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    A Transformative Year FEDEX ANNUAL REPORT 2015


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    Decisive actions on many fronts during FY15 are transforming FedEx, positioning the company to deliver long-term shareowner value in FY16 and beyond. RECORD EARNINGS PAY FOR ACQUISITIONS AS ADJUSTED1 PERFORMANCE Three acquisitions announced in FY15 — GENCO, Bongo Driven by higher Higher variable and TNT Express — will fill volumes and improved compensation for critical gaps in our portfolio base yields from each team members of customer solutions transportation segment $ PROFIT PRICING MODERN IMPROVEMENT LEADERSHIP AIRCRAFT FLEET FedEx Express is on target to Significant actions to better 17 Boeing 767-300 achieve the profit improvement compensate FedEx for the Freighters added goal we outlined in FY13 outstanding services it as part of the fleet provides customers modernization program 1 For a reconciliation of presented non–GAAP measures to the most directly comparable GAAP measures, see http://investors.fedex.com.


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    LETTE R FRO M T H E C H A I R M A N To Our Shareowners, FY15 was a transformative year for FedEx with outstanding financial results, more powerful customer solutions, and actions to generate increased long-term value for shareowners. Record adjusted earnings1 were driven by higher volumes and improved base yields from each transportation segment. Here are a few of the FedEx team’s major accomplishments this past fiscal year: Frederick W. Smith Chairman, President and CEO We believe the TNT Express, GENCO and Bongo acquisitions we announced may prove as important to FedEx as the additions of Flying Tigers in 1989 and Caliber System in 1998, which respectively gave our customers access to global markets and the economical option of convenient ground delivery service. All three companies provide best-in-class capabilities that will fill critical gaps in our portfolio of customer solutions and boost our long-term competitive advantage. The TNT Express transaction is expected to be completed in the first half of calendar 2016. We’re on target to achieve the goal of the FedEx Express profit improvement plan we outlined in FY13 — to exit 2016 with a run rate of $1.6 billion in additional operating profit from the then FY13 base results. In FY15, in light of increasing e-commerce low-density shipments, we took action to ensure we’re more adequately compensated for the high-quality services we provide customers. At FedEx Ground, dimensional weight pricing was extended to all shipments. Fuel surcharge rates were adjusted at all transportation companies to reduce volatility and — for the first time — our 2015 rate increase announcement combined express, ground and freight details, giving our customers a more holistic view of our transportation solutions and additional time to plan their annual budgets. Our team members around the world executed our strategies very effectively. They again came through for our customers, especially during another record-breaking peak season. 1 For a reconciliation of presented non–GAAP measures to the most directly comparable GAAP measures, see http://investors.fedex.com. MORE > fedex.com/AnnualReport2015 1


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    L ET T E R F ROM T HE C HA IR MAN Operating Performance Close collaboration with customers is key to FedEx peak-season success. Our sales force works closely Adaptive strategies allow us to play offense when we with customers to anticipate their needs for volume see opportunities and play defense when we need to and timing months in advance. Managing capacity to quickly respond to weakening economic conditions. their projections requires a high level of discipline and In a word, flexibility differentiates FedEx from our cooperation, allowing us to meet our commitments competition. efficiently and profitably. Flexibility is inherent to our independently operated FedEx Express®, FedEx Ground® and FedEx Freight® networks. Each can be fine-tuned to deliver, without Broad Solutions compromise, the best service and value for the market At the heart of our business is the FedEx portfolio of segment served. Our strategy of “compete collectively, solutions that serves a wide range of logistics needs. operate independently, and manage collaboratively” Customers using all three FedEx transportation helped us successfully navigate the holiday season, companies account for about 77 percent of our overcoming challenges of an evolving e-commerce U.S. revenue. About 96 percent of U.S. revenue is landscape and tough winter conditions. FedEx delivered generated by customers using two or more of our outstanding service and strong financial performance, transportation companies. but at the same time, adjusted capacity to support customers adversely affected by the labor disruptions FedEx Services provides common sales, marketing, at U.S. West Coast ports. revenue management, customer service, and information technology support. FedEx Services team Our use of industry-leading automation also members are modernizing our IT platforms to lower differentiates FedEx Ground, which continues to costs and make us more agile in meeting shifting expand using state-of-the-art package sorting to quickly market demands and changing customer needs. and efficiently process increasing package volumes. In FY15, FedEx Services, including FedEx Office, During peak season, we experienced record shipping was integral to many of our most important volumes, but not always from the locations or on the accomplishments, including industry-leading pricing days expected. Thanks to seamless execution by team management and more convenient solutions for members and our automated hubs, FedEx Ground was customers to pick up and drop off packages. able to quickly accommodate customers’ needs. Purple Promise Chairman’s Award winners exemplify our unique culture. L INDA D ILEO skull implant to Detroit, on a flight, and arrange Michigan, for a life-saving pre-clearance through Specialty Customer operation. Just one customs and pickup Representative, problem: The company from the Detroit ramp. FedEx TechConnect shipped the package on The patient’s surgery Fort Lauderdale, Florida, Friday — a day when proceeded on schedule USA FedEx didn’t operate and a life was saved. When she received the flights from Germany call, Linda DiLeo knew — and the surgery was “If you put your heart into a life was at stake. A scheduled for Monday. everything you do, you can German medical device Linda took it upon herself always make a difference in manufacturer had just to coordinate a FedEx people’s lives,” says DiLeo. Purple Promise Chairman’s Award Winner shipped a custom-made team, place the package 2


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    FedEx® Pack Plus services LETTE R FRO M T H E C H A I R M A N make shipping even more convenient at FedEx Office. Our retail network connects customers to convenience. CUSTOMERS TELL US they want convenience and flexibility, we’re expanding the number of locations where customers and that’s our goal. We continually enhance our retail con- can have their packages held for pickup, which also cuts down venience network to make it easier to pack, ship and pick up on last-mile deliveries by FedEx Express and FedEx Ground. packages, especially e-commerce shipments that are helping The FedEx® Pack Plus expanded line of custom packaging power our growth. solutions and packing services at FedEx Office allows us to FedEx Delivery Manager ® is the key to the FedEx retail pack almost any item a customer may bring in. network. Customers can easily manage deliveries by FedEx SameDay ® City offers a FedEx branded experience re-routing packages to convenient and secure locations. for local pickup and delivery in 23 markets. More than 8,800 staffed locations and about 41,000 In FY15, we tested innovative FedEx Ship&Get® self-serve self-serve locations reach businesses and households lockers that enable customers to ship and pick up packages 24/7. around the world. Because online shopping is booming, MORE > fedex.com/AnnualReport2015 3


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    L ET T E R F ROM T HE C HA IR MAN FedEx Express is successfully lowering costs and increasing base yields through the profit improvement Unique Culture program. FedEx Express has made structural changes Our most important competitive advantage remains to reduce costs and is retiring older aircraft while adding our team members, who deserve the credit for our new Boeing 767Fs to rationalize capacity and modernize outstanding performance this year. At FedEx, we our aircraft fleet. We are serving customers with more believe there should be a strong relationship between efficiency for their less-time-sensitive shipments. pay and performance, and in FY15 the rewards to team members from our variable compensation programs FedEx Ground continues to pull ahead of competitors. were significantly higher than in FY14 because our Margins at FedEx Ground remain strong, and we adjusted earnings1 were higher. continue to improve service. FedEx Ground is faster to more U.S. locations than the competition. As Rewarding team members is an essential part of our e-commerce continued to reshape the transportation culture and our People-Service-Profit (PSP) philosophy. business, FedEx Ground invested $1.2 billion in FY15 PSP, on which FedEx was founded, is more relevant in facilities and automation to support future growth. than ever. Focusing on our People produces outstanding Service for customers, which in turn produces the FedEx Freight is focused on improving quality and Profit required to invest in our future. It’s a strategic increasing profitability through more efficient routing approach that differentiates FedEx, because every of shipments and a better balance of volume and yield single day team members dig deeply to deliver the growth. We’ll continue to enhance our position as the Purple Promise, which is simply stated, “I will make market leader in the less-than-truckload segment and every FedEx experience outstanding.” reinforce our reputation as a great place to work. We are pleased to report that FedEx Freight drivers Our commitment to corporate social responsibility is have rejected union representation in most cases, more important than ever to customers. We estimate demonstrating their strong preference for a direct that $6.8 billion in revenue in recent years came from relationship with our company. customers who requested information on our corporate citizenship. Our commitment starts by integrating our citizenship objectives into our business. 1 For a reconciliation of presented non–GAAP measures to the most directly comparable GAAP measures, see http://investors.fedex.com. F R ANC IS C O The flowers were not to deliver the flowers S A ND OVA L scheduled to be delivered Saturday, even though until the day after the area wasn’t on his Sort Manager, Mother’s Day. The station’s schedule. The result: FedEx Ground sort manager, Francisco Mother’s Day arrived a Saginaw, Michigan, Sandoval, was determined day early. USA to get the flowers there It was the day before on time. Even though “Whether it’s Mother’s Mother’s Day when the recipients lived Day or a typical Saturday, the Saginaw, Michigan, outside the service area, I do everything I can to FedEx Ground station and despite the heavy make our customers received 38 packages of volumes, Sandoval found happy,” Sandoval says. Purple Promise Chairman’s Award Winner flowers and a problem. a FedEx Ground driver 4


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    Boeing 767-300 Freighters are more fuel efficient with lower emissions and lower unit operating costs. New aircraft MODERNIZING THE FEDEX EXPRESS AIR FLEET is improving margins and adding flexibility to our domestic and international operations. We added 17 new Boeing 767-300 Freighters in FY15 and plan to add 11 more in FY16. boost efficiency The B767F carries roughly the same amount of cargo as the MD10 it replaces and is about 30 percent more fuel efficient, resulting in lower emissions. Unit operating costs are at least 20 percent lower. The aircraft also shares parts, tooling and flexibility. and flight simulators with Boeing 757 aircraft already part of the fleet. In the last few years, FedEx Express has retired from service and adjusted the retirement schedules of numerous aircraft. This aligns with our plans to adjust our capacity and modernize our aircraft fleet to more effectively meet our customers’ needs. We’re also modernizing the maintenance processes that keep our air operations safe and reliable. Combining our team members’ knowledge with automated processes for aircraft maintenance, engineering and material management will help us do an even better job serving customers while improving our productivity. Q I N G - HUA W E N route in Shenzhen, China, shipment to a carpenter’s Qing-Hua received an shop, negotiated with the Senior Service urgent pickup request. shop owner and built the Representative, A valuable shipment box himself. The result: FedEx Express had been refused by The crystal sculpture was Shenzhen, China other courier companies safely delivered and FedEx Carpentry isn’t a job because it was too fragile. had a loyal new customer. requirement for FedEx He quickly determined Express senior service that a wooden box “My job is to deliver the representative Qing- would provide the best Purple Promise by thinking Hua Wen, but it sure protection, but one wasn’t for my customers and came in handy. While available. So Qing-Hua solving their problems,” completing his daily took his customer and the says Qing-Hua. Purple Promise Chairman’s Award Winner MORE > fedex.com/AnnualReport2015 5


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    L ET T E R F ROM T HE C HA IR MAN By consuming resources efficiently, we’ve reduced Accelerate our use of leading-edge technology to our environmental footprint and also lowered costs. deliver even better customer service and work more For example, initiatives to reduce aircraft fuel-use efficiently and profitably. For example, the development saved more than $300 million and avoided 976,263 of FedEx Delivery Manager® allows customers to metric tons of greenhouse gas emissions in FY14. personalize deliveries and earned FedEx the 2014 CIO To support the communities where we live and work, Award from CIO magazine, honoring the highest level FedEx and FedEx team members donated $48 million of excellence in information technology. in FY15. We distributed $227 million in dividends to shareowners and incurred more than $17 billion in Remain true to our PSP philosophy by providing team salaries and employee benefits expense in FY15. members the best training and tools; a safe, healthy, and inclusive work environment; fair compensation and We’re proud that FedEx was once again named by benefits; opportunities for promotion; and recognition FORTUNE magazine as one of the world’s most for jobs well done. admired companies and No. 1 in the delivery industry. We also were named one of the world’s most reputable We believe FedEx is on a dynamic trajectory that will companies according to the annual Global RepTrak® make FY16 very successful. Our company has never 100 list released by the Reputation Institute. been better positioned to build shareowner value. Continued Focus FY15 was a historic year for FedEx, and we are Frederick W. Smith committed to capitalizing on our momentum. To Chairman, President and CEO make this happen, we will focus on three areas: Remain “heroes” to our customers by solving their business problems and helping them succeed. C H R IS C OX stores nationwide. customer’s requirements With more than 1,600 and saved FedEx money. City Driver, FedEx Freight pallets of priority freight The result: early delivery, Sheboygan, Wisconsin, to be picked up, Cox no damage returns and a USA proposed a loading better way to do business. Chris Cox had a challenge method to improve that required some efficiency and reduce “I wanted to do this to innovative thinking. He handling throughout the best of my ability and was assigned to pick the many FedEx Freight make it an outstanding up a large shipment hubs through which the experience for the of printed graphics shipment would transit. dock workers and our destined for delivery By taking ownership of customer,” Cox says. Purple Promise Chairman’s Award Winner to home improvement the rollout, Cox met his 6


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    LETTE R FRO M T H E C H A I R M A N Acquisitions change As one of its product lifecycle logistics solutions, GENCO manages more than 38 million square what’s possible for feet of warehouse space for customers. our customers. FEDEX GENCO product life cycle and supply chain services Transportation Logistics: $545 million in managed transportation offer more solutions for our customers in rapidly growing markets and brokerage such as e-commerce, healthcare and technology. As one of the Marketplace: America’s largest wholesaler of retail returns, largest third-party logistics providers (3PL) in North America, liquidating $2.5 billion in merchandise annually FedEx GENCO specializes in: BONGO INTERNATIONAL is a leader in cross border e-commerce Product Lifecycle Logistics®: Leader in delivering tailored technology and solutions and expands the FedEx global e- supply chain solutions commerce portfolio. As part of FedEx Trade Networks, Bongo Warehousing and Distribution: Inbound logistics, distribution, helps more than 2,000 retailers and e-tailers reach international packaging consumers in over 200 countries. By calculating duties and taxes, providing international payment options and more, Bongo takes Reverse Logistics: More than 400 million returned items annually the guesswork out of cross-border online shopping for consumers. Acquisitions change what’s possible for customers. As one of the largest third-party logistics providers (3PL) in BONGO is a leader in cross-border e-commerce technology North America, GENCO provides tailored product lifecycle and solutions. The acquisition complements our portfolio solutions across a wide range of industries to help customers because we anticipate global e-commerce to continue on build stronger supply chains. The GENCO Product Lifecycle a double-digit growth trajectory as more people buy online Logistics® approach treats the movement of products as one from a country other than their own. continuous inventory stream, increasing agility, reducing Through a comprehensive end-to-end suite of solutions, touch points and speeding up the movement of products Bongo connects merchants to consumers around the globe, throughout the supply chain. positioning FedEx for success in the growing cross-border Warehousing and Distribution: Inbound logistics, e-commerce marketplace. Bongo offers retailers the ability to fulfillment, distribution, packaging display total landed cost, including shipping costs and duties Reverse Logistics: More than 400 million returns processed and taxes in local currency, which leads to price transparency annually, including test, repair, refurbish and liquidation and better experience at checkout. Transportation Logistics: $545 million in managed transportation and brokerage ReCommerce: Maximizing the value of $2.5 billion in returned and excess products through resale and recycling MORE MORE >>> fedex.com/AnnualReport2015 MORE fedex.com/AnnualReport2015 fedex.com/AnnualReport2015 77 7


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    L ET T E R F ROM T HE C HA IR MAN Team members are our strongest Ed Merced competitive advantage. FedEx Express Courier Seattle, Washington, USA 8


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    FINANCIAL HIGHLIGHTS Percent (in millions, except earnings per share) 2015 2014 Change Revenue (in billions) 2013 $44.3 Operating Results 2014 $45.6 Revenues $ 47,453 $ 45,567 4 2015 $47.5 Operating income, adjusted(1) 4,264 3,593 19 Operating income(2) (3) 1,867 3,815 (51) Operating margin, adjusted(1) 9.0% 7.9% 110 bp Operating margin(2) (3) 3.9% 8.4% (450)bp Operating Margin, Adjusted(1) 2013 7.8% Net income, adjusted(1) 2,572 2,190 17 2014 7.9% Net income(2) (3) 1,050 2,324 (55) 2015 9.0% Diluted earnings per common share, adjusted(1) 8.95 7.05 27 Diluted earnings per common share(2) (3) 3.65 7.48 (51) Average common and common Diluted Earnings Per Share, equivalent shares 287 310 (7) Adjusted(1) 2013 $6.75 Cash provided by operating activities 5,366 4,264 26 2014 $7.05 Capital expenditures 4,347 3,533 23 2015 $8.95 Financial Position Cash and cash equivalents $ 3,763 $ 2,908 29 Total assets 37,069 33,070 12 Stock Price (May 31 close) Long-term debt, including current 2013 $96.34 portion 7,268 4,737 53 2014 $144.16 2015 $173.22 Common stockholders’ investment 14,993 15,277 (2) Comparison of Five-Year Cumulative Total Return* $225 $200 $175 $150 $125 $100 5/10 5/11 5/12 5/13 5/14 5/15 FedEx Corporation S&P 500 Dow Jones Transportation Average *$100 invested on 5/31/10 in stock or index, including reinvestment of dividends. Fiscal year ending May 31. (1) For a reconciliation of presented non–GAAP measures to the most directly comparable GAAP measures, see http://investors.fedex.com. (2) Results for 2015 include a loss of $2.2 billion ($1.4 billion, net of tax, or $4.81 per diluted share) associated with our mark-to-market pension accounting, impairment and related charges of $276 million ($175 million, net of tax, or $0.61 per diluted share) resulting from the decision to permanently retire and adjust the retirement schedule of certain aircraft and related engines and a charge of $197 million ($133 million, net of tax, or $0.46 per diluted share) to increase the legal reserve associated with the settlement of a legal matter at FedEx Ground to the amount of the settlement. (3) Results for 2014 include a loss of $15 million ($9 million, net of tax, or $0.03 per diluted share) associated with our mark-to-market pension accounting. 9


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW OF FINANCIAL SECTION Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading The financial section of the FedEx Corporation (“FedEx”) Annual U.S. provider of less-than-truckload (“LTL”) freight services. These Report (“Annual Report”) consists of the following Management’s companies represent our major service lines and, along with FedEx Discussion and Analysis of Results of Operations and Financial Corporate Services, Inc. (“FedEx Services”), form the core of our Condition (“MD&A”), the Consolidated Financial Statements and the reportable segments. notes to the Consolidated Financial Statements, and Other Financial Our FedEx Services segment provides sales, marketing, information Information, all of which include information about our significant technology, communications and certain back-office support to our accounting policies, practices and the transactions that underlie our transportation segments. In addition, the FedEx Services segment financial results. The following MD&A describes the principal factors provides customers with retail access to FedEx Express and FedEx affecting the results of operations, liquidity, capital resources, Ground shipping services through FedEx Office and Print Services, Inc. contractual cash obligations and critical accounting estimates of (“FedEx Office”), and provides customer service, technical support and FedEx. The discussion in the financial section should be read in billing and collection services through FedEx TechConnect, Inc. (“FedEx conjunction with the other sections of this Annual Report and our TechConnect”). See “Reportable Segments” for further discussion. detailed discussion of risk factors included in this MD&A. The key indicators necessary to understand our operating results Organization of Information include: Our MD&A is composed of three major sections: Results of > the overall customer demand for our various services based on Operations, Financial Condition and Critical Accounting Estimates. macro-economic factors and the global economy; These sections include the following information: > the volumes of transportation services provided through our > Results of operations includes an overview of our consolidated 2015 networks, primarily measured by our average daily volume and results compared to 2014 results, and 2014 results compared to shipment weight; 2013 results. This section also includes a discussion of key actions > the mix of services purchased by our customers; and events that impacted our results, as well as our outlook for 2016. > the prices we obtain for our services, primarily measured by yield > The overview is followed by a financial summary and analysis (revenue per package or pound or revenue per hundredweight and (including a discussion of both historical operating results and our shipment for LTL freight shipments); outlook for 2016) for each of our reportable transportation segments. > our ability to manage our cost structure (capital expenditures and > Our financial condition is reviewed through an analysis of key operating expenses) to match shifting volume levels; and elements of our liquidity, capital resources and contractual cash obligations, including a discussion of our cash flows and our > the timing and amount of fluctuations in fuel prices and our ability financial commitments. to recover incremental fuel costs through our fuel surcharges. > Critical accounting estimates discusses those financial statement The majority of our operating expenses are directly impacted by elements that we believe are important to understanding certain of revenue and volume levels. Accordingly, we expect these operating the material judgments and assumptions incorporated in our expenses to fluctuate on a year-over-year basis consistent with financial results. changes in revenues and volumes. Therefore, the discussion of > We conclude with a discussion of risks and uncertainties that may operating expense captions focuses on the key drivers and trends impacting expenses other than changes in revenues and volume. The impact our financial condition and operating results. line item “Other operating expenses” includes costs predominantly associated with outside service contracts (such as security and facility Description of Business services), insurance, professional fees, uniforms and advertising. We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, Except as otherwise specified, references to years indicate our fiscal operating independently and managed collaboratively, under the year ended May 31, 2015 or ended May 31 of the year referenced and respected FedEx brand. Our primary operating companies are Federal comparisons are to the prior year. References to our transportation Express Corporation (“FedEx Express”), the world’s largest express segments include, collectively, our FedEx Express, FedEx Ground and transportation company; FedEx Ground Package System, Inc. (“FedEx FedEx Freight segments. 10


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    MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Our operating segment results follow internal management reporting, which is used for making operating decisions and assessing perfor- mance. Historically, total net periodic benefit cost was allocated to Consolidated Results each segment. We will continue to record service cost, interest cost Retirement Plans Mark-to-Market Adjustment and expected return on plan assets at the business segments. Annual recognition of actuarial gains and losses (the “MTM adjustment”) will On June 12, 2015, we announced a change in our accounting method be reflected in our segment results only at the corporate level. for recognizing actuarial gains and losses for defined benefit pension and postretirement healthcare benefits. This method of accounting Additionally, although the actual asset returns of our funded plans is referred to as “mark-to-market” or MTM accounting. Historically, are recognized in each fiscal year through the MTM adjustment, we we have recognized actuarial gains and losses, subject to a corridor, continue to recognize an expected return on assets (“EROA”) in the by amortizing them into operating results over the average future determination of net pension cost. At the segment level, we have set service period of active employees in these plans. We have elected to our EROA at 6.5% for all periods presented, with an offsetting credit immediately recognize actuarial gains and losses in our consolidated at the corporate level to reflect the consolidated EROA in each period. operating results in the year in which the gains and losses occur. This We have set our consolidated EROA assumption at 6.5% for 2016. change will provide greater transparency into operating results by The following tables compare summary operating results and changes more quickly recognizing the effects of economic and interest rate in revenues and operating income (dollars in millions, except per share conditions on plan obligations, investments and assumptions. The amounts) for the years ended May 31. All amounts have been recast actuarial gains and losses are measured annually as of May 31 and, to conform to the current year presentation reflecting the pension accordingly, are recorded during the fourth quarter. In addition, for accounting changes and allocation of corporate headquarters costs purposes of calculating the expected return on plan assets, we will further discussed in this MD&A and Note 1, Note 13 and Note 14 of no longer use an averaging technique permitted under accounting the accompanying consolidated financial statements: principles generally accepted in the United States for the market- related value of plan assets but instead will use actual fair value of plan assets. We have applied these changes retrospectively. Percent Change 2015 2014 2013 2015/2014 2014/2013 Consolidated revenues $ 47,453 $ 45,567 $ 44,287 4 3 FedEx Express Segment operating income(1) 1,584 1,428 929 11 54 FedEx Ground Segment operating income(2) 2,172 2,021 1,859 7 9 FedEx Freight Segment operating income(3) 484 351 246 38 43 Corporate, eliminations and other(4) (2,373) 15 1,400 NM NM Consolidated operating income 1,867 3,815 4,434 (51) (14) FedEx Express Segment operating margin(1) 5.8% 5.3% 3.4% 50 bp 190 bp FedEx Ground Segment operating margin(2) 16.7% 17.4% 17.6% (70)bp (20)bp FedEx Freight Segment operating margin(3) 7.8% 6.1% 4.6% 170 bp 150 bp Consolidated operating margin(4) 3.9% 8.4% 10.0% (450)bp (160)bp Consolidated net income $ 1,050 $ 2,324 $ 2,716 (55) (14) Diluted earnings per share $ 3.65 $ 7.48 $ 8.55 (51) (13) Year-over-Year Changes Revenues Operating Income 2015/2014 2014/2013 2015/2014 2014/2013 FedEx Express segment(1) $ 118 $ (50) $ 156 $ 499 FedEx Ground segment(2) 1,367 1,039 151 162 FedEx Freight segment(3) 434 356 133 105 FedEx Services segment 9 (44) – – Corporate, eliminations and other(4) (42) (21) (2,388) (1,385) $ 1,886 $ 1,280 $ (1,948) $ (619) (1) FedEx Express segment 2015 expenses include impairment and related charges of $276 million resulting from the decision to permanently retire and adjust the retirement schedule of certain aircraft and related engines. Operating expenses for 2013 include $405 million of direct and allocated business realignment costs and an impairment charge of $100 million resulting from the decision to retire 10 aircraft and related engines. (2) FedEx Ground segment 2013 operating expenses include $105 million of allocated business realignment costs. (3) FedEx Freight segment 2013 operating expenses include $50 million of direct and allocated business realignment costs. (4) Operating income includes a loss of $2.2 billion in 2015, a loss of $15 million in 2014 and a gain of $1.4 billion in 2013 associated with our mark-to-market pension accounting further discussed in Note 1 of the accompanying consolidated financial statements. Operating income in 2015 also includes a $197 million charge in the fourth quarter to increase the legal reserve associated with the settlement of a legal matter at FedEx Ground to the amount of the settlement, which is further discussed in Note 18 of the accompanying consolidated financial statements. 11


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    MANAGEMENT’S DISCUSSION AND ANALYSIS Overview FedEx Express U.S. Domestic Average Daily Package Volume Our results for 2015 include a $2.2 billion loss ($1.4 billion, net of 2,700 tax, or $4.81 per diluted share) associated with our fourth quarter 2,683 mark-to-market benefit plans adjustment. In addition, we recorded impairment and related charges of $276 million ($175 million, net of 2,600 2,577 tax, or $0.61 per diluted share) associated with aircraft and engine 2,543 retirements at FedEx Express, and a $197 million ($133 million, net of 2,571 2,500 tax, or $0.46 per diluted share) charge in the fourth quarter to increase the legal reserve associated with the settlement of a legal matter at FedEx Ground to the amount of the settlement. These items are 2,400 2012 2013 2014 2015 further described below in this MD&A. While these charges signifi- (1) cantly impacted our results, each of our transportation segments had FedEx Express International strong performance during 2015. All of our transportation segments Average Daily Package Volume 1,000 experienced higher volumes, coupled with improved yields at FedEx 853 Ground and FedEx Freight. In addition, our results benefited from our 785 819 800 profit improvement program commenced in 2013, the positive net impact of fuel, and a lower year-over-year impact from severe winter 559 576 580 586 600 weather. Our 2015 results include higher maintenance expense, primarily due to the timing of aircraft maintenance events at FedEx 400 495 Express, and higher incentive compensation accruals, which were not affected by the mark-to-market accounting adoption, the aircraft 200 2012 2013 2014 2015 impairment or the legal reserve adjustment described above. International export International domestic In 2015, we repurchased an aggregate of $1.3 billion of our common FedEx Ground stock through open market purchases. Share repurchases in 2015 had Average Daily Package Volume a $0.14 year-over-year positive impact on earnings per diluted share 4,850 5,000 (net of interest expense on debt used to fund a portion of the 4,222 4,588 4,500 program). See additional information on the share repurchase program 4,000 3,907 in Note 1 of the accompanying consolidated financial statements. 3,500 Our revenues for 2014 increased due to improved performance of all our 3,000 2,186 transportation segments. In addition, our 2014 results benefited from 2,500 2,058 2,061 2,000 1,692 our voluntary employee severance program and reduced variable 1,500 incentive compensation, partially offset by the significant negative net 1,000 impact of fuel, an estimated $70 million year-over-year negative impact 2012 2013 2014 2015 of severe weather and one fewer operating day. Our year-over-year FedEx Ground FedEx SmartPost earnings comparisons benefited from the inclusion in 2013 results of FedEx Freight business realignment costs and an aircraft impairment charge. Average Daily LTL Shipments In 2014, we repurchased an aggregate of $4.9 billion of our common 100.0 stock through open market purchases and through accelerated share 95.5 repurchase (“ASR”) agreements with two banks. Share repurchases in 2014 had a modest positive impact on earnings per diluted share. See 90.6 90.0 additional information on the share repurchase program in Note 1 of the accompanying consolidated financial statements. 84.9 85.7 In 2013, we incurred a noncash pre-tax mark-to-market gain of $1.4 billion from actuarial adjustments to pension and postretirement 80.0 2012 2013 2014 2015 healthcare plans related to the measurement of plan assets and liabilities, which resulted in a positive impact to our earnings of $2.63 FedEx Express and FedEx Ground Total Average Daily Package Volume per diluted share. In addition, we recorded business realignment costs 12,000 of $560 million, primarily related to our voluntary cash buyout program, 11,500 and we retired from service 10 aircraft and related engines, which 11,033 10,744 resulted in a noncash asset impairment charge of $100 million. These 11,000 items negatively impacted our earnings by $1.31 per diluted share. 10,500 10,184 10,000 The following graphs for FedEx Express, FedEx Ground and FedEx Freight 9,500 9,230 show selected volume trends (in thousands) for the years ended May 31: 9,000 8,500 2012 2013 2014 2015 12 (1) International domestic average daily package volume represents our international intra-country express operations.


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    MANAGEMENT’S DISCUSSION AND ANALYSIS The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends for the years ended May 31: FedEx Express U.S. Domestic FedEx Express International Revenue per Package – Yield Revenue per Package – Yield $19.00 $70.00 $60.83 $58.72 $58.92 $57.50 $60.00 $50.00 $18.00 $17.42 $40.00 $17.33 $17.12 $17.13 $30.00 $17.00 $20.00 $10.00 $6.74 $6.99 $6.95 $6.49 $16.00 $– 2012 2013 2014 2015 2012 2013 2014 2015 International export composite International domestic FedEx Ground FedEx Freight Revenue per Package – Yield LTL Revenue per Shipment $10.00 $9.10 $9.37 $250.00 $8.77 $8.94 $8.00 $240.09 $240.00 $6.00 $234.23 $231.52 $4.00 $230.00 $1.81 $1.93 $226.24 $1.77 $1.78 $2.00 $– $220.00 2012 2013 2014 2015 2012 2013 2014 2015 FedEx Ground FedEx SmartPost Revenue Retirement Plans MTM Adjustment Revenues increased 4% in 2015 due to improved performance at all We incurred noncash pre-tax mark-to-market losses of $2.2 billion our transportation segments. At FedEx Ground, revenues increased in 2015 ($1.4 billion, net of tax, or $4.81 per diluted share) and $15 12% in 2015 due to higher volume from continued growth in both our million in 2014 ($9 million, net of tax, or $0.03 per diluted share) FedEx Home Delivery service and commercial business, the inclu- and a $1.4 billion gain in 2013 ($835 million, net of tax, or $2.63 per sion of GENCO Distribution System, Inc. (“GENCO”) results from the diluted share) from actuarial adjustments to pension and postretire- date of acquisition and increased yields. At FedEx Freight, revenues ment healthcare plans related to the measurement of plan assets and increased 8% in 2015 primarily due to higher average daily shipments liabilities. For more information see further discussion in the “Critical and revenue per shipment. Revenues at FedEx Express were flat Accounting Estimates” section of this MD&A and Note 1 and Note 13 during 2015 due to U.S. domestic and international package volume of the accompanying consolidated financial statements. growth, which were offset by lower fuel surcharges and the negative impact of exchange rates. Business Realignment, Impairment and Other Charges Revenues increased 3% in 2014, primarily due to higher volumes at FedEx Ground and FedEx Freight and yield increases at FedEx In May 2015, we made the decision to retire from service seven Boeing Ground. Revenues at all of our transportation segments in 2014 were MD11 aircraft and 12 related engines, four Airbus A310-300 aircraft and negatively impacted by one fewer operating day and unusually severe three related engines, three Airbus A300-600 aircraft and three related weather. At our FedEx Ground segment, revenues increased 10% in engines and one Boeing MD10-10 aircraft and three related engines and 2014 due to higher volume from market share gains and increased related parts, and adjusted the retirement schedule of an additional 23 yields as a result of rate increases. Revenues at FedEx Freight aircraft and 57 engines. As a consequence of this decision, impairment increased 7% during 2014 primarily due to higher average daily LTL and related charges of $276 million ($175 million, net of tax, or $0.61 shipments and revenue per LTL shipment. At FedEx Express, revenues per diluted share), of which $246 million was noncash, were recorded were flat as lower fuel surcharges and lower freight revenue were in the fourth quarter. The decision to permanently retire these aircraft offset by revenue growth in our base U.S. and international export and engines aligns with FedEx Express’s plans to rationalize capacity package business and growth in our freight-forwarding business and modernize its aircraft fleet to more effectively serve its customers. at FedEx Trade Networks. The demand shift from our priority inter- These combined changes will not have a material impact on our near- national services to our economy international services dampened term depreciation expense. revenue growth at FedEx Express. 13


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    MANAGEMENT’S DISCUSSION AND ANALYSIS In 2013, we recorded business realignment costs of $560 million, Percent of Revenue primarily related to our voluntary cash buyout program. Furthermore, 2015 2014 2013 in 2013, we retired from service 10 aircraft and related engines, which Operating expenses: resulted in a noncash asset impairment charge of $100 million. These Salaries and employee benefits 36.1% 35.5% 36.3% items negatively impacted our earnings by $1.31 per diluted share. Purchased transportation 17.9 17.6 16.4 See the “Long-lived Assets” section of our “Critical Accounting Rentals and landing fees 5.7 5.7 5.7 Estimates” for additional discussion of our accounting for aircraft retirement decisions. Depreciation and amortization 5.5 5.7 5.4 Fuel 7.8 10.0 10.7 Legal Reserve Increase Maintenance and repairs 4.4 4.1 4.3 On June 12, 2015, we announced an agreement in principle with the Business realignment, impairment plaintiffs in the FedEx Ground independent contractor litigation that is and other charges 0.6(1) – 1.5(2) pending in the United States District Court for the Northern District of Retirement plans mark-to-market California to settle the matter for $228 million. The settlement agree- adjustment 4.6 – (3.1) ment has been filed with the court for approval. The settlement resolves Other 13.5(3) 13.0 12.8 claims dating back to 2000 that concern a model that FedEx Ground Total operating expenses 96.1 91.6 90.0 no longer operates. As a consequence, a charge of $197 million ($133 million, net of tax, or $0.46 per diluted share) was recorded in the fourth Operating margin 3.9% 8.4% 10.0% quarter of 2015 to increase the reserve for this matter to the amount (1) Includes charges resulting from the decision to permanently retire and adjust the retirement schedule of certain aircraft and related engines at FedEx Express. of the settlement. The charge is included in the caption “Other” in our (2) Includes predominantly severance costs associated with our voluntary buyout program and consolidated statements of income. For further information see Note charges resulting from the decision to retire 10 aircraft and related engines at FedEx Express. (3) Includes a $197 million charge in the fourth quarter to increase the legal reserve associated 18 of the accompanying consolidated financial statements. with the settlement of a legal matter at FedEx Ground to the amount of the settlement. Operating Expenses Our operating expenses for 2015 include a $2.2 billion loss ($1.4 The following tables compare operating expenses expressed as dollar billion, net of tax) associated with our mark-to-market pension amounts (in millions) and as a percent of revenue for the years ended accounting as described above. In addition, we recorded charges of May 31, and prior year amounts have been revised to conform to the $276 million ($175 million, net of tax) associated with the decision to current year presentation regarding pension accounting changes: permanently retire and adjust the retirement schedule of certain air- craft and related engines at FedEx Express, and a $197 million ($133 2015 2014 2013 million, net of tax) charge in the fourth quarter to increase the reserve Operating expenses: associated with the settlement of an independent contractor proceed- Salaries and employee benefits $ 17,110 $ 16,171 $ 16,055 ing at FedEx Ground to the amount of the settlement. The settlement Purchased transportation 8,483 8,011 7,272 is further discussed in this MD&A and Note 18 of the accompanying Rentals and landing fees 2,682 2,622 2,521 consolidated financial statements. Our 2015 operating expenses also increased primarily due to volume-related growth in salaries and Depreciation and amortization 2,611 2,587 2,386 employee benefits and purchased transportation expenses, higher Fuel 3,720 4,557 4,746 maintenance and repairs expense and higher incentive compensation Maintenance and repairs 2,099 1,862 1,909 accruals. However, operating margin benefited from revenue growth, Business realignment, impairment our profit improvement program, which we commenced in 2013, the and other charges 276(1) – 660(2) net impact of fuel (as further described below) and a lower year-over- Retirement plans mark-to-market year impact from severe winter weather. adjustment 2,190 15 (1,368) (3) Other 6,415 5,927 5,672 Total operating expenses $ 45,586 $ 41,752 $ 39,853 14


  • Page 17

    MANAGEMENT’S DISCUSSION AND ANALYSIS Operating expenses included an increase in salaries and employee Fuel benefits expense of 6% in 2015 due to the timing of merit increases for The following graph for our transportation segments shows our aver- many of our employees at FedEx Express, additional staffing to support age cost of jet and vehicle fuel per gallon for the years ended May 31: volume growth and higher incentive compensation accruals. These factors were partially offset by the positive impact of our voluntary Average Fuel Cost per Gallon buyout program. Other expenses were driven 8% higher in 2015 due to $5.00 the legal reserve increase discussed above and the inclusion of GENCO results. Purchased transportation costs increased 6% in 2015 due to $4.00 $3.80 $3.81 $3.76 volume growth and higher service provider rates at FedEx Ground and $3.13 volume growth, higher utilization and higher service provider rates $3.00 $3.31 $3.22 $3.13 at FedEx Freight. The timing of aircraft maintenance events at FedEx Express primarily drove an increase in maintenance and repairs expense $2.00 $2.47 of 13% in 2015. $1.00 Our 2014 operating expenses grew due to the volume-related growth 2012 2013 2014 2015 and higher utilization of third-party providers in purchased transporta- Vehicle Jet tion expense, higher depreciation and amortization expense due to the accelerated depreciation on certain aircraft at FedEx Express (as further Fuel expense decreased 18% during 2015 primarily due to lower described below) and the year-over-year impact of unusually severe aircraft fuel prices. However, fuel prices represent only one compo- weather. These factors were partially offset by the inclusion in 2013 nent of the two factors we consider meaningful in understanding of costs associated with our business realignment program, an aircraft the impact of fuel on our business. Consideration must also be impairment charge, as well as lower fuel expense, one fewer operating given to the fuel surcharge revenue we collect. Accordingly, we day and lower maintenance and repairs expense. believe discussion of the net impact of fuel on our results, which is Purchased transportation costs increased 10% in 2014 due to volume a comparison of the year-over-year change in these two factors, is growth at FedEx Ground, higher utilization of third-party transportation important to understand the impact of fuel on our business. In order providers at FedEx Express, including recent business acquisitions at to provide information about the impact of fuel surcharges on the FedEx Express, higher utilization of third-party transportation providers trend in revenue and yield growth, we have included the comparative at FedEx Freight and the expansion of our freight-forwarding business weighted-average fuel surcharge percentages in effect for 2015, 2014 at FedEx Trade Networks. Depreciation and amortization expense and 2013 in the accompanying discussions of each of our transporta- increased 8% in 2014 primarily due to accelerated depreciation tion segments. on certain aircraft scheduled for retirement, and aircraft placed in The index used to determine the fuel surcharge percentage for our service at FedEx Express ($74 million). Salaries and employee benefits FedEx Freight business adjusts weekly, while our fuel surcharges for expense in 2014 increased 1% due to the benefits from our voluntary the FedEx Express and FedEx Ground businesses incorporate a timing employee buyout program, lower pension expense, the delayed timing lag of approximately six to eight weeks before they are adjusted for or absence of merit increases for many of our employees and reduced changes in fuel prices. For example, the fuel surcharge index in effect variable incentive compensation. Maintenance and repairs decreased at FedEx Express in May 2015 was set based on March 2015 fuel 2% in 2014 due to network adjustments at FedEx Express and the prices. In addition, the structure of the table that is used to deter- continued modernization of our aircraft fleet, which impacted the mine our fuel surcharge at FedEx Express and FedEx Ground does not timing of certain maintenance events. adjust immediately for changes in fuel price, but allows for the fuel surcharge revenue charged to our customers to remain unchanged as long as fuel prices remain within certain ranges. 15


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    MANAGEMENT’S DISCUSSION AND ANALYSIS Beyond these factors, the manner in which we purchase fuel also Income Taxes influences the net impact of fuel on our results. For example, our Our effective tax rate was 35.5% in 2015, 36.5% in 2014 and 37.4% contracts for jet fuel purchases at FedEx Express are tied to various in 2013. Due to its effect on income before income taxes, the adoption indices, including the U.S. Gulf Coast index. While many of these of MTM accounting reduced our 2015 effective tax rate by 80 basis indices are aligned, each index may fluctuate at a different pace, points and increased our effective tax rates by 20 basis points in 2014 driving variability in the prices paid for jet fuel. Furthermore, under and 100 basis points in 2013. Our permanent reinvestment strategy these contractual arrangements, approximately 75% of our jet fuel is with respect to unremitted earnings of our foreign subsidiaries purchased based on the index price for the preceding week, with the provided a benefit of approximately $48 million to our 2015 provision remainder of our purchases tied to the index price for the preceding for income taxes. Our cumulative permanently reinvested foreign month, rather than based on daily spot rates. These contractual provi- earnings were $1.9 billion at the end of 2015 and $1.6 billion at the sions mitigate the impact of rapidly changing daily spot rates on our end of 2014. jet fuel purchases. For 2016, we expect our effective tax rate to be between 36.0% and Because of the factors described above, our operating results may be 37.0% prior to any year-end MTM adjustment. The actual rate, however, affected should the market price of fuel suddenly change by a signifi- will depend on a number of factors, including the amount and source of cant amount or change by amounts that do not result in an adjustment operating income and the impact of the MTM adjustment. in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term. Additional information on income taxes, including our effective tax rate reconciliation, liabilities for uncertain tax positions and our global We routinely review our fuel surcharges and our fuel surcharge tax profile can be found in Note 12 of the accompanying consolidated methodology. On February 2, 2015, we updated the tables used to financial statements. determine our fuel surcharges at FedEx Express, FedEx Ground and FedEx Freight. Business Acquisitions The net impact of fuel had a significant benefit to operating income in On April 6, 2015, we entered into a conditional agreement to acquire 2015. This was driven by decreased fuel prices during 2015 versus the TNT Express N.V. (“TNT Express”) for €4.4 billion (currently, approxi- prior year, which was partially offset by the year-over-year decrease in mately $4.9 billion). This combination is expected to expand our global fuel surcharge revenue during these periods. portfolio, particularly in Europe, lower our costs to serve our European markets by increasing density in our pickup-and-delivery operations The net impact of fuel on our operating results does not consider the and accelerate our global growth. This acquisition is expected to be effects that fuel surcharge levels may have on our business, including completed in the first half of calendar year 2016. The closing of the changes in demand and shifts in the mix of services purchased by our acquisition is subject to customary conditions, including obtaining all customers. While fluctuations in fuel surcharge percentages can be necessary approvals and competition clearances. We expect to secure significant from period to period, fuel surcharges represent one of the all relevant competition approvals. many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of During 2015, we acquired two businesses, expanding our portfolio services sold, the base price and extra service charges we obtain for in e-commerce and supply chain solutions. On January 30, 2015, these services and the level of pricing discounts offered. we acquired GENCO, a leading North American third-party logistics provider, for $1.4 billion, which was funded using a portion of the Fuel expense decreased 4% during 2014 primarily due to lower aver- proceeds from our January 2015 debt issuance. The financial results age price per gallon of jet fuel and lower aircraft fuel usage. The net of this business are included in the FedEx Ground segment from the impact of fuel had a significant negative impact on operating income date of acquisition. in 2014. This was driven by decreased fuel surcharge revenue during 2014 versus prior year, which was slightly offset by the year-over-year In addition, on December 16, 2014, we acquired Bongo International, decrease in fuel prices. LLC (“Bongo”), a leader in cross-border enablement technologies and solutions, for $42 million in cash from operations. The financial results Interest Expense of this business are included in the FedEx Express segment from the Interest expense increased $75 million in 2015 primarily due to date of acquisition. increased interest expense from our January 2015 debt offering and In 2014, we expanded the international service offerings of FedEx 2014 debt issuances. Interest expense increased $78 million in 2014 Express by completing our acquisition of the businesses operated by primarily due to increased interest expense from our January 2014 debt our previous service provider, Supaswift (Pty) Ltd., in seven countries offering, 2013 debt issuances and a reduction in capitalized interest. in Southern Africa, for $36 million in cash from operations. The finan- cial results of this business are included in the FedEx Express segment from the date of acquisition. 16


  • Page 19

    MANAGEMENT’S DISCUSSION AND ANALYSIS In 2013, we completed our acquisitions of Rapidão Cometa Logística Outlook e Transporte S.A., a Brazilian transportation and logistics company, We anticipate revenue and earnings growth in 2016, prior to any for $398 million; TATEX, a French express transportation company, for year-end MTM adjustment, driven by continued improvements in the $55 million; and Opek Sp. z o.o., a Polish domestic express pack- performance of all of our transportation segments, including the con- age delivery company, for $54 million. The financial results of these tinued execution of the profit improvement programs noted above. We businesses are included in the FedEx Express segment from their expect continued moderate global economic growth to drive volume respective date of acquisition. and yield improvements. Our expectations for earnings growth in 2016 The financial results of these acquired businesses were not material, are dependent on key external factors, including fuel prices and global individually or in the aggregate, to our results of operations and economic conditions. Our outlook for 2016 does not contemplate any therefore, pro forma financial information has not been presented. impact from our announced intent to acquire TNT Express, such as integration planning or transaction costs or the operating activities of Profit Improvement Programs TNT Express if the transaction is consummated. During 2013, we announced profit improvement programs primarily Our capital expenditures for 2016 are expected to approximate $4.6 through initiatives at FedEx Express and FedEx Services targeting billion for continued expansion of the FedEx Ground network and annual profitability improvement of $1.6 billion at FedEx Express. additional aircraft deliveries in 2016 to support our fleet modernization Our plans position FedEx Express to exit 2016 with a run rate of $1.6 program at FedEx Express. We will continue to evaluate our invest- billion in additional operating profit from the then 2013 base business. ments in critical long-term strategic projects to ensure our capital Our ability to achieve the profit improvement target and other benefits expenditures generate high returns on investments and are balanced from these programs is dependent upon a number of factors, including with our outlook for global economic conditions. For additional details the health of the global economy and future customer demand. on key 2016 capital projects, refer to the “Capital Resources” and In 2015 we made substantial progress in achieving our profit “Liquidity Outlook” sections of this MD&A. improvement goals. FedEx Express has improved operating income by Our outlook is dependent upon a stable pricing environment for fuel, approximately 70% from 2013 with essentially flat revenue during the as volatility in fuel prices impacts our fuel surcharge levels, fuel three-year period. FedEx Services has reduced its total expenses while expense and demand for our services. Volatility in fuel costs may investing in major information technology transformation projects. In impact earnings because adjustments to our fuel surcharges lag addition, our incentive compensation programs have been gradually changes in actual fuel prices paid. Therefore, the trailing impact of reinstated so that 2016 business plan objectives represent more fully adjustments to our fuel surcharges can significantly affect our earn- funded compensation targets. ings either positively or negatively in the short-term. During 2014, we completed a program to offer voluntary cash buyouts As described in Note 18 of the accompanying consolidated finan- to eligible U.S.-based employees in certain staff functions. As a result cial statements, we are involved in a number of lawsuits and other of this program, approximately 3,600 employees left the company. We proceedings that challenge the status of FedEx Ground’s owner- recognized costs of $560 million ($353 million, net of tax, or $1.11 per operators as independent contractors. FedEx Ground anticipates diluted share) during 2013, which were related primarily to severance continuing changes to its relationships with its owner-operators. As when eligible employees accepted their offers. Payments under this previously announced, FedEx Ground reached an agreement, which program were made at the time of departure and totaled approxi- is subject to court approval, to settle an independent contractor case mately $300 million in 2014 and $180 million in 2013. in California, and we accrued a related charge in the fourth quarter The cost of the program is included in the caption “Business realign- of 2015. Additionally, during the first quarter of 2015, we established ment, impairment and other charges” in our consolidated statements an accrual for the estimated probable loss in the Oregon cases that of income. Also included in that caption are other external costs was required to be recognized pursuant to applicable accounting directly attributable to our business realignment activities, such as standards. With respect to the matters that are pending outside of professional fees. See Note 1 of the accompanying consolidated California and Oregon, the nature, timing and amount of any changes financial statements for further discussion of the voluntary employee are dependent on the outcome of numerous future events. We cannot severance program. reasonably estimate the potential impact of any such changes or a meaningful range of potential outcomes, although they could be mate- In addition, see the “Long-lived Assets” section of our “Critical rial. However, we do not believe that any such changes will impair our Accounting Estimates” for a discussion of fleet modernization actions ability to operate and profitably grow our FedEx Ground business. See taken in 2015 and 2013. Note 18 of the accompanying consolidated financial statements for additional information. See “Risk Factors” for a discussion of these and other potential risks and uncertainties that could materially affect our future performance. 17


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    MANAGEMENT’S DISCUSSION AND ANALYSIS Seasonality of Business We believe that no other new accounting guidance was adopted or Our businesses are cyclical in nature, as seasonal fluctuations affect issued during 2015 that is relevant to the readers of our financial volumes, revenues and earnings. Historically, the U.S. express pack- statements. However, there are numerous new proposals under devel- age business experiences an increase in volumes in late November opment which, if and when enacted, may have a significant impact on and December. International business, particularly in the Asia-to-U.S. our financial reporting. market, peaks in October and November in advance of the U.S. holi- day sales season. Our first and third fiscal quarters, because they are Reportable Segments summer vacation and post winter-holiday seasons, have historically FedEx Express, FedEx Ground and FedEx Freight represent our major experienced lower volumes relative to other periods. Normally, the fall service lines and, along with FedEx Services, form the core of our is the busiest shipping period for FedEx Ground, while late December, reportable segments. Our reportable segments include the following June and July are the slowest periods. For FedEx Freight, the spring businesses: and fall are the busiest periods and the latter part of December through February is the slowest period. For FedEx Office, the summer FedEx Express Segment > FedEx Express months are normally the slowest periods. Shipment levels, operating (express transportation) costs and earnings for each of our companies can also be adversely > FedEx Trade Networks affected by inclement weather, particularly the impact of severe (air and ocean freight forwarding winter weather in our third fiscal quarter. and customs brokerage) > FedEx SupplyChain Systems Recent Accounting Guidance (logistics services) New accounting rules and disclosure requirements can significantly > Bongo impact our reported results and the comparability of our financial (cross-border enablement technology statements. and solutions) On June 1, 2013, we adopted the authoritative guidance issued by the FedEx Ground Segment > FedEx Ground Financial Accounting Standards Board (“FASB”) requiring additional (small-package ground delivery) information about reclassification adjustments out of accumulated > FedEx SmartPost other comprehensive income, including changes in accumulated (small-parcel consolidator) other comprehensive income balances by component and significant > GENCO items reclassified out of accumulated other comprehensive income. (third-party logistics) We have adopted this guidance by including expanded accumulated FedEx Freight Segment > FedEx Freight other comprehensive income disclosure requirements in Note 9 of our (LTL freight transportation) consolidated financial statements. > FedEx Custom Critical (time-critical transportation) On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually FedEx Services Segment > FedEx Services all existing revenue recognition guidance under accounting principles (sales, marketing, information generally accepted in the United States (and International Financial technology, communications and Reporting Standards), which has been subsequently updated to defer back-office functions) the effective date of the new revenue recognition standard by one > FedEx TechConnect year. This standard will be effective for us beginning in fiscal 2019. (customer service, technical support, The fundamental principles of the new guidance are that companies billings and collections) should recognize revenue in a manner that reflects the timing of the > FedEx Office transfer of services to customers and the amount of revenue recog- (document and business services nized reflects the consideration that a company expects to receive and package acceptance) for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. Based on our preliminary assessment, we do not anticipate that the new guidance will fundamentally change our revenue recognition policies, practices or systems. 18


  • Page 21

    MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Services Segment equal our consolidated EROA assumption for 2016. In fiscal years The operating expenses line item “Intercompany charges” on the where the consolidated EROA is greater than 6.5%, that difference is accompanying consolidated financial statements of our transportation reflected as a credit in “Corporate, eliminations and other.” We have segments reflects the allocations from the FedEx Services segment to adjusted prior-period segment information to conform to the current the respective transportation segments. The allocations of net operat- period’s presentation to ensure comparability of the segment results ing costs are based on metrics such as relative revenues or estimated across all periods, including comparisons going forward in 2016. services provided. In addition, in 2015, we ceased allocating to our transportation seg- The FedEx Services segment provides direct and indirect support to ments the costs associated with our corporate headquarters division. our transportation businesses, and we allocate all of the net operat- These costs included services related to general oversight functions, ing costs of the FedEx Services segment (including the net operating including executive officers and certain legal and finance functions results of FedEx Office) to reflect the full cost of operating our as well as our annual MTM adjustment and certain other charges or transportation businesses in the results of those segments. Within credits. This change allows for additional transparency and improved the FedEx Services segment allocation, the net operating results of management of our corporate oversight costs. These costs were FedEx Office, which are an immaterial component of our allocations, previously included in the operating expenses line item “Intercompany are allocated to FedEx Express and FedEx Ground. We review and charges” on the accompanying unaudited financial summaries of our evaluate the performance of our transportation segments based on transportation segments. These costs are now included in “Corporate, operating income (inclusive of FedEx Services segment allocations). eliminations and other” in our segment reporting and reconciliations. For the FedEx Services segment, performance is evaluated based on Prior year amounts have been revised to conform to the current year the impact of its total allocated net operating costs on our transporta- segment presentation. See Note 14 of the accompanying consolidated tion segments. We believe these allocations approximate the net cost financial statements for more information. The increase in these of providing these functions. Our allocation methodologies are refined unallocated costs in 2015 from the prior year was driven by a loss periodically, as necessary, to reflect changes in our businesses. associated with our MTM adjustment as further discussed in this MD&A and Note 1 and Note 13 of the accompanying consolidated During the fourth quarter of 2015, we changed our method of account- financial statements and an increase in legal contingency reserves ing for our defined benefit pension and postretirement healthcare recorded in the first and fourth quarters of 2015 associated with a plans to immediately recognize actuarial gains and losses resulting legal matter at FedEx Ground described in Note 18 of the accompanying from the remeasurement of these plans in earnings in the fourth consolidated financial statements. quarter of each fiscal year. This method of accounting is referred to as MTM accounting as described in this MD&A and Note 1 and Note 13 Other Intersegment Transactions of the accompanying consolidated financial statements. FedEx’s seg- Certain FedEx operating companies provide transportation and related ment operating results follow internal management reporting, which services for other FedEx companies outside their reportable segment. is used for making operating decisions and assessing performance. Billings for such services are based on negotiated rates, which we Historically, total net periodic benefit cost was allocated to each seg- believe approximate fair value, and are reflected as revenues of the ment. We continue to record service cost, interest cost and EROA at billing segment. These rates are adjusted from time to time based the business segments as well as an allocation from FedEx Services on market conditions. Such intersegment revenues and expenses are of their comparable costs. Annual recognition of actuarial gains and eliminated in our consolidated results and are not separately identi- losses will be reflected in our segment results only at the corporate fied in the following segment information, because the amounts are level. Additionally, although the actual asset returns are recognized in not material. each fiscal year through a MTM adjustment, we continue to recognize EROA in the determination of net pension cost. At the segment level, we have set our EROA at 6.5% for all periods presented, which will 19


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    MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Express Segment FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including prior- ity services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the years ended May 31, and amounts have been recast to conform to the current year presentation reflecting the pension accounting changes and allocation of corporate headquarters costs further discussed in this MD&A and Note 1, Note 13 and Note 14 of the accompanying consolidated financial statements: Percent Percent of Revenue Change 2015 2014 2013 2015/ 2014/ Operating expenses: 2015 2014 2013 2014 2013 Salaries and employee benefits 37.1% 36.1% 36.2% Revenues: Purchased transportation 9.3 9.3 8.6 Package: Rentals and landing fees 6.2 6.3 6.2 U.S. overnight box $ 6,704 $ 6,555 $ 6,513 2 1 Depreciation and amortization 5.4 5.5 5.0 U.S. overnight envelope 1,629 1,636 1,705 – (4) Fuel 11.7 14.5 15.2 U.S. deferred 3,342 3,188 3,020 5 6 Total U.S. domestic Maintenance and repairs 5.0 4.4 4.6 package revenue 11,675 11,379 11,238 3 1 Business realignment, impairment and other charges(3) 1.0 – 0.9 International priority 6,251 6,451 6,586 (3) (2) Intercompany charges(4) 6.8 6.9 8.1 International economy 2,301 2,229 2,046 3 9 Total international Other 11.7 11.7 11.8 export package Total operating expenses 94.2 94.7 96.6 revenue 8,552 8,680 8,632 (1) 1 Operating margin 5.8% 5.3% 3.4% (1) International domestic 1,406 1,446 1,398 (3) 3 (1) International domestic revenues represent our international intra-country express operations. (2) Includes FedEx Trade Networks, FedEx SupplyChain Systems and Bongo. Total package revenue 21,633 21,505 21,268 1 1 (3) 2015 includes $276 million of impairment and related charges resulting from the decision Freight: to permanently retire and adjust the retirement schedule of certain aircraft and related engines. 2013 includes $143 million of predominantly severance costs associated with our U.S. 2,300 2,355 2,562 (2) (8) voluntary buyout program and a $100 million impairment charge resulting from the decision to retire 10 aircraft and related engines. International priority 1,588 1,594 1,678 – (5) (4) Includes allocations of $262 million in 2013 for business realignment costs. International airfreight 180 205 276 (12) (26) Total freight revenue 4,068 4,154 4,516 (2) (8) Other(2) 1,538 1,462 1,387 5 5 Total revenues 27,239 27,121 27,171 – – Operating expenses: Salaries and employee benefits 10,104 9,797 9,835 3 – Purchased transportation 2,544 2,511 2,331 1 8 Rentals and landing fees 1,693 1,705 1,684 (1) 1 Depreciation and amortization 1,460 1,488 1,350 (2) 10 Fuel 3,199 3,943 4,130 (19) (5) Maintenance and repairs 1,357 1,182 1,244 15 (5) Business realignment, impairment and other charges(3) 276 – 243 NM NM Intercompany charges(4) 1,842 1,888 2,215 (2) (15) Other 3,180 3,179 3,210 – (1) Total operating expenses 25,655 25,693 26,242 – (2) Operating income $ 1,584 $ 1,428 $ 929 11 54 Operating margin 5.8% 5.3% 3.4% 50bp 190bp 20


  • Page 23

    MANAGEMENT’S DISCUSSION AND ANALYSIS The following table compares selected statistics (in thousands, except FedEx Express Segment Revenues yield amounts) for the years ended May 31: FedEx Express total revenues were flat in 2015 as U.S. and interna- Percent tional package volume and base yield growth were offset by lower Change fuel surcharges and unfavorable exchange rates. 2015/ 2014/ U.S. domestic volumes increased 4% in 2015 driven by both our 2015 2014 2013 2014 2013 overnight box and deferred service offerings. U.S. domestic yields Package Statistics(1) decreased 2% in 2015 due to the negative impact of lower fuel Average daily package surcharges, which were partially offset by higher rates. International volume (ADV): export volumes grew 1%, driven by a 4% growth in our international U.S. overnight box 1,240 1,164 1,134 7 3 economy service offering. The 2% decrease in international export U.S. overnight envelope 527 538 574 (2) (6) yields in 2015 was due to the negative impact of lower fuel sur- charges and unfavorable exchange rates, which were partially offset U.S. deferred 916 869 835 5 4 by higher rates and weight per package. International domestic rev- Total U.S. domestic ADV 2,683 2,571 2,543 4 1 enues declined 3% in 2015 due to the negative impact of unfavorable International priority 410 410 421 – (3) exchange rates, which were partially offset by a 4% volume increase. International economy 176 170 155 4 10 FedEx Express segment revenues were also flat in 2014. Lower fuel Total international export surcharges, lower freight revenue, unfavorable exchange rates and ADV 586 580 576 1 1 one fewer operating day were offset by revenue growth in our U.S. International domestic(2) 853 819 785 4 4 and international export package base business and the growth of our Total ADV 4,122 3,970 3,904 4 2 freight-forwarding business at FedEx Trade Networks. In addition, the Revenue per package (yield): demand shift from our priority international services to our economy international services dampened revenue growth. U.S. overnight box $ 21.29 $ 22.18 $ 22.52 (4) (2) U.S. overnight envelope 12.15 11.97 11.66 2 3 Freight yields decreased 7% in 2014 due to lower fuel surcharges and U.S. deferred 14.36 14.44 14.18 (1) 2 lower rates. Freight average daily pounds decreased by 1% in 2014 due to weakness in global economic conditions and capacity reduc- U.S. domestic composite 17.13 17.42 17.33 (2) 1 tions. U.S. domestic yields increased 1% in 2014 primarily due to International priority 60.05 61.88 61.28 (3) 1 higher rates and weight per package, partially offset by lower fuel International economy 51.54 51.75 51.77 – – surcharges. International export package revenues increased 1% in International export 2014 as base business growth was offset by lower fuel surcharges composite 57.50 58.92 58.72 (2) – and the demand shift to our lower-yielding economy services. International domestic(2) 6.49 6.95 6.99 (7) (1) International priority yields increased 1% in 2014, while interna- Composite package yield 20.66 21.32 21.36 (3) – tional priority volumes declined 3%. Within this category, volumes for lower-yielding distribution services declined, while international Freight Statistics(1) priority volumes, excluding these distribution services, increased 1%. Average daily freight pounds: International domestic average daily volumes increased 4% in 2014 U.S. 7,833 7,854 7,612 – 3 primarily due to prior year international business acquisitions. International priority 2,887 2,922 3,048 (1) (4) Our U.S. domestic and outbound fuel surcharge and the international International airfreight 684 798 1,066 (14) (25) fuel surcharges ranged as follows for the years ended May 31: Total average daily freight pounds 11,404 11,574 11,726 (1) (1) 2015 2014 2013 Revenue per pound (yield): U.S. Domestic and Outbound Fuel Surcharge: U.S. $ 1.16 $ 1.18 $ 1.32 (2) (11) Low 1.50% 8.00% 10.00% International priority 2.17 2.15 2.16 1 – High 9.50 10.50 14.50 International airfreight 1.04 1.01 1.01 3 – Weighted-average 6.34 9.47 11.84 Composite freight yield 1.40 1.41 1.51 (1) (7) International Fuel Surcharges: (1) Package and freight statistics include only the operations of FedEx Express. (2) International domestic statistics represent our international intra-country express operations. Low 0.50 12.00 12.00 High 18.00 19.00 20.50 Weighted-average 12.80 16.26 17.02 21


  • Page 24

    MANAGEMENT’S DISCUSSION AND ANALYSIS On February 2, 2015, FedEx Express updated the tables used to severance program and lower maintenance expense. These factors determine fuel surcharges. On September 16, 2014, FedEx Express were partially offset by lower freight revenues, a significant nega- announced a 4.9% average list price increase for FedEx Express U.S. tive net impact of fuel and higher depreciation expense. In addition, domestic, U.S. export and U.S. import services effective January 5, operating income in 2014 reflects one fewer operating day and the 2015. In January 2014, we implemented a 3.9% average list price year-over-year negative impact of severe weather. increase for FedEx Express U.S. domestic, U.S. export and U.S. In 2014, salaries and employee benefits were flat due to lower pen- import services. sion expense, the delayed timing or absence of annual merit increases for many of our employees, benefits from our voluntary employee FedEx Express Segment Operating Income severance program and lower variable incentive compensation. Despite flat revenues, FedEx Express operating income and operating Intercompany charges decreased 15% in 2014 due to the inclusion in margin increased in 2015, driven by U.S. domestic and international the prior year results of costs associated with the business realign- package base yield and volume growth, benefits associated with our ment program at FedEx Services, as well as lower allocated sales and profit improvement program, the positive net impact of fuel, reduced information technology costs. FedEx Express maintenance and repairs pension expense, lower international expenses due to currency costs decreased 5% in 2014 due to network reductions and the exchange rates, lower depreciation expense and a lower year-over- benefits from the retirement of aircraft and related engines, as well year impact from severe winter weather. These factors were partially as the timing of major maintenance events. Purchased transportation offset by higher maintenance expense and higher incentive compensa- costs increased 8% in 2014 due to higher utilization of third-party tion accruals. Additionally, results for 2015 were negatively impacted transportation providers, including recent business acquisitions, and by $276 million ($175 million, net of tax) of impairment and related costs associated with the expansion of our freight-forwarding busi- charges, of which $246 million was noncash, resulting from the decision ness at FedEx Trade Networks. Depreciation and amortization expense to permanently retire and adjust the retirement schedule of certain increased 10% during 2014 as a result of $74 million of year-over-year aircraft and related engines. incremental accelerated depreciation due to the shortened life of cer- Within operating expenses, salaries and employee benefits increased tain aircraft scheduled for retirement, and aircraft placed into service. 3% in 2015 due to the timing of annual merit increases for many Fuel costs decreased 5% in 2014 due to lower aircraft fuel prices and of our employees and higher incentive compensation accruals. usage. The net impact of fuel had a significant negative impact on These factors were partially offset by the benefits from our vol- operating income in 2014. See the “Fuel” section of this MD&A for a untary employee severance program and lower pension expense. description and additional discussion of the net impact of fuel on our Maintenance and repairs expense increased 15% in 2015 primarily operating results. due to the timing of aircraft maintenance events. Costs associated with the growth of our freight-forwarding business at FedEx Trade FedEx Express Segment Outlook Networks drove an increase in purchased transportation costs of We expect revenues and earnings to increase at FedEx Express during 1% in 2015. Depreciation and amortization expense decreased 2016 primarily due to improved U.S. domestic and international export 2% in 2015 driven by the expiration of accelerated depreciation volume and package yields, as we continue to focus on revenue quality for certain aircraft that were retired from service during the year. while managing costs. In addition, we expect operating income to Fuel expense decreased 19% in 2015 due to lower aircraft fuel prices. improve through the continued execution of our profit improvement The net impact of fuel had a significant benefit in 2015 to operating programs, including managing network capacity to match customer income. See the “Fuel” section of this MD&A for a description and demand, reducing structural costs, modernizing our fleet and driving additional discussion of the net impact of fuel on our operating results. productivity increases throughout our U.S. and international operations. FedEx Express operating income and operating margin in 2014 were Capital expenditures at FedEx Express are expected to increase in 2016 positively impacted by the inclusion in 2013 of costs associated driven by our aircraft fleet modernization programs, as we add new air- with our business realignment program and an aircraft impairment craft that are more reliable, fuel-efficient and technologically advanced charge as discussed above. In addition, FedEx Express results in 2014 and retire older, less-efficient aircraft. benefited from the revenue growth in our U.S. and international export package business, lower pension expense, our voluntary employee 22


  • Page 25

    MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Ground Segment Percent of Revenue FedEx Ground service offerings include day-certain service delivery 2015 2014 2013 to businesses in the U.S. and Canada and to nearly 100% of U.S. Operating expenses: residences. FedEx SmartPost consolidates high-volume, low-weight, Salaries and employee benefits 16.5% 15.0% 14.9% less time-sensitive business-to-consumer packages and utilizes the United States Postal Service (“USPS”) for final delivery. On January 30, Purchased transportation 38.7 39.9 39.6 2015, we acquired GENCO, a leading North American third-party Rentals 3.7 3.5 3.1 logistics provider. GENCO’s financial results are included in the following Depreciation and amortization 4.1 4.0 4.1 table from the date of acquisition, which has impacted the year-over- Fuel 0.1 0.2 0.2 year comparability of revenue and operating expenses. The following Maintenance and repairs 1.9 1.9 1.8 tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars Intercompany charges(1) 8.7 9.4 10.3 in millions) and selected package statistics (in thousands, except yield Other 9.6 8.7 8.4 amounts) for the years ended May 31, and amounts have been recast Total operating expenses 83.3 82.6 82.4 to conform to the current year presentation reflecting the pension Operating margin 16.7% 17.4% 17.6% accounting changes and allocation of corporate headquarters costs (1) Includes allocations of $105 million in 2013 for business realignment costs. further discussed in this MD&A and Note 1, Note 13 and Note 14 of the accompanying consolidated financial statements: FedEx Ground Segment Revenues Percent FedEx Ground segment revenues increased 12% in 2015 due to Change volume and yield growth at FedEx Ground, the inclusion of GENCO 2015/ 2014/ 2015 2014 2013 2014 2013 results and yield growth at FedEx SmartPost, partially offset by lower volumes at FedEx SmartPost. Revenues: FedEx Ground $ 11,563 $10,634 $ 9,652 9 10 Average daily volume at FedEx Ground increased 6% in 2015 due to continued growth in our FedEx Home Delivery service and commercial FedEx SmartPost 1,005 983 926 2 6 business. Yield increased 3% in 2015 primarily due to higher GENCO 416 – – NM NM dimensional weight charges and rate increases. Total revenues 12,984 11,617 10,578 12 10 FedEx SmartPost average daily volume decreased 6% in 2015 due to Operating expenses: the reduction in volume from a major customer. FedEx SmartPost yield Salaries and employee increased 8% in 2015 due to rate increases and improved customer benefits 2,146 1,749 1,577 23 11 mix, partially offset by higher postage costs. FedEx SmartPost yield Purchased transportation 5,021 4,635 4,191 8 11 represents the amount charged to customers net of postage paid to Rentals 485 402 331 21 21 the USPS. Depreciation and FedEx Ground segment revenues increased 10% in 2014 due to both amortization 530 468 434 13 8 volume and yield growth at FedEx Ground and volume growth at Fuel 12 17 17 (29) – FedEx SmartPost. In addition, 2014 revenues were negatively Maintenance and repairs 244 222 190 10 17 impacted by one fewer operating day, unusually severe weather Intercompany charges (1) 1,123 1,095 1,086 3 1 and lower fuel surcharges. Other 1,251 1,008 893 24 13 Average daily volume at FedEx Ground increased 9% during 2014 Total operating expenses 10,812 9,596 8,719 13 10 due to market share gains resulting from continued growth in our Operating income $ 2,172 $ 2,021 $ 1,859 7 9 FedEx Home Delivery service and commercial business. FedEx Ground yield increased 2% during 2014 primarily due to rate Operating margin 16.7% 17.4% 17.6% (70)bp (20)bp increases and higher residential surcharges, partially offset by lower Average daily package fuel surcharge revenue. volume: FedEx Ground 4,850 4,588 4,222 6 9 FedEx SmartPost volumes grew 6% during 2014 primarily due to growth in e-commerce. Yields at FedEx SmartPost increased 1% during 2014 FedEx SmartPost 2,061 2,186 2,058 (6) 6 primarily due to rate increases and change in service mix, partially Revenue per package (yield): offset by higher postage costs and lower fuel surcharges. FedEx Ground $ 9.37 $ 9.10 $ 8.94 3 2 FedEx SmartPost $ 1.93 $ 1.78 $ 1.77 8 1 23


  • Page 26

    MANAGEMENT’S DISCUSSION AND ANALYSIS The FedEx Ground fuel surcharge is based on a rounded average of the Salaries and employee benefits expense increased 11% during 2014 national U.S. on-highway average price for a gallon of diesel fuel, as primarily due to additional staffing to support volume growth and published by the Department of Energy. Our fuel surcharge ranged as higher healthcare costs. Other expense increased 13% primarily due follows for the years ended May 31: to higher self-insurance costs and credit card fees. Rentals expense increased 21% in 2014 due to network expansion. Depreciation and 2015 2014 2013 amortization expense increased 8% in 2014 due to network expansion Low 4.50% 6.50% 6.50% and trailer purchases. High 7.00 7.00 8.50 FedEx Ground Segment Outlook Weighted-average 5.90 6.66 7.60 FedEx Ground segment revenues and operating income are expected to continue to grow in 2016, led by volume growth across all our major On February 2, 2015, FedEx Ground updated the tables used to services due to market share gains. We also anticipate yield growth to determine fuel surcharges. On September 16, 2014, FedEx Ground and continue in 2016 through yield management programs, including our FedEx Home Delivery announced a 4.9% increase in average list price dimensional weight rating changes. However, the full-year impact of effective January 5, 2015. In addition, as announced in May 2014, FedEx the GENCO acquisition will have a negative impact on FedEx Ground Ground began applying dimensional weight pricing to all shipments operating margin in 2016 due to integration costs and the impact of effective January 5, 2015. In January 2014, FedEx Ground and FedEx intangible asset amortization arising from purchase accounting. Home Delivery implemented a 4.9% increase in average list price. FedEx SmartPost rates also increased. Capital expenditures at FedEx Ground are expected to increase in 2016 as we continue to make investments to grow our highly FedEx Ground Segment Operating Income profitable FedEx Ground network through facility expansions and FedEx Ground segment operating income increased 7% in 2015 driven equipment purchases. The impact of these investments on our cost by higher revenue per package and volumes, the positive net impact of structure will partially offset earnings growth in 2016. fuel, and a lower year-over-year impact from severe winter weather. The On March 16, 2015, we announced that our FedEx SmartPost business increase to operating income was partially offset by higher network will be merged into FedEx Ground effective September 1, 2015. The expansion costs, as we continue to invest heavily in our FedEx Ground FedEx SmartPost service remains an important component of our and FedEx SmartPost businesses. The decline in operating margin for service offerings and this internal structural change will enhance our 2015 is primarily attributable to network expansion costs and the ability to leverage the strengths of both the FedEx Ground and FedEx inclusion of GENCO results. SmartPost networks to maximize operational efficiencies and will The inclusion of GENCO results in the FedEx Ground segment results provide greater flexibility to meeting the needs of our e-commerce has impacted the year-over-year comparability of all operating customers. No personnel reductions associated with this merger are expenses. Including the incremental costs from GENCO, salaries and expected, and the estimated cost of the merger activities is immate- employee benefits increased 23% driven by additional staffing to rial to our results. support volume growth. Volume growth and higher service provider Effective June 1, 2015, we will begin recording revenues associated rates drove purchased transportation expense to increase 8% in 2015. with FedEx SmartPost on a gross basis including postal fees in Other expense increased 24% in 2015 primarily due to the addition of revenues and expenses, versus our previous net treatment, due to GENCO results and higher self-insurance costs. Network expansion operational changes occurring in 2016 which result in us being the caused rentals expense to increase 21% in 2015. Depreciation and principal in all cases for the FedEx SmartPost service. This change will amortization expense increased 13% in 2015 due to network be prospective as the operational changes did not occur until the expansion and trailer purchases. beginning of 2016. While we expect this to have a negative impact of FedEx Ground segment operating income increased 9% in 2014 driven approximately 120 basis points on the FedEx Ground operating margin by higher volumes and yields. Operating income comparisons were also in 2016, it will not impact the total operating income of FedEx Ground. positively impacted by the inclusion in 2013 of costs associated with our We will continue to vigorously defend various attacks against our business realignment program. The increase to operating income in independent contractor model and incur ongoing legal costs as a part 2014 was partially offset by higher network expansion costs, as we of this process. While we believe that FedEx Ground’s owner-opera- continue to invest heavily in the growing FedEx Ground and FedEx tors are properly classified as independent contractors, it is SmartPost businesses, and the net negative impact of fuel. In addition, reasonably possible that we could incur additional material losses in operating income in 2014 was negatively affected by year-over-year connection with one or more of these matters or be required to make impact of unusually severe weather and one fewer operating day. The material changes to our contractor model. However, we do not believe decline in operating margin for 2014 is primarily attributable to the that any such changes will impair our ability to operate and profitably negative net impact of fuel and network expansion costs. Operating grow our FedEx Ground business. margin in 2014 benefited from the inclusion in 2013 of costs associated with our business realignment program. 24


  • Page 27

    MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Freight Segment FedEx Freight service offerings include priority LTL services when speed is critical and economy services when time can be traded for savings. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income, operating margin (dollars in millions) and selected statistics for the years ended May 31, and amounts have been recast to conform to the current year presenta- tion reflecting the pension accounting changes and allocation of corporate headquarters costs further discussed in this MD&A and Note 1, Note 13 and Note 14 of the accompanying consolidated financial statements: Percent Percent of Revenue Change 2015 2014 2013 2015/ 2014/ 2015 2014 2013 2014 2013 Operating expenses: Revenues $ 6,191 $ 5,757 $ 5,401 8 7 Salaries and employee benefits 43.6% 42.4% 43.3% Operating expenses: Purchased transportation 16.9 17.1 16.0 Salaries and employee Rentals 2.1 2.3 2.2 benefits 2,698 2,442 2,336 10 5 Depreciation and amortization 3.7 4.0 4.0 Purchased transportation 1,045 981 865 7 13 Fuel 8.2 10.3 11.1 Rentals 129 131 118 (2) 11 Maintenance and repairs 3.2 3.1 3.5 Depreciation and Business realignment, impairment amortization 230 231 217 – 6 and other charges(1) – – – Fuel 508 595 598 (15) (1) Intercompany charges(2) 7.2 7.5 8.4 Maintenance and repairs 201 179 191 12 (6) Other 7.3 7.2 6.9 Business realignment, Total operating expenses 92.2 93.9 95.4 impairment and other charges(1) – – 3 NM NM Operating margin 7.8% 6.1% 4.6% (1) 2013 includes severance costs associated with our voluntary buyout program. Intercompany charges(2) 444 431 452 3 (5) (2) Includes allocations of $47 million in 2013 for business realignment costs. Other 452 416 375 9 11 Total operating expenses 5,707 5,406 5,155 6 5 Operating income $ 484 $ 351 $ 246 38 43 Operating margin 7.8% 6.1% 4.6% 170bp 150bp Average daily LTL shipments (in thousands) Priority 66.9 62.9 59.3 6 6 Economy 28.6 27.7 26.4 3 5 Total average daily LTL shipments 95.5 90.6 85.7 5 6 Weight per LTL shipment Priority 1,272 1,262 1,237 1 2 Economy 1,003 1,000 990 – 1 Composite weight per LTL shipment 1,191 1,182 1,161 1 2 LTL revenue per shipment Priority $ 229.57 $ 223.61 $ 220.32 3 1 Economy 264.34 258.05 256.38 2 1 Composite LTL revenue per shipment $ 240.09 $ 234.23 $ 231.52 3 1 LTL revenue per hundredweight Priority $ 18.05 $ 17.73 $ 17.80 2 – Economy 26.34 25.80 25.90 2 – Composite LTL revenue per hundredweight $ 20.15 $ 19.82 $ 19.94 2 (1) 25


  • Page 28

    MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Freight Segment Revenues FedEx Freight Segment Operating Income FedEx Freight segment revenues increased 8% in 2015 due to higher FedEx Freight segment operating income and operating margin average daily shipments and revenue per shipment. Average daily LTL increased in 2015 due to higher LTL revenue per shipment and higher shipments increased 5% in 2015 due to higher demand for our FedEx average daily LTL shipments. These factors were partially offset by Freight Priority and FedEx Freight Economy service offerings. LTL a 10% increase in salaries and employee benefits expense driven by revenue per shipment increased 3% in 2015 due to higher rates and staffing to support volume growth and higher incentive compensation higher weight per LTL shipment. accruals. Volume growth, higher utilization and higher service provider FedEx Freight segment revenues increased 7% during 2014 due to rates drove an increase to purchased transportation expense of 7% in higher average daily LTL shipments and revenue per LTL shipment. 2015. Other expense increased 9% in 2015 driven partially by higher Revenues in 2014 were negatively impacted by one fewer operating cargo claims. day. Average daily LTL shipments increased 6% in 2014 due to higher FedEx Freight segment operating income and operating margin demand for both of our service offerings. LTL revenue per shipment increased in 2014 due to the positive impacts of higher average daily increased 1% in 2014 due to changes in shipment characteristics, LTL shipments, higher LTL revenue per shipment and greater network primarily higher weight per LTL shipment. efficiency. Operating income comparisons also benefited from the The weekly indexed LTL fuel surcharge is based on the average of the inclusion in 2013 of costs associated with our business realignment U.S. on-highway prices for a gallon of diesel fuel, as published by the program as discussed below. Operating income in 2014 was negatively Department of Energy. The indexed LTL fuel surcharge ranged as follows impacted by higher depreciation and amortization expense, the negative for the years ended May 31: year-over-year impact of severe weather and one fewer operating day. 2015 2014 2013 Purchased transportation expense increased 13% in 2014 due to increased use of rail and road third-party transportation providers and Low 20.90% 22.70% 21.80% higher rates. Salaries and employee benefits increased 5% in 2014 High 26.20 23.70 24.40 primarily due to a volume-related increase in labor hours and higher Weighted-average 24.30 23.20 23.38 healthcare costs. Other operating expenses increased 11% in 2014 due to higher self-insurance costs, bad debt expense and real estate taxes. Intercompany charges decreased 5% in 2014 primarily due to On February 2, 2015, FedEx Freight updated the tables used to deter- the inclusion in the prior year results of costs associated with the mine fuel surcharges. On September 16, 2014, FedEx Freight announced business realignment program at FedEx Services, partially offset by a 4.9% average increase in certain U.S. and other shipping rates higher allocated sales costs. effective January 5, 2015. In June 2014, FedEx Freight increased its published fuel surcharge indices by three percentage points. In March FedEx Freight Segment Outlook 2014, FedEx Freight increased certain U.S. and other shipping rates by We expect continued revenue and operating income growth, as well an average of 3.9%. as improvement in our operating margin during 2016 driven by moder- ate volume growth from our differentiated LTL services. We also anticipate effective yield management practices to result in increased revenues. FedEx Freight earnings growth will also be positively impacted by continued improvement in productivity along with further investment in technology. Capital expenditures at FedEx Freight are expected to increase in 2016 primarily driven by investments in vehicles, as well as additional investments in facilities. 26


  • Page 29

    MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL CONDITION CASH PROVIDED BY OPERATING ACTIVITIES. Cash flows from operating activities increased $1.1 billion in 2015 primarily due to higher segment operating income, the inclusion in the prior year of Liquidity payments associated with our voluntary employee buyout program Cash and cash equivalents totaled $3.8 billion at May 31, 2015, and lower incentive compensation payments. Cash flows from compared to $2.9 billion at May 31, 2014. The following table operating activities decreased $424 million in 2014 primarily due to provides a summary of our cash flows for the periods ended May 31 voluntary employee severance program payouts, an income tax refund (in millions). All amounts have been recast to conform to the current received in the prior year, higher income tax payments and higher year presentation reflecting the MTM accounting changes further pension contributions, partially offset by higher segment operating discussed in this MD&A and Note 1, Note 13 and Note 14 of the income. We made contributions of $660 million to our tax-qualified accompanying consolidated financial statements: U.S. domestic pension plans (“U.S. Pension Plans”) in 2015 and 2014 and $560 million in 2013. 2015 2014 2013 Operating activities: CASH USED IN INVESTING ACTIVITIES. Capital expenditures were Net income $ 1,050 $ 2,324 $ 2,716 23% higher in 2015 largely due to increased spending for aircraft at Business realignment, impairment FedEx Express and sort facility expansion at FedEx Ground, and were and other charges 246 – 479 5% higher in 2014 than in 2013, largely due to increased spending at Retirement plans mark-to-market FedEx Ground and FedEx Express. See “Capital Resources” for a more adjustment 2,190 15 (1,368) detailed discussion of capital expenditures during 2015 and 2014. Other noncash charges and credits 2,317 3,173 3,396 FINANCING ACTIVITIES. We had various senior unsecured debt Changes in assets and liabilities (437) (1,248) (535) issuances in 2015, 2014 and 2013. See Note 6 of the accompany- Cash provided by operating activities 5,366 4,264 4,688 ing consolidated financial statements for more information on these Investing activities: issuances. Interest on these notes is paid semiannually. We utilized Capital expenditures (4,347) (3,533) (3,375) $1.4 billion of the net proceeds of the 2015 debt issuance to fund our Business acquisitions, net of acquisition of GENCO and the remaining proceeds for working capital cash acquired (1,429) (36) (483) and general corporate purposes. We utilized the net proceeds of the Proceeds from asset dispositions 2014 debt issuance to finance the ASR agreements as discussed and other 24 18 55 below. We utilized the net proceeds of the 2013 debt issuances for Cash used in investing activities (5,752) (3,551) (3,803) working capital and general corporate purposes. See Note 3 of the accompanying consolidated financial statements for further discussion Financing activities: of business acquisitions. Purchase of treasury stock, including ASRs (1,254) (4,857) (246) During 2014, we repaid our $250 million 7.38% senior unsecured Principal payments on debt (5) (254) (417) notes that matured on January 15, 2014. During 2013, we made prin- Proceeds from debt issuances 2,491 1,997 1,739 cipal payments of $116 million related to capital lease obligations and Dividends paid (227) (187) (177) repaid our $300 million 9.65% unsecured notes that matured in June 2012 using cash from operations. Other 344 582 285 Cash provided by (used in) The effect of exchange rate changes on cash during 2015 was driven financing activities 1,349 (2,719) 1,184 by the overall strengthening of the U.S. dollar primarily against the Effect of exchange rate changes on cash (108) (3) 5 Brazilian real, the British pound, the Japanese yen, the Canadian Net increase (decrease) in cash and dollar and the Mexican peso. cash equivalents $ 855 $ (2,009) $ 2,074 Cash and cash equivalents at end of period $ 3,763 $ 2,908 $ 4,917 The following table provides a summary of our common stock share repurchases for the periods ended May 31 (dollars in millions, except per share amounts): 2015 2014 Total Number Average Total Total Number Average Total of Shares Price Paid Purchase of Shares Price Paid Purchase Purchased per Share Price Purchased per Share Price Common stock purchases 8,142,410 $ 154.03 $ 1,254 36,845,590 $ 131.83 $ 4,857 As of May 31, 2015, 12.2 million shares remained under our share repurchase authorizations. Our share repurchase activity in 2014 includes ASR agreements entered into with two banks to repurchase $2.0 billion of our common stock. 27


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    MANAGEMENT’S DISCUSSION AND ANALYSIS In 2015, our Board of Directors authorized the repurchase of up to 15 Liquidity Outlook million shares of common stock. It is expected that the share authori- We believe that our cash and cash equivalents, which totaled $3.8 zation will primarily be utilized to offset equity compensation dilution billion at May 31, 2015, cash flow from operations and available over the next several years. Shares may be repurchased under this financing sources will be adequate to meet our liquidity needs, program from time to time in the open market or in privately negoti- including working capital, capital expenditure requirements, debt ated transactions. This is the only repurchase program that currently payment obligations and our announced intent to acquire TNT exists, and it does not have an expiration date. Express. Our cash and cash equivalents balance at May 31, 2015 includes $478 million of cash in offshore jurisdictions associated with Capital Resources our permanent reinvestment strategy. We do not believe that the Our operations are capital intensive, characterized by significant indefinite reinvestment of these funds offshore impairs our ability to investments in aircraft, vehicles, technology, facilities, and package- meet our U.S. domestic debt or working capital obligations. handling and sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractualOur capital expenditures are expected to be approximately $4.6 billion commitments, anticipated volume growth, domestic and international in 2016. We anticipate that our cash flow from operations will be economic conditions, new or enhanced services, geographical sufficient to fund our increased capital expenditures in 2016, which will include spending for network expansion at FedEx Ground and expansion of services, availability of satisfactory financing and actions of regulatory authorities. aircraft modernization and re-fleeting at FedEx Express. We expect approximately 45% of capital expenditures in 2016 to be designated The following table compares capital expenditures by asset category for growth initiatives, predominantly at FedEx Ground, and 55% and reportable segment for the years ended May 31 (in millions): dedicated to maintaining our existing operations. Our expected capital Percent expenditures for 2016 include $1.6 billion in investments for delivery Change of aircraft and progress payments toward future aircraft deliveries at 2015/ 2014/ FedEx Express. 2015 2014 2013 2014 2013 We have several aircraft modernization programs underway that are Aircraft and related equipment $ 1,866 $ 1,327 $ 1,190 41 12 supported by the purchase of B777F, B767F and B757 aircraft. These Facilities and sort equipment 1,224 819 727 49 13 aircraft are significantly more fuel-efficient per unit than the aircraft Vehicles 601 784 734 (23) 7 types previously utilized, and these expenditures are necessary to Information and technology achieve significant long-term operating savings and to replace older investments 348 403 452 (14) (11) aircraft. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify Other equipment 308 200 272 54 (26) existing purchase agreements. During September 2014, FedEx Express Total capital expenditures $ 4,347 $ 3,533 $ 3,375 23 5 entered into an agreement to purchase four additional B767F aircraft, FedEx Express segment $ 2,380 $ 1,994 $ 2,067 19 (4) the delivery of which will begin in 2017 and continue through 2019. FedEx Ground segment 1,248 850 555 47 53 We have a shelf registration statement filed with the Securities and FedEx Freight segment 337 325 326 4 – Exchange Commission (“SEC”) that allows us to sell, in one or more FedEx Services segment 381 363 424 5 (14) future offerings, any combination of our unsecured debt securities Other 1 1 3 NM NM and common stock. Total capital expenditures $ 4,347 $ 3,533 $ 3,375 23 5 We plan to finance the aggregate consideration of the announced intent to acquire TNT Express by utilizing available cash on our Capital expenditures during 2015 were higher than the prior year balance sheet and through available financing sources. primarily due to increased spending for aircraft at FedEx Express A $1 billion revolving credit facility is available to finance our and increased spending for sort facility expansion at FedEx Ground. operations and other cash flow needs and to provide support for the Aircraft and related equipment purchases at FedEx Express during issuance of commercial paper. The revolving credit agreement expires 2015 included the delivery of 14 Boeing 767-300 Freighter (“B767F”) in March 2018. The agreement contains a financial covenant, which and 13 Boeing 757 (“B757”) aircraft, as well as the modification of requires us to maintain a leverage ratio of adjusted debt (long-term certain aircraft before being placed into service. Capital expenditures debt, including the current portion of such debt, plus six times our last during 2014 were higher than the prior year primarily due to increased four fiscal quarters’ rentals and landing fees) to capital (adjusted debt spending for sort facility expansion and equipment at FedEx Ground plus total common stockholders’ investment) that does not exceed and aircraft and related equipment at FedEx Express. Aircraft and 70%. Our leverage ratio of adjusted debt to capital was 61% at related equipment expenditures at FedEx Express during 2014 May 31, 2015. We believe the leverage ratio covenant is the only included the delivery of 17 B757 aircraft, four B767F aircraft and two significant restrictive covenant in our revolving credit agreement. Our Boeing 777 Freighter (“B777F”) aircraft, as well as the modification revolving credit agreement contains other customary covenants that of certain aircraft before being placed into service. do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement 28


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    MANAGEMENT’S DISCUSSION AND ANALYSIS and do not expect the covenants to affect our operations, including market. If our senior unsecured debt credit ratings drop below invest- our liquidity or expected funding needs. As of May 31, 2015, no ment grade, our access to financing may become limited. commercial paper was outstanding, and the entire $1 billion under the revolving credit facility was available for future borrowings. Contractual Cash Obligations and For 2016, we anticipate making contributions totaling $660 million Off-Balance Sheet Arrangements (approximately $500 million of which are required) to our U.S. The following table sets forth a summary of our contractual cash Pension Plans. Our U.S. Pension Plans have ample funds to meet obligations as of May 31, 2015. Certain of these contractual expected benefit payments. obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally On June 8, 2015, our Board of Directors declared a quarterly dividend accepted in the United States. Except for the current portion of of $0.25 per share of common stock, an increase of $0.05 per common interest on long-term debt, this table does not include amounts share from the prior quarter’s dividend. The dividend was paid on July already recorded in our balance sheet as current liabilities at May 31, 2, 2015 to stockholders of record as of the close of business on June 2015. We have certain contingent liabilities that are not accrued in 18, 2015. Each quarterly dividend payment is subject to review and our balance sheet in accordance with accounting principles generally approval by our Board of Directors, and we evaluate our dividend accepted in the United States. These contingent liabilities are not payment amount on an annual basis at the end of each fiscal year. included in the table below. We have other long-term liabilities Standard & Poor’s has assigned us a senior unsecured debt credit rating reflected in our balance sheet, including deferred income taxes, of BBB and commercial paper rating of A-2 and a ratings outlook of qualified and nonqualified pension and postretirement healthcare “stable.” Moody’s Investors Service has assigned us a senior unsecured plan liabilities and other self-insurance accruals. Unless statutorily debt credit rating of Baa1 and commercial paper rating of P-2 and a required, the payment obligations associated with these liabilities ratings outlook of “negative.” If our credit ratings drop, our interest are not reflected in the table below due to the absence of scheduled expense may increase. If our commercial paper ratings drop below maturities. Accordingly, this table is not meant to represent a forecast current levels, we may have difficulty utilizing the commercial paper of our total cash expenditures for any of the periods presented. Payments Due by Fiscal Year (Undiscounted) (in millions) 2016 2017 2018 2019 2020 Thereafter Total Operating activities: Operating leases $ 2,128 $ 2,241 $ 1,751 $ 1,511 $ 1,265 $ 7,489 $ 16,385 Non-capital purchase obligations and other 432 230 127 69 22 89 969 Interest on long-term debt 325 320 320 320 260 5,331 6,876 Contributions to our U.S. Pension Plans 500 – – – – – 500 Investing activities: Aircraft and aircraft-related capital commitments 1,255 1,024 1,399 1,017 662 3,786 9,143 Other capital purchase obligations 129 5 1 – – – 135 Financing activities: Debt – – – 750 400 6,090 7,240 Total $ 4,769 $ 3,820 $ 3,598 $ 3,667 $ 2,609 $ 22,785 $ 41,248 29


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    MANAGEMENT’S DISCUSSION AND ANALYSIS Open purchase orders that are cancelable are not considered uncon- table. See Note 12 of the accompanying consolidated financial state- ditional purchase obligations for financial reporting purposes and ments for further information. are not included in the table above. Such purchase orders often rep- We had $472 million in deposits and progress payments as of May resent authorizations to purchase rather than binding agreements. 31, 2015 on aircraft purchases and other planned aircraft-related See Note 17 of the accompanying consolidated financial statements transactions. for more information on such purchase orders. Investing Activities Operating Activities The amounts reflected in the table above for capital purchase In accordance with accounting principles generally accepted in the obligations represent noncancelable agreements to purchase United States, future contractual payments under our operating leases capital-related equipment. Such contracts include those for certain (totaling $16 billion on an undiscounted basis) are not recorded in our purchases of aircraft, aircraft modifications, vehicles, facilities, balance sheet. Credit rating agencies routinely use information con- computers and other equipment. Commitments to purchase aircraft cerning minimum lease payments required for our operating leases to in passenger configuration do not include the attendant costs to calculate our debt capacity. The amounts reflected in the table above modify these aircraft for cargo transport unless we have entered for operating leases represent future minimum lease payments under into noncancelable commitments to modify such aircraft. noncancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at May 31, 2015. Financing Activities Under the proposed new lease accounting rules, the majority of these We have certain financial instruments representing potential leases will be required to be recognized on the balance sheet as a liability with an offsetting right-to-use asset. commitments, not reflected in the table above, that were incurred in the normal course of business to support our operations, including The amounts reflected for purchase obligations represent noncan- standby letters of credit and surety bonds. These instruments are celable agreements to purchase goods or services that are not required under certain U.S. self-insurance programs and are also capital-related. Such contracts include those for printing and advertis- used in the normal course of international operations. The underlying ing and promotions contracts. liabilities insured by these instruments are reflected in our balance Included in the table above within the caption entitled “Non-capital sheets, where applicable. Therefore, no additional liability is reflected purchase obligations and other” is our estimate of the current portion for the letters of credit and surety bonds themselves. of the liability ($1 million) for uncertain tax positions. We cannot rea- The amounts reflected in the table above for long-term debt represent sonably estimate the timing of the long-term payments or the amount future scheduled payments on our long-term debt. In 2016, we have by which the liability will increase or decrease over time; therefore, no scheduled debt payments. the long-term portion of the liability ($35 million) is excluded from the 30


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    MANAGEMENT’S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING ESTIMATES losses have become increasingly material and amortizing them into future periods would punitively burden future operations for legacy The preparation of financial statements in accordance with benefit costs. accounting principles generally accepted in the United States We are required to record year-end adjustments to our financial requires management to make significant judgments and estimates statements on an annual basis for the net funded status of our to develop amounts reflected and disclosed in the financial pension and postretirement healthcare plans. The funded status of our statements. In many cases, there are alternative policies or plans also impacts our liquidity; however, the cash funding rules estimation techniques that could be used. We maintain a thorough operate under a completely different set of assumptions and process to review the application of our accounting policies and to standards than those used for financial reporting purposes. As a evaluate the appropriateness of the many estimates that are result, our actual cash funding requirements can differ materially from required to prepare the financial statements of a complex, global our reported funded status. corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and The “Salaries and employee benefits” caption of our consolidated new or better information. income statements includes expense associated with service and interest costs and the expected return on plan assets. Our fourth The estimates discussed below include the financial statement quarter MTM adjustment is included in the “Retirement plans elements that are either the most judgmental or involve the mark-to-market adjustment” caption in our consolidated income selection or application of alternative accounting policies and are statements. A summary of our retirement plans costs over the past material to our financial statements. Management has discussed three years is as follows (in millions): the development and selection of these critical accounting 2015 2014 2013 estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm. Defined benefit pension plans: Segment level $ 191 $ 285 $ 355 Retirement Plans Coporate, eliminations and other (232) (186) (192) OVERVIEW. We sponsor programs that provide retirement benefits to Total defined benefit pension plans $ (41) $ 99 $ 163 most of our employees. These programs include defined benefit Defined contribution plans 385 363 354 pension plans, defined contribution plans and postretirement healthcare plans and are described in Note 13 of the accompanying Postretirement healthcare plans 81 78 78 consolidated financial statements. The rules for pension accounting Retirement plans mark-to-market are complex and can produce tremendous volatility in our results, adjustment 2,190 15 (1,368) financial condition and liquidity. $ 2,615 $ 555 $ (773) As described in the consolidated results section of this MD&A, in The components of the pre-tax mark-to-market losses (gains) are as 2015 we adopted MTM accounting for recognition of actuarial gains follows, in millions: and losses on our defined benefit pension and postretirement healthcare plans. Previously, we amortized actuarial gains or losses in 2015 2014 2013 excess of a corridor amount over the average remaining service lives Discount rate changes $ 791 $ 705 $ (1,076) of our covered employees. Further, we used a calculated value method Actual versus expected return to determine the value of plan assets amortizing changes in the fair on assets (35) (1,013) (696) value of plan assets over a period no longer than four years. Under our Demographic assumption changes 1,434 323 404 new MTM accounting methodology (as described in Note 1 of the Total mark-to-market loss (gain) $ 2,190 $ 15 $ (1,368) accompanying consolidated financial statements), we will immedi- ately recognize changes in the fair value of plan assets and actuarial gains or losses in our operating results annually in the fourth quarter 2015 each year. The remaining components of pension and postretirement The implementation of new U.S. mortality tables in 2015 resulted in healthcare expense, primarily service and interest costs and the an increased participant life expectancy assumption, which increased expected return on plan assets, will continue to be recorded on a the overall projected benefit obligation by $1.2 billion. The weighted quarterly basis. average discount rate for all of our pension and postretirement We elected to adopt MTM accounting for a number of reasons. healthcare plans declined from 4.57% at May 31, 2014 to 4.38% Immediate recognition of gains and losses in the income statement at May 31, 2015. is the preferred method of accounting for these plans as it aligns the income statement treatment with the treatment required to measure 2014 the related assets and liabilities in the balance sheet. Furthermore, The actual rate of return on our U.S. Pension Plan assets of 13.3% the accumulated actuarial losses relate primarily to the remeasure- exceeded our expected return of 7.75% primarily due to a favorable ment of our legacy pension formula which has been frozen for the vast investment environment for global equity markets. The weighted majority of employees since 2008. Due to persistently low interest average discount rate for all of our pension and postretirement rates and demographic assumption changes, those accumulated healthcare plans decreased from 4.76% at May 31, 2013 to 4.57% at May 31, 2014. 31


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    MANAGEMENT’S DISCUSSION AND ANALYSIS 2013 PLAN ASSETS. The expected average rate of return on plan assets The weighted average discount rate for all of our pension and is a long-term, forward-looking assumption. It is required to be the postretirement healthcare plans increased from 4.44% at May 31, expected future long-term rate of earnings on plan assets. Our pension 2012 to 4.76% at May 31, 2013. The actual rate of return on our U.S. plan assets are invested primarily in publicly tradeable securities, and Pension Plan assets of 12.1% exceeded our expected return of 8.0% our pension plans hold only a minimal investment in FedEx common primarily due to a favorable investment environment for global equity stock that is entirely at the discretion of third-party pension fund and credit markets. investment managers. As part of our strategy to manage pension costs and funded status volatility, we have transitioned to a liability-driven Following is a discussion of the key estimates we consider in investment strategy to better align plan assets with liabilities. determining our U.S. Pension Plans cost: Establishing the expected future rate of investment return on our DISCOUNT RATE. This is the interest rate used to discount the pension assets is a judgmental matter, which we review on an annual estimated future benefit payments that have been accrued to date basis and revise as appropriate. Management considers the following (the projected benefit obligation, or “PBO”) to their net present value factors in determining this assumption: and to determine the succeeding year’s ongoing pension expense (prior to any year-end MTM adjustment). The discount rate is > the duration of our pension plan liabilities, which drives the determined each year at the plan measurement date. The discount investment strategy we can employ with our pension plan assets; rate at each measurement date is as follows: > the types of investment classes in which we invest our pension plan assets and the expected compound geometric return we can Measurement Date Discount Rate reasonably expect those investment classes to earn over time; and 5/31/2015 4.42% > the investment returns we can reasonably expect our investment 5/31/2014 4.60 management program to achieve in excess of the returns we could 5/31/2013 4.79 expect if investments were made strictly in indexed funds. 5/31/2012 4.44 For consolidated pension expense, we assumed a 7.75% expected long-term rate of return on our U.S. Pension Plan assets in 2015 and We determine the discount rate with the assistance of actuaries, who 2014 and 8% in 2013. The actual returns during each of the last three calculate the yield on a theoretical portfolio of high-grade corporate fiscal years have exceeded those long-term assumptions. However, for bonds (rated Aa or better). In developing this theoretical portfolio, we 2016, we have lowered our expected return on plan assets assumption select bonds that match cash flows to benefit payments, limit our for long-term returns on plan assets to 6.5% as we continue to concentration by industry and issuer, and apply screening criteria to implement our asset and liability management strategy. In lowering this ensure bonds with a call feature have a low probability of being assumption we considered our historical returns, our current capital called. To the extent scheduled bond proceeds exceed the estimated markets outlook and our investment strategy for our plan assets, benefit payments in a given period, the calculation assumes those including the impact of the duration of our plan liability. Our actual excess proceeds are reinvested at one-year forward rates. return on plan assets has contracted from 2014 as we have increased The discount rate assumption is highly sensitive. For our largest pension our asset allocation to lower yielding fixed income investments. At the plan, at our May 31, 2015 measurement date, a 50-basis-point increase segment level, we have set our EROA at 6.5% for all periods presented. in the discount rate would have decreased our 2015 PBO by approxi- A one-basis-point change in our expected return on plan assets impacts mately $1.7 billion and a 50-basis-point decrease in the discount rate our 2016 segment pension expense by $2.3 million. The actual historical would have increased our 2015 PBO by approximately $1.9 billion. With annual return on our U.S. Pension Plan assets, calculated on a com- the adoption of MTM accounting, the impact of changes in the discount pound geometric basis, was 6.7%, net of investment manager fees and rate on pension expense are predominately isolated to our fourth administrative expenses, for the 15-year period ended May 31, 2015 quarter mark-to-market adjustment. A one-basis-point change in the and 7%, net of investment manager fees and administrative expenses, discount rate for our largest pension plan would have a $37 million for the 15-year period ended May 31, 2014. Any difference between effect on the fourth quarter mark-to-market adjustment but only a net actual plan asset performance and the expected return is reflected in $100,000 impact on segment level pension expense. our year-end MTM adjustment each fiscal year. 32


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    MANAGEMENT’S DISCUSSION AND ANALYSIS FUNDED STATUS. Following is information concerning the funded We believe the use of actuarial methods to account for these status of our pension plans as of May 31 (in millions): liabilities provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation 2015 2014 technique in this area is inherently sensitive given the magnitude of Funded Status of Plans: claims involved and the length of time until the ultimate cost is Projected benefit obligation (PBO) $ 27,512 $ 24,578 known. We believe our recorded obligations for these expenses are Fair value of plan assets 23,505 21,907 consistently measured on a conservative basis. Nevertheless, changes in healthcare costs, accident frequency and severity, insurance Funded status of the plans $ (4,007) $ (2,671) retention levels and other factors can materially affect the estimates Cash Amounts: for these liabilities. Cash contributions during the year $ 746 $ 727 Benefit payments during the year $ 815 $ 801 Long-Lived Assets USEFUL LIVES AND SALVAGE VALUES. Our business is capital FUNDING. The funding requirements for our U.S. Pension Plans are intensive, with approximately 56% of our total assets invested in our governed by the Pension Protection Act of 2006, which has aggressive transportation and information systems infrastructures. funding requirements in order to avoid benefit payment restrictions The depreciation or amortization of our capital assets over their that become effective if the funded status determined under IRS rules estimated useful lives, and the determination of any salvage values, falls below 80% at the beginning of a plan year. All of our U.S. requires management to make judgments about future events. Because Pension Plans have funded status levels in excess of 80% and our we utilize many of our capital assets over relatively long periods (the plans remain adequately funded to provide benefits to our employees majority of aircraft costs are depreciated over 15 to 30 years), we as they come due. Additionally, current benefit payments are nominal periodically evaluate whether adjustments to our estimated service compared to our total plan assets (benefit payments for our U.S. lives or salvage values are necessary to ensure these estimates Pension Plans for 2015 were approximately $744 million or 3.2% of properly match the economic use of the asset. This evaluation may plan assets). result in changes in the estimated lives and residual values used to During 2015, we made $388 million in required contributions to our U.S. depreciate our aircraft and other equipment. For our aircraft, we Pension Plans. Over the past several years, we have made voluntary typically assign no residual value due to the utilization of these assets contributions to our U.S. Pension Plans in excess of the minimum in cargo configuration, which results in little to no value at the end of required contributions. Amounts contributed in excess of the minimum their useful life. These estimates affect the amount of depreciation required can result in a credit balance for funding purposes that can be expense recognized in a period and, ultimately, the gain or loss on the used to reduce minimum contribution requirements in future years. Our disposal of the asset. Changes in the estimated lives of assets will current credit balance exceeds $2.8 billion at May 31, 2015. For 2016, result in an increase or decrease in the amount of depreciation we anticipate making contributions to our U.S. Pension Plans totaling recognized in future periods and could have a material impact on our $660 million (approximately $500 million of which are required). results of operations (as described below). Historically, gains and losses on disposals of operating equipment have not been material. See Note 13 of the accompanying consolidated financial statements However, such amounts may differ materially in the future due to for further information about our retirement plans. changes in business levels, technological obsolescence, accident frequency, regulatory changes and other factors beyond our control. Self-Insurance Accruals In 2013, FedEx Express made the decision to accelerate the retirement We are self-insured up to certain limits for costs associated with of 76 aircraft and related engines to aid in our fleet modernization and workers’ compensation claims, vehicle accidents and general business improve our global network. In 2012, we shortened the depreciable liabilities, and benefits paid under employee healthcare and long-term lives for 54 aircraft and related engines to accelerate the retirement disability programs. Our reserves are established for estimates of loss of these aircraft, resulting in a depreciation expense increase of $69 on reported claims, including incurred-but-not-reported claims. million in 2013. As a result of these accelerated retirements, we Self-insurance accruals reflected in our balance sheet were $2.0 billion incurred an additional $74 million in year-over-year accelerated at May 31, 2015 and $1.8 billion at May 31, 2014. Approximately 41% depreciation expense in 2014. of these accruals were classified as current liabilities. IMPAIRMENT. The FedEx Express global air and ground network Our self-insurance accruals are primarily based on the actuarially includes a fleet of 647 aircraft (including approximately 300 supple- estimated, cost of claims incurred as of the balance sheet date. These mental aircraft) that provide delivery of packages and freight to more estimates include consideration of factors such as severity of claims, than 220 countries and territories through a wide range of U.S. and frequency and volume of claims, healthcare inflation, seasonality and international shipping services. While certain aircraft are utilized in plan designs. Cost trends on material accruals are updated each primary geographic areas (U.S. versus international), we operate an quarter. We self-insure up to certain limits that vary by operating integrated global network, and utilize our aircraft and other modes of company and type of risk. Periodically, we evaluate the level of transportation to achieve the lowest cost of delivery while maintain- insurance coverage and adjust insurance levels based on risk ing our service commitments to our customers. Because of the tolerance and premium expense. Historically, it has been infrequent integrated nature of our global network, our aircraft are that incurred claims exceeded our self-insured limits. 33


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    MANAGEMENT’S DISCUSSION AND ANALYSIS interchangeable across routes and geographies, giving us flexibility engines, and related parts. We also adjusted the retirement schedule with our fleet planning to meet changing global economic conditions of an additional 23 aircraft and 57 engines. As a consequence, and maintain and modify aircraft as needed. impairment and related charges of $276 million ($175 million, net of tax, or $0.61 per diluted share), of which $246 million was noncash, Because of the lengthy lead times for aircraft manufacture and were recorded in the fourth quarter. The decision to permanently retire modifications, we must anticipate volume levels and plan our fleet these aircraft and engines aligns with FedEx Express’s plans to requirements years in advance, and make commitments for aircraft rationalize capacity and modernize its aircraft fleet to more effectively based on those projections. Furthermore, the timing and availability serve its customers. These combined retirement changes will not have of certain used aircraft types (particularly those with better fuel a material impact on our near-term depreciation expense. efficiency) may create limited opportunities to acquire these aircraft at favorable prices in advance of our capacity needs. These activities In 2013, we retired from service two Airbus A310-200 aircraft and four create risks that asset capacity may exceed demand. Aircraft related engines, three Airbus A310-300 aircraft and two related purchases (primarily aircraft in passenger configuration) that have engines and five Boeing MD10-10 aircraft and 15 related engines, to not been placed in service totaled $102 million at May 31, 2015 and align with the plans of FedEx Express to modernize its aircraft fleet $82 million at May 31, 2014. We plan to modify these assets in the and improve its global network. As a consequence of this decision, a future and place them into operations. noncash impairment charge of $100 million ($63 million, net of tax, or $0.20 per diluted share) was recorded in 2013. All of these aircraft The accounting test for whether an asset held for use is impaired were temporarily idled and not in revenue service. involves first comparing the carrying value of the asset with its estimated future undiscounted cash flows. If the cash flows do not LEASES. We utilize operating leases to finance certain of our aircraft, exceed the carrying value, the asset must be adjusted to its current facilities and equipment. Such arrangements typically shift the risk of fair value. We operate integrated transportation networks and, loss on the residual value of the assets at the end of the lease period accordingly, cash flows for most of our operating assets are assessed to the lessor. As disclosed in “Contractual Cash Obligations” and Note at a network level, not at an individual asset level for our analysis of 7 of the accompanying consolidated financial statements, at May 31, impairment. Further, decisions about capital investments are 2015 we had approximately $16 billion (on an undiscounted basis) of evaluated based on the impact to the overall network rather than the future commitments for payments under operating leases. The return on an individual asset. We make decisions to remove certain weighted-average remaining lease term of all operating leases long-lived assets from service based on projections of reduced outstanding at May 31, 2015 was approximately six years. The future capacity needs or lower operating costs of newer aircraft types, and commitments for operating leases are not reflected as a liability in our those decisions may result in an impairment charge. Assets held for balance sheet under current U.S. accounting rules. disposal must be adjusted to their estimated fair values less costs to The determination of whether a lease is accounted for as a capital sell when the decision is made to dispose of the asset and certain lease or an operating lease requires management to make estimates other criteria are met. The fair value determinations for such aircraft primarily about the fair value of the asset and its estimated economic may require management estimates, as there may not be active useful life. In addition, our evaluation includes ensuring we properly markets for some of these aircraft. Such estimates are subject to account for build-to-suit lease arrangements and making judgments revision from period to period. about whether various forms of lessee involvement during the In the normal management of our aircraft fleet, we routinely idle construction period make the lessee an agent for the owner-lessor or, aircraft and engines temporarily due to maintenance cycles and in substance, the owner of the asset during the construction period. adjustments of our network capacity to match seasonality and overall We believe we have well-defined and controlled processes for making customer demand levels. Temporarily idled assets are classified as these evaluations, including obtaining third-party appraisals for available-for-use, and we continue to record depreciation expense material transactions to assist us in making these evaluations. associated with these assets. These temporarily idled assets are Under a proposed revision to the accounting standards for leases, we assessed for impairment on a quarterly basis. The criteria for determin- would be required to record an asset and a liability for our outstanding ing whether an asset has been permanently removed from service (and, operating leases similar to the current accounting for capital leases. as a result, impaired) include, but are not limited to, our global Notably, the amount we record in the future would be the net present economic outlook and the impact of our outlook on our current and value of our future lease commitments at the date of adoption. This projected volume levels, including capacity needs during our peak proposed guidance has not been issued and has been subjected to shipping seasons; the introduction of new fleet types or decisions to numerous revisions, most recently in May 2013. While we are not permanently retire an aircraft fleet from operations; and changes to required to quantify the effects of the proposed rule changes until planned service expansion activities. At May 31, 2015, we had one they are finalized, we believe that a majority of our operating lease aircraft temporarily idled. This aircraft has been idled for approximately obligations reflected in the contractual cash obligations table would two months and is expected to return to revenue service. be required to be reflected in our balance sheet were the proposed In the fourth quarter of 2015, we retired from service seven Boeing rules to be adopted. Furthermore, our existing financing agreements MD11 aircraft and 12 related engines, four Airbus A310-300 aircraft and the rating agencies that evaluate our creditworthiness already and three related engines, three Airbus A300-600 aircraft and three take our operating leases into account. related engines and one Boeing MD10-10 aircraft and three related 34


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    MANAGEMENT’S DISCUSSION AND ANALYSIS GOODWILL. As of May 31, 2015, we had $3.8 billion of recorded TAX CONTINGENCIES. We are subject to income and operating tax goodwill from our business acquisitions, representing the excess of rules of the U.S., its states and municipalities, and of the foreign the purchase price over the fair value of the net assets we have jurisdictions in which we operate. Significant judgment is required in acquired. During 2015 we recorded $1.1 billion in additional goodwill determining income tax provisions, as well as deferred tax asset and associated with our GENCO and Bongo acquisitions. Several factors liability balances and related deferred tax valuation allowances, if give rise to goodwill in our acquisitions, such as the expected benefit necessary, due to the complexity of these rules and their interaction from synergies of the combination and the existing workforce of the with one another. We account for income taxes by recording both acquired business. current taxes payable and deferred tax assets and liabilities. Our provision for income taxes is based on domestic and international In our evaluation of goodwill impairment, we perform a qualitative statutory income tax rates in the jurisdictions in which we operate, assessment that requires management judgment and the use of applied to taxable income, reduced by applicable tax credits. estimates to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative Tax contingencies arise from uncertainty in the application of tax rules assessment is not conclusive, we proceed to a two-step process to throughout the many jurisdictions in which we operate and are test goodwill for impairment, including comparing the fair value of the impacted by several factors, including tax audits, appeals, litigation, reporting unit to its carrying value (including attributable goodwill). changes in tax laws and other rules and their interpretations, and Fair value is estimated using standard valuation methodologies changes in our business. We regularly assess the potential impact of (principally the income or market approach) incorporating market these factors for the current and prior years to determine the participant considerations and management’s assumptions on revenue adequacy of our tax provisions. We continually evaluate the likelihood growth rates, operating margins, discount rates and expected capital and amount of potential adjustments and adjust our tax positions, expenditures. Estimates used by management can significantly affect including the current and deferred tax liabilities, in the period in which the outcome of the impairment test. Changes in forecasted operating the facts that give rise to a revision become known. In addition, results and other assumptions could materially affect these estimates. management considers the advice of third parties in making conclu- We perform our annual impairment tests in the fourth quarter unless sions regarding tax consequences. circumstances indicate the need to accelerate the timing of the tests. We recognize liabilities for uncertain income tax positions based on a Our reporting units with significant recorded goodwill include FedEx two-step process. The first step is to evaluate the tax position for Express, FedEx Ground, FedEx Freight, FedEx Office (reported in the recognition by determining if the weight of available evidence FedEx Services segment) and GENCO (reported in the FedEx Ground indicates that it is more likely than not that the position will be segment). We evaluated these reporting units during the fourth sustained on audit, including resolution of related appeals or litigation quarters of 2015 and 2014. The estimated fair value of each of these processes, if any. The second step requires us to estimate and reporting units exceeded their carrying values in 2015 and 2014, and measure the tax benefit as the largest amount that is more than 50% we do not believe that any of these reporting units were at risk as of likely to be realized upon ultimate settlement. It is inherently difficult May 31, 2015. and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these Contingencies uncertain tax positions on a quarterly basis or when new information We are subject to various loss contingencies, including tax proceed- becomes available to management. These reevaluations are based on ings and litigation, in connection with our operations. Contingent factors including, but not limited to, changes in facts or circum- liabilities are difficult to measure, as their measurement is subject to stances, changes in tax law, successfully settled issues under audit multiple factors that are not easily predicted or projected. Further, and new audit activity. Such a change in recognition or measurement additional complexity in measuring these liabilities arises due to the could result in the recognition of a tax benefit or an increase to the various jurisdictions in which these matters occur, which makes our related provision. ability to predict their outcome highly uncertain. Moreover, different We classify interest related to income tax liabilities as interest accounting rules must be employed to account for these items based expense, and if applicable, penalties are recognized as a component on the nature of the contingency. Accordingly, significant management of income tax expense. The income tax liabilities and accrued interest judgment is required to assess these matters and to make determina- and penalties that are due within one year of the balance sheet date tions about the measurement of a liability, if any. Our material pending are presented as current liabilities. The remaining portion of our loss contingencies are described in Note 18 of the accompanying income tax liabilities and accrued interest and penalties are presented consolidated financial statements. In the opinion of management, the as noncurrent liabilities because payment of cash is not anticipated aggregate liability, if any, of individual matters or groups of matters within one year of the balance sheet date. These noncurrent income not specifically described in Note 18 is not expected to be material to tax liabilities are recorded in the caption “Other liabilities” in the our financial position, results of operations or cash flows. The accompanying consolidated balance sheets. following describes our methods and associated processes for evaluating these matters. 35


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    MANAGEMENT’S DISCUSSION AND ANALYSIS We account for operating taxes based on multi-state, local and In reaching our conclusions with respect to accrual of a loss or loss foreign taxing jurisdiction rules in those areas in which we operate. contingency disclosure, we take a holistic view of each matter based Provisions for operating taxes are estimated based upon these rules, on these factors and the information available prior to the issuance of asset acquisitions and disposals, historical spend and other variables. our financial statements. Uncertainty with respect to an individual These provisions are consistently evaluated for reasonableness factor or combination of these factors may impact our decisions against compliance and risk factors. related to accrual or disclosure of a loss contingency, including a conclusion that we are unable to establish an estimate of possible We measure and record operating tax contingency accruals in loss or a meaningful range of possible loss. We update our disclo- accordance with accounting guidance for contingencies. As discussed sures to reflect our most current understanding of the contingencies below, this guidance requires an accrual of estimated loss from a at the time we issue our financial statements. However, events may contingency, such as a tax or other legal proceeding or claim, when it arise that were not anticipated and the outcome of a contingency is probable that a loss will be incurred and the amount of the loss can may result in a loss to us that differs materially from our previously be reasonably estimated. estimated liability or range of possible loss. OTHER CONTINGENCIES. Because of the complex environment in Despite the inherent complexity in the accounting and disclosure of which we operate, we are subject to other legal proceedings and contingencies, we believe that our processes are robust and thorough claims, including those relating to general commercial matters, and provide a consistent framework for management in evaluating the governmental enforcement actions, employment-related claims and potential outcome of contingencies for proper accounting recognition FedEx Ground’s owner-operators. Accounting guidance for contingen- and disclosure. cies requires an accrual of estimated loss from a contingency, such as a tax or other legal proceeding or claim, when it is probable (i.e., the future event or events are likely to occur) that a loss has been incurred and the amount of the loss can be reasonably estimated. This QUANTITATIVE AND QUALITATIVE guidance also requires disclosure of a loss contingency matter when, DISCLOSURES ABOUT MARKET RISK in management’s judgment, a material loss is reasonably possible or probable. INTEREST RATES. While we currently have market risk sensitive instruments related to interest rates, we have no significant exposure During the preparation of our financial statements, we evaluate our to changing interest rates on our long-term debt because the interest contingencies to determine whether it is probable, reasonably rates are fixed on all of our long-term debt. As disclosed in Note 6 to possible or remote that a liability has been incurred. A loss is the accompanying consolidated financial statements, we had recognized for all contingencies deemed probable and estimable, outstanding fixed-rate, long-term debt (exclusive of capital leases) regardless of amount. For unresolved contingencies with potentially with estimated fair values of $7.4 billion at May 31, 2015 and $5.0 material exposure that are deemed reasonably possible, we evaluate billion at May 31, 2014. Market risk for fixed-rate, long-term debt is whether a potential loss or range of loss can be reasonably estimated. estimated as the potential decrease in fair value resulting from a Our evaluation of these matters is the result of a comprehensive hypothetical 10% increase in interest rates and amounts to $208 process designed to ensure that accounting recognition of a loss or million as of May 31, 2015 and $165 million as of May 31, 2014. The disclosure of these contingencies is made in a timely manner and underlying fair values of our long-term debt were estimated based on involves our legal and accounting personnel, as well as external quoted market prices or on the current rates offered for debt with counsel where applicable. The process includes regular communica- similar terms and maturities. tions during each quarter and scheduled meetings shortly before the We have interest rate risk with respect to our pension and postretire- completion of our financial statements to evaluate any new legal ment benefit obligations. Changes in interest rates impact our proceedings and the status of existing matters. liabilities associated with these benefit plans, as well as the amount In determining whether a loss should be accrued or a loss contingency of pension and postretirement benefit expense recognized. Declines disclosed, we evaluate, among other factors: in the value of plan assets could diminish the funded status of our pension plans and potentially increase our requirement to make > the current status of each matter within the scope and context of contributions to the plans. Substantial investment losses on plan the entire lawsuit or proceeding (i.e., the lengthy and complex assets would also increase pension expense. nature of class-action matters); FOREIGN CURRENCY. While we are a global provider of transportation, > the procedural status of each matter; e-commerce and business services, the substantial majority of our > any opportunities to dispose of a lawsuit on its merits before trial transactions are denominated in U.S. dollars. The principal foreign (i.e., motion to dismiss or for summary judgment); currency exchange rate risks to which we are exposed are in the > the amount of time remaining before a trial date; Chinese yuan, euro, British pound, Brazilian real, Mexican peso and the Canadian dollar. Historically, our exposure to foreign currency > the status of discovery; fluctuations is more significant with respect to our revenues than our > the status of settlement, arbitration or mediation proceedings; and expenses, as a significant portion of our expenses are denominated in U.S. dollars, such as aircraft and fuel expenses. During 2015, foreign > our judgment regarding the likelihood of success prior to or at trial. currency fluctuations had a moderately positive impact on operating 36


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    MANAGEMENT’S DISCUSSION AND ANALYSIS income. The impact of foreign currency fluctuations was slightly Our businesses depend on our strong reputation and the value of negative in 2014. However, favorable foreign currency fluctuations the FedEx brand. The FedEx brand name symbolizes high-quality also may have had an offsetting impact on the price we obtained or service, reliability and speed. FedEx is one of the most widely the demand for our services, which is not quantifiable. At May 31, recognized, trusted and respected brands in the world, and the FedEx 2015, the result of a uniform 10% strengthening in the value of the brand is one of our most important and valuable assets. In addition, dollar relative to the currencies in which our transactions are we have a strong reputation among customers and the general public denominated would result in an increase in operating income of for high standards of social and environmental responsibility and $36 million for 2016. This theoretical calculation required under SEC corporate governance and ethics. The FedEx brand name and our guidelines assumes that each exchange rate would change in the corporate reputation are powerful sales and marketing tools, and we same direction relative to the U.S. dollar, which is not consistent with devote significant resources to promoting and protecting them. our actual experience in foreign currency transactions. In addition to Adverse publicity (whether or not justified) relating to activities by our the direct effects of changes in exchange rates, fluctuations in employees, contractors or agents, such as customer service mishaps exchange rates also affect the volume of sales or the foreign currency or noncompliance with laws, could tarnish our reputation and reduce sales price as competitors’ services become more or less attractive. the value of our brand. With the increase in the use of social media The sensitivity analysis of the effects of changes in foreign currency outlets such as YouTube and Twitter, adverse publicity can be exchange rates does not factor in a potential change in sales levels or disseminated quickly and broadly, making it increasingly difficult for local currency prices. us to defend against. Damage to our reputation and loss of brand equity could reduce demand for our services and thus have an adverse COMMODITY. While we have market risk for changes in the price of effect on our financial condition, liquidity and results of operations, as jet and vehicle fuel, this risk is largely mitigated by our indexed fuel well as require additional resources to rebuild our reputation and surcharges. For additional discussion of our indexed fuel surcharges restore the value of our brand. see the “Fuel” section of “Management’s Discussion and Analysis of Results of Operations and Financial Condition.” We rely heavily on information and technology to operate our transportation and business networks, and any cybersecurity OTHER. We do not purchase or hold any derivative financial instru- incident or other disruption to our technology infrastructure ments for trading purposes. could result in the loss of critical confidential information or adversely impact our reputation, business or results of opera- tions. Our ability to attract and retain customers and to compete RISK FACTORS effectively depends in part upon the sophistication and reliability of our technology network, including our ability to provide features of Our financial and operating results are subject to many risks and service that are important to our customers and to protect our uncertainties, as described below. confidential business information and the information provided by our We are directly affected by the state of the economy. While customers. We are subject to risks imposed by cybersecurity macro-economic risks apply to most companies, we are particularly incidents, which can range from uncoordinated individual attempts to vulnerable. The transportation industry is highly cyclical and especially gain unauthorized access to our information technology systems, to susceptible to trends in economic activity. Our primary business is to sophisticated and targeted measures directed at us and our systems, transport goods, so our business levels are directly tied to the customers or service providers. Additionally, risks such as code purchase and production of goods — key macro-economic measure- anomalies, “Acts of God,” transitional challenges in migrating ments. When individuals and companies purchase and produce fewer operating company functionality to our FedEx enterprise automation goods, we transport fewer goods, and as companies expand the platform, data leakage and human error, pose a direct threat to our number of distribution centers and move manufacturing closer to products, services and data. consumer markets, we transport goods shorter distances. In addition, Any disruption to our complex, global technology infrastructure, we have a relatively high fixed-cost structure, which is difficult to including those impacting our computer systems and fedex.com, could quickly adjust to match shifting volume levels. Moreover, as we result in the loss of confidential business or customer information, continue to grow our international business, we are increasingly adversely impact our customer service, volumes and revenues or could affected by the health of the global economy, the rate of growth of lead to litigation or investigations, resulting in significant costs. These global trade and the typically more volatile economies of emerging types of adverse impacts could also occur in the event the confidenti- markets. In 2015, we saw a continued customer preference for slower, ality, integrity or availability of company and customer information less costly shipping services. was compromised due to a data loss by FedEx or a trusted third party. While we have invested and continue to invest in technology security initiatives, information technology risk management and disaster recovery plans, these measures cannot fully insulate us from cybersecurity incidents, technology disruptions or data loss, which could adversely impact our competitiveness and results of operations. Additionally, the cost and operational consequences of implementing further data or system protection measures could be significant. 37


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    MANAGEMENT’S DISCUSSION AND ANALYSIS Our transportation businesses are impacted by the price and If we do not successfully execute or effectively operate, availability of fuel. We must purchase large quantities of fuel to integrate, leverage and grow acquired businesses, our financial operate our aircraft and vehicles, and the price and availability of fuel results and reputation may suffer. Our strategy for long-term growth, can be unpredictable and beyond our control. To date, we have been productivity and profitability depends in part on our ability to make mostly successful in mitigating over time the expense impact of higher prudent strategic acquisitions and to realize the benefits we expect fuel costs through our indexed fuel surcharges, as the amount of the when we make those acquisitions. In furtherance of this strategy, over surcharges is closely linked to the market prices for fuel. If we are the past several years, we have acquired businesses in Europe, Latin unable to maintain or increase our fuel surcharges because of America, Africa and the United States. Additionally, in April 2015, we competitive pricing pressures or some other reason, fuel costs could entered into a conditional agreement to acquire TNT Express. adversely impact our operating results. Additionally, if fuel prices rise While we expect to successfully execute the TNT Express acquisition, sharply, even if we increase our fuel surcharge, we could experience a we may not be able to complete the transaction on favorable terms, lag time in implementing the surcharge, which could adversely affect on a timely basis or at all. Additionally, while we anticipate that our our short-term operating results. Even if we are able to offset the cost past and future acquisitions will enhance our value proposition to of fuel with our surcharges, high fuel surcharges could move our customers and improve our long-term profitability, there can be no customers away from our higher-yielding express services to our assurance that we will realize our expectations within the time frame lower-yielding deferred or ground services or even reduce customer we have established, if at all, or that we can continue to support the demand for our services altogether. In addition, disruptions in the value we allocate to these acquired businesses, including their supply of fuel could have a negative impact on our ability to operate goodwill or other intangible assets. our transportation networks. Labor organizations attempt to organize groups of our employees Our businesses are capital intensive, and we must make capital from time to time, and potential changes in labor laws could decisions based upon projected volume levels. We make make it easier for them to do so. If we are unable to continue to significant investments in aircraft, vehicles, technology, package maintain good relationships with our employees and prevent labor handling facilities, sort equipment, copy equipment and other assets organizations from organizing groups of our employees, our operating to support our transportation and business networks. We also make costs could significantly increase and our operational flexibility could significant investments to rebrand, integrate and grow the companies be significantly reduced. Despite continual organizing attempts by labor that we acquire. The amount and timing of capital investments unions, other than the pilots of FedEx Express and drivers at four FedEx depend on various factors, including our anticipated volume growth. Freight facilities, our U.S. employees have thus far chosen not to We must make commitments to purchase or modify aircraft years unionize (we acquired GENCO in January 2015, which already had a before the aircraft are actually needed. We must predict volume levels small number of employees that are members of unions). and fleet requirements and make commitments for aircraft based on those projections. Missing our projections could result in too much or The U.S. Congress has, in the past, considered adopting changes in too little capacity relative to our shipping volumes. Overcapacity could labor laws, however, that would make it easier for unions to organize lead to asset dispositions or write-downs and undercapacity could units of our employees. For example, there is always a possibility that negatively impact service levels. Congress could remove most FedEx Express employees from the purview of the Railway Labor Act of 1926, as amended (“RLA”). Such We face intense competition. The transportation and business legislation could expose our customers to the type of service disrup- services markets are both highly competitive and sensitive to price tions that the RLA was designed to prevent — local work stoppages in and service, especially in periods of little or no macro-economic key areas that interrupt the timely flow of shipments of time-sensitive, growth. Some of our competitors have more financial resources than high-value goods throughout our global network. Such disruptions we do, or they are controlled or subsidized by foreign governments, could threaten our ability to provide competitively priced shipping which enables them to raise capital more easily. We also compete options and ready access to global markets. with regional transportation providers that operate smaller and less capital-intensive transportation networks. In addition, some high There is also the possibility that Congress could pass other labor volume package shippers are developing in-house ground delivery legislation that could adversely affect our companies, such as FedEx capabilities, which would in turn reduce our revenues and market Ground and FedEx Freight, whose employees are governed by the share. We believe we compete effectively with these companies National Labor Relations Act of 1935, as amended (“NLRA”). In — for example, by providing more reliable service at compensatory addition, federal and state governmental agencies, such as the prices. However, an irrational pricing environment can limit our ability National Labor Relations Board, have and may continue to take actions not only to maintain or increase our prices (including our fuel that could make it easier for our employees to organize under the RLA surcharges in response to rising fuel costs), but also to maintain or or NLRA. Finally, changes to federal or state laws governing employee grow our market share. While we believe we compete effectively classification could impact the status of FedEx Ground’s owner-opera- through our current service offerings, if our current competitors or tors as independent contractors. If FedEx Ground is compelled to potential future competitors offer a broader range of services or more convert its independent contractors to employees, labor organizations effectively bundle their services or our current customers become could more easily organize these individuals, our operating costs could competitors, it could impede our ability to maintain or grow our increase materially and we could incur significant capital outlays. market share. 38


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    MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Ground relies on owner-operators to conduct its linehaul aspects of the transportation infrastructure could disrupt our opera- and pickup-and-delivery operations, and the status of these tions and adversely impact demand for our services. owner-operators as independent contractors, rather than The regulatory environment for global aviation or other transpor- employees, is being challenged. FedEx Ground’s use of independent tation rights may impact our operations. Our extensive air network contractors is well suited to the needs of the ground delivery business is critical to our success. Our right to serve foreign points is subject to and its customers, as evidenced by the strong growth of this business the approval of the Department of Transportation and generally segment. We are involved in numerous lawsuits and state tax and requires a bilateral agreement between the United States and foreign other administrative proceedings that claim that the company’s governments. In addition, we must obtain the permission of foreign owner-operators or their drivers should be treated as our employees, governments to provide specific flights and services. Our operations rather than independent contractors. We incur certain costs, including outside of the United States, such as FedEx Express’s growing legal fees, in defending the status of FedEx Ground’s owner-operators international domestic operations, are also subject to current and as independent contractors. potential regulations, including certain postal regulations and We believe that FedEx Ground’s owner-operators are properly licensing requirements, that restrict, make difficult and sometimes classified as independent contractors and that FedEx Ground is not an prohibit, the ability of foreign-owned companies such as FedEx employer of the drivers of the company’s independent contractors. Express to compete effectively in parts of the international domestic However, adverse determinations in these matters could, among other transportation and logistics market. Regulatory actions affecting things, entitle certain of our owner-operators and their drivers to the global aviation or transportation rights or a failure to obtain or reimbursement of certain expenses and to the benefit of wage-and- maintain aviation or other transportation rights in important interna- hour laws and result in employment and withholding tax and benefit tional markets could impair our ability to operate our networks. liability for FedEx Ground, and could result in changes to the indepen- We may be affected by global climate change or by legal, dent contractor status of FedEx Ground’s owner-operators. Changes to regulatory or market responses to such change. Concern over state laws governing the definition of independent contractors could climate change, including the impact of global warming, has led to also impact the status of FedEx Ground’s owner-operators. significant U.S. and international legislative and regulatory efforts to We may not be able to achieve our profit improvement goal by limit greenhouse gas (“GHG”) emissions, including our aircraft and the end of 2016. In 2013, we announced profit improvement programs diesel engine emissions. For example, in 2015, the U.S. Environmental primarily through initiatives at FedEx Express and FedEx Services that Protection Agency (the “EPA”) issued a proposed finding on GHG emissions from aircraft and its relationships to air pollution. The final include cost reductions, modernization of our aircraft fleet, transfor- finding is a regulatory prerequisite to the EPA’s adoption of a new mation of the U.S. domestic operations and international profit certification standard for aircraft emissions. Additionally, in 2009, the improvements at FedEx Express, and improved efficiencies and lower European Commission approved the extension of the European Union costs of information technology at FedEx Services. To this end, since Emissions Trading Scheme (“ETS”) for GHG emissions, to the airline 2013, we have retired from service 25 aircraft and 42 related engines, industry. Under this decision, all FedEx Express flights that are wholly and we have adjusted the retirement schedule of numerous aircraft within the European Union are now covered by the ETS requirements, and engines, in an effort to rationalize capacity and modernize our and each year we are required to submit emission allowances in an aircraft fleet. Additionally, during 2014, we completed a voluntary amount equal to the carbon dioxide emissions from such flights. buyout program offering cash buyouts to eligible U.S.-based employ- ees. We will continue to work towards our goal of annual profitability In addition, the U.S. Congress has, in the past, considered bills that improvement at FedEx Express of $1.6 billion by the end of 2016. Our would regulate GHG emissions, and some form of federal climate ability to achieve this objective is dependent on a number of factors, change legislation is possible in the future. Increased regulation including the health of the global economy and future customer regarding GHG emissions, especially aircraft or diesel engine emissions, demand, particularly for our priority services. In light of these factors, could impose substantial costs on us, especially at FedEx Express. we may not be able to achieve our goal. These costs include an increase in the cost of the fuel and other energy The transportation infrastructure continues to be a target of we purchase and capital costs associated with updating or replacing our terrorist activities. Because transportation assets continue to be a aircraft or vehicles prematurely. Until the timing, scope and extent of target of terrorist activities, governments around the world are such regulation becomes known, we cannot predict its effect on our adopting or are considering adopting stricter security requirements that cost structure or our operating results. It is reasonably possible, will increase operating costs and potentially slow service for busi- however, that it could impose material costs on us. nesses, including those in the transportation industry. For example, the Moreover, even without such regulation, increased awareness and U.S. Transportation Security Administration requires FedEx Express to any adverse publicity in the global marketplace about the GHGs comply with a Full All-Cargo Aircraft Operator Standard Security Plan, emitted by companies in the airline and transportation industries which contains evolving and strict security requirements. These could harm our reputation and reduce customer demand for our requirements are not static, but change periodically as the result of services, especially our air express services. Finally, given the broad regulatory and legislative requirements, imposing additional security and global scope of our operations and our susceptibility to global costs and creating a level of uncertainty for our operations. Thus, it is macro-economic trends, we are particularly vulnerable to the physical reasonably possible that these rules or other future security require- risks of climate change that could affect all of humankind, such as ments could impose material costs on us or slow our service to our shifts in weather patterns and world ecosystems. customers. Moreover, a terrorist attack directed at FedEx or other 39


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    MANAGEMENT’S DISCUSSION AND ANALYSIS A localized disaster in a key geography could adversely impact > the impact of technology developments on our operations and on our business. While we operate several integrated networks with demand for our services, and our ability to continue to identify and assets distributed throughout the world, there are concentrations of eliminate unnecessary information technology redundancy and key assets within our networks that are exposed to adverse weather complexity throughout the organization; conditions or localized risks from natural or manmade disasters such > governmental underinvestment in transportation infrastructure, as tornados, floods, earthquakes or terrorist attacks. The loss of a key which could increase our costs and adversely impact our service location such as our Memphis super hub or one of our information levels due to traffic congestion or sub-optimal routing of our technology centers could cause a significant disruption to our vehicles and aircraft; operations and cause us to incur significant costs to reestablish or relocate these functions. Moreover, resulting economic dislocations, > widespread outbreak of an illness or any other communicable including supply chain and fuel disruptions, could adversely impact disease, or any other public health crisis; and demand for our services. > availability of financing on terms acceptable to us and our ability to Our business may be adversely impacted by disruptions or maintain our current credit ratings, especially given the capital modifications in service by the USPS. The USPS is a significant intensity of our operations. customer and vendor of FedEx, and thus, disruptions or modifications in services by the USPS or any resulting structural changes to its operations, network, service offerings or pricing could have an FORWARD-LOOKING STATEMENTS adverse effect on our operations and financial results. Certain statements in this report, including (but not limited to) those We are also subject to other risks and uncertainties that affect contained in “Outlook” (including segment outlooks), “Liquidity,” many other businesses, including: “Capital Resources,” “Liquidity Outlook,” “Contractual Cash > increasing costs, the volatility of costs and funding requirements Obligations” and “Critical Accounting Estimates,” and the “Retirement and other legal mandates for employee benefits, especially pension Plans” and “Contingencies” notes to the consolidated financial and healthcare benefits; statements, are “forward-looking” statements within the meaning of > the increasing costs of compliance with federal, state and foreign the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, governmental agency mandates (including the Foreign Corrupt objectives, future performance and business. Forward-looking Practices Act and the U.K. Bribery Act) and defending against statements include those preceded by, followed by or that include the inappropriate or unjustified enforcement or other actions by such words “may,” “could,” “would,” “should,” “believes,” “expects,” agencies; “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or > the impact of any international conflicts on the United States and similar expressions. These forward-looking statements involve risks global economies in general, the transportation industry or us in and uncertainties. Actual results may differ materially from those particular, and what effects these events will have on our costs or contemplated (expressed or implied) by such forward-looking the demand for our services; statements, because of, among other things, the risk factors identified > any impacts on our businesses resulting from new domestic or above and the other risks and uncertainties you can find in our press releases and other SEC filings. international government laws and regulation; > changes in foreign currency exchange rates, especially in the As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking Chinese yuan, euro, British pound, Brazilian real, Mexican peso statement is neither a prediction nor a guarantee of future events or and the Canadian dollar, which can affect our sales levels and circumstances and those future events or circumstances may not foreign currency sales prices; occur. You should not place undue reliance on the forward-looking > market acceptance of our new service and growth initiatives; statements, which speak only as of the date of this report. We are > any liability resulting from and the costs of defending against under no obligation, and we expressly disclaim any obligation, to class-action litigation, such as wage-and-hour and discrimination update or alter any forward-looking statements, whether as a result of and retaliation claims, and any other legal or governmental new information, future events or otherwise. proceedings; > the outcome of future negotiations to reach new collective bargaining agreements — including with the union that represents the pilots of FedEx Express (the current pilot contract became amendable in March 2013, and the parties are currently in negotia- tions) and with the union that was elected in 2015 to represent drivers at four FedEx Freight facilities; 40


  • Page 43

    FEDEX CORPORATION MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes, among other things, defined policies and procedures for conducting and governing our business, sophisticated information systems for processing transactions and a properly staffed, professional internal audit department. Mechanisms are in place to monitor the effectiveness of our internal control over financial reporting and actions are taken to correct all identified deficiencies. Our procedures for financial reporting include the active involvement of senior management, our Audit Committee and our staff of highly qualified financial and legal professionals. Management, with the participation of our principal executive and financial officers, assessed our internal control over financial reporting as of May 31, 2015, the end of our fiscal year. Management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on this assessment, management has concluded that our internal control over financial reporting was effective as of May 31, 2015. The effectiveness of our internal control over financial reporting as of May 31, 2015, has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the Company’s consolidated financial statements included in this Annual Report. Ernst & Young LLP’s report on the Company’s internal control over financial reporting is included in this Annual Report. 41


  • Page 44

    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders FedEx Corporation We have audited FedEx Corporation’s internal control over financial reporting as of May 31, 2015, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). FedEx Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assess- ment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of manage- ment and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, FedEx Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of FedEx Corporation as of May 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders’ investment, and cash flows for each of the three years in the period ended May 31, 2015 of FedEx Corporation and our report dated July 14, 2015 expressed an unqualified opinion thereon. Memphis, Tennessee July 14, 2015 42


  • Page 45

    FEDEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended May 31, (in millions, except per share amounts) 2015 2014 2013 As Adjusted Revenues $ 47,453 $ 45,567 $ 44,287 Operating Expenses: Salaries and employee benefits 17,110 16,171 16,055 Purchased transportation 8,483 8,011 7,272 Rentals and landing fees 2,682 2,622 2,521 Depreciation and amortization 2,611 2,587 2,386 Fuel 3,720 4,557 4,746 Maintenance and repairs 2,099 1,862 1,909 Business realignment, impairment and other charges 276 – 660 Retirement plans mark-to-market adjustment 2,190 15 (1,368) Other 6,415 5,927 5,672 45,586 41,752 39,853 Operating Income 1,867 3,815 4,434 Other Income (Expense): Interest expense (235) (160) (82) Interest income 14 18 21 Other, net (19) (15) (35) (240) (157) (96) Income Before Income Taxes 1,627 3,658 4,338 Provision For Income Taxes 577 1,334 1,622 Net Income $ 1,050 $ 2,324 $ 2,716 Basic Earnings Per Common Share $ 3.70 $ 7.56 $ 8.61 Diluted Earnings Per Common Share $ 3.65 $ 7.48 $ 8.55 The accompanying notes are an integral part of these consolidated financial statements. 43


  • Page 46

    FEDEX CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended May 31, (in millions) 2015 2014 2013 As Adjusted Net Income $ 1,050 $ 2,324 $ 2,716 Other Comprehensive (Loss) Income: Foreign currency translation adjustments, net of tax benefit of $45, $1 and $12 (334) (25) 41 Amortization of prior service credit and other, net of tax expense of $1 in 2015 and tax benefit of $38 and $51 in 2014 and 2013 – (76) (63) (334) (101) (22) Comprehensive Income $ 716 $ 2,223 $ 2,694 The accompanying notes are an integral part of these consolidated financial statements. 44


  • Page 47

    FEDEX CORPORATION CONSOLIDATED BALANCE SHEETS May 31, (in millions, except share data) 2015 2014 As Adjusted Assets Current Assets Cash and cash equivalents $ 3,763 $ 2,908 Receivables, less allowances of $185 and $164 5,719 5,460 Spare parts, supplies and fuel, less allowances of $207 and $212 498 463 Deferred income taxes 606 522 Prepaid expenses and other 355 330 Total current assets 10,941 9,683 Property and Equipment, at Cost Aircraft and related equipment 16,186 15,632 Package handling and ground support equipment 6,725 6,082 Computer and electronic equipment 5,208 5,097 Vehicles 5,816 5,514 Facilities and other 8,929 8,366 42,864 40,691 Less accumulated depreciation and amortization 21,989 21,141 Net property and equipment 20,875 19,550 Other Long-Term Assets Goodwill 3,810 2,790 Other assets 1,443 1,047 Total other long-term assets 5,253 3,837 $ 37,069 $ 33,070 Liabilities and Stockholders’ Investment Current Liabilities Current portion of long-term debt $ 19 $ 1 Accrued salaries and employee benefits 1,436 1,277 Accounts payable 2,066 1,971 Accrued expenses 2,436 2,063 Total current liabilities 5,957 5,312 Long-Term Debt, Less Current Portion 7,249 4,736 Other Long-Term Liabilities Deferred income taxes 1,747 2,114 Pension, postretirement healthcare and other benefit obligations 4,893 3,484 Self-insurance accruals 1,120 1,038 Deferred lease obligations 711 758 Deferred gains, principally related to aircraft transactions 181 206 Other liabilities 218 145 Total other long-term liabilities 8,870 7,745 Commitments and Contingencies Common Stockholders’ Investment Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of May 31, 2015 and 2014 32 32 Additional paid-in capital 2,786 2,643 Retained earnings 16,900 16,229 Accumulated other comprehensive income 172 506 Treasury stock, at cost (4,897) (4,133) Total common stockholders’ investment 14,993 15,277 $ 37,069 $ 33,070 The accompanying notes are an integral part of these consolidated financial statements. 45


  • Page 48

    FEDEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended May 31, (in millions) 2015 2014 2013 As Adjusted Operating Activities Net Income $ 1,050 $ 2,324 $ 2,716 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,611 2,587 2,386 Provision for uncollectible accounts 145 130 167 Deferred income taxes and other noncash items (572) 339 734 Business realignment, impairment and other charges 246 – 479 Stock-based compensation 133 117 109 Retirement plans mark-to-market adjustment 2,190 15 (1,368) Changes in assets and liabilities: Receivables (392) (516) (451) Other current assets 25 (22) 257 Pension and postretirement healthcare assets and liabilities, net (692) (453) (335) Accounts payable and other liabilities 659 (235) 10 Other, net (37) (22) (16) Cash provided by operating activities 5,366 4,264 4,688 Investing Activities Capital expenditures (4,347) (3,533) (3,375) Business acquisitions, net of cash acquired (1,429) (36) (483) Proceeds from asset dispositions and other 24 18 55 Cash used in investing activities (5,752) (3,551) (3,803) Financing Activities Principal payments on debt (5) (254) (417) Proceeds from debt issuances 2,491 1,997 1,739 Proceeds from stock issuances 320 557 280 Excess tax benefit on the exercise of stock options 51 44 23 Dividends paid (227) (187) (177) Purchase of treasury stock, including accelerated share repurchase agreements (1,254) (4,857) (246) Other, net (27) (19) (18) Cash provided by (used in) financing activities 1,349 (2,719) 1,184 Effect of exchange rate changes on cash (108) (3) 5 Net increase (decrease) in cash and cash equivalents 855 (2,009) 2,074 Cash and cash equivalents at beginning of period 2,908 4,917 2,843 Cash and cash equivalents at end of period $ 3,763 $ 2,908 $ 4,917 The accompanying notes are an integral part of these consolidated financial statements. 46


  • Page 49

    FEDEX CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ INVESTMENT Accumulated Additional Other Common Paid-in Retained Comprehensive Treasury (in millions, except share data) Stock Capital Earnings Income Stock Total Balance at May 31, 2012 — as adjusted $ 32 $ 2,595 $ 11,552 $ 629 $ (81) $ 14,727 Net income – – 2,716 – – 2,716 Other comprehensive loss, net of tax of $63 – – – (22) – (22) Purchase of treasury stock (2.7 million shares) – – – – (246) (246) Cash dividends declared ($0.56 per share) – – (176) – – (176) Employee incentive plans and other (4.2 million shares issued) – 73 – – 326 399 Balance at May 31, 2013 — as adjusted 32 2,668 14,092 607 (1) 17,398 Net income – – 2,324 – – 2,324 Other comprehensive loss, net of tax of $39 – – – (101) – (101) Purchase of treasury stock (36.8 million shares) – – – – (4,857) (4,857) Cash dividends declared ($0.60 per share) – – (187) – – (187) Employee incentive plans and other (6.7 million shares issued) – (25) – – 725 700 Balance at May 31, 2014 — as adjusted 32 2,643 16,229 506 (4,133) 15,277 Net income – – 1,050 – – 1,050 Other comprehensive loss, net of tax of $44 – – – (334) – (334) Purchase of treasury stock (8.1 million shares) – – – – (1,254) (1,254) Cash dividends declared ($0.80 per share) – – (227) – – (227) Employee incentive plans and other (3.7 million shares issued) – 143 (152) – 490 481 Balance at May 31, 2015 $ 32 $ 2,786 $ 16,900 $ 172 $ (4,897) $ 14,993 The accompanying notes are an integral part of these consolidated financial statements. 47


  • Page 50

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: DESCRIPTION OF BUSINESS transactions is recognized on a gross basis. Costs associated with independent contractor settlements are recognized as incurred and AND SUMMARY OF SIGNIFICANT included in the caption “Purchased transportation” in the accompa- ACCOUNTING POLICIES nying consolidated statements of income. For shipments in transit, revenue is recorded based on the percentage of service completed DESCRIPTION OF BUSINESS. FedEx Corporation (“FedEx”) provides a at the balance sheet date. Estimates for future billing adjustments broad portfolio of transportation, e-commerce and business services to revenue and accounts receivable are recognized at the time of through companies competing collectively, operating independently shipment for money-back service guarantees and billing corrections. and managed collaboratively, under the respected FedEx brand. Our Delivery costs are accrued as incurred. primary operating companies are Federal Express Corporation (“FedEx Our contract logistics, global trade services and certain transportation Express”), the world’s largest express transportation company; FedEx businesses engage in some transactions wherein they act as agents. Ground Package System, Inc. (“FedEx Ground”), a leading North Revenue from these transactions is recorded on a net basis. Net revenue American provider of small-package ground delivery services; and includes billings to customers less third-party charges, including FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less- transportation or handling costs, fees, commissions and taxes and duties. than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Certain of our revenue-producing transactions are subject to taxes, Inc. (“FedEx Services”), form the core of our reportable segments. such as sales tax, assessed by governmental authorities. We present Our FedEx Services segment provides sales, marketing, information these revenues net of tax. technology, communications and certain back-office support to our CREDIT RISK. We routinely grant credit to many of our customers transportation segments. In addition, the FedEx Services segment for transportation and business services without collateral. The risk provides customers with retail access to FedEx Express and FedEx of credit loss in our trade receivables is substantially mitigated by Ground shipping services through FedEx Office and Print Services, Inc. our credit evaluation process, short collection terms and sales to a (“FedEx Office”) and provides customer service, technical support and large number of customers, as well as the low revenue per transac- billing and collection services through FedEx TechConnect, Inc. (“FedEx tion for most of our services. Allowances for potential credit losses TechConnect”). are determined based on historical experience and the impact of FISCAL YEARS. Except as otherwise specified, references to years current economic factors on the composition of accounts receiv- indicate our fiscal year ended May 31, 2015 or ended May 31 of the able. Historically, credit losses have been within management’s year referenced. expectations. RECLASSIFICATIONS. Certain reclassifications have been made to the ADVERTISING. Advertising and promotion costs are expensed as prior years’ consolidated financial statements to conform to the cur- incurred and are classified in other operating expenses. Advertising rent year’s presentation. and promotion expenses were $403 million in 2015, $407 million in 2014 and $424 million in 2013. PRINCIPLES OF CONSOLIDATION. The consolidated financial state- ments include the accounts of FedEx and its subsidiaries, substantially CASH EQUIVALENTS. Cash in excess of current operating requirements all of which are wholly owned. All significant intercompany accounts is invested in short-term, interest-bearing instruments with maturities and transactions have been eliminated in consolidation. We are not of three months or less at the date of purchase and is stated at cost, the primary beneficiary of, nor do we have a controlling financial which approximates market value. interest in, any variable interest entity. Accordingly, we have not SPARE PARTS, SUPPLIES AND FUEL. Spare parts (principally aircraft- consolidated any variable interest entity. related) are reported at weighted-average cost. Allowances REVENUE RECOGNITION. We recognize revenue upon delivery of for obsolescence are provided for spare parts currently identified shipments for our transportation businesses and upon completion as excess or obsolete as well as expected to be on hand at the date of services for our business services, logistics and trade services the aircraft are retired from service. These allowances are provided businesses. Transportation services are provided with the use of over the estimated useful life of the related aircraft and engines. employees and independent contractors. FedEx is the principal to The majority of our supplies and our fuel are reported at weighted- the transaction for most of these services and revenue from these average cost. 48

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