FedEx

My world is bigger than my grandmother’s.

I can get the latest styles from around the world without leaving home.

My brother actually works in an office.

I am a one-person global business. 

My children will think in terms of time zones, not borders.

I believe anything is possible.

What can you do that your grandfather couldn’t?
What will your children be able to do that you can’t?

Everygenerationexpects easier access to more of what 
the world has to offer.More products and services. More 
information and ideas. More people and places. 

FedExhelpedcreatethat expectation.And wedeliveron
it millions of times a day, providing the access to transform 
possibilities into reality.

5

TO OUR SHAREOWNERS:
It was a successful year for our company, our customers, and
our shareowners as FedEx increased revenues and earnings
to record levels. We also expanded our portfolio of services
through the strategic acquisition of Kinko’s, and we developed
new opportunities for sustained, profitable growth.

For the fiscal year ended May 31, 2004, FedEx reported record
revenue of $24.7 billion, up 10 percent over the previous year.
Net  income  grew  to  $838  million,  and  diluted  earnings  per
share rose to $2.76. At the same time, we continued to focus
on margins, cash flow and return on investment while exerting
the discipline to reduce capital spending to $1.3 billion.

These financial results allowed us to raise our quarterly divi-
dend from $0.05 to $0.07 per share and deliver a total return to
our  shareowners  of  15.4  percent  during  FY04.  FedEx  shares
have more than doubled in value during the last four years.

While we are proud of our financial performance in FY04, we
are more excited by the prospects for the future. Among the
reasons for our optimism is a trend that is not only redefining
business, it is redefining the world – the increasing desire for
access to products from every corner of the globe.

Harnessing the “power of possibility” 
The world has changed significantly in my lifetime, giving rise
to a new generation of individuals who believe they can have
the goods, services, and information they want and need any-
time, anywhere, and any way they want. Our society today is
not defined so much by age or geography or culture, but by the
belief that almost anything is possible.

At  FedEx,  we  understand  these  expectations  because  we
helped  create  them.  Our  networks  provide  unprecedented
access to the modern world.

As a parent, I see this “power of possibility” through the eyes of
my children. As a business executive, I see how it is transform-
ing our customers. Through either lens, it’s clear to me that this
access generation will continue to set the agenda for today’s
global economy, seeking even greater access to everything they
need and desire without regard to time or place.

FedEx is in a great position to meet such expectations, creating
opportunities across all our business lines.

Expanding access to accelerate growth 
To  exploit  those  opportunities,  FedEx  is  working  hard  to
increase access for our customers as we expand our services
and networks.

The Kinko’s acquisition opens customer access to a new suite
of business services. In February, we completed the acquisi-
tion of Kinko’s, and before the end of May the rebranded FedEx
Kinko’s  Office  and  Print  Centers  began  offering  full-service
FedEx Express and FedEx Ground shipping at virtually all U.S.
locations. This  fast  business  integration  is  designed  to  capi-
talize on what we see as a perfect alignment of companies. In
addition to providing more convenient retail access for FedEx
shipping services, FedEx Kinko’s will also help us strengthen
relationships with small businesses. In turn, FedEx will leverage
its relationships with large corporate customers to help FedEx
Kinko’s expand its fastest-growing business line – commercial
document solutions.

FedEx Corporation provides strategic leadership and 
consolidated financial reporting for the FedEx family of 
companies, managing a broad portfolio of transportation, 
e-commerce and business services.

7

LETTER TO SHAREOWNERS

Expanded service areas improve access to the global market-
place. Capitalizing  on  continued  strong  international  shipping
demand, FedEx Express added new air routes in Asia and began
serving two new countries – Iraq and Kazakhstan – to bring the
total number of countries FedEx serves to 215. As the premier
all-cargo carrier serving China, we announced plans for a new
FedEx Express headquarters in Shanghai and we expanded the
number of cities available to our customers. We also opened key
international markets for other FedEx companies. For example,
FedEx Custom Critical launched overnight service into Mexico.
FedEx Kinko’s opened its first location there last November. 

Enhanced service in existing markets gives customers greater
choice and reliability. In our core North American markets for
FedEx Freight and FedEx Ground, we focused not just on get-
ting bigger, but also on becoming faster and more reliable to
help our customers streamline complex supply chains. FedEx
Freight  became  the  first  carrier  in  the  less-than-truckload
freight  industry  to  offer  a  no-fee  money-back  guarantee  –  a
seal of approval, if you will, of FedEx reliability and competitive
differentiation in that segment. We continued our planned $1.8
billion network expansion at FedEx Ground, and over the past
two years we have accelerated service delivery commitments
by one day in about 40 percent of our ground traffic lanes.

Advanced  technology  improves  customer  access  to  critical
business  information. Fedex.com  continues  to  be  one  of  the
best and fastest sites in the business world, and we are con-
stantly improving our online tools to support our goal of han-
dling as many transactions as possible via electronic means.
Customers increasingly rely on FedEx InSight to provide criti-
cal information about inbound shipments to help manage their
businesses more efficiently. With extensive online billing infor-
mation, our customers can also manage their FedEx account

right  from  the  desktop.  For  customers  who  have  moved
beyond  the  desktop,  we  continue to provide FedEx tracking
information via wireless devices. And  FedEx  Kinko’s  recently
completed  the  rollout  of  T-Mobile  Wi-Fi  access  in  almost  all
U.S. locations. 

Our commitment to a safe and sustainable environment con-
tinues. Across the FedEx family of companies, we pushed for
increased  energy  efficiency  in  our  vehicles  and  our  opera-
tions. FedEx Express launched its first hybrid-engine delivery
vehicle, which will decrease particulate emissions by 90 per-
cent and travel 50 percent farther on a gallon of fuel. We plan
to  phase  in  the  vehicles  in  select  cities  during  the  coming
year.  For  the  third  year  in  a  row,  the  U.S.  Environmental
Protection  Agency  and  the  U.S.  Department  of  Energy  have
also recognized FedEx Kinko’s for its leadership in renewable
energy purchases.

Operating efficiencies fuel earnings momentum 
While  we  capitalized  on  growth  opportunities  by  increasing
access  for  our  customers,  we  also  took  decisive  internal
action to increase efficiency and profitability – all part of our
continued commitment to increasing shareowner value. 

The largest single initiative was our business realignment at
FedEx Express, a voluntary workforce reduction to help “right-
size”  our  network  and  position  us  for  sustained,  profitable
growth.  It  was  a  difficult  but  necessary  action  that  helped
bring  costs  more  in  line  with  FedEx  Express  revenues.  On  a
personal  note,  I  would  like  to  extend  my  thanks  to  all  those
who  elected  one  of  the  early  retirement  or  voluntary  sever-
ance offers – including many who helped build FedEx from the
very early days of our company.

FedEx Express provides time-definite shipping
to 215 countries, including every street address
in the United States, delivering small packages
and freight usually in one to three business days.

FedEx Ground provides cost-effective,
day-definite shipping, specializing in
small-package business-to-business
delivery with convenient U.S. residential
service through FedEx Home Delivery.

8

LETTER TO SHAREOWNERS

In  the  future,  we  will  continue  to  examine  cost  reduction
opportunities yet still invest wisely in our fastest-growing net-
works. In FY05, we expect capital spending to rise modestly,
funding  additional  aircraft  capacity  for  the  growing  FedEx
Express international business and investing in FedEx Ground,
FedEx  Freight  and  FedEx  Kinko’s.  We  believe  that  prudent
investment will allow us to generate strong growth in earnings
per  share  and  cash  flow  for  the  coming  fiscal  year  as  we 
benefit from our growing businesses and the full-year savings
from our business realignment. 

More than 240,000 FedEx team members around the world, in
all  FedEx  operating  companies,  are  committed  to  our  Purple
Promise and the unwavering commitment to a great customer
experience with every transaction.

No  one  championed  this  commitment  more  than  Sheridan
Garrison, a retired member of the FedEx Board of Directors and
chairman  emeritus of  FedEx  Freight  East.  We  were  greatly
saddened by Sheridan’s untimely death in 2004, and he will be
missed by his colleagues, family and friends. 

Shaping the new global marketplace
We believe the need and desire for access will only continue
to grow. And we intend to be where FedEx has been for the
past three decades – on the leading edge of global trends that
shape the way all of us live and work.

• We will continue to press for free and fair trade in order to
increase global economic access and raise the standards of
living in developing countries, lifting millions of people out of
poverty.

• We will continue to push for a safe and sustainable environ-
ment,  applying  new  technologies  to  help  decrease  the 
energy required to generate economic activity.

• We will continue to be at the forefront of safety and security
measures  as  the  worldwide  community  works  together  to
meet global challenges.

Our commitment to access starts with our great FedEx people
and  extends  to  our  valued  customers  and  shareowners.  It
reaches  across  borders  and  time  zones  to  shape  the  new
global marketplace.

Among  several  recent  board  changes,  we  were  pleased  to
add  an  outstanding  new  director,  Ken  Glass,  who  serves  as
chairman,  president  and  CEO  of  First  Horizon  National
Corporation,  and  valued  board  member  George  Mitchell
announced  his  decision  to  retire.  We  thank  him  for  his 
dedication and contributions to our success.

Guided by a strong board – and a leadership team that is sec-
ond to none – I believe that FedEx is in great shape to meet the
access  demands  for  generations  to  come  as  we  continue  to
perform for our shareowners.

Sincerely,

Frederick W. Smith
Chairman, President and Chief Executive Officer

FedEx Freight is the leading U.S. regional, 
less-than-truckload freight company, 
delivering within the United States and key
international markets usually within one 
to two business days.

FedEx Kinko’s Office and Print Services is 
a leading provider of document solutions and
business services, operating more than 1,200
digitally connected locations in 10 countries.

9

Financial Highlights

In millions, except earnings per share

Operating Results
Revenues
Operating income
Operating margin
Net income
Diluted earnings per common share 
Average common and common equivalent shares
Capital expenditures 

Financial Position
Total assets
Long-term debt, including current portion
Common stockholders’ investment

(1)

2004

2003

Percent
Change

$ 24,710
1,440

5.8%
838
2.76
304
1,271

$

$

$ 22,487
1,471

6.5%
830
2.74
303
1,511

$

$

$ 19,134
3,587
8,036

$ 15,385
2,017
7,288

+10
-2

+1
+1
—
-16

+24
+78
+10

Revenue (in billions)

Diluted earnings per common share

Return on average equity 

2000

2001

2002

2003

(1)

2004

2000

2001

2002

2003

(1)

2004

2000

2001

2002

2003

(1)

2004

$18.3

$19.6

$20.6

$22.5

$24.7

$2.32

$1.99

$2.34

$2.74

$2.76

14.6% 10.9% 11.4% 12.0% 10.9%

Capital expenditures (% of revenue)

Debt to total capitalization

Stock price (May 31 close) 

2000

2001

2002

2003

2004

2000

2001

2002

2003

2004

2000

2001

2002

2003

2004

8.9% 9.6% 7.8% 6.7% 5.1%

27.1% 26.4% 21.6% 21.7% 30.9%

$35.50

$40.00

$53.95

$63.98

$73.58

(1) 2004 includes $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs and a $37 million, net of tax, or $0.12 per diluted
share benefit related to a favorable ruling on an IRS tax case and the reduction of the company’s effective tax rate. 2004 also includes the results of operations
of FedEx Kinko’s from February 12, 2004 (date of acquisition) including revenues of $621 million and operating income of $45 million.

How big is your world?

Your notebook PC is manufactured12 time zones
away, but your office is as close as FedEx Kinko’s.

Your small business has a global reach while big
business provides you next-door-neighbor service.

Big or small, near or far, here are just a few ways
FedEx gives you greater access to a growing
world of opportunities.

Two-thirds of the earth’s surface is water.
Tracy Melton has it covered. 

“A lifelong angler and tournament fisherman, Tracy Melton always believed he could turn his
love of big-game fishing into a profitable business. So, while participating in the entrepreneur
program during his college days at the University of Southern California, he began putting
together his plan.

“From the start, Melton thought far beyond any small business boundaries. What he really
desired was cost-effective access to fishing fanatics worldwide. FedEx helped him achieve
his dream, without a snag.

“When I started this business from my parents’ garage 11 years ago, FedEx saw the value of
my business model and recognized the void I could fill,” Melton said. “I’ve never forgotten
that. So we use FedEx for everything.”

“Today, Melton International Tackle is one of the fastest-growing names in the business,
supplying big-game anglers around the world with the custom gear, hard-to-find lures and
high-end equipment they need to pursue their passion. And FedEx has helped Melton make
his global business possible.

“My customers are passionate about big-game fishing. When they place an order, they don’t
want to wait for it,” said Melton. “I have customers in Australia who’ve told me they get
their orders from us faster than they can get orders from another part of Australia.”

“FedEx consistently answers Melton’s business demands by providing reliable service and
competitive pricing. With customs-cleared, door-to-door deliveries to 215 countries, and
a variety of time-definite services to meet every customer’s need, FedEx is helping Melton
International Tackle build loyal relationships with the world’s most avid fishermen.

15

FedEx and HP invent a faster route 
from the factory floor to your front door.

“Every moment a computer sits on a warehouse shelf, the less it is worth. 

“So FedEx and Hewlett-Packard created a supply chain solution that eliminates the shelf
entirely, shipping HP’s industry-leading notebook PCs direct from manufacturing facilities
in China to homes and businesses throughout North America in only two to three
working days.

“FedEx International Priority DirectDistribution gives HP a clear advantage over many
competitors, who commonly ship from Asian manufacturers to secondary assembly or
distribution centers in the United States or Europe, delaying final delivery to customers. 

“FedEx has helped us remove an entire step from our supply chain process,” explained
Robert Gifford, vice president of HP worldwide logistics and program management. “As
a result, we are not only able to respond faster to our customers’ needs, we’ve been
able to significantly reduce our inventory days and operating costs.”

“Throughout a five-year relationship in Asia, FedEx has responded quickly to the evolving
needs of HP, including the migration of HP’s manufacturing partners from Taiwan to
mainland China. 

“To accommodate the shift, and to meet increasing demand from customers throughout
China, FedEx Express vastly expanded its Shanghai operations, and recently created a
new regional headquarters in the city.

HP utilizes almost every offering in the FedEx portfolio of services. For example, HP counts on FedEx
Freight to distribute original HP LaserJet toner cartridges. HPshopping.com turns to FedEx Home
Delivery. And FedEx Trade Networks provides customs brokerage for HP around the world. HP has
also chosen FedEx Kinko’s to operate 19 off-site document management locations for the company –
plus one on-site facility just down the hall from the office of HP Chairman and CEO Carly Fiorina.

16

For a new breed of road warriors, 
the world is their office. 

“Vanessa Wendling’s office doesn’t have four walls. Instead, it has four wheels. And at least
once a week, you can find it parked outside the FedEx Kinko’s Office and Print Center in
Beverly Hills, California.

“A medical pharmaceutical sales representative for Alcon Laboratories, Wendling is one of a
vast and growing group of always-on-the-road mobile professionals who are changing the
way business gets done in today’s world. 

“My success in my job is dependent upon my ability to be mobile and self-sufficient,”
explained Wendling. “I’m in and out of doctors’ offices all day long, so I depend on FedEx
Kinko’s to do the things I don’t have the time or resources to do myself.” 

“FedEx Kinko’s offers these mobile professionals the broadest range of business services 
in the industry, including one-stop copying and printing services, high-speed wired and 
wireless Internet access, videoconferencing, digital photo printing, signs and graphics, and
computer usage. In addition, all FedEx Kinko’s U.S. locations assist customers with FedEx
Express and FedEx Ground shipments.

“We want mobile professionals to know that ‘our office is your office,’” said Gary M. Kusin,
president and chief executive officer of FedEx Kinko’s. “We’re committed to providing them
and their companies the tools they need to stay connected and succeed.”

FedEx Kinko’s DocStore – a customizable online document service – also
helps companies manage and distribute frequently printed documents
with total security, storing them as digital files for on-demand printing
by authorized employees. The service helps companies control print
costs through reduced obsolescence and storage, and cuts document
distribution times from weeks to hours.

19

20

Zappos.com wins hearts by thinking
out of the shoebox. 

Fans of Zappos.com love the online shoe store, showering the dot-com success story with
accolades ranging from “thrilled” and “awesome” to “I am so glad I found Zappos!”

How did the trendsetting retailer transform an ordinary shopping-mall experience into a
Web-based phenomenon? Simple. Unparalleled selection. Satisfaction-driven service that
includes free delivery and returns. And FedEx.

By providing fast, money-back guaranteed delivery to each customer’s door, FedEx helps
Zappos.com complete the loop in its quest to provide “the best possible online shopping
experience” and exceed the expectations of customers across the United States.

It’s all part of what Zappos.com CEO Tony Hsieh calls the company’s “Wow” philosophy –
to make customers say “Wow!” whenever they interact with the company. This interaction
begins on the company’s Web site and doesn’t end until its customers have their orders 
in-hand … and comfortably “on-foot.”

FedEx is also helping Zappos.com behind the scenes. Through a variety of customized
FedEx automated solutions, the company has streamlined its shipping processes and reduced
its costs, processing orders at “dazzle-the-customer” speed.

From desktop to doorstep, FedEx helps Zappos.com exceed the expectations of loyal
customers who have helped more than double the company’s sales every year since it 
was founded in 1999. 

Today, Zappos.com is expanding into new categories, including handbags. “We don’t think
of ourselves as a shoe retailer,” Hsieh says. “We think of ourselves as a service company
that happens to sell shoes.”

You don’t need X-ray vision to see
a reliable supply chain partner.

“Building a reputation for reliability requires speed, innovation and service – three qualities
that Siemens and FedEx have in common. A perfect example is the new digital radiography
system from Siemens Medical Solutions, the AXIOM Aristos FX.

“The speed of digital imaging – available immediately, without X-ray developing – nearly doubles
the patient capacity of traditional equipment and greatly increases workflow efficiency.
Results are transmitted electronically to physician viewing screens to support faster diagnosis.

“Through innovative use of technology, the AXIOM Aristos FX moves so patients don’t have to,
and the state-of-the-art system emits less radiation.

“Better service revolves around a dedication to improved patient care, with Siemens equipment
installed in thousands of medical facilities around the world. And FedEx provides the vital link
with each customer.

“Customers rely on us for dependable systems and technology,” said Georg Krützfeldt, vice
president of global process material logistics for Siemens Medical Solutions, a division of
Siemens AG. “We rely on FedEx to help us meet our service commitments and deliver critical
parts to the right place at the right time.”

“By delivering parts for preventive maintenance, troubleshooting and the occasional repair,
“FedEx helps keep us up and running,” said Tom Karr, chief operating officer of Gwinnett
Health System. Two of the first five Aristos units in the United States are installed at Gwinnett
Outpatient Imaging Center in Lawrenceville, Georgia.

“Our business is all about taking care of the patient,” said Randy Hill (pictured at right), senior
vice president of national service for Siemens Medical Solutions. “Many patients have to
take time off from work for these procedures. They may be anxious or in pain. When we can
serve them with fast, reliable technology, then we’ve done our job.”

22

23

FedEx and ORBIS deliver 
the precious gift of sight. 

“FedEx Express aircraft mechanic Valerie Suberg has watched a mother – previously blinded
by cataracts – see her baby for the first time. She looked on as two Ethiopian girls first saw
their own reflections in a mirror. 

“With the support of FedEx Express, Suberg recently concluded a two-year stint as a flight
mechanic for the DC-10 Flying Eye Hospital of ORBIS International, a nonprofit, humanitarian
organization dedicated to eliminating avoidable blindness in the developing world. 

“This job is hard work. But being there when a blind child sees for the first time makes it all
worthwhile,” said Suberg who played an integral role in ORBIS’ mission, making sure all
aircraft systems of the flying eye hospital and teaching facility operated flawlessly, so ORBIS
professionals and volunteer ophthalmic surgeons could treat and prevent blindness.

“Since 1982, FedEx has assisted ORBIS with more than 530 programs that have trained more
than 63,000 ophthalmologists, biomedical engineers, nurses and other healthcare workers. 
In turn, these dedicated professionals provide care for an estimated 17.5 million blind and
visually impaired people in 83 countries, including India, China, Ethiopia, Cuba, Syria,
Bulgaria and Peru.

“In addition to providing aircraft inspection and maintenance, FedEx Express pilots join 
volunteers from another airline who fly the ORBIS aircraft on its missions. FedEx also provides
free shipping of medical supplies and DC-10 replacement parts – many donated by the
company – to support ORBIS’ work across the globe. 

“FedEx employees amaze me,” said A.L. Ueltschi, chairman, ORBIS International Board of
Directors. “Across their powerful worldwide network, they extend to us their whatever-it-takes
attitude, innovative spirit and caring hearts to help us deliver the gift of sight. We couldn’t
ask for more in a global sponsor.”

In addition to support for ORBIS International, FedEx helps Heart to 
Heart International deliver food, medicine and emergency supplies 
to Vietnam, China, India and other developing nations. Among its
many other relationships with charitable organizations, FedEx also
provides financial support, complimentary shipping and storage of
emergency supplies for the American Red Cross, helping to speed 
disaster response.

25

As China opens its doors, 
FedEx bids the world welcome. 

“FedEx has been a part of the China free-trade success story for 20 years, helping build the
air transportation infrastructure needed to support China’s growing economic demands. 

“Over that time, FedEx Express has grown to become the largest international express carrier
in the country, with service to more than 220 cities and plans to expand to 100 more during
the next five years.

“With 11 flights every week through three major gateways – Beijing, Shanghai and Shenzhen –
FedEx serves its customers with more flights into and out of China than any other U.S.-based
cargo carrier. Plus, FedEx provides a money-back guarantee on its service to China.

“FedEx is benefiting enormously from the surge in China trade,” explained Michael L. Ducker,
executive vice president of FedEx Express. “But we’re also helping drive it. For its economic
revolution to continue, China will need greater access to the global marketplace. That’s
what FedEx provides.”

“Eddy Chan (pictured at right), FedEx Express China regional vice president and a 19-year
FedEx veteran in the country, believes the company’s track record in China provides a major
advantage in this continuing quest.

“We’ve developed a very good relationship with the Chinese government,” Chan said. 
“We keep the lines of communication open to ensure we are continuously balancing market
demands with government regulations.”

Thanks to a June 2004 agreement between the United States and
China, U.S. cargo airlines will soon be granted 111 new weekly flights
into and out of China. With additional route authorities, FedEx Express
hopes to initiate new flights connecting China to Europe, North and
South America, and other parts of Asia.

Access knows no boundaries.

It connects businessesandcustomers
across time zones, borders, economies 
andcultures.

It inspires the creation of new ideas, 
information, goods and services – many 
of which we cannot envision today.

One company provides more choice and
more access for millions around the globe.

FedEx.

MESSAGE FROM THE CFO:
In FY04, our great operating results created the headlines but
our efforts to position FedEx for profitable future growth were
the big story. You can read the details on the following pages,
where we’ve gone to great lengths to give our shareowners
access to the opportunities and risks we see through highly
transparent  financial  reporting  and  an  extremely  thorough
analysis of our business. 

On strong demand for the entire portfolio of FedEx services, our
FedEx Express, FedEx Ground and FedEx Freight units all boost-
ed revenue. FedEx Kinko’s contributed $521 million in revenue
in its first full quarter as a FedEx company, and was immedi-
ately  accretive  to  earnings.  As  a  result,  FedEx  Corporation
was able to grow revenue 10 percent to $24.7 billion and net
income increased in spite of $435 million of one-time business
realignment costs. 

We also are extremely pleased with our performance in key
areas including cash flows, returns and margins. For the sec-
ond consecutive year we earned returns well in excess of our
cost of capital. 

As outstanding as our financial results were, our list of accom-
plishments in FY04 includes a number of additional items.

• The  voluntary  early  retirement  and  severance  programs  at
FedEx  Express  made  our  largest  operating  company  more
efficient  and  more  profitable.  Related  expenses  have  been
absorbed,  and  while  the  savings  began  during  the  second
quarter of FY04, we’ll see the full-year’s benefit in FY05.

• Kinko’s was one of the most strategically important acquisi-
tions in our history. More than 1,200 convenient retail access
points  should  attract  significantly  more  high-yielding 
packages into our network. On a larger scale, FedEx Kinko’s
redefines  the  future  of  the  business  services  marketplace 
by creating a complete office on the road for mobile profes-
sionals  and  other  business  customers.  Nobody  can  match
our collection of services and solutions.

• We  once  again  reduced  capital  spending  versus  the  prior
year – both in dollars and as a percent of revenue. In fact,
we’ve  cut  our  capital-expenditures-to-revenue  ratio  in  half
since FY99. This capital discipline will result in lower owner-
ship charges in coming years – specifically depreciation and
lease expenses.

• There’s relief ahead on the pension expense front. We con-
tributed  $1.4  billion  to  our  pension  plans  over  the  past  two
fiscal years – much of it invested during the low points of the
market. Thanks to those contributions and asset returns of
almost  30  percent  in  our  plan  year  ended  in  February,  we
foresee  a  significant  reduction  in  the  growth  of  pension
expenses for FY05.

And, for the second straight year, we’ve rewarded shareowners
by increasing our dividend payment. 

Finally, I want to emphasize the ongoing importance of strong
corporate  governance  at  FedEx  and  how  it  relates  to  our
Sarbanes-Oxley  Section  404  (SOX  404)  compliance  efforts.
FedEx has a long history of excellent internal controls, support-
ed by a very thorough internal audit team, an active board of
directors and more than 225 documented financial processes
and their related computer controls. To remain in front of this
critical issue, we expect to spend over $20 million and  more
than 60,000 hours in FY05 verifying that every step in our inter-
nal controls processes comply with SOX 404. 

FedEx established a track record in FY04 that we’re committed
to build on. The year left us with not only great results but also
great  excitement  about  the  future,  and  I  encourage  you  to
read about both on the following pages. 

Alan B. Graf, Jr.
Executive Vice President and Chief Financial Officer

During the first quarter we announced a new reporting structure at FedEx to take advantage of existing synergies and further growth opportunities.
Through this new structure, FedEx now has four core operating companies and four specialty companies. The CEOs of our specialty companies each
report to one of our core company CEOs, creating four reporting segments:

• FedEx Express Segment includes FedEx Express and FedEx Trade

• FedEx Ground Segment includes FedEx Ground and FedEx Supply

During the year we adopted a new reporting structure at FedEx to take
advantage of existing synergies and further growth opportunities.
Through this reporting structure, the CEOs of our specialty companies
each report to one of our core company CEOs. As a result, we now
have the following four reporting segments:

Networks

Chain Services

• FedEx Freight Segment includes FedEx Freight, FedEx Custom Critical

and Caribbean Transportation Services

• FedEx Kinko’s Segment includes FedEx Kinko’s

31

Financial Results

33  Management’s Discussion and Analysis

53  Consolidated Financial Statements

57  Notes to Consolidated Financial Statements
76  Report of Independent Registered Public Accounting Firm

77  Selected Financial Data

78  Board of Directors

79  Executive Officers and Senior Management

80  Corporate Information 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

These companies form the core of our reportable segments. 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 Reportable Segments for further discussion.

The key factors that affect our operating results are as follows:

• the overall customer demand for our various services;

• the volumes of transportation and business 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

average price per shipment (yield); 

• our ability to manage our cost structure for capital expenditures
and operating expenses such as salaries 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 ended May 31, 2004 or ended May 31 of the year
referenced and comparisons are to the prior year.

GENERAL

The following Management’s Discussion and Analysis of Results
of Operations and Financial Condition (“MD&A”) describes the
principal factors affecting the results of operations, liquidity, cap-
ital resources and contractual cash obligations, as well as the
critical accounting policies and estimates, of FedEx Corporation
(also referred to as “FedEx”). This discussion should be read in
conjunction with the accompanying audited financial statements,
which include additional information about our significant account-
ing policies, practices and the transactions that underlie our
financial results. 

Our  MD&A  is  comprised  of  three  major  sections:  Results  of
Operations, Financial Condition and Critical Accounting Policies
and Estimates. Results of Operations begins with an overview of
consolidated 2004 results compared to 2003, and of 2003 results
compared  to  2002.  This  section  includes  a  discussion  of  key
actions, such as our business realignment initiatives and the
acquisition of FedEx Kinko’s, as well as a discussion of our out-
look for 2005. The overview is followed by a financial summary and
narrative (including a discussion of both historical operating
results and our outlook for 2005) for each of our four reportable
operating segments. We then provide an analysis of changes in
our balance sheet and cash flows and discuss our financial com-
mitments in the Financial Condition section. We conclude with a
discussion of the critical accounting policies and estimates that
we believe are important to understanding the judgments and
assumptions incorporated in our reported financial results. 

FedEx provides a broad portfolio of transportation, e-commerce
and business services with companies that operate indepen-
dently and compete collectively under the respected FedEx brand.
These operating companies 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; FedEx Freight, a leading U.S.
provider  of  regional  LTL  freight  services;  and  FedEx  Kinko’s, 
a leading provider of document solutions and business services. 

33

FEDEX CORPORATION

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS
The following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in mil-
lions, except per share amounts) for the years ended May 31:

Revenues
Operating income
Operating margin
Net income
Diluted earnings per share

2004

$24,710

1,440 (1)
5.8%
838 (1)(2)
2.76 (1)(2)

$
$

2003

$22,487
1,471

6.5%
830
2.74

$
$

2002

$20,607
1,321

6.4%
710 (3)
2.34(3)

$
$

$ Change

Percent Change

2004/2003

2003/2002

2004/2003

2003/2002

2,223
(31)
n/a
8
0.02

1,880
150
n/a
120
0.40

10
(2)
(70) bp
1
1

9
11
10 bp
17
17

(1) Includes $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs described below. See Note 4 to the accompanying audited financial statements.
(2) Includes a $37 million, net of tax, or $0.12 per diluted share benefit related to a favorable ruling on a tax case and the reduction of our effective tax rate described below. See Note 11
to the accompanying audited financial statements.
(3) Results for 2002 reflect our adoption of SFAS 142, “Goodwill and Other Intangible Assets.” We recognized an adjustment of $25 million ($15 million, net of tax, or $0.05 per diluted share)
to reduce the carrying value of certain goodwill to its implied fair value. See Note 3 to the accompanying audited financial statements.

The following table shows changes in revenues and operating income by reportable segment for 2004 compared to 2003, and 2003
compared to 2002 (in millions):

FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment
Other and Eliminations (2)

$ Change
Revenues

Percent Change
Revenues

$ Change
Operating Income

Percent Change
Operating Income

2004/2003

2003/2002

2004/2003

2003/2002

2004/2003

2003/2002

2004/2003

2003/2002

1,030
329
246
521
97
2,223

1,029
663
190
n/a
(2)
1,880

6
9
10
n/a
n/a
10

7
23
8
n/a
n/a
9

(154) (1)
28
51
39
5
(31)

(18)
157
8
n/a
3
150

(20)
6
26
n/a
n/a
(2)

(2)
47
4
n/a
n/a
11

(1) Includes $428 million of business realignment costs described below. 
(2) Includes the results of operations of FedEx Kinko’s from February 12, 2004 (date of acquisition) through February 29, 2004 (approximately $100 million of revenue and $6 million of
operating income).

Revenue growth during 2004 was attributable to increased vol-
umes of FedEx Express International Priority (IP), FedEx Ground
and FedEx Freight shipments, as well as strong growth of IP
yields at FedEx Express. Yield improvements at FedEx Ground and
FedEx Freight also contributed to revenue growth. In addition,
FedEx Kinko’s (acquired on February 12, 2004) added $621 million
of revenue during 2004. During 2003, revenue growth was due to
the substantial growth of our FedEx Ground business, increased
international volumes at FedEx Express and higher revenues at
FedEx Freight. Increased U.S. freight volumes at FedEx Express
also contributed to consolidated revenue growth in 2003, as we
benefited from a full twelve months of revenue under the trans-
portation agreement with the U.S. Postal Service (“USPS”), which
commenced in late August 2001.

Operating income decreased 2% in 2004 as costs related to our
business realignment initiatives totaled $435 million (partially off-
set by approximately $150 million of savings). See “Business
Realignment Costs” for a discussion of these costs and related
savings. In total, operating expenses, other than business realign-
ment costs, increased less than the increase in revenue during
2004, despite significant increases in incentive compensation,
pension and maintenance costs. During 2003, operating income

increased 11% as FedEx Ground significantly improved its oper-
ating margin, which more than offset a decline in the operating
margin at FedEx Express. The sluggish economy, combined with
significant increases in pension and healthcare costs and higher
maintenance expenses, reduced profitability at FedEx Express in
2003 despite continued cost control efforts. 

Salaries and benefits expense increased 10% during 2004 due to
higher incentive compensation and pension costs, wage rate
increases and the acquisition of FedEx Kinko’s. Incentive com-
pensation increased approximately $240 million during 2004 due
to above-plan operating income, primarily at FedEx Express and
FedEx Freight. Incentive compensation declined in 2003 based on
below-plan performance at FedEx Express. Pension costs were
approximately $115 million higher in 2004 (on top of an $80 million
increase in 2003), due principally to lower discount rates and
decreased returns on pension plan assets. Although not legally
required, we made $320 million in contributions to our qualified
U.S.  pension  plans  in  2004  compared  to  total  contributions
exceeding $1 billion in 2003. Our 2003 contributions were made to
ensure our qualified U.S. pension plan assets exceeded the related
accumulated benefit obligations at our February 28, 2003 plan
measurement date.

34

MANAGEMENT’S DISCUSSION AND ANALYSIS

Other Income and Expense and Income Taxes
Net interest expense decreased slightly in 2004 as the effects of
the  tax  case  described  below  offset  increases  to  interest
expense. These increases were due to the amendment of aircraft
operating  leases  and  the  adoption  of  Financial  Accounting
Standards Board Interpretation No. (“FIN”) 46, “Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51,” which
together resulted in eight MD11 aircraft being recorded as fixed
assets and the related obligations being recorded as long-term
debt. Interest expense also increased due to additional borrow-
ings related to the FedEx Kinko’s acquisition. Net interest expense
was 15% lower in 2003 due to reduced borrowings.

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. As a
result of this decision, we recognized a one-time benefit in 2004
of $26 million, net of tax, or $0.08 per diluted share, primarily
related to the reduction of accruals related to this matter and the
recognition of interest earned on amounts previously paid to the
IRS. Future periods are not expected to be materially affected by
the resolution of this matter. Although the IRS has appealed this
ruling, we believe the District Court’s ruling will be upheld (also,
see Note 11 to the accompanying audited financial statements). 

Our effective tax rate was 36.5% in 2004, 38.0% in 2003 and 37.5%
in 2002. The lower effective rate in 2004 was primarily attributable
to  the  favorable  decision  in  the  tax  case  discussed  above,
stronger than anticipated international results and the results of
tax audits during 2004. Our stronger than anticipated international
results, along with other factors, increased our ability to credit
income taxes paid to foreign governments on foreign income
against U.S. income taxes paid on the same income, thereby
mitigating our exposure to double taxation. The 38.0% effective
tax rate in 2003 was higher than the 2002 rate primarily due to
lower state taxes in 2002. The effective tax rate exceeds the
statutory U.S. federal tax rate primarily because of state income
taxes. For 2005, we expect the effective tax rate to be approxi-
mately 38.0%. The actual rate, however, will depend on a number
of factors, including the amount and source of operating income.

Business Realignment Costs
During 2004, voluntary early retirement incentives with enhanced
pension and postretirement healthcare benefits were offered to
certain groups of employees at FedEx Express who were age 50
or older. Voluntary cash severance incentives were also offered
to eligible employees at FedEx Express. These programs, which
commenced August 1, 2003 and expired during the second quar-
ter, were limited to eligible U.S. salaried staff employees and
managers.  Approximately  3,600  employees  accepted  offers
under these programs. The response to these voluntary pro-
grams substantially exceeded our expectations. Consequently,
replacement management and staff were required and some
employee departure dates were deferred (up to May 31, 2004). 

Costs were also incurred in 2004 for the elimination of certain
management positions at FedEx Express and other business
units based on the staff reductions from the voluntary programs
and other cost reduction initiatives. Costs for the benefits pro-
vided  under  the  voluntary  programs  were  recognized  in  the
period that eligible employees accepted the offer. Other costs
associated with business realignment activities were recognized
in the period incurred.

We recognized $435 million of business realignment costs during
2004. Savings of approximately $150 million were realized, reflected
primarily in lower salaries and benefits costs. The components of
our business realignment costs and changes in the related accru-
als were as follows for the year ended May 31, 2004 (in millions):

Beginning accrual balances
Charged to expense
Cash paid
Amounts charged to other

assets/liabilities

Ending accrual balances

Voluntary
Retirement

Voluntary
Severance

Other (1)

Total

$

–
202
(8)

$

–
158
(152)

$

–
75
(31)

$

–
435
(191)

(194)
–

$

–
6

$

(22)
$ 22

(216)
$ 28

(1) Other includes costs for management severance agreements, which are payable over
future periods, including compensation related to the modification of previously granted
stock options and incremental pension and healthcare benefits. Other also includes profes-
sionalfeesdirectlyassociatedwiththebusinessrealignmentinitiativesandrelocationcosts.

Total cash payments under these programs are expected to be
approximately $220 million. Amounts charged to other assets/
liabilities relate primarily to incremental pension and health-
care benefits.

Over the past few years, we have taken many steps toward bring-
ing 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 discontinu-
ing low-value programs. These business realignment initiatives
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 finan-
cial returns for our shareholders.

FedEx Kinko’s Acquisition
On February 12, 2004, we acquired FedEx Kinko’s for approxi-
mately $2.4 billion in cash. We also assumed $39 million of capital
lease obligations. FedEx Kinko’s is a leading provider of docu-
ment solutions and business services. Its network of worldwide
locations offers access to color printing, finishing and presenta-
tion services, Internet access, videoconferencing, outsourcing,
managed services, Web-based printing and document manage-
ment solutions.

The transaction was accounted for as a purchase. Accordingly,
the assets and liabilities of FedEx Kinko’s were recorded at their
fair values and the excess of the purchase price over the fair 

35

FEDEX CORPORATION

value of assets acquired was recorded as goodwill. A signifi-
cant amount of the purchase price was recorded as goodwill,
as the acquisition of FedEx Kinko’s expands our portfolio of
business services, while providing a substantially enhanced
capability to provide package-shipping services to small- and
medium-sized business customers through FedEx Kinko’s array
of retail store locations.

The assets and liabilities related to FedEx Kinko’s have been
included in the accompanying audited balance sheet based on a
purchase price allocation. The allocation of the purchase price
to the fair value of the assets acquired, liabilities assumed and
goodwill, as well as the assignment of goodwill to our reportable
segments, was based primarily on internal estimates of cash
flows  and  independent  appraisals.  We  used  an  independent
appraisal firm to determine the fair value of certain assets and
liabilities, primarily property and equipment and acquired intan-
gible assets, including the Kinko’s trade name, customer-related
intangibles, technology assets and contract-based intangibles.
While the purchase price allocation is substantially complete and
we do not expect any material adjustments, we may make adjust-
ments to the purchase price allocation if new data becomes
available. See Notes 2 and 3 to the accompanying audited finan-
cial  statements  for  further  discussion  of  the  purchase  price
allocation and goodwill and intangible assets. 

The results of operations of FedEx Kinko’s have been included in
our consolidated financial statements from February 12, 2004.
During 2004, FedEx Kinko’s contributed $621 million of revenue
and $0.06 per diluted share of earnings, which includes approxi-
mately $15 million of interest and financing costs and $3 million
of rebranding costs. Note 2 to the accompanying audited finan-
cial  statements  includes  the  unaudited  pro  forma  results  of
operations  of  FedEx  as  if  the  acquisition  had  occurred  as  of 
the  beginning  of  2003.  The  accounting  literature  establishes 
firm guidelines around how this pro forma information is pre-
sented, which precludes the assumption of business synergies.
Therefore, this unaudited pro forma information is not intended
to represent, nor do we believe it is indicative of the consolidated
results of operations of FedEx that would have been reported had
the  acquisition  been  completed  as  of  the  beginning  of  2003.
Furthermore, this pro forma information is not representative of
the future consolidated results of operations of FedEx. 

We paid a portion of the purchase price from available cash
balances. To finance the remainder of the purchase price, we
entered  into  a  six-month  credit  facility  for  $2  billion.  During
February 2004, we issued commercial paper backed by unused
commitments under this facility. In March 2004, we replaced the
commercial  paper  with  the  issuance  of  $1.6  billion  of  senior 
unsecured notes in three maturity tranches: one, three and five
years at $600 million, $500 million and $500 million, respectively.
We canceled the six-month credit facility in March 2004. See
Notes 2 and 6 of the accompanying audited financial statements
for further discussion.

Airline Stabilization Compensation
Operations in 2002 were significantly affected by the terrorist
attacks on September 11, 2001. During 2002, we recognized a total
of $119 million of compensation under the Air Transportation
Safety and System Stabilization Act (the “Act”), of which $101
million had been received as of May 31, 2004. The amounts rec-
ognized were for our estimate of losses we incurred as a result of
the mandatory grounding of our aircraft and for incremental losses
incurred through December 31, 2001. All amounts recognized
were  reflected  as  reduction  of  operating  expense  under  the
caption “Airline stabilization compensation.” 

In the fourth quarter of 2003, the Department of Transportation
(“DOT”) asserted that we were overpaid by $31.6 million and has
demanded repayment. We have filed requests for administrative
and judicial review. We received an opinion from the District of
Columbia U.S. Court of Appeals stating that most of the determi-
nations that we requested were not yet ripe for decision and the
Court will not rule prior to final determination by the DOT and
exhaustion of administrative remedies.

Pursuant to the Federal Aviation Administration reauthorization
enacted during the third quarter of 2004, the General Accounting
Office submitted a report to Congress on June 4, 2004, on the cri-
teria and procedures used by the Secretary of Transportation
under the Act. Issuance of the report frees the DOT to make 
a  final  determination  on  our  claim  and  also  reinforces  the
Congressional directive to the DOT to refer any remaining dis-
puted claims to an administrative law judge upon an affected
claimant’s request.

We agreed to mediation with the DOT, but it did not result in a
resolution of the dispute. We will continue to pursue our claim
for compensation under the Act.

We believe that we have complied with all aspects of the Act,
that it is probable we will ultimately collect the remaining $18 mil-
lion receivable 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 we have
previously recognized under the Act could occur. Based on the
DOT’s assertion, the range for potential loss on this matter is zero
to $49.6 million.

Outlook
During 2005 (particularly during the first half), we expect the U.S.
economy to sustain the growth evident in the second half of 2004.
This growth is supported by strong corporate earnings, higher
consumer confidence (led by both increasing income and an
improving job market) and public sector improvement. The macro
economic environment during 2004 was particularly challenging
for our business, as the manufacturing and wholesale sectors 
of  the  economy  lagged  behind  gross  domestic  product,  and 
year-over-year performance in the economy lagged sequential
quarter-to-quarter  growth.  We  expect  the  current  economic

36

MANAGEMENT’S DISCUSSION AND ANALYSIS

expansion to broaden into the manufacturing and wholesale sec-
tors during 2005 as supported by the recent strengthening of
durable goods sales, indicating the inventory restocking cycle has
started. This is further supported by the positive year-over-year
volume trends across all our transportation companies in the
fourth quarter of 2004. We also expect a strong global economy in
2005, evidenced by recent broad-based growth across multiple
sectors and regions, particularly in Asia.

Our outlook anticipates revenue and earnings growth in all our
reportable segments for 2005, as we continue to leverage our
“compete  collectively”  philosophy.  Our  optimism  stems  from
increasing customer demand for services across our operating
companies, a lower cost structure at FedEx Express, as well as
improving  worldwide  economic  conditions.  During  2005,  we
expect continued strong growth of international volumes and
yields at FedEx Express. We expect only slight U.S. domestic vol-
ume growth at FedEx Express, with higher U.S. domestic yields to
account for a large portion of revenue growth at FedEx Express.
We anticipate improved volumes and yields at FedEx Ground and
FedEx Freight, as FedEx Ground continues its multi-year capacity
expansion plan and FedEx Freight continues to grow its regional
and interregional business and enhance its portfolio of services.
FedEx Kinko’s revenue is projected to be approximately $2.1 billion,
which is significantly higher than the partial year revenue included
in our 2004 results. FedEx Kinko’s will focus on continuing to gen-
erate revenue growth by aggressively growing current lines of
business and by leveraging its new relationship with FedEx.

We anticipate significant year-over-year growth of both operating
income and margins. These measures will be positively impacted
by revenue growth and the full-year savings from our business
realignment initiatives (which are expected to be approximately
$80  million  to  $90  million  higher  than  2004  savings)  discussed
above. Over the past several years we have experienced signifi-
cant year-over-year increases in pension cost. For 2005, we expect
a modest $30 million increase in pension cost, as 2004 actual asset
returns have substantially improved the funded status of our pen-
sion plans in spite of a continued decline in the discount rate. 
Also, incentive compensation programs were reinstated to more
normalized levels in 2004, after several years of declines. Our man-
agement teams continue to examine additional cost reduction and
operational productivity opportunities as we focus on optimizing
our networks, improving our service offerings, enhancing the cus-
tomer experience and positioning FedEx to increase cash flow and
financial returns by improving our operating margin.

During 2005, we expect to incur approximately $20 million of
expenses related to the FedEx Kinko’s rebranding. In addition, we
plan  to  open  approximately  70  new  FedEx  Kinko’s  locations,
including many internationally. Despite these costs, we expect
FedEx Kinko’s to contribute to earnings growth in 2005 as we
move quickly to expand our service offerings at its U.S. locations.
See “FedEx Kinko’s Acquisition” and “Reportable Segments” for
additional discussion.

The pilots of FedEx Express, which represent a small number of
FedEx Express total employees, are employed under a collective
bargaining agreement. Negotiations with the pilots’ union began in
March 2004, as the current agreement became amendable on May
31, 2004. We will continue to operate under our current agreement
while we negotiate with our pilots. Our financial results for 2005
may be affected by the results of these negotiations. However, we
cannot estimate the financial impact, if any, the results of these
negotiations may have on our results of operations.

Increased security requirements for air cargo carriers have been
put in place and have not had a material impact on our operating
results for the periods presented. Although no specific proposals
have been issued, further measures may be forthcoming. The
impact on our results of operations of any such additional mea-
sures is unknown. 

Future results will depend upon a number of factors, including
U.S. and international economic conditions, the impact from any
terrorist activities or international conflicts, our ability to match
our cost structure and capacity with shifting volume levels, our
ability to effectively leverage our new service and growth initia-
tives and our ability to effectively operate, integrate and leverage
the FedEx Kinko’s business. In addition, adjustments to our fuel
surcharges  at  FedEx  Express  lag  changes  in  actual  jet  fuel 
prices paid. Therefore, our operating income could be materially
affected should the spot price of jet fuel suddenly change by a 
significant amount or should we be unable to further increase our
fuel surcharges in response to rising fuel prices due to competi-
tive pressures. See “Forward-Looking Statements” for a more
complete discussion of potential risks and uncertainties that
could materially affect our future performance.

Seasonality of Business
Our express package and freight businesses are seasonal in
nature. Historically, the U.S. express package business experi-
ences an increase in volumes in late November and December.
International business, particularly in the Asia to U.S. market,
peaks in October and November due to U.S. holiday sales. Our
first and third fiscal quarters, because they are summer vacation
and  post  winter-holiday  seasons,  have  historically  exhibited
lower volumes relative to other periods.

The transportation and business services industries are affected
directly by the state of the overall domestic and international
economies. Seasonal fluctuations affect volumes, revenues and
earnings. Normally, the fall of each year is the busiest shipping
period for FedEx Ground, while late December, January, June and
July of each year are the slowest periods. For FedEx Freight, the
spring and fall of each year are the busiest periods and the latter
part of December, January and February of each year are the
slowest periods. Shipment levels, operating costs and earnings
for each of our transportation companies can also be adversely
affected by inclement weather.

37

FEDEX CORPORATION

FEDEX EXPRESS SEGMENT
The following table compares revenues, operating expenses and
operating income and margin (dollars in millions) and selected
statistics  (in  thousands,  except  yield  amounts)  for  the  years
ended May 31:

2004

2003

2002

Percent Change
2003/
2004/
2002
2003

Revenues:

Package:

U.S. overnight box
U.S. overnight 
envelope
U.S. deferred

Total U.S. domestic 

$ 5,558 $ 5,432

$ 5,338

1,700
2,592

1,715
2,510

1,755
2,383

package revenue 9,850

9,657

9,476

International 
Priority (IP)
Total package 
revenue

Freight:
U.S. 
International

Total freight 
revenue

Other (1)

Total revenues

5,131

4,367

3,834

14,981

14,024

13,310

1,609
393

1,564
400

1,273
384

2,002
514
17,497

1,964
479
16,467

1,657
471
15,438

Purchased 

transportation

Rentals and 

landing fees
Depreciation and 
amortization

Fuel
Maintenance 
and repairs

Airline stabilization
compensation
Business realignment

costs

Intercompany charges
Other

Total operating 
expenses

Operating income
Operating margin

694

609

564

1,531

1,557

1,531

810
1,343

818
1,231

819
1,009

1,193

1,087

983

10

–

–

(119)

n/a

n/a

428
1,442
2,024

–
1,328
2,053

–
1,331
1,954

16,868
$

629 $
3.6%

15,684
783
4.8%

14,637
801
$
5.2%

n/a
9
(1)

8
(20)

n/a
–
5

7
(2)

2

(1)
3

2

17

7

3
(2)

2
7
6

6

14

(2)

(1)
9

2

(2)
5

2

14

5

23
4

19
2
7

7

8

2

–
22

11

NEW ACCOUNTING PRONOUNCEMENTS
No new accounting pronouncements had a material effect on our
financial position, results of operations or cash flows during 2004.

REPORTABLE SEGMENTS
FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s
form the core of our reportable segments. In 2004, we changed
the  reporting  and  responsibility  relationships  of  our  smaller
business units so they now report directly to a core segment.
Prior year amounts have been reclassified to conform to the 
new segment presentation. Our reportable segments include the
following businesses:

FedEx Express Segment FedEx Express (express transportation)

FedEx Trade Networks 

(global trade services)

FedEx Ground Segment

FedEx Ground (small-package

FedEx Freight Segment

ground delivery)

FedEx Supply Chain Services 

(contract logistics)

FedEx Freight (regional LTL freight)
FedEx Custom Critical 

(surface-expedited transportation)

Caribbean Transportation Services

(airfreight forwarding)

FedEx Services provides customer-facing sales, marketing and
information technology support, primarily for FedEx Express and
FedEx Ground. The costs for these activities are allocated based
on metrics such as relative revenues and estimated services pro-
vided.  These  allocations  materially  approximate  the  cost  of
providing these functions. The line item “Intercompany charges”
on the accompanying financial summaries of our reportable seg-
ments includes the allocations from FedEx Services to FedEx
Express, FedEx Ground and FedEx Freight, allocations for 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. Management evaluates seg-
ment financial performance based on operating income.

38

FedEx Kinko’s Segment

FedEx Kinko’s (document solutions

and business services)

Operating expenses:

Salaries and 

employee benefits

7,403

7,001

6,565

MANAGEMENT’S DISCUSSION AND ANALYSIS

Percent Change
2003/
2004/
2002
2003

surcharge increases, became effective January 5, 2004. Freight
revenue increased in 2004 due to increased yields related to ser-
vice mix, despite lower volumes. 

2004

2003

2002

Package Statistics (2)

Average daily package volume (ADV):

U.S. overnight box
U.S. overnight 
envelope
U.S. deferred
Total U.S. 

domestic ADV

IP

Total ADV
Revenue per package (yield):

1,179

1,176

1,170

667
925

2,771
396
3,167

679
897

2,752
369
3,121

699
868

2,737
340
3,077

U.S. overnight box
U.S. overnight 
envelope
U.S. deferred

U.S. domestic 
composite

IP

Composite 

$ 18.49

$ 18.18

$17.90

10.00
10.99

13.94
50.75

9.95
11.02

13.82
46.59

9.84
10.77

13.58
44.16

package yield

18.55

17.69

16.96

Freight Statistics (2)

Average daily freight pounds:

U.S.
International

8,519
2,093

8,969
2,174

7,736
2,082

Total average daily 
freight pounds

10,612

11,143

9,818

Revenue per pound (yield):

U.S.
International
Composite 

$ 0.74
0.74

$ 0.69
0.72

$ 0.65
0.72

freight yield

0.74

0.69

0.66

–

(2)
3

1
7
1

2

1
–

1
9

5

(5)
(4)

(5)

7
3

7

1

(3)
3

1
9
1

2

1
2

2
6

4

16
4

13

6
–

5

(1) Other includes FedEx Trade Networks.
(2) Package and freight statistics include only the operations of FedEx Express.

FedEx Express Segment Revenues
FedEx Express segment total revenues increased 6% in 2004,
principally due to higher IP revenues in Asia, Europe and U.S. out-
bound. IP revenues increased significantly on volume growth
(7%) and higher yield (9%). Asia experienced strong average daily
volume growth (led by China with volume growth of over 50%),
while outbound shipments from Europe, the United States and
Latin America continued to improve. The increase in IP yield was
largely attributable to Europe. The yield increase was primarily
due to higher average weight per package, favorable exchange
rate differences and higher fuel surcharge revenue. 

U.S. domestic package revenue increased 2% in 2004 as both vol-
umes and yields grew slightly. For U.S. domestic composite yield,
a small decline in average rate per pound was offset by increases
in average weight per package and fuel surcharge revenue. For
U.S. domestic shipments and U.S. outbound international ship-
ments, an average list price increase of 2.5%, along with certain

FedEx Express segment total revenues increased 7% in 2003,
largely due to increased IP and U.S. freight revenues. Year-over-
year  revenue  comparisons  reflect  the  impact  in  2002  of  the
terrorist attacks on September 11, 2001, which adversely affected
both U.S. outbound international shipments and U.S. domestic
shipments, and the economic decline that began in calendar 2001.
IP volume growth occurred predominantly in Asia and Europe,
which experienced average daily volume growth rates of 21% and
11%, respectively, during 2003. IP yield improvements during 2003
were due to favorable exchange rate differences, increased fuel
surcharge revenue and growth in higher-yielding lanes.

U.S. domestic package revenue increased 2% in 2003 due to
higher yield and volumes in the U.S. deferred and overnight box
categories. The increase in U.S. domestic package yield during
2003 was due to higher fuel surcharge revenue and average list
price increases. Higher U.S. freight revenues from increased
average daily pounds during 2003 also affected year-over-year
revenue comparisons, as we benefited from a full twelve months
of operations and higher shipping levels under our transportation
contract with the USPS, which began in August 2001.

Fuel surcharge revenue was higher in 2004 and 2003 primarily
due  to  higher  jet  fuel  prices  and  the  introduction  of  certain
international dynamic fuel surcharges in September 2002. Our
dynamic fuel surcharges are based on the spot price for jet fuel.
During 2003, fuel surcharge revenue was also higher because our
dynamic index for determining our U.S. domestic fuel surcharge
was not implemented until the second quarter of 2002. Using this
index, the U.S. domestic fuel surcharge ranged between 3.0%
and 6.5% during 2004, 2.0% and 5.5% during 2003 and between
0% and 3% from November 2001 through May 2002. International
fuel surcharges ranged between 2% and 6.5% during 2004 and
were as high as 6% during 2003.

FedEx Express Segment Operating Income
During 2004, operating income decreased 20% due to business
realignment costs totaling $428 million (partially offset by approx-
imately $150 million of savings). Higher incentive compensation
and pension costs and base salary increases, as well as higher
maintenance expenses, were offset by revenue growth and ongo-
ing  cost  control  efforts.  In  addition,  2004  benefited  from  one
additional operating day. During 2003, the 2% decrease in operat-
ing income and the decline in operating margin at FedEx Express
were attributable to increased employee benefits costs, higher
maintenance expenses and, to a lesser extent, the net impact of
higher fuel costs in an economic environment of sluggish U.S.
domestic average daily package volumes. Contributing to the
decrease  in  operating  income  was  one  fewer  operating  day.
Operating results during 2003 were also impacted by unusually
inclement weather during the winter and spring, which decreased
business shipping, reduced operational efficiency and increased
certain operating costs, such as for snow removal and de-icing.

39

FEDEX CORPORATION

Salaries and benefits were higher during 2004 due to higher incen-
tive compensation and pension costs and wage rate increases.
This increase was partially offset by savings from the business
realignment initiatives. The 2003 increase was due to wage rate
increases and higher pension and healthcare costs. In addition,
higher  salaries  and  benefits  were  partially  the  result  of  cost
increases related to the USPS contract. Incentive compensation
provisions declined in 2003 based on below-plan performance.

FedEx Express Segment Outlook
We anticipate revenue growth at FedEx Express during 2005, in
both the domestic and international markets. Revenue increases
will be led by IP, where we expect volume and yield growth, par-
ticularly in Asia, U.S. outbound and Europe. We expect only slight
U.S. domestic volume growth at FedEx Express, with higher U.S.
domestic yields to account for a large portion of revenue growth
at FedEx Express.

Purchased transportation costs increased in 2004 and 2003 as IP
volume growth led to an increase in contract pickup and delivery
services. Higher maintenance costs in both 2004 and 2003 were
primarily due to the timing of scheduled aircraft maintenance
events, higher utilization of aircraft related to USPS volumes 
and  a  higher  average  age  of  certain  types  of  our  aircraft.
Intercompany  charges  increased  during  2004  due  to  higher
incentive compensation, healthcare and pension costs and base
salary increases at FedEx Services.

Fuel costs were higher in 2004 due to a 10% increase in the aver-
age price per gallon of aircraft fuel, as fuel consumption was flat.
However, fuel surcharge revenue more than offset higher jet fuel
prices primarily due to the introduction of certain international
dynamic fuel surcharges in September 2002. Fuel consumption
was higher in 2003, primarily due to an increase in aircraft usage
as a result of incremental U.S. freight pounds transported under
the USPS agreement and IP volume growth. Fuel costs were also
higher in 2003 due to a 16% increase in the average price per
gallon of aircraft fuel. Higher net fuel costs at FedEx Express
negatively affected operating income during 2003, as fuel sur-
charge revenue increases were not sufficient to offset higher 
jet fuel prices. 

Rentals and landing fees decreased in 2004 due to the amend-
ment of operating leases for six MD11 aircraft that resulted in
these aircraft being recorded as fixed assets under capital lease.
In addition, as discussed in Note 16 to the accompanying audited
financial statements, two additional MD11s were recorded as
fixed assets at September 1, 2003 as a result of the adoption of
FIN 46. Depreciation and amortization expense declined slightly
due  to  decreases  in  capital  spending,  despite  the  additional
depreciation from the eight MD11 aircraft added to fixed assets. 

During  2003,  other  operating  expenses  increased  at  FedEx
Express as reimbursements in 2002 from the USPS for network
expansion costs were reflected as credits in other operating
expenses. These reimbursements, however, had no effect on
operating income, as they represented the recovery of incre-
mental costs incurred. Partially offsetting operating costs during
2003 was a gain from the insurance settlement on an aircraft
destroyed in an accident in July 2002 that resulted in a net $8
million favorable impact on operating income. During 2002, other
operating  expenses  included  $27  million  from  the  favorable
resolution of certain state tax matters.

40

We expect significant operating margin improvement at FedEx
Express during 2005, led by the full-year salaries and benefits
savings of our 2004 business realignment initiatives. These cost
management actions and improved volumes, along with a sharp
focus on productivity, are expected to produce improved opera-
tional efficiency. In addition, we expect additional improvement
due  to  IP  volume  growth  with  solid  incremental  margins,
increased U.S. domestic yields and volumes aided by the FedEx
Kinko’s retail presence and the impact of reduced capital spend-
ing in prior years. While capital expenditures at FedEx Express
are expected to be higher than 2004 due to planned aircraft pur-
chases to support IP volume growth, they are expected to remain
below historical levels.

FEDEX GROUND SEGMENT
The following table compares revenues, operating expenses and
operating income and margin (dollars in millions) and selected
package statistics (in thousands, except yield amounts) for the
years ended May 31:

2004

2003

2002

Percent Change
2003/
2002

2004/
2003

$ 3,910

$ 3,581

$ 2,918

9

23

Revenues
Operating expenses:
Salaries and 

employee benefits

740
Purchased transportation 1,465
Rentals
98
Depreciation and 
amortization

Fuel
Maintenance and repairs
Business realignment 

costs

Intercompany charges
Other

Total operating
expenses
Operating income
Operating margin
Average daily 

package volume (1)
Revenue per package

709
1,327
88

623
1,067
85

155
11
89

–
346
362

136
5
76

–
256
333

154
16
95

1
432
387

$

3,388
522
13.4%

$

3,087
494
13.8%

$

2,581
337
11.5%

2,285

2,168

1,755

4
10
11

(1)
45
7

n/a
25
7

10
6

5

4

14
24
4 

14
120
17

n/a
35
9

20
47

24

2

(yield) (1)

$ 6.48

$ 6.25

$ 6.11

(1) Package statistics include only the operations of FedEx Ground.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Operating margins improved in 2003 as FedEx Ground realized
substantial improvements in pickup and delivery and linehaul
productivity. Similar to 2004, intercompany charges increased due
to the utilization of a larger portion of allocated resources from
FedEx Services. Salaries and employee benefits increased in 2003
due to higher pension costs and increases in staffing to support
volume growth. Operating results during 2003 were also impacted
by inclement weather during the winter and spring, which was
more severe than in previous years. 

The increase in operating income in both 2004 and 2003 was 
also attributable to improved home delivery service results. In
September 2002, FedEx Ground completed the build-out of its
national home delivery network, enabling it to reach nearly 100%
of U.S. residences, with evening, weekend and day- and time-
specific delivery options, all backed by a money-back guarantee.
Our home delivery service became profitable during 2003. This
service had an operating loss of $32 million during 2002.

FedEx Ground Segment Outlook
We expect FedEx Ground to return to double-digit revenue growth
in 2005, led by increased home delivery and next-business day
package volume and modest yield improvement. Average daily
volume  is  expected  to  improve  on  its  2004  growth  of  5%.
Anticipated  yield  improvements  from  the  average  list  price
increase and extra services revenue will be partially offset by the
impact from the elimination of FedEx Ground’s fuel surcharge in
January 2004. FedEx Ground will also continue to place emphasis
on improving on-time delivery, productivity and safety.

During 2005, we expect continued growth in capital spending at
FedEx  Ground  as  we  continue  to  focus  on  network  capacity
expansion. As a result of losses at FedEx Supply Chain Services,
higher facility expenses due to expansion and slower yield growth
primarily due to the elimination of FedEx Ground’s fuel surcharge,
we expect the 2005 operating margin will be comparable to 2004.

FedEx Ground Segment Revenues
Revenues increased during 2004 due to higher volumes and yield
improvement, led by increased usage of our home delivery ser-
vice. Average daily volume continued its sequential growth in the
fourth quarter, with a 12% increase over the fourth quarter of 2003,
up from 1%, 3% and 6% growth in the first, second and third quar-
ters, respectively. The lower average daily volume increase for
2004 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. In addi-
tion, 2004 benefited from two additional operating days. The FedEx
Ground segment realized 23% revenue growth in 2003, despite one
less operating day, due to increased volumes in our business-to-
business shipments and continued growth of our home delivery
service. During 2003, our home delivery service added facilities to
reach nearly 100% coverage of the U.S. population.

Yield at FedEx Ground increased in 2004 primarily due to general
rate increases and an increase in extra services revenue, par-
tially offset by higher customer discounts and the elimination of
the fuel surcharge in January. An average list price increase of
1.9% on FedEx Ground services became effective January 5,
2004. On that date, the fuel surcharge for all FedEx Ground ship-
ments was discontinued. In 2003, year-over-year yield increases
were  due  to  an  average  list  price  increase  of  3.9%,  which
became effective January 6, 2003. Partially offsetting the effect
of the price increase were higher levels of discounts and lower
average weight per package. 

In the third quarter of 2002, FedEx Ground implemented a dynamic
fuel surcharge, based on the spot price for on-highway diesel fuel.
Before its elimination in January 2004, this surcharge ranged
between 1.25% and 1.50% during 2004, between 0.75% and 2.00%
during 2003 and between 0.50% and 0.75% from February through
May 2002. 

FedEx Ground Segment Operating Income
Operating income increased in 2004 due to volume growth, yield
improvements  and  increased  productivity.  These  gains  were
partially  offset  by  higher  intercompany  charges,  increased
healthcare and pension costs and expenses related to terminal
expansions and relocations. FedEx Ground utilized a larger por-
tion of allocated sales, marketing, information technology and
customer support resources. The cost of providing these services
increased due to higher incentive compensation, healthcare and
pension  costs  and  base  salary  increases  at  FedEx  Services.
Operating margin for the segment was also negatively affected
by operating losses at FedEx Supply Chain Services.

41

FEDEX CORPORATION

FEDEX FREIGHT SEGMENT
The following table shows revenues, operating expenses and
operating income and margin (dollars in millions) and selected
statistics for the years ended May 31:

2004

2003

2002

Percent Change
2003/
2002

2004/
2003

$2,689

$2,443

$2,253

10

8 

Revenues
Operating expenses:
Salaries and 

employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and 
amortization

Fuel
Maintenance 
and repairs

Intercompany charges
Other

1,427
254
100

1,303
224
105

1,218
197
101

92
122

116
21
313

88
107

115
17
291

91
87

91
13
270

Total operating 
expenses
Operating income
Operating margin
Average daily

LTL shipments 
(in thousands)
Weight per LTL 
shipment (lbs)

LTL yield (revenue per 
hundredweight)

2,445
$ 244

2,250
$ 193

2,068
$ 185

9.1%

7.9%

8.2%

58

56

56

1,127

1,114

1,114

$14.23

$13.40

$12.41

10
13
(5)

5
14

1
24
8

9
26

4

1

6

7
14 
4

(3)
23 

26 
31
8

9 
4

– 

–

8

FedEx Freight Segment Revenues
The double-digit increase in FedEx Freight segment revenues
during 2004 was primarily due to increases in LTL yield and LTL
average daily shipments. Year-over-year growth in LTL average
daily shipments accelerated to 11% in the fourth quarter of 2004,
reflecting a strengthening economy and market-share gains. LTL
yield grew 6% during the year, reflecting incremental fuel sur-
charges due to higher fuel prices, growth in our interregional
freight service, a 5.9% general rate increase in June 2003 and
favorable contract renewals. In addition, 2004 had one additional
operating day. Revenues increased 8% during 2003 due to improved
LTL yield, despite the continued impact of a slow economy, severe
winter weather and one fewer operating day during the year. 

FedEx Freight Segment Operating Income
The 26% increase in operating income at the FedEx Freight seg-
ment during 2004 was primarily attributable to LTL revenue growth
and cost management. Operating margins improved as yield man-
agement and operational productivity gains outpaced increased
incentive compensation, fuel, insurance and claims, pension and
healthcare costs. Purchased transportation increased primarily

due to the growth of our interregional freight service. During 2003,
operating income also increased due to LTL revenue growth and
cost management. Lower depreciation and amortization during
2003 reflects increased gains from the sale of operating assets in
the ordinary course of business.

Operating margin improved more than 100 basis points in 2004 
on  strong  revenue  growth.  Lower  operating  margins  in  2003
reflect higher maintenance and repairs expenses, which include
$8 million of incremental expenses associated with rebranding
our two regional LTL carriers under the common name “FedEx
Freight.” The rebranding project began in the fourth quarter of
2002 and is expected to be complete in 2005. Through the end of
2004, rebranding expenses totaled $31 million of the anticipated
total project cost of $41 million. These costs, which are being
expensed as incurred, consist primarily of incremental external
costs for rebranding tractors and trailers.

FedEx Freight Segment Outlook
We expect revenue to continue to grow in 2005, due to both LTL
yield improvement and LTL daily shipment growth. Continued
market share growth, a general rate increase and a relatively sta-
ble industry-pricing environment are expected to contribute to
LTL yield improvement. We implemented a general rate increase
of 5.9%, effective June 14, 2004. Our no-fee money-back guaran-
tee, implemented in September 2003, continues to be a differ-
entiator in the market, generating additional business with new
and existing customers. Continued consolidation among carriers
and an improving economy are providing many opportunities for
FedEx  Freight  to  promote  its  profitable  interregional  service. 
In addition, through collaboration with other FedEx operating
companies, FedEx Freight is increasing business levels with its
major customers. Contributing to the positive outlook for 2005 is
FedEx Freight’s disciplined approach to yield management, cou-
pled with strategic investments in capacity.

FEDEX KINKO’S SEGMENT
The following table shows revenues, operating expenses and
operating income and margin (dollars in millions) for the fourth
quarter ended May 31, 2004:

Revenues
Operating expenses:

Salaries and employee benefits
Rentals
Depreciation and amortization
Maintenance and repairs
Other

Total operating expenses

Operating income
Operating margin

$521

185
115
33
9
140
482
$ 39

7.5%

42

MANAGEMENT’S DISCUSSION AND ANALYSIS

FedEx Kinko’s Segment Operating Results
The results of operations of FedEx Kinko’s are included in our
consolidated results from the date of acquisition (February 12,
2004). The FedEx Kinko’s segment was formed in the fourth quar-
ter of 2004. The results of operations from February 12, 2004 (the
date of acquisition) through February 29, 2004 were included in
“Other and Eliminations” (approximately $100 million of revenue
and $6 million of operating income). FedEx Kinko’s has focused
on strengthening its current lines of business, which include
black-and-white, color and custom printing, copying and binding
services, facilities management and outsourcing, high-speed
Internet access and computer usage, signs and graphics, sale of
retail products and others. Fourth quarter revenue was primarily
driven by strong performance in signs and graphics, finishing ser-
vices and retail products. As in-home technological advances
have  impacted  the  traditional  retail  walk-up  business,  FedEx
Kinko’s has expanded its efforts to attract a larger share of the
commercial document solutions and business service market.

FedEx Kinko’s operating margin benefited from strong revenue
performance during the fourth quarter. Additionally, our efforts to
optimize production machines within each store location resulted
in reduced lease and maintenance costs. Negatively impacting
operating margin was approximately $3 million of rebranding
costs.  The  caption  “Other”  in  the  financial  summary  on  the 
preceding page includes supplies and other direct costs, such as
paper and toner. 

FedEx Kinko’s Segment Outlook
In  2005,  FedEx  Kinko’s  will  focus  on  continuing  to  generate
revenue growth by leveraging its new relationship with FedEx. 
FedEx Kinko’s plans to open approximately 70 new locations in
2005, including many internationally. In addition, there are signifi-
cant opportunities for growth in full-service color copies, finishing
services and signs and graphics product offerings. We expect
operating margins to decrease in 2005, as FedEx Kinko’s will absorb
a portion of the FedEx Corporation headquarters’ fees commencing
in 2005 and approximately $20 million in rebranding costs.

On April 26, 2004, we announced the new brand identity for FedEx
Kinko’s retail locations – FedEx Kinko’s Office and Print Centers.
Following this announcement, we began accepting packages to
be  shipped  from  our  U.S.  locations.  This  capability  will  also 
allow FedEx Kinko’s to launch “pack-and-ship” services in 2005.
Management is also focusing on cost reduction and control, with
continued focus on machine optimization, increased opportunities
for strategic sourcing of operating expenses such as supplies
and machines and implementing best practices across the FedEx
Kinko’s network. Capital expenditures are expected to be approx-
imately $125 million, primarily for technology- and equipment-
related projects, real estate and rebranding.

FINANCIAL CONDITION

LIQUIDITY
Cash and cash equivalents totaled $1.046 billion at May 31, 2004,
compared to $538 million at May 31, 2003. The following table
provides a summary of our cash flows for the years ended May 31
(in millions):

Net cash provided by 
operating activities

Investing activities:

Business acquisition, net of 

cash acquired

Capital expenditures and 

other investing activities
Net cash used in investing activities
Financing activities:

Principal payments on debt
Proceeds from debt issuances
Repurchase of treasury stock
Dividends paid
Other financing activities
Net cash provided by (used in) 

financing activities
Net increase in cash and 

cash equivalents

2004

2003

2002

$ 3,020

$ 1,871

$ 2,228

(2,410)

(1,252)
(3,662)

(319)
1,599
(179)
(66)
115

– 

(35)

(1,490)
(1,490)

(1,577)
(1,612)

(10)
– 
(186)
(60)
82

(320)
– 
(177)
–
91 

1,150

(174)

(406)

$

508

$

207

$

210

The $1.149 billion increase in cash flows from operating activities
in 2004 was largely attributable to lower pension contributions.
Working capital management more than offset cash paid related
to the business realignment initiatives. The $357 million decrease
in cash flow provided by operating activities in 2003 reflected
increased funding to our qualified pension plans, partially offset
by  improved  earnings  and  lower  levels  of  estimated  federal
income tax payments. Although not legally required, we made
cash contributions to our qualified U.S. pension plans of $1.1 bil-
lion during 2003 (compared to $320 million in 2004 and $150 million
in 2002).

Cash Used for Business Acquisitions. On February 12, 2004, we
acquired all of the common stock of FedEx Kinko’s for approxi-
mately $2.4 billion in cash. See “Debt Financing Activities” and
“FedEx Kinko’s Acquisition” for further discussion. During 2002, a
subsidiary of FedEx Trade Networks acquired certain assets of
Fritz Companies, Inc. at a cost of $36.5 million. See Note 2 of the
accompanying audited financial statements for further discus-
sion of these acquisitions.

Cash Used for Capital Investments.For 2004, capital expenditures
declined due to lower aircraft expenditures at FedEx Express,
partially offset by an increase from network capacity expansion
at FedEx Ground. Capital expenditures were also lower in 2003
due to management’s cost reduction actions in 2001 and 2002,
despite deliveries of aircraft during 2003 that were scheduled and
committed to well before the economic slowdown. See “Capital
Resources” for further discussion.

43

FEDEX CORPORATION

Debt Financing Activities. Our  commercial  paper  program  is
backed by unused commitments under two credit agreements,
totaling $1 billion, and reduces the amount available under these
agreements. Commercial paper borrowings of $1.9 billion were
necessary to finance part of our $2.4 billion acquisition of FedEx
Kinko’s. These borrowings were backed by a new six-month $2
billion credit agreement. During February 2004, we issued com-
mercial paper backed by unused commitments under this facility.
In March 2004, we issued $1.6 billion of senior unsecured notes 
in three maturity tranches: one, three and five years, at $600 
million, $500 million and $500 million, respectively. These notes
are guaranteed by all of our subsidiaries that are not considered
minor under Securities and Exchange Commission (“SEC”) regu-
lations. Net proceeds from these borrowings were used to repay
our  commercial  paper  borrowings  backed  by  the  six-month 
facility. We canceled the six-month credit facility in March 2004.
At May 31, 2004, no commercial paper borrowings were out-
standing  and  the  entire  $1  billion  under  the  revolving  credit
agreements was available for future borrowings. Our debt and
revolving  credit  agreements  contain  certain  covenants  and
restrictions, none of which are expected to affect our operations
or ability to pay dividends. 

During 2004, $250 million of senior unsecured notes matured and
were paid. In addition, $25 million of existing unsecured debt at
FedEx Express matured and was paid. During the third quarter of
2003, commercial paper borrowings of $200 million were necessary
to finance part of the cash contribution to our qualified pension
plans. All of the commercial paper borrowings were repaid by
April 11, 2003. At May 31, 2003, no commercial paper was out-
standing. For more information regarding our credit facilities, see
Note 6 of the accompanying audited financial statements.

We have a $1.0 billion shelf registration statement with the SEC to
provide flexibility and efficiency when obtaining financing. Under
this shelf registration statement we may issue, in one or more
offerings, either unsecured debt securities, common stock or a
combination of such instruments. The entire $1 billion is available
for future financings.

Cash Used for Share Repurchases. During 2004 and 2002, our
Board of Directors authorized us to buy back a total of 15.0 million
shares of common stock. During the first half of 2004, we repur-
chased 2.6 million shares at an average price of $68.14 per share,
which decreased cash flows by approximately $179 million. No
shares were repurchased during the second half of 2004. We
repurchased 3.3 million shares in 2003 at an average price of $56.66
per share and this decreased cash flows by $186 million. During
2002, we repurchased approximately 3.3 million shares of our com-
mon stock, at a cost of approximately $177 million or an average of
$52.70 per share. Based on our current financing strategy, we have
significantly reduced the number of shares we expect to repur-
chase and instead are issuing new shares in connection with our
equity  compensation  programs.  A  total  of  5.75  million  shares
remain under existing share repurchase authorizations. 

44

Dividends.Our Board of Directors declared our first-ever cash div-
idend on May 31, 2002. Dividends paid in 2004 and 2003 were $66
million and $60 million, respectively. On May 28, 2004, our Board of
Directors declared a dividend of $0.07 per share of common stock,
an increase of $0.01 per share over the previous dividend payment.
The dividend was paid on July 1, 2004 to stockholders of record as
of the close of business on June 10, 2004. Each quarterly dividend
payment  is  subject  to  review  and  approval  by  our  Board  of
Directors, and we intend to evaluate our dividend payment amount
on an annual basis at the end of each fiscal year.

Other Liquidity Information.We believe that cash flow from oper-
ations, 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
Despite the recent decrease in capital spending, our operations
remain  capital  intensive,  characterized  by  significant  invest-
ments 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 inter-
national  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  by  asset
category and reportable segment for the years ended May 31 (in
millions):

2004

2003

2002

Percent Change
2003/
2002

2004/
2003

$ 372

$ 762

$ 730

(51)

4

Aircraft and related

equipment
Facilities and sort
equipment

Information technology

investments
Vehicles and other

equipment
Total capital

332

249

318

254

273

222

292

288

305

expenditures

$1,271

$1,511

$1,615

FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment
Other

Total capital

$ 592
314
130
36
199

$ 917
252
139
–
203

$1,069
214
86
–
246

expenditures

$1,271

$1,511

$1,615

(16)

(6)

Capital expenditures were 16% lower in 2004, with the year-over-
year  decrease  due  to  lower  aircraft  expenditures  at  FedEx
Express, partially offset by an increase from network capacity
expansion at FedEx Ground. Capital expenditures were 6% lower

31

(13)

(9)

(5)

43

(27)

(16)

(35)
25
(6)
n/a
(2)

(6)

(14)
18
62
n/a
(17)

MANAGEMENT’S DISCUSSION AND ANALYSIS

during 2003. This decrease was primarily at the FedEx Express
segment, where capital expenditures were 14% lower. We con-
tinued to make investments in FedEx Ground’s infrastructure and
information technology, and we also made capital investments to
expand FedEx Freight.

Our capital expenditures are expected to be approximately $1.65
billion in 2005, with much of the year-over-year increase coming
from planned aircraft expenditures at FedEx Express to support
IP volume growth. We also continue to invest in infrastructure
upgrades and scanning technologies, the multi-year capacity
expansion of the FedEx Ground network, expansion of the FedEx
Kinko’s network and replacement vehicle needs at FedEx Freight.

Because of substantial lead times associated with the manufac-
ture  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 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 strategi-
cally in growing business segments.

CONTRACTUAL CASH OBLIGATIONS
The following table sets forth a summary of our contractual cash
obligations as of May 31, 2004. Certain of these contractual obli-
gations  are  reflected  in  our  balance  sheet,  while  others  are
disclosed  as  future  obligations  under  accounting  principles
generally accepted in the United States. Excluding the current
portion of long-term debt and capital lease obligations, this table
does not include amounts already recorded on our balance sheet
as current liabilities at May 31, 2004.

(in millions)

2005

2006

2007

2008

2009

There-
after

Total

Payments Due by Fiscal Year

Amounts reflected in Balance Sheet:
Long-term debt (1) $ 613 $ 265 $ 844 $
Capital lease 

– $ 499 $

832 $ 3,053

obligations (2)

160

122

22

99

11

225

639

Other cash obligations not reflected in Balance Sheet:
Unconditional 
purchase 
obligations (3)
Operating leases
Total

3,402
601
1,707
15,016
$3,081 $2,197 $2,554  $1,640 $2,322 $10,316 $22,110

212
1,436 1,329

1,439
7,820

643
1,169

255
1,555

252

(1) Amounts do not include related interest. See Note 6 for the applicable interest rates.
(2) Capital lease obligations represent principal and interest payments.
(3) See Note 17 to the accompanying audited financial statements.

We have certain contingent liabilities that are not accrued in our
balance sheet in accordance with accounting principles gener-
ally accepted in the United States. These contingent liabilities are
not included in the table above.

Amounts Reflected in Balance Sheet
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 let-
ters of credit. These instruments are generally required under
certain U.S. 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 certain operating leases that were arranged using vari-
able interest entities under terms that are considered customary
in the airline industry. As discussed in Note 16 to the accompa-
nying audited financial statements, we consolidated one of these
entities in the second quarter of 2004 in accordance with FIN 46.
As a result of this consolidation, the accompanying audited May
31, 2004 balance sheet includes an additional $126 million of fixed
assets and $133 million of long-term liabilities, and the payment
of these debt obligations is included in the table above.

FedEx Express amended two leases for MD11 aircraft during 2004,
which required FedEx Express to record $110 million in both fixed
assets  and  long-term  liabilities.  During  2003,  FedEx  Express
amended four leases for MD11 aircraft, which now commits FedEx
Express to firm purchase obligations for two of these aircraft
during both 2005 and 2006. As a result, the amended leases were
accounted for as capital leases, which added $221 million to
both fixed assets and long-term liabilities at May 31, 2003. The
future payments of these capital lease obligations are reflected
in the table above.

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 in 2005 that are
included in current liabilities.

Other Cash Obligations Not Reflected in Balance Sheet
The amounts reflected in the table above for purchase commit-
ments represent noncancelable agreements to purchase goods
or services. Such contracts include those for certain purchases
of aircraft, aircraft modifications, vehicles, facilities, computers,
printing and other equipment and advertising and promotions
contracts. Open purchase orders that are cancelable are not
considered  unconditional  purchase  obligations  for  financial
reporting purposes and are not included in the table above. Such
purchase  orders  often  represent  authorizations  to  purchase
rather than binding agreements. 

45

FEDEX CORPORATION

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 May 31, 2004. 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. 

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 infor-
mation concerning minimum lease payments required for our
operating leases to calculate our debt capacity. In addition, we
have guarantees under certain operating leases, amounting to
$43 million as of May 31, 2004, for the residual values of vehicles
and facilities at the end of the respective operating lease peri-
ods.  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 operat-
ing 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. 

In the future, other forms of secured financing and direct pur-
chases 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 eco-
nomic factors. We believe the capital resources available to us
provide flexibility to access the most efficient markets for financ-
ing 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 sig-
nificant 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.

The policies and estimates discussed below include the financial
statement elements that are either the most judgmental or involve
the selection or application of alternative accounting policies and

are  material  to  our  financial  statements.  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  registered
public accounting firm. 

PENSION COST
We sponsor defined benefit pension plans covering a majority of
our employees. The accounting for pension benefits is deter-
mined by standardized accounting and actuarial methods that
include numerous estimates, including: discount rates; expected
long-term  investment  returns  on  plan  assets;  future  salary
increases; and employee turnover, mortality and retirement ages. 

The determination of our annual pension cost is highly sensitive
to changes in these estimates because we have a large, active
workforce and we have a significant amount of assets in the pen-
sion plans. For example, only 6% of the participants covered
under our principal pension plan are retired and currently receiv-
ing  benefits  and  the  average  remaining  service  life  of  our
employees approximates 14 years (normal retirement is at age 60).
Therefore, the payout of pension benefits will occur over a long
period in the future. This long-time period increases the sensitivity
of our annual pension cost to changes in these key estimates.
Total pension cost increased approximately $115 million in 2004
and approximately $80 million in 2003 primarily due to changes to
these estimates. For 2005 we expect a smaller increase (approxi-
mately $30 million), as 2004 actual asset returns have substantially
improved the funded status of our pension plans in spite of a con-
tinued decline in the discount rate. Pension cost is included in the
salaries and employee benefits caption in our income statements.
Following are the components of pension cost recognized in our
income statements (in millions):

Service cost
Interest cost
Expected return on plan assets
Net amortization and deferral

2004

$ 376
490
(597)
74
$ 343

2003

$ 374 
438
(594)
10
$ 228

2002 

$ 348
409
(621)
13 
$ 149 

Following is a discussion of the estimates we consider most crit-
ical to determining our pension costs:

Discount Rate. This is the interest rate used to discount the esti-
mated future benefit payments that have been earned to date
(the projected benefit obligation) to their net present value. The
discount rate is determined each year at the plan measurement
date (end of February) and affects the succeeding year’s pen-
sion cost. A decrease in the discount rate has a negative effect
on pension expense. 

This assumption is highly sensitive for us as a one-basis-point
change in the discount rate at February 29, 2004 affects our 2005
pension  expense  by  approximately  $1.8  million  and  our  2004
accumulated benefit obligation by approximately $11 million. For
example, the 21-basis-point decrease in the discount rate to 6.78%

46

MANAGEMENT’S DISCUSSION AND ANALYSIS

for 2005 from 6.99% for 2004 will negatively affect our 2005 pen-
sion cost by approximately $38 million. Our 2004 pension cost was
negatively affected by approximately $20 million by the 12-basis-
point decrease in the discount rate to 6.99% for 2004 from 7.11%
for 2003. 

We determine the discount rate (which is required to be the rate at
which the projected benefit obligation could be effectively settled
as of the measurement date) with the assistance of actuaries, who
calculate the yield on a theoretical portfolio of high-grade corpo-
rate bonds with coupon payments and maturities that generally
match  our  expected  benefit  payments.  This  methodology  is
consistently applied and involves little subjectivity. However, the
calculated discount rate can change materially from year to year
based  on  economic  market  conditions  that  impact  yields  on
corporate bonds. 

Plan Assets.Pension plan assets are invested primarily in listed
securities. Our pension plans hold only a minimal investment in
FedEx common stock. The estimated average rate of return on
plan assets is a long-term, forward-looking assumption that also
materially affects our pension cost. It is intended to be the expected
future long-term rate of earnings on plan assets. At February 29,
2004,  with  over  $7.7  billion  of  plan  assets,  a  one-basis-point
change in this assumption affects pension cost by approximately
$750,000 (a decrease in the assumed expected long-term rate of
return has a negative effect on pension expense).

Establishing the expected future rate of investment return on our
pension assets is a judgmental matter. Management considers
the following factors in determining this assumption:

• the  duration  of  our  pension  plan  liabilities,  which  drives  the
investment strategy we can employ with our pension plan assets. 

• the types of investment classes in which we invest our pension
plan assets and the expected compound return we can reason-
ably expect those investment classes to earn over the next 
10- to 15-year time period (or such other time period that may
be appropriate). 

• the investment returns we can reasonably expect our active
investment management program to achieve in excess of the
returns we could expect if investments were made strictly in
indexed funds.

We review the expected long-term rate of return on an annual
basis and revise it as appropriate. Also, we periodically commis-
sion  detailed  asset/liability  studies  performed  by  third-party
professional investment advisors and actuaries. These studies
project our estimated future pension payments and evaluate the
efficiency of the allocation of our pension plan assets into various
investment categories. These studies also generate probability-
adjusted  expected  future  returns  on  those  assets.  The  study
performed for 2003 supported the reasonableness of our 10.10%
return assumption used for 2003 based on our liability duration and
market conditions at the time we set this assumption (in 2002).

Because of the introduction of the Portable Pension Account (dis-
cussed below) for 2004 (which will reduce our liability duration
over time), as well as the significant additional contributions we
made into the plans in late 2003 and the continuing deterioration of
the equity markets through February 28, 2003, we performed a
more recent asset/liability study for 2004, which supported a long-
term return on assets of 9.10%. The results of this study were
reaffirmed for 2005 by our third-party professional investment
advisors and actuaries and support our current asset allocation
strategy, which is summarized below:

Asset Class

Domestic equities
International equities
Private equities
Total equities

Long duration fixed income securities
Other fixed income securities

Target % of Plan Assets

53%
17
5
75
15
10
100%

Our allocation of assets at February 29, 2004 approximates the
target allocation above. Our actual compound return on assets
was 9.4% for the 15-year period ended March 31, 2004. Based 
on these factors, we will retain 9.10% as our estimated future 
rate of return on pension assets for 2005. The 100-basis-point
decrease in the expected long-term rate of return for 2004 nega-
tively affected our 2004 pension cost by approximately $65 million.
Our 2003 pension cost was negatively affected by approximately
$48 million by the 80-basis-point decrease in the expected long-
term rate of return to 10.10% for 2003 from 10.90% for 2002.

Pension expense is also affected by the accounting policy used
to determine the value of plan assets at the measurement date.
We use a calculated-value method to determine the value of plan
assets, which helps mitigate short-term volatility in market per-
formance (both increases and decreases). Another method used
in practice applies the market value of plan assets at the mea-
surement date. The application of the calculated-value method
reduced  2004  and  2003  pension  cost  by  approximately  $106
million and $35 million, respectively. Application of the calculated-
value method will approximate the market-value method in 2005. 

Salary Increases. The assumed future increase in salaries and
wages is also a key estimate in determining pension cost. We cor-
relate changes in estimated future salary increases to changes in
the discount rate (since that is an indicator of general inflation and
cost of living adjustments) and general estimated levels of prof-
itability (since most incentive compensation is a component of
pensionable wages). For 2005 pension cost, a one-basis-point
change in the rate of estimated future salaries affects pension
cost  by  approximately  $900,000  (a  decrease  in  this  rate  will
decrease pension cost). This assumption varies directly with the
discount rate changes (reflecting general inflation trends); how-
ever, the current rate is deemed to be at or near the floor based
on current pay structures and improving company performance.

47

FEDEX CORPORATION

Cumulative unrecognized actuarial losses were approximately
$1.7 billion through February 29, 2004, improved from $2.2 billion at
February 28, 2003. These unrecognized losses primarily reflect the
declining discount rate and the declining stock market during
2003, 2002 and 2001. These amounts may be recovered in future
periods through actuarial gains. However, to the extent that the
discount rate remains low and market performance does not con-
tinue to improve, these unrecognized actuarial losses may be
recognized in future periods.

The  net  amounts  reflected  in  our  balance  sheet  related  to
pension items include a substantial prepaid pension asset. This
results from excess cash contributions to the plans over amounts
that are recognized as pension expense for financial accounting
purposes. Amounts accrued as liabilities (including minimum
pension liabilities) relate primarily to unfunded nonqualified plans
and international pension plans where additional funding may not
provide a current tax deduction.

Effective in 2004, we amended the FedEx Corporation Employees’
Pension Plan to add a cash balance feature, which we call the
Portable  Pension  Account.  We  expect  the  Portable  Pension
Account will help reduce the long-term growth of our pension lia-
bilities.  All  employees  hired  after  May  31,  2003  will  accrue
benefits under the Portable Pension Account formula. Eligible
employees as of May 31, 2003 were able to choose between con-
tinuing to accrue benefits under the traditional pension benefit
formula or accruing future benefits under the Portable Pension
Account formula. The election was entirely optional. There was
no conversion of existing accrued benefits to a cash balance. All
benefits earned through May 31, 2003, including those applicable
to employees electing the Portable Pension Account, will be
determined under a traditional pension plan formula. Accordingly,
it will be several years before the impact of the lower benefit pro-
vided under this formula has a significant impact on our total
pension expense.

Under the Portable Pension Account, the retirement benefit is
expressed as a dollar amount in a notional account that grows
with annual credits based on pay, age and years of credited ser-
vice and interest on the notional account balance. An employee’s
pay credits will be determined each year under a graded formula
that combines age with years of service for points. The plan interest
credit rate will vary from year to year based on the selected U.S.
Treasury maturity, with a 4% minimum and a maximum based on
the government rate. Employees are fully vested on completion of
five years of service. 

Therefore, we will hold this assumption constant for determina-
tion of 2005 pension cost. The decrease in this assumption to
3.15% for 2004 from 3.25% favorably impacted 2004 pension cost
by approximately $10 million.

Following is information concerning the funded status of our pen-
sion plans as of May 31, 2004 and 2003 (in millions):

Funded Status of Plans:
Accumulated benefit obligation (ABO):
Qualified U.S. domestic plans
Other plans
Total ABO

Projected benefit obligation (PBO) 
Fair value of plan assets
PBO in excess of plan assets
Unrecognized actuarial losses, 

principally due to investments 
and changes in discount rate

Unamortized prior service cost and other
Amounts Included in Balance Sheets

Components of Amounts Included 

in Balance Sheets:
Prepaid pension cost
Accrued pension liability
Minimum pension liability
Intangible asset and other
Net amounts recognized in balance sheets

Cash Amounts:
Cash contributions during the year 
Benefit payments during the year

2004

2003

$7,069
358
$7,427
$8,683
7,783
(900)

$ 5,725 
284
$ 6,009
$ 7,117
5,825 
(1,292)

1,694
113
$ 907

2,247
116
$ 1,071

$1,127
(220)
(67)
67
$ 907

$ 1,269 
(198)
(42)
42
$ 1,071 

$ 335
$ 136

$ 1,072
103 
$

The funded status of the plans reflects a snapshot of the state of
our long-term pension liabilities at the plan measurement date.
Declining interest rates (which increase the discounted value of
the PBO) and recent fluctuations in the stock market have signif-
icantly impacted the funded status of our plans. However, our
plans remain adequately funded to provide benefits to our employ-
ees as they come due and current benefit payments are nominal
compared to our total plan assets (benefit payments for 2004
were less than 2% of plan assets at May 31, 2004). 

Although not legally required, we made $320 million in contri-
butions to our qualified U.S. pension plans in 2004 compared to
total contributions exceeding $1 billion in 2003. Our 2003 contri-
butions were made to ensure our qualified pension plan assets
exceeded the related accumulated benefit obligations at our
February 28, 2003 plan measurement date. Currently, we do not
expect any contributions for 2005 will be legally required. Based on
the substantial improvement in the funded status of our qualified
plans, we do not currently expect to contribute any funds to our
qualified defined benefit plans in 2005. 

48

MANAGEMENT’S DISCUSSION AND ANALYSIS

SELF-INSURANCE ACCRUALS
We are self-insured up to certain limits for costs associated with
workers’ compensation claims, vehicle accidents and general
business liabilities, and benefits paid under employee healthcare
and long-term disability programs. At May 31, 2004 there were
approximately $1.03 billion of self-insurance accruals reflected in
our balance sheet ($937 million at May 31, 2003).

The measurement of these costs requires the consideration of
historical cost experience and judgments about the present and
expected levels of cost per claim. We account for these costs pri-
marily through actuarial methods, which develop estimates of the
undiscounted liability for claims incurred, including those claims
incurred but not reported. These methods provide estimates of
future ultimate claim costs based on claims incurred as of the
balance sheet date. Other acceptable methods of accounting for
these accruals include measurement of claims outstanding and
projected payments. 

We believe the use of actuarial methods to account for these lia-
bilities provides a consistent and effective way to measure these
highly judgmental accruals. However, the use of any estimation
technique in this area is inherently sensitive given the magnitude
of claims involved and the length of time until the ultimate cost is
known. We believe our recorded obligations for these expenses
are consistently measured on a conservative basis. Nevertheless,
changes  in  healthcare  costs,  accident  frequency  and  sever-
ity, and other factors can materially affect the estimates for 
these liabilities.

LONG-LIVED ASSETS
Property and Equipment. Our key businesses are capital inten-
sive.  More  than  45%  of  our  total  assets  are  invested  in  our
transportation and information systems infrastructures. We cap-
italize only those costs that meet the definition of capital assets
under accounting standards. Accordingly, repair and mainte-
nance costs that do not extend the useful life of an asset are
expensed as incurred. However, consistent with industry prac-
tice, we capitalize certain aircraft-related costs on one of our
aircraft fleet types and amortize these costs over their estimated
service lives.

The depreciation or amortization of our capital assets over their
estimated useful lives, and the determination of any salvage val-
ues,  requires  management  to  make  judgments  about  future
events. Because we utilize many of our capital assets over rela-
tively long periods (the majority of aircraft costs are depreciated
over 15 to 18 years), we periodically evaluate whether adjust-
ments  to  our  estimated  service  lives  or  salvage  values  are
necessary to ensure these estimates properly match the eco-
nomic use of the asset. This evaluation may result in changes in
the estimated lives and residual values used to depreciate our
aircraft and other equipment. These estimates affect the amount
of depreciation expense recognized in a period and, ultimately,

the gain or loss on the disposal of the asset. Historically, gains
and losses on operating equipment have not been material (typ-
ically less than $10 million annually). However, such amounts
may differ materially in the future due to technological obso-
lescence, accident frequency, regulatory changes and other
factors beyond our control. 

No material changes to the estimated lives and residual values
were made during 2004. At various times during 2003, as studies
were completed, we made changes to the useful lives and resid-
ual values of certain aircraft fleet types, as well as tractors,
trailers  and  other  equipment.  These  changes  resulted  in  a
decrease in 2003 depreciation expense of approximately $13
million. Had all of these changes been made as of June 1, 2002,
depreciation  expense  for  2003  would  have  decreased  by  an
additional $12 million.

Because we must plan years in advance for future volume levels
and make commitments for aircraft based on those projections,
we have risks that asset capacity may exceed demand and that
an impairment of our assets may occur. The accounting test for
whether an asset held for use is impaired involves first comparing
the carrying value of the asset with its estimated future undis-
counted cash flows. If the cash flows do not exceed the carrying
value, the asset must be adjusted to its current fair value. 

Because the cash flows of our transportation networks cannot
be  identified  to  individual  assets,  and  based  on  the  ongoing
profitability of our operations, we have not experienced any sig-
nificant impairment of assets to be held and used. However, from
time to time we make decisions to remove certain long-lived
assets from service based on projections of reduced capacity
needs and those decisions may result in an impairment charge.
Assets held for disposal must be adjusted to their estimated fair
values when the decision is made to dispose of the asset and
certain  other  criteria  are  met.  There  were  no  material  asset
impairment charges recognized in 2004, 2003 or 2002.

Leases.We utilize operating leases to finance a significant num-
ber of our aircraft and FedEx Kinko’s locations. Over the years,
we have found these leasing arrangements to be favorable from
a cash flow and risk management standpoint. Such arrange-
ments typically shift the risk of loss on the residual value of the
assets at the end of the lease period to the lessor. As disclosed in
“Contractual Cash Obligations” and Note 7 to the accompanying
audited financial statements, at May 31, 2004 we had approx-
imately $15 billion (on an undiscounted basis) of future commit-
ments for payments under operating leases.

The future commitments for operating leases are not reflected as
a liability in our balance sheet because the leases do not meet
the accounting definition of capital leases. The determination of
whether a lease is accounted for as a capital lease or an operat-
ing lease requires management to make estimates primarily about
the fair value of the asset and its estimated economic useful life.

49

FEDEX CORPORATION

We believe we have well-defined and controlled processes for
making this evaluation, including obtaining third-party appraisals
for material transactions.

Goodwill. We have approximately $2.8 billion of goodwill on our
balance sheet resulting from the acquisition of businesses, which
includes approximately $1.7 billion from our acquisition of FedEx
Kinko’s in 2004. New accounting standards adopted in 2002 require
that we review this goodwill for impairment on an annual basis and
cease all goodwill amortization. As previously indicated, the adop-
tion of these new rules resulted in an impairment of our recorded
goodwill of $25 million in 2002 at one of our smaller businesses. 

The annual evaluation of goodwill impairment requires the use of
estimates and assumptions to determine the fair value of our
reporting units using a discounted cash flow methodology. In par-
ticular,  the  following  estimates  used  by  management  can
significantly affect the outcome of the impairment test: revenue
growth  rates;  operating  margin;  discount  rates  and  expected
capital  expenditures.  Each  year,  independent  of  our  goodwill
impairment test, we update our weighted-average cost of capital
calculation and perform a long-range planning analysis to project
expected results of operations. Using this data, we complete a
separate analysis for each of our reporting units. Changes in fore-
casted operations and other assumptions could materially affect
these estimates. We compare the fair value of our reporting units
to the carrying value, including goodwill, of each of those units.
Since the acquisition of FedEx Kinko’s occurred near the end of
2004, we did not test its goodwill for impairment in 2004. We will
include the related goodwill in our 2005 annual impairment test,
which, unless circumstances otherwise dictate, will be performed
in the fourth quarter of 2005. We performed our annual impairment
tests in 2004 and 2003 for our other reporting units. The fair value
of  our  reporting  units  exceeded  the  carrying  value,  including
goodwill, of each of those units; therefore, no impairment charge
was necessary.

Intangible Asset with an Indefinite Life.The estimated fair value 
of our intangible asset with an indefinite life was $567 million, con-
sisting of the estimated fair value allocated to the Kinko’s trade
name. This intangible asset will not be amortized because it has
an indefinite remaining useful life based on the length of time that
the Kinko’s name had been in use, the Kinko’s brand awareness
and market position and the plans for continued use of the Kinko’s
brand. We must review this asset for impairment on an annual
basis. This annual evaluation requires the use of estimates about
the future cash flows attributable to the Kinko’s trade name to
determine the estimated fair value of the trade name. Changes in
forecasted operations and changes in discount rates can materi-
ally affect this estimate. However, once an impairment of this
intangible asset has been recorded, it cannot be reversed. Unless
circumstances otherwise dictate, we plan to perform our first
annual impairment test in the fourth quarter of 2005.

REVENUE RECOGNITION
We believe the policies adopted to recognize revenue are criti-
cal because an understanding of the accounting applied in this
area is fundamental to assessing our overall financial perfor-
mance  and  because  revenue  and  revenue  growth  are  key
measures of financial performance in the marketplace. Our busi-
nesses are primarily involved in the direct pickup and delivery of
commercial package and freight shipments, as well as providing
document solutions and business services. Our employees and
agents are involved throughout the process and our operational,
billing and accounting systems directly capture and control all
relevant information necessary to record revenue, bill customers
and collect amounts due to us. 

We recognize revenue upon delivery of shipments or, for our busi-
ness services, logistics and trade services businesses, upon the
completion of services. Transportation industry practice includes
two predominant methods for revenue recognition for shipments
in  process  at  the  end  of  an  accounting  period:  (1)  recognize 
all revenue and the related delivery costs when shipments are
delivered or (2) recognize a portion of the revenue earned for ship-
ments that have been picked up but not yet delivered at period
end and accrue delivery costs as incurred. We use the second
method; we recognize the portion of revenue earned at the bal-
ance sheet date for shipments in transit and accrue all delivery
costs as incurred. We believe this accounting policy effectively
and consistently matches revenue with expenses and recognizes
liabilities as incurred.

There are three key estimates that are included in the recognition
and measurement of our revenue and related accounts receivable
under the policies described above: (1) estimates for unbilled rev-
enue on shipments that have been delivered; (2) estimates for
revenue associated with shipments in transit; and (3) estimates
for  future  adjustments  to  revenue  or  accounts  receivable  for
billing adjustments and bad debts.

Unbilled Revenue.Primarily due to cycle billings to some of our
larger customers, there is a time lag between the completion of a
shipment and the generation of an invoice. At the end of a month,
unprocessed invoices may be as much as one-third of the total
month’s revenue. This revenue is recognized through systematic
accrual processes. Invoices that are essentially complete repre-
sent  most  of  these  accruals,  with  little  subjectivity  over  the
amounts accrued. The remaining amounts are estimated using
actual package or shipment volumes and current trends of aver-
age  revenue  per  shipment.  These  estimates  are  adjusted  in
subsequent months to the actual amounts invoiced. Because of
the low level of subjectivity inherent in these accrual processes,
the estimates have historically not varied significantly from actual
amounts subsequently invoiced.

50

MANAGEMENT’S DISCUSSION AND ANALYSIS

Shipments in Process. The majority of our shipments have short
cycle times; therefore, less than 5% of a total month’s revenue is
typically in transit at the end of a period. We periodically perform
studies to measure the percentage of completion for shipments in
process.  At  month-end,  we  estimate  the  amount  of  revenue
earned  on  shipments  in  process  based  on  actual  shipments
picked up, the scheduled day of delivery, the day of the week on
which the month ends (which affects the percentage of comple-
tion) and current trends in our average price for the respective
services.  We  believe  these  estimates  provide  a  reasonable
approximation of the actual revenue earned at the end of a period.

Future Adjustments to Revenue and Accounts Receivable.Like
many companies, we experience some credit loss on our trade
accounts receivable. Historically, our credit losses from bad debts
have not fluctuated materially because our credit management
processes have been highly effective. We also recognize billing
adjustments to revenue and accounts receivable for certain dis-
counts, money-back service guarantees and billing corrections. 

Estimates for credit losses and billing adjustments are regularly
updated based on historical experience of bad debts, adjustments
processed and current collections trends. Total allowances for
these future adjustments were $151 million at May 31, 2004 and
$149  million  at  May  31,  2003.  We  consider  the  sensitivity  and
subjectivity of these estimates to be moderate, as changes in
economic conditions, pricing arrangements and billing systems
can  significantly  affect  the  estimates  used  to  determine  the
allowances.

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS 

While we currently have market risk sensitive instruments related
to interest rates, we have no significant exposure to changing
interest rates on our long-term debt because the interest rates are
fixed on the majority of our long-term debt. We had approximately
$730 million of outstanding floating-rate borrowings at May 31,
2004. We have not employed interest rate hedging to mitigate the
risks  with  respect  to  these  borrowings.  A  hypothetical  10%
increase in the interest rate on our outstanding floating-rate bor-
rowings  would  not  have  a  material  effect  on  our  results  of
operations. As disclosed in Note 6 to the accompanying audited
financial statements, we had outstanding fixed-rate, long-term
debt (exclusive of capital leases) of $2.3 billion at May 31, 2004 and
$1.6 billion at May 31, 2003. Market risk for fixed-rate, long-term
debt is estimated as the potential decrease in fair value resulting
from a hypothetical 10% increase in interest rates and amounts to
approximately $49 million as of May 31, 2004 and $39 million as of
May 31, 2003. The underlying fair values of our long-term debt
were estimated based on quoted market prices or on the current
rates offered for debt with similar terms and maturities.

While we are a global provider of transportation, e-commerce and
business 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 currency
gains of equal magnitude in other areas of the world. The princi-
pal  foreign  currency  exchange  rate  risks  to  which  we  are
exposed are in the Japanese yen, Taiwan dollar, Canadian dollar
and euro. During 2004 and 2003, we believe operating income
was positively impacted due to foreign currency fluctuations.
However, favorable foreign currency fluctuations also may have
had an offsetting impact on the price we obtained or the demand
for our services. At May 31, 2004, the result of a uniform 10%
strengthening in the value of the dollar relative to the currencies
in which our transactions are denominated would result in a
decrease in operating income of approximately $79 million for
2005 (the comparable amount in the prior year was approximately
$36 million). This increase is primarily due to the strong growth 
of  our  international  operations.  This  theoretical  calculation
assumes that each exchange rate would change in the same
direction relative to the U.S. dollar.

In practice, our experience is that exchange rates in the principal
foreign markets where we have foreign currency denominated
transactions tend to have offsetting fluctuations. Therefore, the
calculation above is not indicative of our actual experience in for-
eign currency transactions. In addition to the direct effects of
changes in exchange rates, which are a changed dollar value of
the resulting reported operating results, changes in exchange
rates also affect the volume of sales or the foreign currency sales
price as competitors’ services become more or less attractive.
The sensitivity analysis of the effects of changes in foreign cur-
rency exchange rates does not factor in a potential change in
sales levels or local currency prices.

We have market risk for changes in the price of jet and diesel
fuel; however, this risk is largely mitigated by revenue from our
fuel surcharges. In 2002, we implemented new indices for calcu-
lating U.S. domestic fuel surcharges, which more closely link the
fuel surcharges to prevailing market prices for fuel. In 2003, we
implemented this methodology for determining a fuel surcharge
on international shipments as well. Therefore, a hypothetical 10%
change in the price of fuel would not be expected to materially
affect our earnings. However, our fuel surcharges have a lag that
exists before they are adjusted for changes in jet fuel prices and
fuel prices can fluctuate within certain ranges before resulting in
a change in our fuel surcharges. 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 a
change in our fuel surcharges.

We do not purchase or hold any derivative financial instruments
for trading purposes.

51

FEDEX CORPORATION

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including (but not limited to)
those contained in “Business Realignment Costs,” “FedEx Kinko’s
Acquisition,” “Airline Stabilization Compensation,” “Outlook,”
“Reportable  Segments,” “Liquidity,” “Capital  Resources,”
“Contractual Cash Obligations” 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 for-
ward-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

• the outcome of negotiations to reach a new collective bargain-
ing agreement with the union that represents the pilots of FedEx
Express;

• market acceptance of our new service and growth initiatives;

• competition from other providers of transportation, e-commerce
and business services, including our ability to compete with
new or improved services offered by our competitors;

• the impact of technology developments on our operations and

on demand for our services;

• disruptions to our technology infrastructure, including our com-

puter systems and Web site;

• our ability to obtain and maintain aviation rights in important

international markets;

• adverse weather conditions or natural disasters;

• availability of financing on terms acceptable to us and our ability

to maintain our current credit ratings; and

in which we operate;

• 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 circum-
stances 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.

• any impacts on our business resulting from new domestic or
international government regulation, including regulatory actions
affecting aviation rights and labor rules;

• the impact of any international conflicts or terrorist activities or
related  security  measures  on  the  United  States  and  global
economies in general, or the transportation industry in particu-
lar, 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 relat-
ing to aircraft, vehicle and sort capacity, to shifting customer
volume levels;

• our ability to effectively operate, integrate and leverage the

FedEx Kinko’s business;

• sudden changes in fuel prices or currency exchange rates;

• our ability to increase our fuel surcharges 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;

52

FEDEX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

REVENUES
Operating Expenses:

Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Business realignment costs
Airline stabilization compensation
Other

OPERATING INCOME
Other Income (Expense):

Interest expense
Interest income
Other, net

Income Before Income Taxes
Provision for Income Taxes
Income Before Cumulative Effect of Change in Accounting Principle
Cumulative Effect of Change in Accounting for Goodwill, Net of Tax Benefit of $10
NET INCOME
BASIC EARNINGS PER COMMON SHARE:

Income before cumulative effect of change in accounting principle
Cumulative effect of change in accounting for goodwill

Basic Earnings Per Common Share
DILUTED EARNINGS PER COMMON SHARE:

Income before cumulative effect of change in accounting principle
Cumulative effect of change in accounting for goodwill

Diluted Earnings Per Common Share

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

2004

$24,710

10,728
2,407
1,918
1,375
1,481
1,523
435
–
3,403
23,270

1,440

(136)
20
(5)
(121)
1,319
481
838
–
838

2.80
–
2.80

2.76
–
2.76

$

$

$

$

$

Years ended May 31,

2003

$ 22,487

9,778
2,155
1,803
1,351
1,349
1,398
–
–
3,182
21,016

1,471

(124)
6
(15)
(133)
1,338
508
830
–
830

2.79
–
2.79

2.74
–
2.74

$

$

$

$

$

2002

$ 20,607

9,099
1,825
1,780
1,364
1,100
1,240
–
(119)
2,997
19,286

1,321

(144)
5
(22)
(161)
1,160
435
725
(15)
710

2.43
(0.05)
2.38

2.39
(0.05)
2.34

$

$

$

$

$

53

FEDEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

ASSETS
Current Assets

Cash and cash equivalents
Receivables, less allowances of $151 and $149
Spare parts, supplies and fuel, less allowances of $124 and $101
Deferred income taxes
Prepaid expenses and other

Total current assets
Property and Equipment, at Cost
Aircraft and related equipment
Package handling and ground support equipment and vehicles
Computer and electronic equipment
Other

Less accumulated depreciation and amortization

Net property and equipment

Other Long-Term Assets

Goodwill
Prepaid pension cost
Intangible and other assets

Total other long-term assets

LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current Liabilities

Current portion of long-term debt
Accrued salaries and employee benefits
Accounts payable
Accrued expenses

Total current liabilities

Long-Term Debt, Less Current Portion
Other Long-Term Liabilities
Deferred income taxes
Pension, postretirement healthcare and other benefit obligations
Self-insurance accruals
Deferred lease obligations
Deferred gains, principally related to aircraft transactions
Other liabilities

Total other long-term liabilities

Commitments and Contingencies
Common Stockholders’ Investment

Common stock, $0.10 par value; 800 million shares authorized; 300 million shares issued for 2004 

and 299 million shares issued for 2003

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss

Less deferred compensation and treasury stock, at cost 

Total common stockholders’ investment

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

54

May 31,

2004

2003

$ 1,046
3,027
249
489
159
4,970

7,001
5,296
3,537
4,477
20,311
11,274
9,037

2,802
1,127
1,198
5,127
$19,134

$

750
1,062
1,615
1,305
4,732
2,837

1,181
768
591
503
426
60
3,529

30
1,079
7,001
(46)
8,064
28
8,036
$19,134

$

538
2,627
228
416
132
3,941

6,624
5,013
3,180
4,200
19,017
10,317
8,700

1,063
1,269
412
2,744
$15,385

$

308
724
1,168
1,135
3,335
1,709

882
657
536
466
455
57
3,053

30
1,088
6,250
(30)
7,338
50
7,288
$15,385

FEDEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

OPERATING ACTIVITIES

Net income
Adjustments to reconcile net income to cash provided by operating activities:

Depreciation and amortization
Provision for uncollectible accounts
Deferred income taxes and other noncash items
Cumulative effect of change in accounting principle
Tax benefit on the exercise of stock options
Changes in operating assets and liabilities, net of the effects of businesses acquired:

Receivables
Other current assets
Pension assets and liabilities, net
Accounts payable and other operating liabilities
Other, net

Cash provided by operating activities
INVESTING ACTIVITIES

Business acquisitions, net of cash acquired
Capital expenditures
Proceeds from asset dispositions
Other, net

Cash used in investing activities
FINANCING ACTIVITIES

Principal payments on debt
Proceeds from debt issuances
Proceeds from stock issuances
Dividends paid
Purchase of treasury stock
Other, net

Cash provided by (used in) financing activities
CASH AND CASH EQUIVALENTS
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

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

Years ended May 31,

2004

2003

2002

$

838

$

830

$

710 

1,375
106
(8)
–
43

(307)
10
155
841
(33)
3,020

(2,410)
(1,271)
18
1
(3,662)

(319)
1,599
115
(66)
(179)
–
1,150

1,351
105
329
–
20

(197)
39
(854)
252
(4)
1,871

–
(1,511)
22
(1)
(1,490)

(10)
–
81
(60)
(186)
1
(174)

508
538
$ 1,046

207
331
538

$

$

1,364 
110 
84
15 
18

(88)
63 
(13)
(37)
2
2,228

(35)
(1,615)
27 
11
(1,612)

(320)
– 
88 
–
(177)
3 
(406)

210 
121
331

55

FEDEX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ INVESTMENT 
AND COMPREHENSIVE INCOME

(In millions, except share data)

BALANCE AT MAY 31, 2001
Net income
Foreign currency translation adjustment,

net of deferred taxes of $1

Minimum pension liability adjustment,
net of deferred tax benefit of $2

Reclassification of deferred jet fuel hedging
charges, net of deferred tax benefit of $6

Adjustment for jet fuel hedging charges
recognized in expense during period,
net of deferred taxes of $6

Total comprehensive income

Purchase of treasury stock
Cash dividends declared ($0.05 per share)
Employee incentive plans and other

(4,224,444 shares issued)

Amortization of deferred compensation
BALANCE AT MAY 31, 2002
Net income
Foreign currency translation adjustment,

net of deferred taxes of $10

Minimum pension liability adjustment,
net of deferred tax benefit of $7
Total comprehensive income

Purchase of treasury stock
Cash dividends declared ($0.15 per share)
Employee incentive plans and other

(3,268,180 shares issued)

Amortization of deferred compensation
BALANCE AT MAY 31, 2003
Net income
Minimum pension liability adjustment,
net of deferred tax benefit of $12
Total comprehensive income

Purchase of treasury stock
Cash dividends declared ($0.29 per share)
Employee incentive plans and other

(4,013,182 shares issued)

Amortization of deferred compensation
BALANCE AT MAY 31, 2004

Common
Stock

$ 30
–

Additional
Paid-in
Capital

$ 1,120
–

Accumulated 
Other
Comprehensive
Loss

$(56)
–

Retained
Earnings

$4,880
710

Treasury
Stock

Deferred
Compensation

$ (53)
–

$(21)
–

Total

$5,900
710 

–

–

–

–

–
–

–
–
30
–

–

–

–
–

–
–
30
–

– 

– 
– 

– 
– 
$30 

–

–

–

–

–
–

24
–
1,144
–

–

–

–
–

(56)
–
1,088
–

– 

– 
– 

(9)
– 
$1,079 

–

–

–

–

–
(15)

(110)
–
5,465
830

–

–

–
(45)

–
–
6,250
838

– 

– 
(87)

6

(3)

(9)

9

–
–

–
–
(53)
–

37

(14)

–
–

–
–
(30)
–

(16)

– 
– 

–

–

–

–

(177)
–

210
–
(20)
–

–

–

(186)
–

181
–
(25)
–

– 

(179)
– 

–

–

–

–

–
–

(12)
12
(21)
–

–

–

–
–

(16)
12
(25)
– 

– 

– 
– 

6 

(3)

(9)

9 
713
(177)
(15)

112 
12 
6,545 
830 

37 

(14)
853
(186)
(45)

109
12
7,288 
838

(16)
822
(179)
(87)

– 
– 
$7,001 

– 
– 
$(46)

204 
– 
– 

$

(18)
15 
$(28)

177 
15 
$8,036 

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

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF 
SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS
FedEx Corporation (“FedEx”) provides a broad portfolio of trans-
portation, e-commerce and business services with companies
that operate independently and compete collectively under the
respected FedEx brand. Our operations are primarily represented
by Federal Express Corporation (“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; FedEx Freight
Corporation (“FedEx Freight”), a leading U.S. provider of regional
less-than-truckload (“LTL”) freight services; and FedEx Kinko’s
Office and Print Services, Inc. (“FedEx Kinko’s”), a leading provider
of document solutions and business services. These businesses
form the core of our reportable segments. Other business units
in the FedEx portfolio are FedEx Trade Networks, Inc. (“FedEx
Trade Networks”), a global trade services company; FedEx Supply
Chain Services, Inc. (“FedEx Supply Chain Services”), a contract
logistics provider; FedEx Custom Critical, Inc. (“FedEx Custom
Critical”), a critical-shipment carrier; Caribbean Transportation
Services, Inc. (“Caribbean Transportation Services”), a provider
of airfreight forwarding services, and FedEx Corporate Services,
Inc. (“FedEx Services”), a provider of customer-facing sales, mar-
keting and information technology functions, primarily for FedEx
Express and FedEx Ground.

The FedEx Kinko’s segment was formed in the fourth quarter of 2004
as a result of our acquisition of FedEx Kinko’s (formerly known as
Kinko’s, Inc.). As discussed in Note 2, we acquired FedEx Kinko’s on
February 12, 2004, and its results of operations have been included
in our financial results from the date of acquisition. 

FISCAL YEARS
Except  as  otherwise  specified,  references  to  years  indicate 
our fiscal year ended May 31, 2004 or ended May 31 of the year
referenced.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
FedEx and its subsidiaries, substantially all of which are wholly
owned. All significant intercompany accounts and transactions
have been eliminated.

CREDIT RISK
We routinely grant credit to many of our customers for trans-
portation and business services without collateral. The risk of
credit loss in our trade receivables is substantially mitigated by
our credit evaluation process, short collection terms and sales to
a large number of customers, as well as the low revenue per
transaction for most of our services. Allowances for potential
credit  losses  are  determined  based  on  historical  experience,
current evaluation of the composition of accounts receivable and
expected credit trends. Historically, credit losses have been within
management’s expectations.

REVENUE RECOGNITION
Revenue is recognized upon delivery of shipments or the com-
pletion of the service for our office and print services, logistics
and trade services businesses. For shipments in transit, revenue
is recorded based on the percentage of service completed at the
balance sheet date. Estimates for future billing adjustments to
revenue and accounts receivable are recognized at the time of
shipment for certain discounts, money-back service guarantees
and billing corrections. Delivery costs are accrued as incurred. 

Our contract logistics and global trade services businesses engage
in certain transactions wherein they act as agents. Revenue from
these transactions is recorded on a net basis.

ADVERTISING
Advertising costs are expensed as incurred and are classified in
other operating expenses. Advertising expenses were $284 million,
$249 million and $226 million in 2004, 2003 and 2002, respectively.

CASH EQUIVALENTS
Cash equivalents in excess of current operating requirements are
invested in short-term, interest-bearing instruments with maturi-
ties of three months or less at the date of purchase and are
stated at cost, which approximates market value. 

SPARE PARTS, SUPPLIES AND FUEL
Spare parts are stated principally at weighted-average cost.
Supplies and fuel are stated principally at standard cost, which
approximates actual cost on a first-in, first-out basis. Allowances
for obsolescence are provided, over the estimated useful life of
the related aircraft and engines, for spare parts expected to be
on hand at the date the aircraft are retired from service, and for
spare parts currently identified as excess or obsolete. These
allowances  are  based  on  management  estimates,  which  are
subject to change. 

PROPERTY AND EQUIPMENT
Expenditures for major additions, improvements, flight equipment
modifications and certain equipment overhaul costs are capital-
ized when such costs are determined to extend the useful life of
the asset. Maintenance and repairs are charged to expense as
incurred, except for certain aircraft-related costs on one of our
aircraft fleet types, which are capitalized and amortized over their
estimated service lives. We capitalize certain direct internal and
external costs associated with the development of internal use
software. The cost and accumulated depreciation of property and
equipment disposed of are removed from the related accounts,
and any gain or loss is reflected in the results of operations.
Gains and losses on sales of property used in operations are
classified with depreciation and amortization.

57

FEDEX CORPORATION

For financial reporting purposes, depreciation and amortization
of property and equipment is provided on a straight-line basis
over the asset’s service life or related lease term as follows:

Wide-body aircraft and related equipment
Narrow-body and feeder aircraft 

and related equipment

Package handling and ground support 

equipment and vehicles

Computer and electronic equipment
Other

Range 

15 to 25 years

5 to 15 years

3 to 30 years
3 to 10 years
2 to 40 years

Substantially all property and equipment have no material residual
values. The majority of aircraft costs are depreciated on a straight-
line basis over 15 to 18 years, while vehicles are depreciated on a
straight-line basis over five to ten years. We periodically evaluate
the estimated service lives and residual values used to depreciate
our aircraft and other equipment. This evaluation may result in
changes in the estimated lives and residual values. The changes
did not materially affect depreciation expense in any period pre-
sented. Depreciation expense, excluding gains and losses on
sales of property and equipment used in operations, was $1.361
billion, $1.334 billion and $1.331 billion in 2004, 2003 and 2002,
respectively. Depreciation and amortization expense includes
amortization of assets under capital lease.

For income tax purposes, depreciation is generally computed
using accelerated methods.

CAPITALIZED INTEREST
Interest on funds used to finance the acquisition and modification
of aircraft, construction of certain facilities and development of 
certain software up to the date the asset is ready for its intended
use is capitalized and included in the cost of the asset. Cap-
italized interest was $11 million in 2004, $16 million in 2003 and 
$27 million in 2002.

IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment when circum-
stances  indicate  the  carrying  value  of  an  asset  may  not  be
recoverable. For assets that are to be held and used, an impair-
ment is recognized when the estimated undiscounted cash flows
associated with the asset or group of assets is less than their
carrying value. If impairment exists, an adjustment is made to
write the asset down to its fair value, and a loss is recorded as
the difference between the carrying value and fair value. Fair val-
ues are determined based on quoted market values, discounted
cash flows or internal and external appraisals, as applicable.
Assets to be disposed of are carried at the lower of carrying
value or estimated net realizable value. 

PENSION AND POSTRETIREMENT HEALTHCARE PLANS
These defined benefit plans are measured as of the last day of
our fiscal third quarter of each year using actuarial techniques
that reflect estimates for mortality, turnover and expected retire-
ment. In addition, management makes assumptions concerning

58

future salary increases, future expected long-term returns on
plan assets and future increases in healthcare costs. Discount
rates are established as of the measurement date using theoret-
ical bond models that select high-grade corporate bonds with
maturities or coupons that correlate to the expected payouts of
the applicable liabilities. Assets for funded plans are presented
at fair value at the measurement date in the accompanying foot-
notes. A calculated-value method is employed for purposes of
determining the expected return on the plan asset component of
net periodic pension cost for our qualified U.S. pension plans.
Generally, we do not fund defined benefit plans when such fund-
ing provides no current tax deduction.

GOODWILL
Goodwill is recognized for the excess of the purchase price over
the fair value of tangible and identifiable intangible net assets of
businesses acquired. Goodwill is reviewed at least annually for
impairment. Unless circumstances otherwise dictate, we perform
our annual impairment testing in the fourth quarter. 

INTANGIBLE ASSETS
Amortizable intangible assets include customer relationships,
contract based, technology based and other. Amortizable intan-
gible assets are amortized over periods ranging from 2 to 15 years,
either on a straight-line basis or an accelerated basis using the
pattern in which the economic benefits are consumed. Non-
amortizing  intangible  assets  include  the  Kinko’s  trade  name.
Non-amortizing intangibles are reviewed at least annually for
impairment. Unless circumstances otherwise dictate, we perform
our annual impairment testing in the fourth quarter. 

INCOME TAXES
Deferred income taxes are provided for the tax effect of tempo-
rary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements. The liability
method is used to account for income taxes, which requires
deferred taxes to be recorded at the statutory rate to be in effect
when the taxes are paid.

We have not recognized deferred taxes for U.S. federal income
taxes on foreign subsidiaries’ earnings that are deemed to be
permanently reinvested and any related taxes associated with
such earnings are not material. Pretax earnings of foreign opera-
tions for 2004 and 2003 were approximately $430 million and $140
million,  respectively,  which  represent  only  a  portion  of  total
results associated with international shipments.

SELF-INSURANCE ACCRUALS
We are primarily self-insured for workers’ compensation claims,
vehicle accidents and general liabilities, benefits paid under
employee healthcare programs and long-term disability. Accruals
are primarily based on the actuarially estimated, undiscounted
cost of claims, which includes incurred-but-not-reported claims.
Current workers’ compensation claims, vehicle and general lia-
bility, employee healthcare claims and long-term disability are
included in accrued expenses. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEFERRED LEASE OBLIGATIONS
While certain aircraft, facility and retail location leases contain
fluctuating or escalating payments, the related rent expense is
recorded on a straight-line basis over the lease term. The deferred
lease obligation is the net cumulative excess of rent expense over
rent payments.

DEFERRED GAINS
Gains on the sale and leaseback of aircraft and other property
and equipment are deferred and amortized ratably over the life
of the lease as a reduction of rent expense. Substantially all of
these deferred gains were related to aircraft transactions. 

EMPLOYEES UNDER COLLECTIVE BARGAINING
ARRANGEMENTS
The pilots of FedEx Express, which represent a small number of
FedEx Express total employees, are employed under a collective
bargaining agreement. Negotiations with the pilots’ union began
in March 2004, as the current agreement became amendable on
May 31, 2004. We will continue to operate under our current
agreement while we negotiate with our pilots.

STOCK COMPENSATION
We apply Accounting Principles Board Opinion No. (“APB”) 25,
“Accounting for Stock Issued to Employees,” and its related inter-
pretations to measure compensation expense for stock-based
compensation plans. We are required to disclose the pro forma
effect of accounting for stock options using a valuation method
under Statement of Financial Accounting Standards No. (“SFAS”)
123, “Accounting for Stock-Based Compensation,” for all options
granted in 1996 and thereafter. We have currently not elected to
adopt this accounting method because it requires the use of sub-
jective valuation models, which we believe are not representative
of the real value of the options to either FedEx or our employees. 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 com-
mon share, 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):

Net income, as reported
Add: Stock compensation included 
in reported net income, net of tax
Deduct: Total stock-based employee 

compensation expense determined 
under fair value based method 
for all awards, net of tax benefit

Pro forma net income
Earnings per common share:

Basic – as reported
Basic – pro forma

Diluted – as reported
Diluted – pro forma

2004

$ 838

Years ended May 31,
2003

2002

$ 830

$ 710

10

–

–

37
$ 811

$ 2.80
$ 2.71

$ 2.76
$ 2.68

34
$ 796

$ 2.79 
$ 2.67

$ 2.74
$ 2.63

37
$ 673

$ 2.38
$ 2.26

$ 2.34
$ 2.22

See Note 9 for a discussion of the assumptions underlying the pro
forma calculations above. 

FOREIGN CURRENCY TRANSLATION
Translation gains and losses of foreign operations that use local
currencies  as  the  functional  currency  are  accumulated  and
reported, net of applicable deferred income taxes, as a compo-
nent of accumulated other comprehensive loss within common
stockholders’ investment. Transaction gains and losses that arise
from exchange rate fluctuations on transactions denominated in
a currency other than the local currency are included in results of
operations. Cumulative net foreign currency translation losses in
accumulated other comprehensive loss were $13 million, $13 mil-
lion and $50 million at May 31, 2004, 2003 and 2002, respectively.

RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.

USE OF ESTIMATES
The preparation of our consolidated financial statements requires
the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, the reported amounts of rev-
enues and expenses and the disclosure of contingent liabilities.
Management makes its best estimate of the ultimate outcome for
these items based on historical trends and other information
available when the financial statements are prepared. Changes in
estimates are recognized in accordance with the accounting
rules for the estimate, which is typically in the period when new
information becomes available to management. Areas where the
nature of the estimate makes it reasonably possible that actual
results could materially differ from amounts estimated include:
self-insurance accruals; employee retirement plan obligations;
income tax liabilities; accounts receivable allowances; obso-
lescence  of  spare  parts;  airline  stabilization  compensation;
contingent liabilities; and impairment assessments on long-lived
assets (including goodwill and indefinite lived intangible assets).

NOTE 2: BUSINESS COMBINATIONS

On February 12, 2004, we acquired FedEx Kinko’s for approximately
$2.4 billion in cash. We also assumed $39 million of capital lease
obligations. FedEx Kinko’s is a leading provider of document solu-
tions and business services. Its network of worldwide locations
offers access to color printing, finishing and presentation services,
Internet access, videoconferencing, outsourcing, managed ser-
vices, Web-based printing and document management solutions. 

The allocation of the purchase price to the fair value of the assets
acquired, liabilities assumed and goodwill, as well as the assign-
ment of goodwill to our reportable segments, was based primarily
on internal estimates of cash flows and independent appraisals.
We used an independent appraisal firm to determine the fair
value  of  certain  assets  and  liabilities,  primarily  property  and
equipment and acquired intangible assets, including: the value of
the Kinko’s trade name, customer-related intangibles, technology 

59

FEDEX CORPORATION

assets and contract-based intangibles. While the purchase price
allocation is substantially complete and we do not expect any
material adjustments, we may make adjustments to the purchase
price allocation if new data becomes available.

A significant amount of the purchase price was recorded as
goodwill, as the acquisition expands our portfolio of business
services, while providing a substantially enhanced capability to
provide package-shipping services to small- and medium-sized
business customers through FedEx Kinko’s array of retail store
locations. Because this was an acquisition of stock, goodwill is not
deductible for tax purposes. Approximately $200 million of the $1.7
billion goodwill balance will be attributed to the FedEx Express seg-
ment ($130 million) and the FedEx Ground segment ($70 million)
based on the expected increase in each segment’s incremental
fair value as a result of the acquisition. 

Our balance sheet reflects the following allocation of the total
purchase price of $2.4 billion (in millions):

Current assets, primarily accounts

receivable and inventory

Property and equipment
Goodwill
Indefinite lived intangible asset (trade name)
Amortizable intangible assets
Other long-term assets
Total assets acquired

Current liabilities
Deferred income taxes
Long-term capital lease obligations
and other long-term liabilities
Total liabilities assumed
Total purchase price

$ 236
328
1,739
567
82
52
3,004
(282)
(266)

(36)
(584)
$ 2,420

Indefinite lived intangible asset.This intangible asset represents
the estimated fair value allocated to the Kinko’s trade name.
This intangible asset will not be amortized because it has an
indefinite remaining useful life based on the length of time that
the Kinko’s name had been in use, the Kinko’s brand awareness
and  market  position  and  the  plans  for  continued  use  of  the
Kinko’s brand.

Amortizable intangible assets.These intangible assets represent
the value associated with business expected to be generated
from existing customer relationships and contracts as of the
acquisition date. The value of these assets was primarily deter-
mined by measuring the present value of the projected future
earnings attributable to these assets. Substantially all of these
assets  are  being  amortized  on  an  accelerated  basis  over  a
weighted-average estimated useful life of approximately seven
years. While the useful life of these customer-relationship assets
is  not  limited  by  contract  or  any  other  economic,  regulatory 
or  other  known  factors,  the  useful  life  of  seven  years  was
determined  at  the  acquisition  date  based  on  management’s
expectations of customer attrition patterns. 

60

The following unaudited pro forma consolidated financial infor-
mation presents the combined results of operations of FedEx and
FedEx Kinko’s as if the acquisition had occurred at the beginning
of 2003. The unaudited pro forma results have been prepared 
for comparative purposes only. Adjustments were made to the
combined results of operations, primarily related to higher depre-
ciation and amortization expense resulting from higher property
and  equipment  values  and  acquired  intangible  assets  and
additional interest expense resulting from acquisition debt. The
accounting literature establishes firm guidelines around how this
pro forma information is presented, which precludes the assump-
tion of business synergies. Therefore, this unaudited pro forma
information is not intended to represent, nor do we believe it is
indicative of the consolidated results of operations of FedEx that
would have been reported had the acquisition been completed
as of the beginning of 2003. Furthermore, this pro forma informa-
tion is not representative of the future consolidated results of
operations of FedEx.

Pro forma unaudited results were as follows (in millions, except
per share data):

Revenues
Net income
Basic earnings per common share
Diluted earnings per common share

Years ended May 31,

2004 (1)

2003

$ 26,056
836
2.80
2.75

$24,427
841
2.82
2.78

(1) Includes $27 million, net of tax, of nonrecurring expenses at FedEx Kinko’s, primarily in
anticipation of the acquisition. Also, includes $270 million, net of tax, of business realign-
ment costs and a $37 million, net of tax, nonrecurring tax benefit at FedEx.

We paid a portion of the purchase price from available cash
balances. To finance the remainder of the purchase price, we
entered  into  a  six-month  credit  facility  for  $2  billion.  During
February 2004, we issued commercial paper backed by unused
commitments under this facility. In March 2004, we issued $1.6
billion of senior unsecured notes in three maturity tranches: one,
three and five years at $600 million, $500 million and $500 million,
respectively. Net proceeds from the borrowings were used to
repay the commercial paper backed by the six-month credit facil-
ity. We canceled the six-month credit facility in March 2004. See
Note 6 for further discussion.

On  March  1,  2002,  a  subsidiary  of  FedEx  Trade  Networks
acquired for cash certain assets of Fritz Companies, Inc. that
provide essential customs clearance services exclusively for
FedEx Express in three U.S. locations, at a cost of $36.5 million.
The excess cost over the estimated fair value of the net assets
acquired (approximately $35 million) was recorded as goodwill,
which was entirely attributed to the FedEx Express segment.
Goodwill for tax purposes associated with this transaction will be
deductible over 15 years. Pro forma results including this acqui-
sition would not differ materially from reported results.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These  acquisitions  were  accounted  for  under  the  purchase
method of accounting. The operating results of the acquired busi-
nesses are included in our consolidated results of operations
from the date of acquisition.

NOTE 3: GOODWILL AND INTANGIBLES

Effective June 1, 2001, we adopted SFAS 142, “Goodwill and Other
Intangible  Assets,”  which  establishes  new  accounting  and
reporting requirements for goodwill and other intangible assets.
Under SFAS 142, material amounts of recorded goodwill attribut-
able to each of our reporting units were tested for impairment by
comparing the fair value of each reporting unit with its carrying
value (including attributable goodwill). Fair value was determined
using a discounted cash flow methodology. Based on our initial
impairment tests when the statement was adopted, we recog-
nized an adjustment of $25 million ($15 million or $0.05 per share,
net of tax) in 2002 to reduce the carrying value of certain good-
will. Under SFAS 142, the impairment adjustment recognized at
adoption of the new rules was reflected as a cumulative effect of
accounting change in our 2002 consolidated statement of income.

The carrying amount of goodwill attributable to each reportable
operating segment and changes therein follows (in millions):

FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment

Goodwill 
Acquired During 
the Year

May 31, 2003

$ 397
–
666
–
$1,063

$ 130 (1)
70 (1)
–
1,539
$1,739

May 31, 2004

$ 527
70
666
1,539
$2,802

(1) These amounts represent goodwill from the FedEx Kinko’s acquisition that is attributable
to the FedEx Express and FedEx Ground segments.

The components of our intangible assets were as follows (in 
millions):

May 31, 2004
Gross Carrying Accumulated
Amount Amortization

May 31, 2003
Gross Carrying Accumulated
Amount Amortization

Amortizable 

intangible assets
Customer relationships
Contract related
Technology related 

and other
Total

Non-amortizing 

intangible asset

Trade name

$ 72
79

45
$ 196

$ (3)
(43)

(17)
$ (63)

$ –
73

40
$ 113

$ –
(37)

(12)
$ (49)

$ 567

$ –

$ –

$ –

Amortization expense for intangible assets was $14 million in
2004, $13 million in 2003 and $14 million in 2002. Estimated amorti-
zation expense for the next five years is as follows (in millions):

2005
2006
2007
2008
2009

$24
23
21
20
17

NOTE 4: BUSINESS REALIGNMENT COSTS 

During 2004, voluntary early retirement incentives with enhanced
pension and postretirement healthcare benefits were offered to
certain groups of employees at FedEx Express who were age 50
or older. Voluntary cash severance incentives were also offered
to eligible employees at FedEx Express. These programs, which
commenced August 1, 2003 and expired during the second quar-
ter, were limited to eligible U.S. salaried staff employees and
managers. Approximately 3,600 employees accepted offers under
these voluntary programs, which considerably exceeded our
expectations. Costs were also incurred in 2004 for the elimination
of certain management positions at FedEx Express and other
business units based on the staff reductions from the voluntary
programs and other cost reduction initiatives. 

Costs for the benefits provided under the voluntary programs
were recognized in the period that eligible employees accepted
the offer. Other costs associated with business realignment activ-
ities were recognized in the period incurred. The savings from
these initiatives will be reflected primarily in lower salaries and
benefits costs.

The components of our business realignment costs and changes
in the related accruals were as follows for the year ended May
31, 2004 (in millions):

Voluntary
Retirement

Voluntary
Severance

Other (1)

Total

Beginning accrual

balances

Charged to expense
Cash paid
Amounts charged to

$

–
202
(8)

other assets/liabilities
Ending accrual balances

(194)
–

$

$

–
158
(152)

– 
6

$

$ –
75
(31)

(22)
$ 22

$

–
435
(191)

(216)
28

$

(1) Other includes costs for management severance agreements, which are payable
over future periods, including compensation related to the modification of previously
granted stock options and incremental pension and healthcare benefits. Other also
includes professional fees directly associated with the business realignment initiatives
and relocation costs. 

Amounts charged to other assets/liabilities relate primarily to
incremental pension and healthcare benefits.

61

FEDEX CORPORATION

NOTE 5: SELECTED CURRENT LIABILITIES

The components of selected current liability captions were as
follows (in millions):

The components of unsecured debt (net of discounts) were as
follows (in millions):

Accrued Salaries and Employee Benefits

Salaries
Employee benefits
Compensated absences

Accrued Expenses

Self-insurance accruals
Taxes other than income taxes
Other

May 31, 

2004

2003

Senior unsecured debt

Interest rate of three-month LIBOR 

$ 163
496
403
$1,062 

$ 442
291
572
$1,305

$ 119
227
378
$ 724

$ 401
279
455
$1,135

(1.11% at May 31, 2004)
plus 0.28%, due in 2005

Interest rate of 7.80%, due in 2007
Interest rate of 2.65%, due in 2007
Interest rate of 3.50%, due in 2009
Interest rates of 6.63% to 7.25%,

due through 2011

Interest rate of 9.65%, due in 2013
Interest rate of 7.60%, due in 2098
Medium term notes, interest rates of
8.00% to 10.57%, due through 2007

May 31, 

2004

2003

$ 600
200
500
499

499
299
239

$

–
200
–
–

747
299
239

19
$ 2,855

44
$1,529

NOTE 6: LONG-TERM DEBT AND OTHER FINANCING
ARRANGEMENTS

The components of our long-term debt were as follows (in millions):

Unsecured debt
Capital lease obligations
Other debt, interest rates of 2.35% to 9.98%

due through 2017

Less current portion

May 31, 

2003

$1,529
422

66
2,017
308
$1,709

2004

$2,855
534

198
3,587
750
$2,837

At May 31, 2004, we had two revolving bank credit facilities total-
ing  $1  billion.  One  revolver  provides  for  $750  million  through
September 28, 2006. The second is a 364-day facility providing for
$250 million through September 24, 2004. Interest rates on bor-
rowings  under  the  agreements  are  generally  determined  by
maturities selected and prevailing market conditions. Borrowings
under the credit agreements will bear interest, at our option, at a
rate per annum equal to either (a) the London Interbank Offered
Rate  (“LIBOR”)  plus  a  credit  spread,  or  (b)  the  higher  of  the
Federal Funds Effective Rate, as defined, plus 1/2 of 1%, or the
bank’s Prime Rate. The revolving credit agreements contain cer-
tain covenants and restrictions, none of which are expected to
significantly affect our operations or ability to pay dividends. 

From time to time, we finance certain operating and investing
activities, including acquisitions, through the issuance of com-
mercial  paper.  Our  commercial  paper  program  is  backed  by
unused commitments under our revolving credit agreements and
reduces  the  amounts  available  under  the  agreements.  As  of 
May 31, 2004 and 2003, no commercial paper borrowings were
outstanding and the entire $1 billion under the revolving credit
agreements was available. 

62

To finance our acquisition of FedEx Kinko’s, we entered into a six-
month  credit  facility  for  $2  billion.  During  February  2004,  we
issued commercial paper backed by unused commitments under
this facility. In March 2004, we issued $1.6 billion of senior unse-
cured notes in three maturity tranches: one, three and five years,
at $600 million, $500 million and $500 million, respectively. Net pro-
ceeds from these borrowings were used to repay the commercial
paper backed by the six-month credit facility. We canceled the
six-month credit facility in March 2004.

In  conjunction  with  the  acquisition  of  FedEx  Freight  East  in
February 2001, debt of $240 million was assumed, a portion of
which was refinanced subsequent to the acquisition. On April 5,
2002,  we  prepaid  the  remaining  $101  million.  Under  the  debt
agreements, we incurred a prepayment penalty of $13 million,
which was included in other nonoperating expense in 2002. 

Capital lease obligations include certain special facility revenue
bonds that have been issued by municipalities primarily to finance
the acquisition and construction of various airport facilities and
equipment. These bonds require interest payments at least annu-
ally with principal payments due at the end of the related lease
agreements. In addition, during 2004, FedEx Express amended two
leases for MD11 aircraft and during 2003, FedEx Express amended
four leases for MD11 aircraft, which commit FedEx Express to firm
purchase obligations for two of these aircraft during both 2005 
and 2006. These amended leases were accounted for as capital
leases from the date of amendment.

Other long-term debt includes $133 million related to two leased
MD11  aircraft  that  are  consolidated  under  the  provisions  of
Financial Accounting Standards Board Interpretation No. (“FIN”)
46, “Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51.” The debt requires interest at LIBOR plus a margin
and is due in installments through March 30, 2007. See Note 16
for further discussion. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We incur other commercial commitments in the normal course of
business to support our operations. Letters of credit at May 31,
2004 were $498 million. The amount unused under our letter of
credit facility totaled $114 million at May 31, 2004. This facility
expires in May of 2006. These instruments are generally required
under certain U.S. self-insurance programs and are used in the
normal course of international operations. The underlying liabili-
ties insured by these instruments are reflected in the balance
sheet,  where  applicable.  Therefore,  no  additional  liability is
reflected for the letters of credit.

Scheduled annual principal maturities of debt, exclusive of capital
leases, for the five years subsequent to May 31, 2004, are as
follows (in millions): 

2005
2006
2007
2008
2009

$613
265
844
–
499

Long-term debt, exclusive of capital leases, had carrying values
of $3.0 billion and $1.6 billion at May 31, 2004 and 2003, respectively,
compared with estimated fair values of approximately $3.2 billion
and $1.9 billion at those respective dates. The estimated fair val-
ues were determined based on quoted market prices or on the
current rates offered for debt with similar terms and maturities.

We have a $1.0 billion shelf registration statement with the SEC to
provide flexibility and efficiency when obtaining financing. Under
this shelf registration statement we may issue, in one or more
offerings, either unsecured debt securities, common stock or a
combination of such instruments. The entire $1 billion is available
for future financings.

NOTE 7: LEASE COMMITMENTS

We utilize certain aircraft, land, facilities, retail locations and
equipment under capital and operating leases that expire at var-
ious dates through 2039. In addition, supplemental aircraft are
leased under agreements that generally provide for cancelation
upon 30 days’ notice.

The components of property and equipment recorded under cap-
ital leases were as follows (in millions):

May 31, 

Aircraft
Package handling and ground support

equipment and vehicles
Other, principally facilities

Less accumulated amortization

2004

$344

207
230
781
390
$391

2003

$221

207
137
565
268
$297

Rent expense under operating leases was as follows (in millions):

Minimum rentals
Contingent rentals

For years ended May 31,

2004

$1,560
143
$1,703

2003

$1,522
107
$1,629

2002

$1,453
132 
$1,585

Contingent rentals are based on equipment usage.

A  summary  of  future  minimum  lease  payments  under  capital
leases and noncancelable operating leases (principally aircraft,
retail locations and facilities) with an initial or remaining term in
excess of one year at May 31, 2004 is as follows (in millions):

2005
2006
2007
2008
2009
Thereafter

Less amount representing interest
Present value of net minimum lease payments

Operating
Leases

$ 1,707
1,555
1,436
1,329
1,169 
7,820 
$15,016 

Capital
Leases

$160
122
22
99
11
225
639
105
$534

FedEx Express makes payments under certain leveraged operat-
ing leases that are sufficient to pay principal and interest on
certain pass-through certificates. The pass-through certificates
are not direct obligations of, or guaranteed by, FedEx or FedEx
Express.

NOTE 8: PREFERRED STOCK

Our Certificate of Incorporation authorizes the Board of Directors,
at its discretion, to issue up to 4,000,000 shares of series preferred
stock. The stock is issuable in series, which may vary as to cer-
tain rights and preferences, and has no par value. As of May 31,
2004, none of these shares had been issued.

NOTE 9: COMMON STOCKHOLDERS’ INVESTMENT

TREASURY SHARES
The following table summarizes information about treasury share
repurchases for the years ended May 31:

2004

2003

2002

Average
Price
Shares Per Share

Average
Price
Shares Per Share

Average
Price
Shares Per Share 

Repurchased 2,625,000

$68.14 3,275,000 $56.66 3,350,000 $52.70 

These repurchases were done under share repurchase programs
aggregating  15  million  shares.  A  total  of  5.75  million  shares
remain  under  existing  share  repurchase  authorizations.  At 
May 31, 2004 and 2003, respectively, 4,760 and 406,304 shares
remained outstanding in treasury. 

63

FEDEX CORPORATION

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 10 years. We examine actual
stock  option  exercises  to  determine  the  expected  life  of  the
options. An increase in the expected term will increase compen-
sation expense.

Expected Volatility. Actual changes in the market value of our
stock are used to calculate the volatility assumption. We calcu-
late daily market value changes from the date of grant over a past
period equal to the expected life of the options to determine
volatility. An increase in the expected volatility will increase com-
pensation expense.

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. An increase in the risk-free interest rate will increase
compensation expense.

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. 
An increase in the dividend yield will decrease compensation
expense.

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. An increase in the forfeiture rate will decrease com-
pensation expense. Our forfeiture rate is approximately 8%.

STOCK COMPENSATION PLANS
Fixed Stock Option Plans
Under the provisions of our stock incentive plans, key employees
and non-employee directors may be granted options to purchase
shares of common stock at a price not less than its fair market
value at the date of grant. Options granted have a maximum term of
10 years. Vesting requirements are determined at the discretion of
the Compensation Committee of our Board of Directors. Option-
vesting periods range from one to four years with more than 80%
of stock option grants vesting ratably over four years. At May 31,
2004,  there  were  4,140,440  shares  available  for  future  grants
under these plans.

The  weighted-average  fair  value  of  these  grants,  calculated
using the Black-Scholes valuation method under the assumptions
indicated below, was $18.02, $17.12 and $12.39 per option in 2004,
2003 and 2002, respectively. 

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 (see Note 1). 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 valu-
ation 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 years ended May 31, 2004, 2003 and 2002,
and a discussion of our methodology for developing each of the
assumptions used in the valuation model:

Expected lives
Expected volatility
Risk-free interest rate
Dividend yield

2004

May 31,
2003

2002

4 years

4 years

4 years

32%
2.118%
0.3102%

35%
4.017%
0.3785%

30%
4.777%
0%

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about our fixed stock option plans for the years ended May 31:

Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year

Exercisable at end of year

2004

2003

2002

Weighted-
Average
Exercise
Price

$38.88
64.96
31.05
46.71
46.39

38.28

Shares

17,315,116
3,937,628
(3,724,605)
(178,832)
17,349,307

8,747,523

Weighted-
Average
Exercise
Price

$34.32
53.22
27.73 
40.47
38.88

Shares

17,306,014
3,261,800
(2,951,154)
(301,544)
17,315,116

Shares

17,498,558
4,023,098
(3,875,767)
(339,875)
17,306,014

8,829,515

33.58

8,050,362

Weighted-
Average
Exercise
Price

$30.24
40.66
22.34
35.06
34.32

29.98

The following table summarizes information about fixed stock options outstanding at May 31, 2004:

Range of
Exercise Price

$14.59 – $21.89
21.97 – 32.95
33.02 – 49.52
49.71 – 73.67
14.59 – 73.67

Options Outstanding

Weighted-
Average
Remaining
Contractual Life

1.9 years
3.7 years
6.6 years
8.0 years
6.6 years

Number
Outstanding

970,670
2,500,525
5,635,270
8,242,842
17,349,307

Weighted-
Average
Exercise
Price

$19.15
29.71
39.58
59.31
46.39

Options Exercisable

Number
Exercisable

970,670
2,437,553
3,248,939
2,090,361
8,747,523

Weighted-
Average
Exercise
Price

$19.15
29.86 
39.49 
55.09 
38.28

Total equity compensation shares outstanding or available for grant represented approximately 7.1% and 7.3% of total outstanding com-
mon and equity compensation shares and equity compensation shares available for grant at May 31, 2004 and May 31, 2003, respectively.

Stock Options Expensed
Under our business realignment programs discussed in Note 4, we recognized approximately $16 million of expense ($10 million, net of tax)
during 2004 related to the modification of previously granted stock options. We calculated this expense using the Black-Scholes method.

Restricted Stock Plans
Under the terms of our restricted stock plans, shares of common stock are awarded to key employees. All restrictions on the shares
expire ratably over a four-year period. Shares are valued at the market price at the date of award. Compensation related to these plans
is recorded as a reduction of common stockholders’ investment and is amortized to expense as restrictions on such shares expire. 

The following table summarizes information about restricted stock awards for the years ended May 31:

Awarded
Forfeited

2004

2003

2002

Weighted-
Average
Fair Value

$67.11
43.41

Shares

282,423
10,000

Weighted-
Average
Fair Value

$47.56
48.01

Shares

343,500
17,438

Weighted-
Average
Fair Value 

$43.01
49.79 

Shares

329,500
12,000

At May 31, 2004, there were 747,553 shares available for future awards under these plans. Annual compensation cost for the restricted
stock plans was approximately $14 million for 2004, and $12 million for 2003 and 2002.

65

FEDEX CORPORATION

NOTE 10: COMPUTATION OF EARNINGS PER SHARE

The calculation of basic earnings per common share and diluted
earnings per common share for the years ended May 31 was as
follows (in millions, except per share amounts):

Net income applicable to 
common stockholders
Weighted-average shares of 
common stock outstanding

Common equivalent shares:
Assumed exercise of 

outstanding dilutive options
Less shares repurchased from 

proceeds of assumed
exercise of options
Weighted-average common 
and common equivalent
shares outstanding

Basic earnings 

per common share

Diluted earnings 

per common share

NOTE 11: INCOME TAXES 

2004

2003

2002

$ 838

$ 830

$ 710 

299

298

298

19

15

16 

(14)

(10)

(11)

304

303

303 

$ 2.80

$ 2.79

$2.38 

$ 2.76

$ 2.74

$2.34 

The components of the provision for income taxes for the years
ended May 31 were as follows (in millions):

2004

2003

2002

Current provision
Domestic:
Federal
State and local

Foreign

Deferred (benefit) provision

Domestic:
Federal
State and local

Foreign

$ 371
54
85
510

(22)
(7)
– 
(29)
$ 481

$ 112
28
39
179

304
25
–
329
$ 508

$ 255 
39
41
335

99
3 
(2)
100 
$ 435

A reconciliation of the statutory federal income tax rate to the effec-
tive income tax rate for the years ended May 31 was as follows:

Statutory U.S. income tax rate
Increase resulting from:

State and local income taxes,

net of federal benefit

Other, net
Effective tax rate

2004

35.0%

2003

35.0%

2002

35.0%

2.3
(0.8)
36.5%

2.6
0.4
38.0%

2.4
0.1
37.5%

The lower effective tax rate in 2004 was primarily attributable to
the  favorable  decision  in  our  U.S.  tax  case  described  below,
stronger than anticipated international results and the results of
tax audits during 2004. Our stronger than anticipated international
results, along with other factors, increased our ability to credit
income taxes paid to foreign governments on foreign income
against U.S. income taxes paid on the same income, thereby mit-
igating our exposure to double taxation. The 38.0% effective tax
rate in 2003 was higher than the 2002 rate primarily due to lower
state taxes in 2002.

The significant components of deferred tax assets and liabilities
as of May 31 were as follows (in millions):

Property, equipment, 

leases and intangibles

Employee benefits
Self-insurance accruals
Other
Net operating loss/credit

carryforwards
Valuation allowance

2004

2003

Deferred
Tax Assets

Deferred
Tax Liabilities

Deferred

Deferred
Tax Assets Tax Liabilities

$ 310
386
297
277

32
(37)
$1,265

$1,372
406
–
179

–
–
$1,957

$ 303
270
259
261

15
(14)
$ 1,094

$ 946
407
–
207

–
–
$1,560

In 2004, the net deferred tax liability of $692 million is classified in
the balance sheet as a current deferred tax asset of $489 million
and a noncurrent deferred tax liability of $1.181 billion. In 2003,
the net deferred tax liability of $466 million is classified in the bal-
ance sheet as a current deferred tax asset of $416 million and a
noncurrent deferred tax liability of $882 million.

The valuation allowance primarily represents amounts reserved
for operating loss and tax credit carryforwards, which expire over
varying periods starting in 2005. As a result of this and other fac-
tors, we believe that a substantial portion of these deferred tax
assets may not be realized. The net increase in the valuation
allowance of $23 million was principally due to net operating
loss/credit carryforwards obtained upon the acquisition of FedEx
Kinko’s during the third quarter of 2004 that are not expected to
be realized.

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 ordi-
nary 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. After settlement discussions failed to resolve
this matter, in 2001 we paid $70 million in tax and interest and filed
suit in Federal District Court for a complete refund of the amounts

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

paid plus interest. Although the IRS has continued to assert its
position in audits for the years 1995 through 2000 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 in 2004
of $26 million, net of tax, primarily related to the reduction of
accruals related to this matter and the recognition of interest
earned on the amount we paid in 2001. These adjustments affected
both net interest expense ($30 million pretax) and income tax
expense ($7 million). Future periods are not expected to be mate-
rially affected by the resolution of this matter. On November 19,
2003, the IRS appealed this ruling to the Sixth Circuit Court of
Appeals. All briefs have been filed in the case. We believe the
District Court’s ruling will be upheld on appeal.

NOTE 12: EMPLOYEE BENEFIT PLANS 

Pension Plans
We sponsor defined benefit pension plans covering a majority of
our employees. The largest plan covers certain U.S. employees
age 21 and over, with at least one year of service. Eligible employ-
ees as of May 31, 2003 were given the opportunity to make a
one-time election to accrue future pension benefits under either
a new cash balance formula which we call the Portable Pension
Account or a traditional pension benefit formula. Benefits pro-
vided  under  the  traditional  formula  are  based  on  average
earnings  and  years  of  service.  Under  the  Portable  Pension
Account, the retirement benefit is expressed as a dollar amount
in a notional account that grows with annual credits based on
pay, age, and years of credited service, and interest on the notional
account balance. In either case, employees retained all benefits
previously accrued under the traditional pension benefit formula
and continue to receive the benefit of future salary increases on
benefits accrued as of May 31, 2003. Eligible employees hired
after May 31, 2003 receive benefits exclusively under the Portable
Pension Account.

Plan funding is actuarially determined and is subject to certain
tax law limitations. International defined benefit pension plans
provide benefits primarily based on final earnings and years of
service  and  are  funded  in  accordance  with  local  laws  and
income tax regulations. Substantially all plan assets are actively
managed. The weighted-average asset allocation for our primary
pension plan at February 29, 2004 was as follows: 

Domestic equities
International equities
Private equities
Long duration fixed income securities
Other fixed income securities

Actual

Target

54%
19
3
16
8
100%

53%
17
5
15
10
100%

The investment strategy for pension plan assets is to utilize a diver-
sified mix of global public and private equity portfolios, together
with public and private fixed income portfolios, to earn a long-term 

investment return that meets our pension plan obligations. Active
management strategies are utilized within the plan in an effort to
realize investment returns in excess of market indices.

Our pension cost is materially affected by the discount rate used
to measure pension obligations, the level of plan assets available
to  fund  those  obligations  at  the  measurement  date  and  the
expected long-term rate of return on plan assets. Due to a lower
discount rate, a lower expected long-term rate of return and a
reduction  in  the  value  of  plan  assets  as  a  result  of  invest-
ment losses at the measurement date for 2004 pension expense
(February 28, 2003), our total net pension cost for 2004 increased
by approximately $115 million.

An  increase  in  pension  cost  of  approximately  $30  million  is
expected for 2005 based primarily on a continuing decline in the
discount rate (to 6.78%). Management reviews the assumptions
used to measure pension costs (including the discount rate and
the expected long-term rate of return on pension assets) on an
annual basis. Economic and market conditions at the measure-
ment date impact these assumptions from year to year and it is
reasonably possible that material changes in pension cost may
continue to be experienced in the future.

Establishing the expected future rate of investment return on our
pension assets is a judgmental matter. Management considers
the following factors in determining this assumption:

• the duration of our pension plan liabilities, which drives the
investment strategy we can employ with our pension plan assets.

• the types of investment classes in which we invest our pension
plan assets and the expected compound return we can reason-
ably expect those investment classes to earn over the next 
10- to 15-year time period (or such other time period that may
be appropriate). 

• the investment returns we can reasonably expect our active
investment management program to achieve in excess of the
returns we could expect if investments were made strictly in
indexed funds.

We review the expected long-term rate of return on an annual
basis and revise it as appropriate. Also, we periodically commis-
sion  detailed  asset/liability  studies  performed  by  third-party
professional investment advisors and actuaries. These studies
project our estimated future pension payments and evaluate the
efficiency of the allocation of our pension plan assets into various
investment categories. These studies also generate probability-
adjusted  expected  future  returns  on  those  assets.  The  study
performed for 2003 supported the reasonableness of our 10.10%
return assumption used for 2003 based on our liability duration and
market conditions at the time we set this assumption (in 2002). We
performed a more recent asset/liability study for 2004, which sup-
ported a long-term return on assets of 9.10%. The results of this
study were reaffirmed for 2005 by our third-party professional
investment advisors and actuaries.

67

FEDEX CORPORATION

Postretirement Healthcare Plans
Certain of our subsidiaries offer medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents. U.S. employ-
ees covered by the principal plan become eligible for these benefits at age 55 and older, if they have permanent, continuous service of
at least 10 years after attainment of age 45 if hired prior to January 1, 1988, or at least 20 years after attainment of age 35 if hired on or
after January 1, 1988. 

The following table provides a reconciliation of the changes in the pension and postretirement healthcare plans’ benefit obligations and fair
value of assets over the two-year period ended May 31, 2004 and a statement of the funded status as of May 31, 2004 and 2003 (in millions):

Pension Plans

Postretirement
Healthcare Plans

2004

2003

2004

2003

Changes in Projected Benefit Obligation (“PBO”)
Projected benefit obligation at the beginning of year

Service cost
Interest cost
Actuarial loss
Benefits paid
Special termination benefits (1)
Amendments, benefit enhancements and other

Projected benefit obligation at the end of year
Accumulated Benefit Obligation (“ABO”)

Change in Plan Assets
Fair value of plan assets at beginning of year

Actual return (loss) on plan assets
Company contributions
Benefits paid
Other

Fair value of plan assets at end of year
Funded Status of the Plans

Unrecognized actuarial loss (gain)
Unamortized prior service cost (benefit)
Unrecognized transition amount

Prepaid (accrued) benefit cost

Amount Recognized in the Balance Sheet at May 31:

Prepaid benefit cost
Accrued benefit liability
Minimum pension liability
Accumulated other comprehensive income (2)
Intangible asset

Prepaid (accrued) benefit cost

$ 7,117
376
490
661
(136)
158
17
$ 8,683
$ 7,427

$ 5,825
1,751
335
(136)
8
$ 7,783
$ (900)
1,694
118
(5)
$ 907

$ 1,127
(220)
(67)
54
13
$ 907

$ 6,227
374
438
164
(103)
–
17
$ 7,117
$ 6,009

$ 5,510
(663)
1,072
(103)
9
$ 5,825
$ (1,292)
2,247
123
(7)
$ 1,071

$ 1,269
(198)
(42)
26
16
$ 1,071

$ 382
35
25
36
(23)
38
3
$ 496

$

–
–
16
(23)
7
$
–
$ (496)
(1)
1
–
$ (496)

$

–
(496)
–
–
–
$ (496)

$ 329 
27
25
23 
(21)
–
(1)
$ 382

$

–
–
18
(21)
3
$
– 
$ (382)
(38)
(1)
–
$ (421)

$

–
(421)
–
–
–
$ (421)

(1) The special termination benefits reflected in the table above related primarily to early retirement incentives offered to certain groups of our employees at FedEx Express during 2004
(see Note 4 for more information).
(2) The minimum pension liability component of Accumulated Other Comprehensive Income is shown in the Statement of Changes in Stockholders’ Investment and Comprehensive
Income, net of deferred taxes. 

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our pension plans included the following components at May 31, 2004 and 2003 (in millions):

ABO
PBO
Fair Value of Plan Assets
Funded Status

Unrecognized actuarial loss
Unamortized prior service cost
Unrecognized transition amount

Prepaid (accrued) benefit cost

Qualified

2004

2003

$ 7,069
$ 8,274
7,678
$ (596)
1,621
95
(7)
$ 1,113

$ 5,725
$ 6,793
5,747
$ (1,046)
2,208
105
(8)
$ 1,259

U.S. Plans

Nonqualified

2004

$ 166
$ 179
–
$ (179)
32
20
–
$ (127)

2003

$ 130
$ 144
–
$ (144)
5
18
–
$ (121)

International Plans
2004

2003

Total

2004

2003

$ 192
$ 230
105
$ (125)
41
3
2
$ (79)

$ 154
$ 180
78
$ (102)
34
–
1
$ (67)

$ 7,427
$ 8,683
7,783
$ (900)
1,694
118
(5)
$ 907

$ 6,009
$ 7,117
5,825
$ (1,292)
2,247
123
(7)
$ 1,071 

The projected benefit obligation (“PBO”) is the actuarial present
value of benefits attributable to employee service rendered to
date, including the effects of estimated future pay increases. The
accumulated benefit obligation (“ABO”) also reflects the actuarial
present value of benefits attributable to employee service ren-
dered to date, but does not include the effects of estimated future
pay increases. Therefore, the ABO as compared to plan assets is
an indication of the assets currently available to fund vested and
nonvested benefits accrued through May 31.

The measure of whether a pension plan is underfunded for finan-
cial accounting purposes is based on a comparison of the ABO to
the fair value of plan assets and amounts accrued for such bene-
fits  in  the  balance  sheet.  In  order  to  eliminate  the  need  to
recognize  an  additional  minimum  pension  liability  (generally
required when the ABO exceeds the fair value of plan assets at
the measurement date), we made $1.1 billion of tax-deductible
contributions to our qualified U.S. pension plans in 2003. In 2004,

we made $320 million in tax-deductible contributions. No contri-
butions  for  2004  or  2003  were  legally  required  and  none  are
expected  to  be  required  in  2005.  Based  on  the  substantial
improvement in the funded status of our qualified plans, we do
not  currently  expect  to  contribute  any  funds  to  our  qualified
defined benefit plans in 2005.

We have certain nonqualified defined benefit pension plans that
are not funded because such funding would be deemed current
compensation to plan participants. Primarily related to those
plans and certain international plans, we have ABOs aggregating
approximately $356 million at May 31, 2004 and $284 million at
May 31, 2003, with assets of $105 million at May 31, 2004 and $78
million at May 31, 2003. Plans with this funded status resulted in
the recognition of a minimum pension liability in our balance
sheets. This minimum liability was $67 million at May 31, 2004 and
$42 million at May 31, 2003.

69

FEDEX CORPORATION

Net periodic benefit cost for the three years ended May 31 was as follows (in millions):

Service cost
Interest cost
Expected return on plan assets
Net amortization and deferral

2004

$ 376
490
(597)
74
$ 343

Pension Plans

2003

$ 374
438
(594)
10
$ 228

2002

$ 348
409
(621)
13
$ 149

2004

$ 35
25
–
–
$ 60

Postretirement Healthcare Plans
2003

$ 27
25
– 
(2)
$ 50

2002

$ 27
25
–
(2)
$ 50

Weighted-average actuarial assumptions for our primary U.S. plans, which comprise substantially all of our projected benefit obliga-
tions, were as follows:

Discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets

2004

6.78%
3.15
9.10*

Pension Plans

2003

6.99%
3.15
10.10

2002

7.11%
3.25
10.90

Postretirement Healthcare Plans
2003

2004

6.57%
–
– 

6.75%
– 
– 

2002

7.30%
– 
– 

*For 2005, the expected long-term rate of return on plan assets will continue to be 9.10%.

The  expected  long-term  rate  of  return  assumptions  for  each
asset  class  are  selected  based  on  historical  relationships
between the assets classes and the economic and capital market
environments, updated for current conditions.

Benefit  payments,  which  reflect  expected  future  service,  as
appropriate, are expected to be paid as follows for the years end-
ing May 31 (in millions):

2005
2006
2007
2008
2009
2010-2014

Pension Benefits

$   216
219
257
283
319
2,389

These estimates are based on assumptions about future events.
Actual benefit payments may vary significantly from these estimates.

Future medical benefit costs are estimated to increase at an
annual rate of 14% during 2005, decreasing to an annual growth
rate of 5% in 2019 and thereafter. Future dental benefit costs are
estimated  to  increase  at  an  annual  rate  of  7%  during  2005,
decreasing to an annual growth rate of 5% in 2013 and thereafter.
Our postretirement healthcare cost is capped at 150% of the 1993
employer cost and, therefore, is not subject to medical and dental
trends after the capped cost is attained. Therefore, a 1% change
in these annual trend rates would not have a significant impact
on the accumulated postretirement benefit obligation at May 31,
2004, or 2004 benefit expense. 

Defined Contribution Plans
Profit sharing and other defined contribution plans are in place
covering a majority of U.S. employees. Profit sharing plans provide

for discretionary employer contributions, which are determined
annually by our Board of Directors. Other plans provide match-
ing  funds  based  on  employee  contributions  to  401(k)  plans.
Expense under these plans was $89 million in 2004, $82 million in
2003 and $75 million in 2002. 

NOTE 13: BUSINESS SEGMENT INFORMATION

Our operations for the periods presented are primarily represent-
ed by FedEx Express, FedEx Ground, FedEx Freight and FedEx
Kinko’s. These businesses form the core of our reportable seg-
ments. Other business units in the FedEx portfolio are FedEx Trade
Networks, FedEx Supply Chain Services, FedEx Custom Critical
and Caribbean Transportation Services. Management evaluates
segment financial performance based on operating income.

In 2004, we changed the reporting and responsibility relationships of
our smaller business units so that they now report directly to a core
segment. Prior year amounts have been reclassified to conform to
the new segment presentation. As a result, our reportable seg-
ments included the following businesses for the periods presented:

FedEx Express Segment

FedEx Ground Segment 

FedEx Freight Segment

FedEx Express
FedEx Trade Networks

FedEx Ground
FedEx Supply Chain Services

FedEx Freight
FedEx Custom Critical
Caribbean Transportation

Services

FedEx Kinko’s Segment

FedEx Kinko’s

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides a reconciliation of reportable segment revenues, depreciation and amortization, operating income (loss)
and segment assets to consolidated financial statement totals for the years ended or as of May 31 (in millions):

Revenues
2004
2003
2002
Depreciation and amortization
2004
2003
2002
Operating income (loss) (3)
2004
2003
2002
Segment assets (4)
2004
2003
2002

FedEx
Express
Segment

$17,497
16,467
15,438

$

$

810
818
819

629
783
801

$12,443
11,188
10,151

FedEx
Ground
Segment

$ 3,910
3,581
2,918

$ 154
155
136

$ 522
494
337

$ 2,248
1,846
1,480

FedEx
Freight
Segment

$ 2,689
2,443
2,253

$

92
88
91

$ 244
193
185

$ 1,924
1,825
1,786

FedEx
Kinko’s
Segment (1)

$ 521
–
–

$

$

33
–
–

39
–
–

$2,903
–
–

Other and
Eliminations (2)

Consolidated
Total

$ 93
(4)
(2)

$ 286
290
318

$

6
1
(2)

$(384)
526
395

$ 24,710 
22,487
20,607

$ 1,375 
1,351
1,364

$ 1,440 
1,471 
1,321 

$ 19,134 
15,385
13,812

(1) Includes the operations of FedEx Kinko’s from the formation of the FedEx Kinko’s segment on March 1, 2004.
(2) Includes the results of operations of FedEx Kinko’s from February 12, 2004 (date of acquisition) through February 29, 2004 (approximately $100 million of revenue and $6 million of
operating income).
(3) Includes business realignment costs of $428 million in the FedEx Express segment, $1 million in the FedEx Ground segment and $6 million in Other and Eliminations.
(4) Segment assets include intercompany receivables.

The following table provides a reconciliation of reportable segment capital expenditures to consolidated totals for the years ended
May 31 (in millions):

2004
2003
2002

FedEx
Express
Segment

$ 592
917
1,069

FedEx
Ground
Segment

$314
252
214

FedEx
Freight
Segment

$130
139
86

FedEx
Kinko’s
Segment

$36
–
–

Other

$199
203
246

Consolidated
Total

$1,271
1,511
1,615

71

FEDEX CORPORATION

The following table presents revenue by service type and geo-
graphic  information  for  the  years  ended  or  as  of  May  31  (in
millions):

Revenue by Service Type

FedEx Express segment:

Package:

U.S. overnight box
U.S. overnight envelope
U.S. deferred

Total domestic package

revenue
International priority

Total package revenue

Freight:
U.S. 
International

Total freight revenue

Other

Total FedEx Express segment

FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment (1)
Other and Eliminations (2)

Geographical Information(3)
Revenues:
U.S.
International

Noncurrent assets:

U.S.
International

2004

2003

2002

$ 5,558
1,700
2,592

9,850
5,131
14,981

1,609
393
2,002
514
17,497
3,910
2,689
521
93
$ 24,710

$18,643
6,067
$ 24,710

$12,644
1,520
$ 14,164

$ 5,432 
1,715
2,510

$ 5,338
1,755
2,383 

9,657
4,367
14,024

1,564
400
1,964
479
16,467
3,581
2,443
– 
(4)
$ 22,487

$ 17,277
5,210
$ 22,487

$ 9,908
1,536
$ 11,444

9,476 
3,834
13,310

1,273
384
1,657
471
15,438
2,918
2,253 
– 
(2)
$ 20,607 

$ 15,968
4,639 
$ 20,607

$ 8,627
1,520
$ 10,147

(1) Includes the operations of FedEx Kinko’s from the formation of the FedEx Kinko’s 
segment on March 1, 2004.
(2) Includes the results of operations of FedEx Kinko’s from February 12, 2004 (date of
acquisition) through February 29, 2004 (approximately $100 million of revenue).
(3) International revenue includes shipments that either originate in or are destined to
locations outside the United States. Noncurrent assets include property and equipment,
goodwill and other long-term assets. Flight equipment is allocated between geographic
areas based on usage.

NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest expense and income taxes for the years
ended May 31 was as follows (in millions):

Interest (net of capitalized interest) 
Income taxes

2004

$151
364

2003

$125
53

2002

$146
312

FedEx Express amended two leases in 2004 and four leases in
2003 for MD11 aircraft, which required FedEx Express to record
$110 million in 2004 and $221 million in 2003, in both fixed assets
and long-term liabilities. 

FedEx Express consolidated an entity that owns two MD11 aircraft
under the provisions of FIN 46. The consolidation of this entity on
September 1, 2003 resulted in an increase in our fixed assets and
long-term liabilities of approximately $140 million. See Note 16.

NOTE 15: GUARANTEES AND INDEMNIFICATIONS 

We  adopted  FIN  45,  “Guarantor’s  Accounting  and  Disclosure
Requirements  for  Guarantees,  Including  Indirect  Guarantees 
of  Indebtedness  of  Others,”  during  2003,  which  required  the
prospective recognition and measurement of certain guarantees
and indemnifications. Accordingly, any contractual guarantees or
indemnifications  we  have  issued  or  modified  subsequent  to
December 31, 2002 are subject to evaluation. 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 modi-
fied since then. Therefore, no amounts have been recognized in
our financial statements for the underlying fair value of these
obligations. With the exception of residual value guarantees in
certain operating leases, a maximum obligation is generally not
specified in our guarantees and indemnifications. As a result, the
overall maximum potential amount of the obligation under such
guarantees and indemnifications cannot be reasonably estimated.
Historically, we have not been required to make significant pay-
ments under our guarantee or indemnification obligations.

Operating Leases
We have guarantees under certain operating leases, amounting
to $43 million as of May 31, 2004, for the residual values of vehi-
cles and facilities at the end of the respective operating lease
periods. Under these leases, if the fair market value of the leased
asset at the end of the lease term is less than an agreed-upon
value as set forth in the related operating lease agreement, we
will be responsible to the lessor for the amount of such deficiency.
Based upon our expectation that none of these leased assets will
have a residual value at the end of the lease term that is materi-
ally 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.

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain of our operating leases contain other indemnification
obligations to the lessor, which are considered ordinary and cus-
tomary (e.g., use and environmental indemnifications). The terms
of these obligations range in duration and often are not limited.
Such indemnification obligations continue until and, in many
cases, after expiration of the respective lease.

Other Contracts
In conjunction with certain transactions, primarily sales or pur-
chases of operating assets or services in the ordinary course of
business, we sometimes provide routine indemnifications (e.g.,
environmental, tax and software infringement), the terms of which
range in duration and often are not limited.

Intra-company Guarantees
FedEx’s publicly held debt (approximately $2.3 billion) is guar-
anteed by our subsidiaries. The guarantees are full and uncon-
ditional,  joint  and  several  and  any  subsidiaries  that  are  not
guarantors are minor as defined by Securities and Exchange
Commission 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 guaran-
tor to obtain funds from its subsidiaries by such means as a
dividend or loan.

Special facility revenue bonds have been issued by certain munic-
ipalities primarily to finance the acquisition and construction of
various airport facilities and equipment. In certain cases, the bond
proceeds were loaned to FedEx Express and are included in long-
term debt and, in other cases, the facilities were leased to us and
are accounted for as either capital leases or operating leases.
Approximately $800 million in principal of these bonds (with total
future principal and interest payments of approximately $1.5 bil-
lion as of May 31, 2004) is unconditionally guaranteed by FedEx
Express. Of the $800 million bond principal, $45 million was in long-
term debt and $204 million was in capital lease obligations at May
31, 2004 and the remainder was in operating leases.

NOTE 16: VARIABLE INTEREST ENTITIES

FedEx Express entered into a lease in July 2001 for two MD11 air-
craft. These assets are held by a separate entity, which was
established and is owned by independent third parties who pro-
vide financing through debt and equity participation. 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 May 31, 2004, the residual value guarantee associated
with this lease, which represents the maximum exposure to loss,

was $89 million. FIN 46 required us to consolidate the separate
entity that owns the two MD11 aircraft. Since the entity was cre-
ated  before  February  1,  2003,  we  measured  the  assets  and
liabilities at their carrying amounts (the amounts at which they
would have been recorded in the consolidated financial state-
ments if FIN 46 had been effective at the inception of the lease).
As a result of this consolidation, the accompanying May 31, 2004
balance sheet includes an additional $126 million of fixed assets
and $133 million of long-term liabilities. 

NOTE 17: COMMITMENTS  

Annual purchase commitments under various contracts as of
May 31, 2004 were as follows (in millions):

2005 
2006
2007
2008
2009
Thereafter

Aircraft

$

22
–
111
131
567
1,141

Aircraft-
Related (1)

$ 170
136
97
67
63
119

Other (2)

Total

$409
119
44
14
13
179

$ 601 
255
252
212
643
1,439

(1) Primarily aircraft modifications.
(2) Primarily vehicles, facilities, computers, printing and other equipment and advertising
and promotions contracts.

The amounts reflected in the table above for purchase commit-
ments represent noncancelable agreements to purchase goods
or services. Such contracts include those for certain purchases
of aircraft, aircraft modifications, vehicles, facilities, computers,
printing and other equipment and advertising and promotions
contracts. Open purchase orders that are cancelable are not
considered  unconditional  purchase  obligations  for  financial
reporting purposes.

FedEx Express is committed to purchase two A310s, seven ATRs
and ten Airbus A380s (a new high-capacity, long-range aircraft).
The A310s and ATRs are expected to be delivered in 2005. FedEx
Express expects to take delivery of three of the ten A380 aircraft
in each of 2009, 2010 and 2011 and the remaining one in 2012.
Deposits and progress payments of $25 million have been made
toward  these  purchases  and  other  planned  aircraft-related
transactions. In addition, we have committed to modify our DC10
aircraft for passenger-to-freighter and two-man cockpit config-
urations. Payments related to these activities are included in the
table above. Aircraft and aircraft-related contracts are subject to
price escalations.

73

FEDEX CORPORATION

NOTE 18: LEGAL PROCEEDINGS

Operations in 2002 were significantly affected by the terrorist
attacks on September 11, 2001. During 2002, we recognized a
total of $119 million of compensation under the Air Transportation
Safety and System Stabilization Act (the “Act”), of which $101 
million had been received as of May 31, 2004. The amounts recog-
nized were for our estimate of losses we incurred as a result of the
mandatory grounding of our aircraft and for incremental losses
incurred through December 31, 2001. All amounts recognized
were reflected as reduction of operating expense under the cap-
tion “Airline stabilization compensation.” 

In the opinion of management, the aggregate liability, if any, with
respect to these claims will not materially adversely affect our
financial position, results of operations or cash flows.

Also,  see  Note  11  for  discussion  of  other  legal  proceedings.
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 finan-
cial position, results of operations or cash flows.

NOTE 19: RELATED PARTY TRANSACTIONS

In the fourth quarter of 2003, the Department of Transportation
(“DOT”) asserted that we were overpaid by $31.6 million and has
demanded repayment. We have filed requests for administrative
and judicial review. We received an opinion from the District of
Columbia U.S. Court of Appeals stating that most of the determi-
nations that we requested were not yet ripe for decision and the
Court will not rule prior to final determination by the DOT and
exhaustion of administrative remedies. 

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. 

Pursuant to the Federal Aviation Administration reauthorization
enacted during the third quarter of 2004, the General Accounting
Office submitted a report to Congress on June 4, 2004, on the cri-
teria and procedures used by the Secretary of Transportation
under the Act. Issuance of the report frees the DOT to make 
a  final  determination  on  our  claim  and  also  reinforces  the
Congressional directive to the DOT to refer any remaining disputed
claims to an administrative law judge upon an affected claimant’s
request.

We agreed to mediation with the DOT, but it did not result in a res-
olution of the dispute. We will continue to pursue our claim for
compensation under the Act.

We believe that we have complied with all aspects of the Act,
that it is probable we will ultimately collect the remaining $18 mil-
lion receivable 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 mate-
rial  reduction  to  the  $119  million  of  compensation  we  have
previously recognized under the Act could occur. Based on the
DOT’s assertion, the range for potential loss on this matter is zero
to $49.6 million.

We are a defendant in a number of lawsuits filed in California
state courts containing various class-action allegations under
California’s wage and hour laws. The plaintiffs in these lawsuits
generally are hourly employees of FedEx operating companies
who allege, among other things, that they were forced to work
“off the clock” and were not provided work breaks. The plaintiffs
generally seek unspecified monetary damages, injunctive relief,
or both. To date, only one of these cases has been certified as a
class action. We believe that the claims in these cases are with-
out merit. We have denied any liability with respect to these
claims and intend to vigorously defend ourselves in these cases. 

Mr. Smith’s son-in-law is a 50% owner of a company that provides
insurance brokerage and consulting services in connection with
certain insurance and legal services plan benefits offered by
FedEx to certain of its employees. Mr. Smith’s son-in-law’s com-
pany  is  paid  commissions  and  fees  directly  by  the  benefit
providers and not FedEx. During fiscal 2004, such commissions
and fees totaled approximately $497,000.

A member of our Board of Directors, J.R. Hyde, III, and his wife
together own approximately 13% of HOOPS, L.P. (“HOOPS”), the
owner  of  the  NBA  Memphis  Grizzlies  professional  basketball
team. Mr. Hyde, through one of his companies, also is the general
partner of the minority limited partner of HOOPS. During 2002,
FedEx entered into a multi-year, $90 million naming rights agree-
ment with HOOPS that will be amortized to expense over the life
of the agreement. Under this agreement, FedEx has certain mar-
keting rights, including the right to name the new arena where
the Grizzlies will play. Pursuant to a separate agreement with
HOOPS,  the  City  of  Memphis  and  Shelby  County,  FedEx  has
agreed to pay $2.5 million a year for the balance of the 25-year
term of the agreement if HOOPS terminates its lease for the new
arena after 17 years. FedEx also purchased $2 million of municipal
bonds  issued  by  the  Memphis  and  Shelby  County  Sports
Authority, the proceeds of which are to be used to finance a por-
tion of the construction costs of the new arena.

On March 26, 2004, FedEx purchased an aggregate of 94 acres of
real estate in Olive Branch, Mississippi, for $4.7 million. FedEx pro-
poses to construct a FedEx Ground hub on this site, which is just
south of Memphis. The 94-acre site is divided into three parcels,
two of which were owned by entities in which Mr. Hyde has a 50%
ownership interest. These two parcels total approximately 3.4
acres. An independent appraisal of the property determined its
fair market value to be not less than the negotiated purchase price.

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20: SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)

(In millions, except per share amounts)

2004 (1)
Revenues
Operating income
Net income
Basic earnings per common share (6)
Diluted earnings per common share
2003
Revenues
Operating income
Net income
Basic earnings per common share (6)
Diluted earnings per common share

First
Quarter

Second
Quarter

$5,687

$ 5,920

200 (2)
128 (2)(3) 
0.43 (2)(3)
0.42 (2)(3)

$5,445
283
158
0.53
0.52

183 (4)
91(4)
0.31(4)
0.30 (4)

$ 5,667
427
245
0.82
0.81

Third
Quarter

$ 6,062
372
207
0.69
0.68

$ 5,545
269
147
0.49
0.49

Fourth
Quarter

$7,041
685
412 (5)
1.38 (5)
1.36 (5)

$5,830
492
280
0.94
0.92

(1) Includes FedEx Kinko’s from February 12, 2004 (date of acquisition). See Note 2.
(2) Includes $132 million ($82 million, net of tax, $0.28 per share, or $0.27 per diluted share) of business realignment costs described in Note 4. 
(3) Includes $26 million, net of tax ($0.09 per share or $0.08 per diluted share) related to a favorable ruling on an IRS case described in Note 11.
(4) Includes $283 million ($175 million, net of tax, $0.59 per share, or $0.57 per diluted share) of business realignment costs described in Note 4. 
(5) Includes a $12 million ($0.04 per share and per diluted share) nonrecurring benefit related to the reduction of our effective tax rate. See Note 11.
(6) The sum of the quarterly earnings per share may not equal annual amounts due to differences in the weighted-average number of shares outstanding during the respective periods. 

75

FEDEX CORPORATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders 
FedEx Corporation

We have audited the accompanying consolidated balance sheets of FedEx Corporation as of May 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for each of the
three years in the period ended May 31, 2004. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits. 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
FedEx Corporation at May 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended May 31, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, in 2002.

Memphis, Tennessee
June 22, 2004

76

FEDEX CORPORATION

SELECTED FINANCIAL DATA

The following table sets forth certain selected consolidated financial and operating data for FedEx as of and for the five years ended
May 31, 2004. This information should be read in conjunction with the Consolidated Financial Statements, Management’s Discussion and
Analysis of Results of Operations and Financial Condition and other financial data appearing elsewhere herein.

(In millions, except per share amounts and other operating data)

2004 (1)(2)(3)

2003

2002

2001(4)(5)

2000

Operating Results
Revenues
Operating income
Income before income taxes
Income before cumulative effect of change in

accounting principle

Cumulative effect of change in accounting for goodwill (6)
Net income

Per Share Data
Earnings per share:

Basic:

Income before cumulative effect of change in

accounting principle

Cumulative effect of change in accounting for goodwill (6)

Assuming dilution:

Income before cumulative effect of change in

accounting principle

Cumulative effect of change in accounting for goodwill (6)

Average shares of common stock outstanding
Average common and common equivalent shares outstanding
Cash dividends declared

Financial Position
Property and equipment, net
Total assets
Long-term debt, less current portion
Common stockholders’ investment

Other Operating Data
FedEx Express aircraft fleet
Average full-time equivalent employees and contractors

$ 24,710
1,440
1,319

$ 22,487
1,471
1,338

$ 20,607
1,321
1,160

$19,629
1,071
927

$18,257
1,221
1,138

838
–
838

2.80
–
2.80

2.76
–
2.76
299
304
0.29

$

$

$

$

$

$

$ 9,037
19,134
2,837
8,036

645
195,838

830
–
830

2.79
–
2.79

2.74
–
2.74
298
303
0.15

$

$

$

$

$

$

725
(15)
710

2.43
(0.05)
2.38

2.39
(0.05)
2.34
298
303
0.05

$

$

$

$

$

$

$ 8,700
15,385
1,709
7,288

$ 8,302
13,812
1,800
6,545

643
190,918

647
184,953

$

$

$

$

$

584
–
584

2.02
–
2.02

1.99
–
1.99
289
293
–

$ 8,100
13,392
1,900
5,900

640
176,960

$

$

$

$

$

688
–
688

2.36
–
2.36

2.32
–
2.32
292
296
–

$ 7,084
11,527
1,776
4,785

663
163,324

(1) Results for 2004 include $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs. See Note 4 to the accompanying audited financial statements.
(2) Results for 2004 include the financial results of FedEx Kinko’s from February 12, 2004 (the date of acquisition). See Note 2 to the accompanying audited financial statements.
(3) Results for 2004 include $37 million, net of tax, or $0.12 per diluted share benefit related to a favorable ruling on an aircraft engine maintenance tax case and the reduction of our
effective tax rate. See Note 11 to the accompanying audited financial statements.
(4) Results for 2001 include the financial results of FedEx Freight East from January 1, 2001 (the date of acquisition for financial reporting purposes).
(5) Asset impairment charges of $102 million ($65 million, net of tax, or $0.22 per diluted share) at FedEx Express and reorganization costs of $22 million ($14 million, net of tax, or $0.05 
per diluted share) at FedEx Supply Chain Services were recorded in 2001.
(6) Results for 2002 reflect our adoption of SFAS 142, “Goodwill and Other Intangible Assets.” We recognized an adjustment of $25 million ($15 million, net of tax, or $0.05 per share) to
reduce the carrying value of certain goodwill to its implied fair value. See Note 3 to the accompanying audited financial statements.

77

FEDEX CORPORATION

BOARD OF DIRECTORS

James L. Barksdale (2)(3)
Chairman and President
Barksdale Management Corporation
Investment management company

August A. Busch IV (2)
President
Anheuser-Busch, Inc.
Brewing organization

John A. Edwardson (1*)
Chairman and Chief Executive Officer
CDW Corporation
Technology products and services company

Judith L. Estrin (3*)
President and Chief Executive Officer
Packet Design, LLC
Internet technology company

J. Kenneth Glass (1)
Chairman, President and 
Chief Executive Officer
First Horizon National Corporation
Bank holding company

Philip Greer (2*)
Managing Director
Greer Family Consulting & Investments, LLC
Investment management firm

(1)Audit Committee
(2)Compensation Committee
(3)Information Technology Oversight Committee
(4)Nominating & Governance Committee
*Committee Chair

J.R. Hyde, III (3)
Chairman
GTx, Inc.
Biopharmaceutical company

Dr. Shirley A. Jackson (3)(4)
President
Rensselaer Polytechnic Institute
Technological university

George J. Mitchell (2)(4)
Partner
Piper Rudnick LLP
Law firm

Frederick W. Smith
Chairman, President and 
Chief Executive Officer
FedEx Corporation

Dr. Joshua I. Smith (1)
Chairman and Managing Partner
Coaching Group, LLC
Consulting firm

Paul S. Walsh (2)
Chief Executive Officer
Diageo plc
Consumer food and beverage company

Peter S. Willmott (1)(4*)
Chairman and Chief Executive Officer
Willmott Services, Inc.
Retail and consulting firm

78

FEDEX CORPORATION

EXECUTIVE OFFICERS AND SENIOR MANAGEMENT

FedEx Corporation

Frederick W. Smith
Chairman, President and Chief Executive Officer

Alan B. Graf, Jr.
Executive Vice President and Chief Financial Officer

Robert B. Carter
Executive Vice President and Chief Information Officer

Kenneth R. Masterson
Executive Vice President, General Counsel and Secretary

T. Michael Glenn
Executive Vice President,
Market Development and Corporate Communications

John L. Merino
Corporate Vice President and Principal Accounting Officer

FedEx Express

David J. Bronczek
President and Chief Executive Officer

David F. Rebholz
Executive Vice President, 
Operations and Systems Support

Michael L. Ducker
Executive Vice President, International

FedEx Freight

Douglas G. Duncan
President and Chief Executive Officer

FedEx Ground

Daniel J. Sullivan
President and Chief Executive Officer

Rodger G. Marticke
Executive Vice President and Chief Operating Officer

Bram B. Johnson
Executive Vice President, 
Strategic Planning, Quality Management and Communications

FedEx Kinko’s

Gary M. Kusin
President and Chief Executive Officer

Patrick L. Reed
President and Chief Executive Officer, FedEx Freight East

Kenneth A. May
Executive Vice President and Chief Operating Officer

Keith E. Lovetro
President and Chief Executive Officer, FedEx Freight West

Paul G. Rostron
Executive Vice President and Chief People Officer

FedEx Custom Critical

John G. Pickard
President and Chief Executive Officer

FedEx Supply Chain Services

Douglas E. Witt
President and Chief Executive Officer

FedEx Trade Networks

G. Edmond Clark
President and Chief Executive Officer

Caribbean Transportation Services

Rick A. Faieta
President and Chief Executive Officer

79

FEDEX CORPORATION

CORPORATE INFORMATION

CONTACT INFORMATION

Corporate Headquarters: 942 South Shady Grove Road,
Memphis, Tennessee 38120, (901) 818-7500.

Annual Meeting: The annual meeting of shareowners will be
held in the Tennessee Grand Ballroom at the Hilton Hotel, 
939 Ridge Lake Boulevard, Memphis, Tennessee 38120, 
on Monday, September 27, 2004, at 10:00 a.m. Central time.

FINANCIAL INFORMATION

Stock Listing: FedEx Corporation’s common stock is listed on
the New York Stock Exchange under the ticker symbol FDX.

Shareowners: As of July 12, 2004, there were 17,901 shareown-
ers of record.

Market Information: Following are high and low sale prices and
cash dividends paid, by quarter, for FedEx Corporation’s common
stock in 2004 and 2003.

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

FY 2004
High
Low
Dividend

FY 2003
High
Low
Dividend

$68.96
59.01
0.05

$57.25
43.71
0.05

$78.05
63.70
0.05

$56.24
42.75
0.05

$75.15
64.84
0.06

$58.60
47.70
0.05

$76.07
65.88
0.06 

$64.35
48.18
0.05

Dividends: FedEx paid its first cash dividend on July 8, 2002 and
has paid a cash dividend each subsequent quarter, including on
July 1, 2004 ($0.07 per share). We expect to continue to pay
regular quarterly cash dividends, though each quarterly dividend
is subject to review and approval by our Board of Directors.

Financial Information: Copies of FedEx Corporation’s Annual
Report on Form 10-K, other documents filed with the Securities
and Exchange Commission (SEC) and other financial and statisti-
cal information are available through our Web site at fedex.com.
The most recent certifications by our principal executive and
financial officers pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 are filed as exhibits to our Form 10-K. You will
be mailed a copy of the Form 10-K upon request to Investor
Relations, FedEx Corporation, 942 South Shady Grove Road,
Memphis, Tennessee 38120, (901) 818-7200, e-mail ir@fedex.com.
Company documents filed electronically with the SEC can also
be found at the SEC’s Web site at www.sec.gov. 

Independent Registered Public Accounting Firm:
Ernst and Young LLP, Memphis, Tennessee.

80

Customer Inquiries: Call l-800-Go-FedEx or visit the 
Customer Support section of fedex.com: 
http://www.fedex.com/us/customersupport/

General and Media Inquiries: Contact FedEx Public Relations,
942 South Shady Grove Road, Memphis, Tennessee 38120, 
(901) 434-8400 or the About FedEx section of fedex.com:
http://www.fedex.com/us/about/

Shareowner Account Inquiries: Contact EquiServe Trust
Company, N.A., P.O. Box 43069, Providence, Rhode Island
02940-3069, (800) 446-2617.

Direct Stock Purchase and Dividend Reinvestment Inquiries:
For information on the direct stock purchase and dividend 
reinvestment plan for FedEx Corporation common stock, call
EquiServe at (800) 446-2617 or visit their direct stock purchase
plan Web site at equiserve.com. This plan provides an alterna-
tive to traditional retail brokerage methods of purchasing,
holding and selling FedEx common stock. This plan also permits
shareowners to automatically reinvest their dividends to pur-
chase additional shares of FedEx common stock.

Investor Inquiries: Contact J.H. Clippard, Jr., Vice President,
Investor Relations, FedEx Corporation, 942 South Shady Grove
Road, Memphis, Tennessee 38120, (901) 818-7200, e-mail
ir@fedex.com or visit the Investor Relations section of
fedex.com: http://www.fedex.com/us/investorrelations/

GENERAL INFORMATION

Equal Employment Opportunity: Our greatest asset is our 
people. We are committed to providing a workplace where 
our employees and contractors feel respected, satisfied and
appreciated. Our policies are designed to promote fairness 
and respect for everyone. We hire, evaluate and promote
employees, and engage contractors, based on their skills and
performance. With this in mind, we will not tolerate certain
behaviors. These include harassment, violence, intimidation
and discrimination of any kind involving race, color, religion,
national origin, gender, sexual orientation, age, disability or,
where applicable, veteran or marital status.

Service Marks: The following are registered service marks of
Federal Express Corporation, registered with the U.S. Patent &
Trademark Office and in other countries: FedEx®, FedEx Express®,
FedEx Ground®, FedEx Freight®, FedEx Custom Critical®, FedEx
Supply Chain Services®, FedEx InSight®, FedEx Home Delivery ®
and FedEx International Priority DirectDistribution®. The 
following are service marks of Federal Express Corporation:
FedEx Trade NetworksSM, FedEx ServicesSM and Caribbean
Transportation ServicesSM. DocStore® is a registered service
mark of Kinko’s Ventures, Inc. FedEx Kinko’s Office and Print
CentersSM is a service mark of Federal Express Corporation and
Kinko’s Ventures, Inc.

This entire annual report is printed on recycled paper.

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FedEx Corporation
942 South Shady Grove Road
Memphis, Tennessee 38120
fedex.com