Edgar Filing: FEDEX CORP

Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

FOR THE QUARTERLY PERIOD ENDED November 30, 2010


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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 1-15829

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(901) 818-7500
(Registrant’s telephone number, including area code)

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

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 þ No o

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


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

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

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


Common Stock		Outstanding Shares at December 15, 2010
Common Stock, par value $0.10 per share		315,020,546

FEDEX CORPORATION

INDEX


	PAGE
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Condensed Consolidated Balance Sheets November 30, 2010 and May 31, 2010		3

Condensed Consolidated Statements of Income Three and Six Months Ended November 30, 2010 and 2009		5

Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, 2010 and 2009		6

Notes to Condensed Consolidated Financial Statements		7

Report of Independent Registered Public Accounting Firm		24

ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition		25

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		49

ITEM 4. Controls and Procedures		49

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		50

ITEM 1A. Risk Factors		50

ITEM 6. Exhibits		51

Signature		52

Exhibit Index		E-1

Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
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 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)


	November 30,
	2010		May 31,
	(Unaudited)		2010
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,877	$	1,952
Receivables, less allowances of $172 and $166		4,279		4,163
Spare parts, supplies and fuel, less allowances of $165 and $170		400		389
Deferred income taxes		540		529
Prepaid expenses and other		302		251


Total current assets		7,398		7,284

PROPERTY AND EQUIPMENT, AT COST		32,720		31,302
Less accumulated depreciation and amortization		17,454		16,917


Net property and equipment		15,266		14,385

OTHER LONG-TERM ASSETS
Goodwill		2,224		2,200
Other assets		1,205		1,033


Total other long-term assets		3,429		3,233


	$	26,093	$	24,902

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

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


	November 30,
	2010			May 31,
	(Unaudited)			2010
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	251		$	262
Accrued salaries and employee benefits		1,231			1,146
Accounts payable		1,561			1,522
Accrued expenses		1,820			1,715


Total current liabilities		4,863			4,645

LONG-TERM DEBT, LESS CURRENT PORTION		1,667			1,668

OTHER LONG-TERM LIABILITIES
Deferred income taxes		976			891
Pension, postretirement healthcare and other benefit obligations		1,731			1,705
Self-insurance accruals		969			960
Deferred lease obligations		913			804
Deferred gains, principally related to aircraft transactions		257			267
Other liabilities		156			151


Total other long-term liabilities		5,002			4,778

COMMITMENTS AND CONTINGENCIES

COMMON STOCKHOLDERS’ INVESTMENT
Common stock, $0.10 par value; 800 million shares authorized; 315 million shares issued as of November 30, 2010 and 314 million shares issued as of May 31, 2010		31			31
Additional paid-in capital		2,343			2,261
Retained earnings		14,515			13,966
Accumulated other comprehensive loss		(2,316	)		(2,440	)
Treasury stock, at cost		(12	)		(7	)


Total common stockholders’ investment		14,561			13,811


	$	26,093		$	24,902

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

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


	Three Months Ended						Six Months Ended
	November 30,						November 30,
	2010			2009			2010			2009

REVENUES	$	9,632		$	8,596		$	19,089		$	16,605

OPERATING EXPENSES:
Salaries and employee benefits		3,779			3,424			7,582			6,801
Purchased transportation		1,390			1,155			2,717			2,209
Rentals and landing fees		628			593			1,229			1,171
Depreciation and amortization		502			487			981			982
Fuel		938			744			1,825			1,410
Maintenance and repairs		473			410			990			811
Impairment and other charges		67			—			67			—
Other		1,386			1,212			2,601			2,335

		9,163			8,025			17,992			15,719


OPERATING INCOME		469			571			1,097			886

OTHER INCOME (EXPENSE):
Interest, net		(23	)		(15	)		(41	)		(33	)
Other, net		(9	)		(9	)		(16	)		(12	)

		(32	)		(24	)		(57	)		(45	)


INCOME BEFORE INCOME TAXES		437			547			1,040			841

PROVISION FOR INCOME TAXES		154			202			377			315


NET INCOME	$	283		$	345		$	663		$	526


EARNINGS PER COMMON SHARE:
Basic	$	0.90		$	1.10		$	2.11		$	1.68


Diluted	$	0.89		$	1.10		$	2.09		$	1.68


DIVIDENDS DECLARED PER COMMON SHARE	$	0.12		$	0.11		$	0.36		$	0.33

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

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)


	Six Months Ended
	November 30,
	2010			2009

Operating Activities:
Net income	$	663		$	526
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		981			982
Provision for uncollectible accounts		66			68
Stock-based compensation		56			58
Deferred income taxes and other noncash items		140			50
Changes in assets and liabilities:
Receivables		(79	)		(408	)
Other assets		(53	)		240
Accounts payable and other liabilities		253			304
Other, net		(16	)		(463	)


Cash provided by operating activities		2,011			1,357

Investing Activities:
Capital expenditures		(2,059	)		(1,549	)
Proceeds from asset dispositions and other		7			33


Cash used in investing activities		(2,052	)		(1,516	)

Financing Activities:
Principal payments on debt		(12	)		(625	)
Proceeds from stock issuances		25			24
Excess tax benefit on the exercise of stock options		4			5
Dividends paid		(76	)		(69	)
Other, net		—			(16	)


Cash used in financing activities		(59	)		(681	)


Effect of exchange rate changes on cash		25			13

Net decrease in cash and cash equivalents		(75	)		(827	)
Cash and cash equivalents at beginning of period		1,952			2,292


Cash and cash equivalents at end of period	$	1,877		$	1,465

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

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K (“Annual Report”) for the year ended May 31, 2010. Accordingly, significant accounting policies and other disclosures normally provided have been omitted because such items are disclosed therein.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of November 30, 2010, the results of our operations for the three- and six-month periods ended November 30, 2010 and 2009 and cash flows for the six-month periods ended November 30, 2010 and 2009. Operating results for the three- and six-month periods ended November 30, 2010 are not necessarily indicative of the results that may be expected for the year ending May 31, 2011.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (“FedEx Express”), which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on October 31, 2010. In accordance with applicable labor law, we will continue to operate under our current agreement while we negotiate with our pilots. Contract negotiations with the pilots’ union began in August 2010 and are ongoing. We cannot estimate the financial impact, if any, that the results of these negotiations may have on our future results of operations.

BUSINESS ACQUISITIONS. On November 2, 2010, FedEx Express entered into an agreement to acquire the logistics, distribution and express businesses of AFL Pvt. Ltd. and its affiliate, Unifreight India Pvt. Ltd. Additionally, on December 15, 2010, FedEx entered into an agreement to acquire Servicios Nacionales Mupa, SA de CV (MultiPack), a Mexican domestic express package delivery company. Once completed, these acquisitions will give us more robust domestic transportation and related capabilities in these important global markets. These acquisitions will be funded with cash from operations and are expected to be completed during 2011, subject to customary closing conditions. The financial results of the acquired businesses will be included in the FedEx Express segment from the date of acquisition and will be immaterial to our 2011 results.

BUSINESS REALIGNMENT. In September 2010, we announced the combination of our FedEx Freight and FedEx National LTL operations. This action, which will be effective January 30, 2011, will increase efficiencies, reduce operational costs and provide customers both priority and economy less-than-truckload (“LTL”) freight services across all lengths of haul from one integrated company. The estimated cost of this program is now expected to be $140 to $170 million, down from our initial forecast. The actions to combine these operations began in the second quarter of 2011 and resulted in $86 million of costs incurred during the quarter. Of these costs, $67 million primarily relate to accrued severance expenses and impairment charges on assets to be sold, which were recorded in the “Impairment and other charges” caption of the condensed consolidated income statement. In addition, we recorded $14 million in accelerated depreciation expense due to a change in the estimated useful life of certain assets impacted by the combination of these operations. No amounts recorded related to severance accruals were paid during the quarter and these amounts will be paid during the third quarter of 2011 following the combination of these operations. The cash outlays related to these actions are immaterial and the estimates recorded are not subject to any material risk of change.

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 $22 million for the three-month period ended November 30, 2010 and $56 million for the six-month period ended November 30, 2010. Our stock-based compensation expense was $23 million for the three-month period ended November 30, 2009 and $58 million for the six-month period ended November 30, 2009. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

DIVIDENDS DECLARED PER COMMON SHARE. On November 8, 2010, our Board of Directors declared a dividend of $0.12 per share of common stock. The dividend was paid on December 17, 2010 to stockholders of record as of the close of business on November 22, 2010. 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) Comprehensive Income

The following table provides a reconciliation of net income reported in our financial statements to comprehensive income for the periods ended November 30 (in millions):


	Three Months Ended
	2010		2009

Net income	$	283	$	345
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $11 in 2010 and $3 in 2009		44		28
Amortization of unrealized pension actuarial gains/losses, net of tax of $15 in 2010 and $1 in 2009		26		1


Comprehensive income	$	353	$	374


	Six Months Ended
	2010		2009

Net income	$	663	$	526
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $17 in 2010 and $11 in 2009		72		37
Amortization of unrealized pension actuarial gains/losses, net of tax of $31 in 2010 and $1 in 2009		52		2


Comprehensive income	$	787	$	565

(3) Financing Arrangements

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

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. The revolving credit agreement expires in July 2012. As of November 30, 2010, no commercial paper was outstanding, and the entire $1 billion under the revolving credit facility was available for future borrowings. 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 0.7 to 1.0. Our leverage ratio of adjusted debt to capital was 0.5 at November 30, 2010. We are in compliance with this covenant and all other restrictive covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or borrowing capacity.

Long-term debt, exclusive of capital leases, had a carrying value of $1.8 billion compared with an estimated fair value of $2.1 billion at November 30, 2010 and May 31, 2010. The estimated fair values were determined based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

(4) Computation of Earnings Per Share

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


	Three Months Ended				Six Months Ended
	2010		2009		2010		2009
Basic earnings per common share:
Net earnings allocable to common shares	$	282	$	345	$	661	$	525
Weighted-average common shares		314		312		314		312

Basic earnings per common share	$	0.90	$	1.10	$	2.11	$	1.68


Diluted earnings per common share:
Net earnings allocable to common shares	$	282	$	345	$	661	$	525


Weighted-average common shares		314		312		314		312
Dilutive effect of share-based awards		2		2		2		1

Weighted-average diluted shares		316		314		316		313
Diluted earnings per common share	$	0.89	$	1.10	$	2.09	$	1.68


Anti-dilutive options excluded from diluted earnings per common share		11.2		9.5		11.3		13.5

(5) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended November 30 were as follows (in millions):


	Three Months Ended				Six Months Ended
	2010		2009		2010		2009
U.S. domestic and international pension plans	$	134	$	76	$	275	$	151
U.S. domestic and international defined contribution plans		51		23		105		45
Postretirement healthcare plans		15		10		30		21

	$	200	$	109	$	410	$	217

The three- and six-month periods ended November 30, 2010 reflect higher retirement plans costs due to a significantly lower discount rate used to measure our benefit obligations at our May 31, 2010 measurement date and higher expenses for our 401(k) plans due to the partial reinstatement of the company-matching contributions on January 1, 2010. We will fully restore the company match for all of our 401(k) plans effective January 1, 2011.

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


	Three Months Ended						Six Months Ended
	2010			2009			2010			2009
Pension Plans
Service cost	$	130		$	104		$	260		$	208
Interest cost		225			205			449			411
Expected return on plan assets		(265	)		(238	)		(530	)		(477	)
Recognized actuarial losses and other		44			5			96			9

	$	134		$	76		$	275		$	151


	Three Months Ended						Six Months Ended
	2010			2009			2010			2009
Postretirement Healthcare Plans
Service cost	$	7		$	6		$	15		$	12
Interest cost		9			7			17			15
Recognized actuarial gains and other		(1	)		(3	)		(2	)		(6	)

	$	15		$	10		$	30		$	21

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


	2010		2009
Required	$	158	$	118
Voluntary		—		495

	$	158	$	613

In 2010, we contributed an aggregate of $848 million to these plans. Our U.S. Retirement Plans have ample funds to meet expected benefit payments. Amounts contributed in excess of the minimum required have resulted in a credit balance for funding purposes, which can be used to meet minimum contribution requirements in future years. For the remainder of 2011, we anticipate making required contributions to our U.S. Retirement Plans totaling approximately $322 million, a reduction from 2010 due to the use of a portion of our credit balance.

(6) Business Segment Information

Our reportable segments include the following businesses:


FedEx Express Segment		FedEx Express (express transportation)
		FedEx Trade Networks (global trade services)
		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 Group:
		FedEx Freight (fast-transit LTL freight transportation)
		FedEx National LTL (economical LTL freight transportation)
		FedEx Custom Critical (time-critical transportation)

FedEx Services Segment		FedEx Corporate Services, Inc. (“FedEx Services”) (sales, marketing and information technology functions)
		FedEx Office and Print Services, Inc. (“FedEx Office”) (document and business services and package acceptance)
		FedEx TechConnect, formerly FedEx Customer Information Services (customer service, technical support, billings and collections)

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. The FedEx Services segment includes: FedEx Services, which provides sales, marketing and information technology support to our other companies; FedEx TechConnect, which is responsible for customer service, 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.

Effective December 1, 2010, FedEx Customer Information Services was renamed FedEx TechConnect to better reflect our goal of providing integrated customer-service solutions and revenue systems. In addition to the existing functions performed, FedEx TechConnect will also offer technical support and repair services for non-FedEx equipment, such as computers, scanners, printers and handheld devices, thereby broadening our portfolio of business services.

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 are allocated to FedEx Express and FedEx Ground. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance is evaluated based on the impact of its total allocated net operating costs on our transportation segments. 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.

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments in Management’s Discussion and Analysis of Operations and Financial Condition 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.

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

The following table provides a reconciliation of reportable segment revenues and operating income to our condensed consolidated income statement totals for the periods ended November 30 (in millions):


	Three Months Ended						Six Months Ended
	2010			2009			2010			2009
Revenues
FedEx Express segment	$	5,992		$	5,314		$	11,904		$	10,238
FedEx Ground segment		2,077			1,837			4,038			3,567
FedEx Freight segment		1,221			1,068			2,479			2,050
FedEx Services segment		434			465			849			916
Other and eliminations		(92	)		(88	)		(181	)		(166	)

	$	9,632		$	8,596		$	19,089		$	16,605

Operating Income (Loss)
FedEx Express segment	$	264		$	345		$	621		$	449
FedEx Ground segment		296			238			583			447
FedEx Freight segment		(91	)		(12	)		(107	)		(10	)

	$	469		$	571		$	1,097		$	886

(7) Commitments

As of November 30, 2010, our purchase commitments under various contracts for the remainder of 2011 and annually thereafter were as follows (in millions):


			Aircraft-
	Aircraft⁽¹⁾		Related⁽²⁾		Other⁽³⁾		Total

2011 (remainder)	$	186	$	156	$	459	$	801
2012		986		4		183		1,173
2013		724		—		83		807
2014		480		—		20		500
2015		493		—		12		505
Thereafter		1,431		—		143		1,574


⁽¹⁾		Our obligation to purchase 15 of these aircraft (Boeing 777 Freighters, or B777Fs) is conditioned upon there being no event that causes FedEx Express or its employees to no longer be covered by the Railway Labor Act of 1926, as amended.

⁽²⁾		Primarily aircraft modifications.

⁽³⁾		Primarily vehicles, facilities, advertising and promotions contracts, and for the remainder of 2011, a total of $322 million of quarterly contributions to our U.S. Retirement Plans.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into 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.

We had $610 million in deposits and progress payments as of November 30, 2010 (an increase of $173 million from May 31, 2010) 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, 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 number and type of aircraft we are committed to purchase as of November 30, 2010, with the year of expected delivery:


	B777F⁽¹⁾		B757		Total

2011 (remainder)		1		9		10
2012		6		9		15
2013		6		—		6
2014		3		—		3
2015		3		—		3
Thereafter		10		—		10

Total		29		18		47


⁽¹⁾		Our obligation to purchase 15 of these B777F aircraft is conditioned upon there being no event that causes FedEx Express or its employees to no longer be covered by the Railway Labor Act of 1926, as amended.

A summary of future minimum lease payments under capital leases and noncancelable operating leases with an initial or remaining term in excess of one year at November 30, 2010 is as follows (in millions):


			Operating Leases
			Aircraft				Total
	Capital		and Related		Facilities		Operating
	Leases		Equipment		and Other		Leases

2011 (remainder)	$	4	$	393	$	659	$	1,052
2012		8		504		1,199		1,703
2013		119		499		1,042		1,541
2014		2		473		887		1,360
2015		2		455		807		1,262
Thereafter		14		2,003		5,292		7,295

Total		149	$	4,327	$	9,886	$	14,213


Less amount representing interest		20

Present value of net minimum lease payments	$	129

(8) 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. The following describes the wage-and-hour matters that have been certified as class actions.

In September 2008, in Tidd v. Adecco USA, Kelly Services and FedEx Ground, a Massachusetts federal court conditionally certified a class limited to individuals who were employed by two temporary employment agencies and who worked as temporary pick-up-and-delivery drivers for FedEx Ground in the New England region within the past three years. Potential claimants must voluntarily “opt in” to the lawsuit in order to be considered part of the class. In addition, in the same opinion, the court granted summary judgment in favor of FedEx Ground with respect to the plaintiffs’ claims for unpaid overtime wages. The court has since granted judgment in favor of the other two defendants with respect to the overtime claims. Accordingly, the conditionally certified class of plaintiffs is now limited to a claim of failure to pay minimum wage due under the federal Fair Labor Standards Act.

In April 2009, in Bibo v. FedEx Express, a California federal court granted class certification, certifying several subclasses of FedEx Express couriers in California from April 14, 2006 (the date of the settlement of the Foster class action) to the present. The plaintiffs allege that FedEx Express violated California wage-and-hour laws after the date of the Foster settlement. In particular, the plaintiffs allege, among other things, that they were forced to work “off the clock” and were not provided with required meal breaks or split-shift premiums. The U.S. Court of Appeals for the Ninth Circuit has refused to accept a discretionary appeal of the class certification order at this time.

In September 2009, in Taylor v. FedEx Freight, a California state court granted class certification, certifying a class of all current and former drivers employed by FedEx Freight in California who performed linehaul services since June 2003. The plaintiffs allege, among other things, that they were forced to work “off the clock” and were not provided with required rest or meal breaks. The case has been removed to federal court in California, and trial is currently scheduled for July 2011.

These class certification rulings do not address whether we will ultimately be held liable. We have denied any liability and intend to vigorously defend ourselves in these wage-and-hour lawsuits. Given the nature and status of these lawsuits, we cannot yet determine the amount or a reasonable range of potential loss, if any. However, we do not believe that any loss is probable in these lawsuits.

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 30 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 granted FedEx Ground’s motions for summary judgment and entered judgment in favor of FedEx Ground on all claims in 19 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, Florida, Georgia, Indiana, Kansas (the court’s previous dismissal without prejudice of the nationwide class claim under the Employee Retirement Income Security Act of 1974 based on the plaintiffs’ failure to exhaust administrative remedies has been appealed), Louisiana, Maryland, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, West Virginia and Wisconsin.

In the other nine certified class actions in the multidistrict litigation, the court ruled in favor of FedEx Ground on some of the claims and against FedEx Ground on at least one claim in three of the cases (filed in Kentucky, Nevada and New Hampshire) and then remanded all nine cases back to district court in the following states for resolution of the remaining claims: Arkansas, California, Kentucky, Nevada, New Hampshire, Ohio, Oregon (two certified classes) and Texas.

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 have appealed the verdict.

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.

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 attorneys general in New York and Kentucky each filed lawsuits against FedEx Ground challenging the validity of the contractor model.

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

ATA Airlines. In October 2010, a jury returned a verdict in favor of ATA Airlines in its lawsuit against FedEx Express and awarded damages of $66 million. The suit was filed in Indiana federal court and alleged that we had breached a contract by not including ATA on our 2009 Civil Reserve Air Fleet (CRAF)/Air Mobility Command (AMC) team, which provides cargo and passenger service to the U.S. military. While we do not agree with the verdict or the amount of damages awarded and are appealing the matter, accounting standards require accrual of the $66 million loss.

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

(9) Supplemental Cash Flow Information

The following table presents supplemental cash flow information for the six-month periods ended November 30 (in millions):


	2010			2009
Cash payments for:
Interest (net of capitalized interest)	$	45		$	46


Income taxes	$	340		$	113
Income tax refunds received		(11	)		(275	)

Cash tax payments, net	$	329		$	(162	)

(10) Condensed Consolidating Financial Statements

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

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee $1.2 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the “Guarantor” and “Non-Guarantor” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

CONDENSED CONSOLIDATING BALANCE SHEETS
(UNAUDITED)
November 30, 2010


			Guarantor		Non-guarantor
	Parent		Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,162	$	268	$	503	$	(56	)	$	1,877
Receivables, less allowances		2		3,435		880		(38	)		4,279
Spare parts, supplies, fuel, prepaid expenses and other, less allowances		43		611		48		—			702
Deferred income taxes		—		507		47		(14	)		540

Total current assets		1,207		4,821		1,478		(108	)		7,398

PROPERTY AND EQUIPMENT, AT COST		24		30,389		2,307		—			32,720
Less accumulated depreciation and amortization		18		16,239		1,197		—			17,454

Net property and equipment		6		14,150		1,110		—			15,266

INTERCOMPANY RECEIVABLE		—		—		1,087		(1,087	)		—
GOODWILL		—		1,552		672		—			2,224
INVESTMENT IN SUBSIDIARIES		14,586		2,768		—		(17,354	)		—
OTHER ASSETS		1,496		980		94		(1,365	)		1,205


	$	17,295	$	24,271	$	4,441	$	(19,914	)	$	26,093


LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	250	$	1	$	—	$	—		$	251
Accrued salaries and employee benefits		41		1,010		180		—			1,231
Accounts payable		43		1,216		396		(94	)		1,561
Accrued expenses		75		1,530		215		—			1,820

Total current liabilities		409		3,757		791		(94	)		4,863

LONG-TERM DEBT, LESS CURRENT PORTION		1,000		667		—		—			1,667
INTERCOMPANY PAYABLE		499		588		—		(1,087	)		—
OTHER LONG-TERM LIABILITIES
Deferred income taxes		—		2,355		—		(1,379	)		976
Other liabilities		826		3,055		145		—			4,026

Total other long-term liabilities		826		5,410		145		(1,379	)		5,002

STOCKHOLDERS’ INVESTMENT		14,561		13,849		3,505		(17,354	)		14,561


	$	17,295	$	24,271	$	4,441	$	(19,914	)	$	26,093

CONDENSED CONSOLIDATING BALANCE SHEETS
May 31, 2010


			Guarantor		Non-guarantor
	Parent		Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,310	$	258	$	443	$	(59	)	$	1,952
Receivables, less allowances		1		3,425		782		(45	)		4,163
Spare parts, supplies, fuel, prepaid expenses and other, less allowances		5		581		54		—			640
Deferred income taxes		—		492		37		—			529

Total current assets		1,316		4,756		1,316		(104	)		7,284

PROPERTY AND EQUIPMENT, AT COST		23		29,193		2,086		—			31,302
Less accumulated depreciation and amortization		18		15,801		1,098		—			16,917

Net property and equipment		5		13,392		988		—			14,385

INTERCOMPANY RECEIVABLE		—		—		1,132		(1,132	)		—
GOODWILL		—		1,551		649		—			2,200
INVESTMENT IN SUBSIDIARIES		13,850		2,619		—		(16,469	)		—
OTHER ASSETS		1,527		801		99		(1,394	)		1,033


	$	16,698	$	23,119	$	4,184	$	(19,099	)	$	24,902


LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	250	$	12	$	—	$	—		$	262
Accrued salaries and employee benefits		36		955		155		—			1,146
Accounts payable		8		1,196		422		(104	)		1,522
Accrued expenses		47		1,488		180		—			1,715

Total current liabilities		341		3,651		757		(104	)		4,645

LONG-TERM DEBT, LESS CURRENT PORTION		1,000		668		—		—			1,668
INTERCOMPANY PAYABLE		702		430		—		(1,132	)		—
OTHER LONG-TERM LIABILITIES
Deferred income taxes		—		2,253		32		(1,394	)		891
Other liabilities		844		2,921		122		—			3,887

Total other long-term liabilities		844		5,174		154		(1,394	)		4,778

STOCKHOLDERS’ INVESTMENT		13,811		13,196		3,273		(16,469	)		13,811


	$	16,698	$	23,119	$	4,184	$	(19,099	)	$	24,902

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended November 30, 2010


				Guarantor			Non-guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

REVENUES	$	—		$	8,002		$	1,718		$	(88	)	$	9,632

OPERATING EXPENSES:
Salaries and employee benefits		26			3,216			537			—			3,779
Purchased transportation		—			970			447			(27	)		1,390
Rentals and landing fees		1			564			64			(1	)		628
Depreciation and amortization		—			443			59			—			502
Fuel		—			891			47			—			938
Maintenance and repairs		—			440			33			—			473
Impairment and other charges		—			17			50			—			67
Intercompany charges, net		(58	)		(80	)		138			—			—
Other		31			1,137			278			(60	)		1,386

		—			7,598			1,653			(88	)		9,163


OPERATING INCOME		—			404			65			—			469

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		283			23			—			(306	)		—
Interest, net		(23	)		1			(1	)		—			(23	)
Intercompany charges, net		28			(34	)		6			—			—
Other, net		(5	)		(3	)		(1	)		—			(9	)


INCOME BEFORE INCOME TAXES		283			391			69			(306	)		437

Provision for income taxes		—			138			16			—			154


NET INCOME	$	283		$	253		$	53		$	(306	)	$	283

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended November 30, 2009


				Guarantor			Non-guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

REVENUES	$	—		$	7,240		$	1,442		$	(86	)	$	8,596

OPERATING EXPENSES:
Salaries and employee benefits		26			2,935			463			—			3,424
Purchased transportation		—			837			341			(23	)		1,155
Rentals and landing fees		1			534			58			—			593
Depreciation and amortization		1			436			50			—			487
Fuel		—			707			37			—			744
Maintenance and repairs		—			379			31			—			410
Intercompany charges, net		(53	)		(56	)		109			—			—
Other		25			995			255			(63	)		1,212

		—			6,767			1,344			(86	)		8,025


OPERATING INCOME		—			473			98			—			571

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		345			42			—			(387	)		—
Interest, net		(23	)		12			(4	)		—			(15	)
Intercompany charges, net		28			(36	)		8			—			—
Other, net		(5	)		(4	)		—			—			(9	)


INCOME BEFORE INCOME TAXES		345			487			102			(387	)		547

Provision for income taxes		—			167			35			—			202


NET INCOME	$	345		$	320		$	67		$	(387	)	$	345

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended November 30, 2010


				Guarantor			Non-guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

REVENUES	$	—		$	15,895		$	3,364		$	(170	)	$	19,089

OPERATING EXPENSES:
Salaries and employee benefits		64			6,465			1,053			—			7,582
Purchased transportation		—			1,890			879			(52	)		2,717
Rentals and landing fees		2			1,101			128			(2	)		1,229
Depreciation and amortization		—			875			106			—			981
Fuel		—			1,732			93			—			1,825
Maintenance and repairs		—			923			67			—			990
Impairment and other charges		—			17			50			—			67
Intercompany charges, net		(129	)		(172	)		301			—			—
Other		63			2,123			531			(116	)		2,601

		—			14,954			3,208			(170	)		17,992


OPERATING INCOME		—			941			156			—			1,097

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		663			49			—			(712	)		—
Interest, net		(47	)		9			(3	)		—			(41	)
Intercompany charges, net		55			(69	)		14			—			—
Other, net		(8	)		(7	)		(1	)		—			(16	)


INCOME BEFORE INCOME TAXES		663			923			166			(712	)		1,040

Provision for income taxes		—			334			43			—			377


NET INCOME	$	663		$	589		$	123		$	(712	)	$	663

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended November 30, 2009


				Guarantor			Non-guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

REVENUES	$	—		$	14,091		$	2,670		$	(156	)	$	16,605

OPERATING EXPENSES:
Salaries and employee benefits		49			5,828			924			—			6,801
Purchased transportation		—			1,633			612			(36	)		2,209
Rentals and landing fees		2			1,054			116			(1	)		1,171
Depreciation and amortization		1			874			107			—			982
Fuel		—			1,338			72			—			1,410
Maintenance and repairs		—			751			60			—			811
Intercompany charges, net		(100	)		(29	)		129			—			—
Other		48			1,925			481			(119	)		2,335

		—			13,374			2,501			(156	)		15,719


OPERATING INCOME		—			717			169			—			886

OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries		526			76			—			(602	)		—
Interest, net		(52	)		26			(7	)		—			(33	)
Intercompany charges, net		59			(75	)		16			—			—
Other, net		(7	)		(4	)		(1	)		—			(12	)


INCOME BEFORE INCOME TAXES		526			740			177			(602	)		841

Provision for income taxes		—			255			60			—			315


NET INCOME	$	526		$	485		$	117		$	(602	)	$	526

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended November 30, 2010


				Guarantor			Non-guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	(6	)	$	1,755		$	259		$	3		$	2,011

INVESTING ACTIVITIES
Capital expenditures		(1	)		(1,968	)		(90	)		—			(2,059	)
Proceeds from asset dispositions and other		—			6			1			—			7


CASH USED IN INVESTING ACTIVITIES		(1	)		(1,962	)		(89	)		—			(2,052	)

FINANCING ACTIVITIES
Net transfers from (to) Parent		(94	)		100			(6	)		—			—
Payment on loan between subsidiaries		—			113			(113	)		—			—
Intercompany dividends		—			5			(5	)		—			—
Principal payments on debt		—			(12	)		—			—			(12	)
Proceeds from stock issuances		25			—			—			—			25
Excess tax benefit on the exercise of stock options		4			—			—			—			4
Dividends paid		(76	)		—			—			—			(76	)


CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(141	)		206			(124	)		—			(59	)


Effect of exchange rate changes on cash		—			11			14			—			25

Net (decrease) increase in cash and cash equivalents		(148	)		10			60			3			(75	)
Cash and cash equivalents at beginning of period		1,310			258			443			(59	)		1,952


Cash and cash equivalents at end of period	$	1,162		$	268		$	503		$	(56	)	$	1,877

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended November 30, 2009


				Guarantor			Non-guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	(333	)	$	1,373		$	353		$	(36	)	$	1,357

INVESTING ACTIVITIES
Capital expenditures		—			(1,446	)		(103	)		—			(1,549	)
Proceeds from asset dispositions and other		—			32			1			—			33


CASH USED IN INVESTING ACTIVITIES		—			(1,414	)		(102	)		—			(1,516	)

FINANCING ACTIVITIES
Net transfers from (to) Parent		54			55			(109	)		—			—
Payment on loan between subsidiaries		—			35			(35	)		—			—
Intercompany dividends		—			70			(70	)		—			—
Principal payments on debt		(500	)		(125	)		—			—			(625	)
Proceeds from stock issuances		24			—			—			—			24
Excess tax benefit on the exercise of stock options		5			—			—			—			5
Dividends paid		(69	)		—			—			—			(69	)
Other, net		(16	)		—			—			—			(16	)


CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(502	)		35			(214	)		—			(681	)


Effect of exchange rate changes on cash		—			6			7			—			13

Net (decrease) increase in cash and cash equivalents		(835	)		—			44			(36	)		(827	)
Cash and cash equivalents at beginning of period		1,768			272			304			(52	)		2,292


Cash and cash equivalents at end of period	$	933		$	272		$	348		$	(88	)	$	1,465

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of November 30, 2010, and the related condensed consolidated statements of income for the three-month and six-month periods ended November 30, 2010 and 2009 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2010 and 2009. 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, 2010, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for the year then ended not presented herein, and in our report dated July 15, 2010, 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, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee
December 17, 2010

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, 2010 (“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 provider of small-package ground delivery services; and the FedEx Freight LTL Group, which comprises the FedEx Freight and FedEx National LTL businesses of FedEx Freight Corporation, a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments. Our FedEx Services segment provides sales, marketing, information technology and customer service 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”). See “Reportable Segments” for further discussion.

The key indicators necessary to understand our operating results include:

•

the overall customer demand for our various services;

•

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.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2011 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 three- and six-month periods ended November 30:


	Three Months Ended						Percent			Six Months Ended						Percent
	2010			2009			Change			2010			2009			Change
Revenues	$	9,632		$	8,596			12		$	19,089		$	16,605			15

Operating income		469			571			(18	)		1,097			886			24

Operating margin		4.9	%		6.6	%		(170	)bp		5.7	%		5.3	%		40	bp

Net income	$	283		$	345			(18	)	$	663		$	526			26

Diluted earnings per share	$	0.89		$	1.10			(19	)	$	2.09		$	1.68			24

The following table shows changes in revenues and operating income by reportable segment for the three- and six-month periods ended November 30, 2010 compared to November 30, 2009 (dollars in millions):


													Change in						Percent change in
	Change in						Percent change in						Operating Income						Operating Income
	Revenues						Revenue						(Loss)						(Loss)
	Three			Six			Three			Six			Three			Six			Three			Six
	Months			Months			Months			Months			Months			Months			Months			Months
	Ended			Ended			Ended			Ended			Ended			Ended			Ended			Ended
FedEx Express segment	$	678		$	1,666			13			16		$	(81	)	$	172			(23	)		38
FedEx Ground segment		240			471			13			13			58			136			24			30
FedEx Freight segment		153			429			14			21			(79	)		(97	)		(658	)		(970	)
FedEx Services segment		(31	)		(67	)		(7	)		(7	)		—			—			—			—
Other and eliminations		(4	)		(15	)	NM			NM				—			—			—			—


	$	1,036		$	2,484			12			15		$	(102	)	$	211			(18	)		24

Overview

Despite continued growth in revenue driven by solid demand and yield improvements in our transportation segments, operating income and operating margin decreased in the second quarter of 2011. Two special charges incurred during the quarter and higher operating expenses significantly impacted earnings.

Our second quarter 2011 results included $86 million in costs related to the previously announced combination of our FedEx Freight and FedEx National LTL operations (discussed below) and a $66 million reserve associated with an adverse jury decision in the ATA Airlines lawsuit against FedEx Express. The net impact on second quarter earnings of these two charges was $0.27 per diluted share after considering the effect of variable incentive compensation accruals. In addition, our prior year second quarter results included a $54 million benefit from plan design changes to a self insurance program at FedEx Express from a remeasurement of the plan liabilities. The net benefit of this credit to last year’s second quarter earnings per diluted share was $0.05 after considering the effect of variable incentive compensation accruals.

In addition to the above charges, our 2011 second quarter earnings were negatively impacted by higher compensation and benefits due to reinstatement of compensation programs curtailed during the recession and higher pension costs. Higher maintenance and repairs expenses also reduced our earnings in the second quarter of 2011. A positive year-over-year net benefit from changes in fuel surcharges and fuel prices partially offset the impact of these items on our second quarter earnings.

Our revenues increased for the second quarter and first half of 2011 due to higher volumes across all of our transportation segments, particularly in FedEx International Priority (“IP”) package shipments at FedEx Express. FedEx Express U.S. domestic package and FedEx Ground yields improved during the second quarter and first half of 2011 due to higher package rates and fuel surcharges. FedEx Express IP package yields improved during the second quarter and first half of 2011 due to higher package weights and fuel surcharges.

In September 2010, we announced the combination of our FedEx Freight and FedEx National LTL operations. This action, which will be effective January 30, 2011, will increase efficiencies, reduce operational costs and provide customers both priority and economy LTL freight services across all lengths of haul from one integrated company. The estimated cost of this program is now expected to be $140 to $170 million, down from our initial forecast. The actions to combine these operations began in the second quarter of 2011 and resulted in $86 million of costs incurred during the quarter. Of these costs, $67 million primarily relate to accrued severance expenses and impairment charges on assets to be sold, which were recorded in the “Impairment and other charges” caption of the condensed consolidated income statement. In addition, we recorded $14 million in accelerated depreciation expense due to a change in the estimated useful life of certain assets impacted by the combination of these operations.

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


⁽¹⁾		Package statistics do not include the operations of FedEx SmartPost.

The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected yield trends over the five most recent quarters:


⁽¹⁾		Package statistics do not include the operations of FedEx SmartPost.

Revenue

Revenues increased 12% during the second quarter of 2011 and 15% for the first half of 2011 due to volume and yield increases across all of our transportation segments. At FedEx Express, IP package volume increased 11% in the second quarter of 2011 and 15% in the first half of 2011 led by growth in Asia, while U.S. domestic package yields increased 5% in the second quarter of 2011 and 6% in the first half of 2011 primarily due to a higher rate per pound and higher fuel surcharges. At the FedEx Ground segment, revenues increased 13% for the second quarter and first half of 2011 due to volume and yield growth at both FedEx Ground and FedEx SmartPost. Revenues at FedEx Freight increased 14% during the second quarter of 2011 and 21% for the first half of 2011 driven by growth in average daily LTL shipments and higher yield. Our ongoing yield management plan to improve pricing in our LTL businesses had a positive impact during the quarter, as the performance of the FedEx Freight segment is continuing to stabilize, with yields increasing 7% year over year in the second quarter of 2011 and improving 5% from the first quarter of 2011.

Operating Income

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


	Three Months Ended				Six Months Ended
	2010		2009		2010		2009
Operating expenses:
Salaries and employee benefits	$	3,779	$	3,424	$	7,582	$	6,801
Purchased transportation		1,390		1,155		2,717		2,209
Rentals and landing fees		628		593		1,229		1,171
Depreciation and amortization		502		487		981		982
Fuel		938		744		1,825		1,410
Maintenance and repairs		473		410		990		811
Impairment and other charges⁽¹⁾		67		—		67		—
Other		1,386		1,212		2,601		2,335

Total operating expenses	$	9,163	$	8,025	$	17,992	$	15,719


⁽¹⁾		Represents charges associated with the combination of FedEx Freight and FedEx National LTL operations, which will be effective January 30, 2011.


	Percent of Revenue						Percent of Revenue
	Three Months Ended 2010			Three Months Ended 2009			Six Months Ended 2010			Six Months Ended 2009
Operating expenses:
Salaries and employee benefits		39.2	%		39.8	%		39.7	%		41.0	%
Purchased transportation		14.4			13.4			14.2			13.3
Rentals and landing fees		6.5			6.9			6.4			7.0
Depreciation and amortization		5.2			5.7			5.2			5.9
Fuel		9.8			8.7			9.6			8.5
Maintenance and repairs		4.9			4.8			5.2			4.9
Impairment and other charges		0.7			—			0.4			—
Other		14.4			14.1			13.6			14.1

Total operating expenses		95.1			93.4			94.3			94.7


Operating margin		4.9	%		6.6	%		5.7	%		5.3	%

Operating income and operating margin declined for the second quarter of 2011 due to the charges described above, as well as higher salaries and employee benefits. Operating income and operating margin increased for the first half of 2011, as increased revenues more than offset the higher expenses noted below.

Salaries and employee benefits increased 10% in the second quarter and 11% in the first half of 2011 due to the reinstatement of merit salary increases, increases in pension costs, the partial reinstatement of 401(k) company-matching contributions effective January 1, 2010 and increases in variable incentive compensation. Purchased transportation costs increased 20% in the second quarter of 2011 and 23% in the first half of 2011 due to volume growth at all of our transportation segments, as well as higher rates paid to our independent contractors at FedEx Ground. Maintenance and repairs expense increased 15% in the second quarter of 2011 and 22% in the first half of 2011 primarily due to an increase in aircraft maintenance events as a result of timing and higher utilization of our fleet driven by increased volumes.

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

Fuel expense increased 26% during the second quarter of 2011 and 29% for the first half of 2011 due to increases in the average price per gallon of fuel and fuel consumption driven by volume increases. Fuel surcharges more than offset incremental fuel costs for the second quarter and first half of 2011, based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared to changes in fuel surcharges.

Our analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express 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 purchased, 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 second quarter and first half of 2011 and 2010 in the accompanying discussions of each of our transportation segments.

Income Taxes

Our effective tax rate was 35.3% for the second quarter of 2011 and 36.3% for the first half of 2011, compared with 36.9% for the second quarter of 2010 and 37.4% for the first half of 2010. Our lower effective tax rates in the second quarter and first half of 2011 were driven primarily by the benefit derived from increases in international earnings, which are generally taxed at lower rates than in the U.S. For the remainder of 2011, we expect the effective tax rate to be 36.0% to 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

As of November 30, 2010, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2010. The Internal Revenue Service is currently auditing our 2007 through 2009 consolidated U.S. income tax returns.

We file income tax returns in the U.S. and various U.S. states and foreign jurisdictions. It is reasonably possible that certain U.S. federal, U.S. state and foreign jurisdiction 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. An estimate of the range of the change cannot be made at this time. The expected impact of any changes would not be material to our consolidated financial statements.

Business Acquisitions

On November 2, 2010, FedEx Express entered into an agreement to acquire the logistics, distribution and express businesses of AFL Pvt. Ltd. and its affiliate, Unifreight India Pvt. Ltd. Additionally, on December 15, 2010, FedEx entered into an agreement to acquire Servicios Nacionales Mupa, SA de CV (MultiPack), a Mexican domestic express package delivery company. Once completed, these acquisitions will give us more robust domestic transportation and related capabilities in these important global markets. These acquisitions will be funded with cash from operations and are expected to be completed during 2011, subject to customary closing conditions. The financial results of the acquired businesses will be included in the FedEx Express segment from the date of acquisition and will be immaterial to our 2011 results.

Outlook

We anticipate volume growth at FedEx Express and FedEx Ground and positive yield trends across our transportation segments during the second half of 2011. Our on-going yield improvement activities, including general rate increases and changes to our dimensional weight pricing, will continue to be a major focus in the second half of 2011. However, as we continue to take actions to improve yields within our FedEx Freight segment, we expect that segment’s volume growth to moderate as we transition lower yielding volumes out of our LTL network. We expect revenue growth to be partially offset by cost increases associated with higher aircraft maintenance, increased pension costs and continued investments in our employees, as we complete the reinstatement of compensation and benefit programs curtailed during the recession. We will also incur additional charges associated with our realignment of the FedEx Freight segment. Our expectations are based on a continued recovery in global economic conditions, moderate near-term growth in the U.S. and stable fuel prices.

For the remainder of 2011, we will continue to make strategic investments in aircraft, including the Boeing 777 Freighter (“B777F”) and Boeing 757 (“B757”) aircraft, which are substantially more fuel-efficient per unit than the aircraft types that they are replacing. We are committed to investing in critical long-term strategic projects focused on enhancing and broadening our service offerings to position us for stronger growth as global economic conditions continue to improve. For additional details on key 2011 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.

The pilots of FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on October 31, 2010. In accordance with applicable labor law, we will continue to operate under our current agreement while we negotiate with our pilots. Contract negotiations with the pilots’ union began in August 2010 and are ongoing. We cannot estimate the financial impact, if any, that the results of these negotiations may have on our future results of operations.

As described in Note 8 of the accompanying unaudited condensed consolidated financial statements and the “Independent Contractor Matters” 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. We believe that there is no new accounting guidance adopted but not yet effective 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.

REPORTABLE SEGMENTS

FedEx Express, FedEx Ground and the FedEx Freight LTL Group 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 (global trade services)
		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 Group:
		FedEx Freight (fast-transit LTL freight transportation)
		FedEx National LTL (economical LTL freight transportation)
		FedEx Custom Critical (time-critical transportation)

FedEx Services Segment		FedEx Services (sales, marketing and information technology functions)
		FedEx Office (document and business services and package acceptance)
		FedEx TechConnect, formerly FedEx Customer Information Services (customer service, technical support, billings and collections)

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.

Effective August 1, 2009, approximately 3,600 employees (predominantly from the FedEx Freight segment) were transferred to entities within the FedEx Services segment. This internal reorganization further centralized most customer support functions, such as sales, customer service and information technology, into our shared services organizations. While the reorganization had no impact on the net operating results of any of our transportation segments, the net intercompany charges to our FedEx Freight segment increased significantly with corresponding decreases to other expense captions, such as salaries and employee benefits. The impact of this internal reorganization to the expense captions in our other segments was immaterial.

OTHER INTERSEGMENT TRANSACTIONS

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 three- and six-month periods ended November 30:


	Three Months Ended						Percent			Six Months Ended						Percent
	2010			2009			Change			2010			2009			Change
Revenues:
Package:
U.S. overnight box	$	1,489		$	1,372			9		$	2,980		$	2,703			10
U.S. overnight envelope		416			395			5			848			803			6
U.S. deferred		666			626			6			1,327			1,227			8

Total U.S. domestic package revenue		2,571			2,393			7			5,155			4,733			9

International priority		2,009			1,763			14			3,983			3,357			19
International domestic ⁽¹⁾		165			151			9			313			285			10

Total package revenue		4,745			4,307			10			9,451			8,375			13
Freight:
U.S.		530			490			8			1,053			939			12
International priority		435			321			36			841			581			45
International airfreight		69			63			10			139			124			12

Total freight revenue		1,034			874			18			2,033			1,644			24
Other ⁽²⁾		213			133			60			420			219			92

Total revenues		5,992			5,314			13			11,904			10,238			16
Operating expenses:
Salaries and employee benefits		2,253			2,036			11			4,511			4,079			11
Purchased transportation		388			283			37			757			538			41
Rentals and landing fees		427			396			8			830			781			6
Depreciation and amortization		265			251			6			520			503			3
Fuel		802			638			26			1,556			1,209			29
Maintenance and repairs		320			267			20			672			528			27
Intercompany charges		512			470			9			1,025			939			9
Other		761			628			21			1,412			1,212			17

Total operating expenses		5,728			4,969			15			11,283			9,789			15

Operating income	$	264		$	345			(23	)	$	621		$	449			38


Operating margin		4.4	%		6.5	%		(210	)bp		5.2	%		4.4	%		80	bp


⁽¹⁾		International domestic revenues include our international intra-country domestic express operations.

⁽²⁾		Other revenues include FedEx Trade Networks and, beginning in the second quarter of 2010, FedEx SupplyChain Systems.


	Percent of Revenue						Percent of Revenue
	Three			Three			Six			Six
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	2010			2009			2010			2009
Operating expenses:
Salaries and employee benefits		37.6	%		38.3	%		37.9	%		39.8	%
Purchased transportation		6.5			5.3			6.3			5.3
Rentals and landing fees		7.1			7.5			7.0			7.6
Depreciation and amortization		4.4			4.7			4.4			4.9
Fuel		13.4			12.0			13.1			11.8
Maintenance and repairs		5.3			5.0			5.6			5.2
Intercompany charges		8.6			8.9			8.6			9.2
Other		12.7			11.8			11.9			11.8

Total operating expenses		95.6			93.5			94.8			95.6


Operating margin		4.4	%		6.5	%		5.2	%		4.4	%

The following table compares selected statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30:


	Three Months Ended				Percent		Six Months Ended				Percent
	2010		2009		Change		2010		2009		Change
Package Statistics⁽¹⁾
Average daily package volume (ADV):
U.S. overnight box		1,196		1,154		4		1,182		1,141		4
U.S. overnight envelope		626		606		3		625		611		2
U.S. deferred		865		858		1		855		840		2

Total U.S. domestic ADV		2,687		2,618		3		2,662		2,592		3

International priority		585		529		11		575		502		15
International domestic⁽²⁾		354		338		5		339		315		8

Total ADV		3,626		3,485		4		3,576		3,409		5

Revenue per package (yield):
U.S. overnight box	$	19.75	$	18.87		5	$	19.70	$	18.51		6
U.S. overnight envelope		10.54		10.36		2		10.59		10.27		3
U.S. deferred		12.24		11.58		6		12.12		11.40		6
U.S. domestic composite		15.19		14.51		5		15.13		14.26		6
International priority		54.54		52.88		3		54.12		52.27		4
International domestic⁽²⁾		7.39		7.09		4		7.22		7.07		2
Composite package yield		20.77		19.62		6		20.65		19.19		8
Freight Statistics⁽¹⁾
Average daily freight pounds:
U.S.		7,459		7,193		4		7,179		6,883		4
International priority		3,320		2,571		29		3,171		2,353		35
International airfreight		1,243		1,207		3		1,242		1,253		(1	)

Total average daily freight pounds		12,022		10,971		10		11,592		10,489		11

Revenue per pound (yield):
U.S.	$	1.13	$	1.08		5	$	1.15	$	1.07		7
International priority		2.08		1.98		5		2.07		1.93		7
International airfreight		0.88		0.83		6		0.87		0.77		13
Composite freight yield		1.36		1.26		8		1.37		1.22		12


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

⁽²⁾		International domestic statistics include our international intra-country domestic express operations.

FedEx Express Segment Revenues

FedEx Express segment revenues increased 13% in the second quarter of 2011 and 16% in the first half of 2011 primarily due to an increase in IP package and freight volume, as well as higher U.S. domestic package and IP yields. IP package volume increased in the second quarter and first half of 2011 primarily due to exports from Asia. IP freight volume increased in the second quarter of 2011 primarily due to exports from Europe and Asia and during the first half of 2011 primarily due to exports from Asia.

For the second quarter of 2011, U.S. domestic package yields increased due to a higher rate per pound, higher fuel surcharges and increased package weights. IP package yields increased due to increased package weights and higher fuel surcharges.

The increase in U.S. domestic package yields in the first half of 2011 was due to higher fuel surcharges, as well as a higher rate per pound and increased package weights. IP package yields increased in the first half of 2011 due to increased package weights and higher fuel surcharges, partially offset by a lower rate per pound.

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 three- and six-month periods ended November 30:


	Three Months Ended						Six Months Ended
	2010			2009			2010			2009
U.S. Domestic and Outbound Fuel Surcharge:
Low		7.00	%		5.50	%		7.00	%		1.00	%
High		8.50			7.50			10.00			7.50
Weighted-average		7.82			6.35			8.17			4.81

International Fuel Surcharges:
Low		7.00			5.50			7.00			1.00
High		13.50			12.50			14.00			12.50
Weighted-average		10.59			9.57			10.83			8.50

On September 29, 2010, we announced a 5.9% average list price increase effective January 3, 2011, on FedEx Express U.S. domestic and U.S. outbound express package and freight shipments and made various changes to other surcharges, while we lowered our fuel surcharge index by two percentage points. In addition, FedEx Express will implement a change to the dimensional weight volumetric divisor for U.S. domestic services. In September 2009, we announced a 5.9% average list price increase effective January 4, 2010 on FedEx Express U.S. domestic and U.S. outbound express package and freight shipments and made various changes to other surcharges, while we lowered our fuel surcharge index by two percentage points. Furthermore, in connection with these changes, the structure of the FedEx Express fuel surcharge table was modified.

FedEx Express Segment Operating Income

FedEx Express segment operating income and operating margin decreased during the second quarter of 2011. The year-over-year comparison of the results was impacted by a $66 million legal reserve associated with the ATA Airlines lawsuit (see Note 8 of the accompanying condensed consolidated financial statements) recorded during the second quarter of 2011, and the inclusion in the second quarter of 2010 of a benefit of $54 million for plan design changes to a self-insurance program, which required a remeasurement of the plan liabilities. The combination of these two items significantly impacted year-over-year operating margin comparisons. In addition, the reinstatement of certain employee compensation programs, increased aircraft maintenance costs and higher pension expenses offset the benefit of increased revenues and the positive net impact of higher fuel surcharges.

FedEx Express segment operating income and operating margin increased in the first half of 2011 as a result of volume and yield growth, particularly in higher-margin IP package and freight services, along with a benefit from the net impact of higher fuel surcharges. However, the first half was also negatively impacted by the higher expenses noted above.

Salaries and employee benefits expense increased 11% in both the second quarter of 2011 and first half of 2011 due to volume-related increases in labor hours, higher pension costs, and the reinstatement of several employee compensation programs, including higher variable incentive compensation, merit salary increases and 401(k) company-matching contributions. Purchased transportation costs increased 37% in the second quarter of 2011 and 41% in the first half of 2011 due to costs associated with the expansion of our freight forwarding business at FedEx Trade Networks and IP package and freight volume growth. Maintenance and repairs expense increased 20% in the second quarter of 2011 and 27% in the first half of 2011 primarily due to an increase in aircraft maintenance expenses as a result of timing of maintenance events and higher utilization of our fleet driven by increased volumes. Intercompany charges increased 9% in the second quarter and first half of 2011 primarily due to higher marketing and sales costs.

Fuel costs increased 26% in the second quarter of 2011 and 29% in the first half of 2011 due to increases in the average price per gallon of fuel and fuel consumption driven by volume increases. 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 positive impact on operating income in both the second quarter and first half of 2011. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express services.

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 three- and six-month periods ended November 30:


	Three Months Ended						Percent			Six Months Ended						Percent
	2010			2009			Change			2010			2009			Change
Revenues:
FedEx Ground	$	1,916		$	1,712			12		$	3,755		$	3,349			12
FedEx SmartPost		161			125			29			283			218			30

Total revenues		2,077			1,837			13			4,038			3,567			13


Operating expenses:
Salaries and employee benefits		318			288			10			625			570			10
Purchased transportation		845			733			15			1,627			1,426			14
Rentals		67			63			6			129			121			7
Depreciation and amortization		83			83			—			165			168			(2	)
Fuel		3			2		NM				4			3		NM
Maintenance and repairs		42			40			5			86			78			10
Intercompany charges		227			196			16			448			380			18
Other		196			194			1			371			374			(1	)

Total operating expenses		1,781			1,599			11			3,455			3,120			11


Operating income	$	296		$	238			24		$	583		$	447			30


Operating margin		14.3	%		13.0	%		130	bp		14.4	%		12.5	%		190	bp

Average daily package volume
FedEx Ground		3,843			3,602			7			3,686			3,454			7
FedEx SmartPost		1,484			1,265			17			1,287			1,135			13

Revenue per package (yield)
FedEx Ground	$	7.89		$	7.54			5		$	7.94		$	7.56			5
FedEx SmartPost	$	1.72		$	1.57			10		$	1.70		$	1.50			13


	Percent of Revenue						Percent of Revenue
	Three			Three			Six			Six
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	2010			2009			2010			2009
Operating expenses:
Salaries and employee benefits		15.3	%		15.7	%		15.5	%		16.0	%
Purchased transportation		40.7			39.9			40.3			40.0
Rentals		3.2			3.4			3.2			3.4
Depreciation and amortization		4.0			4.5			4.1			4.7
Fuel		0.1			0.1			0.1			0.1
Maintenance and repairs		2.0			2.2			2.1			2.2
Intercompany charges		10.9			10.7			11.1			10.6
Other		9.5			10.5			9.2			10.5

Total operating expenses		85.7			87.0			85.6			87.5


Operating margin		14.3	%		13.0	%		14.4	%		12.5	%

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 13% in the second quarter and first half of 2011 due to volume and yield growth at both FedEx Ground and FedEx SmartPost.

FedEx Ground average daily volume increased during the second quarter of 2011 and first half of 2011 due to market share gains resulting from continued growth in our commercial business and our FedEx Home Delivery service. Yield improvement at FedEx Ground during the second quarter and first half of 2011 was primarily due to higher fuel surcharges, rate increases and higher extra service revenue.

FedEx SmartPost volumes grew 17% during the second quarter of 2011 and 13% in the first half of 2011 as a result of growth in e-commerce, gains in market share and the introduction of new service offerings. Yields at FedEx SmartPost increased 10% during the second quarter of 2011 and 13% in the first half of 2011 primarily due to lower postage costs as a result of increased deliveries to United States Postal Service (“USPS”) final destination facilities and higher fuel surcharges. 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 prices for a gallon of diesel fuel, as published by the Department of Energy. Our fuel surcharge ranged as follows for the three- and six-month periods ended November 30:


	Three Months Ended						Six Months Ended
	2010			2009			2010			2009
Low		5.50	%		3.75	%		5.50	%		2.75	%
High		6.00			4.00			6.00			4.00
Weighted-average		5.66			3.92			5.74			3.47

On December 3, 2010, we announced a 4.9% average list price increase effective January 3, 2011 for FedEx Ground and FedEx Home Delivery services. The full average rate increase of 5.9% will be partially offset by adjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surcharge by one percentage point. FedEx Ground will make additional changes to dimensional weight charges and surcharges, and FedEx SmartPost rates will also increase. In December 2009, we announced a 4.9% average list price increase and made various changes to other surcharges, including modifying the fuel surcharge table, effective January 4, 2010 on FedEx Ground shipments.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income and operating margin increased during the second quarter and first half of 2011 due to volume and yield growth. Purchased transportation costs increased 15% during the second quarter and 14% in the first half of 2011 primarily as a result of volume growth and higher rates paid to our independent contractors. The increase in salaries and employee benefits expense during the second quarter and first half of 2011 was primarily due to increased staffing at FedEx Ground and FedEx SmartPost to support volume growth and higher accruals under variable incentive compensation programs. Intercompany charges increased in the second quarter and first half of 2011 primarily due to higher allocated information technology costs.

Independent Contractor Matters

FedEx Ground relies on owner-operators to conduct its linehaul and pickup-and-delivery operations, as the use of independent contractors is well suited to the needs of the ground delivery business and its customers. Although FedEx Ground believes its relationship with independent contractors is generally excellent, the company is involved in numerous lawsuits and other proceedings (such as state tax audits or other administrative challenges) where the classification of the contractors is at issue. For a description of these proceedings, see Note 8 of the accompanying unaudited condensed consolidated financial statements.

FedEx Ground has made changes to its relationships with contractors that, among other things, provide incentives for improved service and enhanced regulatory and other compliance by the contractors. For a description of these changes, see our Annual Report.

We anticipate continuing changes to FedEx Ground’s relationships with its contractors, the nature, timing and amount of which are dependent on the outcome of numerous future events. We do not believe that any of these changes will impair our ability to operate and profitably grow our FedEx Ground business.

FEDEX FREIGHT SEGMENT

The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating loss and operating margin (dollars in millions) and selected statistics for the three- and six-month periods ended November 30:


	Three Months Ended						Percent			Six Months Ended						Percent
	2010			2009			Change			2010			2009			Change
Revenues	$	1,221		$	1,068			14		$	2,479		$	2,050			21
Operating expenses:
Salaries and employee benefits		584			513			14			1,184			1,020			16
Purchased transportation		185			168			10			389			286			36
Rentals		31			27			15			65			56			16
Depreciation and amortization		62			46			35			110			101			9
Fuel		133			104			28			264			198			33
Maintenance and repairs		45			35			29			91			69			32
Impairment and other charges ⁽¹⁾		67			—		NM				67			—		NM
Intercompany charges ⁽²⁾		108			98			10			217			150			45
Other		97			89			9			199			180			11

Total operating expenses		1,312			1,080			21			2,586			2,060			26


Operating loss	$	(91	)	$	(12	)		(658	)	$	(107	)	$	(10	)		(970	)


Operating margin		(7.5	%)		(1.1	%)		(640	)bp		(4.3	%)		(0.5	%)		(380	)bp

Average daily LTL shipments (in thousands)		89.4			82.9			8			90.6			77.0			18
Weight per LTL shipment (lbs)		1,115			1,128			(1	)		1,125			1,119			1
LTL yield (revenue per hundredweight)	$	18.27		$	17.09			7		$	17.77		$	17.45			2


⁽¹⁾		Includes severance, impairment and other charges associated with the combination of FedEx Freight and FedEx National LTL operations, which will be effective January 30, 2011.

⁽²⁾		Certain functions were transferred from the FedEx Freight segment to FedEx Services and FedEx TechConnect effective August 1, 2009. For 2010, the costs associated with these functions, previously a direct charge, were allocated to the FedEx Freight segment through intercompany allocations.


	Percent of Revenue						Percent of Revenue
	Three			Three			Six			Six
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	2010			2009			2010			2009
Operating expenses:
Salaries and employee benefits		47.8	%		48.0	%		47.8	%		49.8	%
Purchased transportation		15.2			15.7			15.7			13.9
Rentals		2.5			2.5			2.6			2.7
Depreciation and amortization		5.1			4.3			4.4			4.9
Fuel		10.9			9.8			10.6			9.7
Maintenance and repairs		3.7			3.3			3.7			3.4
Impairment and other charges⁽¹⁾		5.5			—			2.7			—
Intercompany charges⁽²⁾		8.9			9.2			8.8			7.3
Other		7.9			8.3			8.0			8.8

Total operating expenses		107.5			101.1			104.3			100.5


Operating margin		(7.5)	%		(1.1)	%		(4.3)	%		(0.5)	%


⁽¹⁾		Includes charges associated with the combination of FedEx Freight and FedEx National LTL operations, which will be effective January 30, 2011.

⁽²⁾		Certain functions were transferred from the FedEx Freight segment to FedEx Services and FedEx TechConnect effective August 1, 2009. For 2010, the costs associated with these functions, previously a direct charge, were allocated to the FedEx Freight segment through intercompany allocations.

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 14% during the second quarter of 2011 and 21% in the first half of 2011 as a result of higher average daily LTL shipments and higher LTL yield. Discounted pricing in contracts signed during the second half of fiscal 2010 led to an increase in average daily LTL shipments of 8% for the second quarter of 2011 and 18% for the first half of 2011. Yields increased during the second quarter and first half of 2011 as a result of our yield management programs, which include more disciplined contract pricing and reviews of lower-performing accounts for rate adjustments. Yields increased 7% year over year in the second quarter of 2011 and improved 5% from the first quarter of 2011.

On November 1, 2010, we implemented a 6.9% general rate increase for FedEx Freight and FedEx National LTL shipments. 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 three- and six-month periods ended November 30:


	Three Months Ended						Six Months Ended
	2010			2009			2010			2009
Low		15.30	%		12.50	%		15.10	%		10.80	%
High		16.40			14.20			16.40			14.20
Weighted-average		15.80			13.40			15.60			12.90

FedEx Freight Segment Operating Loss

In September 2010, we announced the combination of our FedEx Freight and FedEx National LTL operations. This action, which will be effective January 30, 2011, will increase efficiencies, reduce operational costs and provide customers both priority and economy LTL freight services across all lengths of haul from one integrated company. The estimated cost of this program is now expected to be $140 to $170 million, down from our initial forecast. The actions to combine these operations began in the second quarter of 2011 and resulted in $86 million of costs incurred during the quarter. Of these costs, $67 million primarily relates to accrued severance expenses and impairment charges on assets to be sold, which were recorded in the “Impairment and other charges” caption of the condensed consolidated income statement. In addition, we recorded $14 million in accelerated depreciation expense due to a change in the estimated useful life of certain assets impacted by the combination of these operations.

Salaries and employee benefits increased 14% during the second quarter of 2011 and 16% in the first half of 2011 primarily due to increased staffing driven by higher shipment volumes and the reinstatement of several employee compensation programs, including 401(k) company-matching contributions, variable incentive compensation and merit salary increases. Purchased transportation costs increased 10% during the second quarter of 2011 and 36% in the first half of 2011 to support higher shipment volumes. Fuel costs increased 28% during the second quarter of 2011 and 33% in the first half of 2011 due to a higher average price per gallon of diesel fuel and increased fuel consumption as a result of higher shipment volumes. 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 positive impact on operating income in the second quarter of 2011. Maintenance and repairs expense increased 29% in the second quarter of 2011 and 32% in the first half of 2011 primarily due to higher shipment volumes. Also, higher intercompany charges in the first half of 2011 reflect the transfer of sales and customer service employees from the FedEx Freight segment entities in August 2009.

FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $1.9 billion at November 30, 2010, compared to $2 billion at May 31, 2010. The following table provides a summary of our cash flows for the six-month periods ended November 30 (in millions):


	2010			2009
Operating activities:
Net income	$	663		$	526
Noncash charges and credits		1,243			1,158
Changes in assets and liabilities		105			(327	)

Cash provided by operating activities		2,011			1,357


Investing activities:
Capital expenditures		(2,059	)		(1,549	)
Proceeds from asset dispositions and other		7			33

Cash used in investing activities		(2,052	)		(1,516	)


Financing activities:
Principal payments on debt		(12	)		(625	)
Proceeds from stock issuances		25			24
Dividends paid		(76	)		(69	)
Other		4			(11	)

Cash used in financing activities		(59	)		(681	)


Effect of exchange rate changes on cash		25			13


Net decrease in cash and cash equivalents	$	(75	)	$	(827	)

Our cash flows from operating activities increased $654 million in the first half of 2011 primarily due to lower pension contributions and increased earnings in 2011. We made contributions of $158 million to our U.S. domestic pension plans (“U.S. Retirement Plans”) during the first half of 2011 and contributions of $613 million to our tax-qualified U.S. Retirement Plans during the first half of 2010. Capital expenditures during the first half of 2011 were higher primarily due to increased spending at FedEx Express for aircraft, as described in the “Capital Resources” discussion below. During the first six months of 2010, we repaid our $500 million 5.50% notes that matured on August 15, 2009.

CAPITAL RESOURCES

Our operations are capital intensive, characterized by significant investments in aircraft, vehicles, technology, facilities, 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 segments for the three- and six-month periods ended November 30 (in millions):


									Percent Change
									2010/2009
	Three Months Ended				Six Months Ended				Three Months			Six Months
	2010		2009		2010		2009		Ended			Ended
Aircraft and related equipment	$	660	$	303	$	1,407	$	859		118			64
Facilities and sort equipment		133		167		203		353		(20	)		(42	)
Information and technology investments		124		59		196		115		110			70
Vehicles		92		106		195		162		(13	)		20
Other equipment		38		33		58		60		15			(3	)

Total capital expenditures	$	1,047	$	668	$	2,059	$	1,549		57			33


FedEx Express segment		760		377		1,604		1,019		102			57
FedEx Ground segment		119		105		191		216		13			(12	)
FedEx Freight segment		59		106		91		172		(44	)		(47	)
FedEx Services segment		108		80		172		142		35			21
Other and eliminations		1		—		1		—		—			—

Total capital expenditures	$	1,047	$	668	$	2,059	$	1,549		57			33

Capital expenditures during the first half of 2011 were higher than the prior-year period primarily due to increased spending at FedEx Express for aircraft and related equipment and at FedEx Services for information technology investments. Aircraft and related equipment purchases at FedEx Express during the first half of 2011 included the delivery of five new B777Fs.

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.

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. 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. The revolving credit agreement expires in July 2012. As of November 30, 2010, no commercial paper was outstanding and the entire $1 billion under the revolving credit facility was available for future borrowings. 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.

The revolving credit agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our last four fiscal quarters’ rentals and landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 0.7 to 1.0. Our leverage ratio of adjusted debt to capital was 0.5 at November 30, 2010. We are in compliance with this covenant and all other restrictive covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or borrowing capacity.

Our capital expenditures are expected to be approximately $3.5 billion in 2011 and include spending for aircraft and related equipment at FedEx Express, network expansion at FedEx Ground and revenue equipment at the FedEx Freight segment. We invested $1.4 billion in aircraft and aircraft-related equipment in the first half of 2011 and expect to invest approximately $625 million for aircraft and aircraft-related equipment during the remainder of 2011. Aircraft-related capital outlays include the new B777Fs and the B757s, which are substantially more fuel-efficient per unit than the aircraft types they are replacing. These aircraft-related capital 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. Although we expect higher capital expenditures in 2011, we anticipate that our cash flow from operations will be sufficient to fund these expenditures.

As noted above, we made tax-deductible contributions of $158 million to our U.S. Retirement Plans during the first half of 2011. Our U.S. Retirement Plans have ample funds to meet expected benefits payments. For 2011, we have $322 million in remaining required contributions to our U.S. Retirement Plans.

Standard & Poor’s has assigned us a senior unsecured debt credit rating of BBB, a commercial paper rating of A-2 and a ratings outlook of “stable.” Moody’s Investors Service has reaffirmed our senior unsecured debt credit rating of Baa2 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.

CONTRACTUAL CASH OBLIGATIONS

The following table sets forth a summary of our contractual cash obligations as of November 30, 2010. 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 U.S. 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 November 30, 2010. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the U.S. 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)
	2011 ⁽¹⁾		2012		2013		2014		2015		Thereafter		Total
Operating activities:
Operating leases	$	1,052	$	1,703	$	1,541	$	1,360	$	1,262	$	7,295	$	14,213
Non-capital purchase obligations and other		101		183		83		20		12		143		542
Interest on long-term debt		72		126		98		97		78		1,737		2,208
Quarterly contributions to our U.S. Retirement Plans		322		—		—		—		—		—		322

Investing activities:
Aircraft and aircraft-related capital commitments		342		990		724		480		493		1,431		4,460
Other capital purchase obligations		37		—		—		—		—		—		37

Financing activities:
Debt		250		—		300		250		—		989		1,789
Capital lease obligations		4		8		119		2		2		14		149


Total	$	2,180	$	3,010	$	2,865	$	2,209	$	1,847	$	11,609	$	23,720


⁽¹⁾		Cash obligations for the remainder of 2011.

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 November 30, 2010.

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. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. See Note 7 of the accompanying unaudited condensed consolidated financial statements for more information. 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 ($79 million) is excluded from the table.

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.

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 contracts. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. See Note 7 of the accompanying unaudited condensed consolidated financial statements for more information.

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 2011, we have scheduled debt payments of $254 million, which includes $250 million of principal payments on our 7.25% unsecured notes maturing in February 2011, and principal and interest payments on capital leases.

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 U.S. 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 reviewed at least annually for impairment by comparing the fair value of each reporting unit with its carrying value (including attributable goodwill). Fair value for our reporting units is determined by incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, expected capital expenditures and discount rates. 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 November 30, 2010, nor do we believe the goodwill of our reporting units is at risk of failing impairment testing.

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.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including (but not limited to) those contained in “Outlook,” “Liquidity,” “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;

•

the impact of any international conflicts or terrorist activities on the U.S. 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;

•

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 shipment levels;

•

the price and availability of jet and vehicle fuel;

•

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

•

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;

•

any impacts on our businesses resulting from new domestic or international government laws and regulation, including regulatory actions affecting global aviation rights, increased air cargo and other security or 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 climate change legislation) or postal rules;

•

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

•

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;

•

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 proceedings;

•

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;

•

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

•

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;

•

market acceptance of our new service and growth initiatives;

•

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;

•

adverse weather conditions or natural disasters, 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;

•

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;

•

the outcome of negotiations to reach a new collective bargaining agreement with the union that represents the pilots of FedEx Express; 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of November 30, 2010, 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 euro, Chinese yuan, Canadian dollar, British pound and Japanese yen. Historically, our exposure to foreign currency fluctuations has been more significant with respect to our revenues rather than our expenses as a significant portion of our expenses are denominated in U.S. dollars, such as aircraft and fuel expenses. During the first half of 2011, the U.S. dollar has weakened relative to the currencies of the foreign countries in which we operate as compared to May 31, 2010; however, this weakening did not have a material effect on our results of operations.

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 5% 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 Securities and Exchange Commission’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 November 30, 2010 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended November 30, 2010, 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of all material pending legal proceedings, see Note 8 of the accompanying condensed consolidated financial statements.

Item 1A. Risk Factors

Increased pilot safety requirements could impose substantial costs on FedEx Express. The Federal Aviation Administration, in September 2010, proposed rules that would significantly reduce the maximum number of hours on duty and increase the minimum amount of rest time for our pilots, and thus require us to hire additional pilots and modify certain of our aircraft. It is reasonably possible that these rules, if enacted as currently drafted, or other future flight safety requirements could impose material costs on us.

Otherwise, 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			Compensation Arrangements with Outside Directors.

10.2			Supplemental Agreement No. 12 (and related side letter) dated as of September 3, 2010, Supplemental Agreement No. 14 (and related side letter) dated as of October 25, 2010, and Supplemental Agreement No. 15 (and related side letter) dated as of October 29, 2010, each 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 commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

10.3			Amendment dated November 22, 2010 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 commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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.

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: December 17, 2010	/s/ JOHN L. MERINO
	JOHN L. MERINO
	CORPORATE VICE PRESIDENT AND PRINCIPAL ACCOUNTING OFFICER

EXHIBIT INDEX


Exhibit
Number			Description of Exhibit

10.1			Compensation Arrangements with Outside Directors.

10.2			Supplemental Agreement No. 12 (and related side letter) dated as of September 3, 2010, Supplemental Agreement No. 14 (and related side letter) dated as of October 25, 2010, and Supplemental Agreement No. 15 (and related side letter) dated as of October 29, 2010, each 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 commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

10.3			Amendment dated November 22, 2010 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 commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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.

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