FEDEX CORP - Quarter Report: 2013 February (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED February 28, 2013

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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 1-15829

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(901) 818-7500

(Registrant’s telephone number, including area code)

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

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

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

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

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


Common Stock		Outstanding Shares at March 19, 2013
Common Stock, par value $0.10 per share		316,868,914

FEDEX CORPORATION

INDEX


	PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

Condensed Consolidated Balance Sheets February 28, 2013 and May 31, 2012		3

Condensed Consolidated Statements of Income Three and Nine Months Ended February 28, 2013 and February 29, 2012		5

Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended February 28, 2013 and February 29, 2012		6

Condensed Consolidated Statements of Cash Flows Nine Months Ended February 28, 2013 and February 29, 2012		7

Notes to Condensed Consolidated Financial Statements		8

Report of Independent Registered Public Accounting Firm		28

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		56

ITEM 4. Controls and Procedures		56

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		57

ITEM 1A. Risk Factors		57

ITEM 6. Exhibits		57

Signature		59

Exhibit Index		E-1

Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 12.1
Exhibit 15.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)


	February 28, 2013 (Unaudited)		May 31, 2012
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	3,372	$	2,843
Receivables, less allowances of $178 and $178		4,950		4,704
Spare parts, supplies and fuel, less allowances of $198 and $184		460		440
Deferred income taxes		510		533
Prepaid expenses and other		453		536


Total current assets		9,745		9,056

PROPERTY AND EQUIPMENT, AT COST		38,114		36,164
Less accumulated depreciation and amortization		19,786		18,916


Net property and equipment		18,328		17,248

OTHER LONG-TERM ASSETS
Goodwill		2,765		2,387
Other assets		992		1,212


Total other long-term assets		3,757		3,599


	$	31,830	$	29,903

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)


	February 28, 2013 (Unaudited)			May 31, 2012
LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES
Current portion of long-term debt	$	251		$	417
Accrued salaries and employee benefits		1,395			1,635
Accounts payable		1,730			1,613
Accrued expenses		1,723			1,709


Total current liabilities		5,099			5,374

LONG-TERM DEBT, LESS CURRENT PORTION		1,991			1,250

OTHER LONG-TERM LIABILITIES
Deferred income taxes		1,139			836
Pension, postretirement healthcare and other benefit obligations		5,361			5,582
Self-insurance accruals		989			963
Deferred lease obligations		766			784
Deferred gains, principally related to aircraft transactions		234			251
Other liabilities		139			136


Total other long-term liabilities		8,628			8,552

COMMITMENTS AND CONTINGENCIES

COMMON STOCKHOLDERS’ INVESTMENT
Common stock, $0.10 par value; 800 million shares authorized; 317 million shares issued as of February 28, 2013 and May 31, 2012		32			32
Additional paid-in capital		2,623			2,595
Retained earnings		18,216			17,134
Accumulated other comprehensive loss		(4,710	)		(4,953	)
Treasury stock, at cost		(49	)		(81	)


Total common stockholders’ investment		16,112			14,727

	$	31,830		$	29,903

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


	Three Months Ended						Nine Months Ended
	February 28, 2013			February 29, 2012			February 28, 2013			February 29, 2012
REVENUES	$	10,953		$	10,564		$	32,852		$	31,672

OPERATING EXPENSES:
Salaries and employee benefits		4,150			4,021			12,378			12,007
Purchased transportation		1,871			1,619			5,411			4,713
Rentals and landing fees		640			628			1,888			1,871
Depreciation and amortization		599			543			1,764			1,570
Fuel		1,215			1,233			3,588			3,677
Maintenance and repairs		424			456			1,477			1,518
Business realignment costs		47			—			64			—
Other		1,418			1,251			4,233			3,986

		10,364			9,751			30,803			29,342

OPERATING INCOME		589			813			2,049			2,330

OTHER INCOME (EXPENSE):
Interest, net		(9	)		(12	)		(37	)		(30	)
Other, net		(16	)		(9	)		(29	)		(7	)

		(25	)		(21	)		(66	)		(37	)

INCOME BEFORE INCOME TAXES		564			792			1,983			2,293

PROVISION FOR INCOME TAXES		203			271			725			811


NET INCOME	$	361		$	521		$	1,258		$	1,482


EARNINGS PER COMMON SHARE:
Basic	$	1.14		$	1.66		$	3.99		$	4.69


Diluted	$	1.13		$	1.65		$	3.97		$	4.67


DIVIDENDS DECLARED PER COMMON SHARE	$	0.14		$	0.13		$	0.56		$	0.52

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)


	Three Months Ended					Nine Months Ended
	February 28, 2013			February 29, 2012		February 28, 2013		February 29, 2012
NET INCOME	$	361		$	521	$	1,258	$	1,482
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments, net of tax of $0, $17, $6 and $5		(3	)		65		54		(27	)
Amortization of unrealized pension actuarial gains/losses and other, net of tax of $37, $19, $112 and $55		63			33		189		94


COMPREHENSIVE INCOME	$	421		$	619	$	1,501	$	1,549

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)


	Nine Months Ended
	February 28, 2013			February 29, 2012
Operating Activities:
Net income	$	1,258		$	1,482
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		1,764			1,570
Provision for uncollectible accounts		130			123
Stock-based compensation		87			83
Deferred income taxes and other noncash items		493			694
Changes in assets and liabilities:
Receivables		(280	)		(87	)
Other assets		113			(153	)
Accounts payable and other liabilities		(570	)		(660	)
Other, net		(19	)		(35	)


Cash provided by operating activities		2,976			3,017

Investing Activities:
Capital expenditures		(2,430	)		(2,946	)
Business acquisitions, net of cash acquired		(483	)		(114	)
Proceeds from asset dispositions and other		45			20


Cash used in investing activities		(2,868	)		(3,040	)

Financing Activities:
Principal payments on debt		(417	)		(28	)
Proceeds from debt issuance		991			—
Proceeds from stock issuances		221			83
Excess tax benefit on the exercise of stock options		9			7
Dividends paid		(132	)		(123	)
Purchase of treasury stock		(246	)		(197	)
Other, net		(9	)		—


Cash provided by (used in) financing activities		417			(258	)


Effect of exchange rate changes on cash		4			(7	)

Net increase (decrease) in cash and cash equivalents		529			(288	)
Cash and cash equivalents at beginning of period		2,843			2,328


Cash and cash equivalents at end of period	$	3,372		$	2,040

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

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2012 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of February 28, 2013, the results of our operations for the three- and nine-month periods ended February 28, 2013 and February 29, 2012 and cash flows for the nine-month periods ended February 28, 2013 and February 29, 2012. Operating results for the three- and nine-month periods ended February 28, 2013 are not necessarily indicative of the results that may be expected for the year ending May 31, 2013.

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

BUSINESS ACQUISITIONS. In the first quarter of 2013, we expanded the international service offerings of FedEx Express by completing the following business acquisitions:

•

Rapidão Cometa Logística e Transporte S.A., a Brazilian transportation and logistics company, for $398 million in cash from operations on July 4, 2012

•

TATEX, a French express transportation company, for $55 million in cash from operations on July 3, 2012

•

Opek Sp. z o.o., a Polish domestic express package delivery company, for $54 million in cash from operations on June 13, 2012

These acquisitions give us more robust transportation networks within these countries and added capabilities in these important international markets.

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The estimated fair values of the assets and liabilities related to these acquisitions have been recorded in the FedEx Express segment and are included in the accompanying unaudited balance sheet based on a preliminary allocation of the purchase price (summarized in the table below in millions). These allocations will be finalized as soon as the information becomes available and working capital adjustments are completed, which will not exceed one year from the acquisition date.


Current assets	$	145
Property and equipment		87
Goodwill		349
Intangible assets		60
Other non-current assets		67
Current liabilities		(169	)
Long-term liabilities		(32	)

Total purchase price	$	507

The goodwill of $349 million is primarily attributable to expected benefits from synergies of the combinations with existing businesses and other acquired entities. The portion of the purchase price allocated to goodwill is not deductible for U.S. income tax purposes. The intangible assets acquired consist primarily of customer-related intangible assets, which will be amortized on an accelerated basis over their average estimated useful lives of nine years, with the majority of the amortization recognized during the first five years.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of FedEx Express, which represent a small number of FedEx Express’s total employees, are employed under a collective bargaining agreement. The contract became amendable in March 2013, and the parties are currently in negotiations. In addition to our pilots at FedEx Express, certain FedEx non-U.S. employees are unionized.

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

Our stock-based compensation expense was $23 million for the three-month period ended February 28, 2013 and $87 million for the nine-month period ended February 28, 2013. Our stock-based compensation expense was $22 million for the three-month period ended February 29, 2012 and $83 million for the nine-month period ended February 29, 2012. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

BUSINESS REALIGNMENT COSTS. During the second quarter of 2013, we announced profit improvement programs including reducing our selling, general and administrative cost functions through a voluntary employee separation program.

During the third quarter of 2013, we commenced a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain staff functions. The voluntary buyout program includes voluntary severance payments and funding to healthcare reimbursement accounts, with the voluntary severance calculated based on four weeks of gross base salary for every year of FedEx service up to a maximum payment of two years of pay. Eligible employees will be scheduled to vacate positions in four phases to ensure a smooth transition in the impacted functions so that we maintain service levels to our customers. Employees in the first phase will vacate their positions on May 31, 2013, and we expect all employees who accept the buyout to vacate their positions by the end of fiscal year 2014. Costs of the benefits provided under the voluntary program will be recognized as special termination benefits in the period that eligible employees accept their offers, predominantly in the fourth quarter of 2013.

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We incurred costs of $47 million ($30 million, net of tax, or $0.09 per diluted share) during the third quarter and $64 million ($40 million, net of tax, or $0.13 per diluted share) during the nine months of 2013, associated with our business realignment activities. These costs related predominantly to voluntary severance for officers and managing directors who accepted voluntary buyouts in the third quarter of 2013 to adjust our leadership team to our new organizational structure. We expect the pretax cost of the voluntary buyout program to range from approximately $450 million to $550 million in cash expenditures in 2013, but actual costs will depend on employee acceptance rates. Payments will be made at the time of departure, and no material payments of these costs were made in the third quarter of 2013. The cost of the buyout program is included in the caption “Business realignment costs” in our unaudited condensed consolidated statements of income. Also included in that caption are immaterial involuntary severance costs and other external costs directly attributable to our business realignment activities, such as professional fees. Additional costs will be incurred beyond 2013, primarily related to facility optimization and professional fees.

NEW ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

On June 1, 2012, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on the presentation of comprehensive income. The new guidance requires companies to report components of comprehensive income by including comprehensive income on the face of the income statement or in a separate statement of comprehensive income. We have adopted this guidance by including a separate statement of comprehensive income for the three-month and nine-month periods ended February 28, 2013 and February 29, 2012. In addition, on June 1, 2012, we adopted the FASB’s amendments to the fair value measurements and disclosure requirements, which expanded existing disclosure requirements regarding the fair value of our long-term debt.

In February 2013, the FASB issued new guidance requiring additional information about reclassification adjustments out of comprehensive income, including changes in comprehensive income balances by component and significant items reclassified out of comprehensive income. This new standard is effective for our fiscal year ending May 31, 2014 and will have no impact on our financial condition or results of operations.

We believe that no other new accounting guidance was adopted or issued during the nine months of 2013 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

TREASURY SHARES. During the first quarter of 2013, we repurchased 2.7 million shares of FedEx common stock at an average price of $91 per share for a total of $246 million. As of February 28, 2013, 188,000 shares remained under existing share repurchase authorizations.

In March 2013, our board of directors authorized the repurchase of up to 10 million shares of common stock. These shares augment the remaining 188,000 shares authorized for purchase under existing share repurchase programs. It is expected that the additional share authorization will primarily be utilized to offset equity compensation dilution over the next several years.

DIVIDENDS DECLARED PER COMMON SHARE. On February 15, 2013, our Board of Directors declared a dividend of $0.14 per share of common stock. The dividend will be paid on April 1, 2013 to stockholders of record as of the close of business on March 11, 2013. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

(2) Financing Arrangements

In September 2012, we filed a shelf registration statement with the SEC that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock.

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During the second quarter of 2013, we made principal payments of $116 million related to capital lease obligations. During the first quarter of 2013, we repaid our $300 million 9.65% unsecured notes that matured on June 15, 2012 using cash from operations.

In July 2012, we issued $1 billion of senior unsecured debt under a then current shelf registration statement, comprised of $500 million of 2.625% fixed-rate notes due in August 2022 and $500 million of 3.875% fixed-rate notes due in August 2042. Interest on these notes is payable semi-annually. We utilized the net proceeds for working capital and general corporate purposes.

A $1 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper. On March 1, 2013, we entered into an amendment to our credit agreement to, among other things, extend its maturity date from April 26, 2016 to March 1, 2018. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our last four fiscal quarters’ rentals and landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 52% at February 28, 2013. We believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of February 28, 2013, no commercial paper was outstanding, and the entire $1 billion under the revolving credit facility was available for future borrowings.

Long-term debt, exclusive of capital leases, had a carrying value of $2.2 billion compared with an estimated fair value of $2.6 billion at February 28, 2013 and $1.5 billion compared with an estimated fair value of $2.0 billion at May 31, 2012. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

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(3) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the periods ended February 28, 2013 and February 29, 2012 was as follows (in millions, except per share amounts):


	Three Months Ended				Nine Months Ended
	2013		2012		2013		2012
Basic earnings per common share:
Net earnings allocable to common shares⁽¹⁾	$	360	$	521	$	1,255	$	1,479
Weighted-average common shares		315		314		314		315

Basic earnings per common share	$	1.14	$	1.66	$	3.99	$	4.69


Diluted earnings per common share:
Net earnings allocable to common shares⁽¹⁾	$	360	$	521	$	1,255	$	1,479


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

Weighted-average diluted shares		317		316		316		317
Diluted earnings per common share	$	1.13	$	1.65	$	3.97	$	4.67


Anti-dilutive options excluded from diluted earnings per common share		7.9		12.7		12.1		13.4

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

(4) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended February 28, 2013 and February 29, 2012 were as follows (in millions):


	Three Months Ended				Nine Months Ended
	2013		2012		2013		2012
U.S. domestic and international pension plans	$	169	$	133	$	509	$	397
U.S. domestic and international defined contribution plans		87		82		262		249
Postretirement healthcare plans		19		17		58		52

	$	275	$	232	$	829	$	698

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Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended February 28, 2013 and February 29, 2012 included the following components (in millions):


	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
Pension Plans
Service cost	$	173		$	148		$	519		$	445
Interest cost		242			245			726			733
Expected return on plan assets		(346	)		(311	)		(1,037	)		(929	)
Recognized actuarial losses and other		100			51			301			148

	$	169		$	133		$	509		$	397


	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
Postretirement Healthcare Plans
Service cost	$	10		$	8		$	31		$	26
Interest cost		9			9			27			27
Recognized actuarial gains and other		—			—			—			(1	)

	$	19		$	17		$	58		$	52

Required contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) were $420 million for the nine-month period ended February 28, 2013 and $484 million for the nine-month period ended February 29, 2012. We also made voluntary contributions of $226 million for the nine-month period ended February 29, 2012. In March 2013, we made an additional contribution of $140 million to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

(5) Business Segment Information

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Our reportable segments include the following businesses:


FedEx Express Segment		FedEx Express (express transportation)
		FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)
		FedEx SupplyChain Systems (logistics services)

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

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

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

FedEx Services Segment

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

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

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

Other Intersegment Transactions

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

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The following table provides a reconciliation of reportable segment revenues and operating income (loss) to our unaudited condensed consolidated financial statement totals for the periods ended February 28, 2013 and February 29, 2012 (in millions):


	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
Revenues
FedEx Express segment	$	6,704		$	6,543		$	20,194		$	19,718
FedEx Ground segment		2,747			2,480			7,802			7,097
FedEx Freight segment		1,237			1,234			4,013			3,887
FedEx Services segment		380			401			1,174			1,239
Other and eliminations		(115	)		(94	)		(331	)		(269	)

	$	10,953		$	10,564		$	32,852		$	31,672

Operating Income (Loss)
FedEx Express segment	$	118		$	349		$	555		$	979
FedEx Ground segment		467			465			1,324			1,270
FedEx Freight segment		4			(1	)		170			81

	$	589		$	813		$	2,049		$	2,330

(6) Commitments

As of February 28, 2013, our purchase commitments under various contracts for the remainder of 2013 and annually thereafter were as follows (in millions):


	Aircraft and Aircraft-Related		Other⁽¹⁾		Total
2013 (remainder)	$	250	$	231	$	481
2014		716		252		968
2015		1,051		150		1,201
2016		1,140		81		1,221
2017		955		58		1,013
Thereafter		5,813		142		5,955

⁽¹⁾	Primarily vehicles, facilities, advertising contracts, and for the remainder of 2013, a total of $140 million of quarterly contributions to our U.S. Pension Plans.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. Our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and nine Boeing 777 Freighter (“B777F”) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

On December 11, 2012, FedEx Express entered into an agreement with The Boeing Company for the purchase of four incremental B767F aircraft, the delivery of which will occur in 2015. FedEx Express also deferred the delivery of two firm B777F aircraft orders from 2015 to 2016.

- 15 -

We had $380 million in deposits and progress payments as of February 28, 2013 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our condensed consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of February 28, 2013, with the year of expected delivery:


	B757		B767F		B777F		Total
2013 (remainder)		4		—		—		4
2014		—		4		2		6
2015		—		12		—		12
2016		—		10		2		12
2017		—		10		—		10
Thereafter		—		14		16		30

Total		4		50		20		74

On March 8, 2013, FedEx Express entered into an agreement with United Airlines to purchase 14 B757 aircraft, the delivery of which will occur in 2013 through 2015. After delivery, these passenger aircraft will be modified for cargo transport. The agreement also provides for FedEx Express to purchase up to 16 additional B757 aircraft, subject to the satisfaction of certain conditions. This aircraft transaction is not included in the table above, as it occurred subsequent to the end of the third quarter of 2013.

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at February 28, 2013 is as follows (in millions):


	Operating Leases
	Aircraft and Related Equipment		Facilities and Other		Total Operating Leases
2013 (remainder)	$	105	$	361	$	466
2014		462		1,425		1,887
2015		448		1,323		1,771
2016		453		1,125		1,578
2017		391		1,245		1,636
Thereafter		1,150		6,425		7,575

Total	$	3,009	$	11,904	$	14,913

Future minimum lease payments under capital leases were immaterial at February 28, 2013, and therefore are excluded from the table above. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

(7) Contingencies

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

- 16 -

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 31 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the company’s owner-operators should be treated as employees, rather than independent contractors.

Most of the class-action lawsuits were consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. The multidistrict litigation court granted class certification in 28 cases and denied it in 14 cases. On December 13, 2010, the court entered an opinion and order addressing all outstanding motions for summary judgment on the status of the owner-operators (i.e., independent contractor vs. employee). In sum, the court has now ruled on our summary judgment motions and entered judgment in favor of FedEx Ground on all claims in 20 of the 28 multidistrict litigation cases that had been certified as class actions, finding that the owner-operators in those cases were contractors as a matter of the law of the following states: Alabama, Arizona, Georgia, Indiana, Kansas (the court previously dismissed without prejudice the nationwide class claim under the Employee Retirement Income Security Act of 1974 based on the plaintiffs’ failure to exhaust administrative remedies), Louisiana, Maryland, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, West Virginia and Wisconsin. The plaintiffs filed notices of appeal in all of these 20 cases. The Seventh Circuit heard the appeal in the Kansas case in January 2012 and, in July 2012, issued an opinion that did not make a determination with respect to the correctness of the district court’s decision and, instead, certified two questions to the Kansas Supreme Court related to the classification of the plaintiffs as independent contractors under the Kansas Wage Payment Act. The other 19 cases that are before the Seventh Circuit remain stayed pending a decision of the Kansas Supreme Court.

The multidistrict litigation court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. Specifically, in the five cases in Arkansas, California, Florida, and Oregon (two certified cases), the court’s ruling granted summary judgment in FedEx Ground’s favor on all of the certified claims but did not decide the uncertified claims. In the cases filed in Kentucky and New Hampshire, the court ruled in favor of FedEx Ground on some of the claims and against FedEx Ground on at least one claim. In May 2012, the Oregon district court dismissed the two Oregon cases, but in June 2012, the plaintiffs in both cases filed notices of appeal with the Ninth Circuit Court of Appeals. We settled the individual claims in the California case for an immaterial amount, and in November 2012, the plaintiffs filed notices of appeal as to the certified claims to the Ninth Circuit Court of Appeals. In June 2012, the Kentucky district court ruled in favor of FedEx Ground on certain of the plaintiffs’ claims, thereby reducing our potential exposure in the matter.

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

In August 2010, another one of the contractor-model lawsuits that is not part of the multidistrict litigation, Rascon v. FedEx Ground, was certified as a class action by a Colorado state court. The plaintiff in Rascon represents a class of single-route, pickup-and-delivery owner-operators in Colorado who drove vehicles weighing less than 10,001 pounds at any time from August 27, 2005 through the present. The lawsuit seeks unpaid overtime compensation, and related penalties and attorneys’ fees and costs, under Colorado law. Our applications for appeal challenging this class certification decision have been rejected. We settled this matter for an immaterial amount, subject to court approval, in June 2012.

- 17 -

In August 2012, another one of the contractor-model lawsuits that was not part of the multidistrict litigation, Scovil v. FedEx Ground, was certified as a class action by the federal district court in Maine. The court certified two state law claims seeking overtime and alleged illegal deductions; class notices were sent out to 143 potential class members; and three individuals opted out. The court also previously certified an opt-in class for the Fair Labor Standards Act claims, and 21 people opted into this class.

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

With respect to the state administrative proceedings relating to the classification of FedEx Ground’s owner-operators as independent contractors, during the second quarter of 2011, the attorney general in New York filed a lawsuit against FedEx Ground challenging the validity of the contractor model.

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

Other Matters. In August 2010, a third-party consultant who works with shipping customers to negotiate lower rates filed a lawsuit in federal district court in California against FedEx and United Parcel Service, Inc. (“UPS”) alleging violations of U.S. antitrust law. This matter was dismissed in May 2011, but the court granted the plaintiff permission to file an amended complaint, which FedEx received in June 2011. In November 2011, the court granted our motion to dismiss this complaint, but again allowed the plaintiff to file an amended complaint. The plaintiff filed a new complaint in December 2011, and the matter remains pending before the court. In February 2011, shortly after the initial lawsuit was filed, we received a demand for the production of information and documents in connection with a civil investigation by the U.S. Department of Justice (“DOJ”) into the policies and practices of FedEx and UPS for dealing with third-party consultants who work with shipping customers to negotiate lower rates. In November 2012, the DOJ served a civil investigative demand on the third-party consultant seeking all pleadings, depositions and documents produced in the lawsuit. We are cooperating with the investigation, do not believe that we have engaged in any anti-competitive activities and will vigorously defend ourselves in any action that may result from the investigation. While the litigation proceedings and the DOJ investigation move forward, and the amount of loss, if any, is dependent on a number of factors that are not yet fully developed or resolved, we do not believe that a material loss is reasonably possible.

We have received requests for information from the DOJ in the Northern District of California in connection with a criminal investigation relating to the transportation of packages for online pharmacies that may have shipped pharmaceuticals in violation of federal law. We responded to grand jury subpoenas issued in June 2008 and August 2009 and to additional requests for information pursuant to those subpoenas, and we continue to respond and cooperate with the investigation. We believe that our employees have acted in good faith at all times. We do not believe that we have engaged in any illegal activities and will vigorously defend ourselves in any action that may result from the investigation. The DOJ may pursue a criminal indictment and, if we are convicted, remedies could include fines, penalties, financial forfeiture and compliance conditions. We cannot estimate the amount or range of loss, if any, as such analysis would depend on facts and law that are not yet fully developed or resolved.

- 18 -

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

(8) Supplemental Cash Flow Information

Cash paid for interest expense and income taxes for the nine-month periods ended February 28, 2013 and February 29, 2012 was as follows (in millions):


	2013			2012
Cash payments for:
Interest (net of capitalized interest)	$	87		$	73


Income taxes	$	613		$	342
Income tax refunds received		(205	)		(46	)

Cash tax payments, net	$	408		$	296

(9) Condensed Consolidating Financial Statements

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

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee $2.0 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the “Guarantor Subsidiaries” and “Non-guarantor Subsidiaries” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

- 19 -

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

February 28, 2013


	Parent		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,362	$	419	$	712	$	(121	)	$	3,372
Receivables, less allowances		2		3,951		1,031		(34	)		4,950
Spare parts, supplies, fuel, prepaid expenses and other, less allowances		144		719		50		—			913
Deferred income taxes		—		491		19		—			510

Total current assets		2,508		5,580		1,812		(155	)		9,745

PROPERTY AND EQUIPMENT, AT COST		26		36,003		2,085		—			38,114
Less accumulated depreciation and amortization		21		18,646		1,119		—			19,786

Net property and equipment		5		17,357		966		—			18,328

INTERCOMPANY RECEIVABLE		—		66		1,137		(1,203	)		—
GOODWILL		—		1,552		1,213		—			2,765
INVESTMENT IN SUBSIDIARIES		18,431		3,255		—		(21,686	)		—
OTHER ASSETS		2,741		761		198		(2,708	)		992


	$	23,685	$	28,571	$	5,326	$	(25,752	)	$	31,830


LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	250	$	1	$	—	$	—		$	251
Accrued salaries and employee benefits		65		1,150		180		—			1,395
Accounts payable		47		1,277		561		(155	)		1,730
Accrued expenses		178		1,341		204		—			1,723

Total current liabilities		540		3,769		945		(155	)		5,099

LONG-TERM DEBT, LESS CURRENT PORTION		1,741		250		—		—			1,991
INTERCOMPANY PAYABLE		1,203		—		—		(1,203	)		—
OTHER LONG-TERM LIABILITIES
Deferred income taxes		—		3,831		16		(2,708	)		1,139
Other liabilities		4,089		3,187		213		—			7,489

Total other long-term liabilities		4,089		7,018		229		(2,708	)		8,628

STOCKHOLDERS’ INVESTMENT		16,112		17,534		4,152		(21,686	)		16,112


	$	23,685	$	28,571	$	5,326	$	(25,752	)	$	31,830

- 20 -

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2012


	Parent		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,906	$	417	$	636	$	(116	)	$	2,843
Receivables, less allowances		3		3,793		943		(35	)		4,704
Spare parts, supplies, fuel, prepaid expenses and other, less allowances		261		671		44		—			976
Deferred income taxes		—		514		19		—			533

Total current assets		2,170		5,395		1,642		(151	)		9,056

PROPERTY AND EQUIPMENT, AT COST		29		34,301		1,834		—			36,164
Less accumulated depreciation and amortization		20		17,822		1,074		—			18,916

Net property and equipment		9		16,479		760		—			17,248

INTERCOMPANY RECEIVABLE		—		323		1,524		(1,847	)		—
GOODWILL		—		1,553		834		—			2,387
INVESTMENT IN SUBSIDIARIES		17,163		2,978		—		(20,141	)		—
OTHER ASSETS		2,845		1,099		86		(2,818	)		1,212


	$	22,187	$	27,827	$	4,846	$	(24,957	)	$	29,903


LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	—	$	417	$	—	$	—		$	417
Accrued salaries and employee benefits		83		1,365		187		—			1,635
Accounts payable		6		1,276		482		(151	)		1,613
Accrued expenses		184		1,406		119		—			1,709

Total current liabilities		273		4,464		788		(151	)		5,374

LONG-TERM DEBT, LESS CURRENT PORTION		1,000		250		—		—			1,250
INTERCOMPANY PAYABLE		1,847		—		—		(1,847	)		—
OTHER LONG-TERM LIABILITIES
Deferred income taxes		—		3,649		5		(2,818	)		836
Other liabilities		4,340		3,193		183		—			7,716

Total other long-term liabilities		4,340		6,842		188		(2,818	)		8,552

STOCKHOLDERS’ INVESTMENT		14,727		16,271		3,870		(20,141	)		14,727


	$	22,187	$	27,827	$	4,846	$	(24,957	)	$	29,903

- 21 -

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended February 28, 2013


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

REVENUES	$	—		$	9,182		$	1,851		$	(80	)	$	10,953

OPERATING EXPENSES:
Salaries and employee benefits		26			3,594			530			—			4,150
Purchased transportation		—			1,261			649			(39	)		1,871
Rentals and landing fees		2			555			85			(2	)		640
Depreciation and amortization		—			551			48			—			599
Fuel		—			1,190			25			—			1,215
Maintenance and repairs		—			395			29			—			424
Business realignment costs		5			42			—			—			47
Intercompany charges, net		(55	)		(71	)		126			—			—
Other		22			1,129			306			(39	)		1,418

		—			8,646			1,798			(80	)		10,364


OPERATING INCOME		—			536			53			—			589

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		361			53			—			(414	)		—
Interest, net		(27	)		16			2			—			(9	)
Intercompany charges, net		29			(33	)		4			—			—
Other, net		(2	)		(13	)		(1	)		—			(16	)


INCOME BEFORE INCOME TAXES		361			559			58			(414	)		564

Provision for income taxes		—			155			48			—			203


NET INCOME	$	361		$	404		$	10		$	(414	)	$	361


COMPREHENSIVE INCOME	$	419		$	401		$	15		$	(414	)	$	421

- 22 -

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended February 29, 2012


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

REVENUES	$	—		$	9,031		$	1,607		$	(74	)	$	10,564

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

		—			8,358			1,467			(74	)		9,751


OPERATING INCOME		—			673			140			—			813

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


INCOME BEFORE INCOME TAXES		521			751			142			(622	)		792

Provision for income taxes		—			219			52			—			271


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


COMPREHENSIVE INCOME	$	549		$	548		$	144		$	(622	)	$	619

- 23 -

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Nine Months Ended February 28, 2013


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

REVENUES	$	—		$	27,501		$	5,594		$	(243	)	$	32,852

OPERATING EXPENSES:
Salaries and employee benefits		79			10,752			1,547			—			12,378
Purchased transportation		—			3,613			1,905			(107	)		5,411
Rentals and landing fees		4			1,648			241			(5	)		1,888
Depreciation and amortization		1			1,626			137			—			1,764
Fuel		—			3,516			72			—			3,588
Maintenance and repairs		1			1,391			85			—			1,477
Business realignment costs		15			49			—			—			64
Intercompany charges, net		(169	)		(276	)		445			—			—
Other		69			3,403			892			(131	)		4,233

		—			25,722			5,324			(243	)		30,803


OPERATING INCOME		—			1,779			270			—			2,049

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		1,258			152			—			(1,410	)		—
Interest, net		(77	)		35			5			—			(37	)
Intercompany charges, net		82			(95	)		13			—			—
Other, net		(5	)		(18	)		(6	)		—			(29	)


INCOME BEFORE INCOME TAXES		1,258			1,853			282			(1,410	)		1,983

Provision for income taxes		—			581			144			—			725


NET INCOME	$	1,258		$	1,272		$	138		$	(1,410	)	$	1,258


COMPREHENSIVE INCOME	$	1,434		$	1,284		$	193		$	(1,410	)	$	1,501

- 24 -

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Nine Months Ended February 29, 2012


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations			Consolidated

REVENUES	$	—		$	27,039		$	4,851	$	(218	)	$	31,672

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

		—			25,135			4,425		(218	)		29,342


OPERATING INCOME		—			1,904			426		—			2,330

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


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

Provision for income taxes		—			636			175		—			811


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


COMPREHENSIVE INCOME	$	1,566		$	1,458		$	259	$	(1,734	)	$	1,549

- 25 -

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2013


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	78		$	2,556		$	347		$	(5	)	$	2,976

INVESTING ACTIVITIES
Capital expenditures		(3	)		(2,201	)		(226	)		—			(2,430	)
Business acquisitions, net of cash acquired		—			—			(483	)		—			(483	)
Proceeds from asset dispositions and other		—			39			6			—			45


CASH USED IN INVESTING ACTIVITIES		(3	)		(2,162	)		(703	)		—			(2,868	)

FINANCING ACTIVITIES
Net transfers from (to) Parent		(453	)		517			(64	)		—			—
Payment on loan between subsidiaries		—			(407	)		407			—			—
Intercompany dividends		—			12			(12	)		—			—
Principal payments on debt		—			(417	)		—			—			(417	)
Proceeds from debt issuance		991			—			—			—			991
Proceeds from stock issuances		221			—			—			—			221
Excess tax benefit on the exercise of stock options		9			—			—			—			9
Dividends paid		(132	)		—			—			—			(132	)
Purchase of treasury stock		(246	)					—			—			(246	)
Other, net		(9	)		(93	)		93			—			(9	)


CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		381			(388	)		424			—			417


Effect of exchange rate changes on cash		—			(4	)		8			—			4

Net increase (decrease) in cash and cash equivalents		456			2			76			(5	)		529
Cash and cash equivalents at beginning of period		1,906			417			636			(116	)		2,843

Cash and cash equivalents at end of period	$	2,362		$	419		$	712		$	(121	)	$	3,372

- 26 -

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 29, 2012


	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	(61	)	$	2,664		$	451		$	(37	)	$	3,017

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


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

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


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


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

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


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

- 27 -

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of February 28, 2013, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended February 28, 2013 and February 29, 2012 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 2013 and February 29, 2012. These financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2012, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income (loss), and cash flows for the year then ended not presented herein, and in our report dated July 16, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee

March 21, 2013

- 28 -

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

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (“FedEx”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2012 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.

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

The key indicators necessary to understand our operating results include:

•

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

•

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

•

the mix of services purchased by our customers;

•

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

•

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

•

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

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

- 29 -

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2013 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended						Percent			Nine Months Ended						Percent
	2013			2012			Change			2013			2012			Change
Revenues	$	10,953		$	10,564			4		$	32,852		$	31,672			4
Operating income		589			813			(28	)		2,049			2,330			(12	)
Operating margin		5.4	%		7.7	%		(230	)bp		6.2	%		7.4	%		(120	)bp
Net income	$	361		$	521			(31	)	$	1,258		$	1,482			(15	)

Diluted earnings per share	$	1.13		$	1.65			(32	)	$	3.97		$	4.67			(15	)

The following table shows changes in revenues and operating income by reportable segment for the periods ended February 28, 2013 compared to February 29, 2012 (dollars in millions):


	Change in Revenues						Percent Change in Revenue						Change in Operating Income						Percent Change in Operating Income
	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
FedEx Express segment	$	161		$	476			2			2		$	(231	)	$	(424	)		(66	)		(43	)
FedEx Ground segment		267			705			11			10			2			54			—			4
FedEx Freight segment		3			126			—			3			5			89			NM			110
FedEx Services segment		(21	)		(65	)		(5	)		(5	)		—			—			—			—
Other and eliminations		(21	)		(62	)		NM			NM			—			—			—			—

	$	389		$	1,180			4			4		$	(224	)	$	(281	)		(28	)		(12	)

Overview

Our results for the third quarter reflect a significant decline in profitability at FedEx Express resulting from ongoing shifts in demand from priority international services to economy international services and lower international export yields. Reduced profitability at FedEx Express more than offset the strong performance of FedEx Ground and continuing profit improvement at FedEx Freight. Our results were also negatively impacted by business realignment costs of $47 million in the third quarter of 2013 primarily related to our voluntary cash buyout program for eligible U.S. officers and managing directors (see “Business Realignment Costs” for additional information). Additionally, operating result comparisons were negatively impacted by the reversal of a $66 million legal accrual in the third quarter of 2012. Results for the nine months reflect the net year-over-year negative impact from the timing lag that exists between when fuel prices change and indexed fuel surcharges automatically adjust. All our transportation segments experienced the negative impact of fewer operating days in the third quarter and nine months of 2013.

- 30 -

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

LOGO

⁽¹⁾	International domestic average daily package volume includes our international intra-country express operations, including recent acquisitions in Mexico (July 2011), Poland (June 2012), France (July 2012) and Brazil (July 2012).

- 31 -

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

LOGO

Revenue

Revenues increased 4% in both the third quarter and nine months of 2013, primarily driven by increases in international domestic revenue at FedEx Express and volume growth at FedEx Ground. At FedEx Express, revenues increased 2% in both the third quarter and nine months of 2013 primarily driven by increases in international domestic revenues due to recent acquisitions and growth in our freight-forwarding business at FedEx Trade Networks. While overall revenue increased, shifts in demand from our priority international services to our economy international services and lower rates resulted in declines in package yields at FedEx Express in the third quarter and nine months of 2013. At FedEx Ground, revenues increased 11% in the third quarter and 10% in the nine months of 2013 primarily due to volume growth from e-commerce and market share gains. At FedEx Freight, revenues were flat in the third quarter, and in the nine months of 2013 increased 3% as a result of higher yield and average daily LTL shipments.

- 32 -

Operating Income

The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended				Nine Months Ended
	2013		2012		2013		2012
Operating expenses:
Salaries and employee benefits	$	4,150	$	4,021	$	12,378	$	12,007
Purchased transportation		1,871		1,619		5,411		4,713
Rentals and landing fees		640		628		1,888		1,871
Depreciation and amortization		599		543		1,764		1,570
Fuel		1,215		1,233		3,588		3,677
Maintenance and repairs		424		456		1,477		1,518
Business realignment costs⁽¹⁾		47		—		64		—
Other⁽²⁾		1,418		1,251		4,233		3,986

Total operating expenses	$	10,364	$	9,751	$	30,803	$	29,342

⁽¹⁾	Includes predominantly severance costs associated with our voluntary buyout program.

⁽²⁾	The third quarter of 2012 includes the reversal of a $66 million legal reserve.


	Percent of Revenue						Percent of Revenue
	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	2013			2012			2013			2012
Operating expenses:
Salaries and employee benefits		37.9	%		38.1	%		37.7	%		37.9	%
Purchased transportation		17.1			15.3			16.5			14.9
Rentals and landing fees		5.8			6.0			5.7			5.9
Depreciation and amortization		5.5			5.1			5.4			4.9
Fuel		11.1			11.7			10.9			11.6
Maintenance and repairs		3.9			4.3			4.5			4.8
Business realignment costs⁽¹⁾		0.4			—			0.2			—
Other⁽²⁾		12.9			11.8			12.9			12.6

Total operating expenses		94.6			92.3			93.8			92.6


Operating margin		5.4	%		7.7	%		6.2	%		7.4	%

⁽¹⁾	Includes predominantly severance costs associated with our voluntary buyout program.

⁽²⁾	The third quarter of 2012 includes the reversal of a $66 million legal reserve.

Operating income and operating margin decreased in both the third quarter and nine months of 2013 as a result of significant reductions in profitability at FedEx Express. The reversal of a legal reserve in the third quarter of 2012 also negatively impacted our operating result comparisons. Additionally, we incurred business realignment costs in the third quarter of 2013 primarily due to our voluntary buyout program. Our operating income was positively impacted in the third quarter and nine months of 2013 by higher volumes and increased yields at our FedEx Ground segment and by increased yields and higher volumes at our FedEx Freight segment. All our transportation segments experienced the negative impact of fewer operating days in the third quarter and nine months of 2013, including one fewer day at FedEx Express and FedEx Ground and two fewer days at FedEx Freight.

- 33 -

Purchased transportation costs increased 16% in the third quarter and 15% in the nine months of 2013 due to volume growth at FedEx Ground, recent international business acquisitions and the expansion of our freight forwarding business at FedEx Trade Networks. Salaries and employee benefits increased 3% in both the third quarter and nine months of 2013 primarily due to increases in pension and group health insurance costs, partially offset by lower incentive compensation accruals. Other expenses increased 13% in the third quarter and 6% in the nine months of 2013 primarily due to the reversal in 2012 of a legal reserve and current year costs associated with business acquisitions. Depreciation and amortization expense increased 10% in the third quarter and 12% in the nine months of 2013 due to aircraft recently placed in service and accelerated depreciation on certain aircraft at FedEx Express.

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

LOGO

Fuel expense decreased 1% in the third quarter of 2013 due to lower aircraft fuel usage and decreased 2% in the nine months of 2013 due to lower jet fuel costs and lower aircraft fuel usage. Based on a static analysis of year-over-year changes in fuel prices compared to changes in fuel surcharges, fuel had a minimal impact on operating income in the third quarter but had a negative impact for the nine months of 2013.

Our analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express and FedEx Ground services. However, this analysis does not consider the negative effects that fuel surcharge levels may have on our business, including reduced demand and shifts by our customers to lower-yielding services. While fluctuations in fuel surcharge rates can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges we obtain for these services and the level of pricing discounts offered. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative fuel surcharge rates in effect for the third quarter and nine months of 2013 and 2012 in the accompanying discussions of each of our transportation segments.

Income Taxes

Our effective tax rate was 36.0% for the third quarter and 36.6% for the nine months of 2013, compared with 34.1% for the third quarter and 35.4% for the nine months of 2012. Our tax rates for both periods in 2012 were favorably impacted by the conclusion of the Internal Revenue Service (“IRS”) audit of our 2007-2009 consolidated income tax returns. For 2013, we expect our effective tax rate to be approximately 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

As of February 28, 2013, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2012.

- 34 -

We are subject to taxation in the U.S. and various U.S. state, local and foreign jurisdictions. Substantially all U.S. federal income tax matters through fiscal year 2009 are concluded, and we are currently under examination by the IRS for the 2010 and 2011 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements.

Business Acquisitions

In the first quarter of 2013, we expanded the international service offerings of FedEx Express by completing the following business acquisitions:

•

Rapidão Cometa Logística e Transporte S.A., a Brazilian transportation and logistics company, for $398 million in cash from operations on July 4, 2012

•

TATEX, a French express transportation company, for $55 million in cash from operations on July 3, 2012

•

Opek Sp. z o.o., a Polish domestic express package delivery company, for $54 million in cash from operations on June 13, 2012

These acquisitions give us more robust transportation networks within these countries and added capabilities in these important international markets.

The financial results of these acquired businesses are included in the FedEx Express segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations. The estimated fair values of the assets and liabilities related to these acquisitions have been included in the accompanying unaudited balance sheet based on a preliminary allocation of the purchase price. See Note 1 of the accompanying unaudited financial statements for further discussion of these acquisitions.

Business Realignment Costs

During the second quarter of 2013, we announced profit improvement programs primarily through initiatives at FedEx Express and FedEx Services that include the following:

•

Cost reductions in selling, general and administrative functions, including information technology, through headcount reductions, streamlining of processes and elimination of less essential work, as well as deriving greater value from strategic sourcing

•

Modernization of our aircraft fleet, transformation of the U.S. domestic operations and international profit improvements at FedEx Express

•

Improved efficiencies and lower costs of information technology at FedEx Services

- 35 -

We incurred costs of $47 million ($30 million, net of tax, or $0.09 per diluted share) during the third quarter and $64 million ($40 million, net of tax or $0.13 per diluted share) during the nine months of 2013, associated with our business realignment activities. These costs related predominantly to voluntary severance for officers and managing directors who accepted voluntary buyouts in the third quarter of 2013 to adjust our leadership team to our new organizational structure. We expect the pretax cost of the voluntary buyout program to range from approximately $450 million to $550 million in cash expenditures in 2013, but actual costs will depend on employee acceptance rates. Our current range for the 2013 cost of the voluntary buyout program is approximately $100 million lower than our previous forecast due to facility closures we originally expected to occur in late 2013 that will now happen in 2014 and deferred hiring of open positions which reduced our need to offer voluntary buyouts in some cases. Payments will be made at the time of departure, and no material payments of these costs were made in the third quarter of 2013. The cost of the buyout program is included in the caption “Business realignment costs” in our unaudited condensed consolidated statements of income. Also included in that caption are immaterial involuntary severance costs and other external costs directly attributable to our business realignment activities, such as professional fees. Additional costs will be incurred beyond 2013, primarily related to facility optimization and professional fees.

In addition to continued profit improvements in the base businesses at FedEx Ground and FedEx Freight, our profit improvement programs are targeting annual profitability improvement of $1.6 billion at FedEx Express by the end of 2016 (from the full year 2013 base business). Collectively, these initiatives, are expected to increase margins, improve cash flows and increase our competitiveness. The ultimate costs and savings from our profit improvement initiatives will depend, among other things, on the number of employees that participate in the voluntary buyout program and the timing and execution of these programs. We expect to begin realizing a portion of the benefits of these programs in 2014; however, the majority of the benefits, including those from our voluntary severance program, will not occur until 2015 and 2016.

Outlook

While we expect revenues to increase for 2013, we expect earnings to decrease due to business realignment costs and the demand shift from our priority international services to our economy international services at FedEx Express. However, we expect solid financial performance at FedEx Ground and FedEx Freight to partially offset the negative impact of these factors on our results for the remainder of 2013.

Base yields on priority international services at FedEx Express continue to weaken based on our customers’ accelerating preference for our lower-yielding services. Given the persistence of this trend, we are evaluating further actions to adjust our FedEx Express network capacity. Some of these actions may involve temporarily or permanently grounding aircraft, which could result in asset impairment or other charges in future periods. We operate integrated transportation networks and, accordingly, cash flows for most of our operating assets are assessed at a network level, not at an individual asset level for our analysis of impairment. In the normal management of our aircraft fleet, we routinely idle aircraft and engines temporarily due to maintenance cycles and adjustments of our network capacity to match seasonality and overall customer demand levels. Temporarily idled assets are classified as available-for-use, and we continue to record depreciation expense associated with these assets. These temporarily idled assets are assessed for impairment on a quarterly basis. Factors which could cause impairment include, but are not limited to, adverse changes in our global economic outlook and the impact of our outlook on our current and projected volume levels, including lower capacity needs during our peak shipping seasons; the introduction of new fleet types or decisions to permanently retire an aircraft fleet from operations; or the elimination of planned service expansion activities.

Other Outlook Matters. For additional details on key 2013 capital projects, refer to the “Liquidity Outlook” section of this MD&A.

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

- 36 -

As described in Note 7 of the accompanying unaudited condensed consolidated financial statements and the “Evolution of Independent Contractor Model” section of our FedEx Ground segment MD&A, we are involved in a number of lawsuits and other proceedings that challenge the status of FedEx Ground’s owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its contractors. The nature, timing and amount of any changes are dependent on the outcome of numerous future events. We cannot reasonably estimate the potential impact of any such changes or a meaningful range of potential outcomes, although they could be material. However, we do not believe that any such changes will impair our ability to operate and profitably grow our FedEx Ground business.

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

NEW ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

- 37 -

REPORTABLE SEGMENTS

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


FedEx Express Segment		FedEx Express (express transportation) FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)
		FedEx SupplyChain Systems (logistics services)

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

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

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

FEDEX SERVICES SEGMENT

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

- 38 -

OTHER INTERSEGMENT TRANSACTIONS

- 39 -

FEDEX EXPRESS SEGMENT

The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended						Percent			Nine Months Ended						Percent
	2013			2012			Change			2013			2012			Change
Revenues:
Package:
U.S. overnight box	$	1,609		$	1,619			(1	)	$	4,822		$	4,882			(1	)
U.S. overnight envelope		413			426			(3	)		1,252			1,298			(4	)
U.S. deferred		812			792			3			2,246			2,254			—

Total U.S. domestic package revenue		2,834			2,837			—			8,320			8,434			(1	)

International priority⁽¹⁾		1,567			1,625			(4	)		4,906			5,093			(4	)
International economy⁽²⁾		491			454			8			1,492			1,355			10

Total international export package revenue		2,058			2,079			(1	)		6,398			6,448			(1	)

International domestic⁽³⁾		342			210			63			1,035			634			63

Total package revenue		5,234			5,126			2			15,753			15,516			2
Freight:
U.S.		668			647			3			1,923			1,866			3
International priority⁽⁴⁾		384			443			(13	)		1,269			1,362			(7	)
International airfreight		64			77			(17	)		215			228			(6	)

Total freight revenue		1,116			1,167			(4	)		3,407			3,456			(1	)
Other⁽⁵⁾		354			250			42			1,034			746			39

Total revenues		6,704			6,543			2			20,194			19,718			2
Operating expenses:
Salaries and employee benefits		2,539			2,410			5			7,500			7,200			4
Purchased transportation		583			449			30			1,728			1,346			28
Rentals and landing fees		429			425			1			1,262			1,269			(1	)
Depreciation and amortization		334			299			12			993			869			14
Fuel		1,066			1,078			(1	)		3,126			3,194			(2	)
Maintenance and repairs		262			303			(14	)		983			1,037			(5	)
Business realignment costs⁽⁶⁾		13			—			NM			14			—			NM
Intercompany charges⁽⁷⁾		548			547			—			1,620			1,643			(1	)
Other⁽⁸⁾		812			683			19			2,413			2,181			11

Total operating expenses		6,586			6,194			6			19,639			18,739			5


Operating income	$	118		$	349			(66	)	$	555		$	979			(43	)

Operating margin		1.8	%		5.3	%		(350	)bp		2.7	%		5.0	%		(230	)bp

⁽¹⁾	International priority package services provide time-definite delivery within one, two or three business days worldwide.

⁽²⁾	International economy package services provide time-definite delivery within five business days worldwide.

⁽³⁾	International domestic revenues include our international intra-country express operations including recent acquisitions in Mexico (July 2011), Poland (June 2012), France (July 2012) and Brazil (July 2012).

⁽⁴⁾	Freight international priority includes our FedEx International Priority and FedEx International Economy freight services.

⁽⁵⁾	Other revenues include FedEx Trade Networks and FedEx SupplyChain Systems.

⁽⁶⁾	Includes predominantly severance costs associated with our voluntary buyout program.

⁽⁷⁾	Includes allocations of $21 million in the third quarter and $31 million in the nine months of 2013 for business realignment costs.

⁽⁸⁾	The third quarter of 2012 includes the reversal of a $66 million legal reserve.

- 40 -


	Percent of Revenue						Percent of Revenue
	Three Months Ended 2013			Three Months Ended 2012			Nine Months Ended 2013			Nine Months Ended 2012
Operating expenses:
Salaries and employee benefits		37.8	%		36.8	%		37.1	%		36.5	%
Purchased transportation		8.7			6.9			8.6			6.8
Rentals and landing fees		6.4			6.5			6.2			6.4
Depreciation and amortization		5.0			4.6			4.9			4.4
Fuel		15.9			16.5			15.5			16.2
Maintenance and repairs		3.9			4.6			4.9			5.3
Business realignment costs⁽¹⁾		0.2			—			0.1			—
Intercompany charges⁽²⁾		8.2			8.4			8.0			8.3
Other⁽³⁾		12.1			10.4			12.0			11.1

Total operating expenses		98.2			94.7			97.3			95.0

Operating margin		1.8	%		5.3	%		2.7	%		5.0	%

⁽¹⁾	Includes predominantly severance costs associated with our voluntary buyout program.

⁽²⁾	Includes allocations of $21 million in the third quarter and $31 million in the nine months of 2013 for business realignment costs.

⁽³⁾	The third quarter of 2012 includes the reversal of a $66 million legal reserve.

- 41 -

The following table compares selected statistics (in thousands, except yield amounts) for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended				Percent			Nine Months Ended				Percent
	2013		2012		Change			2013		2012		Change
Package Statistics⁽¹⁾
Average daily package volume (ADV):
U.S. overnight box		1,176		1,171		—			1,135		1,158		(2	)
U.S. overnight envelope		569		581		(2	)		570		586		(3	)
U.S. deferred		944		923		2			843		863		(2	)

Total U.S. domestic ADV		2,689		2,675		1			2,548		2,607		(2	)

International priority⁽²⁾		420		413		2			424		421		1
International economy⁽³⁾		155		139		12			152		134		13

Total international export ADV		575		552		4			576		555		4

International domestic⁽⁴⁾		781		508		54			781		493		58

Total ADV		4,045		3,735		8			3,905		3,655		7

Revenue per package (yield):
U.S. overnight box	$	22.08	$	21.93		1		$	22.35	$	22.08		1
U.S. overnight envelope		11.69		11.65		—			11.57		11.59		—
U.S. deferred		13.87		13.62		2			14.02		13.67		3
U.S. domestic composite		17.00		16.83		1			17.18		16.94		1
International priority⁽²⁾		60.25		62.49		(4	)		60.93		63.44		(4	)
International economy⁽³⁾		51.03		51.74		(1	)		51.72		52.86		(2	)
International export composite		57.76		59.78		(3	)		58.50		60.88		(4	)
International domestic⁽⁴⁾		7.06		6.57		7			6.98		6.73		4
Composite package yield		20.87		21.79		(4	)		21.23		22.23		(4	)
Freight Statistics⁽¹⁾
Average daily freight pounds:
U.S.		8,324		8,104		3			7,697		7,561		2
International priority⁽⁵⁾		2,894		3,257		(11	)		3,098		3,279		(6	)
International airfreight		1,035		1,169		(11	)		1,102		1,182		(7	)

Total average daily freight pounds		12,253		12,530		(2	)		11,897		12,022		(1	)

Revenue per pound (yield):
U.S.	$	1.30	$	1.27		2		$	1.31	$	1.29		2
International priority⁽⁵⁾		2.14		2.16		(1	)		2.15		2.18		(1	)
International airfreight		0.99		1.04		(5	)		1.03		1.01		2
Composite freight yield		1.47		1.48		(1	)		1.51		1.51		—

⁽¹⁾	Package and freight statistics include only the operations of FedEx Express.

⁽²⁾	International priority package services provide time-definite delivery within one, two or three business days worldwide.

⁽³⁾	International economy package services provide time-definite delivery within five business days worldwide.

⁽⁴⁾	International domestic statistics include our international intra-country express operations, including recent acquisitions in Mexico (July 2011), Poland (June 2012), France (July 2012) and Brazil (July 2012).

⁽⁵⁾	Freight international priority includes FedEx International Priority and FedEx International Economy freight services.

FedEx Express Segment Revenues

FedEx Express segment revenues increased 2% in both the third quarter and nine months of 2013 primarily due to the impact of new business acquisitions and growth in our freight-forwarding business at FedEx Trade Networks. However, core revenue growth was constrained by global economic conditions as revenue growth from higher international export volume was offset by decreased yields due to shifts in demand from our priority international services to our economy international services and lower rates.

- 42 -

International domestic revenues increased 63% in both the third quarter and nine months of 2013 due to recent acquisitions in Brazil, France and Poland, while total international export volumes increased 4% in both the third quarter and nine months of 2013 driven by increases in FedEx International Economy services from Asia and Europe. International export package yields decreased 3% in the third quarter and 4% in the nine months of 2013 primarily due to the demand shift toward lower-yielding services, lower rates and lower fuel surcharges. Although U.S. domestic package volume increased slightly in the third quarter of 2013, ongoing weakness in economic conditions resulted in a 2% decrease in U.S. domestic package volume for the nine months of 2013.

Our fuel surcharges are indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
U.S. Domestic and Outbound Fuel Surcharge:
Low		10.00	%		11.50	%		10.00	%		11.50	%
High		13.50			14.00			14.50			16.50
Weighted-average		11.29			12.91			12.14			14.36

International Fuel Surcharges:
Low		14.00			13.50			12.00			13.50
High		19.00			19.00			20.50			23.00
Weighted-average		16.96			16.45			16.78			17.23

In both January 2013 and 2012, we implemented a 5.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services, while we lowered our fuel surcharge index by two percentage points.

FedEx Express Segment Operating Income

FedEx Express operating income and operating margin decreased significantly in the third quarter and nine months of 2013 due to the demand shift toward lower-yielding international services, higher pension costs and increased depreciation expense. Operating result comparisons were also negatively impacted by a legal reserve accrual reversal in the third quarter of 2012. Additionally, results were negatively impacted by $34 million in the third quarter and $45 million in the nine months of 2013 of costs associated with our business realignment program, both directly and through intercompany allocations.

Purchased transportation costs increased 30% in the third quarter and 28% in the nine months of 2013 due to recent business acquisitions and the expansion of our freight forwarding business at FedEx Trade Networks. Salaries and employee benefits increased 5% in the third quarter and 4% in the nine months of 2013 due to recent acquisitions and higher pension costs, partially offset by lower incentive compensation accruals. Other operating expenses increased 19% in the third quarter and 11% in the nine months of 2013 primarily due to the negative impact on the year-over-year comparison of the legal reserve accrual reversal in 2012 and current year costs associated with recent business acquisitions. Depreciation and amortization expense increased 12% in the third quarter and 14% in the nine months of 2013 as a result of aircraft recently placed into service and accelerated depreciation due to the shortened life of certain aircraft.

Fuel costs decreased 1% in the third quarter of 2013 due to lower aircraft fuel usage and decreased 2% in the nine months of 2013 due to lower jet fuel costs and lower aircraft fuel usage. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a minimal impact on operating income in the third quarter, but a negative impact for the nine months of 2013. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express services.

- 43 -

U.S. Postal Service Agreement

Under an agreement with the U.S. Postal Service (“USPS”) that runs through September 2013, FedEx Express provides domestic air transportation services to the USPS, including for its First-Class, Priority and Express Mail. The USPS has solicited proposals for the provision of these services upon the expiration of the current agreement, and we have responded to its bid request. We expect a decision shortly from the USPS. For additional information, see the “Risk Factors” section of our Annual Report.

FEDEX GROUND SEGMENT

The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended						Percent			Nine Months Ended						Percent
	2013			2012			Change			2013			2012			Change
Revenues:
FedEx Ground	$	2,480		$	2,259			10		$	7,112		$	6,518			9
FedEx SmartPost		267			221			21			690			579			19

Total revenues		2,747			2,480			11			7,802			7,097			10


Operating expenses:
Salaries and employee benefits		405			369			10			1,178			1,082			9
Purchased transportation		1,121			995			13			3,124			2,814			11
Rentals		86			74			16			245			212			16
Depreciation and amortization		111			102			9			324			289			12
Fuel		6			4			NM			13			11			NM
Maintenance and repairs		48			43			12			140			130			8
Intercompany charges		270			246			10			794			732			8
Other		233			182			28			660			557			18

Total operating expenses		2,280			2,015			13			6,478			5,827			11

Operating income	$	467		$	465			—		$	1,324		$	1,270			4


Operating margin		17.0	%		18.8	%		(180	)bp		17.0	%		17.9	%		(90	)bp

Average daily package volume
FedEx Ground		4,476			4,072			10			4,214			3,922			7
FedEx SmartPost		2,477			1,960			26			2,051			1,701			21

Revenue per package (yield)
FedEx Ground	$	8.92		$	8.79			1		$	8.86		$	8.68			2
FedEx SmartPost	$	1.77		$	1.79			(1	)	$	1.78		$	1.78			—

- 44 -


	Percent of Revenue						Percent of Revenue
	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	2013			2012			2013			2012
Operating expenses:
Salaries and employee benefits		14.8	%		14.9	%		15.1	%		15.2	%
Purchased transportation		40.8			40.1			40.0			39.7
Rentals		3.1			3.0			3.1			3.0
Depreciation and amortization		4.0			4.1			4.1			4.1
Fuel		0.2			0.2			0.2			0.2
Maintenance and repairs		1.8			1.7			1.8			1.8
Intercompany charges		9.8			9.9			10.2			10.3
Other		8.5			7.3			8.5			7.8

Total operating expenses		83.0			81.2			83.0			82.1


Operating margin		17.0	%		18.8	%		17.0	%		17.9	%

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 11% in the third quarter and 10% in the nine months of 2013 due to volume growth at both FedEx Ground and FedEx SmartPost, as well as yield growth at FedEx Ground.

Average daily volume at FedEx Ground increased 10% during the third quarter and 7% in the nine months of 2013 due to market share gains from continued growth in our FedEx Home Delivery service and increases in our commercial business. FedEx Ground yield increased 1% during the third quarter and 2% in the nine months of 2013 primarily due to increased rates and higher residential surcharge revenue, partially offset by lower package weights and fuel surcharges.

FedEx SmartPost volumes grew 26% during the third quarter and 21% in the nine months of 2013 as a result of the growth in e-commerce. Yields at FedEx SmartPost decreased 1% during the third quarter of 2013 primarily due to higher postage costs, partially offset by increased rates. FedEx SmartPost yield represents the amount charged to customers net of postage paid to the USPS.

The FedEx Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by the Department of Energy. Our fuel surcharge ranged as follows for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
Low		7.00	%		7.50	%		7.00	%		7.50	%
High		8.50			8.50			8.50			9.50
Weighted-average		7.56			8.04			7.75			8.61

In January 2013 and 2012, FedEx Ground and FedEx Home Delivery implemented a 4.9% increase in average list price. The full average rate increase of 5.9% each year was partially offset by adjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surcharge by one percentage point. FedEx SmartPost rates also increased.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased slightly in the third quarter of 2013, while operating margin was lower, as the benefit of higher volume and revenue per package was mostly offset by higher purchased transportation, a favorable self-insurance adjustment in the prior year, higher network expansion costs and intercompany charges of $9 million associated with the business realignment program. FedEx Ground segment operating income increased 4% in the nine months of 2013 primarily due to higher volume and yield growth, partially offset by higher purchased transportation costs. Purchased transportation costs increased 13% during the third quarter and 11% in the nine months of 2013 primarily as a result of volume growth and higher rates paid to our independent contractors. Salaries and employee benefits expense increased 10% in the third quarter and 9% in the nine months of 2013 primarily due to increased staffing to support volume growth. Other operating expenses increased 28% in the third quarter and 18% in the nine months of 2013 primarily due to a favorable self-insurance adjustment in the prior year.

- 45 -

Evolution of Independent Contractor Model

Although FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax audits or other administrative challenges) where the classification of its independent contractors is at issue, a number of recent judicial decisions support our classification and we believe our relationship with the contractors is generally excellent. For a description of these proceedings, see “Risk Factors” and Note 7 of the accompanying unaudited condensed consolidated financial statements.

For additional information on the FedEx Ground Independent Service Provider model, see Part 1, Item 1 of our Annual Report under the caption “Evolution of Independent Contractor Model.”

- 46 -

FEDEX FREIGHT SEGMENT

The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected statistics for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended						Percent			Nine Months Ended						Percent
	2013			2012			Change			2013			2012			Change
Revenues	$	1,237		$	1,234			—		$	4,013		$	3,887			3
Operating expenses:
Salaries and employee benefits		562			566			(1	)		1,750			1,721			2
Purchased transportation		197			201			(2	)		647			629			3
Rentals		30			29			3			88			86			2
Depreciation and amortization		55			47			17			160			135			19
Fuel		142			149			(5	)		447			470			(5	)
Maintenance and repairs		45			45			—			142			143			(1	)
Business realignment costs		1			—			NM			1			—			NM
Intercompany charges		109			107			2			330			324			2
Other		92			91			1			278			298			(7	)

Total operating expenses		1,233			1,235			—			3,843			3,806			1


Operating income (loss)	$	4		$	(1	)		NM		$	170		$	81			110


Operating margin		0.3	%		(0.1	%)		40	bp		4.2	%		2.1	%		210	bp

Average daily LTL shipments (in thousands)
Priority⁽¹⁾		55.3			56.4			(2	)		59.5			59.9			(1	)
Economy⁽²⁾		25.2			23.4			8			26.2			23.9			10

Total average daily LTL shipments		80.5			79.8			1			85.7			83.8			2

Weight per LTL shipment (lbs)
Priority⁽¹⁾		1,250			1,212			3			1,226			1,193			3
Economy⁽²⁾		989			1,025			(4	)		993			1,055			(6	)
Composite weight per LTL shipment		1,168			1,157			1			1,154			1,154			—
LTL yield (revenue per hundredweight)
Priority⁽¹⁾	$	17.87		$	18.10			(1	)	$	17.91		$	18.14			(1	)
Economy⁽²⁾		26.17			24.28			8			25.92			23.70			9
Composite LTL yield	$	20.10		$	19.70			2		$	20.03		$	19.59			2

⁽¹⁾	FedEx Freight Priority is utilized when speed is critical, delivering LTL shipments fast and efficiently.

⁽²⁾	FedEx Freight Economy is utilized when time can be traded for savings, providing reliable, economical delivery of basic LTL freight shipments.

- 47 -


	Percent of Revenue						Percent of Revenue
	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	2013			2012			2013			2012
Operating expenses:
Salaries and employee benefits		45.4	%		45.9	%		43.6	%		44.3	%
Purchased transportation		15.9			16.3			16.1			16.2
Rentals		2.4			2.3			2.2			2.2
Depreciation and amortization		4.5			3.8			4.0			3.5
Fuel		11.5			12.1			11.2			12.1
Maintenance and repairs		3.6			3.6			3.6			3.7
Business realignment costs		0.1			—			—			—
Intercompany charges		8.8			8.7			8.2			8.3
Other		7.5			7.4			6.9			7.6

Total operating expenses		99.7			100.1			95.8			97.9

Operating margin		0.3	%		(0.1	)%		4.2	%		2.1	%

FedEx Freight Segment Revenues

Although revenues at the FedEx Freight segment were flat for the third quarter, revenues increased 3% in the nine months of 2013 as a result of higher LTL yield and average daily LTL shipments. LTL yield increased 2% during both the third quarter and nine months of 2013 due to improvements in FedEx Freight Economy yield resulting from higher rates and lower weight per LTL shipment. Average daily LTL shipments increased 1% in the third quarter and 2% in the nine months of 2013 due to an increase in customer demand for our FedEx Freight Economy service offering.

Generally, LTL freight is rated using a standard class system for the LTL industry and classes are assigned based on transportation characteristics including density, risk and handling. Under the class system, low-value freight that is easy to handle, unlikely to damage and dense will receive lower class ratings (and lower yields) than expensive, light, bulky freight which is highly susceptible to damage (and produces higher yields). Revenue per hundredweight is a commonly-used indicator of pricing trends, but this metric can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment, length of haul and the mix of freight. As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates.

The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge ranged as follows for the periods ended February 28, 2013 and February 29, 2012:


	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
Low		23.10	%		22.50	%		21.80	%		19.80	%
High		24.40			23.90			24.40			23.90
Weighted-average		23.60			23.00			23.28			22.90

In July 2012, FedEx Freight implemented a rate increase of 6.9% for LTL shipments. In June 2011, FedEx Freight increased the fuel surcharge rate to a maximum of 3.6 percentage points above previous levels.

FedEx Freight Segment Operating Income

The FedEx Freight segment operating results for the third quarter and nine months of 2013 improved as a result of LTL yield growth and increased average daily LTL shipments, along with ongoing improvements in operational efficiencies in our integrated network.

- 48 -

Salaries and employee benefits decreased 1% in the third quarter of 2013 due to operational efficiencies and lower incentive compensation accruals, partially offset by higher workers’ compensation and pension costs. Salaries and employee benefits increased 2% in the nine months of 2013 primarily due to a volume-related increase in labor hours and higher healthcare, workers’ compensation and pension costs, partially offset by operational efficiencies and lower incentive compensation accruals. Depreciation and amortization expense increased 17% in the third quarter and 19% in the nine months of 2013 due to continued investment in transportation equipment. Purchased transportation costs decreased 2% in the third quarter due to improved efficiencies, partially offset by increased utilization of rail and higher rates. Purchased transportation costs increased 3% in the nine months of 2013 due to increased utilization of rail and higher rates. Other operating expenses decreased 7% in the nine months of 2013 primarily due to lower bad debt expense and cargo claims and higher legal settlements in the prior year.

Fuel costs decreased 5% during both the third quarter and nine months of 2013 due to increased utilization of rail and fuel efficiency improvements. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a minimal impact on operating income in the third quarter and nine months of 2013.

FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $3.4 billion at February 28, 2013, compared to $2.8 billion at May 31, 2012. The following table provides a summary of our cash flows for the nine-month periods ended February 28, 2013 and February 29, 2012 (in millions):


	2013			2012
Operating activities:
Net income	$	1,258		$	1,482
Noncash charges and credits		2,474			2,470
Changes in assets and liabilities		(756	)		(935	)

Cash provided by operating activities		2,976			3,017


Investing activities:
Capital expenditures		(2,430	)		(2,946	)
Business acquisitions, net of cash acquired		(483	)		(114	)
Proceeds from asset dispositions and other		45			20

Cash used in investing activities		(2,868	)		(3,040	)


Financing activities:
Principal payments on debt		(417	)		(28	)
Proceeds from debt issuance		991			—
Proceeds from stock issuances		221			83
Dividends paid		(132	)		(123	)
Purchase of treasury stock		(246	)		(197	)
Other		—			7

Cash provided by (used in) financing activities		417			(258	)


Effect of exchange rate changes on cash		4			(7	)


Net increase (decrease) in cash and cash equivalents	$	529		$	(288	)

- 49 -

Cash flows from operating activities decreased $41 million in the nine months of 2013 primarily due to a decrease in net income and higher variable compensation payments, partially offset by a decrease in pension contributions. We made contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) of $420 million in the nine months of 2013 and $710 million in the nine months of 2012. Capital expenditures during the nine months of 2013 were lower primarily due to decreased spending at FedEx Express for aircraft. See “Capital Resources” for a discussion of capital expenditures during 2013 and 2012.

During the first quarter of 2013, we repurchased 2.7 million shares of FedEx common stock at an average price of $91 per share for a total of $246 million. As of February 28, 2013, 188,000 shares remained under existing share repurchase authorizations.

CAPITAL RESOURCES

Our operations are capital intensive, characterized by significant investments in aircraft, vehicles, technology, facilities, and package-handling and sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, availability of satisfactory financing and actions of regulatory authorities.

The following table compares capital expenditures by asset category and reportable segment for the periods ended February 28, 2013 and February 29, 2012 (in millions):


									Percent Change 2013/2012
	Three Months Ended				Nine Months Ended				Three Months			Nine Months
	2013		2012		2013		2012		Ended			Ended
Aircraft and related equipment	$	95	$	240	$	926	$	1,455		(60	)		(36	)
Facilities and sort equipment		169		141		454		398		20			14
Vehicles		106		166		610		575		(36	)		6
Information and technology investments		100		110		272		363		(9	)		(25	)
Other equipment		72		72		168		155		—			8

Total capital expenditures	$	542	$	729	$	2,430	$	2,946		(26	)		(18	)

FedEx Express segment	$	260	$	394	$	1,526	$	2,021		(34	)		(24	)
FedEx Ground segment		102		110		365		363		(7	)		1
FedEx Freight segment		80		136		263		255		(41	)		3
FedEx Services segment		100		89		273		305		12			(10	)
Other		—		—		3		2		—			NM

Total capital expenditures	$	542	$	729	$	2,430	$	2,946		(26	)		(18	)

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Capital expenditures during the nine months of 2013 were lower than the prior-year period primarily due to decreased spending for aircraft at FedEx Express. Aircraft and related equipment purchases at FedEx Express during the nine months of 2013 included the delivery of ten Boeing 757s (“B757”) to be modified for cargo transport and four new Boeing 777 Freighters (“B777F”).

LIQUIDITY OUTLOOK

We believe that our existing cash and cash equivalents, cash flow from operations and available financing sources are adequate to meet our liquidity needs, including working capital, capital expenditure requirements and debt payment obligations. Our cash and cash equivalents balance at February 28, 2013 includes $443 million of cash in offshore jurisdictions associated with our permanent reinvestment strategy. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic debt or working capital obligations. Historically, we have been successful in obtaining unsecured financing, from both domestic and international sources, although the marketplace for such investment capital can become restricted depending on a variety of economic factors.

Our capital expenditures are expected to be approximately $3.6 billion in 2013 and include spending for aircraft and related equipment at FedEx Express, facility projects at FedEx Express and FedEx Ground and vehicle replacement at all our transportation segments. We invested $926 million in aircraft and aircraft-related equipment in the nine months of 2013 and expect to invest approximately $315 million for aircraft and aircraft-related equipment during the remainder of 2013. We have several aircraft modernization programs underway which are supported by the purchase of B777F, Boeing 767-300 Freighter (“B767F”) and B757 aircraft. These are substantially more fuel-efficient per unit than the aircraft type previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to support projected long-term international volume growth. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements.

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

In March 2013, we made $140 million in required contributions to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments. We have no additional required contributions to our U.S. Pension Plans for the remainder of 2013.

Standard & Poor’s has assigned us a senior unsecured debt credit rating of BBB and commercial paper rating of A-2 and a ratings outlook of “stable.” Moody’s Investors Service has assigned us a senior unsecured debt credit rating of Baa1 and commercial paper rating of P-2 and a ratings outlook of “stable.” If our credit ratings drop, our interest expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt credit ratings drop below investment grade, our access to financing may become limited.

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CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The following table sets forth a summary of our contractual cash obligations as of February 28, 2013. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of long-term debt and capital lease obligations, this table does not include amounts already recorded in our balance sheet as current liabilities at February 28, 2013. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table below. We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare plan liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table below due to the absence of scheduled maturities. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.


	Payments Due by Fiscal Year (Undiscounted) (in millions)
	2013⁽¹⁾		2014		2015		2016		2017		Thereafter		Total

Operating activities:
Operating leases	$	466	$	1,887	$	1,771	$	1,578	$	1,636	$	7,575	$	14,913
Non-capital purchase obligations and other		68		250		148		81		58		142		747
Interest on long-term debt		4		129		111		111		111		2,147		2,613
Quarterly contributions to our U.S. Pension Plans		140		—		—		—		—		—		140

Investing activities:
Aircraft and aircraft-related capital commitments		250		716		1,051		1,140		955		5,813		9,925
Other capital purchase obligations		24		2		2		—		—		—		28

Financing activities:
Debt		—		250		—		—		—		1,981		2,231

Total	$	952	$	3,234	$	3,083	$	2,910	$	2,760	$	17,658	$	30,597

⁽¹⁾	Cash obligations for the remainder of 2013.

Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements. See Note 6 of the accompanying unaudited condensed consolidated financial statements for more information.

Operating Activities

The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at February 28, 2013.

Included in the table above within the caption entitled “Non-capital purchase obligations and other” is our estimate of the current portion of the liability ($1 million) for uncertain tax positions and amounts for purchase obligations that represent noncancelable agreements to purchase goods or services that are not capital related. Such contracts include those for printing and advertising and promotions contracts. We cannot reasonably estimate the timing of the long-term payments or the amount by which the liability for uncertain tax positions will increase or decrease over time; therefore, the long-term portion of the liability for uncertain tax positions ($45 million) is excluded from the table.

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The amounts reflected in the table above for interest on long-term debt represent future interest payments due on our long-term debt, all of which are fixed rate.

We had $380 million in deposits and progress payments as of February 28, 2013 on aircraft purchases and other planned aircraft-related transactions.

Investing Activities

The amounts reflected in the table above for capital purchase obligations represent noncancelable agreements to purchase capital-related equipment. Such contracts include those for certain purchases of aircraft, aircraft modifications, vehicles, facilities, computers and other equipment.

Financing Activities

The amounts reflected in the table above for long-term debt represent future scheduled payments on our long-term debt. For the remainder of 2013, we have no scheduled principal debt payments and payments for principal and interest on capital leases are immaterial.

Additional information on amounts included within the operating, investing and financing activities captions in the table above can be found in our Annual Report.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.

GOODWILL. Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that the fair value of a reporting unit has fallen below its carrying value. We do not believe there has been any change of events or circumstances that would indicate that a reevaluation of the goodwill of our reporting units is required as of February 28, 2013, nor do we believe the goodwill of our reporting units is at risk of failing impairment testing. For additional details on goodwill impairment testing, refer to Note 1 of our Annual Report.

Information regarding our critical accounting estimates can be found in our Annual Report, including Note 1 to the financial statements therein. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.

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FORWARD-LOOKING STATEMENTS

Certain statements in this report, including (but not limited to) those contained in “Outlook,” “Liquidity,” “Capital Resources,” “Liquidity Outlook,” “Contractual Cash Obligations” and “Critical Accounting Estimates,” and the “General,” “Retirement Plans,” and “Contingencies” notes to the consolidated financial statements, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:

•

economic conditions in the global markets in which we operate;

•

significant changes in the volumes of shipments transported through our networks, customer demand for our various services or the prices we obtain for our services;

•

damage to our reputation or loss of brand equity;

•

disruptions to the Internet or our technology infrastructure, including those impacting our computer systems and Web site, which can adversely affect our operations and reputation among customers;

•

the price and availability of jet and vehicle fuel;

•

our ability to manage our cost structure for capital expenditures and operating expenses, and match it to shifting and future customer volume levels;

•

the impact of intense competition on our ability to maintain or increase our prices (including our fuel surcharges in response to rising fuel costs) or to maintain or grow our market share;

•

our ability to effectively operate, integrate, leverage and grow acquired businesses, and to continue to support the value we allocate to these acquired businesses, including their goodwill;

•

the number of employees that participate in the voluntary buyout programs and the timing and execution of those programs;

•

our ability to maintain good relationships with our employees and prevent attempts by labor organizations to organize groups of our employees, which could significantly increase our operating costs and reduce our operational flexibility;

•

the impact of costs related to (i) challenges to the status of FedEx Ground’s owner-operators as independent contractors, rather than employees, and (ii) any related changes to our relationship with these owner-operators;

•

the impact of any international conflicts or terrorist activities on the United States and global economies in general, the transportation industry or us in particular, and what effects these events will have on our costs or the demand for our services;

•

any impacts on our businesses resulting from new domestic or international government laws and regulation, including regulatory actions affecting global aviation or other transportation rights, increased air cargo and other security or pilot safety requirements, and tax, accounting, trade (such as protectionist measures enacted in response to weak economic conditions), labor (such as card-check legislation or changes to the Railway Labor Act affecting FedEx Express employees), environmental (such as global climate change legislation) or postal rules;

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•

adverse weather conditions or localized natural disasters in key geographic areas, such as earthquakes, volcanoes, and hurricanes, which can disrupt our electrical service, damage our property, disrupt our operations, increase our fuel costs and adversely affect our shipment levels;

•

any impact on our business from disruptions or modifications in service by the USPS, which is a significant customer and vendor of FedEx, as a consequence of the USPS’s current financial difficulties, any resulting structural changes to its operations, network, service offerings or pricing or its decision to solicit proposals for the provision of air transportation services currently provided by FedEx Express;

•

increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits;

•

the increasing costs of compliance with federal and state governmental agency mandates, including those related to healthcare benefits, and defending against inappropriate or unjustified enforcement of other actions by such agencies;

•

the impact of any international conflicts on the United States and global economies in general, the transportation industry or us in particular, and what effects these events will have on our costs or the demand for our services;

•

any impacts on our businesses resulting from new domestic or international government laws and regulation;

•

changes in foreign currency exchange rates, especially in the British pound, Canadian dollar, Chinese yuan, euro, Hong Kong dollar and Japanese yen, which can affect our sales levels and foreign currency sales prices;

•

market acceptance of our new service and growth initiatives;

•

any liability resulting from and the costs of defending against class-action litigation, such as wage-and-hour and discrimination and retaliation claims, and any other legal or governmental 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 negotiations);

•

the impact of technology developments on our operations and on demand for our services, and our ability to continue to identify and eliminate unnecessary information technology redundancy and complexity throughout the organization;

•

widespread outbreak of an illness or any other communicable disease, or any other public health crisis;

•

availability of financing on terms acceptable to us and our ability to maintain our current credit ratings, especially given the capital intensity of our operations; and

•

other risks and uncertainties you can find in our press releases and SEC filings, including the risk factors identified under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our Annual Report, as updated by our quarterly reports on Form 10-Q.

As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of February 28, 2013, there had been no material changes in our market risk sensitive instruments and positions since our disclosures in our Annual Report.

The principal foreign currency exchange rate risks to which we are exposed are in the British pound, Canadian dollar, Chinese yuan, euro, Hong Kong dollar and Japanese yen. Historically, our exposure to foreign currency fluctuations is more significant with respect to our revenues than our expenses as a significant portion of our expenses are denominated in U.S. dollars, such as aircraft and fuel expenses. During the nine months of 2013, the U.S. dollar weakened relative to the currencies of the foreign countries in which we operate, as compared to May 31, 2012; however, this weakening did not have a material effect on our results.

While we have market risk for changes in the price of jet and vehicle fuel, this risk is largely mitigated by our variable fuel surcharges. However, our fuel surcharges for FedEx Express and FedEx Ground have a timing lag of approximately six to eight weeks before they are adjusted for changes in fuel prices. Our fuel surcharge index also allows fuel prices to fluctuate approximately 2% for FedEx Express and approximately 4% for FedEx Ground before an adjustment to the fuel surcharge occurs. Therefore, our operating income may be affected should the spot price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges.

Item 4. Controls and Procedures

The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of February 28, 2013 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended February 28, 2013, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of all material pending legal proceedings, see Note 7 of the accompanying unaudited condensed consolidated financial statements.

Item 1A. Risk Factors

In December 2012, the Federal Aviation Administration determined that no revision to its December 2011 regulations related to pilot fatigue is necessary, continuing to exclude us from the new rule. In “Forward-Looking Statements,” we include a risk factor relating to the number of participating employees in the voluntary buyout programs and the timing and execution of those programs. With the exception of these two items, there have been no material changes from the risk factors disclosed in our Annual Report (under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition”) in response to Part I, Item 1A of Form 10-K.

Item 6. Exhibits


Exhibit Number		Description of Exhibit

10.1		Supplemental Agreement No. 3 (and related side letters) dated as of December 11, 2012, amending the Boeing 767-3S2 Freighter Purchase Agreement dated as of December 14, 2011 between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential and financial information, pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

10.2		Supplemental Agreement No. 22 (and related side letters) dated as of December 11, 2012, amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006 between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential and financial information, pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

10.3		Amendment dated December 3, 2012 to the Transportation Agreement dated July 31, 2006 between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential and financial information, pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

10.4		Letter Agreement dated January 25, 2013, amending the Transportation Agreement dated July 31, 2006 between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential and financial information, pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

10.5		Fifth Amendment dated December 19, 2012 (but effective as of January 1, 2013) to the Composite Lease Agreement dated May 21, 2007 (but effective as of January 1, 2007) between the Memphis-Shelby County Airport Authority and Federal Express Corporation.

10.6		First Amendment dated March 1, 2013 amending the Five-Year Credit Agreement dated April 26, 2011, among FedEx Corporation, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders.

12.1		Computation of Ratio of Earnings to Fixed Charges.

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15.1		Letter re: Unaudited Interim Financial Statements.

31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1		Interactive Data Files.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		FEDEX CORPORATION

Date:	March 21, 2013	/s/ JOHN L. MERINO
		JOHN L. MERINO
		CORPORATE VICE PRESIDENT AND
		PRINCIPAL ACCOUNTING OFFICER

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EXHIBIT INDEX


Exhibit Number		Description of Exhibit

10.1		Supplemental Agreement No. 3 (and related side letters) dated as of December 11, 2012, amending the Boeing 767-3S2 Freighter Purchase Agreement dated as of December 14, 2011 between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential and financial information, pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

10.2		Supplemental Agreement No. 22 (and related side letters) dated as of December 11, 2012, amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006 between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential and financial information, pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

10.3		Amendment dated December 3, 2012 to the Transportation Agreement dated July 31, 2006 between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential and financial information, pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

10.4		Letter Agreement dated January 25, 2013, amending the Transportation Agreement dated July 31, 2006 between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential and financial information, pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

10.5		Fifth Amendment dated December 19, 2012 (but effective as of January 1, 2013) to the Composite Lease Agreement dated May 21, 2007 (but effective as of January 1, 2007) between the Memphis-Shelby County Airport Authority and Federal Express Corporation.

10.6		First Amendment dated March 1, 2013 amending the Five-Year Credit Agreement dated April 26, 2011, among FedEx Corporation, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders.

12.1		Computation of Ratio of Earnings to Fixed Charges.

15.1		Letter re: Unaudited Interim Financial Statements.

31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1		Interactive Data Files.

E-1