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    Possibility speaks.


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    Talking to FedEx gives voice to new possibilities. And those conversations yield powerful returns: ideas that move your business and the world forward. Quiksilver meets the demand for its outdoor sports apparel and accessories in 90 countries — from Chile to China — using the FedEx portfolio for global sourcing and distribution.


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    With the most express flights from India and secure, temperature-controlled delivery, FedEx helps Zydus Cadila provide its healthcare solutions to people around the globe. 2


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    Using a variety of FedEx shipping solutions, Build-A-Bear Workshop® brings customized, furry friendships to life in more than 15 countries. 3


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    With freight delivery options that match speed to need, FedEx keeps Borders employees selling books rather than waiting for trucks. 4


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    Rosenstiel’s, a family-owned business since 1880, uses FedEx as its modern-day clipper ship to export fine art prints from London to more than 100 countries. 6


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    Using critical replacement parts stocked at FedEx Kinko’s Office and Print Centers, Wincor Nixdorf’s technicians get customers’ ATMs up and running faster. 7


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    By replacing Boeing 727s with 757s, FedEx is adding planes that lessen the environmental impact — reducing fuel consumption up to 36% while providing 20% more capacity. 9


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    By consolidating Lug’s shipments from Canada, FedEx enables the company to cut costs, streamline customs clearance and move 10 times more of its travel accessories across the border each day. 10


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    With the click of a mouse you can access FedEx Kinko’s Print Online, an innovation that connects your computer to the professional printing capabilities of FedEx Kinko’s Office and Print Centers. 11


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    Possibilities speak loudest to those who want to achieve more: the possibility of innovation to give you an advantage your competitors can’t match, new choices to ensure a better future, and greater access for communities at the farthest frontiers of the world. FedEx has always been fluent in possibility. We continue to give people, businesses and nations the ability to move forward, achieving higher standards of living and new levels of success.


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    Financial Highlights (1) (2) In millions, except earnings per share 2007 2006 Percent Change Operating Results Revenues $35,214 $32,294 9 Operating income 3,276 3,014 9 Operating margin 9.3% 9.3 % Net income 2,016 1,806 12 Diluted earnings per common share 6.48 5.83 11 Average common and common equivalent shares 311 310 Capital expenditures 2,882 2,518 14 Financial Position Total assets $24,000 $22,690 6 Long-term debt, including current portion 2,646 2,442 8 Common stockholders’ investment 12,656 11,511 10 2003 2004 2005 2006 2003 2004 2006(2)(2) 2007(1)(1) (2) (1) 2007 2003 2004 2005 2005 2006 2007 2003 2003 2004 2004 2005 2005 2006 2006 (2) 2007 2007 (1) $22.5 $24.7 $29.4 $32.3 $35.2 6.5% 6.5% 5.8% 5.8% 8.4% 8.4% 9.3% 9.3% 9.3% 9.3% $2.74 $2.76 $4.72 $5.83 $6.48 Revenue (in billions) Operating margin Operating margin Diluted earnings per common share 2003 2004 2005 2006(2) 2007(1) 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 12.0% 10.9% 16.4% 17.1% 16.7% 21.7% 30.9% 22.6% 17.5% 17.3% $63.98 $73.58 $89.42 $109.27 $111.62 Return on average equity Debt to total capitalization Stock price (May 31 close) (1) Results for 2007 include a $143 million charge associated with upfront compensation and benefits under the new pilot labor contract. (2) Results for 2006 include a $79 million ($49 million, net of tax, or $0.16 per diluted share) charge to adjust the accounting for certain facility leases.


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    MESSAGE FROM THE CHAIRMAN To Our Shareowners: This past year, 280,000 FedEx team members applied their We strengthened our network in both the eastern and dedication, creativity, and passion to the task of changing western portions of the European Union. In the UK, we what’s possible for our customers, offering them more acquired ANC, allowing FedEx Express to directly serve the innovative solutions, faster delivery, and greater access entire UK domestic market, providing customers a broader to the world. In short, our team members are providing range of shipping options and services. In Hungary, we a consistently outstanding customer experience that we acquired our global service provider there, Flying-Cargo, believe sets an industry standard. Thanks to their efforts, increasing our capacity in fast-growing eastern Europe. I am pleased to report that FedEx Corporation achieved another benchmark in financial performance. In North America, we enhanced our less-than-truckload freight portfolio by completing the acquisition of Watkins We have just entered our 35th year of continuous operation, Motor Lines. Watkins now operates as FedEx National and often, someone mentions to me they’ve seen the first LTL, broadening our FedEx Freight service offerings. FedEx aircraft — the very special “Wendy” N8FE — at Watkins’ Canadian operations are now FedEx Freight the Smithsonian Air and Space Museum. I tell them how Canada, a great addition to our portfolio there. A number honored I am to be a part of that history. But I also say I’m of new terminals were opened throughout the Freight proud to be part of a team that focuses on the future and system this past year. new ways we can help our customers achieve their goals in the vast global marketplace. In fact, I often tell people The second area of accomplishment to note this past fiscal that FedEx is just getting started. Though customers may year was continued crisp execution. begin talking to us about one or more of our services, they sometimes end up telling us what they really want When we acquired FedEx Kinko’s, we envisioned it as a to accomplish is better service, greater sales, and higher complementary and powerful retail and digital network, profits. Then, given our broad portfolio of solutions, we having great synergies with other FedEx services. We made can really help them achieve their goals. significant progress toward that vision in FY07. We are weaving FedEx philosophy, culture, and metrics deep into And as we talk to businesses large and small, we realize the fabric of FedEx Kinko’s, resulting in reduced employee that what FedEx provides is greater than transportation, turnover and continued performance improvement. We logistics, and business services. We ultimately provide rolled out a new, more compact model for FedEx Kinko’s access. As we’ve learned from our landmark research with centers and opened more than 200 of them in FY07. This SRI International, greater access leads to better societies. new model will help us open more locations faster and Individuals, businesses, and nations alike benefit from the increase convenience and service for our customers. ability to draw from a global marketplace of goods, services, Through FedEx Print Online, we are applying our digital and information. The possibilities speak to our customers, network expertise to helping customers print complex and they speak to us at FedEx as well. Looking forward, we documents, regardless of time and distance. In the same will strive to meet the evolving needs of our customers and vein, customers can now initiate end-to-end direct mail create new markets for our services. campaigns right from their computers, with the order fulfilled at a FedEx Kinko’s. The FedEx Kinko’s network With that forward focus in mind, I’d like to mention in is now producing significant revenues — at an particular three areas of accomplishment among many $800,000,000 run rate as we ended FY07 — for our in fiscal 2007. Express and Ground companies. This highly profitable traffic is growing substantially. The first is the growth of our networks. We believe we have the best collection of networks in the industry and FedEx Ground made a seamless transition from its long- are always looking to expand them strategically for time leader Dan Sullivan to its new president and CEO, Dave more profitable growth and greater possibilities for our Rebholz, who brings great skills and many years of FedEx customers. In FY07, we completed acquisitions in areas experience to his new role. This past year FedEx Ground where we see a bright future. added new hubs, additional direct routings, and numerous IT system improvements to further reduce transit times In China, FedEx Express completed its acquisition of our in our Ground network. A number of new state-of-the-art partner DTW’s share of our joint venture international FedEx Ground facilities were opened during FY07. priority express business. We also acquired DTW’s domestic China express network. Within three months, we instituted The FedEx Ground small business owners have remained next-business-day domestic express service in China, committed to providing outstanding service to Ground improving access to markets for businesses throughout the customers, despite litigation challenges. As we have in the world’s largest nation. past, we will continue to aggressively defend our model, wherever challenged. In India, we acquired our service provider, PAFEX, giving us a wholly owned subsidiary serving nearly 4,400 destinations At FedEx Express, we further strengthened our industry- in a country that has joined China as one of the world’s leading global network. Our strongest emphasis in FY07 fastest growing markets. came where growth is fastest: Asia. Our new Asia Pacific 15


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    MESSAGE FROM THE CHAIRMAN Hub is slated to open in FY09 in Guangzhou, the epicenter and in FedEx facilities in Subic Bay, Dubai, and Miami. of Chinese manufacturing, optimally positioning us to meet We also maintain a significant support relationship with the future needs of this thriving market. Our domestic hub the Red Cross to help in times of crisis. in Hangzhou opened at the end of FY07 and will play a major role in our new China system. We also created a new We recognize the importance of environmental stewardship administrative center for China in Nanjing and one for the and the necessity of improving fuel efficiency. That is why Asia Pacific region in Manila. We added more capacity to we are adding more hybrid vans to our FedEx Express meet projected shipping growth in South Korea as well. fleet and are participating in the development of improved commercial hybrid powertrains, to accelerate the spread A third area of significant accomplishment is our continuing and lower the acquisition costs of this promising technology commitment to improving our customers’ experience at industry-wide. We will further reduce our energy intensity every FedEx touchpoint. and noise footprint by acquiring Boeing 757 aircraft, which offer major reductions in fuel consumption per ton earned We know that expanding the physical networks of our over the planes they replace. Also with conservation in companies is not enough. We must also fulfill our Purple mind, we have chosen the fuel-efficient Boeing 777-200LR Promise: “I will make every FedEx experience outstanding.” twin jet wide-body freighter to meet future international In FY07, we revamped our Service Quality Index across expansion needs. operating companies to better reflect customer needs. This is making our networks easier to use and helping us Our focus in FY07 resolutely remained on providing more offer new solutions that enable customers to build their possibilities each day to our customers, while positioning businesses by tapping into the power of access. FedEx to extend access to more markets and offer more services in coming years. This is how the people of FedEx FedEx team members in our operating companies literally keep businesses small and large on the leading edge of see the world from the air, the ground, and from store commerce — equipping them for continued success in a windows facing main streets and malls in cities and towns changing business world. of every size. From every angle, we see opportunities to improve the quality of life for people in the communities we Though the years ahead will certainly contain challenges, serve. We continue to act on many of those opportunities, there will also be unprecedented opportunities. Whether in both in our daily business activities and through our China, Chile, California or the Czech Republic, people today corporate citizenship activities. move to a global beat of new possibilities, thanks in large part to the explosive growth of access to goods and ideas. In FY07, we expanded our long-standing commitment to bring help quickly when disaster strikes. We announced a It’s a future we at FedEx anticipate with great excitement. donation to the Salvation Army to deploy mobile canteens, each providing up to 2,500 meals a day, along with a grant Sincerely, to train Salvation Army emergency response personnel in countries around the world. On a day-to-day basis, our company continues to increase support to communities by giving people access to needed food, education, medical care, safety programs, and more. This past year, in conjunction with Heart to Heart, we agreed to pre-stage Frederick W. Smith disaster-relief supplies in a response center in Kansas City Chairman, President and Chief Executive Officer 16


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    Talking with FedEx results in tailored solutions that take advantage of our global transportation and information networks: FedEx Express provides time-definite shipping to more than 220 countries and territories. FedEx Ground provides cost-effective, day- definite package delivery throughout the United States and Canada. FedEx Freight is a leading North American less-than-truckload freight company. FedEx Kinko’s is a leading provider of document solutions and business services, with a global retail network of nearly 1,700 locations. 17


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    Possibilities speak when we talk with customers about enhancing their return on investment, increasing sales, improving the experience for their customers or extending access to more of the world. By understanding customers’ needs and tailoring solutions to serve them, we help turn conversations into the fulfillment of valuable possibilities. 18


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    China Sony 20


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    “FedEx framed the conversation around Sony’s end objectives — with results that help us grow our business.” “Sony’s business units span many segments of the electronics and entertainment industries. But whether it’s a movie, a music CD or a computer game, our products all excite and touch the lives of our customers. That’s really how the whole conversation with FedEx started: How can we compete as a united front? We didn’t need vendors — we needed a carrier that could help us work smarter and grow our business. FedEx talked with us to understand our business objectives. They saw that some of our processes weren’t serving our business needs and proposed changes to better address what we really wanted to accomplish. We didn’t expect FedEx to focus on our business objectives, but that’s what made the discussions and the solutions so valuable. “The conversations extended to all of our business units. If we said, ‘We want X,’ FedEx asked what X meant to us — what was the root need? They worked across the operating companies to build solutions that help us better serve our customers and vendors, reduce costs and give us the competitive edge. Today, the conversation has become about how we’re going to move forward in our industry.” — Todd Yamagiwa, Director of Logistics, Sony Logistics of America 21


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    Hitting critical “street dates” has gotten easier for Sony and its customers with the help of FedEx. In Sony’s business, the number one priority is meeting the “street dates” when new products are expected to arrive across retail outlets for public release. Missing that window not only disappoints consumers and hurts sales, it also results in retailer penalties and other costs. FedEx saw that 100% in-transit visibility was essential. We provided a creative technology solution that gives Sony the information it needs to make solid decisions if weather or other factors threaten the timing of a shipment. And with the flexibility to access FedEx express, ground and freight services to optimize shipping, Sony has increased its on-time performance serving retail outlets across North America. The company is also taking advantage of a similar flexibility to cut costs and better fulfill direct-to- consumer orders for computer equipment, electronics and more through its Web site, sonystyle.com. With thousands of product releases each year, Sony counts on FedEx to keep the hits coming. 22


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    Crocs 24


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    “Crocs gained global advantages when FedEx changed the conversation about what was possible.” “When Crocs started talking to FedEx three years ago, we were a small company that wanted to break the mold in our industry. Footwear has always been a seasonal business where retailers typically place orders six months ahead. We wanted a greater ability to match styles and colors to changing demand. In a series of discussions, FedEx coached us on adopting a direct distribution model that would give us the just-in-time replenishment capabilities of a high- tech manufacturer — and save $5 million annually on traditional warehousing and distribution. These discussions brought our vision of rapid replenishment to life with a solution unlike anything in our industry. “We’ve relied on our relationship with individuals across FedEx as we’ve grown from $13.5 million to more than $350 million in sales over the past three years. Apart from providing solutions for a wide range of issues, they’ve been a great sounding board for us. It’s not an overstatement to say that our conversations with FedEx have been instrumental in our success.” — Scott Crutchfield, VP of Operations, Crocs, Inc. 25


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    With FedEx shipping options from China, Crocs has turn-on-a-dime control of its distribution. Crocs invites everyone to “walk a mile in our shoes,” but those shoes typically cross several thousand miles to reach devoted customers’ feet. FedEx provides the company with a suite of services to move products manufactured in China to the U.S. market, matching speed to demand. Using an innovative technology solution developed by FedEx, Crocs can select the best mode of delivery for a shipment and generate the appropriate U.S. domestic shipping labels in China. During peak seasons — and whenever the hottest-selling shoes and new releases need to get into stores quickly — FedEx Express moves bulk shipments by air and breaks them down on arrival for delivery to retailers. More classic stock moves in bulk via ocean shipments, arranged by FedEx Trade Networks, for final delivery through FedEx Ground and FedEx Freight. Whether the company needs to meet a surge in demand for a special product release, or a retailer’s request for as few as 24 pairs, FedEx has given Crocs the flexibility to choose the distribution method to match. 26


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    “What FedEx is doing in China today is so different — it opens up possibilities that customers are increasingly talking to us about.” “Sometimes in order to change the conversation about what’s possible, you have to build the infrastructure to support new ideas. We did this when FedEx began service in the United States 35 years ago, and the growth in China today is even greater. Middle-class incomes are rising dramatically — China is expected to become the world’s third-largest consumer market in the coming decades. By building two new hubs here, we’re expanding access within the country and for our customers around the world. “In May, our new China domestic hub in Hangzhou began operations, providing time- or day-definite service to more than 200 cities and counties poised for growth. And in December 2008, we’ll relocate our current Asia Pacific hub in Subic Bay, Philippines, farther north to Guangzhou. It’s a move that uniquely positions us to serve the global demand for service in and out of the booming Pearl River Delta region. These investments are initiating some of the most powerful conversations we have today: helping companies large and small navigate this market and grow their business here.” — David L. Cunningham Jr., President, Asia Pacific, FedEx Express 29


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    “Even before a conversation starts, we’re looking ahead for new answers. FedEx Innovation Lab was created for this purpose.” “Our job is to keep changing what’s possible. That means using imagination to address needs that others haven’t anticipated — or maybe never thought could be met. FedEx was founded on this ability, and we set up the lab to support innovation by exploring emerging technologies and ideas that might be applied anywhere from two years to much farther into the future. “Within our portfolios, we’re working with mobile technologies, biometrics and video object recognition, as a few examples. Some of the applications are operationally driven; others are more customer-focused. Ultimately, they’re all designed to contribute to the customer experience. One innovation we’re piloting now is packaging with sensors that continually monitor temperature, humidity, speed and light — factors that are critical for certain types of shipments. Advanced as it sounds, it goes back to our idea that ‘the information about the package is as important as the package itself.’ This important principle has driven FedEx from the beginning.” — Miley Ainsworth, Director, Innovation and Scanning Technology, FedEx Innovation Lab 30


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    MESSAGE FROM THE CHIEF FINANCIAL OFFICER To Our Shareowners: FedEx delivered solid financial performance for our by $1 billion. We feel these changes balance our shareowners despite increasingly challenging economic responsibilities to remain competitive in the future, to conditions in fiscal 2007. Our results benefited from the provide our employees with a comfortable retirement and continued strong growth of our ground and international to maintain our fiscal responsibility to our shareowners. express businesses and from our investments to expand our portfolio of service offerings, drive In FY08, we will continue to be challenged by a soft revenue growth and increase productivity. economic environment; however, we will continue to make significant investments in our global networks. We completed strategic acquisitions in three These investments will position our company to dynamic international markets — China, India and continue to achieve our long-term financial goals the United Kingdom — and began offering domestic of improving earnings, margins, cash flows and time-definite service to customers throughout China. returns for our shareowners. We have an excellent In the United States, we absorbed the acquisition track record in this regard. Over the last 10 years, and network integration costs associated with our our revenues have grown more than 11 percent on new FedEx National LTL business. We also made a compounded annual basis while net income has investments in technology and network infrastructure increased more than 18 percent. Equally as important, at FedEx Ground, which have resulted in faster our shareholders have earned more than 15 percent delivery lanes and increased productivity. Finally, annually on their investment during that time. we continued to expand the FedEx Kinko’s retail network with 226 new store openings in FY07. Thank you for your continued support as a FedEx shareowner. I hope you share my confidence that we During the year, we also announced our intentions to will deliver on our long-term financial goals for our investors. modernize our employee retirement plans in response to a changing regulatory landscape and shifting demographic trends. The recently adopted and proposed accounting rules presented an unacceptable level of risk and volatility to the future of the company. Under our new programs, we expect our retirement plan costs to become more predictable. In addition, we were able to reduce the Alan B. Graf, Jr. impact on shareholder equity of the adoption of SFAS 158 Executive Vice President and Chief Financial Officer Comparison of Five-Year Cumulative Total Return* $ 220 ------------------------------------------------------------------------------------------------------- $ 200 ------------------------------------------------------------------------------------------------------- $ 180 ------------------------------------------------------------------------------------------------------- $ 160 ------------------------------------------------------------------------------------------------------- $ 140 ------------------------------------------------------------------------------------------------------- $ 120 ------------------------------------------------------------------------------------------------------- $ 100 ------------------------------------------------------------------------------------------------------- $ 80 ------------------------------------------------------------------------------------------------------- 2002 2003 2004 2005 2006 2007 FedEx Corporation Dow Jones Transportation Average S&P 500 * Shows the value, at the end of each of the last five fiscal years, of $100 invested in FedEx Corporation common stock or the relevant index on May 31, 2002, and assumes reinvestment of dividends. Fiscal year ended May 31. 32


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    34 Management’s Discussion and Analysis 57 Management’s Report on Internal Control over Financial Reporting 58 Report of Independent Registered Public Accounting Firm 59 Consolidated Financial Statements 63 Notes to Consolidated Financial Statements 88 Report of Independent Registered Public Accounting Firm 89 Selected Financial Data 90 Board of Directors 91 Executive Officers and Senior Management 92 Corporate Information Financial Results 33


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Overview of Financial Section DESCRIPTION OF BUSINESS FedEx provides a broad portfolio of transportation, e-commerce The financial section of the FedEx Corporation (“FedEx”) Annual and business services through companies competing collec- Report consists of the following Management’s Discussion tively, operating independently and managed collaboratively, and Analysis of Results of Operations and Financial Condition under the respected FedEx brand. These operating companies (“MD&A”), the Consolidated Financial Statements and the notes are primarily represented by FedEx Express, the world’s largest to the Consolidated Financial Statements, and Other Financial express transportation company; FedEx Ground, a leading pro- Information, all of which include information about our signifi- vider of small-package ground delivery services; FedEx Freight cant accounting policies, practices and the transactions that Corporation, a leading U.S. provider of less-than-truckload underlie our financial results. The following MD&A describes (“LTL”) freight services; and FedEx Kinko’s, a leading provider of the principal factors affecting the results of operations, liquidity, document solutions and business services. These companies rep- capital resources, contractual cash obligations and the critical resent our major service lines and form the core of our reportable accounting estimates of FedEx. The discussion in the financial segments. See “Reportable Segments” for further discussion. section should be read in conjunction with the other sections The key indicators necessary to understand our operating results of this Annual Report and our detailed discussion of risk factors include: included in this MD&A. • the overall customer demand for our various services; ORGANIZATION OF INFORMATION • the volumes of transportation and business services provided Our MD&A is comprised of three major sections: Results of through our networks, primarily measured by our average daily Operations, Financial Condition and Critical Accounting Estimates. volume and shipment weight; These sections include the following information: • the mix of services purchased by our customers; • Results of Operations includes an overview of our consolidated 00 results compared to 00, and 00 results compared to • the prices we obtain for our services, primarily measured by 00. This section also includes a discussion of key actions and yield (average price per shipment or pound) or average price events that impacted our results, as well as a discussion of our per hundredweight for FedEx Freight LTL Group shipments; outlook for 00. • our ability to manage our cost structure for capital expendi- • The overview is followed by a financial summary and analysis tures and operating expenses and to match our cost structure (including a discussion of both historical operating results and to shifting volume levels; and our outlook for 00) for each of our four reportable business • the timing and amount of fluctuations in fuel prices and our segments. ability to recover incremental fuel costs through our fuel • Our financial condition is reviewed through an analysis of key surcharges. elements of our liquidity, capital resources and contractual cash Except as otherwise specified, references to years indicate our obligations, including a discussion of our cash flow statements fiscal year ended May , 00 or ended May  of the year ref- and our financial commitments. erenced and comparisons are to the prior year. References to our • We conclude with a discussion of the critical accounting esti- transportation segments mean, collectively, our FedEx Express, mates that we believe are important to understanding certain FedEx Ground and FedEx Freight segments. of the material judgments and assumptions incorporated in our reported financial results. 


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    MANAGEMENT’S DISCUSSION AND ANALYSIS Results of Operations CONSOLIDATED RESULTS The following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in millions, except per share amounts) for the years ended May 31: Percent Change 2007(1) 2006(2) 2005(3) 2007/2006 2006/2005 Revenues $35,214 $ 32,294 $ 29,363 9 10 Operating income 3,276 3,014 2,471 9 22 Operating margin 9.3% 9.3% 8.4% –bp 90bp Net income $ 2,016 $ 1,806 $ 1,449 12 25 Diluted earnings per share $ 6.48 $ 5.83 $ 4.72 11 24 (1) Operating expenses include a $143 million charge at FedEx Express associated with upfront compensation and benefits under the new labor contract with our pilots, which was ratified in October 2006. The impact of this new contract on second quarter net income was approximately $78 million net of tax, or $0.25 per diluted share. (2) Operating expenses include a $79 million ($49 million, net of tax, or $0.16 per diluted share) charge to adjust the accounting for certain facility leases, predominantly at FedEx Express. (3) Results include a $48 million ($31 million, net of tax, or $0.10 per diluted share) Airline Stabilization Act charge at FedEx Express and a $12 million, or $0.04 per diluted share, benefit from an income tax adjustment. The following table shows changes in revenues and operating income by reportable segment for 2007 compared to 2006, and 2006 compared to 2005 (in millions): Revenues Operating Income Dollar Change Percent Change Dollar Change Percent Change 2007/2006 2006/2005 2007/2006 2006/2005 2007/2006 2006/2005 2007/2006 2006/2005 FedEx Express segment (1) $1,235 $1,961 6 10 $188 $353 11 25 FedEx Ground segment 737 626 14 13 108 101 15 17 FedEx Freight segment 941 428 26 13 (22) 131 (5) 37 FedEx Kinko’s segment (48) 22 (2) 1 (12) (43) (21) (43) Other and Eliminations 55 (106) NM NM – 1 NM NM $2,920 $2,931 9 10 $262 $543 9 22 (1) FedEx Express 2007 operating expenses include a $143 million charge associated with upfront compensation and benefits under the new pilot labor contract, 2006 operating expenses include a $75 million charge to adjust the accounting for certain facility leases, and 2005 operating expenses include a $48 million charge related to the Airline Stabilization Act. The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected operating statistics (in thousands, except yield amounts) for the years ended May 31: Average Daily Package Volume (ADV) Average Daily LTL Shipments (ADS) FedEx Express and FedEx Ground FedEx Freight LTL Group Total ADV 5,864 6,098 6,391 Total ADS 63 67 78 % Change 8% 4% 5% % Change 9% 6% 16% 7,000 80 6,000 5,000 60 2,609 2,815 3,126 4,000 40 78 3,000 67 63 2,000 20 3,255 3,283 3,265 1,000 0 0 2005 2006 2007 2005 2006 2007 FedEx Express FedEx Ground FedEx Freight LTL Group 35


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    FEDEX CORPORATION Revenue Per Package – Yield LTL Revenue per Hundredweight – Yield $30.00 $30.00 $25.00 $21.72 $25.00 $20.77 $19.31 $18.65 $20.00 $20.00 $16.84 $15.48 $15.00 $15.00 $10.00 $6.68 $7.02 $7.21 $10.00 $5.00 $5.00 $0.00 $0.00 2005 2006 2007 2005 2006 2007 FedEx Express FedEx Ground FedEx Freight LTL Group Overall results for 2007 were solid in spite of several challenges, labor contract that included signing bonuses and other upfront as we continued to execute our business strategy during a time compensation of approximately $143 million, as well as pay of slower economic growth and expanded our service offerings increases and other benefit enhancements. These costs were through key acquisitions. Operating results moderated during partially mitigated by reductions in variable incentive compensa- 2007, reflecting the impact of weaker volumes in the second tion. The effect of this new agreement on second quarter 2007 half of our fiscal year in our FedEx Express and FedEx Freight net income was approximately $78 million net of tax, or $0.25 per segments due to the slowing economic environment. The diluted share. year-over-year negative impact from the timing lag in our fuel The timing and amount of fluctuations in fuel prices and our abil- surcharges and a $143 million charge associated with upfront ity to recover incremental fuel costs through our various fuel compensation and benefits under the new contract with our surcharges continue to impact our results. Fuel costs increased pilots also negatively impacted 2007 operating results. during 2007 due to an increase in the average price per gallon of Revenue growth in 2007 was due to strong FedEx Ground pack- fuel and an increase in gallons consumed. Because of the timing age volume growth and continued growth in FedEx Express lag that exists between when we purchase fuel and when our International Priority (“IP”) services, as we continued to focus fuel surcharges are automatically adjusted at FedEx Express, fuel on expanding these service offerings. Our 2007 revenues also surcharges were not sufficient to offset the effect of changes in reflected the acquisition of FedEx National LTL (formerly known fuel costs on our operating results for 2007. Though fluctuations as Watkins Motor Lines), which added approximately $760 million in fuel surcharge rates can be significant from period to period, to 2007 revenue. Revenue growth in 2007 was slightly offset by fuel surcharges represent one of the many individual components declines in copy product revenues at FedEx Kinko’s. of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services purchased, the Operating income increased in 2007, as revenue growth at FedEx base price and other extra service fees we obtain for these ser- Express and FedEx Ground more than offset reduced profitability vices and the level of pricing discounts offered. In order to provide at the FedEx Freight segment and FedEx Kinko’s. Operating mar- information about the impact of fuel surcharges on the trend in gin was flat in 2007 due to slower economic growth, the negative revenue and yield growth, we have included the comparative fuel impact of higher salaries and benefits primarily as a result of the surcharge rates in effect for 2007, 2006 and 2005 in the accompa- new labor contract with our pilots and the timing of adjustments nying discussions of each of our transportation segments. to our fuel surcharges at FedEx Express (described below), as well as operating losses at FedEx National LTL. Softening vol- Our 2006 results benefited from strong growth in the global econ- umes in the LTL sector and ongoing expenses to integrate the omy. During 2006, revenue growth was primarily attributable to yield FedEx National LTL network negatively impacted the performance improvement across our transportation segments, package volume of the FedEx Freight segment in 2007. growth in our IP services at FedEx Express and volume growth at FedEx Ground and FedEx Freight. Yields improved principally due Salaries and employee benefits increased in 2007 as a result of to incremental fuel surcharges and base rate increases. the new labor contract for the pilots of FedEx Express and the FedEx National LTL acquisition. The impacts of expensing stock Operating income increased during 2006 primarily due to rev- options commencing in 2007 and higher retirement plan costs enue growth and improved margins across all our transportation were largely offset by lower incentive compensation accruals. segments. Yield and cost management activities, combined with Purchased transportation costs increased in 2007 due to FedEx productivity gains across all transportation segments, contrib- Ground volume growth, the FedEx National LTL acquisition and uted to our margin growth. Operating income improvement was IP package volume growth. partially offset by higher costs at FedEx Express to support inter- national volume growth, expansion costs at FedEx Ground and The pilots of FedEx Express, who represent a small number of reduced operating profit at FedEx Kinko’s. our total employees, are employed under a collective bargaining agreement. In October 2006, the pilots ratified a new four-year 36


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    MANAGEMENT’S DISCUSSION AND ANALYSIS While fuel costs increased substantially in 2006, fuel surcharges million in cash. This acquisition converts our joint venture with more than offset the effect of these higher fuel costs. Salaries and DTW Group into a wholly owned subsidiary and increases our employee benefits increased in 2006 due largely to increases in presence in China in the international and domestic express busi- wage rates, pension and medical expenses. Pension expense nesses. Prior to the fourth quarter of 2007, we accounted for our increased $64 million in 2006 due primarily to a reduction in the investment in the joint venture under the equity method. discount rate. Purchased transportation increased in 2006 due The financial results of the ANC and DTW Group acquisitions, primarily to the continued increase in the use of contract carriers as well as other immaterial business acquisitions during 2007, to support increasing volumes at FedEx Ground, increased IP vol- are included in the FedEx Express segment from the date of umes at FedEx Express and higher fuel surcharges from third-party acquisition. These acquisitions were not material to our results transportation providers, including our independent contractors. of operations or financial condition. Other Income and Expense We paid the purchase price for these acquisitions from available Net interest expense decreased $51 million during 2007 primarily cash balances, which included the net proceeds from our $1 bil- due to increased interest income earned on higher cash bal- lion senior unsecured debt offering completed during 2007. See ances. Net interest expense decreased $35 million during 2006 Note 6 of the accompanying consolidated financial statements due primarily to the reduction in the level of outstanding debt for further discussion of this debt offering. and capital leases as a result of scheduled payments, increased See Note 3 of the accompanying consolidated financial state- interest income due to higher cash balances and interest rates, ments for further information about these acquisitions. and higher capitalized interest related to modification of certain aircraft at FedEx Express. Lease Accounting Charge Our results for 2006 included a noncash charge of $79 million Income Taxes ($49 million net of tax, or $0.16 per diluted share) to adjust the Our effective tax rate was 37.3% in 2007, 37.7% in 2006 and 37.4% accounting for certain facility leases, predominantly at FedEx in 2005. Our 2007 tax rate was favorably impacted by the conclu- Express. The charge, which included the impact on prior years, sion of various state and federal tax audits and appeals. This related primarily to rent escalations in on-airport facility leases favorable impact was partially offset by tax charges incurred as that were not being recognized appropriately. a result of a reorganization in Asia associated with our acqui- sition in China (described below). The 37.4% effective tax rate Airline Stabilization Act Charge in 2005 was favorably impacted by the reduction of a valuation In 2005, the United States Department of Transportation (“DOT”) allowance on foreign tax credits arising from certain of our inter- issued a final order in its administrative review of the FedEx national operations as a result of the passage of the American Express claim for compensation under the Air Transportation Jobs Creation Act of 2004 and by a lower effective state tax rate. Safety and System Stabilization Act. As a result, we recorded a For 2008, we expect our effective tax rate to be between 37.5% charge of $48 million in 2005 ($31 million net of tax, or $0.10 per and 38%. The actual rate, however, will depend on a number of diluted share), representing the DOT’s repayment demand of $29 factors, including the amount and source of operating income. million and the write-off of a $19 million receivable. Business Acquisitions Outlook On September 3, 2006, we acquired the assets and assumed cer- Our outlook for 2008 reflects continued investment in several tain obligations of the LTL operations of Watkins Motor Lines, major, long-term initiatives in a soft but stable U.S. economy. a privately held company, and certain affiliates for $787 million Outside the United States, economic activity is expected to con- in cash. Watkins, a leading provider of long-haul LTL services, tinue to expand, but at a more moderate pace than in 2007. As a was renamed FedEx National LTL and meaningfully extends our result, we expect our revenue trends to moderate in 2008, with leadership position in the heavyweight LTL freight sector. The growth driven by increased shipments at FedEx Ground, the full- financial results of FedEx National LTL are included in the FedEx year benefit of the FedEx National LTL business and expansion of Freight segment from the date of acquisition. international business at FedEx Express (both IP and international On December 16, 2006, we acquired all of the outstanding capital domestic services). stock of ANC Holdings Ltd. (“ANC”), a United Kingdom domestic We expect our earnings in 2008 to be below our long-term goal express transportation company, for $241 million, predominantly of 10% to 15% annual earnings growth due to the softening U.S. in cash. This acquisition allows FedEx Express to better serve the economy and planned investments in our businesses, which are United Kingdom domestic market, which we previously served critical to our long-term strategy. We remain optimistic about the primarily through independent agents. long-term prospects for all of our business segments. On March 1, 2007, FedEx Express acquired Tianjin Datian W. Group Co., Ltd.’s (“DTW Group”) 50% share of the FedEx-DTW International Priority express joint venture and assets relating to DTW Group’s domestic express network in China for $427 37


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    FEDEX CORPORATION We expect to make significant investments to expand our global NEW ACCOUNTING PRONOUNCEMENTS networks, in part through the continued integration and expansion New accounting rules and disclosure requirements can signifi- of the businesses we acquired in 00. Our planned investments cantly impact the comparability of our financial statements. We for 00 are focused on the following three key opportunities: believe the following new accounting pronouncements, which were issued or became effective for us during 00, are relevant • support for long-term volume growth, such as additional or to the readers of our financial statements. expanded facilities across all segments, new aircraft (such as the Boeing  and  Freighter) and expansion of our inter- On June , 00, we adopted the provisions of Statement of national domestic express businesses; Financial Accounting Standards (“SFAS”) R, “Share-Based Payment,” which requires recognition of compensation expense • improvements in service levels, including expanded delivery for stock-based awards using a fair value method. The adop- areas for the FedEx Priority Overnight and FedEx First Overnight tion of SFAS R reduced earnings for 00 by $0. per diluted services at FedEx Express and reduced transit times at FedEx share. For additional information on the impact of the adoption Ground; and of SFAS R, refer to Note  to the accompanying consolidated • improvements to productivity, including updates and enhance- financial statements. ments to our technology capabilities. On May , 00, we adopted SFAS , “Employers’ Accounting FedEx Kinko’s will continue to focus on key strategies related to for Defined Benefit Pension and Other Postretirement Plans,” adding new locations, improving customer service and increasing which requires recognition in the balance sheet of the funded investments in employee development and training. We expect status of defined benefit pension and other postretirement benefit these strategies to continue to adversely affect profitability in plans, and the recognition in accumulated other comprehensive 00. FedEx Kinko’s plans to open approximately 00 new centers income of unrecognized gains or losses, prior service costs or in the coming year, which will bring the total number of centers credits and transition assets or obligations existing at the time to approximately ,000 by the end of 00. of adoption. Additionally, SFAS  requires the measurement date for plan assets and liabilities to coincide with the sponsor’s All of our transportation businesses operate in a competitive pric- year-end. We currently use a February  measurement date for ing environment, exacerbated by continuing volatile fuel prices. our plans; therefore, this standard will require us to change our Historically, our fuel surcharges have generally been sufficient to measurement date to May  (beginning in 00). offset incremental fuel costs; however, volatility in fuel costs may impact earnings because adjustments to our fuel surcharges lag The funded status recognition and disclosure provisions of SFAS changes in actual fuel prices paid. Therefore, the trailing impact  were effective for FedEx as of May , 00. The requirement of adjustments to our fuel surcharges can affect our earnings. to measure plan assets and benefit obligations as of our fiscal year-end is effective for FedEx no later than 00. See “Risk Factors” for a discussion of these and other potential risks and uncertainties that could materially affect our future The adoption of SFAS  resulted in a $ million charge to performance. shareholders’ equity at May , 00 through accumulated other comprehensive income. Under SFAS , we were required to Seasonality of Business write off our prepaid pension asset of $. billion and increase Our businesses are seasonal in nature. Seasonal fluctuations our pension and other postretirement benefit liabilities by $0 affect volumes, revenues and earnings. Historically, the U.S. million. These adjustments, net of deferred taxes of $ mil- express package business experiences an increase in volumes lion, were required to recognize the unfunded projected benefit in late November and December. International business, particu- obligation in our balance sheet. SFAS  has no impact on the larly in the Asia-to-U.S. market, peaks in October and November determination of expense for our pension or other postretirement in advance of the U.S. holiday sales season. Our first and third benefit plans. fiscal quarters, because they are summer vacation and post win- In February 00, we announced changes to modernize certain of ter-holiday seasons, have historically experienced lower volumes our retirement programs over the next two fiscal years. Effective relative to other periods. Normally, the fall is the busiest shipping January , 00, we will increase the annual company matching period for FedEx Ground, while late December, June and July are contribution under the largest of our 0(k) plans covering most the slowest periods. For the FedEx Freight LTL Group, the spring employees from $00 to a maximum of .% of eligible compensa- and fall are the busiest periods and the latter part of December, tion. Effective May , 00, benefits previously accrued under our January and February are the slowest periods. For FedEx Kinko’s, primary pension plans using a traditional pension benefit formula the summer months are normally the slowest periods. Shipment will be capped for most employees, and those benefits will be levels, operating costs and earnings for each of our companies payable beginning at retirement. Beginning June , 00, future can also be adversely affected by inclement weather, particularly pension benefits for most employees will be accrued under a cash in our third fiscal quarter. In addition, the transportation and busi- balance formula we call the Portable Pension Account. These ness services industries are directly affected by the state of the changes will not affect the benefits of current retirees. For addi- overall global economy. tional information on the adoption of SFAS  and these changes, see Note  to the accompanying audited financial statements and the Critical Accounting Estimates section of this MD&A. 


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    MANAGEMENT’S DISCUSSION AND ANALYSIS In July 2006, the Financial Accounting Standards Board (“FASB”) FEDEX SERVICES & OTHER INTERSEGMENT issued FASB Interpretation No. (“FIN”) 48, “Accounting for TRANSACTIONS Uncertainty in Income Taxes.” This interpretation establishes new FedEx Services provides customer-facing sales, marketing and standards for the financial statement recognition, measurement information technology support, primarily for FedEx Express and disclosure of uncertain tax positions taken or expected to be and FedEx Ground. The costs for these activities are allocated taken in income tax returns. The new rules will be effective for based on metrics such as relative revenues or estimated services FedEx in the first quarter of 2008. The adoption of this interpreta- provided. We believe these allocations approximate the cost of tion will not have a material effect on our financial statements. providing these functions. In September 2006, the Securities and Exchange Commission The operating expenses line item “Intercompany charges” on (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, the accompanying unaudited financial summaries of our report- “Considering the Effects of Prior Year Misstatements when able segments includes the allocations from FedEx Services to Quantifying Misstatements in Current Year Financial Statements,” the respective segments. The “Intercompany charges” caption which eliminates the diversity in practice surrounding the quan- also includes allocations for administrative services provided tification and evaluation of financial statement errors. The between operating companies and certain other costs such as guidance outlined in SAB 108 was effective for FedEx in the fourth corporate management fees related to services received for gen- quarter of 2007 and is consistent with our historical practices for eral corporate oversight, including executive officers and certain assessing such matters when circumstances have required such legal and finance functions. Management evaluates segment an evaluation. financial performance based on operating income. Effective June 1, 2006, we moved the credit, collections and REPORTABLE SEGMENTS customer service functions with responsibility for FedEx Express FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s U.S. and FedEx Ground customer information from FedEx Express represent our major service lines and form the core of our report- into a new subsidiary of FedEx Services named FedEx Customer able segments. As of May 31, 2007, our reportable segments Information Services, Inc. (“FCIS”). Also, effective June 1, 2006, included the following businesses: we moved FedEx Supply Chain Services, Inc., the results of which were previously reported in the FedEx Ground segment, into a FedEx Express Segment FedEx Express new subsidiary of FedEx Services named FedEx Global Supply (express transportation) Chain Services, Inc. The costs of providing these customer FedEx Trade Networks service functions and the net operating costs of FedEx Global (global trade services) Supply Chain Services are allocated back to the FedEx Express FedEx Ground Segment FedEx Ground and FedEx Ground segments. Prior year amounts have not been (small-package ground delivery) reclassified to conform to the current year segment presentation, FedEx SmartPost as the financial results are materially comparable. (small-parcel consolidator) Certain FedEx operating companies provide transportation FedEx Freight Segment FedEx Freight LTL Group: and related services for other FedEx companies outside their FedEx Freight reportable segment. Billings for such services are based on (regional LTL freight negotiated rates that we believe approximate fair value and are transportation) reflected as revenues of the billing segment. These rates are FedEx National LTL adjusted from time to time based on market conditions. FedEx (long-haul LTL freight Kinko’s segment revenues include package acceptance revenue, transportation) which represents the fee received by FedEx Kinko’s from FedEx FedEx Custom Critical Express and FedEx Ground for accepting and handling packages (time-critical transportation) at FedEx Kinko’s locations on behalf of these operating compa- Caribbean Transportation Services nies. Package acceptance revenue does not include the external (airfreight forwarding) revenue associated with the actual shipments. Such interseg- ment revenues and expenses are eliminated in the consolidated FedEx Kinko’s Segment FedEx Kinko’s results and are not separately identified in the following segment (document solutions and information, as the amounts are not material. business services) 39


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    FEDEX CORPORATION FEDEX EXPRESS SEGMENT The following table compares selected statistics (in thousands, The following table compares revenues, operating expenses, except yield amounts) for the years ended May 31: operating income and operating margin (dollars in millions) for Percent Change 2007/ 2006/ the years ended May 31: 2007 2006 2005 2006 2005 Percent Change 2007/ 2006/ Package Statistics (1) 2007 2006 2005 2006 2005 Average daily package volume (ADV): Revenues: U.S. overnight box 1,174 1,203 1,184 (2) 2 Package: U.S. overnight envelope 706 713 680 (1) 5 U.S. overnight box $ 6,485 $ 6,422 $ 5,969 1 8 U.S. deferred 898 901 958 – (6) U.S. overnight Total U.S. envelope 1,990 1,974 1,798 1 10 domestic ADV 2,778 2,817 2,822 (1) – U.S. deferred 2,883 2,853 2,799 1 2 IP (2) 487 466 433 5 8 Total U.S. domestic Total ADV 3,265 3,283 3,255 (1) 1 package revenue 11,358 11,249 10,566 1 6 Revenue per package (yield): International U.S. overnight box $ 21.66 $20.94 $19.77 3 6 Priority (IP) (1) 6,722 6,139 5,464 9 12 U.S. overnight envelope 11.06 10.86 10.37 2 5 Total package U.S. deferred 12.59 12.42 11.46 1 8 revenue 18,080 17,388 16,030 4 8 U.S. domestic Freight: composite 16.04 15.66 14.69 2 7 U.S. 2,412 2,218 1,854 9 20 IP (2) 54.13 51.64 49.47 5 4 International Composite priority freight (1) 1,045 840 670 24 25 package yield 21.72 20.77 19.31 5 8 International airfreight 394 434 381 (9) 14 (1) Total freight Freight Statistics revenue 3,851 3,492 2,905 10 20 Average daily freight pounds: Other (2) 750 566 550 33 3 U.S. 9,569 9,374 8,885 2 6 Total revenues 22,681 21,446 19,485 6 10 International priority freight (2) 1,878 1,634 1,395 15 17 Operating expenses: International airfreight 1,831 2,126 1,914 (14) 11 Salaries and Total average employee benefits 8,234(3) 8,033 7,704 3 4 daily freight pounds 13,278 13,134 12,194 1 8 Purchased Revenue per pound (yield): transportation 1,098 971 843 13 15 U.S. $ 0.99 $ 0.93 $ 0.82 6 13 Rentals and International landing fees 1,610 1,696(4) 1,608 (5) 5 priority freight (2) 2.18 2.02 1.88 8 7 Depreciation and International airfreight 0.84 0.80 0.78 5 3 amortization 856 805 798 6 1 Composite Fuel 2,946 2,786 2,012 6 38 freight yield 1.14 1.04 0.93 10 12 Maintenance and (1) Package and freight statistics include only the operations of FedEx Express. repairs 1,444 1,344 1,276 7 5 (2) We reclassified certain prior period international priority freight service statistics previously Airline Stabilization included within the IP package statistics to international priority freight statistics to conform to Act charge – – 48 NM NM the current period presentation and more precisely present the nature of the services provided. Intercompany charges 2,082 1,542 1,509 35 2 Other 2,456 2,502 2,273 (2) 10 Total operating expenses 20,726 19,679 18,071 5 9 Operating income $ 1,955 $ 1,767 $ 1,414 11 25 Operating margin 8.6% 8.2% 7.3% 40bp 90bp (1) We reclassified certain prior period international priority freight service revenues previously included within IP package revenues to international priority freight revenues to conform to the current period presentation and more precisely present the nature of the services provided. (2) Other revenues includes FedEx Trade Networks and our international domestic express businesses, such as ANC, DTW Group and our Canadian domestic express operations. (3) Includes a $143 million charge for signing bonuses and other upfront compensation associated with a new four-year labor contract with our pilots. (4) Includes a $75 million one-time, noncash charge to adjust the accounting for certain facility leases. 40


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    MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Express Segment Revenues FedEx Express Segment Operating Income Solid yield growth primarily due to pricing discipline contributed Despite slower overall revenue growth, operating income and to revenue growth in 2007, despite flat package volume growth. operating margin increased in 2007. Increases in operating Package revenue growth in 2007 was driven by IP revenues, which income and margin in 2007 resulted from growth in IP services grew 9% on yield growth of 5% as a result of yield improvements and were partially offset by costs associated with the ratification across all regions and a 5% increase in volumes due to IP vol- of a new labor contract with our pilots in October 2006. These ume growth in U.S. outbound, Asia and Europe, as we continued costs included signing bonuses and other upfront compensa- to focus on expanding this service. Also contributing to revenue tion of $143 million, as well as pay increases and other benefit growth in 2007 were increases in other revenues primarily due enhancements, which were mitigated by reductions in variable to our acquisition of ANC and increases in freight revenues due incentive compensation. Year-over-year results in 2007 were to higher U.S. and international priority freight volumes. U.S. positively affected by a $75 million charge in 2006 to adjust the domestic package revenues increased 1% as a result of yield accounting for certain facility leases. improvements, partially offset by a decrease in volumes. Fuel costs increased during 2007 due to an increase in the aver- IP yield increased during 2007 as a result of favorable exchange age price per gallon of fuel. Fuel surcharges did not offset the rates, higher package weights and an increase in the average effect of higher fuel costs on our year-over-year operating results rate per pound. U.S. domestic composite yield increases in 2007 for 2007, due to the timing lag that exists between when we pur- were due to an increase in the average rate per pound, partially chase fuel and when our fuel surcharges are adjusted, based offset by changes in product mix and lower package weights. on a static analysis of the year-over-year changes in fuel prices U.S. freight yield increased in 2007 due to an increase in the aver- compared to changes in fuel surcharges. age rate per pound and higher fuel surcharges. Salaries and employee benefits increased in 2007 primarily as IP volume growth in 2007 was primarily due to increased demand a result of the new labor contract with our pilots. Purchased in the U.S. outbound, Asia and Europe markets. U.S. domestic transportation costs increased 13% in 2007 due to IP volume package volumes decreased during 2007 primarily due to the growth, which required a higher utilization of contract pickup moderating growth rate of the U.S. economy. and delivery services and an increase in the cost of purchased transportation. We use purchased transportation in markets FedEx Express segment revenues increased in 2006 due to yield where we do not have a direct presence or to meet short-term improvements and volume growth in IP services (particularly in capacity needs. Maintenance and repairs increased 7% in 2007 Asia, U.S. outbound and Europe). U.S. domestic package and U.S. primarily due to higher aircraft maintenance expenses for vari- freight revenue growth also contributed to the revenue increase for ous airframes and Airbus A300 engines. The 5% decrease in 2006. U.S. volumes were flat compared to the prior year, as growth rentals and landing fees in 2007 was attributable to the one-time in our U.S. domestic overnight services was offset by declines in adjustment for leases in 2006 described above. Intercompany deferred volumes that resulted from yield management actions. charges increased 35% in 2007 due to allocations as a result IP yield increased during 2006 due to higher fuel surcharges and of moving the FCIS organization from FedEx Express to FedEx increases in international average weight per package and aver- Services in 2007. The costs associated with the FCIS organiza- age rate per pound. U.S. domestic composite yield increases were tion in 2006 were of a comparable amount but were reported in due to higher fuel surcharges and improved yields on U.S. domes- individual operating expense captions. tic deferred packages. Improvements in U.S. domestic deferred During 2007, we terminated our agreement with Airbus for the yield resulted from our continued efforts to improve the profit- purchase of A380 aircraft and in March 2007 entered into a sepa- ability of this service. U.S. freight yield increases were due to an rate settlement agreement with Airbus that, among other things, increase in average rate per pound and higher fuel surcharges. provides us with credit memoranda applicable to the purchase Our fuel surcharges are indexed to the spot price for jet fuel. of goods and services in the future. The net impact of this settle- Using this index, the U.S. domestic and outbound fuel surcharge ment was immaterial to our 2007 results and was recorded as an and the international fuel surcharges ranged as follows for the operating gain during the fourth quarter of 2007. years ended May 31: Operating income grew significantly in 2006 as a result of strong 2007 2006 2005 revenue growth and improved operating margin. Volume growth U.S. Domestic and Outbound Fuel Surcharge: in higher margin U.S. domestic overnight and IP services con- Low 8.50% 10.50% 6.00% tributed to yield improvements. Improved yields, combined with High 17.00 20.00 13.00 productivity gains and cost containment, allowed FedEx Express Weighted-average 12.91 13.69 9.05 to improve operating margin in 2006. Revenue and margin growth International Fuel Surcharges: for 2006 more than offset the one-time adjustment for leases and Low 8.50 10.00 3.00 costs associated with two new around-the-world flights. High 17.00 20.00 13.00 Weighted-average 12.98 12.73 8.45 41


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    FEDEX CORPORATION In 2006, salaries and benefits increased primarily due to higher FEDEX GROUND SEGMENT pension costs and wage rates. Fuel costs were higher in 2006 The following table compares revenues, operating expenses, primarily due to an increase in the average price per gallon of operating income and operating margin (dollars in millions) and jet fuel, while gallons consumed increased slightly, primarily selected package statistics (in thousands, except yield amounts) related to the two new around-the-world flights. However, our for the years ended May 31: Percent Change fuel surcharges substantially mitigated the impact of higher jet 2007/ 2006/ fuel prices. Purchased transportation costs increased in 2006, 2007 2006 2005 2006 2005 though at a slower rate than in 2005, driven by IP volume growth, Revenues: $ 6,043 $ 5,306 $ 4,680 14 13 which required a higher utilization of contract pickup and delivery Operating expenses: services. Rentals and landing fees increased in 2006, primarily due Salaries and to the one-time adjustment for leases of $75 million. employee benefits 1,006 929 845 8 10 Purchased FedEx Express Segment Outlook transportation 2,326 2,019 1,791 15 13 We expect moderate revenue growth at FedEx Express in 2008, Rentals 166 133 122 25 9 as growth in both IP and domestic package services will continue Depreciation and to slow as a result of the softening U.S. economy and declining amortization 268 224 176 20 27 growth outside the U.S. The majority of the revenue increase in Fuel 117 93 48 26 94 2008 will be provided by IP services, as we continue to focus on Maintenance growing our service offerings in international markets, particu- and repairs 134 118 110 14 7 larly China and Europe. Our international domestic revenue is Intercompany charges 578 526 482 10 9 projected to increase in 2008 due to the full-year benefit of 2007 Other 635 559 502 14 11 acquisitions such as ANC and DTW Group and the expansion of Total operating our China domestic service. expenses 5,230 4,601 4,076 14 13 Operating income and operating margin are expected to improve Operating income $ 813 $ 705 $ 604 15 17 in 2008 despite the soft U.S. economy due to continued cost con- Operating margin 13.5% 13.3% 12.9% 20bp 40bp tainment and productivity improvements. Capital expenditures at FedEx Ground: FedEx Express are expected to be higher in 2008 due to invest- Average daily ments in equipment and facilities necessary to support projected package volume 3,126 2,815 2,609 11 8 long-term volume growth, as well as continued investments in Revenue per China. In March 2006, we broke ground on a new $150 million package (yield) $ 7.21 $ 7.02 $ 6.68 3 5 Asia-Pacific hub in the southern China city of Guangzhou. This hub is planned to be operational in 2009. Aircraft-related capi- FedEx Ground Segment Revenues tal and expense outlays, including support of our Boeing 757 Strong volume growth fueled a 14% increase in revenue during program and the new Boeing 777 Freighter fleet, are expected 2007. Average daily volumes at FedEx Ground rose 11% because to approximate 2007 spending levels. We will continue to make of increased commercial business and the continued growth of strategic investments despite short-term economic softness. our FedEx Home Delivery service. Yield improvement during 2007 was primarily due to the impact of general rate increases and higher extra service revenues, primarily on our residential ser- vices. This yield increase was partially offset by higher customer discounts and a lower average weight and zone per package. Additionally, revenue at FedEx SmartPost increased significantly in 2007 due to increased market share, as a major competitor exited this market in 2006, enabling significant growth in the cus- tomer base and related volumes. Revenues increased during 2006 due to volume increases and yield improvement. Average daily volumes increased across all of our services, led by the continued growth of our FedEx Home Delivery service. Yield improvement during 2006 was primarily due to increased fuel surcharges, higher extra service revenue and the impact of general rate increases. These increases were partially offset by higher customer discounts and a lower average weight per package. 42


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    MANAGEMENT’S DISCUSSION AND ANALYSIS The FedEx Ground fuel surcharge is based on a rounded average FedEx Ground Segment Outlook of the national U.S. on-highway average prices for a gallon of We expect the FedEx Ground segment to have revenue growth diesel fuel, as published by the Department of Energy. Our fuel in 2008 consistent with 2007, led by continued strong volume surcharge ranged as follows for the years ended May 31: growth at FedEx Ground and FedEx SmartPost. FedEx Ground’s average daily volume is expected to increase in 2008 due to 2007 2006 2005 increased base business and FedEx Home Delivery volumes. Low 3.50% 2.50% 1.80% FedEx SmartPost volumes are also expected to grow, because of High 5.25 5.25 2.50 increased market share and improved service levels. Yields for all Weighted-average 4.18 3.54 2.04 services at FedEx Ground are expected to increase in 2008 from increases in list prices and residential and commercial delivery No fuel surcharge was in effect from January 2004 to January 2005. area surcharges. FedEx Ground’s operating margin in 2008 is expected to improve FedEx Ground Segment Operating Income from continued cost controls, productivity gains and yield FedEx Ground segment operating income increased 15% during improvements, partially offset by the impact of our network 2007 principally due to revenue growth and improved results at expansion and increased purchased transportation costs. Capital FedEx SmartPost. Operating margin increased only slightly in 2007, spending is expected to grow, as we continue with comprehen- as revenue growth was partially offset by increased purchased sive network expansion and productivity-enhancing technologies transportation costs, increased legal costs and higher deprecia- within the FedEx Ground segment. During 2008, the multi-phase tion and rent expense associated with network expansion. expansion plan includes one new hub, 14 expanded hubs and Purchased transportation increased 15% in 2007 primarily due two relocated facilities. We are committed to investing in the to volume growth and higher rates paid to our independent con- FedEx Ground network because of the long-term benefits we will tractors, including fuel supplements. Our fuel surcharge was experience from these investments. sufficient to offset the effect of higher fuel costs on our operating results, based on a static analysis of the year-over-year changes FEDEX FREIGHT SEGMENT in fuel prices compared to changes in the fuel surcharge. Other The following table shows revenues, operating expenses, operat- operating expenses increased 14% in 2007 primarily due to ing income and operating margin (dollars in millions) and selected increased legal costs. Depreciation expense increased 20% and statistics for the years ended May 31: Percent Change rent expense increased 25% principally due to higher spending 2007/ 2006/ on material handling and scanning equipment and facilities asso- 2007 2006 2005 2006 2005 ciated with our multi-year network expansion. Revenues $ 4,586 $ 3,645 $ 3,217 26 13 Effective June 1, 2006, we moved FedEx Supply Chain Services, Operating expenses: Inc., the results of which were previously reported in the FedEx Salaries and Ground segment, into a new subsidiary of FedEx Services named employee benefits 2,250 1,801 1,650 25 9 FedEx Global Supply Chain Services, Inc. The net operating costs Purchased of this entity are allocated to FedEx Express and FedEx Ground. transportation 465 298 315 56 (5) Prior year amounts have not been reclassified to conform to the Rentals and landing fees 112 94 99 19 (5) current year segment presentation, as financial results are mate- Depreciation and rially comparable. amortization 195 120 102 63 18 Fuel 468 377 257 24 47 FedEx Ground segment operating income increased in 2006, Maintenance resulting principally from revenue growth and yield improvement. and repairs 165 120 128 38 (6) Operating margin for the segment improved in 2006 due to fuel Intercompany charges 61 37 26 65 42 surcharges, general rate increases, improved productivity and Other 407 313 286 30 9 the inclusion in 2005 of a $10 million charge at FedEx Supply Chain Total operating Services related to the termination of a vendor agreement. A por- expenses 4,123 3,160 2,863 30 10 tion of the operating margin improvement was offset by higher Operating income $ 463 $ 485 $ 354 (5) 37 year-over-year expenses related to investments in new technol- Operating margin 10.1% 13.3% 11.0% (320)bp 230bp ogy and the opening of additional FedEx Ground facilities. Average daily LTL Salaries and employee benefits increased in 2006 principally due shipments (in thousands) 78 67 63 16 6 to wage rate increases and increases in staffing and facilities to Weight per LTL support volume growth. Depreciation expense in 2006 increased shipment (lbs) 1,130 1,143 1,132 (1) 1 at a higher rate than revenue due to increased spending associ- LTL yield (revenue per ated with material handling and scanning equipment. In 2006, hundredweight) $ 18.65 $ 16.84 $ 15.48 11 9 purchased transportation increased due to increased volumes and an increase in the cost of purchased transportation due to The results of operations of FedEx National LTL are included in higher fuel surcharges from third-party transportation providers, FedEx Freight segment results from the date of acquisition on including our independent contractors. September 3, 2006. 43


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    FEDEX CORPORATION FedEx Freight Segment Revenues decreased, due to increased utilization of company equipment FedEx Freight segment revenues increased 26% in 2007 primarily in our interregional freight services. as a result of the acquisition of FedEx National LTL, which contrib- uted significantly to an increase in average daily LTL shipments FedEx Freight Segment Outlook of 16% and LTL yield of 11%. Average daily LTL shipments exclud- We expect FedEx Freight segment revenue to increase in 2008 ing FedEx National LTL grew slightly in 2007 due to increased due to continued growth in our LTL business and the inclusion demand for our regional and interregional services. This growth of FedEx National LTL for the full year. LTL yield is expected to rate moderated throughout the year, however, with year-over- increase due to our continued focus on pricing discipline, as well year declines in the second half of 2007. LTL yield growth was due as the impact of higher yields on longer-haul FedEx National LTL to higher yields from longer-haul FedEx National LTL shipments, shipments. Ongoing costs to integrate information technology higher rates and favorable contract renewals. systems and to increase sales resources to support long-term growth opportunities, as well as incremental costs associated FedEx Freight segment revenues increased 13% in 2006 due to with facility expansions, are expected to restrain operating growth in LTL yield and average daily LTL shipments. LTL yield income and operating margin growth in 2008. Continued invest- grew during 2006, reflecting incremental fuel surcharges result- ments in facilities and equipment to support revenue growth and ing from higher fuel prices and higher rates. Average daily LTL in technology to improve productivity and to meet our customers’ shipment growth in 2006 was driven in part by features such as needs account for the majority of the total incremental capital our no-fee money-back guarantee and our Advance Notice ser- spending anticipated for 2008. We expect our rebranding efforts vice, which continue to differentiate us in the LTL market. at FedEx National LTL to continue in 2008. The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average prices for a gallon of diesel FEDEX KINKO’S SEGMENT fuel, as published by the Department of Energy. The indexed LTL The following table shows revenues, operating expenses, oper- fuel surcharge ranged as follows for the years ended May 31: ating income and operating margin (dollars in millions) for the years ended May 31: 2007 2006 2005 Percent Change 2007/ 2006/ Low 14.0% 12.5% 7.6% 2007 2006 2005 2006 2005 High 21.2 20.1 14.0 Revenues $ 2,040 $ 2,088 $ 2,066 (2) 1 Weighted-average 17.8 16.3 11.0 Operating expenses: Salaries and FedEx Freight Segment Operating Income employee benefits 781 752 742 4 1 FedEx Freight segment operating income decreased 5% dur- Rentals 375 394 412 (5) (4) ing 2007 due to operating losses at FedEx National LTL, which Depreciation and resulted from softening volumes and ongoing expenses to inte- amortization 139 148 138 (6) 7 grate its network. The inclusion of FedEx National LTL in our Maintenance and results has impacted the year-over-year comparability of all repairs 66 73 70 (10) 4 of our operating expenses. Along with incremental costs from Intercompany charges 57 26 6 NM NM FedEx National LTL (including amortization of acquired intan- Other operating expenses: gible assets), depreciation expense increased due to prior-year Supplies, including purchases of vehicles and other operating equipment to sup- paper and toner 263 274 278 (4) (1) port volume growth. Purchased transportation increased due Other 314 364 320 (14) 14 to higher rates paid to our third-party transportation providers Total operating and the utilization of third-party providers at FedEx National LTL. expenses 1,995 2,031 1,966 (2) 3 While fuel costs increased in 2007, our fuel surcharge was more Operating income $ 45 $ 57 $ 100 (21) (43) than sufficient to offset the effect of higher fuel costs, based on a Operating margin 2.2% 2.7% 4.8% (50)bp (210)bp static analysis of the year-over-year changes in fuel prices com- pared to changes in the fuel surcharge. FedEx Kinko’s Segment Revenues FedEx Freight segment operating income increased in 2006 Revenues decreased slightly during 2007 due to decreased primarily due to LTL revenue growth, as well as our ability to demand for copy products and the discontinuation of unprofit- control costs in line with volume growth. Increased staffing able service offerings, which more than offset higher package to support volume growth and higher incentive compensation acceptance fees from FedEx Express and FedEx Ground. During expense increased salaries and employee benefits in 2006. While 2007, FedEx Kinko’s announced a multi-year network expan- fuel costs increased substantially in 2006, fuel surcharges more sion plan, including the model for new centers, which will be than offset the effect of higher fuel costs. Depreciation costs approximately one-third the size of a traditional center and will increased in 2006 primarily due to investments in operating include enhanced pack-and-ship stations and a doubling of the equipment, which in some cases replaced leased equipment. number of retail office products offered. While revenues from Maintenance and repairs decreased in 2006 due to the pres- new centers were not significant in 2007, this multi-year expan- ence of rebranding costs in 2005, as well as an increase in the sion of the FedEx Kinko’s network is a key strategy relating to purchase of new fleet vehicles. Purchased transportation costs FedEx Kinko’s future revenue growth. In addition, this expansion 44


  • Page 47

    MANAGEMENT’S DISCUSSION AND ANALYSIS will provide FedEx Express and FedEx Ground customers with Financial Condition more retail access points. FedEx Kinko’s opened 226 new centers during 2007. LIQUIDITY In 2006, a year-over-year increase in package acceptance reve- Cash and cash equivalents totaled $1.569 billion at May 31, 2007, nue led to modest revenue growth. Package acceptance revenue compared to $1.937 billion at May 31, 2006 and $1.039 billion at benefited year over year from the April 2005 conversion of FedEx May 31, 2005. The following table provides a summary of our cash World Service Centers to FedEx Kinko’s Ship Centers. FedEx flows for the years ended May 31 (in millions): Kinko’s experienced declines in copy product line revenues in 2007 2006 2005 2006 due to decreased demand for these services and a competi- Operating activities: tive pricing environment. Net income $ 2,016 $ 1,806 $ 1,449 Noncash charges and credits 1,988 2,006 1,671 FedEx Kinko’s Segment Operating Income Changes in operating Operating income decreased $12 million during 2007 primarily due assets and liabilities (441) (136) (3) to the decrease in copy product revenues, as well as the impact Cash provided by of increased salaries and employee benefit costs incurred in con- operating activities 3,563 3,676 3,117 nection with expansion activities and significant investments in Investing activities: employee training and development programs. Rentals decreased Business acquisitions, during 2007 due to declines in copier rental expenses, which are net of cash acquired (1,310) – (122) variable based on usage. The increase in intercompany charges Capital expenditures was primarily due to increased allocations of sales and marketing and other investing activities (2,814) (2,454) (2,226) and IT support functions in 2007. Cash used in Operating income decreased in 2006, as the increase in package investing activities (4,124) (2,454) (2,348) acceptance revenues was more than offset by a decline in copy Financing activities: product line revenues. In 2006, salaries and employee benefits Proceeds from debt issuances 1,054 – – increased due to the addition of FedEx Kinko’s Ship Centers, Principal payments on debt (906) (369) (791) higher group health insurance costs and increased costs asso- Dividends paid (110) (97) (84) ciated with employee training and development programs. Other financing activities 155 142 99 Increased depreciation in 2006 was driven by center rebranding Cash provided by and investments in new technology to replace legacy systems. (used in) financing activities 193 (324) (776) The increase for 2006 in other operating expenses was primar- Net (decrease) increase ily due to increased costs related to technology, strategic and in cash and cash product offering initiatives. equivalents $ (368) $ 898 $ (7) FedEx Kinko’s Segment Outlook We believe that our existing cash and cash equivalents, cash We expect increased revenue at FedEx Kinko’s in 2008 primarily flow from operations, our commercial paper program, revolving due to the new store openings associated with the multi-year bank credit facility and shelf registration statement with the SEC network expansion, together with a sales force realignment and are adequate to meet our current and foreseeable future working marketing and service initiatives. The network expansion pro- capital and capital expenditure needs. In addition, other forms gram, combined with employee training and retention programs, of secured financing may be used to obtain capital assets if we is expected to negatively impact operating income and operat- determine that they best suit our needs for the foreseeable future. ing margin in 2008. These investments, however, are focused on We have been successful in obtaining investment capital, both long-term profit and margin growth. Initiatives in e-commerce domestic and international, although the marketplace for such technology such as Print Online and new service offerings, capital can become restricted depending on a variety of eco- including our direct mail service, are expected to support addi- nomic factors. We believe the capital resources available to us tional growth opportunities for 2008 and beyond. Capital spending provide flexibility to access the most efficient markets for financ- is expected to increase at FedEx Kinko’s in 2008 primarily due to ing capital acquisitions, including aircraft, and are adequate for the multi-year network expansion and technology investments. our future capital needs. FedEx Kinko’s plans to open approximately 300 new centers in 2008, which will bring the total number of centers to approxi- mately 2,000 by the end of the year. 45


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    FEDEX CORPORATION Cash Provided by Operating Activities. Cash flows from operat- The $500 million of floating-rate notes issued in 2007 will become ing activities decreased $113 million in 2007 primarily due to an due in August 2007. The timing of cash requirements in the first increase in income tax payments of $184 million, partially offset half of 2008 may dictate that we refinance a portion of this debt by increased earnings. The $559 million increase in cash flows through our commercial paper program. from operating activities in 2006 was principally due to increased As discussed in Note 1 of the accompanying consolidated finan- earnings. During 2007, we made tax-deductible voluntary con- cial statements, we adopted SFAS 158 on May 31, 2007. Our tributions to our principal U.S. domestic pension plans of $482 adoption of this standard did not impact our compliance with million, compared to $456 million during 2006 and $460 million any current loan covenants or affect our debt ratings, pension during 2005. funding requirements or our overall liquidity. Cash Used in Investing Activities. During 2007, $1.3 billion of cash Dividends. Dividends paid were $110 million in 2007, $97 million was used for the FedEx National LTL, ANC, DTW Group and other in 2006 and $84 million in 2005. On May 25, 2007, our Board of immaterial acquisitions. See Note 3 of the accompanying audited Directors declared a dividend of $0.10 per share of common financial statements for further discussion of these acquisitions. stock, an increase of $0.01 per share. The dividend was paid on See “Capital Resources” for a discussion of capital expenditures July 2, 2007 to stockholders of record as of the close of business during 2007 and 2006. on June 11, 2007. Each quarterly dividend payment is subject to Financing Activities. On August 2, 2006, we filed an updated shelf review and approval by our Board of Directors, and we intend to registration statement with the SEC. The new registration state- evaluate our dividend payment amount on an annual basis at the ment does not limit the amount of any future offering. By using end of each fiscal year. this shelf registration statement, we may sell, in one or more Other Liquidity Information. We have a senior unsecured debt future offerings, any combination of our unsecured debt securi- credit rating from Standard & Poor’s of BBB and a commercial ties and common stock. paper rating of A-2. Moody’s Investors Service has assigned us On August 8, 2006, under the new shelf registration statement, we a senior unsecured debt credit rating of Baa2 and a commercial issued $1 billion of senior unsecured debt, comprised of floating- paper rating of P-2. Moody’s characterizes our ratings outlook as rate notes totaling $500 million due in August 2007 and fixed-rate “stable,” while Standard & Poor’s characterizes our ratings out- notes totaling $500 million due in August 2009. The floating-rate look as “positive.” If our credit ratings drop, our interest expense notes bear interest at the three-month London Interbank Offered may increase. If our commercial paper ratings drop below cur- Rate (“LIBOR”) plus 0.08%, reset on a quarterly basis. As of May rent levels, we may have difficulty utilizing the commercial paper 31, 2007, the floating interest rate was 5.44%. The fixed-rate notes market. If our senior unsecured debt ratings drop below invest- bear interest at an annual rate of 5.5%, payable semi-annually. ment grade, our access to financing may become more limited. The net proceeds were used for working capital and general corporate purposes, including the funding of the acquisitions referenced above. During 2007, $700 million of senior unsecured notes and $18 mil- lion of medium-term notes matured and were repaid. During 2006, $250 million of senior unsecured notes matured and were repaid. In addition, other debt was reduced by $118 million as a result of the purchase by FedEx Express of two MD11 aircraft in March 2007. In 2001, FedEx Express entered into a lease for the two MD11 aircraft from a separate entity, which we were required to consolidate under FIN 46. The purchase of these aircraft extin- guished this liability. A $1.0 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper. Our revolving credit agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times rentals and landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 0.7. Our leverage ratio of adjusted debt to capital was 0.6 at May 31, 2007. We are in compliance with this and all other restrictive covenants of our revolving credit agreement and do not expect the covenants to affect our operations. As of May 31, 2007, no commercial paper was outstanding and the entire $1.0 billion under the revolving credit facility was available for future borrowings. 46


  • Page 49

    MANAGEMENT’S DISCUSSION AND ANALYSIS CAPITAL RESOURCES associated with its multi-year expansion program. Capital expen- Our operations are capital intensive, characterized by significant ditures during 2006 were higher than the prior year primarily due investments in aircraft, vehicles, technology, package handling to the purchase of vehicles at FedEx Express and FedEx Freight facilities and sort equipment. The amount and timing of capital and information technology investments at FedEx Services. In additions depend on various factors, including pre-existing con- addition, investments were made in the FedEx Ground and FedEx tractual commitments, anticipated volume growth, domestic and Freight networks in 2006 to support growth in customer demand. international economic conditions, new or enhanced services, While we pursue market opportunities to purchase aircraft when geographical expansion of services, availability of satisfactory they become available, we must make commitments regarding financing and actions of regulatory authorities. our airlift requirements years before aircraft are actually needed The following table compares capital expenditures by asset because of substantial lead times associated with the manufacture category and reportable segment for the years ended May 31 and modification of aircraft. We are closely managing our capital (in millions): spending based on current and anticipated volume levels and will Percent Change defer or limit capital additions where economically feasible, while 2007/ 2006/ 2007 2006 2005 2006 2005 continuing to invest strategically in growing service lines. Aircraft and During 2007, FedEx Express announced two aircraft acquisition related equipment $ 1,107 $ 1,033 $ 990 7 4 programs designed to meet future capacity needs. The first is a Facilities and sort $2.6 billion multi-year program to acquire and modify approxi- equipment 674 507 496 33 2 mately 90 Boeing 757-200 aircraft to replace our narrow-body Vehicles 445 413 261 8 58 fleet of Boeing 727-200 aircraft. The second is an agreement to Information and acquire 15 new Boeing 777F (“B777F”) aircraft and an option to technology investments 431 394 331 9 19 purchase an additional 15 B777F aircraft. The B777F aircraft will Other equipment 225 171 158 32 8 provide us with non-stop, point-to-point transoceanic routes with Total capital shorter flight times. See Note 16 of the accompanying consoli- expenditures $ 2,882 $ 2,518 $ 2,236 14 13 dated financial statements for further discussion of our aircraft FedEx Express segment $ 1,672 $ 1,408 $ 1,195 19 18 purchase commitments. FedEx Ground segment 489 487 456 – 7 Our capital expenditures are expected to be approximately $3.5 FedEx Freight segment 287 274 217 5 26 billion in 2008, with much of the year-over-year increase due FedEx Kinko’s segment 157 94 152 67 (38) to spending for facilities and sort equipment at FedEx Express Other, principally and FedEx Ground and network expansion at FedEx Kinko’s. We FedEx Services 277 255 216 9 18 also continue to invest in productivity-enhancing technologies. Total capital Aircraft-related capital and expense outlays, including support expenditures $ 2,882 $ 2,518 $ 2,236 14 13 of the narrow-body aircraft replacement program and the B777F fleet, are expected to approximate 2007 aircraft spending levels. Capital expenditures increased during 2007 primarily due to We currently expect to fund our 2008 capital requirements with increased spending at FedEx Express for facility expansion and cash from operations. aircraft and related equipment and expenditures at FedEx Kinko’s CONTRACTUAL CASH OBLIGATIONS The following table sets forth a summary of our contractual cash obligations as of May 31, 2007. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of long-term debt and capital lease obligations, this table does not include amounts already recorded in our balance sheet as current liabilities at May 31, 2007. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented. Payments Due by Fiscal Year (in millions) 2008 2009 2010 2011 2012 Thereafter Total Amounts reflected in Balance Sheet: Long-term debt $ 521 $ 530 $ 500 $ 250 $ – $ 539 $ 2,340 Capital lease obligations (1) 103 13 97 8 8 137 366 Other cash obligations not reflected in Balance Sheet: Unconditional purchase obligations (2) 1,282 1,111 1,150 704 86 164 4,497 Interest on long-term debt 118 111 79 65 47 1,553 1,973 Operating leases 1,680 1,481 1,297 1,143 1,010 6,752 13,363 Total $ 3,704 $ 3,246 $ 3,123 $ 2,170 $ 1,151 $ 9,145 $ 22,539 (1) Capital lease obligations represent principal and interest payments. (2) See Note 16 to the accompanying consolidated financial statements. 47


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    FEDEX CORPORATION We have certain contingent liabilities that are not accrued in our In accordance with accounting principles generally accepted in balance sheets in accordance with accounting principles gener- the United States, our operating leases are not recorded in our ally accepted in the United States. These contingent liabilities are balance sheet. Credit rating agencies routinely use information not included in the table above. concerning minimum lease payments required for our operating leases to calculate our debt capacity. In addition, we have guar- Amounts Reflected in Balance Sheet antees under certain operating leases, amounting to $17 million We have certain financial instruments representing potential as of May 31, 2007, for the residual values of vehicles and facili- commitments, not reflected in the table above, that were incurred ties at the end of the respective operating lease periods. Although in the normal course of business to support our operations, some of these leased assets may have a residual value at the including surety bonds and standby letters of credit. These instru- end of the lease term that is less than the value specified in the ments are generally required under certain U.S. self-insurance related operating lease agreement, we do not believe it is prob- programs and are also used in the normal course of international able that we will be required to fund material amounts under the operations. The underlying liabilities insured by these instruments terms of these guarantee arrangements. Accordingly, no material are reflected in our balance sheets, where applicable. Therefore, accruals have been recognized for these guarantees. no additional liability is reflected for the surety bonds and letters of credit themselves. We have other long-term liabilities reflected in our balance sheet, Critical Accounting Estimates including deferred income taxes, qualified and nonqualified pension and postretirement healthcare liabilities and other self- The preparation of financial statements in accordance with insurance accruals. The payment obligations associated with accounting principles generally accepted in the United States these liabilities are not reflected in the table above due to the requires management to make significant judgments and esti- absence of scheduled maturities. Therefore, the timing of these mates to develop amounts reflected and disclosed in the financial payments cannot be determined, except for amounts estimated statements. In many cases, there are alternative policies or esti- to be payable within twelve months that are included in current mation techniques that could be used. We maintain a thorough liabilities. process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that Other Cash Obligations Not Reflected in Balance Sheet are required to prepare the financial statements of a complex, The amounts reflected in the table above for purchase commit- global corporation. However, even under optimal circumstances, ments represent non-cancelable agreements to purchase goods estimates routinely require adjustment based on changing cir- or services. Such contracts include those for certain purchases cumstances and new or better information. of aircraft, aircraft modifications, vehicles, facilities, computers, The estimates discussed below include the financial statement printing and other equipment and advertising and promotions elements that are either the most judgmental or involve the selec- contracts. In addition, we have committed to modify our DC10 tion or application of alternative accounting policies and are aircraft for two-man cockpit configurations, which is reflected material to our financial statements. Management has discussed in the table above. Commitments to purchase aircraft in passen- the development and selection of these critical accounting esti- ger configuration do not include the attendant costs to modify mates with the Audit Committee of our Board of Directors and these aircraft for cargo transport unless we have entered into a with our independent registered public accounting firm. non-cancelable commitment. Open purchase orders that are can- celable are not considered unconditional purchase obligations As discussed in the notes to our financial statements and previ- for financial reporting purposes and are not included in the table ously in this MD&A, we are required to adopt new accounting above. Such purchase orders often represent authorizations to rules for income taxes under FIN 48, commencing in 2008. While purchase rather than binding agreements. the adoption of FIN 48 will not have a material effect on our financial statements, its application substantially increases the The amounts reflected in the table above for interest on long-term sensitivities of the estimation process used in the accounting debt represent future interest payments due on our long-term and reporting for tax contingencies. Therefore, we will add a debt, which are primarily fixed rate. “Contingencies, including Income Taxes” category to our criti- The amounts reflected in the table above for operating leases cal accounting estimates in the first quarter of 2008. represent future minimum lease payments under non-cancelable Over the past several years, we have substantially improved operating leases (principally aircraft and facilities) with an initial and automated the rating and billing processes for our package or remaining term in excess of one year at May 31, 2007. In the businesses. As a result, our experience with invoice corrections past, we financed a significant portion of our aircraft needs (and and bad debts has improved markedly, as has the accuracy of certain other equipment needs) using operating leases (a type our revenue estimates for shipments not yet billed at period end. of “off-balance sheet financing”). At the time that the decision Therefore, substantially less judgment is required in the report- to lease was made, we determined that these operating leases ing of revenue and we have concluded that revenue recognition would provide economic benefits favorable to ownership with will no longer be considered a critical accounting estimate com- respect to market values, liquidity or after-tax cash flows. mencing in 2008. 48

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