UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2008

OR

o		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 (State or other jurisdiction of incorporation or organization)		62-1721435 (I.R.S. Employer Identification No.)
942 South Shady Grove Road Memphis, Tennessee (Address of principal executive offices)		38120 (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 þ No o

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. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(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 o No þ

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 September 15, 2008
Common Stock, par value $0.10 per share		311,241,913

 

 

FEDEX CORPORATION

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets August 31, 2008 and May 31, 2008			3-4
Condensed Consolidated Statements of Income Three Months Ended August 31, 2008 and 2007			5
Condensed Consolidated Statements of Cash Flows Three Months Ended August 31, 2008 and 2007			6
Notes to Condensed Consolidated Financial Statements			7
Report of Independent Registered Public Accounting Firm			22
ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			44
ITEM 4. Controls and Procedures			44
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			45
ITEM 1A. Risk Factors			45
ITEM 6. Exhibits			45
Signature			46
Exhibit Index			E-1
Exhibit 12.1
Exhibit 15.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

		August 31,
		2008				May 31,
		(Unaudited)				2008
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,573			$	1,539
Receivables, less allowances of $155 and $158			4,361				4,359
Spare parts, supplies and fuel, less allowances of $164 and $163			412				435
Deferred income taxes			528				544
Prepaid expenses and other			300				367
Total current assets			7,174				7,244
PROPERTY AND EQUIPMENT, AT COST			28,710				29,305
Less accumulated depreciation and amortization			15,177				15,827
Net property and equipment			13,533				13,478
OTHER LONG-TERM ASSETS
Goodwill			3,160				3,165
Pension assets			1,310				827
Intangible and other assets			966				919
Total other long-term assets			5,436				4,911
		$	26,143			$	25,633

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

FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)

		August 31,
		2008				May 31,
		(Unaudited)				2008
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt		$	1,001			$	502
Accrued salaries and employee benefits			890				1,118
Accounts payable			2,050				2,195
Accrued expenses			1,578				1,553
Total current liabilities			5,519				5,368
LONG-TERM DEBT, LESS CURRENT PORTION			1,007				1,506
OTHER LONG-TERM LIABILITIES
Deferred income taxes			1,484				1,264
Pension, postretirement healthcare and other benefit obligations			997				989
Self-insurance accruals			813				804
Deferred lease obligations			683				671
Deferred gains, principally related to aircraft transactions			309				315
Other liabilities			191				190
Total other long-term liabilities			4,477				4,233
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS’ INVESTMENT
Common stock, $0.10 par value; 800 million shares authorized; 311 million shares issued as of August 31, 2008 and May 31, 2008			31				31
Additional paid-in capital			1,954				1,922
Retained earnings			13,274				13,002
Accumulated other comprehensive loss			(115	)			(425	)
Treasury stock, at cost			(4	)			(4	)
Total common stockholders’ investment			15,140				14,526
		$	26,143			$	25,633

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

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

		Three Months Ended
		August 31,
		2008				2007
REVENUES		$	9,970			$	9,199
OPERATING EXPENSES:
Salaries and employee benefits			3,585				3,483
Purchased transportation			1,207				1,025
Rentals and landing fees			617				593
Depreciation and amortization			492				473
Fuel			1,599				964
Maintenance and repairs			537				544
Other			1,303				1,303
			9,340				8,385
OPERATING INCOME			630				814
OTHER INCOME (EXPENSE):
Interest, net			(9	)			(25	)
Other, net			(3	)			(2	)
			(12	)			(27	)
INCOME BEFORE INCOME TAXES			618				787
PROVISION FOR INCOME TAXES			234				293
NET INCOME		$	384			$	494
EARNINGS PER COMMON SHARE:
Basic		$	1.24			$	1.60
Diluted		$	1.23			$	1.58
DIVIDENDS DECLARED PER COMMON SHARE		$	0.22			$	0.10

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

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

		Three Months Ended
		August 31,
		2008				2007
Operating Activities:
Net income		$	384			$	494
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			492				473
Provision for uncollectible accounts			35				33
Stock-based compensation			33				29
Deferred income taxes and other noncash items			35				32
Changes in operating assets and liabilities:
Receivables			(98	)			(35	)
Other assets			97				(32	)
Accounts payable and other operating liabilities			(306	)			(166	)
Other, net			26				(27	)
Cash provided by operating activities			698				801
Investing Activities:
Capital expenditures			(636	)			(775	)
Proceeds from asset dispositions and other			15				4
Cash used in investing activities			(621	)			(771	)
Financing Activities:
Principal payments on debt			(1	)			(507	)
Proceeds from stock issuances			5				40
Excess tax benefit on the exercise of stock options			—				9
Dividends paid			(34	)			(31	)
Cash used in financing activities			(30	)			(489	)
Effect of exchange rate changes on cash			(13	)			2
Net increase (decrease) in cash and cash equivalents			34				(457	)
Cash and cash equivalents at beginning of period			1,539				1,569
Cash and cash equivalents at end of period		$	1,573			$	1,112

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

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, 2008 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.

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 August 31, 2008 and the results of our operations and cash flows for the three-month periods ended August 31, 2008 and 2007. Operating results for the three-month period ended August 31, 2008 are not necessarily indicative of the results that may be expected for the year ending May 31, 2009.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2009 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

NEW ACCOUNTING PRONOUNCEMENTS. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. We believe the following new accounting pronouncements are relevant to the readers of our financial statements.

On May 31, 2007, we adopted Statement of Financial Accounting Standards (“SFAS”) 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS 158 requires recognition in the balance sheet of the funded status of defined benefit pension and other postretirement benefit plans, and the recognition in accumulated other comprehensive income (“AOCI”) of unrecognized gains or losses and prior service costs or credits. Additionally, SFAS 158 requires the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. On June 1, 2008, we made our transition election for the measurement date provision of SFAS 158 using the two-measurement approach. Under this approach, we completed two actuarial measurements, one at February 29, 2008 and the other at June 1, 2008. This approach requires us to record the net periodic benefit cost for the transition period from March 1, 2008 through May 31, 2008 as an adjustment to beginning retained earnings ($44 million, net of tax) and actuarial gains and losses for the period (a gain of $372 million, net of tax) as an adjustment to the opening balance of AOCI. These adjustments increased the amount recorded for our pension assets by $528 million. Our actuarial gains resulted primarily from a 19 basis point increase in the discount rate for our primary pension plan and an increase in plan assets at June 1, 2008.

On June 1, 2008, we adopted SFAS 157, “Fair Value Measurements,” which provides a common definition of fair value, establishes a uniform framework for measuring fair value and requires expanded disclosures about fair value measurements. There is a one-year deferral of the adoption of the standard as it relates to non-financial assets and liabilities. The adoption of SFAS 157 had no impact on our financial statements at June 1, 2008.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 141R, “Business Combinations,” and SFAS 160, “Accounting and Reporting Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51.”

These new standards significantly change the accounting for and reporting of business combination transactions, including noncontrolling interests (previously referred to as minority interests). For example, these standards require the acquiring entity to recognize the full fair value of assets acquired and liabilities assumed in the transaction and require the expensing of most transaction and restructuring costs. Both standards are effective for us beginning June 1, 2009 (fiscal 2010) and are applicable only to transactions occurring after the effective date.

DIVIDENDS DECLARED PER COMMON SHARE. In 2009, we declared two quarterly dividends within the first quarter. On June 2, 2008, our Board of Directors declared a dividend of $0.11 per share of common stock. The dividend was paid on July 1, 2008 to stockholders of record as of the close of business on June 13, 2008. On August 15, 2008, our Board of Directors declared a dividend of $0.11 per share of common stock. The dividend will be paid on October 1, 2008 to stockholders of record as of the close of business on September 10, 2008. 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) 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 are set forth in our Annual Report.

We use the Black-Scholes option pricing model to calculate the fair value of stock options. The value of restricted stock awards is based on the price of the stock on the grant date. We recognize stock-based compensation expense on a straight-line basis over the requisite service period of the award in the “Salaries and employee benefits” caption of our condensed consolidated income statement.

Our total stock-based compensation expense was $33 million for the three months ended August 31, 2008 and $29 million for the three months ended August 31, 2007.

During the first quarter of 2009, we made stock option grants of 1.9 million shares, primarily in connection with our principal annual stock option grant. We granted options to purchase 2.4 million shares during the first quarter of 2008.

See our Annual Report for a discussion of our methodology for developing each of the assumptions used in the valuation model. The fair value of our stock option grants, as determined by the Black-Scholes valuation model, was $24.87 during the first quarter of 2009 and $31.21 during the first quarter of 2008, using the following assumptions:

		Three Months Ended
		August 31,
		2008				2007
Expected lives		5.5 years				5 years
Expected volatility			23	%			19	%
Risk-free interest rate			3.56	%			5.03	%
Dividend yield			0.452	%			0.322	%

(3) Comprehensive Income

The following table provides a reconciliation of net income reported in our financial statements to comprehensive income for the three-month periods ended August 31 (in millions):

		2008				2007
Net income		$	384			$	494
Other comprehensive income:
Foreign currency translation adjustments, net of deferred tax benefit of $11 in 2008 and deferred taxes of $1 in 2007			(47	)			16
Amortization of unrealized pension actuarial gains/losses, net of deferred tax benefit of $7 in 2008 and deferred taxes of $8 in 2007			(11	)			14
Comprehensive income		$	326			$	524

(4) Financing Arrangements

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

From time to time, we finance certain operating and investing activities, including acquisitions, through borrowings under our $1.0 billion revolving credit facility or the issuance of commercial paper. The revolving credit agreement contains certain covenants and restrictions, none of which are expected to significantly affect our operations or ability to pay dividends. Our commercial paper program is backed by unused commitments under the revolving credit facility and borrowings under the program reduce the amount available under the credit facility. At August 31, 2008, no commercial paper borrowings were outstanding and the entire amount under the credit facility was available.

(5) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the three-month periods ended August 31 was as follows (in millions, except per share amounts):

		2008				2007
Net income		$	384			$	494
Weighted-average shares of common stock outstanding			311				308
Common equivalent shares:
Assumed exercise of outstanding dilutive options			9				16
Less shares repurchased from proceeds of assumed exercise of options			(7	)			(12	)
Weighted-average common and common equivalent shares outstanding			313				312
Basic earnings per common share		$	1.24			$	1.60
Diluted earnings per common share		$	1.23			$	1.58
Antidilutive options excluded from diluted earnings per common share calculation			9.6				2.7

(6) 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 three-month periods ended August 31 were as follows (in millions):

		2008				2007
U.S. domestic and international pension plans		$	44			$	85
U.S. domestic and international defined contribution plans			84				38
Postretirement healthcare plans			14				16
		$	142			$	139

The reduction in pension costs for the three-month period ended August 31, 2008 was due to lower pension expense attributable to a significantly higher discount rate used to determine our 2009 expense. The increase in defined contribution costs for the three-month period ended August 31, 2008 was due to plan design changes, which are described in our Annual Report.

Net periodic benefit cost for the three-month periods ended August 31 was as follows (in millions):

										Postretirement
		Pension Plans								Healthcare Plans
		2008				2007				2008				2007
Service cost		$	125			$	129			$	8			$	9
Interest cost			200				180				8				8
Expected return on plan assets			(265	)			(246	)			—				—
Amortization of prior service cost and other			(16	)			22				(2	)			(1	)
		$	44			$	85			$	14			$	16

We made no contributions to our qualified U.S. domestic pension plans during the first quarter of 2009 and $110 million of such contributions during the first quarter of 2008. However, on September 2, 2008, we made tax-deductible voluntary contributions of $483 million to these plans. We do not expect to make further contributions to our qualified U.S. domestic pension plans for the remainder of 2009. In 2008, we contributed an aggregate of $479 million to these plans.

(7) 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 Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery services; and FedEx Freight Corporation, a leading U.S. provider of less-than-truckload (“LTL”) freight services. Our FedEx Services segment provides customer-facing sales, marketing, information technology and customer service support, as well as retail access for customers through FedEx Office and Print Services, Inc. (“FedEx Office”), primarily for the benefit of FedEx Express and FedEx Ground. These companies represent our major service lines and form the core of our reportable segments.

Our reportable segments include the following businesses:

FedEx Express Segment		FedEx Express (express transportation) FedEx Trade Networks (global trade services)
FedEx Ground Segment		FedEx Ground (small-package ground delivery) FedEx SmartPost (small-parcel consolidator)
FedEx Freight Segment		FedEx Freight LTL Group:      FedEx Freight (regional LTL freight transportation)      FedEx National LTL (long-haul LTL freight transportation) FedEx Custom Critical (time-critical transportation) Caribbean Transportation Services (airfreight forwarding)
FedEx Services Segment		FedEx Services (sales, marketing and information technology functions) FedEx Office (document and business services and package acceptance) FedEx Customer Information Services (“FCIS”) (customer service, billings and collections) FedEx Global Supply Chain Services (logistics services)

The FedEx Services segment includes: FedEx Services, which provides sales, marketing and information technology support; FCIS, which is responsible for customer service, billings and collections for FedEx Express and FedEx Ground U.S. customers; FedEx Global Supply Chain Services, which provides a range of logistics services to our customers; and FedEx Office, which provides retail access to our customers for our package transportation businesses and an array of document and business services.

The costs of the sales, marketing and information technology support provided by FedEx Services and the customer service functions of FCIS, together with the normal, ongoing net operating costs of FedEx Global Supply Chain Services and FedEx Office, are allocated primarily to the FedEx Express and FedEx Ground segments based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of providing these functions.

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 the consolidated results and are not separately identified in the following segment information, as the amounts are not material.

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments in Management’s Discussion and Analysis of Operations and Financial Condition (“MD&A”) includes the allocations from the FedEx Services segment to the respective transportation segments. The “Intercompany charges” caption also includes allocations for administrative services provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. Management evaluates segment financial performance based on operating income.

The following table provides a reconciliation of reportable segment revenues and operating income to our condensed consolidated financial statement totals for the three-month periods ended August 31 (in millions):

		2008				2007
Revenue
FedEx Express segment		$	6,419			$	5,889
FedEx Ground segment			1,761				1,618
FedEx Freight segment			1,353				1,233
FedEx Services segment			513				525
Other and eliminations			(76	)			(66	)
		$	9,970			$	9,199
Operating Income
FedEx Express segment		$	345			$	519
FedEx Ground segment			196				190
FedEx Freight segment			89				105
FedEx Services segment (1)			—				—
Other and eliminations			—				—
		$	630			$	814

(8) Commitments

As of August 31, 2008, our purchase commitments under various contracts for the remainder of 2009 and annually thereafter were as follows (in millions):

						Aircraft-
		Aircraft				Related (1)				Other (2)				Total
2009 (remainder)		$	727			$	154			$	387			$	1,268
2010			910				132				137				1,179
2011			736				9				69				814
2012			82				—				58				140
2013			—				—				33				33
Thereafter			—				—				133				133

The amounts reflected in the table above for purchase commitments represent non-cancelable agreements to purchase goods or services. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into non-cancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

Deposits and progress payments of $326 million have been made toward aircraft purchases, options to purchase additional aircraft and other planned aircraft-related transactions. Our primary aircraft purchase commitments include the Boeing 757 (“B757”) in passenger configuration, which will require additional costs to modify for cargo transport, and the new Boeing 777 Freighter (“B777F”) aircraft. In addition, we have committed to modify our DC10 aircraft for two-man cockpit configurations. Future payments related to these activities are included in the table above. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the number and type of aircraft we are committed to purchase as of August 31, 2008, with the year of expected delivery:

		A300				B757				B777F				MD11				Total
2009 (remainder)			3				13				—				1				17
2010			—				6				4				1				11
2011			—				5				10				—				15
2012			—				2				1				—				3
Total			3				26				15				2				46

A summary of future minimum lease payments under capital leases and noncancelable operating leases with an initial or remaining term in excess of one year at August 31, 2008 is as follows (in millions):

						Operating Leases
		Capital				Aircraft and Related				Facilities and				Total Operating
		Leases				Equipment				Other				Leases
2009 (remainder)		$	10			$	454			$	947			$	1,401
2010			97				545				1,140				1,685
2011			8				526				984				1,510
2012			8				504				855				1,359
2013			119				499				736				1,235
Thereafter			17				2,931				5,501				8,432
Total			259			$	5,459			$	10,163			$	15,622
Less amount representing interest			40
Present value of net minimum lease payments		$	219

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.

FedEx Express makes payments under certain leveraged operating leases that are sufficient to pay principal and interest on certain pass-through certificates. The pass-through certificates are not direct obligations of, or guaranteed by, FedEx or FedEx Express.

(9) Contingencies

Wage-and-Hour. We have agreed to settle two wage-and-hour lawsuits against FedEx Ground for an immaterial amount and executed a settlement agreement, which awaits court approval. We are a defendant in a number of other lawsuits containing various class-action allegations of wage-and-hour violations. The plaintiffs in these lawsuits allege, among other things, that they were forced to work “off the clock,” were not paid overtime or were not provided work breaks or other benefits. The complaints generally seek unspecified monetary damages, injunctive relief, or both.

In February 2008, one of these wage-and-hour cases, Wiegele v. FedEx Ground, was certified as a class action by a California federal court, and in April 2008, the U.S. Court of Appeals for the Ninth Circuit denied our petition to review the class certification ruling. The class certification ruling, however, does not address whether we will ultimately be held liable. The plaintiffs in Wiegele represent a class of FedEx Ground sort managers and dock service managers in California from May 10, 2002 to present. The plaintiffs allege that FedEx Ground has misclassified the managers as exempt from the overtime requirements of California wage-and-hour laws and is correspondingly liable for failing to pay them overtime compensation and for failing to provide them with rest and meal breaks.

On September 17, 2008, in another of these wage-and-hour cases, Tidd v. Adecco USA, Kelly Services and FedEx Ground, a Massachusetts federal court conditionally certified a class limited to individuals who were employed by two temporary employment agencies and who worked as temporary pick-up-and-delivery drivers for FedEx Ground in the New England region within the past three years. Potential claimants must voluntarily “opt in” to the lawsuit in order to be considered part of the class, and the conditional class certification ruling does not address whether we will ultimately be held liable. In addition, in the same opinion, the court granted summary judgment in favor of the defendants with respect to the plaintiffs’ claims for unpaid overtime wages under the federal Fair Labor Standards Act (“FLSA”) and Massachusetts law. Accordingly, the conditionally certified class of plaintiffs is now limited to a claim of failure to pay regular wages due under the FLSA.

We have denied any liability and intend to vigorously defend ourselves in these wage-and-hour lawsuits. We do not believe that any loss is probable in these lawsuits, and given the nature and status of the claims, we cannot yet determine the amount or a reasonable range of potential loss, if any.

Independent Contractor — Estrada and Mason. Estrada v. FedEx Ground is a class action involving FedEx Ground single-route contractors in California. In August 2007, the California appellate court affirmed the trial court’s ruling in Estrada that a limited number of California single-route contractors (most of whom have not contracted with FedEx Ground since 2001) should be reimbursed as employees for some of their operating expenses. The Supreme Court of California has affirmed the appellate court’s liability and class certification decisions. The case has been remanded to the trial court for reconsideration of the amount of such reimbursable expenses and attorneys’ fees. Forty of the class members from the Estrada litigation have filed another lawsuit (entitled Mason) seeking reimbursement of expenses for the post-Estrada period (January 1, 2005 to present). The forty plaintiffs continued to provide pickup-and-delivery services to FedEx Ground after the damages period terminated in Estrada (December 31, 2004). We do not expect to incur a material loss in the Estrada and Mason matters.

Independent Contractor — Other Lawsuits and State Administrative Proceedings. FedEx Ground is involved in approximately 50 other class-action lawsuits (including 21 that have been certified as class actions), several individual lawsuits and approximately 35 state tax and other administrative proceedings that claim that the company’s owner-operators should be treated as employees, rather than independent contractors.

Most of the class-action lawsuits have been consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. With the exception of recently filed cases that have been or will be transferred to the multidistrict litigation, discovery and class certification briefing are now complete. In October 2007, we received a decision from the court granting class certification in a Kansas action alleging state law claims on behalf of a statewide class and federal law claims under the Employee Retirement Income Security Act of 1974 on behalf of a nationwide class. In January 2008, the U.S. Court of Appeals for the Seventh Circuit declined our request for appellate review of the class certification decision. In March 2008, the court granted class certification in 19 additional cases and denied it in nine cases. The court has not yet ruled on class certification in the other cases that are pending in the multidistrict litigation. Motions for summary judgment on the classification issue (i.e., independent contractor vs. employee) are pending in all 20 of the multidistrict litigation cases that have been certified as class actions.

In January 2008, one of the contractor-model lawsuits that is not part of the multidistrict litigation, Anfinson v. FedEx Ground, was certified as a class action by a Washington state court. The plaintiffs in Anfinson represent a class of FedEx Ground single-route, pickup-and-delivery owner-operators in Washington from December 21, 2001 through December 31, 2005 and allege that the class members should be reimbursed as employees for their uniform expenses and should receive overtime pay. The Anfinson case is scheduled for trial in October 2008. The other contractor-model lawsuits that are not part of the multidistrict litigation are not as far along procedurally as Anfinson.

FedEx Ground is also involved in several lawsuits, including three purported class actions, brought by drivers of the company’s independent contractors who claim that they were jointly employed by the contractor and FedEx Ground.

Adverse determinations in these matters could, among other things, entitle certain of our contractors and their drivers to the reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax and benefit liability for FedEx Ground, and could result in changes to the independent contractor status of FedEx Ground’s owner-operators. 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. Given the nature and status of these lawsuits, we cannot yet determine the amount or a reasonable range of potential loss, if any, but it is reasonably possible that such potential loss or such changes to the independent contractor status of FedEx Ground’s owner-operators could be material. However, we do not believe that a material loss is probable in any of these matters.

Independent Contractor — IRS Audit. In December 2007, the Internal Revenue Service (“IRS”) informed us that its audit team had concluded an audit for the 2002 calendar year regarding the classification of owner-operators at FedEx Ground. The IRS has tentatively concluded, subject to ongoing discussions with us, that FedEx Ground’s pickup-and-delivery owner-operators should be reclassified as employees for federal employment tax purposes. The IRS has indicated that it anticipates assessing tax and penalties of $319 million plus interest for 2002. Substantially all of the IRS’s tentative assessment relates to employment and withholding taxes for the 2002 calendar year and, if paid by the company, would be fully deductible. Similar issues are under audit by the IRS for calendar years 2004 through 2006. We are in discussions with the IRS audit team and expect that a final resolution of this matter will not occur for some time. We believe that we have strong defenses to the IRS’s tentative assessment and will vigorously defend our position, as we continue to believe that FedEx Ground’s owner-operators are independent contractors. Given the preliminary status of this matter, we cannot yet determine the amount or a reasonable range of potential loss. However, we do not believe that any loss is probable.

Independent Contractor — Shareholder Derivative Lawsuits. The Plumbers and Pipefitters Local 51 Pension Fund and the Western Pennsylvania Bricklayers Pension Fund each filed shareholder derivative lawsuits (which have now been consolidated) in Tennessee federal court naming FedEx Corporation as a nominal defendant and the members of the Board of Directors of FedEx Corporation as defendants (the Plumbers and Pipefitters suit was filed in May 2008 and the Bricklayers suit was filed in June 2008). The derivative lawsuits, which are purportedly brought to assert the rights of FedEx Corporation, assert claims against the Board members for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment in connection with the management of FedEx Ground — in particular, the classification of FedEx Ground’s owner-operators as independent contractors. Given the preliminary status of these matters, we cannot yet determine the amount or a reasonable range of potential loss. However, we do not believe that any loss is probable.

Antitrust — FedEx Freight Fuel Surcharge. In July 2007, a purported antitrust class-action lawsuit was filed in California federal court, naming FedEx Corporation (particularly FedEx Freight Corporation and its LTL freight subsidiaries) and several other major LTL freight carriers as defendants. The lawsuit alleges that the defendants conspired to fix fuel surcharge rates in violation of federal antitrust laws and seeks injunctive relief, treble damages and attorneys’ fees. Since the filing of the original case, numerous similar cases have been filed against us and other LTL freight carriers, each with allegations of conspiracy to fix fuel surcharge rates along with other related allegations. The U.S. Judicial Panel on Multidistrict Litigation has consolidated these cases for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Georgia. We do not believe that any loss is probable, and given the nature and status of the claims, we cannot yet determine the amount or a reasonable range of potential loss, if any, in these matters.

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

(10) Supplemental Cash Flow Information

The following table presents supplemental cash flow information for the three-month periods ended August 31 (in millions):

		2008				2007
Cash payments for:
Interest (net of capitalized interest)		$	29			$	60
Income taxes			73				91

(11) Condensed Consolidating Financial Statements

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

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee approximately $1.2 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” and “Non-Guarantor” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

CONDENSED CONSOLIDATING BALANCE SHEETS
(UNAUDITED)
August 31, 2008

						Guarantor				Non-guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,121			$	191			$	261			$	—			$	1,573
Receivables, less allowances			4				3,327				1,061				(31	)			4,361
Spare parts, supplies, fuel, prepaid expenses and other, less allowances			6				624				82				—				712
Deferred income taxes			—				495				33				—				528
Total current assets			1,131				4,637				1,437				(31	)			7,174
PROPERTY AND EQUIPMENT, AT COST			23				26,056				2,631				—				28,710
Less accumulated depreciation and amortization			16				13,910				1,251				—				15,177
Net property and equipment			7				12,146				1,380				—				13,533
INTERCOMPANY RECEIVABLE			1,860				—				397				(2,257	)			—
GOODWILL			—				2,299				861				—				3,160
INVESTMENT IN SUBSIDIARIES			11,992				2,694				—				(14,686	)			—
PENSION ASSETS			1,304				6				—				—				1,310
OTHER ASSETS			197				800				140				(171	)			966
		$	16,491			$	22,582			$	4,215			$	(17,145	)		$	26,143
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt		$	1,000			$	—			$	1			$	—			$	1,001
Accrued salaries and employee benefits			25				708				157				—				890
Accounts payable			49				1,596				436				(31	)			2,050
Accrued expenses			15				1,343				220				—				1,578
Total current liabilities			1,089				3,647				814				(31	)			5,519
LONG-TERM DEBT, LESS CURRENT PORTION			250				756				1				—				1,007
INTERCOMPANY PAYABLE			—				2,257				—				(2,257	)			—
OTHER LONG-TERM LIABILITIES
Deferred income taxes			—				1,544				111				(171	)			1,484
Other liabilities			293				2,588				112				—				2,993
Total other long-term liabilities			293				4,132				223				(171	)			4,477
STOCKHOLDERS’ INVESTMENT			14,859				11,790				3,177				(14,686	)			15,140
		$	16,491			$	22,582			$	4,215			$	(17,145	)		$	26,143

CONDENSED CONSOLIDATING BALANCE SHEETS
May 31, 2008

						Guarantor				Non-guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,101			$	166			$	272			$	—			$	1,539
Receivables, less allowances			4				3,310				1,083				(38	)			4,359
Spare parts, supplies, fuel, prepaid expenses and other, less allowances			10				710				82				—				802
Deferred income taxes			—				512				32				—				544
Total current assets			1,115				4,698				1,469				(38	)			7,244
PROPERTY AND EQUIPMENT, AT COST			24				26,658				2,623				—				29,305
Less accumulated depreciation and amortization			16				14,578				1,233				—				15,827
Net property and equipment			8				12,080				1,390				—				13,478
INTERCOMPANY RECEIVABLE			1,902				—				333				(2,235	)			—
GOODWILL			—				2,299				866				—				3,165
INVESTMENT IN SUBSIDIARIES			11,683				2,678				—				(14,361	)			—
PENSION ASSETS			813				1				13				—				827
OTHER ASSETS			381				744				153				(359	)			919
		$	15,902			$	22,500			$	4,224			$	(16,993	)		$	25,633
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt		$	500			$	—			$	2			$	—			$	502
Accrued salaries and employee benefits			41				881				196				—				1,118
Accounts payable			11				1,774				448				(38	)			2,195
Accrued expenses			23				1,301				229				—				1,553
Total current liabilities			575				3,956				875				(38	)			5,368
LONG-TERM DEBT, LESS CURRENT PORTION			749				756				1				—				1,506
INTERCOMPANY PAYABLE			—				2,235				—				(2,235	)			—
OTHER LONG-TERM LIABILITIES
Deferred income taxes			—				1,518				105				(359	)			1,264
Other liabilities			288				2,549				132				—				2,969
Total other long-term liabilities			288				4,067				237				(359	)			4,233
STOCKHOLDERS’ INVESTMENT			14,290				11,486				3,111				(14,361	)			14,526
		$	15,902			$	22,500			$	4,224			$	(16,993	)		$	25,633

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended August 31, 2008

						Guarantor				Non-guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
REVENUES		$	—			$	8,246			$	1,795			$	(71	)		$	9,970
OPERATING EXPENSES:
Salaries and employee benefits			24				2,931				630				—				3,585
Purchased transportation			—				842				375				(10	)			1,207
Rentals and landing fees			1				535				82				(1	)			617
Depreciation and amortization			—				421				71				—				492
Fuel			—				1,490				109				—				1,599
Maintenance and repairs			—				497				40				—				537
Intercompany charges, net			(56	)			(32	)			89				(1	)			—
Other			31				1,073				258				(59	)			1,303
			—				7,757				1,654				(71	)			9,340
OPERATING INCOME			—				489				141				—				630
OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries			384				77				—				(461	)			—
Interest, net			(10	)			5				(4	)			—				(9	)
Intercompany charges, net			14				(24	)			10				—				—
Other, net			(4	)			(6	)			7				—				(3	)
INCOME BEFORE INCOME TAXES			384				541				154				(461	)			618
Provision for income taxes			—				176				58				—				234
NET INCOME		$	384			$	365			$	96			$	(461	)		$	384

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended August 31, 2007

						Guarantor				Non-guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
REVENUES		$	—			$	7,646			$	1,649			$	(96	)		$	9,199
OPERATING EXPENSES:
Salaries and employee benefits			33				2,856				594				—				3,483
Purchased transportation			—				746				298				(19	)			1,025
Rentals and landing fees			1				519				74				(1	)			593
Depreciation and amortization			—				399				74				—				473
Fuel			—				896				68				—				964
Maintenance and repairs			—				506				38				—				544
Intercompany charges, net			(53	)			(18	)			71				—				—
Other			19				1,100				260				(76	)			1,303
			—				7,004				1,477				(96	)			8,385
OPERATING INCOME			—				642				172				—				814
OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries			494				74				—				(568	)			—
Interest, net			(9	)			(13	)			(3	)			—				(25	)
Intercompany charges, net			12				(13	)			1				—				—
Other, net			(3	)			1				—				—				(2	)
INCOME BEFORE INCOME TAXES			494				691				170				(568	)			787
Provision for income taxes			—				245				48				—				293
NET INCOME		$	494			$	446			$	122			$	(568	)		$	494

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended August 31, 2008

						Guarantor				Non-guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES		$	82			$	560			$	56			$	—			$	698
INVESTING ACTIVITIES
Capital expenditures			—				(571	)			(65	)			—				(636	)
Proceeds from asset dispositions and other			—				10				5				—				15
CASH USED IN INVESTING ACTIVITIES			—				(561	)			(60	)			—				(621	)
FINANCING ACTIVITIES
Net transfers (to) from Parent			(33	)			30				3				—				—
Principal payments on debt			—				—				(1	)			—				(1	)
Proceeds from stock issuances			5				—				—				—				5
Dividends paid			(34	)			—				—				—				(34	)
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(62	)			30				2				—				(30	)
Effect of exchange rate changes on cash			—				(4	)			(9	)			—				(13	)
Net increase (decrease) in cash and cash equivalents			20				25				(11	)			—				34
Cash and cash equivalents at beginning of period			1,101				166				272				—				1,539
Cash and cash equivalents at end of period		$	1,121			$	191			$	261			$	—			$	1,573