Edgar Filing: FEDEX CORP

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

FOR THE QUARTERLY PERIOD ENDED November 30, 2016

☐

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☒ 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.


Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
	(Do not check if a smaller reporting company)

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

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


Common Stock		Outstanding Shares at December 20, 2016
Common Stock, par value $0.10 per share		266,509,290

FEDEX CORPORATION

INDEX


	PAGE
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Condensed Consolidated Balance Sheets November 30, 2016 and May 31, 2016		3

Condensed Consolidated Statements of Income Three and Six Months Ended November 30, 2016 and 2015		5

Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended November 30, 2016 and 2015		6

Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, 2016 and 2015		7

Notes to Condensed Consolidated Financial Statements		8

Report of Independent Registered Public Accounting Firm		28

ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition		29

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		58

ITEM 4. Controls and Procedures		58

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		59

ITEM 1A. Risk Factors		59

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		59

ITEM 6. Exhibits		59

Signature		61

Exhibit Index		E-1

Exhibit 10.1

Exhibit 10.2

Exhibit 10.3

Exhibit 10.4

Exhibit 10.5

Exhibit 10.6

Exhibit 10.7

Exhibit 10.8

Exhibit 10.9

Exhibit 10.10

Exhibit 12.1

Exhibit 15.1

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

Exhibit 101 - Instance Document

Exhibit 101 - Schema Document

Exhibit 101 - Calculation Linkbase Document

Exhibit 101 - Presentation Linkbase Document

Exhibit 101 - Definition Linkbase Document

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)


	November 30,
	2016		May 31,
	(Unaudited)		2016
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	3,059	$	3,534
Receivables, less allowances of $218 and $178		7,575		7,252
Spare parts, supplies and fuel, less allowances of $225 and $218		517		496
Prepaid expenses and other		901		707

Total current assets		12,052		11,989

PROPERTY AND EQUIPMENT, AT COST		48,918		47,018
Less accumulated depreciation and amortization		23,611		22,734

Net property and equipment		25,307		24,284

OTHER LONG-TERM ASSETS
Goodwill		6,921		6,747
Other assets		2,068		2,939

Total other long-term assets		8,989		9,686

	$	46,348	$	45,959

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)


	November 30,
	2016			May 31,
	(Unaudited)			2016
LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES
Current portion of long-term debt	$	43		$	29
Accrued salaries and employee benefits		1,765			1,972
Accounts payable		2,954			2,944
Accrued expenses		3,045			3,063

Total current liabilities		7,807			8,008

LONG-TERM DEBT, LESS CURRENT PORTION		13,553			13,733

OTHER LONG-TERM LIABILITIES
Deferred income taxes		2,148			1,567
Pension, postretirement healthcare and other benefit obligations		5,845			6,227
Self-insurance accruals		1,349			1,314
Deferred lease obligations		547			400
Deferred gains, principally related to aircraft transactions		145			155
Other liabilities		423			771

Total other long-term liabilities		10,457			10,434

COMMITMENTS AND CONTINGENCIES

COMMON STOCKHOLDERS’ INVESTMENT
Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of November 30, 2016 and May 31, 2016		32			32
Additional paid-in capital		2,946			2,892
Retained earnings		19,410			18,371
Accumulated other comprehensive loss		(425	)		(169	)
Treasury stock, at cost		(7,432	)		(7,342	)

Total common stockholders’ investment		14,531			13,784

	$	46,348		$	45,959

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)


	Three Months Ended November 30,						Six Months Ended November 30,
	2016			2015			2016			2015
REVENUES	$	14,931		$	12,453		$	29,594		$	24,732

OPERATING EXPENSES:
Salaries and employee benefits		5,353			4,570			10,664			9,095
Purchased transportation		3,431			2,538			6,671			4,882
Rentals and landing fees		802			682			1,592			1,377
Depreciation and amortization		740			653			1,479			1,301
Fuel		658			615			1,308			1,327
Maintenance and repairs		579			529			1,177			1,077
Other		2,201			1,729			4,272			3,392

		13,764			11,316			27,163			22,451

OPERATING INCOME		1,167			1,137			2,431			2,281

OTHER INCOME (EXPENSE):
Interest, net		(119	)		(74	)		(232	)		(137	)
Other, net		30			(8	)		21			(5	)

		(89	)		(82	)		(211	)		(142	)

INCOME BEFORE INCOME TAXES		1,078			1,055			2,220			2,139

PROVISION FOR INCOME TAXES		378			364			805			756

NET INCOME	$	700		$	691		$	1,415		$	1,383

EARNINGS PER COMMON SHARE:
Basic	$	2.63		$	2.47		$	5.32		$	4.92

Diluted	$	2.59		$	2.44		$	5.24		$	4.86


DIVIDENDS DECLARED PER COMMON SHARE	$	0.40		$	0.25		$	1.20		$	0.75

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)


	Three Months Ended November 30,						Six Months Ended November 30,
	2016			2015			2016			2015
NET INCOME	$	700		$	691		$	1,415		$	1,383

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments, net of tax of $21, $4, $16 and $17		(230	)		(33	)		(218	)		(171	)
Amortization of prior service credit, net of tax of $11, $11, $22, and $18		(19	)		(18	)		(38	)		(42	)

		(249	)		(51	)		(256	)		(213	)


COMPREHENSIVE INCOME	$	451		$	640		$	1,159		$	1,170

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)


	Six Months Ended November 30,
	2016			2015
Operating Activities:
Net income	$	1,415		$	1,383
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		1,479			1,301
Provision for uncollectible accounts		76			57
Stock-based compensation		93			86
Deferred income taxes and other noncash items		320			(48	)
Gain from sale of investment		(35	)		—
Changes in assets and liabilities:
Receivables		(513	)		(263	)
Other assets		(250	)		(113	)
Accounts payable and other liabilities		67			66
Other, net		(17	)		(15	)

Cash provided by operating activities		2,635			2,454

Investing Activities:
Capital expenditures		(2,681	)		(2,562	)
Proceeds from asset dispositions and other		100			12

Cash used in investing activities		(2,581	)		(2,550	)

Financing Activities:
Principal payments on debt		(43	)		(17	)
Proceeds from debt issuance		—			1,238
Proceeds from stock issuances		164			62
Dividends paid		(213	)		(141	)
Purchase of treasury stock		(334	)		(1,101	)
Other, net		(5	)		(8	)

Cash (used in) provided by financing activities		(431	)		33

Effect of exchange rate changes on cash		(98	)		(53	)

Net decrease in cash and cash equivalents		(475	)		(116	)
Cash and cash equivalents at beginning of period		3,534			3,763

Cash and cash equivalents at end of period	$	3,059		$	3,647

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, 2016 (“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 November 30, 2016, the results of our operations for the three- and six-month periods ended November 30, 2016 and 2015 and cash flows for the six-month periods ended November 30, 2016 and 2015. Operating results for the three- and six-month periods ended November 30, 2016 are not necessarily indicative of the results that may be expected for the year ending May 31, 2017.

RECLASSIFICATIONS. Reclassifications have been made to the May 31, 2016 condensed consolidated balance sheets to conform to the current year’s presentation of debt issuance costs. See recent accounting guidance below for additional information.

BUSINESS ACQUISITION. On May 25, 2016, we acquired TNT Express B.V. (“TNT Express”) for €4.4 billion (approximately $4.9 billion). Cash acquired in the acquisition was approximately €250 million ($280 million). As of November 30, 2016, $26 million of shares associated with the transaction remained untendered, a decrease of $261 million since May 31, 2016. The remaining untendered shares are included in the “Other liabilities” caption of our consolidated balance sheets. We funded the acquisition with proceeds from our April 2016 debt issuance and existing cash balances. The financial results of this business are included in the FedEx Express group and TNT Express segment from the date of acquisition.

TNT Express collects, transports and delivers documents, parcels and freight to over 200 countries. This strategic acquisition broadens our portfolio of international transportation solutions by combining TNT Express’s strong European road platform with FedEx Express’s strength in other regions globally.

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This acquisition is included in the accompanying balance sheets based on an allocation of the purchase price (summarized in the table below, in millions), which reflect updates to property and equipment and identifiable intangible assets from the May 31, 2016 and August 31, 2016 estimates, resulting in a net increase to goodwill of $382 million. These updates reflect the valuation work completed to date by third party experts, refinements to cash flow estimates and the receipt of other information. Given the timing and complexity of the acquisition, the presentation of TNT Express in our financial statements, including the allocation of the purchase price, continues to be preliminary and will likely change in future periods, perhaps significantly, as additional information concerning the fair value estimates of the assets acquired and liabilities assumed as of the acquisition date is obtained during the remainder of the fiscal year. Due to the global scope of TNT Express’s operations and the decentralized nature of the accounting records, the measurement periods for fixed assets, customer intangibles and certain liabilities are longer than for the other categories noted below. We will complete our purchase price allocation no later than the fourth quarter of 2017.


Current assets⁽¹⁾	$	1,920
Property and equipment		993
Goodwill		3,346
Identifiable intangible assets		530
Other non-current assets		295
Current liabilities ⁽²⁾		(1,644	)
Long-term liabilities		(546	)

Total purchase price	$	4,894

⁽¹⁾	Primarily accounts receivable and cash.

⁽²⁾	Primarily accounts payable and other accrued expenses.

As a result of this acquisition, we recognized a preliminary value of $3.3 billion of goodwill, which is primarily attributable to the TNT Express workforce and the expected benefits from synergies of the combination with existing businesses and growth opportunities. The majority of the purchase price allocated to goodwill is not deductible for income tax purposes.

The purchase price was preliminarily allocated to the identifiable intangible assets acquired as follows (in millions):


Intangible assets with finite lives
Customer relationships (12-year useful life)	$	420
Technology (4-year useful life)		30
Trademarks (4-year useful life)		80

Total intangible assets	$	530

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (“FedEx Express”), which represent a small number of FedEx Express’s total employees, are employed under a collective bargaining agreement that took effect on November 2, 2015. This collective bargaining agreement is scheduled to become amendable in November 2021, after a six-year term. In addition to our pilots at FedEx Express, GENCO Distribution System, Inc. (“GENCO”) has a small number of employees who are members of unions, and certain 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.

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Our stock-based compensation expense was $36 million for the three-month period ended November 30, 2016 and $93 million for the six-month period ended November 30, 2016. Our stock-based compensation expense was $33 million for the three-month period ended November 30, 2015 and $86 million for the six-month period ended November 30, 2015. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

RECENT ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. These matters are described in our Annual Report.

During the first quarter of 2017, we retrospectively adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) to simplify the presentation of debt issuance costs. This new guidance requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, rather than as an asset. This new guidance had a minimal impact on our accounting and financial reporting.

On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States (and International Financial Reporting Standards) which has been subsequently updated to defer the effective date of the new revenue recognition standard by one year. This standard will be effective for us beginning in fiscal 2019. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. Based on our current assessment, we do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems.

On February 25, 2016, the FASB issued the new lease accounting standard which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. We are currently evaluating the impact of this new standard on our financial reporting, but recognizing the lease liability and related right-of-use asset will significantly impact our balance sheet. These changes will be effective for our fiscal year beginning June 1, 2019 (fiscal 2020), with a modified retrospective adoption method to the beginning of 2018.

During the second quarter of 2017, we adopted the Accounting Standards Update issued by the FASB in March 2016 to simplify the accounting for share-based payment transactions. The new guidance requires companies to recognize the income tax effects of awards that vest or are settled as income tax expense or benefit in the income statement as opposed to additional paid-in capital as is current practice. The guidance also provides clarification of the presentation of certain components of share-based awards in the statement of cash flows. Additionally, the guidance allows companies to make a policy election to account for forfeitures either upon occurrence or by estimating forfeitures. We have elected to continue estimating forfeitures expected to occur in order to determine the amount of compensation cost to be recognized each period and to apply the cash flow classification guidance prospectively. Excess tax benefits are now classified as an operating activity rather than a financing activity. The adoption of the new standard had a benefit of $21 million to net income and $0.07 per diluted share for the second quarter of 2017. The first quarter of 2017 has not been recast due to immateriality.

We believe that no other new accounting guidance was adopted or issued during the first half of 2017 that is relevant to the readers of our financial statements.

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TREASURY SHARES. In January 2016, our Board of Directors authorized a share repurchase program of up to 25 million shares. Shares under the current repurchase program may be repurchased from time to time in the open market or in privately negotiated transactions. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of FedEx common stock and general market conditions. No time limit was set for the completion of the program, and the program may be suspended or discontinued at any time.

During the second quarter of 2017, we repurchased 0.7 million shares of FedEx common stock at an average price of $172.25 per share for a total of $112 million. During the first half of 2017, we repurchased 2.0 million shares of FedEx common stock at an average price of $164.04 per share for a total of $334 million. As of November 30, 2016, 16.9 million shares remained under the share repurchase authorization.

DIVIDENDS DECLARED PER COMMON SHARE. On November 18, 2016, our Board of Directors declared a quarterly dividend of $0.40 per share of common stock. The dividend will be paid on January 3, 2017 to stockholders of record as of the close of business on December 12, 2016. 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) Accumulated Other Comprehensive Income (Loss)

The following table provides changes in accumulated other comprehensive loss (“AOCI”), net of tax, reported in our unaudited condensed consolidated financial statements for the periods ended November 30 (in millions; amounts in parentheses indicate debits to AOCI):


	Three Months Ended						Six Months Ended
	2016			2015			2016			2015
Foreign currency translation loss:
Balance at beginning of period	$	(502	)	$	(391	)	$	(514	)	$	(253	)
Translation adjustments		(230	)		(33	)		(218	)		(171	)

Balance at end of period		(732	)		(424	)		(732	)		(424	)

Retirement plans adjustments:
Balance at beginning of period		326			401			345			425
Reclassifications from AOCI		(19	)		(18	)		(38	)		(42	)

Balance at end of period		307			383			307			383

Accumulated other comprehensive lossat end of period	$	(425	)	$	(41	)	$	(425	)	$	(41	)

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The following table presents details of the reclassifications from AOCI for the periods ended November 30 (in millions; amounts in parentheses indicate debits to earnings):


	Amount Reclassified from AOCI												Affected Line Item in the Income Statement
	Three Months Ended						Six Months Ended
	2016			2015			2016			2015
Amortization of retirement plans prior service credits, before tax	$	30		$	29		$	60		$	60		Salaries and employee benefits
Income tax benefit		(11	)		(11	)		(22	)		(18	)	Provision for income taxes

AOCI reclassifications, net of tax	$	19		$	18		$	38		$	42		Net income

(3) Financing Arrangements

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

We have a five-year $1.75 billion revolving credit facility that expires in November 2020. The facility, which includes a $500 million letter of credit sublimit, is available to finance our operations and other cash flow needs. The agreement contains a financial covenant, which requires us to maintain a ratio of debt to consolidated earnings (excluding non-cash pension mark-to-market adjustments and non-cash asset impairment charges) before interest, taxes, depreciation and amortization (“adjusted EBITDA”) of not more than 3.5 to 1.0, calculated as of the end of the applicable quarter on a rolling four quarters basis. The ratio of our debt to adjusted EBITDA was 1.8 to 1.0 at November 30, 2016. We believe this covenant is the 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 financial 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 November 30, 2016, no commercial paper was outstanding. However, we had a total of $319 million in letters of credit outstanding at November 30, 2016, with $181 million of the letter of credit sublimit unused under our revolving credit facility.

Long-term debt, exclusive of capital leases, had carrying values of $13.5 billion at November 30, 2016 and $13.7 billion at May 31, 2016, compared with estimated fair values of $13.8 billion at November 30, 2016 and $14.3 billion at May 31, 2016. The annualized weighted average interest rate on long-term debt was 3.6% for the six months ended November 30, 2016. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

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(4) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the periods ended November 30 was as follows (in millions, except per share amounts):


	Three Months Ended				Six Months Ended
	2016		2015		2016		2015
Basic earnings per common share:
Net earnings allocable to common shares⁽¹⁾	$	700	$	690	$	1,414	$	1,382
Weighted-average common shares		266		279		266		281

Basic earnings per common share	$	2.63	$	2.47	$	5.32	$	4.92


Diluted earnings per common share:
Net earnings allocable to common shares⁽¹⁾	$	700	$	690	$	1,414	$	1,382

Weighted-average common shares		266		279		266		281
Dilutive effect of share-based awards		4		4		4		3

Weighted-average diluted shares		270		283		270		284
Diluted earnings per common share	$	2.59	$	2.44	$	5.24	$	4.86


Anti-dilutive options excluded from diluted earnings per common share		5.1		3.7		5.1		3.6

⁽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 November 30 were as follows (in millions):


	Three Months Ended				Six Months Ended
	2016		2015		2016		2015
Defined benefit pension plans	$	58	$	54	$	116	$	107
Defined contribution plans		112		103		231		205
Postretirement healthcare plans		19		20		38		41

	$	189	$	177	$	385	$	353

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Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended November 30 included the following components (in millions):


	Three Months Ended						Six Months Ended
Pension Plans	2016			2015			2016			2015
Service cost	$	180		$	165		$	360		$	331
Interest cost		293			295			586			590
Expected return on plan assets		(386	)		(377	)		(772	)		(754	)
Amortization of prior service credit and other		(29	)		(29	)		(58	)		(60	)

	$	58		$	54		$	116		$	107


	Three Months Ended						Six Months Ended
Postretirement Healthcare Plans	2016			2015			2016			2015
Service cost	$	9		$	10		$	18		$	20
Interest cost		10			10			20			21

	$	19		$	20		$	38		$	41

Contributions to our tax qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the six-month periods ended November 30 were as follows (in millions):


	2016		2015
Required	$	250	$	8
Voluntary		250		322

	$	500	$	330

In December 2016, we made $250 million in contributions to our U.S. Pension Plans, of which $178 million was required. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

(6) Business Segment Information

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 include FedEx Express, the world’s largest express transportation company; TNT Express, an international express, small-package ground delivery and freight transportation company that was acquired near the end of our 2016 fourth quarter; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American 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.

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Our reportable segments include the following businesses:


FedEx Express Group:

FedEx Express Segment		FedEx Express (express transportation)
		FedEx Trade Networks (air and ocean freight forwarding, customs brokerage and cross-border enablement technology and solutions)
		FedEx SupplyChain Systems (logistics services)

TNT Express Segment		TNT Express (international express transportation, small-package ground delivery and freight transportation)

FedEx Ground Segment		FedEx Ground (small-package ground delivery)
		GENCO (third-party logistics)

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

FedEx Services Segment		FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services and back-office functions)
		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 that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express and for TNT Express, some of these functions are performed on a regional basis and reported in the applicable segment in their natural expense line items. The FedEx Services segment includes: FedEx Services, which provides sales, marketing, information technology, communications, customer service, technical support, billing and collection services for U.S. customers of our major business units and certain back-office support to our other companies; 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, which are an immaterial component of our allocations, are allocated to FedEx Express and FedEx Ground. 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.

Operating expenses for each of our transportation segments include the allocations from the FedEx Services segment to the respective transportation segments. These allocations also include charges and credits for administrative services provided between operating companies. 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. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.

- 15 -

Eliminations, Corporate and Other

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 to our unaudited condensed consolidated financial statement totals for the periods ended November 30 (in millions):


	Three Months Ended						Six Months Ended
	2016			2015			2016			2015
Revenues
FedEx Express segment	$	6,743		$	6,588		$	13,399		$	13,179
TNT Express segment		1,899			N/A			3,703			N/A
FedEx Ground segment		4,419			4,050			8,709			7,880
FedEx Freight segment		1,597			1,547			3,255			3,148
FedEx Services segment		414			403			809			793
Eliminations and other		(141	)		(135	)		(281	)		(268	)

	$	14,931		$	12,453		$	29,594		$	24,732

Operating Income
FedEx Express segment	$	636		$	622		$	1,260		$	1,167
TNT Express segment		70			N/A			56			N/A
FedEx Ground segment		465			526			1,075			1,063
FedEx Freight segment		88			101			223			233
Eliminations, corporate and other		(92	)		(112	)		(183	)		(182	)

	$	1,167		$	1,137		$	2,431		$	2,281

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(7) Commitments

As of November 30, 2016, our purchase commitments under various contracts for the remainder of 2017 and annually thereafter were as follows (in millions):


	Aircraft andAircraft-Related		Other⁽¹⁾		Total
2017 (remainder)	$	371	$	524	$	895
2018		1,767		473		2,240
2019		1,717		335		2,052
2020		1,925		239		2,164
2021		1,460		154		1,614
Thereafter		4,205		119		4,324

Total	$	11,445	$	1,844	$	13,289

⁽¹⁾	Primarily equipment and advertising contracts.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of November 30, 2016, our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and seven Boeing 777 Freighter (“B777F”) aircraft 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. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

We had $430 million in deposits and progress payments as of November 30, 2016 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our consolidated balance sheets. 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 November 30, 2016 with the year of expected delivery:


	B767F		B777F		Total
2017 (remainder)		2		—		2
2018		16		2		18
2019		15		2		17
2020		16		3		19
2021		10		3		13
Thereafter		16		6		22

Total		75		16		91

- 17 -

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at November 30, 2016 is as follows (in millions):


	Operating Leases
	Aircraft and Related Equipment		Facilities and Other		Total Operating Leases
2017 (remainder)	$	367	$	1,051	$	1,418
2018		402		1,928		2,330
2019		345		1,715		2,060
2020		262		1,520		1,782
2021		204		1,372		1,576
Thereafter		376		8,436		8,812

Total	$	1,956	$	16,022	$	17,978

Future minimum lease payments under capital leases were immaterial at November 30, 2016. 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.

(8) Contingencies

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 22 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the company’s owner-operators under a contractor model no longer in use should have been 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 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 20 states. The plaintiffs filed notices of appeal in all of these 20 cases. The Seventh Circuit heard the appeal in the Kansas case in January 2012 and, in July 2012, issued an opinion that did not make a determination with respect to the correctness of the district court’s decision and, instead, certified two questions to the Kansas Supreme Court related to the classification of the plaintiffs as independent contractors under the Kansas Wage Payment Act. The other 19 cases that are before the Seventh Circuit were stayed.

On October 3, 2014, the Kansas Supreme Court determined that a 20 factor right to control test applies to claims under the Kansas Wage Payment Act and concluded that under that test, the class members were employees, not independent contractors. The case was subsequently transferred back to the Seventh Circuit, where both parties made filings requesting the action necessary to complete the resolution of the appeals. The parties also made recommendations to the court regarding next steps for the other 19 cases that are before the Seventh Circuit. FedEx Ground requested that each of those cases be separately briefed given the potential differences in the applicable state law from that in Kansas. On July 8, 2015, the Seventh Circuit issued an order and opinion confirming the decision of the Kansas Supreme Court, concluding that the class members are employees, not independent contractors. Additionally, the Seventh Circuit referred the other 19 cases to a representative of the court for purposes of setting a case management conference to address briefing and argument for those cases.

- 18 -

During the second quarter of 2015, we established an accrual for the estimated probable loss in the Kansas case. In the second quarter of 2016 the Kansas case settled, and we increased the accrual to the amount of the settlement. The settlement requires court approval.

During the third quarter of 2016, we reached agreements in principle to settle all of the 19 cases on appeal in the multidistrict independent contractor litigation. All of these settlements require court approval. We recognized a liability for the expected loss (net of recognized insurance recovery) related to these cases and certain other pending independent-contractor-related proceedings of $204 million.

The Kansas case was remanded to the multidistrict litigation court, and the other 19 cases remain at the Seventh Circuit; however, approval proceedings will be conducted primarily by the multidistrict litigation court. Plaintiffs filed motions for preliminary approval between June 15 and June 30, 2016, and on August 3 and 4, 2016, the multidistrict litigation court issued orders indicating that it would grant preliminary approval if the Seventh Circuit would remand the cases on appeal for the purpose of entering approval orders. Upon the parties’ joint motion, the Seventh Circuit remanded the cases for this purpose on August 10, 2016, and the multidistrict litigation court entered orders preliminarily approving the settlements on August 17, 2016. Fairness hearings are scheduled for January 23 and 24, 2017.

The multidistrict litigation 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. Four of these matters settled for immaterial amounts and have received court approval.

The case in Arkansas settled in the second quarter of 2016, and we established an accrual for the amount of the settlement. The court granted preliminary approval on September 15, 2016, and scheduled a final approval hearing for March 1, 2017.

Two cases in Oregon and one in California were appealed to the Ninth Circuit Court of Appeals, where the court reversed the district court decisions and held that the plaintiffs in California and Oregon were employees as a matter of law and remanded the cases to their respective district courts for further proceedings. In the first quarter of 2015, we recognized an accrual for the then-estimated probable loss in those cases.

In June 2015, the parties in the California case reached an agreement to settle the matter for $228 million, and in the fourth quarter of 2015 we increased the accrual to that amount. The court entered final judgment on June 20, 2016, and two objectors to the settlement filed appeals with the Ninth Circuit. One objector has settled with plaintiffs’ counsel, and we expect the appeal by the second objector to be briefed by the end of the third quarter of 2017 and arguments to be scheduled thereafter. The settlement is not effective until all appeals have been resolved without affecting the court’s approval of the settlement.

The two cases in Oregon were consolidated with a non-multidistrict litigation independent contractor case in Oregon. The three cases collectively settled in the second quarter of 2016, and we increased the accrual in these cases to the amount of the settlement. The settlement was preliminarily approved on April 20, 2016 and the court granted final approval after a fairness hearing on October 20, 2016.

In addition, we are defending contractor-model cases that are not or are no longer part of the multidistrict litigation. These cases are in varying stages of litigation. We do not expect to incur a material loss in these matters; however, it is reasonably possible that potential loss in some of these lawsuits or changes to the independent contractor status of FedEx Ground’s owner-operators could be material. In these cases, we continue to evaluate what facts may arise in the course of discovery and what legal rulings the courts may render and how these facts and rulings might impact FedEx Ground’s loss. For a number of reasons, we are not currently able to estimate a range of reasonably possible loss in these cases. The number and identities of plaintiffs in these lawsuits are uncertain, as they are dependent on how the class of drivers is defined and how many individuals will qualify based on whatever criteria may be established. In addition, the parties have conducted only very limited discovery into damages in certain of these cases, which could vary considerably from plaintiff to plaintiff and be dependent on evidence pertaining to individual plaintiffs, which has yet to be produced in the cases. Further, the range of potential loss could be impacted substantially by future rulings by the court, including on the merits of the claims, on FedEx Ground’s defenses, and on evidentiary issues. As a consequence of these factors, as well as others that are specific to these cases, we are not currently able to estimate a range of reasonably possible loss. We do not believe that a material loss is probable in these matters.

- 19 -

Adverse determinations in matters related to FedEx Ground’s independent contractors, could, among other things, entitle certain owner-operators 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. 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.

City and State of New York Cigarette Suit. The City of New York and the State of New York filed two related lawsuits against FedEx Ground in December 2013 and November 2014 arising from FedEx Ground’s alleged shipments of cigarettes to New York residents in contravention of several statutes, including the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and New York’s Public Health Law, as well as common law nuisance claims. In April 2016, the two lawsuits were consolidated and will now proceed as one lawsuit. The first-filed lawsuit alleges that FedEx Ground provided delivery services on behalf of four shippers, and the second-filed lawsuit alleges that FedEx Ground provided delivery services on behalf of six additional shippers; none of these shippers continue to ship in our network. Pursuant to motions to dismiss filed in both lawsuits, some of the claims have been dismissed entirely or limited. In the first-filed lawsuit, the New York Public Health Law and common law nuisance claims were dismissed and the plaintiffs voluntarily dismissed another claim. In the second-filed lawsuit, the court dismissed, without prejudice to plaintiffs’ right to refile the claim at a later date, the New York Public Health Law claim. The plaintiffs have refiled the New York Public Health Law claim, and FedEx Ground has filed a motion to dismiss that claim that is pending with the court. Other claims, including the RICO claims, remain in both lawsuits. The likelihood of loss is reasonably possible, but the amount of loss cannot be estimated at this stage of the litigation and we expect the amount of any loss to be immaterial.

Environmental Matters. SEC regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that management reasonably believes could exceed $100,000.

On September 9, 2016, GENCO received a written offer from several District Attorneys’ Offices in California to settle a civil action that the District Attorneys intend to file against GENCO for alleged violations of the state’s hazardous waste regulations. Specifically, the District Attorneys’ Offices allege GENCO unlawfully disposed of hazardous waste at one of its California facilities and caused the illegal transportation and disposal of hazardous waste from the retail stores of a GENCO customer at this same facility. The District Attorneys allege these violations began in 2006 and continued until the facility closed in the spring of 2015. We believe an immaterial loss in this matter is probable. The District Attorneys are also investigating GENCO’s hazardous waste activities at eight additional facilities within California. We will pursue all available remedies against the sellers of GENCO to recover any losses in these matters.

FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of business, including certain lawsuits containing various class-action allegations of wage-and-hour violations in which plaintiffs claim, 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. 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.

- 20 -

(9) Supplemental Cash Flow Information

Cash paid for interest expense and income taxes for the six-month periods ended November 30 was as follows (in millions):


	2016			2015
Cash payments for:
Interest (net of capitalized interest)	$	232		$	146


Income taxes	$	216		$	831
Income tax refunds received		(13	)		(3	)

Cash tax payments, net	$	203		$	828

(10) Condensed Consolidating Financial Statements

We are required to present condensed consolidating financial information in order for the subsidiary guarantors 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 100% owned by FedEx, guarantee $13.4 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.

- 21 -

Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

November 30, 2016


			Guarantor		Non-guarantor
	Parent		Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,330	$	294	$	1,490	$	(55	)	$	3,059
Receivables, less allowances		1		4,753		2,872		(51	)		7,575
Spare parts, supplies, fuel, prepaid expenses and other, less allowances		370		822		226		—			1,418

Total current assets		1,701		5,869		4,588		(106	)		12,052

PROPERTY AND EQUIPMENT, AT COST		22		45,735		3,161		—			48,918
Less accumulated depreciation and amortization		17		22,360		1,234		—			23,611

Net property and equipment		5		23,375		1,927		—			25,307

INTERCOMPANY RECEIVABLE		2,359		1,602		—		(3,961	)		—
GOODWILL		—		1,571		5,350		—			6,921
INVESTMENT IN SUBSIDIARIES		25,967		3,558		—		(29,525	)		—
OTHER ASSETS		3,041		867		1,052		(2,892	)		2,068

	$	33,073	$	36,842	$	12,917	$	(36,484	)	$	46,348

LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	—	$	26	$	17	$	—		$	43
Accrued salaries and employee benefits		43		1,247		475		—			1,765
Accounts payable		112		1,441		1,507		(106	)		2,954
Accrued expenses		887		1,434		724		—			3,045

Total current liabilities		1,042		4,148		2,723		(106	)		7,807

LONG-TERM DEBT, LESS CURRENT PORTION		13,281		245		27		—			13,553
INTERCOMPANY PAYABLE		—		—		3,961		(3,961	)		—
OTHER LONG-TERM LIABILITIES
Deferred income taxes		—		4,792		248		(2,892	)		2,148
Other liabilities		4,219		3,501		589		—			8,309

Total other long-term liabilities		4,219		8,293		837		(2,892	)		10,457
STOCKHOLDERS’ INVESTMENT		14,531		24,156		5,369		(29,525	)		14,531

	$	33,073	$	36,842	$	12,917	$	(36,484	)	$	46,348

- 22 -

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2016


			Guarantor		Non- guarantor
	Parent		Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,974	$	326	$	1,277	$	(43	)	$	3,534
Receivables, less allowances		1		4,461		2,831		(41	)		7,252
Spare parts, supplies, fuel, prepaid expenses and other, less allowances		233		724		246		—			1,203

Total current assets		2,208		5,511		4,354		(84	)		11,989

PROPERTY AND EQUIPMENT, AT COST		22		43,760		3,236		—			47,018
Less accumulated depreciation and amortization		17		21,566		1,151		—			22,734

Net property and equipment		5		22,194		2,085		—			24,284

INTERCOMPANY RECEIVABLE		2,437		1,284		—		(3,721	)		—
GOODWILL		—		1,571		5,176		—			6,747
INVESTMENT IN SUBSIDIARIES		24,766		3,697		—		(28,463	)		—
OTHER ASSETS		3,359		967		1,851		(3,238	)		2,939

	$	32,775	$	35,224	$	13,466	$	(35,506	)	$	45,959

LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	—	$	13	$	16	$	—		$	29
Accrued salaries and employee benefits		54		1,377		541		—			1,972
Accounts payable		8		1,501		1,519		(84	)		2,944
Accrued expenses		883		1,411		769		—			3,063

Total current liabilities		945		4,302		2,845		(84	)		8,008

LONG-TERM DEBT, LESS CURRENT PORTION		13,451		245		37		—			13,733
INTERCOMPANY PAYABLE		—		—		3,721		(3,721	)		—
OTHER LONG-TERM LIABILITIES
Deferred income taxes		—		4,436		369		(3,238	)		1,567
Other liabilities		4,595		3,375		897		—			8,867

Total other long-term liabilities		4,595		7,811		1,266		(3,238	)		10,434
STOCKHOLDERS’ INVESTMENT		13,784		22,866		5,597		(28,463	)		13,784

	$	32,775	$	35,224	$	13,466	$	(35,506	)	$	45,959

- 23 -

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended November 30, 2016


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
REVENUES	$	—		$	10,997		$	4,004		$	(70	)	$	14,931

OPERATING EXPENSES:
Salaries and employee benefits		29			4,161			1,163			—			5,353
Purchased transportation		—			2,074			1,383			(26	)		3,431
Rentals and landing fees		2			625			177			(2	)		802
Depreciation and amortization		—			634			106			—			740
Fuel		—			584			74			—			658
Maintenance and repairs		—			504			75			—			579
Intercompany charges, net		(89	)		38			51			—			—
Other		58			1,429			756			(42	)		2,201

		—			10,049			3,785			(70	)		13,764


OPERATING INCOME		—			948			219			—			1,167

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		700			54			—			(754	)		—
Interest, net		(123	)		4			—			—			(119	)
Intercompany charges, net		124			(64	)		(60	)		—			—
Other, net		(1	)		(5	)		36			—			30


INCOME BEFORE INCOME TAXES		700			937			195			(754	)		1,078

Provision for income taxes		—			291			87			—			378

NET INCOME	$	700		$	646		$	108		$	(754	)	$	700

COMPREHENSIVE INCOME	$	682		$	635		$	(112	)	$	(754	)	$	451

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended November 30, 2015


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
REVENUES	$	—		$	10,479		$	2,048		$	(74	)	$	12,453

OPERATING EXPENSES:
Salaries and employee benefits		26			3,926			618			—			4,570
Purchased transportation		—			1,941			622			(25	)		2,538
Rentals and landing fees		2			596			86			(2	)		682
Depreciation and amortization		1			601			51			—			653
Fuel		—			597			18			—			615
Maintenance and repairs		—			497			32			—			529
Intercompany charges, net		(112	)		84			28			—			—
Other		83			1,293			400			(47	)		1,729

		—			9,535			1,855			(74	)		11,316


OPERATING INCOME		—			944			193			—			1,137

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		691			73			—			(764	)		—
Interest, net		(81	)		6			1			—			(74	)
Intercompany charges, net		84			(83	)		(1	)		—			—
Other, net		(3	)		(6	)		1			—			(8	)


INCOME BEFORE INCOME TAXES		691			934			194			(764	)		1,055

Provision for income taxes		—			309			55			—			364

NET INCOME	$	691		$	625		$	139		$	(764	)	$	691

COMPREHENSIVE INCOME	$	672		$	620		$	112		$	(764	)	$	640

- 24 -

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Six Months Ended November 30, 2016


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
REVENUES	$	—		$	21,900		$	7,834		$	(140	)	$	29,594

OPERATING EXPENSES:
Salaries and employee benefits		65			8,267			2,332			—			10,664
Purchased transportation		—			3,991			2,734			(54	)		6,671
Rentals and landing fees		3			1,245			347			(3	)		1,592
Depreciation and amortization		—			1,245			234			—			1,479
Fuel		—			1,162			146			—			1,308
Maintenance and repairs		—			1,030			147			—			1,177
Intercompany charges, net		(179	)		100			79			—			—
Other		111			2,802			1,442			(83	)		4,272

		—			19,842			7,461			(140	)		27,163


OPERATING INCOME		—			2,058			373			—			2,431

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		1,415			110			—			(1,525	)		—
Interest, net		(245	)		13			—			—			(232	)
Intercompany charges, net		246			(145	)		(101	)		—			—
Other, net		(1	)		(10	)		32			—			21


INCOME BEFORE INCOME TAXES		1,415			2,026			304			(1,525	)		2,220

Provision for income taxes		—			671			134			—			805

NET INCOME	$	1,415		$	1,355		$	170		$	(1,525	)	$	1,415

COMPREHENSIVE INCOME	$	1,378		$	1,337		$	(31	)	$	(1,525	)	$	1,159

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Six Months Ended November 30, 2015


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
REVENUES	$	—		$	20,352		$	4,557		$	(177	)	$	24,732

OPERATING EXPENSES:
Salaries and employee benefits		60			7,739			1,296			—			9,095
Purchased transportation		—			3,375			1,587			(80	)		4,882
Rentals and landing fees		3			1,183			194			(3	)		1,377
Depreciation and amortization		1			1,184			116			—			1,301
Fuel		—			1,288			39			—			1,327
Maintenance and repairs		—			1,005			72			—			1,077
Intercompany charges, net		(181	)		44			137			—			—
Other		117			2,557			812			(94	)		3,392

		—			18,375			4,253			(177	)		22,451


OPERATING INCOME		—			1,977			304			—			2,281

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		1,383			134			—			(1,517	)		—
Interest, net		(156	)		14			5			—			(137	)
Intercompany charges, net		162			(159	)		(3	)		—			—
Other, net		(6	)		(9	)		10			—			(5	)


INCOME BEFORE INCOME TAXES		1,383			1,957			316			(1,517	)		2,139

Provision for income taxes		—			666			90			—			756

NET INCOME	$	1,383		$	1,291		$	226		$	(1,517	)	$	1,383

COMPREHENSIVE INCOME	$	1,346		$	1,271		$	70		$	(1,517	)	$	1,170

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended November 30, 2016


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	(376	)	$	2,550		$	473		$	(12	)	$	2,635

INVESTING ACTIVITIES
Capital expenditures		—			(2,455	)		(226	)		—			(2,681	)
Proceeds from asset dispositions and other		84			13			3			—			100

CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		84			(2,442	)		(223	)		—			(2,581	)

FINANCING ACTIVITIES
Net transfers from (to) Parent		24			(94	)		70			—			—
Payment on loan between subsidiaries		8			(15	)		7			—			—
Intercompany dividends		—			1			(1	)		—			—
Principal payments on debt		—			(31	)		(12	)		—			(43	)
Proceeds from stock issuances		164			—			—			—			164
Dividends paid		(213	)		—			—			—			(213	)
Purchase of treasury stock		(334	)		—			—			—			(334	)
Other, net		4			(2	)		(7	)		—			(5	)

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(347	)		(141	)		57			—			(431	)

Effect of exchange rate changes on cash		(5	)		1			(94	)		—			(98	)

Net (decrease) increase in cash and cash equivalents		(644	)		(32	)		213			(12	)		(475	)
Cash and cash equivalents at beginning of period		1,974			326			1,277			(43	)		3,534

Cash and cash equivalents at end of period	$	1,330		$	294		$	1,490		$	(55	)	$	3,059

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended November 30, 2015


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	(847	)	$	3,054		$	213		$	34		$	2,454

INVESTING ACTIVITIES
Capital expenditures		—			(2,482	)		(80	)		—			(2,562	)
Proceeds from asset dispositions and other		(5	)		21			(4	)		—			12

CASH USED IN INVESTING ACTIVITIES		(5	)		(2,461	)		(84	)		—			(2,550	)

FINANCING ACTIVITIES
Net transfers from (to) Parent		648			(691	)		43			—			—
Payment on loan between subsidiaries		—			106			(106	)		—			—
Intercompany dividends		—			20			(20	)		—			—
Principal payments on debt		—			(2	)		(15	)		—			(17	)
Proceeds from debt issuance		1,238			—			—			—			1,238
Proceeds from stock issuances		62			—			—			—			62
Dividends paid		(141	)		—			—			—			(141	)
Purchase of treasury stock		(1,101	)		—			—			—			(1,101	)
Other, net		(8	)		(27	)		27			—			(8	)

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		698			(594	)		(71	)		—			33

Effect of exchange rate changes on cash		—			(12	)		(41	)		—			(53	)

Net (decrease) increase in cash and cash equivalents		(154	)		(13	)		17			34			(116	)
Cash and cash equivalents at beginning of period		2,383			487			971			(78	)		3,763

Cash and cash equivalents at end of period	$	2,229		$	474		$	988		$	(44	)	$	3,647

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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 November 30, 2016, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended November 30, 2016 and 2015 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2016 and 2015. 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 (United States), 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, 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ investment, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated July 18, 2016. In our opinion, the accompanying condensed consolidated balance sheet of FedEx Corporation as of May 31, 2016, 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

December 21, 2016

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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, 2016 (“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; TNT Express B.V. (“TNT Express”), an international express, small-package ground delivery and freight transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American 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, information technology, communications, customer service, technical support, billing and collection services, and certain back-office support functions that support 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”). See “Reportable Segments” for further discussion. Additional information on our businesses can also be found in our Annual Report.

The key indicators necessary to understand our operating results include:

•

the overall customer demand for our various services based on macro-economic factors and the global economy;

•

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

•

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 shipment or hundredweight for LTL freight shipments);

•

our ability to manage our network capacity and 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. The line item “Other operating expenses” predominantly includes costs associated with outside service contracts (such as security, facility services and cargo handling), insurance, professional fees, and uniforms.

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Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2017 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 group, which includes the FedEx Express and TNT Express segments, the FedEx Ground segment and the FedEx Freight segment.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following tables compare summary operating results and changes in revenue and operating income (dollars in millions, except per share amounts) for the periods ended November 30:


	Three Months Ended						Percent Change			Six Months Ended						Percent Change
	2016			2015			Percent Change			2016			2015			Percent Change
Revenues	$	14,931		$	12,453			20		$	29,594		$	24,732			20
Operating income:
FedEx Express segment		636			622			2			1,260			1,167			8
TNT Express segment		70			—			NM			56			—			NM
FedEx Ground segment		465			526			(12	)		1,075			1,063			1
FedEx Freight segment		88			101			(13	)		223			233			(4	)
Eliminations, corporate and other		(92	)		(112	)		(18	)		(183	)		(182	)		1

Consolidated operating income		1,167			1,137			3			2,431			2,281			7

Operating margin:
FedEx Express segment		9.4	%		9.4	%		—	bp		9.4	%		8.9	%		50	bp
TNT Express segment		3.7	%		—			NM			1.5	%		—			NM
FedEx Ground segment		10.5	%		13.0	%		(250	)bp		12.3	%		13.5	%		(120	)bp
FedEx Freight segment		5.5	%		6.5	%		(100	)bp		6.9	%		7.4	%		(50	)bp
Consolidated operating margin		7.8	%		9.1	%		(130	)bp		8.2	%		9.2	%		(100	)bp
Consolidated net income	$	700		$	691			1		$	1,415		$	1,383			2

Diluted earnings per share	$	2.59		$	2.44			6		$	5.24		$	4.86			8

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	Change in Revenue						Change in Operating Income
	Three Months Ended			Six Months Ended			Three Months Ended			Six Months Ended
FedEx Express segment	$	155		$	220		$	14		$	93
TNT Express segment		1,899			3,703			70			56
FedEx Ground segment		369			829			(61	)		12
FedEx Freight segment		50			107			(13	)		(10	)
FedEx Services segment		11			16			—			—
Eliminations, corporate and other		(6	)		(13	)		20			(1	)

	$	2,478		$	4,862		$	30		$	150

Overview

In addition to the inclusion of TNT Express, which has impacted the year-over-year comparability of our results, operating income increased in the second quarter and first half of 2017 due to improved results at FedEx Express, as we continue to grow base yields and constrain expense growth. Operating income also improved in the first half of 2017 due to volume and yield growth at FedEx Ground.

However, increased rent, depreciation and staffing as a result of network expansion, as well as increased purchased transportation rates, resulted in a decline in FedEx Ground’s second quarter results. Lower operating income at FedEx Freight negatively impacted our results in the second quarter and first half of 2017.

We incurred an aggregate $58 million ($50 million, net of tax, or $0.18 per diluted share) in the second quarter and $126 million ($94 million, net of tax, or $0.35 per diluted share) in the first half of 2017 of integration expenses for TNT Express and charges associated with TNT Express’s restructuring program called Outlook. The integration expenses are predominantly incremental costs directly associated with the integration of TNT Express, including professional and legal fees, salaries and wages, advertising expenses and travel. Internal salaries and wages are included only to the extent the individuals are assigned full time to integration activities. These costs were incurred primarily at FedEx Corporation and FedEx Express. The identification of these costs as integration-related expenditures is subject to our disclosure controls and procedures. In addition, we incurred $10 million ($7 million, net of tax, or $0.03 per diluted share) in the second quarter and $38 million ($28 million, net of tax, or $0.10 per diluted share) in the first half of 2017 of increased intangible asset amortization as a result of this acquisition.

In the second quarter of 2016 we incurred expenses related to the settlement of independent contractor litigation matters involving FedEx Ground for $41 million ($25 million, net of tax, or $0.09 per diluted share).

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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) over the five most recent quarters (TNT Express volume trends are not presented, as it was acquired on May 25, 2016):

LOGO

⁽¹⁾	International domestic average daily package volume represents our international intra-country operations in the FedEx Express segment.

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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 (TNT Express yield trends are not presented, as it was acquired on May 25, 2016):

LOGO

Revenue

Revenues increased 20% in the second quarter and the first half of 2017 due to the inclusion of TNT Express and improvements at our other transportation segments. At FedEx Ground, revenues increased 9% in the second quarter and 11% in the first half of 2017 due to volume growth in our residential services and commercial business and yield growth. Revenues at FedEx Express increased 2% in the second quarter and the first half of 2017 due to yield and package volume growth. FedEx Freight revenues increased 3% in the second quarter and the first half of 2017 due to higher average daily LTL shipments. Lower fuel surcharges had a negative impact on revenues at all of our transportation segments in the second quarter and first half of 2017.

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Operating Expenses

The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended November 30:


	Three Months Ended						Six Months Ended
	2016			2015			2016			2015
Operating expenses:
Salaries and employee benefits	$	5,353		$	4,570		$	10,664		$	9,095
Purchased transportation		3,431			2,538			6,671			4,882
Rentals and landing fees		802			682			1,592			1,377
Depreciation and amortization		740			653			1,479			1,301
Fuel		658			615			1,308			1,327
Maintenance and repairs		579			529			1,177			1,077
Other		2,201			1,729			4,272			3,392

Total operating expenses	$	13,764		$	11,316		$	27,163		$	22,451

Operating income	$	1,167		$	1,137		$	2,431		$	2,281


	Percent of Revenue
	Three Months Ended						Six Months Ended
	2016			2015			2016			2015
Operating expenses:
Salaries and employee benefits		35.8	%		36.7	%		36.1	%		36.8	%
Purchased transportation		23.0			20.4			22.5			19.7
Rentals and landing fees		5.4			5.5			5.4			5.6
Depreciation and amortization		5.0			5.2			5.0			5.3
Fuel		4.4			4.9			4.4			5.4
Maintenance and repairs		3.9			4.3			4.0			4.3
Other		14.7			13.9			14.4			13.7

Total operating expenses		92.2			90.9			91.8			90.8

Operating margin		7.8	%		9.1	%		8.2	%		9.2	%

Operating margin declined during the second quarter and first half of 2017 due to the inclusion of TNT Express, increased depreciation, rent and staffing as a result of network expansion and increased purchased transportation rates at FedEx Ground and lower operating income at FedEx Freight. These impacts were partially offset by the continued benefits from cost management initiatives at FedEx Express.

The inclusion of the TNT Express segment in our results has impacted the year-over-year comparability of our operating expenses. Purchased transportation costs increased 35% in the second quarter and 37% in the first half of 2017 due to the inclusion of TNT Express and higher volumes, as well as increased service provider and U.S. Postal Service rates at FedEx Ground. Salaries and employee benefits expense increased 17% in the second quarter and first half of 2017. These increases were due to the inclusion of TNT Express, volume growth and staffing to support network expansion at FedEx Ground, merit increases at FedEx Express and increased staffing and merit increases at FedEx Freight. Other expenses were 27% higher in the second quarter and 26% in the first half of 2017 primarily due to the inclusion of TNT Express results driven by outside service contracts.

- 34 -

Fuel

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 7% in the second quarter of 2017 due to the inclusion of TNT Express. However, fuel expense decreased 1% in the first half of 2017 due to lower fuel prices, which was mostly offset by the inclusion of TNT Express. Fuel prices represent only one component of the two factors we consider meaningful in understanding the impact of fuel on our business. Consideration must also be given to the fuel surcharge revenue we collect. Accordingly, we believe discussion of the net impact of fuel on our results, which is a comparison of the year-over-year change in these two factors, is important to understand the impact of fuel on our business. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative weighted-average fuel surcharge percentages in effect for the second quarter and first half of 2017 and 2016 in the accompanying discussions of each of our transportation segments.

The index used to determine the fuel surcharge percentage for our FedEx Freight business adjusts weekly, while our fuel surcharges for the FedEx Express, TNT Express and FedEx Ground businesses incorporate a timing lag of approximately six to eight weeks before they are adjusted for changes in fuel prices. For example, the fuel surcharge index in effect at FedEx Express in November 2016 was set based on September 2016 fuel prices. In addition, the structure of the table that is used to determine our fuel surcharge at FedEx Express, TNT Express and FedEx Ground does not adjust immediately for changes in fuel price, but allows for the fuel surcharge revenue charged to our customers to remain unchanged as long as fuel prices remain within certain ranges.

Beyond these factors, the manner in which we purchase fuel also influences the net impact of fuel on our results. For example, our contracts for jet fuel purchases at FedEx Express are tied to various indices, including the U.S. Gulf Coast index. While many of these indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for jet fuel. Furthermore, under these contractual arrangements, approximately 75% of our jet fuel is purchased based on the index price for the preceding week, with the remainder of our purchases tied to the index price for the preceding month, rather than based on daily spot rates. These contractual provisions mitigate the impact of rapidly changing daily spot rates on our jet fuel purchases.

Because of the factors described above, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term.

We routinely review our fuel surcharges and our fuel surcharge methodology. As announced on September 19, 2016, FedEx Express and FedEx Ground fuel surcharges will be adjusted on a weekly basis compared to the current monthly adjustment, effective February 6, 2017. On November 2, 2015, we updated the tables used to determine our fuel surcharges at FedEx Express, FedEx Ground and FedEx Freight.

- 35 -

The net impact of fuel had a minimal impact in the second quarter and first half of 2017 to operating income.

The net impact of fuel on our operating results does not consider the effects that fuel surcharge levels may have on our business, including changes in demand and shifts in the mix of services purchased by our customers. While fluctuations in fuel surcharge percentages 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.

Other Income and Expense

Interest expense increased $95 million in the first half of 2017 primarily due to our U.S. and European debt issuances in fiscal 2016, which was partially offset by a gain of $35 million from the sale of an investment during the second quarter of 2017. The annualized weighted average interest rate on our long-term debt was 3.6% for the six months ended November 30, 2016, reflecting the favorable interest rates obtained in recent debt offerings.

Income Taxes

Our effective tax rate was 35.1% for the second quarter and 36.3% for the first half of 2017, compared with 34.5% in the second quarter and 35.3% in the first half of 2016. The first half tax rate in 2017 has been negatively impacted by local country losses in some entities within TNT Express, for which no tax benefit was recognized due to uncertainty as to the utilization of these losses. This year-to-date negative impact was partially offset by the benefit of early adopting the Accounting Standards Update for share-based payments in the second quarter of 2017. Longer term, as the synergies from the TNT Express acquisition result in greater international profits, we expect our effective tax rate to be lower than the rate in recent years. The tax rates in 2016 were favorably impacted by the resolution of a state tax matter.

We are subject to taxation in the United States and various U.S. state, local and foreign jurisdictions. We are currently under examination by the Internal Revenue Service for the 2014 and 2015 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next twelve months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. As of November 30, 2016, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2016.

Business Acquisition

On May 25, 2016, we acquired TNT Express for €4.4 billion (approximately $4.9 billion). Cash acquired in the acquisition was approximately €250 million ($280 million). As of November 30, 2016, $26 million of shares associated with the transaction remained untendered, a decrease of $261 million since May 31, 2016. The remaining untendered shares are included in the “Other liabilities” caption of our consolidated balance sheets. We funded the acquisition with proceeds from our April 2016 debt issuance and existing cash balances. The financial results of this business are included in the FedEx Express group and TNT Express segment from the date of acquisition.

Given the timing and complexity of the acquisition, the presentation of TNT Express in our financial statements, including the allocation of the purchase price, continues to be preliminary and will likely change in future periods, perhaps significantly, as additional information concerning the fair value estimates of the assets acquired and liabilities assumed as of the acquisition date is obtained during the remainder of the fiscal year. We will complete our purchase price allocation no later than the fourth quarter of 2017.

- 36 -

See Note 1 of the accompanying unaudited condensed consolidated financial statements for further discussion of this acquisition.

Outlook

We expect volume and yield growth at FedEx Express and FedEx Ground and the inclusion of TNT Express to drive our continued earnings growth in 2017 prior to any mark-to-market (MTM) benefit plans adjustment. At FedEx Ground, we are focused on balancing capacity and volume growth with yield management. These actions contributed to the second quarter volume results and are also expected to mute third quarter volume growth. Our results in 2017 will continue to be negatively impacted by our TNT Express integration and restructuring activities. Our expectations for earnings growth in the third quarter and the remainder of 2017 are dependent on key external factors, including fuel prices and the pace of improvement of the global economy.

During the second half of 2017, we will continue to execute our TNT Express integration plans. The integration process is complex as it spans over 200 countries and involves combining our pickup and delivery operations at a local level, our global and regional air and ground networks, and our extensive operations, customs clearance, sales and back-office IT systems, and is expected to take four years to complete.

As a result of updates to the TNT Express purchase price allocation during the second quarter of 2017, the intangible asset amortization is now estimated to be $38 million in the second half and $75 million for 2017. See Note 1 of the accompanying unaudited condensed consolidated financial statements and the TNT Express discussion in this MD&A for additional information.

In addition, as discussed in our Annual Report, TNT Express is undergoing a large restructuring program called Outlook, which includes incurring certain restructuring costs. We estimate incurring costs of approximately $250 million in 2017 as a result of the TNT Express integration and Outlook restructuring programs. We currently expect the aggregate integration program expense over the four years to be in the range of $700 million to $800 million. The timing and amount of integration-related expenses in any future period is subject to change as we implement our plans. Therefore, we cannot currently predict if TNT Express will be accretive under accounting principles generally accepted in the United States in 2018. We believe that this acquisition presents significant opportunities for material synergies in pickup and delivery costs, air and ground network optimization, selling, general and administrative expenses, as well as revenue growth, and the benefit of a lower tax rate. We are currently anticipating annual pre-tax synergies following the completion of the integration program in fiscal 2020 of $750 million. Given that the integration is complex and spans several years, how we achieve our target may evolve over time as market conditions and other factors change.

Other Outlook Matters. For details on key 2017 capital projects, refer to the “Liquidity Outlook” section of this 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. For a description of these proceedings, see Note 8 of the accompanying unaudited condensed consolidated financial statements and the “Independent Contractor Model” section of our FedEx Ground segment MD&A.

FedEx Ground previously announced plans to implement the Independent Service Provider (“ISP”) model throughout its entire U.S. pickup and delivery network, including the 29 states that had not yet begun transitioning to the ISP model. The transition to the ISP model in these 29 states is being accomplished on a district-by-district basis and is expected to be completed by the end of 2020. As of November 30, 2016, 43% of FedEx Ground volume was being delivered by small businesses operating under the ISP model. The costs associated with these transitions will be recognized in the periods incurred and are not expected to be material to any future quarter.

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

- 37 -

RECENT ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. These matters are described in our Annual Report.

We believe that no other new accounting guidance was adopted or issued during the first half of 2017 that is relevant to the readers of our financial statements.

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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 Group:

FedEx Express Segment		FedEx Express (express transportation)
		FedEx Trade Networks (air and ocean freight forwarding, customs brokerage and cross-border enablement technology and solutions)
		FedEx SupplyChain Systems (logistics services)

TNT Express Segment		TNT Express (international express transportation, small-package ground delivery and freight transportation)

FedEx Ground Segment		FedEx Ground (small-package ground delivery)
		GENCO (third-party logistics)

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

FedEx Services Segment		FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services and back-office functions)
		FedEx Office (document and business services and package acceptance)

FEDEX SERVICES SEGMENT

The line item “Intercompany charges” on the accompanying unaudited condensed consolidated financial statements of our transportation segments reflects the allocations from the FedEx Services segment to the respective transportation segments. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided.

ELIMINATIONS, CORPORATE AND OTHER

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Corporate and other includes corporate headquarters costs for executive officers and certain legal and financial functions, as well as certain other costs and credits not attributed to our core business. These costs are not allocated to the business segments. The year-over-year decrease in these costs in the second quarter and first half of 2017 was driven by a prior year expense related to the settlement of independent contractor litigation matters involving FedEx Ground, partially offset by the TNT Express integration expenses discussed above.

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FEDEX EXPRESS GROUP

The FedEx Express group consists of the combined results of the FedEx Express and TNT Express segments. As discussed in our Annual Report, we have combined these segments for financial reporting discussion purposes into a collective business as a result of their management reporting structure. Furthermore, over time their operations will be integrated, therefore presenting a group view provides a basis for future year-over-year comparison purposes. We acquired TNT Express in the fourth quarter of 2016, which has impacted the year-over-year comparability of revenue and operating income. The following table compares selected performance measures (dollars in millions) for the periods ended November 30:


	Three Months Ended						Percent Change			Six Months Ended						Percent Change
	2016			2015			Percent Change			2016			2015			Percent Change
Revenues:
FedEx Express segment	$	6,743		$	6,588			2		$	13,399		$	13,179			2
TNT Express segment		1,899			—			NM			3,703			—			NM

FedEx Express group		8,642			6,588			31			17,102			13,179			30

Operating income:
FedEx Express segment		636			622			2			1,260			1,167			8
TNT Express segment		70			—			NM			56			—			NM

FedEx Express group	$	706		$	622			14		$	1,316		$	1,167			13

Operating margin:
FedEx Express segment		9.4	%		9.4	%		—	bp		9.4	%		8.9	%		50	bp
TNT Express segment		3.7	%		—			NM	bp		1.5	%		—			NM	bp

FedEx Express group		8.2	%		9.4	%		(120	)bp		7.7	%		8.9	%		(120	)bp

FedEx Express Group Results

FedEx Express group revenues increased 31% in the second quarter and 30% in the first half of 2017. This increase was due to the inclusion of our recently acquired TNT Express segment, as well as improved yields and package volume growth at our FedEx Express segment, which were partially offset by lower fuel surcharges and unfavorable exchange rates.

Operating income increased in the second quarter and first half of 2017 within the FedEx Express group reflecting the continued success of our FedEx Express segment and the inclusion of the TNT Express segment. The TNT Express segment reported an operating profit due to revenue growth, which outpaced costs associated with the Outlook restructuring program and amortization of intangible assets. Operating margin of the group decreased in the second quarter and first half of 2017 due to the inclusion of the TNT Express segment.

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FEDEX EXPRESS SEGMENT

FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income (dollars in millions) and operating margin for the periods ended November 30:


	Three Months Ended				Percent Change		Six Months Ended				Percent Change
	2016		2015		Percent Change		2016		2015		Percent Change
Revenues:
Package:
U.S. overnight box	$	1,709	$	1,682		2	$	3,431	$	3,340		3
U.S. overnight envelope		422		397		6		865		819		6
U.S. deferred		834		826		1		1,644		1,642		—

Total U.S. domestic package revenue		2,965		2,905		2		5,940		5,801		2