FEDEX CORP - Interim / Quarterly Report 2014

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED August 31, 2013

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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 1-15829

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

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

(901) 818-7500

(Registrants 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 ¨

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 ¨

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
(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 ¨ No þ

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

Common Stock	Outstanding Shares at September 18, 2013
Common Stock, par value $0.10 per share	316,642,256

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FEDEX CORPORATION

INDEX


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets August 31, 2013 and May 31, 2013	3
Condensed Consolidated Statements of Income Three Months Ended August 31, 2013 and 2012	5
Condensed Consolidated Statements of Comprehensive Income Three Months Ended August 31, 2013 and
2012	6
Condensed Consolidated Statements of Cash Flows Three Months Ended August 31, 2013 and 2012	7
Notes to Condensed Consolidated Financial Statements	8
Report of Independent Registered Public Accounting Firm	24
ITEM 2. Managements Discussion and Analysis of Results of Operations and Financial
Condition	25
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	48
ITEM 4. Controls and Procedures	48
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings	49
ITEM 1A. Risk Factors	49
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	49
ITEM 6. Exhibits	49
Signature	51
Exhibit Index	E-1
Exhibit 10.1
Exhibit 12.1
Exhibit 15.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

	August 31, — 2013	May 31,
	(Unaudited)	2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$ 5,096	$ 4,917
Receivables, less allowances of $173 and $176	4,990	5,044
Spare parts, supplies and fuel, less allowances of $209 and $205	451	457
Deferred income taxes	604	533
Prepaid expenses and other	352	323
Total current assets	11,493	11,274
PROPERTY AND EQUIPMENT, AT COST	38,167	38,109
Less accumulated depreciation and amortization	19,730	19,625
Net property and equipment	18,437	18,484
OTHER LONG-TERM ASSETS
Goodwill	2,712	2,755
Other assets	1,031	1,054
Total other long-term assets	3,743	3,809
	$ 33,673	$ 33,567

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

	August 31, — 2013	May 31,
	(Unaudited)	2013
LIABILITIES AND STOCKHOLDERS INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$ 254	$	251
Accrued salaries and employee benefits	1,366		1,688
Accounts payable	1,879		1,879
Accrued expenses	2,024		1,932
Total current liabilities	5,523		5,750
LONG-TERM DEBT, LESS CURRENT PORTION	2,739		2,739
OTHER LONG-TERM LIABILITIES
Deferred income taxes	1,820		1,652
Pension, postretirement healthcare and other benefit obligations	3,813		3,916
Self-insurance accruals	996		987
Deferred lease obligations	797		778
Deferred gains, principally related to aircraft transactions	221		227
Other liabilities	109		120
Total other long-term liabilities	7,756		7,680
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS INVESTMENT
Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of August 31, 2013 and May 31, 2013	32		32
Additional paid-in capital	2,696		2,668
Retained earnings	18,913		18,519
Accumulated other comprehensive loss	(3,857	)	(3,820	)
Treasury stock, at cost	(129	)	(1	)
Total common stockholders investment	17,655		17,398
	$ 33,673	$	33,567

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

	Three Months Ended August 31, — 2013	2012
REVENUES	$ 11,024	$	10,792
OPERATING EXPENSES:
Salaries and employee benefits	4,077		4,103
Purchased transportation	1,879		1,680
Rentals and landing fees	640		618
Depreciation and amortization	639		573
Fuel	1,104		1,138
Maintenance and repairs	480		542
Other	1,410		1,396
	10,229		10,050
OPERATING INCOME	795		742
OTHER INCOME (EXPENSE):
Interest, net	(27	)	(10	)
Other, net	(2	)	(5	)
	(29	)	(15	)
INCOME BEFORE INCOME TAXES	766		727
PROVISION FOR INCOME TAXES	277		268
NET INCOME	$ 489	$	459
EARNINGS PER COMMON SHARE:
Basic	$ 1.54	$	1.46
Diluted	$ 1.53	$	1.45
DIVIDENDS DECLARED PER COMMON SHARE	$ 0.30	$	0.28

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

	Three Months Ended August 31, — 2013	2012
NET INCOME	$ 489	$	459
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments, net of tax of $10 in 2013 and $4 in 2012	(79	)	43
Amortization of unrealized pension actuarial gains/losses and other, net of tax of $25 in 2013 and $37 in 2012	42		63
	(37	)	106
COMPREHENSIVE INCOME	$ 452	$	565

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

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

	Three Months Ended August 31, — 2013	2012
Operating Activities:
Net income	$ 489	$	459
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	639		573
Provision for uncollectible accounts	37		47
Stock-based compensation	45		40
Deferred income taxes and other noncash items	89		122
Changes in assets and liabilities:
Receivables	10		3
Other assets	(31	)	147
Accounts payable and other liabilities	(343	)	(474	)
Other, net	(6	)	(14	)
Cash provided by operating activities	929		903
Investing Activities:
Capital expenditures	(572	)	(972	)
Business acquisitions, net of cash acquired			(483	)
Proceeds from asset dispositions and other	10		12
Cash used in investing activities	(562	)	(1,443	)
Financing Activities:
Principal payments on debt			(301	)
Proceeds from debt issuance			991
Proceeds from stock issuances	131		30
Excess tax benefit on the exercise of stock options	14		4
Dividends paid	(48	)	(44	)
Purchase of treasury stock	(278	)	(246	)
Other, net			(9	)
Cash (used in) provided by financing activities	(181	)	425
Effect of exchange rate changes on cash	(7	)	15
Net increase (decrease) in cash and cash equivalents	179		(100	)
Cash and cash equivalents at beginning of period	4,917		2,843
Cash and cash equivalents at end of period	$ 5,096	$	2,743

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

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (FedEx) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (SEC) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2013 (Annual Report). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of August 31, 2013, and the results of our operations and cash flows for the three-month periods ended August 31, 2013 and 2012. Operating results for the three-month period ended August 31, 2013 are not necessarily indicative of the results that may be expected for the year ending May 31, 2014.

BUSINESS ACQUISITIONS. As discussed in our Annual Report, on June 20, 2013, we signed agreements to acquire the businesses operated by our current service provider Supaswift (Pty) Ltd. in five countries in Southern Africa. In addition, on September 2, 2013, we entered into an agreement to acquire Supaswifts business in two additional countries. This acquisition will be funded with cash from operations and is expected to be completed in the second half of 2014, 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 2014 results.

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

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

Our stock-based compensation expense was $45 million for the three-month period ended August 31, 2013 and $40 million for the three-month period ended August 31, 2012. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

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

On June 1, 2013, we adopted the authoritative guidance issued by the Financial Accounting Standards Board requiring additional information about reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. We have adopted this guidance by including expanded accumulated other comprehensive income disclosure requirements in Note 2 of our condensed consolidated financial statements.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

We believe that no other new accounting guidance was adopted or issued during the first three months of 2014 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 as described in our Annual Report.

TREASURY SHARES. During the first quarter of 2014, we repurchased 2.8 million shares of FedEx common stock at an average price of $98 per share for a total of $278 million. As of August 31, 2013, 7.4 million shares remained under existing share repurchase authorizations.

DIVIDENDS DECLARED PER COMMON SHARE. On August 16, 2013, our Board of Directors declared a quarterly dividend of $0.15 per share of common stock. The dividend will be paid on October 1, 2013 to stockholders of record as of the close of business on September 10, 2013. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

(2) Accumulated Other Comprehensive Income (Loss)

The following table provides changes in accumulated other comprehensive income (loss) (AOCI), net of tax, reported in our condensed consolidated financial statements for the three-month periods ended August 31 (in millions):

	2013 (1)		2012 (1)
Foreign currency translation gain (loss):
Balance at beginning of period	$ 102		$ 61
Translation adjustments	(79	)	43
Balance at end of period	23		104
Retirement plans adjustments:
Balance at beginning of period	(3,922	)	(5,014	)
Reclassifications from AOCI	42		63
Balance at end of period	(3,880	)	(4,951	)
Accumulated other comprehensive loss at end of period	$ (3,857	)	$ (4,847	)

(1) Amounts in parentheses indicate debits to AOCI.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table presents details of the reclassifications from AOCI for the three-month periods ended August 31 (in millions):

	Amount Reclassified from AOCI (1)				Affected Line Item in the Income Statement
	2013		2012
Retirement plans:
Amortization of actuarial losses	$ (95	)	$ (129	)	Salaries and employee benefits
Amortization of prior service credits	28		29		Salaries and employee benefits
Total before tax	(67	)	(100	)
Income tax benefit	25		37		Provision for income taxes
AOCI reclassifications, net of tax	$ (42	)	$ (63	)	Net income

(1) Amounts in parentheses indicate debits to earnings.

(3) Financing Arrangements

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

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 March 2018. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our last four fiscal quarters rentals and landing fees) to capital (adjusted debt plus total common stockholders investment) that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 51% at August 31, 2013. We believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of August 31, 2013, no commercial paper was outstanding, and the entire $1 billion under the revolving credit facility was available for future borrowings.

Long-term debt, exclusive of capital leases, had carrying values of $3.0 billion at August 31, 2013 and May 31, 2013 compared with estimated fair values of $3.0 billion at August 31, 2013 and $3.2 billion at May 31, 2013. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

(4) Computation of Earnings Per Share

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

	2013	2012
Basic earnings per common share:
Net earnings allocable to common shares (1)	$ 489	$ 458
Weighted-average common shares	316	315
Basic earnings per common share	$ 1.54	$ 1.46
Diluted earnings per common share:
Net earnings allocable to common shares (1)	$ 489	$ 458
Weighted-average common shares	316	315
Dilutive effect of share-based awards	3	1
Weighted-average diluted shares	319	316
Diluted earnings per common share	$ 1.53	$ 1.45
Anti-dilutive options excluded from diluted earnings per common share	9.8	13.9

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

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

	2013	2012
U.S. domestic and international pension plans	$ 121	$ 169
U.S. domestic and international defined contribution plans	89	88
U.S. domestic and international postretirement healthcare plans	20	19
	$ 230	$ 276

Net periodic benefit cost of the pension and postretirement healthcare plans for the three-month periods ended August 31 included the following components (in millions):

	Pension Plans — 2013	2012		2013		2012
Service cost	$ 164	$	173	$	10	$ 10
Interest cost	263		242		10	9
Expected return on plan assets	(373	)	(346	)
Recognized actuarial losses and other	67		100
	$ 121	$	169	$	20	$ 19

Required contributions to our tax qualified U.S. domestic pension plans (U.S. Pension Plans) for the three-month periods ended August 31 were $150 million in 2013 and $140 million in 2012. In September 2013, we made an additional contribution of $165 million to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

(6) Business Segment Information

Our reportable segments include the following businesses:

FedEx Express Segment	FedEx Express (express transportation)
	FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)
	FedEx SupplyChain Systems (logistics services)
FedEx Ground Segment	FedEx Ground (small-package ground delivery)
	FedEx SmartPost (small-parcel consolidator)
FedEx Freight Segment	FedEx Freight (LTL freight transportation)
	FedEx Custom Critical (time-critical transportation)
FedEx Services Segment	FedEx Services (sales, marketing, information technology, communications and back-office functions)
	FedEx TechConnect (customer service, technical support, billings and collections)
	FedEx Office (document and business services and package acceptance)

FedEx Services Segment

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis by FedEx Express and reported in the FedEx Express segment in their natural expense line items. The FedEx Services segment is discussed further in our Annual Report.

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

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

Other Intersegment Transactions

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

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

	2013
Revenues
FedEx Express segment	$ 6,605	$	6,632
FedEx Ground segment	2,730		2,462
FedEx Freight segment	1,424		1,399
FedEx Services segment	375		389
Other and eliminations	(110	)	(90	)
	$ 11,024	$	10,792
Operating Income
FedEx Express segment	$ 236	$	207
FedEx Ground segment	468		445
FedEx Freight segment	91		90
	$ 795	$	742

(7) Commitments

As of August 31, 2013, our purchase commitments under various contracts for the remainder of 2014 and annually thereafter were as follows (in millions):

	Aircraft and Aircraft-Related	Other (1)	Total
2014 (remainder)	$ 828	$ 870	$ 1,698
2015	1,121	182	1,303
2016	1,083	124	1,207
2017	891	100	991
2018	1,475	44	1,519
Thereafter	5,211	109	5,320
Total	$ 10,609	$ 1,429	$ 12,038

(1) Primarily vehicles, facilities, advertising contracts, and for the remainder of 2014, a total of $495 million of quarterly contributions to our U.S. Pension Plans.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of August 31, 2013, our obligation to purchase four Boeing 767-300 Freighter (B767F) aircraft and nine Boeing 777 Freighter (B777F) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

During the first quarter of 2014, we entered into supplemental agreements to purchase the 16 Boeing 757 (B757) option aircraft pursuant to an agreement originally entered into in March 2013. Delivery of the aircraft will occur through 2015.

We had $416 million in deposits and progress payments as of August 31, 2013 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the Other assets caption of our consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the B757 aircraft in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of August 31, 2013 with the year of expected delivery:

2014 (remainder)	16	4	2	22
2015	11	12		23
2016		10	2	12
2017		10		10
2018		10	2	12
Thereafter		4	14	18
Total	27	50	20	97

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at August 31, 2013 is as follows (in millions):

	Operating Leases — Aircraft and Related Equipment	Facilities and Other	Total Operating Leases
2014 (remainder)	$ 416	$ 1,129	$ 1,545
2015	448	1,438	1,886
2016	453	1,233	1,686
2017	391	1,340	1,731
2018	326	941	1,267
Thereafter	824	5,976	6,800
Total	$ 2,858	$ 12,057	$ 14,915

Future minimum lease payments under capital leases were immaterial at August 31, 2013. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

(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. We do not believe that a material loss is reasonably possible with respect to any of these matters.

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 companys owner-operators should be treated as employees, rather than independent contractors.

Most of the class-action lawsuits were consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. The multidistrict litigation court granted class certification in 28 cases and denied it in 14 cases. On December 13, 2010, the court entered an opinion and order addressing all outstanding motions for summary judgment on the status of the owner-operators ( i.e., independent contractor vs. employee). In sum, the court has now ruled on our summary judgment motions and entered judgment in favor of FedEx Ground on all claims in 20 of the 28 multidistrict litigation cases that had been certified as class actions, finding that the owner-operators in those cases were contractors as a matter of the law of 20 states. The plaintiffs filed notices of appeal in all of these 20 cases. The Seventh Circuit heard the appeal in the Kansas case in January 2012 and, in July 2012, issued an opinion that did not make a determination with respect to the correctness of the district courts decision and, instead, certified two questions to the Kansas Supreme Court related to the classification of the plaintiffs as independent contractors under the Kansas Wage Payment Act. The other 19 cases that are before the Seventh Circuit remain stayed pending a decision of the Kansas Supreme Court.

The multidistrict litigation court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. Three of those cases are now on appeal with the Court of Appeals for the Ninth Circuit. The other five remain pending in their respective district courts, but two of these five matters have been settled for immaterial amounts, subject to court approval.

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

In addition, we are defending contractor-model cases that are not or are no longer part of the multidistrict litigation, two of which have been certified as class actions. These certified class actions were settled for immaterial amounts in the first quarter of fiscal year 2014, subject to court approval. The other cases are in varying stages of litigation, and we do not expect to incur a material loss in any of these matters.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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

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

Cash paid for interest expense and income taxes for the three-month periods ended August 31 was as follows (in millions):

	2013
Cash payments for:
Interest (net of capitalized interest)	$ 57	$	45
Income taxes	$ 138	$	54
Income tax refunds received	(34	)	(184	)
Cash tax payments (refunds), net	$ 104	$	(130	)

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

(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, as amended.

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee $2.75 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the Guarantor Subsidiaries and Non-guarantor Subsidiaries columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting.

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

August 31, 2013

	Parent	Guarantor Subsidiaries	Non- guarantor Subsidiaries	Eliminations		Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$ 4,058	$ 431	$ 723	$ (116	)	$ 5,096
Receivables, less allowances		3,993	1,041	(44	)	4,990
Spare parts, supplies, fuel, prepaid expenses and other, less allowances	35	714	54			803
Deferred income taxes		589	15			604
Total current assets	4,093	5,727	1,833	(160	)	11,493
PROPERTY AND EQUIPMENT, AT COST	27	35,912	2,228			38,167
Less accumulated depreciation and amortization	21	18,555	1,154			19,730
Net property and equipment	6	17,357	1,074			18,437
INTERCOMPANY RECEIVABLE		711	1,186	(1,897	)
GOODWILL		1,552	1,160			2,712
INVESTMENT IN SUBSIDIARIES	19,131	3,433		(22,564	)
OTHER ASSETS	2,156	767	228	(2,120	)	1,031
	$ 25,386	$ 29,547	$ 5,481	$ (26,741)		$ 33,673
LIABILITIES AND STOCKHOLDERS INVESTMENT CURRENT LIABILITIES
Current portion of long-term debt	$ 250	$ 4	$	$		$ 254
Accrued salaries and employee benefits	58	1,132	176			1,366
Accounts payable	51	1,389	599	(160	)	1,879
Accrued expenses	457	1,387	180			2,024
Total current liabilities	816	3,912	955	(160	)	5,523
LONG-TERM DEBT, LESS CURRENT PORTION	2,489	250				2,739
INTERCOMPANY PAYABLE	1,897			(1,897	)
OTHER LONG-TERM LIABILITIES
Deferred income taxes		3,883	57	(2,120	)	1,820
Other liabilities	2,529	3,166	241			5,936
Total other long-term liabilities	2,529	7,049	298	(2,120	)	7,756
STOCKHOLDERS INVESTMENT	17,655	18,336	4,228	(22,564	)	17,655
	$ 25,386	$ 29,547	$ 5,481	$ (26,741	)	$ 33,673

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2013

	Parent	Guarantor Subsidiaries	Non- guarantor Subsidiaries	Eliminations		Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$ 3,892	$ 405	$ 717	$ (97	)	$ 4,917
Receivables, less allowances		3,989	1,084	(29	)	5,044
Spare parts, supplies, fuel, prepaid expenses and other, less allowances	45	681	54			780
Deferred income taxes		518	15			533
Total current assets	3,937	5,593	1,870	(126	)	11,274
PROPERTY AND EQUIPMENT, AT COST	27	35,915	2,167			38,109
Less accumulated depreciation and amortization	21	18,469	1,135			19,625
Net property and equipment	6	17,446	1,032			18,484
INTERCOMPANY RECEIVABLE		439	1,203	(1,642	)
GOODWILL		1,552	1,203			2,755
INVESTMENT IN SUBSIDIARIES	18,739	3,347		(22,086	)
OTHER ASSETS	2,187	822	191	(2,146	)	1,054
	$ 24,869	$ 29,199	$ 5,499	$ (26,000	)	$ 33,567
LIABILITIES AND STOCKHOLDERS INVESTMENT CURRENT LIABILITIES
Current portion of long-term debt	$ 250	$ 1	$	$		$ 251
Accrued salaries and employee benefits	82	1,402	204			1,688
Accounts payable	4	1,392	609	(126	)	1,879
Accrued expenses	355	1,366	211			1,932
Total current liabilities	691	4,161	1,024	(126	)	5,750
LONG-TERM DEBT, LESS CURRENT PORTION	2,489	250				2,739
INTERCOMPANY PAYABLE	1,642			(1,642	)
OTHER LONG-TERM LIABILITIES
Deferred income taxes		3,798		(2,146	)	1,652
Other liabilities	2,649	3,133	246			6,028
Total other long-term liabilities	2,649	6,931	246	(2,146	)	7,680
STOCKHOLDERS INVESTMENT	17,398	17,857	4,229	(22,086	)	17,398
	$ 24,869	$ 29,199	$ 5,499	$ (26,000	)	$ 33,567

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended August 31, 2013

REVENUES	Parent — $	$	9,228	$	1,878	Eliminations — $ (82	)	Consolidated — $ 11,024
OPERATING EXPENSES:
Salaries and employee benefits	31		3,514		532			4,077
Purchased transportation			1,242		673	(36	)	1,879
Rentals and landing fees	1		558		82	(1	)	640
Depreciation and amortization			589		50			639
Fuel			1,081		23			1,104
Maintenance and repairs			449		31			480
Intercompany charges, net	(61	)	(6	)	67
Other	29		1,133		293	(45	)	1,410
			8,560		1,751	(82	)	10,229
OPERATING INCOME			668		127			795
OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries	489		110			(599	)
Interest, net	(34	)	5		2			(27	)
Intercompany charges, net	35		(41	)	6
Other, net	(1	)	(2	)	1			(2	)
INCOME BEFORE INCOME TAXES	489		740		136	(599	)	766
Provision for income taxes			232		45			277
NET INCOME	$ 489	$	508	$	91	$ (599	)	$ 489
COMPREHENSIVE INCOME	$ 528	$	507	$	16	$ (599	)	$ 452

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

| CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended
August 31, 2012 — REVENUES | $ | $ | 9,094 | $ | 1,778 | $ | (80 | ) | $ 10,792 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| OPERATING EXPENSES: | | | | | | | | | | |
| Salaries and employee benefits | 30 | | 3,589 | | 484 | | | | 4,103 | |
| Purchased transportation | | | 1,130 | | 583 | | (33 | ) | 1,680 | |
| Rentals and landing fees | 1 | | 544 | | 75 | | (2 | ) | 618 | |
| Depreciation and amortization | | | 530 | | 43 | | | | 573 | |
| Fuel | | | 1,116 | | 22 | | | | 1,138 | |
| Maintenance and repairs | | | 515 | | 27 | | | | 542 | |
| Intercompany charges, net | (60 | ) | (112 | ) | 172 | | | | | |
| Other | 29 | | 1,133 | | 279 | | (45 | ) | 1,396 | |
| | | | 8,445 | | 1,685 | | (80 | ) | 10,050 | |
| OPERATING INCOME | | | 649 | | 93 | | | | 742 | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | |
| Equity in earnings of subsidiaries | 459 | | 29 | | | | (488 | ) | | |
| Interest, net | (23 | ) | 11 | | 2 | | | | (10 | ) |
| Intercompany charges, net | 24 | | (29 | ) | 5 | | | | | |
| Other, net | (1 | ) | (2 | ) | (2 | ) | | | (5 | ) |
| INCOME BEFORE INCOME TAXES | 459 | | 658 | | 98 | | (488 | ) | 727 | |
| Provision for income taxes | | | 236 | | 32 | | | | 268 | |
| NET INCOME | $ 459 | $ | 422 | $ | 66 | $ | (488 | ) | $ 459 | |
| COMPREHENSIVE INCOME | $ 518 | $ | 428 | $ | 107 | $ | (488 | ) | $ 565 | |

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Three Months Ended August 31, 2013

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	Parent — $ 118	$	773	$	57	$	(19	)	Consolidated — $ 929
INVESTING ACTIVITIES
Capital expenditures			(464	)	(108	)			(572	)
Proceeds from asset dispositions and other			10						10
CASH USED IN INVESTING ACTIVITIES			(454	)	(108	)			(562	)
FINANCING ACTIVITIES
Net transfers from (to) Parent	229		(261	)	32
Payment on loan between subsidiaries			(29	)	29
Intercompany dividends			2		(2	)
Proceeds from stock issuances	131								131
Excess tax benefit on the exercise of stock options	14								14
Dividends paid	(48	)							(48	)
Purchase of treasury stock	(278	)							(278	)
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	48		(288	)	59				(181	)
Effect of exchange rate changes on cash			(5	)	(2	)			(7	)
Net increase (decrease) in cash and cash equivalents	166		26		6		(19	)	179
Cash and cash equivalents at beginning of period	3,892		405		717		(97	)	4,917
Cash and cash equivalents at end of period	$ 4,058	$	431	$	723	$	(116	)	$ 5,096

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended
August 31, 2012 | Parent | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | | Consolidated | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | $ 118 | $ | 710 | $ | 96 | $ | (21 | ) | $ 903 | |
| INVESTING ACTIVITIES | | | | | | | | | | |
| Capital expenditures | (3 | ) | (844 | ) | (125 | ) | | | (972 | ) |
| Business acquisitions, net of cash acquired | | | | | (483 | ) | | | (483 | ) |
| Proceeds from asset dispositions and other | | | 15 | | (3 | ) | | | 12 | |
| CASH USED IN INVESTING ACTIVITIES | (3 | ) | (829 | ) | (611 | ) | | | (1,443 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | |
| Net transfers from (to) Parent | (980 | ) | 963 | | 17 | | | | | |
| Payment on loan between subsidiaries | | | (450 | ) | 450 | | | | | |
| Principal payments on debt | | | (301 | ) | | | | | (301 | ) |
| Proceeds from debt issuances | 991 | | | | | | | | 991 | |
| Proceeds from stock issuances | 30 | | | | | | | | 30 | |
| Excess tax benefit on the exercise of stock options | 4 | | | | | | | | 4 | |
| Dividends paid | (44 | ) | | | | | | | (44 | ) |
| Purchase of treasury stock | (246 | ) | | | | | | | (246 | ) |
| Other, net | (9 | ) | (69 | ) | 69 | | | | (9 | ) |
| CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (254 | ) | 143 | | 536 | | | | 425 | |
| Effect of exchange rate changes on cash | | | 1 | | 14 | | | | 15 | |
| Net (decrease) increase in cash and cash equivalents | (139 | ) | 25 | | 35 | | (21 | ) | (100 | ) |
| Cash and cash equivalents at beginning of period | 1,906 | | 417 | | 636 | | (116 | ) | 2,843 | |
| Cash and cash equivalents at end of period | $ 1,767 | $ | 442 | $ | 671 | $ | (137 | ) | $ 2,743 | |

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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 August 31, 2013, and the related condensed consolidated statements of income, comprehensive income and cash flows for the three-month periods ended August 31, 2013 and 2012. These financial statements are the responsibility of the Companys 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, 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders investment, and cash flows for the year then ended not presented herein, and in our report dated July 15, 2013, 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, 2013, 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

September 19, 2013

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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition

GENERAL

The following Managements 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, 2013 (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 worlds largest express transportation company; FedEx Ground Package System, Inc. (FedEx Ground), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (FedEx Freight), a leading North American provider of less-than-truckload (LTL) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (FedEx Services), form the core of our reportable segments. Our FedEx Services segment provides sales, marketing, information technology, communications and back-office support to our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (FedEx Office) and provides customer service, technical support and billing and collection services through FedEx TechConnect, Inc. (FedEx TechConnect). See Reportable Segments for further discussion.

The key indicators necessary to understand our operating results include:

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

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

the mix of services purchased by our customers;

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

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

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

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

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Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2014 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-month periods ended August 31:

Revenues	2013 — $ 11,024	2012 — $ 10,792	2
Operating income	795	742	7
Operating margin	7.2 %	6.9 %	30	bp
Net income	$ 489	$ 459	7
Diluted earnings per share	$ 1.53	$ 1.45	6

The following table shows changes in revenues and operating income by reportable segment for the three-month periods ended August 31, 2013 compared to August 31, 2012 (dollars in millions):

	Revenues — Dollar Change	Percent Change		Dollar Change	Percent Change
FedEx Express segment	$ (27	)		$	29	14
FedEx Ground segment	268		11		23	5
FedEx Freight segment	25		2		1	1
FedEx Services segment	(14	)	(4	)
Other and eliminations	(20	)	NM
	$ 232		2	$	53	7

Overview

Our revenues and earnings increased in the first quarter of 2014 driven by the solid performance of each of our transportation segments, although our results include some significant headwinds from the net negative impact of fuel (described further below) and one fewer operating day. While these factors constrained earnings growth in the first quarter of 2014, our results benefited from lower pension expense as well as the deferral of annual salary increases from the first quarter of 2014 to the second quarter of 2014 for many of our employees. The results at our FedEx Express segment improved in the first quarter of 2014; however, ongoing shifts in demand from our priority international services to economy international services continue to impact this business. The benefits realized from our voluntary severance program that commenced in 2013 will ramp up as the fiscal year progresses as the majority of scheduled employee departures will occur throughout the remainder of 2014.

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

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

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

Revenue

Revenues increased 2% during the first quarter of 2014 primarily due to higher volumes and yield increases at our FedEx Ground segment. At FedEx Ground, revenues increased 11% in the first quarter of 2014 due to higher volume from market share gains and increased yields as a result of rate increases. Revenues at FedEx Freight increased 2% due to higher weight per shipment, LTL yields and average daily LTL shipments. At FedEx Express, revenues decreased slightly as revenue growth from stronger base U.S. business and prior year international domestic acquisitions was more than offset by the negative impact of lower fuel surcharges and one fewer operating day.

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Operating Income

The following table compares operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the three-month periods ended August 31:

	2013	2012	Percent of Revenue — 2013	2012
Operating expenses:
Salaries and employee benefits	$ 4,077	$ 4,103	37.0 %	38.0 %
Purchased transportation	1,879	1,680	17.0	15.6
Rentals and landing fees	640	618	5.8	5.7
Depreciation and amortization	639	573	5.8	5.3
Fuel	1,104	1,138	10.1	10.6
Maintenance and repairs	480	542	4.3	5.0
Other	1,410	1,396	12.8	12.9
Total operating expenses	$ 10,229	$ 10,050	92.8	93.1
Operating margin			7.2 %	6.9 %

Operating income increased in the first quarter of 2014 primarily as a result of improved profitability at FedEx Express, higher volumes and increased yields at FedEx Ground and improved performance at FedEx Freight. Our results in the first quarter of 2014 were negatively impacted by the timing lag which exists between when fuel prices change and when indexed fuel surcharges automatically adjust and one fewer operating day. These factors were offset by lower aircraft maintenance and salaries and wages expense.

Operating expenses in the first quarter of 2014 included an increase of 12% in purchased transportation costs due to volume growth at FedEx Ground, prior year international business acquisitions and higher utilization of third-party transportation providers. Depreciation and amortization expense increased 12% in the first quarter of 2014 primarily due to accelerated depreciation on certain aircraft and aircraft recently placed in service at FedEx Express. Maintenance and repairs expense decreased 11% due to the continued modernization of our aircraft fleet, which impacted the timing of certain maintenance events. Salaries and employee benefits expense benefited from lower pension expense, the delayed timing or absence of annual merit increases for many of our employees and lower headcount due to employees departing through our voluntary buyout program.

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

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Fuel costs decreased 3% in the first quarter of 2014 due to lower aircraft fuel usage. Based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a significant negative impact on operating income in the first quarter of 2014.

Our analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express and FedEx Ground services. However, this analysis does not consider the negative effects that fuel surcharge levels may have on our business, including reduced demand and shifts by our customers to lower-yielding services. While fluctuations in fuel surcharge rates can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges we obtain for these services and the level of pricing discounts offered. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative fuel surcharge rates in effect for the first quarter of 2014 and 2013 in the accompanying discussions of each of our transportation segments.

Income Taxes

Our effective tax rate was 36.2% for the first quarter of 2014 and 36.8% for the first quarter of 2013. For 2014, we expect an effective tax rate between 36.5% and 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

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

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

Business Acquisitions

As discussed in our Annual Report, on June 20, 2013, we signed agreements to acquire the businesses operated by our current service provider Supaswift (Pty) Ltd. in five countries in Southern Africa. In addition, on September 2, 2013, we entered into an agreement to acquire Supaswifts business in two additional countries. This acquisition will be funded with cash from operations and is expected to be completed in the second half of 2014, 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 2014 results.

Outlook

We expect revenue and earnings growth to continue into the second quarter and the remainder of 2014 driven by FedEx Ground and improved results at FedEx Express and FedEx Freight. Our expected results for 2014 will continue to be constrained by moderate growth in the global economy and continued challenges from the demand shift trend from our priority international services to our economy international services.

We continued to execute on the profit improvement programs we announced in 2013 during the first quarter of 2014. These activities are focused primarily at FedEx Express and FedEx Services. As previously noted, the majority of the benefits from our profit improvement programs will not occur until 2015 and 2016. Our ability to achieve the profit improvement target and other benefits from these programs is dependent upon a number of factors, including the health of the global economy and future customer demand, particularly for our priority services. No significant business realignment costs were incurred during the first quarter of 2014, and we are continuing to evaluate additional cost reduction actions to improve results.

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During the first quarter an additional 5% of the 3,600 employees accepting voluntary cash buyouts departed the company. As of August 31, 2013, approximately 45% of the total population of employees leaving the company had vacated their positions. The additional 55% will depart throughout the remainder of 2014, with approximately 25% remaining until May 31, 2014. The benefits realized from our voluntary severance program will ramp up as the fiscal year progresses as the majority of scheduled employee departures will occur throughout the remainder of 2014.

Other Outlook Matters . For details on key 2014 capital projects, refer to the Liquidity Outlook section of this MD&A.

Our outlook is dependent upon a stable pricing environment for fuel, as volatility in fuel prices impacts our fuel surcharge levels, fuel expense and demand for our services. 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.

As described in Note 8 of the accompanying unaudited condensed consolidated financial statements and the Independent Contractor Model section of our FedEx Ground segment MD&A, we are involved in a number of lawsuits and other proceedings that challenge the status of FedEx Grounds owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its owner-operators. 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.

RECENT ACCOUNTING GUIDANCE

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

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REPORTABLE SEGMENTS

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

FedEx Express Segment	FedEx Express (express transportation) FedEx Trade Networks (air and ocean freight forwarding and customs brokerage) FedEx SupplyChain Systems (logistics services)
FedEx Ground Segment	FedEx Ground (small-package ground delivery) FedEx SmartPost (small-parcel consolidator)
FedEx Freight Segment	FedEx Freight (LTL freight transportation) FedEx Custom Critical (time-critical transportation)
FedEx Services Segment	FedEx Services (sales, marketing, information technology, communications and back-office
functions) FedEx TechConnect (customer service, technical support, billings and collections) FedEx Office (document and business services and package acceptance)

FEDEX SERVICES SEGMENT

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

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OTHER INTERSEGMENT TRANSACTIONS

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FEDEX EXPRESS SEGMENT

FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the three-month periods ended August 31:

	2013	2012	Percent — Change
Revenues:
Package:
U.S. overnight box	$ 1,584	$ 1,604	(1	)
U.S. overnight envelope	419	430	(3	)
U.S. deferred	729	702	4
Total U.S. domestic package revenue	2,732	2,736
International priority	1,576	1,661	(5	)
International economy	532	487	9
Total international export package revenue	2,108	2,148	(2	)
International domestic (1)	345	309	12
Total package revenue	5,185	5,193
Freight:
U.S.	624	610	2
International priority	388	439	(12	)
International airfreight	54	74	(27	)
Total freight revenue	1,066	1,123	(5	)	Percent of Revenue
Other (2)	354	316	12		2013	2012
Total revenues	6,605	6,632			100.0 %	100.0 %
Operating expenses:
Salaries and employee benefits	2,440	2,473	(1	)	36.9	37.3
Purchased transportation	608	537	13		9.2	8.1
Rentals and landing fees	421	415	1		6.4	6.2
Depreciation and amortization	369	323	14		5.6	4.9
Fuel	956	986	(3	)	14.5	14.9
Maintenance and repairs	307	372	(17	)	4.6	5.6
Intercompany charges	495	537	(8	)	7.5	8.1
Other	773	782	(1	)	11.7	11.8
Total operating expenses	6,369	6,425	(1	)	96.4 %	96.9 %
Operating income	$ 236	$ 207	14
Operating margin	3.6 %	3.1 %	50	bp

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

(2) Includes FedEx Trade Networks and FedEx SupplyChain Systems.

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The following table compares selected statistics (in thousands, except yield amounts) for the three-month periods ended August 31:

	2013	2012
Package Statistics (1)
Average daily package volume (ADV):
U.S. overnight box	1,112	1,092	2
U.S. overnight envelope	563	575	(2	)
U.S. deferred	790	762	4
Total U.S. domestic ADV	2,465	2,429	1
International priority	406	408
International economy	165	143	15
Total international export ADV	571	551	4
International domestic (2)	789	681	16
Total ADV	3,825	3,661	4
Revenue per package (yield):
U.S. overnight box	$ 22.27	$ 22.59	(1	)
U.S. overnight envelope	11.61	11.51	1
U.S. deferred	14.42	14.17	2
U.S. domestic composite	17.32	17.33
International priority	60.65	62.68	(3	)
International economy	50.41	52.17	(3	)
International export composite	57.70	59.94	(4	)
International domestic (2)	6.84	7.00	(2	)
Composite package yield	21.18	21.82	(3	)
Freight Statistics (1)
Average daily freight pounds:
U.S.	7,423	7,077	5
International priority	2,862	3,184	(10	)
International airfreight	850	1,104	(23	)
Total average daily freight pounds	11,135	11,365	(2	)
Revenue per pound (yield):
U.S.	$ 1.31	$ 1.33	(2	)
International priority	2.12	2.12
International airfreight	0.99	1.03	(4	)
Composite freight yield	1.50	1.52	(1	)

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

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

FedEx Express Segment Revenues

FedEx Express segment revenues decreased slightly in the first quarter of 2014 as revenue growth from stronger base U.S. business and prior year international domestic acquisitions was more than offset by the negative impact of lower fuel surcharges, one fewer operating day and continued shifts in demand from our priority international services to our economy international services. International export revenues were down in the first quarter of 2014 as revenue per package decreased 4% due to lower fuel surcharges, lower rates, and the demand shift to our lower-yielding economy services, while volume increased 4% driven by our economy services. Total average daily freight pounds decreased 2% in the first quarter of 2014 due to weakness in economic global conditions. International domestic revenues increased 12% during the first quarter of 2014 due to international business acquisitions during the first quarter of 2013.

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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-month periods ended August 31:


U.S. Domestic and Outbound Fuel Surcharge:
Low	8.00 %	10.00 %
High	9.00	14.50
Weighted-average	8.50	12.12
International Fuel Surcharges:
Low	12.00	12.00
High	17.00	20.50
Weighted-average	15.36	16.13

In September 2013, we announced a 3.9% average list price increase effective January 6, 2014, for FedEx Express U.S. domestic, U.S. export and U.S. import services.

FedEx Express Segment Operating Income

Our results for the FedEx Express segment for the first quarter of 2014 were significantly constrained by the net negative impact of fuel and one fewer operating day. Despite the negative impact of these factors, FedEx Express operating income increased by 14% and operating margin increased by 50 basis points in the first quarter of 2014, driven by stronger base U.S. business and lower aircraft maintenance and pension expense, partially offset by higher depreciation expense.

In the first quarter of 2014, salaries and employee benefits benefited from lower pension expense, one fewer operating day and the delayed timing or absence of annual merit increases for many of our employees, partially offset by the impact of prior year international domestic acquisitions. Intercompany charges decreased 8% due to lower allocated sales and information technology costs. Purchased transportation costs increased 13% due to prior year international business acquisitions, higher utilization of third-party transportation providers and costs associated with the expansion of our freight-forwarding business at FedEx Trade Networks. Depreciation and amortization expense increased 14% during the first quarter of 2014 as a result of accelerated depreciation due to the shortened life of certain aircraft and aircraft recently placed into service.

FedEx Express aircraft maintenance and repairs costs are largely driven by aircraft utilization and required periodic maintenance events. When newer aircraft are introduced into our operating fleet, less maintenance costs are incurred. As a part of our fleet modernization program, FedEx Express has retired older, less efficient aircraft prior to required periodic maintenance events and has introduced newly manufactured aircraft into the fleet. FedEx Express aircraft maintenance and repairs costs decreased 17% in the first quarter of 2014, due to the benefits from the fourth quarter of 2013 retirement of 10 aircraft and related engines as we eliminated maintenance events for certain of these engines, along with the timing of other major maintenance events.

Fuel costs decreased 3% during the first quarter of 2014 due to lower aircraft fuel usage. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a significant negative impact on operating income in the first quarter of 2014. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express services.

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FEDEX GROUND SEGMENT

FedEx Ground service offerings include day-certain service delivery to businesses in the United States and Canada and to nearly 100% of U.S. residences. FedEx SmartPost consolidates high-volume, low-weight, less time-sensitive business-to-consumer packages and utilizes the United States Postal Service (USPS) for final delivery. The following table compares 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-month periods ended August 31:

	2013	2012	Percent — Change
Revenues:
FedEx Ground	$ 2,506	$ 2,273	10	Percent of Revenue
FedEx SmartPost	224	189	19	2013	2012
Total revenues	2,730	2,462	11	100.0 %	100.0 %
Operating expenses:
Salaries and employee benefits	414	377	10	15.2	15.3
Purchased transportation	1,064	946	12	39.0	38.4
Rentals	92	74	24	3.4	3.0
Depreciation and amortization	111	103	8	4.1	4.2
Fuel	3	3		0.1	0.1
Maintenance and repairs	53	46	15	1.9	1.9
Intercompany charges	285	262	9	10.4	10.6
Other	240	206	17	8.8	8.4
Total operating expenses	2,262	2,017	12	82.9 %	81.9 %
Operating income	$ 468	$ 445	5
Operating margin	17.1 %	18.1 %	(100	)bp
Average daily package volume
FedEx Ground	4,313	3,898	11
FedEx SmartPost	2,092	1,664	26
Revenue per package (yield)
FedEx Ground	$ 9.05	$ 8.94	1
FedEx SmartPost	$ 1.67	$ 1.75	(5	)

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 11% during the first quarter of 2014 due to volume and yield growth at FedEx Ground and volume growth at FedEx SmartPost.

Average daily volume at FedEx Ground increased 11% during the first quarter of 2014 due to market share gains resulting from continued growth in our FedEx Home Delivery service and commercial business. FedEx Ground yield increased 1% during the first quarter of 2014 primarily due to rate increases and higher residential surcharges partially offset by lower fuel surcharge revenue.

FedEx SmartPost volumes grew 26% during the first quarter of 2014 as a result of the growth in e-commerce. Yields at FedEx SmartPost decreased 5% during the first quarter of 2014 primarily due to higher postage costs and lower fuel surcharges, partially offset by rate increases. FedEx SmartPost yield represents the amount charged to customers net of postage paid to the USPS.

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The FedEx Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by the Department of Energy. Our fuel surcharge ranged as follows for the three-month periods ended August 31:

Low	6.50 %	7.00 %
High	7.00	8.50
Weighted-average	6.66	7.80

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 5% during the first quarter of 2014 driven by higher volumes and revenue per package. The increase to operating income was partially offset by the significant negative impact of fuel and higher network expansion costs, as we continue to invest heavily in the growing FedEx Ground and FedEx SmartPost businesses. The FedEx Ground segment results were also negatively impacted by one fewer operating day. The decline in operating margin is attributable to the net negative impact of fuel.

Purchased transportation costs increased 12% during the first quarter of 2014 primarily as a result of volume growth. Salaries and employee benefits expense increased 10% during the first quarter of 2014 primarily due to additional staffing to support volume growth. Intercompany charges increased 9% in the first quarter of 2014 primarily due to higher allocated marketing, sales and information technology costs.

Independent Contractor Model

Although FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax audits or other administrative challenges) where the classification of its independent contractors is at issue, a number of recent judicial decisions support our classification, and we believe our relationship with the contractors is generally excellent. For a description of these proceedings, see Risk Factors and Note 8 of the accompanying unaudited condensed consolidated financial statements.

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

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FEDEX FREIGHT SEGMENT

FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected statistics for the three-month periods ended August 31:

	2013	2012	Percent — Change	2013	2012
Revenues	$ 1,424	$ 1,399	2		100.0 %	100.0 %
Operating expenses:
Salaries and employee benefits	598	599			42.0	42.8
Purchased transportation	234	226	4		16.4	16.2
Rentals	32	29	10		2.3	2.1
Depreciation and amortization	57	53	8		4.0	3.8
Fuel	145	148	(2	)	10.2	10.6
Maintenance and repairs	46	48	(4	)	3.2	3.4
Intercompany charges	121	111	9		8.5	7.9
Other	100	95	5		7.0	6.8
Total operating expenses	1,333	1,309	2		93.6 %	93.6 %
Operating income	$ 91	$ 90	1
Operating margin	6.4 %	6.4 %		bp
Average daily LTL shipments (in thousands)
Priority	61.1	61.4
Economy	27.6	26.6	4
Total average daily LTL shipments	88.7	88.0	1
Weight per LTL shipment (lbs)
Priority	1,244	1,215	2
Economy	993	999	(1	)
Composite weight per LTL shipment	1,166	1,150	1
LTL yield (revenue per hundredweight)
Priority	$ 17.88	$ 17.73	1
Economy	25.84	25.33	2
Composite LTL yield	$ 19.99	$ 19.72	1

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 2% during the first quarter of 2014 due to higher weight per shipment, LTL yields and average daily LTL shipments, partially offset by one fewer operating day. LTL yield increased 1% during the first quarter of 2014 due to improvements in FedEx Freight Priority and FedEx Freight Economy yields resulting from higher rates. Weight per shipment increased 1% driven by FedEx Freight Priority service offerings, while average daily LTL shipments increased 1% primarily due to FedEx Freight Economy.

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

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The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge ranged as follows for the three-month periods ended August 31:

Low	22.70 %	21.80 %
High	23.20	24.00
Weighted-average	23.00	22.60

In July 2013, FedEx Freight implemented a rate increase of 4.5% for LTL shipments. In July 2012, FedEx Freight implemented a rate increase of 6.9% for LTL shipments.

FedEx Freight Segment Operating Income

Despite the headwind from one fewer operating day, operating income increased slightly while operating margin remained flat at FedEx Freight in the first quarter of 2014, as higher weight per shipment, LTL yields and average daily LTL shipments were partially offset by higher intercompany charges.

In the first quarter of 2014, intercompany charges increased 9% primarily due to higher allocated sales costs. Purchased transportation expense increased 4% due to higher rates and the increased utilization of rail, partially offset by a lower cost per mile due to our ability to optimize mode of transportation. Depreciation and amortization expense increased 8% due to continued investment in transportation equipment and technology.

Fuel costs decreased 2% during the first quarter of 2014 due to increased utilization of rail and fuel efficiency improvements. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had minimal impact on operating income in the first quarter of 2014.

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FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $5.1 billion at August 31, 2013, compared to $4.9 billion at May 31, 2013. The following table provides a summary of our cash flows for the three-month periods ended August 31 (in millions):

	2013
Operating activities:
Net income	$ 489	$	459
Noncash charges and credits	810		782
Changes in assets and liabilities	(370	)	(338	)
Cash provided by operating activities	929		903
Investing activities:
Capital expenditures	(572	)	(972	)
Business acquisitions, net of cash acquired			(483	)
Proceeds from asset dispositions and other	10		12
Cash used in investing activities	(562	)	(1,443	)
Financing activities:
Principal payments on debt			(301	)
Proceeds from debt issuance			991
Proceeds from stock issuances	131		30
Excess tax benefit on the exercise of stock options	14		4
Dividends paid	(48	)	(44	)
Purchase of treasury stock	(278	)	(246	)
Other			(9	)
Cash (used in) provided by financing activities	(181	)	425
Effect of exchange rate changes on cash	(7	)	15
Net increase (decrease) in cash and cash equivalents	$ 179	$	(100	)

Cash flows from operating activities increased $26 million in the first quarter of 2014 primarily due to lower variable compensation payouts and higher net income, partially offset by an income tax refund received in the prior year. We made contributions of $165 million to our tax qualified U.S. domestic pension plans (U.S. Pension Plans) during the first quarter of 2014 and $140 million in contributions to our U.S. Pension Plans during the first quarter of 2013. Capital expenditures during the first three months of 2014 were lower primarily due to decreased spending for aircraft and vehicle replacement at FedEx Express. See Capital Resources for a discussion of capital expenditures during 2014 and 2013.

During the first quarter of 2014, we repurchased 2.8 million shares of FedEx common stock at an average price of $98 per share for a total of $278 million. As of August 31, 2013, 7.4 million shares remained under existing share repurchase authorizations.

CAPITAL RESOURCES

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

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The following table compares capital expenditures by asset category and reportable segment for the three-month periods ended August 31 (in millions):

Aircraft and related equipment	2013 — $ 197	2012 — $ 474	Dollar Change — $ (277	)	(58	)
Facilities and sort equipment	125	113	12		11
Vehicles	149	264	(115	)	(44	)
Information and technology investments	71	91	(20	)	(22	)
Other equipment	30	30
Total capital expenditures	$ 572	$ 972	$ (400	)	(41	)
FedEx Express segment	305	749	(444	)	(59	)
FedEx Ground segment	161	86	75		87
FedEx Freight segment	40	44	(4	)	(9	)
FedEx Services segment	66	90	(24	)	(27	)
Other		3	(3	)	NM
Total capital expenditures	$ 572	$ 972	$ (400	)	(41	)

Capital expenditures during the first quarter of 2014 were lower than the prior-year period primarily due to decreased spending for aircraft and vehicle replacement at FedEx Express. Aircraft and related equipment purchases at FedEx Express during the first quarter of 2014 included the delivery of two Boeing 757 (B757) aircraft.

LIQUIDITY OUTLOOK

We believe that our cash and cash equivalents, cash flow from operations and available financing sources are adequate to meet our liquidity needs, including working capital, capital expenditure requirements and debt payment obligations. Our cash and cash equivalents balance at August 31, 2013 includes $437 million of cash in offshore jurisdictions associated with our permanent reinvestment strategy. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic debt or working capital obligations. Although we expect higher capital expenditures in 2014, we anticipate that our cash flow from operations will be sufficient to fund these expenditures. Historically, we have been successful in obtaining unsecured financing, from both domestic and international sources, although the marketplace for such investment capital can become restricted depending on a variety of economic factors.

Our capital expenditures are expected to be approximately $4.0 billion in 2014 and include spending for aircraft and aircraft-related equipment at FedEx Express, sort facility expansion, primarily at FedEx Ground, and vehicle replacement at all our transportation segments. We invested $197 million in aircraft and aircraft-related equipment in the first quarter of 2014 and expect to invest an additional $1.2 billion for aircraft and aircraft-related equipment during the remainder of 2014. We have several aircraft modernization programs underway which are supported by the purchase of Boeing 777 Freighter, Boeing 767-300 Freighter and B757 aircraft. These aircraft are significantly more fuel-efficient per unit than the aircraft types previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to replace older aircraft. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements.

During the first quarter of 2014, we entered into supplemental agreements to purchase the 16 B757 option aircraft pursuant to an agreement originally entered into in March 2013. Delivery of the aircraft will occur through 2015.

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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 March 2018. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our last four fiscal quarters rentals and landing fees) to capital (adjusted debt plus total common stockholders investment) that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 51% at August 31, 2013. We believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of August 31, 2013, no commercial paper was outstanding and the entire $1 billion under the revolving credit facility was available for future borrowings.

In September 2013, we made $165 million in required contributions to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments. For the remainder of 2014, we have $330 million in required contributions to our U.S. Pension Plans.

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

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CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The following table sets forth a summary of our contractual cash obligations as of August 31, 2013. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of long-term debt, this table does not include amounts already recorded in our balance sheet as current liabilities at August 31, 2013. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table below. We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare plan liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table below due to the absence of scheduled maturities. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.

	Payments Due by Fiscal Year (Undiscounted) (in millions) — 2014 (1)	2015	2016	2017	2018	Thereafter	Total
Operating activities:
Operating leases	$ 1,545	$ 1,886	$ 1,686	$ 1,731	$ 1,267	$ 6,800	$ 14,915
Non-capital purchase obligations and other	227	180	123	100	44	109	783
Interest on long-term debt	92	138	138	138	138	2,583	3,227
Quarterly contributions to our U.S. Pension Plans	495						495
Investing activities:
Aircraft and aircraft-related capital commitments	828	1,121	1,083	891	1,475	5,211	10,609
Other capital purchase obligations	149	2	1				152
Financing activities:
Debt	250					2,740	2,990
Total	$ 3,586	$ 3,327	$ 3,031	$ 2,860	$ 2,924	$ 17,443	$ 33,171

(1) Cash obligations for the remainder of 2014.

Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements. See Note 7 of the accompanying unaudited condensed consolidated financial statements for more information.

Operating Activities

The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at August 31, 2013.

Included in the table above within the caption entitled Non-capital purchase obligations and other is our estimate of the current portion of the liability ($1 million) for uncertain tax positions and amounts for purchase obligations that represent noncancelable agreements to purchase goods or services that are not capital related. Such contracts include those for printing and advertising and promotions contracts. We cannot reasonably estimate the timing of the long-term payments or the amount by which the liability for uncertain tax positions will increase or decrease over time; therefore, the long-term portion of the liability for uncertain tax positions ($40 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.

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We had $416 million in deposits and progress payments as of August 31, 2013 on aircraft purchases and other planned aircraft-related transactions.

Investing Activities

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

Financing Activities

The amounts reflected in the table above for long-term debt represent future scheduled payments on our long-term debt. For the remainder of 2014, we have scheduled principal debt payments of $250 million.

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

CRITICAL ACCOUNTING ESTIMATES

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

GOODWILL. Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that the fair value of a reporting unit has fallen below its carrying value. We do not believe there has been any change of events or circumstances that would indicate that a reevaluation of the goodwill of our reporting units is required as of August 31, 2013, nor do we believe the goodwill of our reporting units is at risk of failing impairment testing. For additional details on goodwill impairment testing, refer to Note 1 of our Annual Report.

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

FORWARD-LOOKING STATEMENTS

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

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economic conditions in the global markets in which we operate;

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

damage to our reputation or loss of brand equity;

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

the price and availability of jet and vehicle fuel;

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

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

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

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

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

our ability to execute on our business realignment program;

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

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

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

any impact on our business from disruptions or modifications in service by the USPS, which is a significant customer and vendor of FedEx, as a consequence of the USPSs current financial difficulties or any resulting structural changes to its operations, network, service offerings or pricing;

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

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

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

market acceptance of our new service and growth initiatives;

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

the outcome of future negotiations to reach new collective bargaining agreements including with the union that represents the pilots of FedEx Express (the current pilot contract became amendable in March 2013, and the parties are currently in negotiations);

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

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

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

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

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of August 31, 2013, there had been no material changes in our market risk sensitive instruments and positions since our disclosures in our Annual Report.

The principal foreign currency exchange rate risks to which we are exposed are in the Chinese yuan, euro, Brazilian real, Canadian dollar and the British pound. Historically, our exposure to foreign currency fluctuations is more significant with respect to our revenues than our expenses, as a significant portion of our expenses are denominated in U.S. dollars, such as aircraft and fuel expenses. During the first three months of 2014, the U.S. dollar strengthened relative to the currencies of the foreign countries in which we operate as compared to May 31, 2013; however, this strengthening did not have a material effect on our results.

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

Item 4. Controls and Procedures

The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs 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 August 31, 2013 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended August 31, 2013, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in our Annual Report (under the heading Risk Factors in Managements Discussion and Analysis of Results of Operations and Financial Condition) in response to Part I, Item 1A of Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information on FedExs repurchases of our common stock during the first quarter of 2014:

ISSUER PURCHASES OF EQUITY SECURITIES

Period — June 1-30, 2013	998,561	Average Price Paid per Share — $ 96.12	998,561	9,189,439
July 1-31, 2013	1,733,325	99.23	1,733,325	7,456,114
Aug. 1-31, 2013	93,217	104.97	93,217	7,362,897
Total	2,825,103	98.32	2,825,103

The repurchases were made under two share repurchase programs that were approved by our Board of Directors. The repurchase program announced in July 2003 authorized us to purchase, in the open market or in negotiated or block transactions, up to an aggregate of 5 million shares of our common stock. There are now no shares remaining authorized for purchase under this program. The repurchase program announced in March 2013 authorized us to purchase, in the open market or in negotiated or block transactions, up to an aggregate of 10 million shares of our common stock. A total of 7,362,897 shares remain authorized for purchase under the 2013 share repurchase program, which is the only such program that currently exists. This program does not have an expiration date.

Item 6. Exhibits

Exhibit Number	Description of Exhibit
10.1	Amendment dated June 24, 2013, amending the Transportation Agreement dated April 23, 2013 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.

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Exhibit Number	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1	Interactive Data Files.

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SIGNATURE

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

	FEDEX CORPORATION
Date: September 19, 2013	/s/ JOHN L. MERINO
	JOHN L. MERINO CORPORATE VICE PRESIDENT AND PRINCIPAL ACCOUNTING OFFICER

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EXHIBIT INDEX

Exhibit Number	Description of Exhibit
10.1	Amendment dated June 24, 2013, amending the Transportation Agreement dated April 23, 2013 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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