motions for summary judgment on the status of the owner-operators (i.e., independent contractor vs. employee). In sum, the court has now ruled on our summary judgment motions and entered judgment in favor of FedEx Ground on all claims in 20 of the 28 multidistrict litigation cases that had been certified as class actions, finding that the owner-operators in those cases were contractors as a matter of the law of the following states: Alabama, Arizona, Georgia, Indiana, Kansas (the court previously dismissed without prejudice the nationwide class claim under the Employee Retirement Income Security Act of 1974 based on the plaintiffs’ failure to exhaust administrative remedies), Louisiana, Maryland, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, West Virginia and Wisconsin. The plaintiffs filed notices of appeal in all of these 20 cases. The Seventh Circuit heard the appeal in the Kansas case first in January 2012.

The court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. Specifically, in the five cases in Arkansas, California, Florida, and Oregon (two certified cases), the court’s ruling granted summary judgment in FedEx Ground’s favor on all of the certified claims but did not decide the uncertified claims. In the three cases filed in Kentucky, Nevada and New Hampshire, the court ruled in favor of FedEx Ground on some of the claims and against FedEx Ground on at least one claim. In January 2011, we asked the court to issue final judgments in these eight cases, and the court denied our motion. In July 2011, we filed a petition to the Seventh Circuit asking the appeals court to require these cases to be returned to the multidistrict litigation court for issuance of a final judgment so that all appeals of the December 2010 summary judgment rulings would be heard by the Seventh Circuit, and in November 2011, the Seventh Circuit denied our petition.

In January 2008, one of the contractor-model lawsuits that is not part of the multidistrict litigation, Anfinson v. FedEx Ground, was certified as a class action by a Washington state court. The plaintiffs in Anfinson represent a class of single-route, pickup-and-delivery owner-operators in Washington from December 21, 2001 through December 31, 2005 and allege that the class members should be reimbursed as employees for their uniform expenses and should receive overtime pay. In March 2009, a jury trial in the Anfinson case was held, and the jury returned a verdict in favor of FedEx Ground, finding that all 320 class members were independent contractors, not employees. The plaintiffs appealed the verdict. In December 2010, the Washington Court of Appeals reversed and remanded for further proceedings, including a new trial. We filed a motion to reconsider, and this motion was denied. In March 2011, we filed a discretionary appeal with the Washington Supreme Court, and in August 2011, that petition was granted. The Washington Supreme Court heard oral arguments in February 2012.

- 14 -

In August 2010, another one of the contractor-model lawsuits that is not part of the multidistrict litigation, Rascon v. FedEx Ground, was certified as a class action by a Colorado state court. The plaintiff in Rascon represents a class of single-route, pickup-and-delivery owner-operators in Colorado who drove vehicles weighing less than 10,001 pounds at any time from August 27, 2005 through the present. The lawsuit seeks unpaid overtime compensation, and related penalties and attorneys’ fees and costs, under Colorado law. Our applications for appeal challenging this class certification decision have been rejected.

Other contractor-model cases that are not or are no longer part of the multidistrict litigation are in varying stages of litigation.

With respect to the state administrative proceedings relating to the classification of FedEx Ground’s owner-operators as independent contractors, during the second quarter of 2011, the attorneys general in New York and Kentucky each filed lawsuits against FedEx Ground challenging the validity of the contractor model. In January 2012, FedEx Ground settled the lawsuit filed by the Kentucky Attorney General for an immaterial amount.

While the granting of summary judgment in favor of FedEx Ground by the multidistrict litigation court in 20 of the 28 cases that had been certified as class actions remains subject to appeal, we believe that it significantly improves the likelihood that our independent contractor model will be upheld. Adverse determinations in matters related to FedEx Ground’s independent contractors, however, could, among other things, entitle certain of our contractors and their drivers to the reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax and benefit liability for FedEx Ground, and could result in changes to the independent contractor status of FedEx Ground’s owner-operators in certain jurisdictions. We believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the company’s independent contractors. While it is reasonably possible that potential loss in some of these lawsuits or such changes to the independent contractor status of FedEx Ground’s owner-operators could be material, we cannot yet determine the amount or reasonable range of potential loss. A number of factors contribute to this. The number of plaintiffs in these lawsuits continues to change, with some being dismissed and others being added and, as to new plaintiffs, discovery is still ongoing. In addition, the parties have not yet conducted any discovery into damages, which could vary considerably from plaintiff to plaintiff. Further, the range of potential loss could be impacted considerably by future rulings on the merits of certain claims and FedEx Ground’s various defenses, and on evidentiary issues. In any event, we do not believe that a material loss is probable in these matters.

ATA Airlines. In October 2010, a jury returned a verdict in favor of ATA Airlines in its breach of contract lawsuit against FedEx Express and awarded damages of $66 million, and in January 2011, the court awarded ATA pre-judgment interest of $5 million. In December 2011, the Seventh Circuit overturned the entire judgment entered against FedEx Express. ATA Airlines requested the Seventh Circuit to rehear oral argument on appeal, and in February 2012, the Seventh Circuit denied the request. The time for filing further appeal has passed. We have reversed the $66 million accrual established in the second quarter of 2011.

California Paystub Class Action. A federal court in California ruled in April 2011 that paystubs for certain FedEx Express employees in California did not meet that state’s requirements to reflect pay period begin date, total overtime hours worked and the correct overtime wage rate. The ruling came in a class action lawsuit filed by a former courier seeking damages on behalf of herself and all other FedEx Express employees in California that allegedly received noncompliant paystubs. The court certified the class in June 2011. The court has ruled that FedEx Express is liable to the State of California, and there will be a ruling as to whether FedEx Express is liable to class members who can prove they were injured by the paystub deficiencies. The judge has not yet decided on the amount, if any, of liability to the State of California or to the class, but has wide discretion. Prior to any decision on the amount of liability, we reached an agreement to settle this matter for an immaterial amount in October 2011, subject to approval by the court. The court preliminarily approved the proposed settlement in January 2012. Class notices were mailed in March 2012.

Other. FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not have a material adverse effect on our financial position, results of operations or cash flows.

- 15 -

(9) Supplemental Cash Flow Information

Cash paid for interest expense and income taxes for the nine-month periods ended February 29, 2012 and February 28, 2011 was as follows (in millions):

		September 30,			September 30,
	2012			2011
Cash payments for:
Interest (net of capitalized interest)	$	73		$	106


Income taxes	$	342		$	417
Income tax refunds received		(46	)		(16	)

Cash tax payments, net	$	296		$	401

(10) Condensed Consolidating Financial Statements

We are required to present condensed consolidating financial information in order for the subsidiary guarantors (other than FedEx Express) of our public debt to continue to be exempt from reporting under the Securities Exchange Act of 1934, as amended.

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee $1.0 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the “Guarantor Subsidiaries” and “Non-guarantor Subsidiaries” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

- 16 -

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

February 29, 2012

		September 30,		September 30,		September 30,		September 30,			September 30,
	Parent		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,033	$	423	$	707	$	(123	)	$	2,040
Receivables, less allowances		97		3,638		919		(19	)		4,635
Spare parts, supplies, fuel, prepaid expenses and other, less allowances		143		713		50		—			906
Deferred income taxes		—		599		18		—			617

Total current assets		1,273		5,373		1,694		(142	)		8,198

PROPERTY AND EQUIPMENT, AT COST		26		34,117		1,790		—			35,933
Less accumulated depreciation and amortization		19		17,965		1,106		—			19,090

Net property and equipment		7		16,152		684		—			16,843

INTERCOMPANY RECEIVABLE		—		—		1,350		(1,350	)		—
GOODWILL		—		1,564		855		—			2,419
INVESTMENT IN SUBSIDIARIES		16,857		2,938		—		(19,795	)		—
OTHER ASSETS		1,496		1,162		104		(1,470	)		1,292


	$	19,633	$	27,189	$	4,687	$	(22,757	)	$	28,752


LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	—	$	419	$	—	$	—		$	419
Accrued salaries and employee benefits		73		1,232		139		—			1,444
Accounts payable		40		1,318		471		(142	)		1,687
Accrued expenses		154		1,330		118		—			1,602

Total current liabilities		267		4,299		728		(142	)		5,152

LONG-TERM DEBT, LESS CURRENT PORTION		1,000		251		—		—			1,251
INTERCOMPANY PAYABLE		1,126		224		—		(1,350	)		—
OTHER LONG-TERM LIABILITIES
Deferred income taxes		—		3,485		15		(1,470	)		2,030
Other liabilities		671		2,922		157		—			3,750

Total other long-term liabilities		671		6,407		172		(1,470	)		5,780

STOCKHOLDERS’ INVESTMENT		16,569		16,008		3,787		(19,795	)		16,569


	$	19,633	$	27,189	$	4,687	$	(22,757	)	$	28,752

- 17 -

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2011

		September 30,		September 30,		September 30,		September 30,			September 30,
	Parent		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,589	$	279	$	546	$	(86	)	$	2,328
Receivables, less allowances		—		3,696		912		(27	)		4,581
Spare parts, supplies, fuel, prepaid expenses and other, less allowances		77		645		44		—			766
Deferred income taxes		—		598		12		—			610

Total current assets		1,666		5,218		1,514		(113	)		8,285

PROPERTY AND EQUIPMENT, AT COST		24		31,916		1,746		—			33,686
Less accumulated depreciation and amortization		18		17,071		1,054		—			18,143

Net property and equipment		6		14,845		692		—			15,543

INTERCOMPANY RECEIVABLE		—		—		1,317		(1,317	)		—
GOODWILL		—		1,564		762		—			2,326
INVESTMENT IN SUBSIDIARIES		15,404		2,705		—		(18,109	)		—
OTHER ASSETS		1,652		1,039		63		(1,523	)		1,231


	$	18,728	$	25,371	$	4,348	$	(21,062	)	$	27,385


LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	—	$	18	$	—	$	—		$	18
Accrued salaries and employee benefits		50		1,071		147		—			1,268
Accounts payable		—		1,385		430		(113	)		1,702
Accrued expenses		198		1,563		133		—			1,894

Total current liabilities		248		4,037		710		(113	)		4,882

LONG-TERM DEBT, LESS CURRENT PORTION		1,000		667		—		—			1,667
INTERCOMPANY PAYABLE		1,095		222		—		(1,317	)		—
OTHER LONG-TERM LIABILITIES
Deferred income taxes		—		2,842		17		(1,523	)		1,336
Other liabilities		1,165		3,001		114		—			4,280

Total other long-term liabilities		1,165		5,843		131		(1,523	)		5,616

STOCKHOLDERS’ INVESTMENT		15,220		14,602		3,507		(18,109	)		15,220


	$	18,728	$	25,371	$	4,348	$	(21,062	)	$	27,385

- 18 -

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(UNAUDITED)

Three Months Ended February 29, 2012

		September 30,			September 30,			September 30,			September 30,			September 30,
	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
REVENUES	$	—		$	9,031		$	1,607		$	(74	)	$	10,564

OPERATING EXPENSES:
Salaries and employee benefits		28			3,528			465			—			4,021
Purchased transportation		—			1,169			481			(31	)		1,619
Rentals and landing fees		1			560			68			(1	)		628
Depreciation and amortization		—			504			39			—			543
Fuel		—			1,213			20			—			1,233
Maintenance and repairs		1			432			23			—			456
Intercompany charges, net		(51	)		(66	)		117			—			—
Other		21			1,018			254			(42	)		1,251

		—			8,358			1,467			(74	)		9,751


OPERATING INCOME		—			673			140			—			813

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		521			101			—			(622	)		—
Interest, net		(19	)		6			1			—			(12	)
Intercompany charges, net		20			(25	)		5			—			—
Other, net		(1	)		(4	)		(4	)		—			(9	)


INCOME BEFORE INCOME TAXES		521			751			142			(622	)		792

Provision for income taxes		—			219			52			—			271


NET INCOME	$	521		$	532		$	90		$	(622	)	$	521

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(UNAUDITED)

Three Months Ended February 28, 2011

		September 30,			September 30,			September 30,			September 30,			September 30,
	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
REVENUES	$	—		$	8,188		$	1,555		$	(80	)	$	9,663

OPERATING EXPENSES:
Salaries and employee benefits		23			3,319			486			—			3,828
Purchased transportation		—			1,051			423			(28	)		1,446
Rentals and landing fees		1			558			63			(1	)		621
Depreciation and amortization		1			448			44			—			493
Fuel		—			1,012			37			—			1,049
Maintenance and repairs		1			452			27			—			480
Impairment and other charges		—			10			11			—			21
Intercompany charges, net		(48	)		(117	)		165			—			—
Other		22			1,095			266			(51	)		1,332

		—			7,828			1,522			(80	)		9,270


OPERATING INCOME		—			360			33			—			393

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		231			12			—			(243	)		—
Interest, net		(23	)		—			(1	)		—			(24	)
Intercompany charges, net		27			(34	)		7			—			—
Other, net		(4	)		(4	)		(1	)		—			(9	)


INCOME BEFORE INCOME TAXES		231			334			38			(243	)		360

Provision for income taxes		—			105			24			—			129


NET INCOME	$	231		$	229		$	14		$	(243	)	$	231

- 19 -

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(UNAUDITED)

Nine Months Ended February 29, 2012

		September 30,			September 30,			September 30,		September 30,			September 30,
	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations			Consolidated
REVENUES	$	—		$	27,039		$	4,851	$	(218	)	$	31,672

OPERATING EXPENSES:
Salaries and employee benefits		89			10,565			1,353		—			12,007
Purchased transportation		—			3,371			1,427		(85	)		4,713
Rentals and landing fees		3			1,672			200		(4	)		1,871
Depreciation and amortization		1			1,455			114		—			1,570
Fuel		—			3,618			59		—			3,677
Maintenance and repairs		1			1,446			71		—			1,518
Intercompany charges, net		(162	)		(291	)		453		—			—
Other		68			3,299			748		(129	)		3,986

		—			25,135			4,425		(218	)		29,342


OPERATING INCOME		—			1,904			426		—			2,330

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		1,482			252			—		(1,734	)		—
Interest, net		(58	)		25			3		—			(30	)
Intercompany charges, net		62			(80	)		18		—			—
Other, net		(4	)		(7	)		4		—			(7	)


INCOME BEFORE INCOME TAXES		1,482			2,094			451		(1,734	)		2,293

Provision for income taxes		—			636			175		—			811


NET INCOME	$	1,482		$	1,458		$	276	$	(1,734	)	$	1,482

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(UNAUDITED)

Nine Months Ended February 28, 2011

		September 30,			September 30,			September 30,			September 30,			September 30,
	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
REVENUES	$	—		$	24,083		$	4,919		$	(250	)	$	28,752

OPERATING EXPENSES:
Salaries and employee benefits		87			9,784			1,539			—			11,410
Purchased transportation		—			2,941			1,302			(80	)		4,163
Rentals and landing fees		3			1,659			191			(3	)		1,850
Depreciation and amortization		1			1,323			150			—			1,474
Fuel		—			2,744			130			—			2,874
Maintenance and repairs		1			1,375			94			—			1,470
Impairment and other charges		—			27			61			—			88
Intercompany charges, net		(177	)		(289	)		466			—			—
Other		85			3,218			797			(167	)		3,933

		—			22,782			4,730			(250	)		27,262


OPERATING INCOME		—			1,301			189			—			1,490

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		894			61			—			(955	)		—
Interest, net		(70	)		9			(4	)		—			(65	)
Intercompany charges, net		82			(103	)		21			—			—
Other, net		(12	)		(11	)		(2	)		—			(25	)


INCOME BEFORE INCOME TAXES		894			1,257			204			(955	)		1,400

Provision for income taxes		—			439			67			—			506


NET INCOME	$	894		$	818		$	137		$	(955	)	$	894

- 20 -

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 29, 2012


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	(61	)	$	2,664		$	451		$	(37	)	$	3,017

INVESTING ACTIVITIES
Capital expenditures		(2	)		(2,856	)		(88	)		—			(2,946	)
Business acquisition, net of cash acquired		—			—			(114	)		—			(114	)
Proceeds from asset dispositions and other		—			20			—			—			20


CASH USED IN INVESTING ACTIVITIES		(2	)		(2,836	)		(202	)		—			(3,040	)

FINANCING ACTIVITIES
Net transfers from (to) Parent		(263	)		320			(57	)		—			—
Intercompany dividends		—			46			(46	)		—			—
Principal payments on debt		—			(28	)		—			—			(28	)
Proceeds from stock issuances		83			—			—			—			83
Excess tax benefit on the exercise of stock options		7			—			—			—			7
Dividends paid		(123	)		—			—			—			(123	)
Purchase of treasury stock		(197	)		—			—			—			(197	)
Other, net		—			(16	)		16			—			—


CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(493	)		322			(87	)		—			(258	)


Effect of exchange rate changes on cash		—			(6	)		(1	)		—			(7	)

Net (decrease) increase in cash and cash equivalents		(556	)		144			161			(37	)		(288	)
Cash and cash equivalents at beginning of period		1,589			279			546			(86	)		2,328


Cash and cash equivalents at end of period	$	1,033		$	423		$	707		$	(123	)	$	2,040

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2011


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	(152	)	$	2,758		$	(142	)	$	(7	)	$	2,457

INVESTING ACTIVITIES
Capital expenditures		(1	)		(2,581	)		(121	)		—			(2,703	)
Business acquisition, net of cash acquired		—			(96	)		—			—			(96	)
Proceeds from asset dispositions and other		—			15			—			—			15


CASH USED IN INVESTING ACTIVITIES		(1	)		(2,662	)		(121	)		—			(2,784	)

FINANCING ACTIVITIES
Net transfers from (to) Parent		(237	)		(239	)		476			—			—
Payment on loan between subsidiaries		—			147			(147	)		—			—
Intercompany dividends		—			19			(19	)		—			—
Principal payments on debt		(250	)		(12	)		—			—			(262	)
Proceeds from stock issuances		64			—			—			—			64
Excess tax benefit on the exercise of stock options		11			—			—			—			11
Dividends paid		(113	)		—			—			—			(113	)
Other, net		—			(1	)		1			—			—


CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(525	)		(86	)		311			—			(300	)


Effect of exchange rate changes on cash		—			11			23			—			34

Net (decrease) increase in cash and cash equivalents		(678	)		21			71			(7	)		(593	)
Cash and cash equivalents at beginning of period		1,310			258			443			(59	)		1,952


Cash and cash equivalents at end of period	$	632		$	279		$	514		$	(66	)	$	1,359

- 21 -

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of February 29, 2012, and the related condensed consolidated statements of income for the three-month and nine-month periods ended February 29, 2012 and February 28, 2011 and the condensed consolidated statements of cash flows for the nine-month periods ended February 29, 2012 and February 28, 2011. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2011, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for the year then ended not presented herein, and in our report dated July 12, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee

March 23, 2012

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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (“FedEx”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2011 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments. Our FedEx Services segment provides sales, marketing and information technology support to our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (“FedEx Office”) and provides customer service, technical support and billing and collection services through FedEx TechConnect, Inc. (“FedEx TechConnect”). See “Reportable Segments” for further discussion.

The key indicators necessary to understand our operating results include:

•

the overall customer demand for our various services;

•

the volumes of transportation services provided through our networks, primarily measured by our average daily volume and shipment weight;

•

the mix of services purchased by our customers;

•

the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per hundredweight for LTL freight shipments);

•

our ability to manage our cost structure (capital expenditures and operating expenses) to match shifting volume levels; and

•

the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.

The majority of our operating expenses are directly impacted by revenue and volume levels. Accordingly, we expect these operating expenses to fluctuate on a year-over-year basis consistent with the change in revenues and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than changes in revenues and volume.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2012 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.

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RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the periods ended February 29, 2012 and February 28, 2011:


	Three Months Ended						Percent			Nine Months Ended						Percent
	2012			2011			Change			2012			2011			Change
Revenues	$	10,564		$	9,663			9		$	31,672		$	28,752			10
Operating income		813			393			107			2,330			1,490			56
Operating margin		7.7	%		4.1	%		360	bp		7.4	%		5.2	%		220	bp
Net income	$	521		$	231			126		$	1,482		$	894			66
Diluted earnings per share	$	1.65		$	0.73			126		$	4.67		$	2.82			66

The following table shows changes in revenues and operating income by reportable segment for the periods ended February 29, 2012 compared to February 28, 2011 (dollars in millions):


	Change in Revenues						Percent Change in Revenue					Change in Operating Income (Loss)				Percent Change in Operating Income (Loss)
	Three Months Ended			Nine Months Ended			Three Months Ended		Nine Months Ended			Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
FedEx Express segment	$	494		$	1,765			8		10		$	171	$	180		96		23
FedEx Ground segment		296			875			14		14			140		362		43		40
FedEx Freight segment		111			285			10		8			109		298		99		137
FedEx Services segment		4			(7	)		1		(1	)		—		—		—		—
Other and eliminations		(4	)		2			NM		NM			—		—		—		—


	$	901		$	2,920			9		10		$	420	$	840		107		56

Overview

Strong earnings growth at the FedEx Ground segment and ongoing yield management programs at all of our transportation segments resulted in improved results in the third quarter and nine months of 2012, despite continued slow economic growth. Our year-over-year comparisons for the third quarter and nine months of 2012 were impacted by certain one-time items, which are described below.

Our third quarter of 2012 results include the reversal of a $66 million reserve associated with the ATA Airlines lawsuit at FedEx Express. This reserve was initially recorded in the second quarter of 2011 when a loss was deemed probable as a result of an adverse decision in the lawsuit. We reversed this reserve during the third quarter of 2012 when FedEx Express won the appeal of this case and the court overturned the prior ruling. In addition, the third quarter and nine months of 2011 include one-time costs associated with the combination of our FedEx Freight and FedEx National LTL operations of $43 million in the third quarter of 2011 and $130 million in the nine months of 2011. Collectively, these items favorably impacted our year-over-year results by an estimated $0.18 per diluted share in the third quarter of 2012 and $0.45 per diluted share in the nine months of 2012, after considering the effect of variable incentive compensation accruals.

- 24 -

During the third quarter and nine months of 2012 our results benefited from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust. Our year-over-year results for the third quarter and nine months of 2012 also benefited from milder winter weather, as our third quarter 2011 results were negatively impacted by unusually severe winter weather.

At our FedEx Ground segment, revenues and operating income increased in the third quarter and nine months of 2012 due to increased yields and strong demand for FedEx Home Delivery and FedEx SmartPost services. In addition to the benefits from the fuel surcharge timing lag, milder winter weather and the reversal of the ATA Airlines matter (described above), FedEx Express revenues and operating income benefited from higher U.S. domestic package and International Priority (“IP”) package yields in the third quarter and nine months of 2012. Slow global economic growth driven by constrained consumer demand resulted in package volume declines in U.S. domestic and IP services during the third quarter and nine months of 2012 at FedEx Express, while international domestic volumes increased due to acquisitions in India and Mexico. Despite a slight operating loss during the third quarter of 2012, the operating results at our FedEx Freight segment improved significantly for the third quarter and nine months of 2012 due to higher fuel surcharges, base yield growth and improved operational efficiencies.

The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) over the five most recent quarters:

LOGO

⁽¹⁾	Includes international domestic operations of acquisitions in India (February 2011) and Mexico (July 2011).

⁽²⁾	Package statistics do not include the operations of FedEx SmartPost.

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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends over the five most recent quarters:

LOGO

⁽¹⁾	Includes international domestic operations of acquisitions in India (February 2011) and Mexico (July 2011).

⁽²⁾	Package statistics do not include the operations of FedEx SmartPost.

Revenue

Revenues increased 9% in the third quarter and 10% in the nine months of 2012 due to yield increases across all of our transportation segments. Revenues at FedEx Express increased 8% during the third quarter and 10% in the nine months of 2012 primarily due to an increase in yield, partially offset by decreases in U.S. domestic and IP volumes. At the FedEx Ground segment, revenues increased 14% in both the third quarter and nine months of 2012 due to yield and volume growth at both FedEx Ground and FedEx SmartPost. Revenues at FedEx Freight increased 10% during the third quarter of 2012 and 8% in the nine months of 2012 due to higher fuel surcharges and yield management actions, despite a decrease in volume for the nine months of 2012.

- 26 -

Operating Income

The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended February 29, 2012 and February 28, 2011:

		September 30,		September 30,		September 30,		September 30,
	Three Months Ended				Nine Months Ended
	2012		2011		2012		2011
Operating expenses:
Salaries and employee benefits	$	4,021	$	3,828	$	12,007	$	11,410
Purchased transportation		1,619		1,446		4,713		4,163
Rentals and landing fees		628		621		1,871		1,850
Depreciation and amortization		543		493		1,570		1,474
Fuel		1,233		1,049		3,677		2,874
Maintenance and repairs		456		480		1,518		1,470
Impairment and other charges⁽¹⁾		—		21		—		88
Other⁽²⁾		1,251		1,332		3,986		3,933

Total operating expenses	$	9,751	$	9,270	$	29,342	$	27,262

⁽¹⁾	Represents charges associated with the combination of FedEx Freight and FedEx National LTL operations, effective January 30, 2011.

⁽²⁾	The third quarter of 2012 includes the reversal of a $66 million legal reserve associated with the ATA Airlines lawsuit. The reserve was initially recorded in the second quarter of 2011 (See Note 8 of the accompanying unaudited condensed consolidated financial statements).

		September 30,			September 30,			September 30,			September 30,
	Percent of Revenue						Percent of Revenue
	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	2012			2011			2012			2011
Operating expenses:
Salaries and employee benefits		38.1	%		39.6	%		37.9	%		39.7	%
Purchased transportation		15.3			15.0			14.9			14.5
Rentals and landing fees		6.0			6.4			5.9			6.4
Depreciation and amortization		5.1			5.1			4.9			5.1
Fuel		11.7			10.8			11.6			10.0
Maintenance and repairs		4.3			5.0			4.8			5.1
Impairment and other charges⁽¹⁾		—			0.2			—			0.3
Other⁽²⁾		11.8			13.8			12.6			13.7

Total operating expenses		92.3			95.9			92.6			94.8


Operating margin		7.7	%		4.1	%		7.4	%		5.2	%

⁽¹⁾	Represents charges associated with the combination of FedEx Freight and FedEx National LTL operations, effective January 30, 2011.

⁽²⁾	The third quarter of 2012 includes the reversal of a $66 million legal reserve associated with the ATA Airlines lawsuit. The reserve was initially recorded in the second quarter of 2011 (see Note 8 of the accompanying unaudited condensed consolidated financial statements).

Operating income and operating margin increased in both the third quarter and nine months of 2012 as a result of increased yields due to higher fuel surcharges and our yield management programs. In addition, our year-over-year comparisons were favorably impacted in the third quarter and nine months of 2012 by the one-time items described in the “Overview” section above. Our third quarter of 2012 results also benefited from milder winter weather, as our third quarter 2011 results were negatively impacted by unusually severe winter weather.

- 27 -

Salaries and employee benefits increased 5% in both the third quarter and the nine months of 2012 primarily due to higher incentive compensation and the full reinstatement of 401(k) company-matching contributions effective January 1, 2011. Purchased transportation costs increased 12% in the third quarter and 13% in the nine months of 2012 due to higher fuel costs and volume growth at FedEx Ground, costs associated with the expansion of our freight forwarding business at FedEx Trade Networks and higher utilization of third-party transportation providers in international locations primarily due to business acquisitions at FedEx Express.

The following graph for our transportation segments shows our average cost of jet and vehicle fuel per gallon for the five most recent quarters:

LOGO

Fuel expense increased 18% during the third quarter of 2012 and 28% for the nine months of 2012 due to increases in the average price per gallon of fuel. Our fuel surcharges, which are more fully described in the “Quantitative and Qualitative Disclosures About Market Risk” section of this MD&A, have a timing lag and are designed to pass through the price of fuel not included in our base shipping rates to our customers. Based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared to changes in fuel surcharges, fuel surcharges more than offset incremental fuel costs for the third quarter and nine months of 2012.

Our analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express and FedEx Ground services. However, this analysis does not consider the negative effects that fuel surcharge levels may have on our business, including reduced demand and shifts by our customers to lower-yielding services. While fluctuations in fuel surcharge rates can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges we obtain for these services and the level of pricing discounts offered. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative fuel surcharge rates in effect for the third quarter and nine months of 2012 and 2011 in the accompanying discussions of each of our transportation segments.

Income Taxes

Our effective tax rate was 34.1% for the third quarter of 2012 and 35.4% for the nine months of 2012, compared with 35.7% for the third quarter of 2011 and 36.1% for the nine months of 2011. Our tax rates for both periods in 2012 were favorably impacted by the conclusion of the Internal Revenue Service (“IRS”) audit of our 2007-2009 consolidated income tax returns noted below. For the remainder of 2012, we expect our effective tax rate to be between 36.0% and 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

- 28 -

As of February 29, 2012, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2011. The IRS completed its audit of our 2007 through 2009 consolidated U.S. income tax returns, and the result of the audit did not have a material effect on our consolidated financial statements.

We file income tax returns in the U.S. and various U.S. states and foreign jurisdictions. It is reasonably possible that certain other U.S. federal, U.S. state and foreign jurisdiction income tax return proceedings could be completed during the next 12 months and result in a change in our balance of unrecognized tax benefits. An estimate of the range of the change cannot be made at this time; however, the expected impact of any changes would not be material to our consolidated financial statements.

Business Acquisition

On July 25, 2011, we completed our acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million in cash from operations. The financial results of the acquired business are included in the FedEx Express segment from the date of acquisition and were not material to our results of operations or financial condition. Substantially all of the purchase price was allocated to goodwill, which was entirely attributed to our FedEx Express reporting unit.

Outlook

We expect strong yields across all our transportation segments to support revenue and earnings growth in the fourth quarter of 2012. Our expectations for the fourth quarter of 2012 are based on current global economic conditions and a stable fuel price environment.

We are evaluating actions to adjust our FedEx Express U.S. domestic network capacity and improve efficiency. However, we remain committed to investing in critical long-term strategic projects focused on improving our cost structure and enhancing and broadening our service offerings to position us for stronger growth as global economic conditions improve. For additional details on key 2012 capital projects, refer to the “Liquidity Outlook” section of this MD&A.

All of our businesses operate in a competitive pricing environment, exacerbated by continuing volatile fuel prices, which impact our fuel surcharge levels. Historically, our fuel surcharges have largely offset incremental fuel costs; however, volatility in fuel costs may impact earnings because adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, the trailing impact of adjustments to our fuel surcharges can significantly affect our earnings either positively or negatively in the short-term.

As described in Note 8 of the accompanying unaudited condensed consolidated financial statements and the “Evolution of Independent Contractor Model” section of our FedEx Ground segment MD&A, we are involved in a number of lawsuits and other proceedings that challenge the status of FedEx Ground’s owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its contractors. The nature, timing and amount of any changes are dependent on the outcome of numerous future events. We cannot reasonably estimate the potential impact of any such changes or a meaningful range of potential outcomes, although they could be material. However, we do not believe that any such changes will impair our ability to operate and profitably grow our FedEx Ground business.

See “Forward-Looking Statements” for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.

NEW ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. See our Annual Report for a discussion of the impact of new accounting guidance issued but not yet effective as of May 31, 2011. We believe that no new accounting guidance was adopted or issued during the nine months of 2012 that is relevant to the readers of our financial statements.

- 29 -

However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

REPORTABLE SEGMENTS

FedEx Express, FedEx Ground and FedEx Freight represent our major service lines and, along with FedEx Services, form the core of our reportable segments. Our reportable segments include the following businesses:


FedEx Express Segment		FedEx Express (express transportation)
		FedEx Trade Networks (global trade services)
		FedEx SupplyChain Systems (logistics services)

FedEx Ground Segment		FedEx Ground (small-package ground delivery)
		FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment		FedEx Freight (LTL freight transportation)
		FedEx Custom Critical (time-critical transportation)

FedEx Services Segment		FedEx Services (sales, marketing and information technology functions)
		FedEx TechConnect (customer service, technical support, billings and collections)
		FedEx Office (document and business services and package acceptance)

FEDEX SERVICES SEGMENT

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments reflects the allocations from the FedEx Services segment to the respective transportation segments. The “Intercompany charges” caption also includes charges and credits for administrative services provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe these allocations approximate the net cost of providing these functions.

- 30 -

OTHER INTERSEGMENT TRANSACTIONS

FEDEX EXPRESS SEGMENT

The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the periods ended February 29, 2012 and February 28, 2011:


	Three Months Ended						Percent			Nine Months Ended						Percent
	2012			2011			Change			2012			2011			Change
Revenues:
Package:
U.S. overnight box	$	1,619		$	1,514			7		$	4,882		$	4,494			9
U.S. overnight envelope		426			425			—			1,298			1,273			2
U.S. deferred		792			743			7			2,254			2,070			9

Total U.S. domestic package revenue		2,837			2,682			6			8,434			7,837			8

International priority⁽¹⁾		2,079			1,974			5			6,448			5,957			8
International domestic⁽²⁾		210			158			33			634			471			35

Total package revenue		5,126			4,814			6			15,516			14,265			9
Freight:
U.S.		647			565			15			1,866			1,618			15
International priority⁽³⁾		443			412			8			1,362			1,253			9
International airfreight		77			68			13			228			207			10

Total freight revenue		1,167			1,045			12			3,456			3,078			12
Other⁽⁴⁾		250			190			32			746			610			22

Total revenues		6,543			6,049			8			19,718			17,953			10
Operating expenses:
Salaries and employee benefits		2,410			2,321			4			7,200			6,832			5
Purchased transportation		449			386			16			1,346			1,143			18
Rentals and landing fees		425			424			—			1,269			1,254			1
Depreciation and amortization		299			267			12			869			787			10
Fuel		1,078			898			20			3,194			2,454			30
Maintenance and repairs		303			330			(8	)		1,037			1,002			3
Intercompany charges		547			498			10			1,643			1,523			8
Other⁽⁵⁾		683			747			(9	)		2,181			2,159			1

Total operating expenses		6,194			5,871			6			18,739			17,154			9

Operating income	$	349		$	178			96		$	979		$	799			23


Operating margin		5.3	%		2.9	%		240	bp		5.0	%		4.5	%		50	bp

⁽¹⁾	International priority package revenues include our international overnight package, international overnight letter and international economy services.

⁽²⁾	International domestic revenues include our international intra-country express operations, including acquisitions in India (February 2011) and Mexico (July 2011).

⁽³⁾	International priority freight revenues include our international priority freight and international economy freight services.

⁽⁴⁾	Other revenues include FedEx Trade Networks and FedEx SupplyChain Systems.

⁽⁵⁾	The third quarter of 2012 includes the reversal of a $66 million legal reserve associated with the ATA Airlines lawsuit. The reserve was initially recorded in the second quarter of 2011 (see Note 8 of the accompanying unaudited condensed consolidated financial statements).

- 31 -

		September 30,			September 30,			September 30,			September 30,
	Percent of Revenue						Percent of Revenue
	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	2012			2011			2012			2011
Operating expenses:
Salaries and employee benefits		36.8	%		38.4	%		36.5	%		38.0	%
Purchased transportation		6.9			6.4			6.8			6.3
Rentals and landing fees		6.5			7.0			6.4			7.0
Depreciation and amortization		4.6			4.4			4.4			4.4
Fuel		16.5			14.8			16.2			13.7
Maintenance and repairs		4.6			5.5			5.3			5.6
Intercompany charges		8.4			8.2			8.3			8.5
Other⁽¹⁾		10.4			12.4			11.1			12.0

Total operating expenses		94.7			97.1			95.0			95.5


Operating margin		5.3	%		2.9	%		5.0	%		4.5	%

⁽¹⁾	The third quarter of 2012 includes the reversal of a $66 million legal reserve associated with the ATA Airlines lawsuit. The reserve was initially recorded in the second quarter of 2011 (see Note 8 of the accompanying unaudited condensed consolidated financial statements).

- 32 -

The following table compares selected statistics (in thousands, except yield amounts) for the periods ended February 29, 2012 and February 28, 2011:


	Three Months Ended				Percent Change			Nine Months Ended				Percent Change
	2012		2011		Percent Change			2012		2011		Percent Change
Package Statistics⁽¹⁾
Average daily package volume (ADV):
U.S. overnight box		1,171		1,218		(4	)		1,158		1,194		(3	)
U.S. overnight envelope		581		631		(8	)		586		627		(7	)
U.S. deferred		923		952		(3	)		863		887		(3	)

Total U.S. domestic ADV		2,675		2,801		(4	)		2,607		2,708		(4	)

International priority⁽²⁾		552		558		(1	)		555		569		(2	)
International domestic⁽³⁾		508		337		51			493		338		46

Total ADV		3,735		3,696		1			3,655		3,615		1

Revenue per package (yield):
U.S. overnight box	$	21.93	$	20.05		9		$	22.08	$	19.81		11
U.S. overnight envelope		11.65		10.87		7			11.59		10.68		9
U.S. deferred		13.62		12.60		8			13.67		12.29		11
U.S. domestic composite		16.83		15.45		9			16.94		15.23		11
International priority⁽²⁾		59.78		57.07		5			60.88		55.06

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