Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number: 1-15829

FEDEX CORPORATION
(Exact name of registrant as specified in its charter)

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

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

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

FEDEX CORPORATION

INDEX

2

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)

ASSETS

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

3

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

LIABILITIES AND STOCKHOLDERS' INVESTMENT

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

4

FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

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

5

FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)

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

6

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1)   Summary of Significant Accounting Policies

GENERAL

        These interim financial statements of FedEx Corporation ("FedEx") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2003. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.

        In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our consolidated financial position as of August 31, 2003 and the consolidated results of our operations and cash flows for the three-month periods ended August 31, 2003 and 2002. Operating results for the three-month period ended August 31, 2003 are not necessarily indicative of the results that may be expected for the year ending May 31, 2004.

        Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2004 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

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

        RECENT ACCOUNTING PRONOUNCEMENTS.    During the first quarter of 2004, we adopted Statement of Financial Accounting Standards No. ("SFAS") 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," and SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activity." The adoption of these statements did not have any effect on our financial position or results of operations.

        AIRLINE STABILIZATION COMPENSATION.    In March 2003, the Department of Transportation ("DOT") asserted that we were overpaid under the Air Transportation Safety and System Stabilization Act (the "Act") by $31.6 million and has demanded repayment. We have filed requests for administrative and judicial review of this determination. We believe that we have complied with all aspects of the Act, that it is probable we will ultimately collect the remaining $18 million receivable we have recorded, and that we will not be required to pay any portion of the DOT's $31.6 million demand. We cannot be assured of the ultimate outcome; however, it is reasonably possible that a material reduction to the $119 million of compensation recognized in 2002 could occur.

        STOCK COMPENSATION.    We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations to measure compensation expense for stock-based compensation plans. See Note 6 for a discussion of the assumptions underlying the pro forma calculations below. If compensation cost for stock-based compensation plans had been determined under SFAS 123, pro forma net income, stock option compensation expense, and basic and diluted earnings per common share for the three-month periods ended August 31, 2003 and 2002, assuming all options granted in 1996 and thereafter were valued at fair value using the Black-Scholes method, would have been as follows (in millions, except per share amounts):

7

(2)   Business Realignment Costs

        During the first quarter of 2004, Federal Express Corporation ("FedEx Express") offered early retirement and severance programs to continue resizing the FedEx Express U.S. organization and improving profitability. Voluntary early retirement incentives, with enhanced pension and postretirement healthcare benefits, were offered to certain groups of employees who are age 50 or older. Voluntary severance incentives were offered to eligible employees. Both programs commenced August 1, 2003, are limited to eligible U.S. salaried staff employees and managers at FedEx Express and will expire during the second quarter of 2004. Also, certain management positions were eliminated during the first quarter of 2004, based on the anticipated staff reductions from the voluntary programs.

        The pretax cost for these voluntary programs and certain management severance is estimated to be $230 million to $290 million in 2004, with most of the cost to be incurred in the first half of the year. The ultimate cost will depend on actual employee acceptance rates of the voluntary programs. Between one-third and one-half of the pretax cost will be cash. The remainder of the costs relate primarily to incremental pension and postretirement healthcare benefits. Costs for the benefits provided under the voluntary programs are recognized in the period that eligible employees accept the offer. The cost of these initiatives is reflected as a separate component of operating expenses in the caption "Business realignment costs" in our unaudited condensed consolidated statements of income. The savings from these initiatives will be reflected primarily in lower ongoing salaries, wages and benefit costs.

        During the first quarter, we incurred $132 million of business realignment costs. Voluntary early retirement and severance program costs were $91 million. Costs for management severance agreements, including compensation related to previously granted stock options, incremental pension and healthcare benefits, and professional fees directly associated with this initiative were $41 million during the first quarter. No material payments of these costs were made in the first quarter of 2004.

8

(3)   Goodwill and Other Intangible Assets

        The carrying amount of goodwill at August 31, 2003 and May 31, 2003 was attributable as follows: $397 million to the FedEx Express Segment and $666 million to the FedEx Freight Segment.

        The components of our amortizing intangible assets, included in other long-term assets on the accompanying unaudited condensed balance sheets, were as follows (in millions):

        Amortization expense for intangible assets other than goodwill during the first quarter of 2004 was $3 million. Estimated amortization expense is $6 million for the remainder of 2004 and $8 million for each of the four succeeding fiscal years.

(4)   Comprehensive Income

        The following table provides a reconciliation of net income reported in our condensed consolidated financial statements to comprehensive income (in millions):

(5)   Financing Arrangements

        From time to time, we finance certain operating and investing activities through the issuance of commercial paper. Our commercial paper program is backed by unused commitments under two revolving credit agreements totaling $1 billion and reduces the amount available under these agreements. One revolver provides for $750 million through September 28, 2006. The second is a 364-day facility providing for $250 million through September 26, 2003. We intend to renew the 364-day facility through September 2004. At August 31, 2003, no commercial paper borrowings were outstanding and the entire amount under the credit facilities was available.

(6)   Stock Option Assumptions

        We account for stock options using the intrinsic value method wherein compensation expense is recognized on stock options granted to employees only for the excess of the market price of our common stock at the date of grant over the option exercise price. All of our options have an exercise price equal to the fair value of our stock at the date of grant so no compensation expense is recorded.

9

        Some companies recognize compensation expense for the fair value of the option right itself. We have elected not to adopt this accounting method because it requires the use of subjective valuation models, which we believe are not representative of the real value of the option to either FedEx or our employees. However, we are required to disclose the pro forma effect of accounting for stock options using such a valuation method for all options granted in 1996 and thereafter. We use the Black-Scholes option pricing model to calculate the fair value of options for our pro forma disclosures. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, forfeiture rate and exercise price. Many of these assumptions are judgmental and highly sensitive in the determination of pro forma compensation expense. Following is a table of the key weighted average assumptions used in the option valuation calculations for the options granted in the three-month periods ended August 31, 2003 and 2002 and a discussion of our methodology for developing each of the assumptions used in the valuation model.

        Expected Lives.    This is the period of time over which the options granted are expected to remain outstanding. Generally, options granted have a maximum term of ten years. We examine actual stock option exercises to determine the expected life of the options. Based on this experience, our average expected option life is currently four years. The longer the expected life of the option, the higher the calculated fair value of the option.

        Expected Volatility.    Stock price volatility has a significant, direct effect on the valuation of stock options. Actual changes in the market value of our stock are used to calculate the volatility assumption. We calculate daily market value changes from the date of grant over a past period equal to the expected life of the options to determine volatility.

        Risk-Free Interest Rate.    This is the U.S. Treasury Strip rate posted at the date of grant having a term equal to the expected life of the option. The risk-free interest rate has a direct effect on the calculated fair value.

        Dividend Yield.    This is the annual rate of dividends per share over the exercise price of the option. In July 2002, we paid the first dividend in the history of the company. Therefore, the fair value of options prior to 2003 is not affected by the dividend yield. The dividend yield has an inverse effect on the fair value of the option.

        Forfeiture Rate.    This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. This percentage is derived from historical experience and will lower compensation expense. Our forfeiture rate is approximately 8%.

        During the first quarter of 2004, we made option grants of 3,548,550 shares at a weighted average exercise price of $64.53 per share, primarily in connection with our principal annual stock option grant. The weighted average Black-Scholes value of these grants under the assumptions indicated above was $17.97 per option.

        Total stock options outstanding at August 31, 2003 represented 6.1% of total outstanding common shares and options.

10

(7)    Computation of Earnings Per Share

        The calculation of basic and diluted earnings per common share for the three-month periods ended August 31, 2003 and 2002 was as follows (in millions, except per share amounts):

(8)   Business Segment Information

        We are a premier global provider of transportation, e-commerce and supply chain management services, whose operations are primarily represented by FedEx Express, the world's largest express transportation company; FedEx Ground Package System, Inc. ("FedEx Ground"), North America's second largest provider of small-package ground delivery service; and FedEx Freight Corporation ("FedEx Freight"), the largest U.S. provider of regional less-than-truckload ("LTL") freight services. These businesses form the core of our reportable segments. Other business units in the FedEx portfolio are FedEx Trade Networks, Inc., a global trade services company; FedEx Custom Critical, Inc., a critical-shipment carrier; FedEx Supply Chain Services, Inc., a contract logistics provider; and Caribbean Transportation Services, Inc. a leading provider of airfreight forwarding services.

        Effective in 2004, we changed the reporting and responsibility relationships of our smaller business units so that they now report directly to a core segment. As a result, our reportable segments now include the following businesses:

11

        The following table provides a reconciliation of reportable segment revenues and operating income to our consolidated financial statement totals (in millions). Prior year amounts have been reclassified to conform to the new segment presentation.

(9)   Guarantees and Indemnifications

        We adopted Financial Accounting Standards Board Interpretation No. ("FIN") 45 effective January 1, 2003. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to certain guarantees and indemnifications issued or modified after December 31, 2002. Accordingly, any contractual guarantees or indemnifications we issue or modify subsequent to December 31, 2002 will be evaluated and, if required, a liability for the fair value of the obligation undertaken will be recognized. Substantially all of our guarantees and indemnifications were entered into prior to December 31, 2002 and have not been modified since then. Therefore, no amounts have been recognized in our financial statements for the underlying fair value of these agreements. During the first quarter, there were no contracts entered into or modified containing guarantees or indemnifications that must be recognized or disclosed.

        Certain of our long-term debt is guaranteed by our subsidiaries. The guarantees are full and unconditional, joint and several, and any subsidiaries that are not guarantors are minor as defined by Securities and Exchange Commission ("SEC") regulations. FedEx, as the parent company issuer of this debt, has no independent assets or operations. There are no significant restrictions on our ability or the ability of any guarantor to obtain funds from its subsidiaries by such means as a dividend or loan.

(10) Variable Interest Entities ("VIE")

        FedEx Express entered into a lease in July 2001 for two MD11 aircraft. These assets are held by a separate entity, which was established and is owned by independent third parties who provide financing through debt and equity participation. This lease is accounted for as an operating lease. Under current accounting principles generally accepted in the United States, the assets and the related obligations are excluded from the consolidated balance sheet and the entity is not consolidated. The original cost of the assets under the lease was approximately $150 million.

        This lease contains residual value guarantees that obligate FedEx Express, not the third party owners, to absorb the majority of the losses, if any, of the entity. The lease also provides FedEx Express with the right to receive any residual returns of the entity if they occur. At August 31, 2003, the residual value guarantee associated with this lease, which represents the maximum exposure to loss, was $89 million. Under FIN 46, we will be required to consolidate the

12

separate entity that owns the two MD11 aircraft beginning September 1, 2003. Since the entity was created before February 1, 2003, we will initially measure the assets and liabilities at their carrying amounts, which are the amounts at which they would have been recorded in the consolidated financial statements if FIN 46 had been effective at the inception of the lease. Accordingly, our long-term assets and long-term liabilities will increase by approximately $140 million at September 1, 2003. The consolidation of this VIE will not have a material effect on our financial position, results of operations or cash flows.

(11) Commitments and Contingencies

        As of August 31, 2003, our purchase commitments for the remainder of 2004 and annually thereafter under various contracts were as follows (in millions):

(1)

Primarily aircraft modifications.

(2)

Primarily vehicles, facilities, computers, other equipment and advertising and promotions contracts.

        FedEx Express is committed to purchase one A300, two A310s, ten A380s, 17 ATR42s and two ATR72s to be delivered through 2012. Deposits and progress payments of $26 million have been made toward these purchases and other planned aircraft-related transactions.

        In September 2003, the 9th Circuit Court of Appeals ruled in our favor in the class action lawsuit alleging we improperly suspended our money-back guarantee during the UPS strike in 1997. The lower court had entered judgment against FedEx Express of approximately $70 million, including accrued interest through August 31, 2003 and fees for the plaintiffs' attorney. The court of appeals has overturned that decision and entered judgment in FedEx's favor.

        In August 2003, we received a favorable ruling from the U.S. District Court in Memphis over the tax treatment of jet engine maintenance costs. The court held that these costs were ordinary and necessary business expenses and properly deductible by us. In connection with an Internal Revenue Service ("IRS") audit for the tax years 1993 and 1994, the IRS had proposed adjustments characterizing routine jet engine maintenance costs as capital expenditures that must be recovered over seven years, rather than as expenses that are deducted immediately, as has been our practice. We filed an administrative protest of these adjustments and engaged in discussions with the Appeals office of the IRS. After these discussions failed to result in a settlement, in 2001 we paid $70 million in tax and interest and filed suit in Federal District Court for a complete refund of the amounts paid, plus interest. Although the IRS has continued to assert its position in audits for the years 1995 through 1998 with respect to maintenance costs for jet engines and rotable aircraft parts, we believe this ruling should also apply to future tax years.

        As a result of this ruling, we recognized a one-time benefit of $26 million, net of tax, primarily related to the reduction of accruals related to this matter and the recognition of interest earned to date on the amount we paid in 2001. These adjustments affected both net interest expense ($30 million pre-tax) and income tax expense ($7 million). Future periods are not expected to be materially affected by the resolution of this matter.

13

        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 materially adversely affect our financial position, results of operations or cash flows.

(12) Related Party Transactions

        In November 1999, FedEx entered into a multi-year naming rights agreement with the National Football League Washington Redskins professional football team. Under this agreement, FedEx has certain marketing rights, including the right to name the Redskins' stadium "FedExField." In August 2003, Frederick W. Smith, Chairman, President and Chief Executive Officer of FedEx, personally acquired an approximate 10% ownership interest in the Washington Redskins and joined its board of directors.

(13) Supplemental Cash Flow Information

        During the first quarter of 2004, FedEx Express amended two leases for MD11 aircraft, which now require FedEx Express to record $110 million in both fixed assets and long-term liabilities.

14

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

The Board of Directors and Stockholders
FedEx Corporation

We have reviewed the accompanying condensed consolidated balance sheet of FedEx Corporation as of August 31, 2003, and the related condensed consolidated statements of income and cash flows for the three-month periods ended August 31, 2003 and 2002. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of FedEx Corporation as of May 31, 2003, and the related consolidated statements of income, changes in stockholders' investment and comprehensive income, and cash flows for the year then ended not presented herein and in our report dated June 23, 2003, 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, 2003, 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 16, 2003

15

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

GENERAL

        The following management's discussion and analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies and estimates, of FedEx. This discussion should be read in conjunction with the accompanying financial statements and our Annual Report on Form 10-K for the year ended May 31, 2003 ("Annual Report"), which include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

        FedEx is one of the largest transportation companies in the world. Our business strategy is to offer a portfolio of transportation services through our independently operated business units. These business units are primarily represented by FedEx Express, the world's largest express transportation company; FedEx Ground, North America's second largest provider of small-package ground delivery service; and FedEx Freight, the largest U.S. provider of regional less-than-truckload ("LTL") freight services. These businesses form the core of our reportable segments. Effective in 2004, we changed the reporting and responsibility relationships of our smaller business units so that they now report directly to a core segment. See the "Reportable Segments" section for further discussion.

        The key factors that affect our operating results are the volumes of shipments transported through our networks, as measured by our average daily volume; the mix of services purchased by our customers; the prices we obtain for our services, as measured by average price per shipment (yield); our ability to manage our cost structure for capital expenditures and operating expenses such as salaries, wages and benefits, fuel and maintenance; and our ability to match operating costs to shifting volume levels.

        Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2004 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

Dollars in millions, except per share amounts
Three-month periods ended August 31:

⁽¹⁾

Includes $132 million ($82 million, net of tax, or $0.27 per diluted share) of business realignment costs described further below.

⁽²⁾

Includes a $26 million, net of tax, or $0.08 per diluted share benefit related to a favorable ruling on an IRS tax case described further below.

16

        Revenue growth of 4% during the first quarter of 2004 was attributable to strong growth of international yields at FedEx Express, as well as increased yields at FedEx Ground and FedEx Freight, led by continued growth of FedEx Ground's home delivery service. FedEx Ground and FedEx Freight volumes were negatively affected early in the first quarter of 2004 by weaker than expected inventory replenishment in the retail sector.

        Operating income in the first quarter of 2004 decreased 29% due to FedEx Express business realignment costs of $132 million related to early retirement and severance programs. See "Business Realignment Costs" for a discussion of these costs. These costs more than offset an improvement in the operating margins of FedEx Ground and FedEx Freight. Operating income was also negatively affected by higher pension and healthcare costs in the first quarter.

        During the first quarter of 2004, we received a favorable ruling from the U.S. District Court in Memphis over the tax treatment of jet engine maintenance costs. The court held that these costs were ordinary and necessary business expenses and properly deductible. As a result of this decision, we recognized a one-time benefit of $26 million, net of tax, or $0.08 per diluted share, in the first quarter of 2004, primarily related to the reduction of accruals related to this matter and the recognition of interest earned to date on amounts previously paid to the IRS. Future periods are not expected to be materially affected by the resolution of this matter (also, see Note 11 to the accompanying financial statements).

        Net interest expense decreased 84% in the first quarter of 2004, primarily due to the favorable resolution of the tax case described above. The reduction of our effective tax rate for the first quarter of 2004 to 34.5% was also due to the tax ruling described above. The effective tax rate for the first quarter and full year of 2003 was 38%. We expect the effective tax rate to be approximately 38% for the second through fourth quarters of 2004 and 37.5% for the fiscal year; however, the actual rate will depend on a number of factors, including the amount and source of operating income.

        Net income and diluted earnings per share decreased in the first quarter of 2004 due to the business realignment costs at FedEx Express. These costs were $132 million ($82 million, net of tax, or $0.27 per diluted share) and were partially offset by the $26 million, net of tax, or $0.08 per diluted share benefit recognized due to the favorable ruling on the IRS tax case.

Business Realignment Costs

        During the first quarter of 2004, FedEx Express offered early retirement and severance programs to continue resizing the FedEx Express U.S. organization and improving profitability. Voluntary early retirement incentives, with enhanced pension and postretirement healthcare benefits, were offered to certain groups of employees who are age 50 or older. Voluntary severance incentives were offered to eligible employees. Both programs commenced August 1, 2003, are limited to eligible U.S. salaried staff employees and managers at FedEx Express and will expire during the second quarter of 2004. Also, certain management positions were eliminated during the first quarter of 2004, based on the anticipated staff reductions from the voluntary programs.

        The pretax cost for these voluntary programs and certain management severance is estimated to be $230 million to $290 million in 2004, with most of the cost to be incurred in the first half of the year. The ultimate cost will depend on actual employee acceptance rates of the voluntary programs. Between one-third and one-half of the pretax costs will be cash. The remainder of the costs relate primarily to incremental pension and postretirement healthcare benefits. Costs for the benefits provided under the voluntary programs are recognized in the period that eligible employees accept the offer. The cost of these initiatives is reflected as a separate component of operating expenses in the caption "Business realignment costs" in our unaudited condensed consolidated statements of income. We continue to expect the savings from these initiatives to be $100 million to $130

17

million in 2004, primarily in the second half of the year. The savings will be reflected primarily in lower ongoing salaries, wages and benefit costs. Based on employee acceptance levels to date, we believe the costs and savings will be near the high end of the ranges.

        During the first quarter, we incurred $132 million of business realignment costs. Voluntary early retirement and severance program costs were $91 million. Costs for management severance agreements, including compensation related to previously granted stock options, incremental pension and healthcare benefits and professional fees directly associated with this initiative, were $41 million during the first quarter. No material payments of these costs were made in the first quarter of 2004.

        Over the past few years, we have taken many steps to bring our expense growth in line with revenue growth, particularly at FedEx Express, while maintaining our industry-leading service levels. We have significantly decreased capital expenditures by reducing aircraft orders, consolidating facilities and discontinuing low-value programs. The early retirement and severance programs are another step in this ongoing process of reducing our cost structure in order to increase our competitiveness, meet the future needs of our employees and provide the expected financial returns for our shareholders.

Outlook

        Our current outlook assumes year-over-year economic improvement, particularly in the manufacturing and wholesale sectors, to be evident in our second half results as we anticipate revenue and volume growth in all segments. We continue to believe the fundamentals for domestic economic acceleration in the U.S. economy are in place, including supportive conditions in the overall financial markets, the tax stimulus package, continued accommodative monetary policy and improved consumer confidence. Our management teams are focusing on sizing our networks for current economic conditions, improving our service offerings, enhancing the customer experience and positioning FedEx to take full advantage of an economic recovery. We continue to believe we are well positioned for long-term growth when the economy recovers and experiences sustained growth.

        Increasing pension and healthcare expenses, as well as the net costs of our early retirement and severance programs discussed above, will negatively impact operating income and margins during the remainder of 2004. We expect our net pension cost for 2004 will increase by approximately $115 million. Despite these increases in employee retirement costs, our retirement programs continue to be adequately funded with assets more than sufficient to meet our current obligations.

        Future results will depend upon a number of factors, including the timing, speed and magnitude of the U.S. domestic economic recovery, international economic conditions, the extent to which eligible employees participate in our early retirement and severance programs, the impact from any terrorist activities or international conflicts, our ability to match our cost structure and capacity with shifting volume levels and our ability to effectively leverage our new service and growth initiatives. In addition, adjustments to our fuel surcharges lag changes in actual jet and diesel fuel prices paid. Therefore, our operating income could be materially affected should the spot price of fuel suddenly change by a significant amount or should we be unable to further increase our fuel surcharge in response to rising fuel prices due to competitive pressures.

        Although increased security requirements for air cargo carriers have been put in place and further measures may be forthcoming, as of yet we have no estimate of what impact any such measures may ultimately have on our results of operations. See "Forward-Looking Statements" for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.

18

REPORTABLE SEGMENTS

        FedEx Express, FedEx Ground and FedEx Freight form the core of our reportable segments. Effective in 2004, we changed the reporting and responsibility relationships of our smaller business units so they now report directly to a core segment. As a result, our reportable segments now include the following businesses:

        FedEx Services provides the customer-facing sales, marketing and information technology functions, primarily for FedEx Express and FedEx Ground. The costs for these activities are allocated based on metrics such as relative revenues and estimated services provided. These allocations materially approximate the cost of providing these functions. The line item "Intercompany charges" on the accompanying financial summaries of our reportable segments includes the allocations from FedEx Services to FedEx Express, FedEx Ground and FedEx Freight, 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. Prior year amounts have been reclassified to conform to the new segment presentation. Management evaluates segment financial performance based on operating income.

19

FEDEX EXPRESS SEGMENT

        The following table compares revenues, operating expenses and operating income (dollars in millions) and selected statistics (in thousands, except yield amounts) for the three-month periods ended August 31:

⁽¹⁾

Other includes, among other things, FedEx Trade Networks.

⁽²⁾

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

20

FedEx Express Segment Revenues

        During the first quarter of 2004, total revenue increased 4%, principally due to an increase in IP revenues. IP revenues grew 12% on 8% yield growth and 3% volume growth. Average daily volume growth was 9% in the Asian market. Outbound shipments from the U.S., Europe and Latin America experienced modest average daily volume growth. U.S. domestic volumes at FedEx Express increased, yet continue to be below levels experienced prior to the economic slowdown, which began in calendar 2001. Freight revenue decreased slightly due to lower U.S. domestic volumes, despite increased yields.

        U.S. domestic composite yield was flat as a slight decline in average rate per pound was offset by increased fuel surcharge revenue. For U.S. domestic shipments and U.S. outbound international shipments, an average list price increase of 3.5% became effective January 6, 2003. The increase in IP yield was primarily attributable to Europe and was due to favorable exchange rate differences and increases in average weight per package and fuel surcharge revenue.

        Fuel surcharge revenue was higher in the first quarter of 2004 due to higher jet fuel prices and the introduction of a dynamic international fuel surcharge in September 2002. Our fuel surcharge is based on the spot price for jet fuel. Using this index, the U.S. domestic fuel surcharge ranged between 3.0% and 5.0% during the first quarter and between 2.0% and 2.5% during the prior year period. International fuel surcharges were as high as 4% during the first quarter of 2004.

FedEx Express Segment Operating Income

        Operating income at FedEx Express decreased during the first quarter of 2004. The decrease was attributable to $132 million of costs related to our early retirement and severance programs. Increases in revenues and ongoing cost control efforts offset higher salaries, wages and benefits from higher pension and healthcare costs and base salary increases. First quarter results for 2003 included a gain realized from the insurance settlement on a 727-200 aircraft destroyed in an accident in July 2002 that resulted in a net $8 million favorable impact on operating income during the quarter.

        During the first quarter, fuel costs were higher, due to a 9% increase in the average price per gallon of aircraft fuel. However, fuel surcharge revenue more than offset higher jet fuel prices. Maintenance expenses declined 3% during the first quarter.

        Purchased transportation costs increased in the first quarter as IP volume growth led to an increase in the utilization of global service providers. Rentals and landing fees decreased due to the amendment of six operating leases for MD11 aircraft that resulted in these aircraft being recorded in fixed assets. Depreciation and amortization expense remained flat during the first quarter, reflecting a trend of decreasing levels of capital spending.

21

FEDEX GROUND SEGMENT

        The following table compares revenues, operating expenses and operating income (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three-month periods ended August 31:

⁽¹⁾

Package statistics include only the operations of FedEx Ground.

FedEx Ground Segment Revenues

        Increasing popularity of our home delivery service helped FedEx Ground realize revenue growth in the first quarter of 2004. The relatively low volume increase of 1% was due to a difficult year-over-year comparison, as first quarter 2003 volume included an estimated 140,000 to 150,000 daily packages as a result of the threat of a UPS work stoppage. Management estimates approximately 50% of this additional volume has been retained through the first quarter of 2004.

        Yield at FedEx Ground increased primarily due to a general rate increase, which became effective in January 2003, and an increase in extra service and fuel surcharge revenue. FedEx Ground uses a dynamic fuel surcharge that is indexed to the current price of diesel fuel. Using this index, the fuel surcharge ranged between 1.25% and 1.50% during the first quarter of 2004 compared to 0.75% for the first quarter of the prior year.

FedEx Ground Segment Operating Income

        Operating income increased at FedEx Ground as a result of yield improvement and strict cost controls. Operating margins improved in spite of increased intercompany charges, as FedEx Ground is utilizing a larger portion of allocated sales, marketing and customer support, and information technology costs in relation to its revenues. Slower yield growth and higher intercompany allocations are expected to constrain margins during the remainder of 2004.

22

FEDEX FREIGHT SEGMENT

        The following table shows revenues, operating expenses and operating income (dollars in millions) and selected statistics for the three-month periods ended August 31:

FedEx Freight Segment Revenues

        FedEx Freight Segment revenues increased $22 million in the first quarter of 2004, despite the continued impact of a sluggish economic environment. The increase in revenue was attributable to improved LTL yields during the quarter. Average daily LTL shipments decreased 3% compared to last year and weight per LTL shipment was flat, while LTL yield increased 9%. Contributing to the increase in LTL yield during the first quarter were the impact of growth in our interregional freight service, a 5.9% general rate increase on June 30, 2003, favorable contract renewals and higher fuel surcharge revenue.

FedEx Freight Segment Operating Income

        The increase in operating income at FedEx Freight during the first quarter of 2004 was attributable to LTL revenue growth and cost management in line with lower volumes, along with the positive impact of $4 million in lower rebranding expenses during the quarter. These costs, which are being expensed as incurred, consist primarily of incremental external costs for rebranding tractors and trailers.

23

FINANCIAL CONDITION

LIQUIDITY

        Cash and cash equivalents totaled $706 million at August 31, 2003, compared to $538 million at May 31, 2003. The following table provides a summary of our cash flows for the three-month periods ended August 31 (in millions):

        The $92 million increase in cash flows from operating activities in the first quarter of 2004 is largely attributable to revenue growth and working capital management. In addition, business realignment costs at FedEx Express in the first quarter were primarily noncash. Between one-third and one-half of the total 2004 pretax costs will be cash. Some of the net cash provided from operations may be used to make additional discretionary contributions to our pension plans. Although not required, we made a $320 million contribution to our principal U.S. domestic pension plan in September 2003.

        Cash Used for Capital Investments.    Capital expenditures during the first quarter of 2004 were 44% lower than 2003, primarily at FedEx Express where capital expenditures were significantly lower due to previously contracted aircraft expenditures in 2003. See "Capital Resources" below for further discussion.

        Debt Financing Activities.    From time to time, we finance certain operating and investing activities through the issuance of commercial paper. Our commercial paper program is backed by unused commitments under two revolving credit agreements, totaling $1 billion, and reduces the amount available under these agreements. At August 31, 2003, no commercial paper was outstanding and the entire $1 billion under the revolving credit agreements was available for future borrowings. See Note 5 of the accompanying financial statements for further discussion of these credit facilities. During the first quarter of 2004, $25 million of existing medium term notes matured.

        Cash Used for Share Repurchases.    During the first quarter of 2004, our Board of Directors authorized us to buy back an additional 5.0 million shares of common stock. During the first quarter of 2004, we repurchased 1,725,000 shares at an average price of $64.81 per share, which decreased cash flows by approximately $112 million. We repurchased 800,000 shares of our common stock in the first quarter of 2003 at a cost of approximately $41 million or an average price of $51.48. A total of 6.65 million shares remain under existing share repurchase authorizations.

        Dividends.    Dividends paid in the first quarter of 2004 and 2003 were $15 million. On August 20, 2003, our Board of Directors declared a dividend of $0.05 per share of common stock, which will be paid on October 1, 2003 to stockholders of record as of the close of business on September 10, 2003. We expect to continue quarterly dividend payments, although each subsequent dividend payment is subject to review and approval by our Board of Directors.

24

        Other Liquidity Information.    We believe that cash flow from operations, our commercial paper program and revolving bank credit facilities will adequately meet our working capital and capital expenditure needs for the foreseeable future.

CAPITAL RESOURCES

        Over time, we have invested aggressively to build our global networks and information systems. In recent years, we invested in strategic acquisitions in order to expand and diversify our portfolio to compete across a wide spectrum of the transportation market. The sustained need for capital investments and strategic acquisitions throughout those years meant that we were not able to generate a positive cash flow after investing activities until 2002.

        Despite the recent decrease in capital spending, our operations remain capital intensive, characterized by significant investments in aircraft, vehicles, computer hardware and software and telecommunications equipment, package-handling facilities and sort equipment. The amount and timing of capital additions depend on various factors, including preexisting contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, competition, availability of satisfactory financing and actions of regulatory authorities.

        The following table compares capital expenditures for the three-month periods ended August 31 (in millions):

        Capital expenditures during the first quarter of 2004 were 44% lower than the prior year period, primarily due to previously contracted aircraft expenditures in 2003. In the first three months of 2003, FedEx Express took delivery of eight aircraft and spent $367 million on aircraft and related equipment versus $80 million in the first quarter of 2004. This significant decrease was slightly offset by the multi-year capacity expansion of the FedEx Ground network. For all of 2004, we expect capital expenditures of approximately $1.6 billion (compared to $1.5 billion in 2003), with much of the year-over-year increase coming from capacity expansion at FedEx Ground.

        Because of substantial lead times associated with the manufacture or modification of aircraft, we must generally plan our aircraft orders or modifications three to eight years in advance. Therefore, we must make commitments regarding our airlift requirements many years before aircraft are actually needed. We are closely managing our capital spending based on current and anticipated volume levels and will defer or limit capital additions where economically feasible, while continuing to invest strategically in growing business segments.

25

CONTRACTUAL CASH OBLIGATIONS

        The following table sets forth a summary of our contractual cash obligations as of August 31, 2003. 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.

⁽¹⁾

Cash obligations for the remainder of 2004.

⁽²⁾

Includes related interest.

⁽³⁾

See Note 11 to the accompanying financial statements.

        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 above.

Amounts Reflected in Balance Sheet

        During the first quarter of 2004, FedEx Express amended two leases for MD11 aircraft, which now require FedEx Express to record $110 million in both fixed assets and long-term liabilities.

        We have other commercial commitments, not reflected in the table above, that were incurred in the normal course of business to support our operations, including surety bonds and standby letters of credit. These instruments are generally required under certain U.S. domestic self-insurance programs and are used in the normal course of international operations. While the notional amounts of these instruments are material, there are no additional contingent liabilities associated with them because the underlying liabilities are already reflected in our balance sheet.

        We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, pension and postretirement healthcare liabilities and self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. Therefore, the timing of these payments cannot be determined except for amounts estimated to be payable within twelve months that are included in current liabilities.

Other Cash Obligations Not Reflected in Balance Sheet

        The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancellable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at August 31, 2003. In the past, we financed a significant portion of our aircraft needs (and certain other equipment needs) using operating leases (a type of "off-balance sheet financing"). At the time that the decision to lease was made, we determined that these operating leases would provide economic benefits favorable to ownership with respect to market values, liquidity and after-tax cash flows.

26

        In accordance with accounting principles generally accepted in the United States, our operating leases are not recorded in our balance sheet. Credit rating agencies routinely use this information concerning minimum lease payments required for our operating leases to calculate our debt capacity. Furthermore, our debt covenants would not be adversely affected by the capitalization of some or all of our operating leases.

        We have guarantees under certain operating leases, amounting to $132 million as of August 31, 2003, for the residual values of aircraft, vehicles and facilities at the end of the respective operating lease periods. Based upon our expectation that none of these leased assets will have a residual value at the end of the lease term that is materially less than the value specified in the related operating lease agreement, we do not believe it is probable that we will be required to fund any amounts under the terms of these guarantee arrangements. Accordingly, no accruals have been recognized for these guarantees. See Note 9 to the accompanying financial statements for further discussion of our guarantees and indemnifications.

        Certain of these operating leases were arranged using variable interest entities under terms that are considered customary in the airline industry. As discussed in Note 10 to the accompanying financial statements, we expect to consolidate one of these entities in the second quarter of 2004 in accordance with FIN 46. We expect this consolidation to increase our long-term assets and long-term liabilities by approximately $140 million at September 1, 2003. Consolidation will not materially affect our results of operations and our debt covenants will not be adversely affected.

        In the future, other forms of secured financing and direct purchases may be used to obtain capital assets if we determine that they best suit our needs. We have been successful in obtaining investment capital, both domestic and international, for long-term leases on acceptable terms, although the marketplace for such capital can become restricted depending on a variety of economic factors. We believe the capital resources available to us provide flexibility to access the most efficient markets for financing capital acquisitions, including aircraft, and are adequate for our future capital needs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to adopt accounting policies and 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 large, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

        Information regarding our "Critical Accounting Policies and Estimates" can be found in our Annual Report. The four critical accounting policies that we believe are either the most judgmental, or involve the selection or application of alternative accounting policies, and are material to our financial statements are those relating to pension cost, self-insurance accruals, long-lived assets and revenue recognition. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent auditors. In addition, Note 1 to the financial statements in our Annual Report contains a summary of our significant accounting policies.

27

FORWARD-LOOKING STATEMENTS

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

•

economic conditions in the domestic and international markets in which we operate, including the timing, speed and magnitude of the economy's recovery from the downturn that began in calendar 2001 in the sectors that drive demand for our services;



•

any impacts on our business resulting from new domestic or international government regulation;



•

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



•

our ability to manage our cost structure for capital expenditures and operating expenses and match them, especially those relating to aircraft, vehicle and sort capacity, to shifting customer volume levels;



•

the extent to which eligible employees participate in our early retirement and severance programs;



•

sudden changes in fuel prices;



•

our ability to increase our fuel surcharge in response to rising fuel prices due to competitive pressures;



•

significant changes in the volumes of shipments transported through our networks, the mix of services purchased by our customers or the prices we obtain for our services;



•

the amount of compensation we are entitled to receive and retain under the Air Transportation Safety and System Stabilization Act;



•

market acceptance of our new service and growth initiatives, including our residential home delivery service;



•

competition from other providers of transportation and logistics services, including our ability to compete with new or improved services offered by our competitors;



•

changes in customer demand patterns;



•

the impact of technology developments on our operations and on demand for our services;



•

disruptions to our technology infrastructure, including our computer systems and Web site;



•

our ability to obtain and maintain aviation rights in important international markets;



•

adverse weather conditions;

28

•

availability of financing on terms acceptable to us; and



•

other risks and uncertainties you can find in our press releases and SEC filings.

        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 the forward-looking statements, which speak only as of the date of this report. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

29

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        As of August 31, 2003, there had been no material changes in our market risk sensitive instruments and positions since the disclosure in our Annual Report. While we are a global provider of transportation services, the substantial majority of our transactions are denominated in U.S. dollars. The distribution of our foreign currency denominated transactions is such that currency declines in some areas of the world are often offset by foreign currency gains of equal magnitude in other areas of the world. The principal foreign currency exchange rate risks to which we are exposed are in the euro, British pound sterling, Canadian dollar and Japanese yen. Foreign currency fluctuations during the three-month period ended August 31, 2003 did not have a material effect on our results of operations.

Item 4.    Controls and Procedures

        We maintain rigorous disclosure controls and procedures and internal control over financial reporting designed to ensure that our assets are adequately safeguarded and the information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We perform a quarterly assessment of these procedures and controls requiring certification by all principal executive and financial management at both the operating company and corporate levels.

        Our operating companies maintain appropriate policies, procedures and systems to support the timely and accurate reporting of their financial results. Our corporate forecasting, accounting close and audit committee reporting processes form the foundation to ensure that all relevant information about our financial results is available to management. In addition, we maintain a thorough quarterly and annual financial reporting process that ensures all key members of management have direct and meaningful input into our financial disclosures.

        Our controls include the presence of an extensive internal audit function staffed by professional auditors that review the operational and financial effectiveness of internal control systems on a global basis. In addition, our control environment is evaluated on an ongoing basis by our financial management and annually by our external auditors in connection with their audit of our financial statements.

        While we believe our disclosure controls and procedures and our internal control over financial reporting are adequate, no system of controls can prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people.

        Our principal executive and financial officers have evaluated our disclosure controls and procedures and, based on such evaluation, have determined that such disclosure controls and procedures were effective as of August 31, 2003 (the end of the period covered by this Quarterly Report on Form 10-Q).

        During our fiscal quarter ended August 31, 2003, 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.

30

PART II.    OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K

(a)

Exhibits.

(b)

Reports on Form 8-K.

During the quarter ended August 31, 2003, FedEx Corporation filed one Current Report on Form 8-K. The report furnished FedEx's press release, dated June 24, 2003, announcing its financial results for the quarter and year ended May 31, 2003.

31

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.

32

EXHIBIT INDEX

E-1

QuickLinks

Item 1. Financial Statements

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

FORWARD-LOOKING STATEMENTS
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures

Item 6. Exhibits and Reports on Form 8-K