FedEx Annual Report 2005

FY2005 Annual Report · FedEx

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I can see farther.

I can reach beyond the walls of
my home, office and store.

With one loading dock, I can reach customers around the globe.

I can be a local merchant and a citizen of the world.

I can gain access to almost anyone or anything on
the planet. This used to be the astronauts’ view —
now it’s a map of my sales territory.

From the day our first customer shipped a
box overnight, we’ve been at the leading
edge of change.

We’ve pioneered packaging and systems,
technologies and trade routes. We’ve
enabled new ways of working and new
business models. We’ve closed the gap
between the virtual and physical worlds.
All for one reason — to give people access
to the goods, information and markets that
make their growing expectations possible.

Can you see all that’s possible?

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)

2005

(2)

2004

Percent
Change

$29,363
2,471

8.4%

1,449
4.72
307
2,236

$20,404
2,796
9,588

$24,710
1,440

5.8%
838
2.76
304
1,271

$19,134
3,587
8,036

19
72

73
71
1
76

7
(22
19

)

Revenues (in billions)

Diluted earnings per common share

Return on average equity

2001

2002

2003

(2)

2004

2005

2001

2002

2003

(2)

2004

(1)

2005

2001

2002

2003

(2)

2004

(1)

2005

$19.6

$20.6

$22.5

$24.7

$29.4

$1.99

$2.34

$2.74

$2.76

$4.72

10.9% 11.4% 12.0% 10.9% 16.4%

Capital expenditures (% of revenues)

Debt to total capitalization

Stock price (May 31 close)

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

9.6% 7.8% 6.7% 5.1% 7.6%

26.4% 21.6% 21.7% 30.9% 22.6%

$40.00

$53.95

$63.98

$73.58

$89.42

(1) 2005 includes $48 million ($31 million, net of tax, or $0.10 per diluted share) related to an Airline Stabilization Act charge and a $12 million or $0.04 per
diluted share benefit from an income tax adjustment.
(2) 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 benefitrelated 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.

MESSAGE FROM THE CHAIRMAN

TO OUR SHAREOWNERS:
A snapshot of FedEx Corporation for fiscal year 2005 shows
record revenues and earnings from solid execution of our
business strategy. However, I believe the real story is not a
single snapshot but the bigger picture — one of long-term,
sustained growth and shareowner value.

At FedEx, the bigger picture starts with a clear vision executed
through a unique operating strategy and brought to life
through a sense of purpose shared by our unmatched team.

A Vision for Global Access
FedEx sees a global marketplace with expanded access to
goods, services and information. It’s good for individuals,
good for businesses and good for nations. Countries with
higher levels of access consistently have higher growth
rates for GDP and per capita income, and as world GDP
continues to expand, global trade is expected to increase
twelvefold over the next three decades.

More than two decades ago, we envisioned China as a nexus
of global supply and demand. FedEx Express became the first
all-cargo carrier to enter that market in 1984 and now oper-
ates more all-cargo flights to and from China than any other
U.S. airline. In FY05, FedEx Express launched the express
industry’s first direct flight from mainland China to Europe.
The westbound around-the-world flight is the initial phase of
a plan that extends the company’s global connectivity leader-
ship. This flight will further enhance our service offerings
between the fastest growing economies in both markets.
In FY09, we also plan to open a new hub at the Guangzhou
Bauyun International Airport in southern China to better
serve our global customers doing business in and with the
fast-growing China and Asia-Pacific markets.

In addition to improving access to our physical transportation
networks, our vision also calls for improved access to
information. Last November, fedex.com celebrated its 10th
year and exceeded the one-billion mark for packages tracked
online. When it comes to technology solutions, one of our
greatest successes this year was the launch of File, Print

FedEx Kinko’s, a software enhancement to the Microsoft
Office Suite that turns the “print” function into a direct link
to any U.S. FedEx Kinko’s Office and Print Center.

Our entire Information Technology organization has stepped
back to look at the bigger picture, taking on a major transfor-
mation to enable us to deliver faster business solutions and
improve return on investment. In FY06, we expect to see real
benefits from that multi-year transformation.

Effective Operating Strategy
Our strong performance in FY05 may be largely credited to the
successful execution of our unique “operate independently,
compete collectively” strategy. We operate independently
to allow our companies to focus on very distinct market
needs while we compete collectively under the FedEx brand
name worldwide.

Independently, we continued to improve the efficiency of
each network. Both FedEx Ground and FedEx Freight have
significantly reduced transit times, which provides an even
greater value proposition for customers who are speeding
up their supply chains.

Our major networks also continued to expand capacity to
meet customer needs and promote business growth. For
example, FedEx Ground opened major facilities in Dallas
and Cincinnati, continuing our plan to increase network
capacity to five million packages a day by 2010. Also in FY05,
we expanded the FedEx Ground service portfolio with the
acquisition of Parcel Direct, now called FedEx SmartPost.
Targeted to customers in the fast-growing e-tail and catalog
industries, FedEx SmartPost provides a cost-effective means
of shipping low-weight, less-time-sensitive goods.

When it comes to “operating independently,” the FedEx
Ground contractor model is a perfect example. Although we
believe the contractor model is best for our contractors,
our customers, our company and our shareowners, it has
recently been challenged by a small number of current and

MESSAGE FROM THE CHAIRMAN

Add that to our rollout of energy-saving hybrid vehicles and
more fuel-efficient aircraft joining our fleet and it’s clear that
FedEx is taking a much broader view of environmental
needs for today and for the future.

Seeing the Bigger Picture
By remaining focused on our vision, executing our strategy
and coming together with a sense of purpose centered on
our customers, FedEx is uniquely positioned to weather times
of change and transition.

We remain committed to continuing to deliver for our share-
owners by increasing earnings, return on our investments
and cash flow.

Our outstanding results for FY05, and our plans for FY06 and
beyond, are just part of the bigger picture. Our vision compels
us to work for expanded access around the world. Our
strategy requires us to invest in our networks wisely as we
work together to strengthen the FedEx brand and reputation
worldwide. Our purpose calls us to action, focused on serving
our customers and our communities.

This bigger picture continues to open the world to our
customers so they may turn the power of possibility
into prosperity.

Sincerely,

Frederick W. Smith
Chairman, President and Chief Executive Officer

former owner-operators. These proceedings question whether
owner-operators — who enjoy great opportunities through
self-employment — should be classified as employees.
We will continue to defend our model vigorously to keep the
entrepreneurial spirit alive and to ensure superior service
for our customers.

While our strategy provides the freedom and flexibility to oper-
ate independently, our companies all compete collectively.
Five years ago, when we extended the FedEx brand name
to our major operating companies, we made a commitment
to provide easy, one-touch access for our customers to the
full range of FedEx services. In FY05, we did a better job of
that than ever before, particularly in cross-selling the entire
portfolio of FedEx services.

Another part of our collective strategy involves our retail
presence — giving our customers a convenient drop-off
point for both Express and Ground package shipping. With
the conversion of 176 former FedEx World Service Centers
to FedEx Kinko’s Ship Centers, along with the continued
opening of new locations, FedEx Kinko’s now has about
1,440 centers worldwide, up from about 1,200 a year ago.

An Outstanding Experience
Along with our vision and our strategy, there is one more
important ingredient. That’s a clear sense of purpose. For
every one of our more than 250,000 employees, contractors
and team members around the world, our purpose is to
deliver outstanding customer service. Internally, we call it
The Purple Promise, which is, simply stated, “I will make
every FedEx experience outstanding.”

Our Promise extends to the way we work with each other,
the way we serve our customers, and the way we care for
communities and the environment. For example, we are
building California’s largest corporate solar-electric system
atop our hub at Oakland International Airport to provide
approximately 80 percent of the peak-load energy demand.
At FedEx Kinko’s, we increased the recycled content of the
paper used behind the counter from 10 percent to 30 percent
— conserving an estimated 19,000 tons of wood annually.

FEDEX OVERVIEW

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.

FedEx Express provides time-definite shipping to more than
220 countries and territories, 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 ground delivery with convenient
U.S. residential service through its FedEx Home Delivery service.

FedEx Freight is a 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 is a leading provider of document solutions
and business services, with a retail network of more than
1,400 locations in 11 countries.

“I am on your schedule.”

From factory to doorstep, L.L. Bean gives customers what they want.

“I do not consider a sale complete until goods are worn
out and a customer still satisfied.”

Leon Leonwood Bean founded his company in Freeport,
Maine, in 1912 with a commitment to customer service
that has since become legendary. The merchant offers
a guarantee of 100 percent satisfaction on its rugged
outdoor clothing and gear — even accepting returns
decades after the purchase with no questions asked.

For the past 20 years, FedEx has helped L.L. Bean stay
true to its heritage of giving people what they want, right
down to shipping options. Customers can choose between
lower prices (four to six days via FedEx Ground) or faster
access (two days via FedEx Express).

To meet customer demand, FedEx runs its own facility
under the same roof as L.L. Bean’s 600,000-square-foot
order fulfillment center in Freeport. The operation processes
thousands of mail, phone, fax and Web orders every day,
requiring precise coordination of people, products and
information. And none of that speed or volume comes at
the sacrifice of quality. For example, on the rare occasion
when a stitch in a monogram goes awry, craftspeople
carefully correct the design and send the product on its
way down the maze of conveyor belts and right into a
FedEx truck.

From there to the customer’s home, L.L. Bean entrusts
FedEx with guarding its century-long reputation for
delivering 100 percent satisfaction.

llbean.com

“I was born global.”

FedEx helps Kaenon span the world — as a startup company.

Athletes ranging from beach volleyball players to Indy 500
drivers turn to hot startup Kaenon Polarized for its must-
have sunglasses. FedEx helps Kaenon deliver — anywhere.

When brothers Steve and Darren Rosenberg started Kaenon
in 2001, they knew they could, in Darren Rosenberg’s
words, “build a better mousetrap.” The brothers developed
a polarized lens material that combines the optical clarity
of glass with the lighter weight and impact resistance of
polycarbonate. They also found a way to control the amount
of light that gets through to the wearer’s eyes, allowing
the sunglasses to be customized for different activities
and weather conditions.

But they still needed to get their breakthrough product to
world markets.

“It was important for us to go global right away,” said
Darren Rosenberg, vice president. “A lot of startups
don’t do that, but we secured distributors in Europe and
Australia.” Customs procedures immediately presented

a problem. The brothers worked with freight forwarders and
attempted to deal with customs directly. Both approaches
proved frustrating. Then Kaenon partnered with FedEx,
which became its broker for global customs.

With decades of know-how about operating around the
world, FedEx offers the expertise and shipping services to
help any company enter new markets. Kaenon uses FedEx
Express for international shipping, while FedEx Ground
handles deliveries to retailers in the United States and
Canada — as well as many of Kaenon’s online customers.
Now you’re as likely to spot surfers and kiteboarders
wearing Kaenon’s glasses on the shoreline of Sydney,
Australia, as you are at the company’s home base of
Newport Beach, Calif.

Darren Rosenberg put it simply: “FedEx becoming our
global broker was huge for us.”

kaenon.com

Shipping direct from China puts Motion Computing’s products into
customers’ hands fast.

Motion Computing’s tablet PCs are in demand around the
world in places like hospitals, where the handheld com-
puters replace the loose papers and clipboards that chart
diagnosis and treatment.

To give customers immediate access to its industry-
changing technology, Motion Computing uses FedEx to
ship products from the factory in Shanghai, China, directly
to North America and to countries in the European Union
— by operating the industry’s first direct link between
mainland China and Europe.

Since Motion Computing was founded by industry veterans
in 2002, it has won customers in 18 countries. Among its
competitive advantages: Customers can order its tablet
PCs with the exact features to suit their needs — and get
them shipped overnight. Forty percent of sales come from
healthcare clients. ‘Specially for Children, a pediatric
hospital in Austin, Texas, has equipped its staff with tablet
PCs to help minimize paperwork, so physicians and nurses
can focus more on the children’s care. For kids in Austin
who need medical attention, the technology can make a
big difference.

“FedEx capabilities have been instrumental in helping us
achieve our business objectives and greater efficiencies
in our business model,” said Jerome Kearns, vice president
of global product fulfillment at Motion Computing. “The
FedEx direct-ship programs from China to our distribution
channel and to our end customers help Motion expand
globally at an accelerated pace and in a cost-effective
manner.”

And for startups like Motion Computing, the strategic
relationship with FedEx makes all the difference. “The
unique capabilities that FedEx offers can help any com-
pany go global,” said Kearns. “From shipping choices to
understanding international import and export rules and
regulations, FedEx can help reduce total cost as well as
lead times — a winning combination for both company
and customer.”

motioncomputing.com

“I am the future.”

Taiwan

Hong Kong

Subic Bay

Philippines

Vietnam

“I see a faster way.”

Pentax develops a new picture of
global distribution.

Speed to market is critical for high-value products like Pentax digital
and film cameras. Working together with FedEx, Japan’s Pentax
Corporation reduced its factory-to-retailer lead time by half in the
United States, Canada and the Caribbean.

Pentax products bound for those markets used to take up to 10 days
to go from factories across Asia to a central warehouse in Colorado,
and then on to retailers. No longer.

The Pentax senior management team worked with FedEx to rethink
its strategy. The result is an entirely new Pentax Direct Distribution
System, with products moving from regional manufacturing to the
FedEx Asia-Pacific Hub at Subic Bay, the Philippines. Inside the on-
site Pentax operation, order data is received from Pentax information
systems and individual shipments are prepared for direct delivery to
retailers, using FedEx International Priority DirectDistribution.

The lean, efficient distribution model is not only five days faster but
less costly, too, since Pentax saves on total inventory expense.

Pentax created an entirely new business model that allowed it to
“maximize sales potential and minimize long-term inventory levels,”
said Michael L. Ducker, executive vice president international, FedEx
Express. “The FedEx Express global air, ground and information
technology networks are ideally suited to help Pentax speed delivery
of its products.”

pentax.com

“I am the world’s longest
printer cable.”

“Microsoft and FedEx collaborated to create a

productivity tool that offers users a simple,

quick and convenient way to place print orders

from any Windows application. Despite all the

amazing advances that have been made over

the past few decades, I believe we’re only

beginning to realize computing’s potential —

as File, Print FedEx Kinko’s clearly shows.“

Bill Gates
Chairman and Chief Software Architect,
Microsoft Corporation

FedEx and Microsoft connect your computer to a full range of document services.

Lisa McIlvoy was in a bind. She was flying out of town the next
morning to deliver a presentation but didn’t have the time or
the equipment in her home office to make the 500 hard copies
she needed to bring with her.

Using File, Print FedEx Kinko’s, a free software tool that gives
users a virtual printer cable to more than 1,100 FedEx Kinko’s
Office and Print Centers across the United States, McIlvoy
placed an electronic order from her home computer.

“The copies were all ready when I arrived and they were sorted
correctly with tabs and everything,” said McIlvoy, a sales
manager for W.P. Hickman Systems Inc. “It was like having my
own personal assistant. It was convenient and a real time saver.”

FedEx Kinko’s has long been the trusted back office of remote
workers like McIlvoy. With a digitally linked global network,
FedEx Kinko’s offers copying and printing, Internet access,
video conferencing and other crucial services for the growing
ranks of mobile business professionals.

The File, Print FedEx Kinko’s tool, developed with Microsoft,
works from the menu inside Windows desktop programs. It’s
just like sending a file to the printer, except the printer is at
whichever FedEx Kinko’s location you choose — even in another
city. It’s no wonder that usage is growing at the rate of more
than 10,000 downloads per week.

fedex.com/us/officeprint/main

FedEx keeps CompUSA products flying off the shelves.

When shoppers are roaming the aisles of a superstore,
the retailer’s reputation depends on whether customers
can find what they’re looking for — or whether they drive
away frustrated. CompUSA relies on FedEx Freight to help
guarantee that any personal computer product it sells will
almost always be in stock.

But FedEx Freight is only one part of the FedEx portfolio
that the Dallas-based retail powerhouse has come to
trust. CompUSA also depends on FedEx Express, FedEx
Ground and FedEx Trade Networks to meet needs ranging
from e-commerce fulfillment to customs clearance and
freight forwarding.

The FedEx Freight network is perfectly designed for
CompUSA’s fast-cycle inventory replenishment. Shipments
from manufacturers arrive at five distribution centers
around the nation, where the products are immediately
sorted and loaded right onto FedEx Freight trucks, eliminat-
ing the costly need to warehouse goods. The trucks deliver
directly to CompUSA’s 252 stores, typically resupplying
them in two days or less.

Doug Brown, CompUSA’s senior director of logistics, said,
“As our valued business partner, FedEx helped CompUSA
gain the competitive edge in the marketplace through
cutting-edge supply chain technology, the right mix of
transportation and the passionate spirit in which the
relationship is managed.”

compusa.com

“I bypass warehouses.”

“I am always fresh.”

Dipping and shipping the same day keeps Shari’s Berries growing.

The business of fresh berries is part art, part science — and
always a race against time. For Shari’s Berries, winning that race
means delivering hand-dipped strawberries for peak freshness.

strawberries in 60 tons of toppings and send them to 200,000
addresses using FedEx.

“FedEx is an invaluable ally for us,” said Kevin Beresford, the
company’s president and CEO. “We rely on FedEx because
their people at every level are focused on customer service.”

While the company’s processes are meticulous — every berry
is dipped and packaged by hand at the Roseville, Calif., head-
quarters on the day it is shipped — this is no small-scale
operation. The ability to ship overnight has allowed Shari’s
Berries to increase annual revenue from $700,000 in 2000 to
$8 million in 2004, making it one of America’s top 400 e-commerce
merchants. This year, Shari’s Berries will dip two million

Valentine’s Day is an awesome challenge for Shari’s Berries,
with 14,000 orders to be filled in a single day. To handle the spike
in volume, FedEx Express brings empty air cargo containers to
the Shari’s Berries loading dock, fills them with shipments and
takes them directly to its aircraft for distribution.

“Moving that many orders reliably and quickly requires a
commitment from everyone at FedEx — not just locally, but
across their entire network,” Beresford said. “FedEx has it
down to a science.”

berries.com

“I need to be in Hong Kong...”
“I need to be in Hong Kong...”

Strategic shipping helps Louis Vuitton get its most in-demand products
Strategic shipping helps Louis Vuitton get its most in-demand products
in stores around the world.
in stores around the world.

Louis Vuitton’s distinctive trunks and bags have been
Louis Vuitton’s distinctive trunks and bags have been
synonymous with luxury for 150 years. Since the arrival of
synonymous with luxury for 150 years. Since the arrival of
designer Marc Jacobs in 1997, the company has diversified its
designer Marc Jacobs in 1997, the company has diversified its
product range, spurring it to even greater levels of success.
product range, spurring it to even greater levels of success.
Louis Vuitton now operates an exclusive retail network of 341
Louis Vuitton now operates an exclusive retail network of 341
stores across 52 countries, supplying chic shoppers with its
stores across 52 countries, supplying chic shoppers with its
famous monogram bags, as well as a range of Ready-to-Wear
famous monogram bags, as well as a range of Ready-to-Wear
and accessories.
and accessories.

Part of the stores’ success is a combination of FedEx services
Part of the stores’ success is a combination of FedEx services
that keeps the right mix of products in stock at each location.
that keeps the right mix of products in stock at each location.

The hottest, fast-selling merchandise is shipped from factories
The hottest, fast-selling merchandise is shipped from factories
directly to Louis Vuitton stores worldwide by FedEx Express.
directly to Louis Vuitton stores worldwide by FedEx Express.
Rush orders are handled by FedEx International Priority. For
Rush orders are handled by FedEx International Priority. For
replenishing its classic stock, Louis Vuitton relies on FedEx
replenishing its classic stock, Louis Vuitton relies on FedEx
Express to transport multi-piece heavyweight shipments from
Express to transport multi-piece heavyweight shipments from

its international logistics and information processing center in
its international logistics and information processing center in
Cergy, France, to distribution centers in Honolulu and Memphis.
Cergy, France, to distribution centers in Honolulu and Memphis.
From Memphis, merchandise is shipped by FedEx Express and
From Memphis, merchandise is shipped by FedEx Express and
FedEx Ground to Louis Vuitton stores across the United States.
FedEx Ground to Louis Vuitton stores across the United States.
The retailer often uses the Web-based FedEx InSight application
The retailer often uses the Web-based FedEx InSight application
to receive automatic notification of critical shipments and to
to receive automatic notification of critical shipments and to
view shipment status without inputting a tracking number.
view shipment status without inputting a tracking number.

“Louis Vuitton is aiming to increase the responsiveness of its
“Louis Vuitton is aiming to increase the responsiveness of its
logistics operations,” said Vincent Barale, director of Logistics
logistics operations,” said Vincent Barale, director of Logistics
and Transportation for Louis Vuitton. “The services provided
and Transportation for Louis Vuitton. “The services provided
by FedEx enable us to reduce lead times while optimizing stock
by FedEx enable us to reduce lead times while optimizing stock
levels within our retail network. FedEx is an integral part of our
levels within our retail network. FedEx is an integral part of our
remarkable, ongoing story of innovative luxury.”
remarkable, ongoing story of innovative luxury.”

www.vuitton.com
www.vuitton.com

“...and Brussels...and Chicago...and Johannesburg...and Melbourne...
“...and Brussels...and Chicago...and Johannesburg...and Melbourne...
and Sydney...and Manila...and Tokyo...and Salzburg...and Antwerp...and Cannes...
and Sydney...and Manila...and Tokyo...and Salzburg...and Antwerp...and Cannes...
and Berlin...and São Paulo...and Athens...and Vancouver...
and Berlin...and São Paulo...and Athens...and Vancouver...
and Toronto...and Los Angeles...and Honolulu.”
and Toronto...and Los Angeles...and Honolulu.”

“I am a successful
“I am an entrepreneur
entrepreneur.”
at heart.”

The FedEx contractor model lets thousands build their own future.

FedEx does more than serve small businesses. It helps
create them.

Nick Ciardiello is one of thousands of independent con-
tractors who pick up, transport and deliver packages
for FedEx Ground and its residential service, FedEx
Home Delivery.

The FedEx Ground business model allows the Woodbridge,
N.J., contractor to be his own boss — and a successful
small business. Ciardiello owns 16 trucks and operates 10
routes. He hires the workers he wants — a diverse group
of 19 employees — while having one of the world’s best-
known brand names behind him. He also benefits from
the FedEx global sales force, which steadily increases the
number of packages he delivers. This can make his
routes more valuable every year, since FedEx pays him
based on volume as well as reliable performance.

This opportunity appeals to entrepreneurs who are willing
to make the investment to get started in the business. In
addition to the initial acquisition fee for the route, FedEx
Ground contractors pay for their own trucks, insurance,
uniforms, fuel and maintenance. And they’re responsible
for serving their routes safely and efficiently.

While it requires a lot of hard work, it can be a good long-
term investment. It’s not uncommon for FedEx Ground
contractors to resell the rights to their routes at an
attractive profit. Or, like Ciardiello, to continue to grow their
business by carrying out their duties with the reliability and
spirit the world expects from someone in a FedEx uniform.

“The best part about it is being the boss,” Ciardiello said.
“I can still climb into a truck and handle my share of
stops when I have to, but working with FedEx Ground has
given me the opportunity to become a total manager.”

fedex.com/us/careers/independentcontractors.html

“I am clean.”

Hybrid trucks carry FedEx farther.

FedEx’s commitment to the environment starts behind the counter at every FedEx
Kinko’s, rises to the top of our hub in Oakland, Calif., and travels the streets of
Tampa, Sacramento, New York City and Washington D.C. That’s where we’ve
begun deploying eco-friendly hybrid trucks.

The FedEx OptiFleet E700 diesel-electric hybrid is a revolution in truck technology.
Developed in partnership among FedEx, Eaton Corp. and Environmental Defense,
the hybrid produces 96 percent less soot than its diesel-only counterparts and
travels more than 50 percent farther on a gallon of fuel. It will cost the same as
a conventional truck over its lifetime while reducing both fuel costs and global-
warming emissions by one-third.

The trucks are ideally suited for the frequent stop-and-go delivery pattern required
in cities. When a driver hits the brakes on the hybrid, the batteries capture and
store energy that is usually lost during deceleration. On acceleration, the batteries
release the stored energy to produce a smooth acceleration that’s quiet and
fuel-efficient.

FedEx plans to add up to 75 new hybrids to its fleet by the spring of 2006 and
replace as many diesel delivery trucks as possible during the normal replacement
cycle within the next 10 years, if hybrid production rises and prices fall as desired
— ultimately saving more than one million barrels of crude oil a year.

“As fuel prices rise, fuel-efficient trucks are an investment every company should
be making,” said Gwen Ruta, director of corporate partnerships at Environmental
Defense. “They’re not only good for business but good for America.”

fedex.com/us/about/responsibility

MESSAGE FROM THE CFO

TO OUR SHAREOWNERS:
Several years ago, we committed to managing FedEx
Corporation for improving financial performance — setting
very specific long-term goals around improved margins, earn-
ings growth, better cash flow and higher return on capital.
Since then, we’ve consistently delivered against those goals.
And in FY05, we recorded our best performance yet.

As our independent operating companies and unique global
networks continue to find new and better ways to compete
collectively, demand for the entire portfolio of FedEx services
has steadily grown. Over the past five years, FedEx
Corporation revenue has increased to $29.4 billion in FY05
from $18.3 billion in FY00, thanks to solid volume growth,
strategic acquisitions, new services and steady pricing disci-
pline. Our continued focus on productivity across the corpora-
tion has helped us also drive sustainable improvement in
operating margin in recent years, growing to 8.4 percent in
FY05 from 6.7 percent in FY00. And during that same time period
net income has more than doubled — increasing to $1.4
billion in FY05 from $688 million in FY00. We view this as a very
strong indication that our operating strategy is working.

Comparison of Five-Year Cumulative Total Return*
*

$ 300

$ 250

$ 200

$ 150

$ 100

$ 50

In response to the growing demand for our services, we’ve
taken a very disciplined approach to investing in the business
to increase capacity for future growth. We’ve been able to
hold our capital expenditures to within 5 to 8 percent of revenue
in recent years, and the $2.5 billion in capital spending fore-
casted for FY06 remains within that range. Additionally, solid
improvement in operating cash flow allowed us to repay nearly
$800 million in debt in FY05, and for the second straight year
we have more than $1 billion in cash on the balance sheet.

This consistent performance and ongoing focus on our finan-
cial goals have also paid off for our shareowners. For the third
straight year we increased our dividend payment, boosting
our quarterly dividend by 14 percent to 8 cents per share on
May 27, 2005. Even more significantly, for the five-year period
ending May 31, 2005, our total cumulative return to shareowners
is up more than 150 percent — outpacing the S&P 500 and the
Dow Jones Transportation Index.

But not all of our financial goals deal with dollars. Another
critical focus for FedEx is our long-standing commitment to
integrity, transparency and excellent internal controls. In
FY05, that commitment was demonstrated by more than 1,200
FedEx employees who spent nearly 100,000 hours ensuring we
fully comply with the requirements of Section 404 of the
Sarbanes-Oxley Act. Thanks to their hard work, internal controls
were strengthened with the documentation of approximately
225 key financial processes, which are supported by more
than 200 financial IT systems. Our intention was not only to
comply with the law but also to build upon a process that will
further enhance a strong controls mindset across all of FedEx
— today and into the future.

Our outstanding results in FY05 followed several years of con-
sistently strong performance. Now, thanks to carefully
planned expansion we are financially well positioned to take
advantage of the host of future growth opportunities in the
global marketplace.

2000

2001

2002

2003

2004

2005

FedEx Corporation Common Stock

S&P 500

Dow Jones Transportation Average

Shows the value, at the end of each of the last five fiscal years, of $100
invested in FedEx stock or the relevant index on May 31, 2000, and assumes
reinvestment of dividends. Fiscal year ended May 31.

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

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

OVERVIEW OF FINANCIAL SECTION

DESCRIPTION OF BUSINESS

The financial section of the FedEx Corporation (also referred to
as “FedEx”) Annual Report, consists of this Management’s
Discussion and Analysis of Results of Operations and Financial
Condition (“MD&A”), the Consolidated Financial Statements and
the notes to the Consolidated Financial Statements, and Other
Financial Information, which include information about our sig-
nificant accounting policies, practices and the transactions that
underlie our financial results. The following MD&A describes the
principal factors affecting the results of operations, liquidity, cap-
ital resources, contractual cash obligations and the critical
accounting policies and estimates of FedEx. The discussion in the
financial section should be read in conjunction with the other
sections of this Annual Report.

ORGANIZATION OF INFORMATION

Our MD&A is comprised of three major sections: Results of
Operations, Financial Condition and Critical Accounting Policies
and Estimates. These sections include the following information:

• Results of Operations includes an overview of consolidated 2005
results compared to 2004, and 2004 results compared to 2003.
This section also includes a discussion of key actions and
events that impacted our results, as well as a discussion of our
outlook for 2006.

• The overview is followed by a financial summary and analysis
(including a discussion of both historical operating results and
our outlook for 2006) for each of our four reportable business
segments.

• The financial condition of FedEx is reviewed through an analysis
of key elements of our liquidity, capital resources and contrac-
tual cash obligations, including a discussion of our cash flows
statements and our financial commitments.

• We conclude with a discussion of the critical accounting
policies and estimates that we believe are important to under-
standing certain of the material judgments and assumptions
incorporated in our reported financial results.

FedEx provides a broad portfolio of transportation, e-commerce
and business services through operating companies that
compete collectively and are managed collaboratively under
the respected FedEx brands. These operating companies are
primarily represented by FedEx Express, the world’s largest
express transportation company; FedEx Ground, a leading
provider of small-package ground delivery services; 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, which was formed following the acqui-
sition of Kinko’s, Inc. on February 12, 2004. These companies
form the core of our reportable segments. See “Reportable
Segments” for further discussion.

The key indicators necessary to understand our operating results
include:

• the overall customer demand for our various services;

• the volumes of transportation 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); and

• our ability to manage our cost structure for capital expendi-
tures and operating expenses such as salaries and benefits,
fuel and maintenance and to match such expenses to shifting
volume levels.

Except as otherwise specified, references to years indicate
our fiscal year ended May 31, 2005 or ended May 31 of the year
referenced and comparisons are to the prior year.

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
millions, except per share amounts) for the years ended May 31:

Revenues
Operating income
Operating margin
Net income(3)
Diluted earnings per share(3)

2005(1)

2004(2)

2003

2005/2004

2004/2003

2005/2004

2004/2003

Dollar Change

Percent Change

$29,363
$ 2,471

8.4%

$ 1,449
4.72
$

$24,710
$ 1,440

5.8%
838
2.76

$
$

$22,487
$ 1,471

6.5%
830
2.74

$
$

4,653
1,031
NM
611
1.96

2,223
(31)
NM
8
0.02

19
72
260 bp
73
71

10
(2)
(70) bp
1
1

(1) Includes $48 million ($31 million, net of tax, or $0.10 per diluted share) related to an Airline Stabilization Act charge described below.
(2) Includes $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs described below. Also, see Note 5 to the accompanying consolidated
financial statements.
(3) 2005 includes a $12 million, or $0.04 per diluted share benefit from an income tax adjustment described below. 2004 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. Also, see Note 12 to the accompanying consolidated financial statements.

The following table shows changes in revenues and operating income by reportable segment for 2005 compared to 2004, and 2004
compared to 2003 (in millions):

FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment
Other and Eliminations (3)

Dollar Change
Revenues

Percent Change
Revenues

Dollar Change
Operating Income

Percent Change
Operating Income

2005/2004

2004/2003

2005/2004

2004/2003

2005/2004

2004/2003

2005/2004

2004/2003

1,988
770
528
1,545
(178)
4,653

1,030
329
246
521
97
2,223

11
20
20
NM
NM
19

6
9
10
NM
NM
10

785(1)
82
110
61
(7)
1,031

(154)(2)
28
51
39
5
(31)

125
16
45
NM
(117)
72

(20)
6
26
NM
NM
(2)

(1) Includes $48 million related to an Airline Stabilization Act charge described below.
(2) Includes $428 million of business realignment costs described below.
(3) 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).

The following table shows selected operating statistics (in thou-
sands, except yield amounts) for the years ended May 31:

2005

2004

2003

Percent Change
2004/
2003

2005/
2004

Average daily package

volume (ADV):

FedEx Express
FedEx Ground
Total ADV

Average daily LTL shipments:

3,259
2,609
5,868

3,167
2,285
5,452

3,121
2,168
5,289

FedEx Freight

Revenue per package (yield):

FedEx Express
FedEx Ground
LTL yield (revenue per
hundredweight):
FedEx Freight

$20.10
6.68

$ 18.55
6.48

$17.69
6.25

$15.48

$ 14.23

$13.40

3
14
8

8
3

1
5
3

5
4

During 2005, revenue growth was attributable to volume and yield
improvements across all transportation segments and the inclu-
sion of FedEx Kinko’s for the full year. Combined volume growth in
our package businesses increased 8%, the strongest growth rate
experienced in several years. Yields improved primarily due to
incremental jet and diesel fuel surcharges and rate increases.

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 2004 revenue growth. In addi-
tion, FedEx Kinko’s (acquired on February 12, 2004) added $621
million of revenue during 2004.

MANAGEMENT’S DISCUSSION AND ANALYSIS

During 2005, operating income increased primarily due to revenue
growth in all transportation segments and improved margins at
FedEx Express and FedEx Freight. FedEx Express benefited from
the realization of a full year of savings from our 2004 business
realignment programs (versus a half year in 2004), which reduced
the growth in salaries, wages and benefits. Although our fuel
costs increased significantly during 2005, higher revenues from
our jet and diesel fuel surcharges at FedEx Express and FedEx
Freight more than offset these higher fuel costs. In addition, rein-
statement of a fuel surcharge at FedEx Ground during the third
quarter of 2005 partially mitigated the impact of their higher fuel
costs during the last two quarters of 2005.

Operating income decreased 2% in 2004 as costs related to our
business realignment initiatives totaled $435 million (partially
offset by approximately $150 million of savings). See “Business
Realignment Costs” for a discussion of these costs and related
savings. Higher incentive compensation and pension costs and
base salary increases, as well as higher maintenance expenses,
were offset by revenue growth and ongoing cost control efforts
during the year.

Salaries and employee benefits expense increased 12% during
2005 primarily due to higher incentive compensation, a full 12
months of FedEx Kinko’s and increased medical costs. Incentive
compensation increased approximately $170 million during 2005
primarily due to above-plan operating income at our transporta-
tion segments. Pension cost increased only $18 million in 2005
after a $115 million increase in 2004. Salaries and benefits
expense increased 10% during 2004 due to higher incentive com-
pensation and pension costs, wage rate increases and the
acquisition of FedEx Kinko’s. Incentive compensation increased
approximately $240 million during 2004 due to above-plan oper-
ating income, primarily at FedEx Express and FedEx Freight.

Purchased transportation increased at a faster rate than revenue
in 2005 reflecting higher fuel surcharges from third party trans-
portation providers and increased use of contract carriers to
support international express and domestic LTL volume growth.
Other operating expenses increased disproportionately in 2005
primarily due to the inclusion of a full year of production supplies
costs at FedEx Kinko’s.

Other Income and Expense and Income Taxes
Net interest expense increased $23 million during 2005. The
increase in interest expense was primarily due to the full year
effect of borrowings related to the FedEx Kinko’s acquisition and
the impact on comparisons of a prior year favorable adjustment
(the positive resolution of the tax case described below). 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 operat-
ing 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 in 2004 was also affected by additional borrow-
ings related to the FedEx Kinko’s acquisition in February of 2004.
Other expense also increased $14 million during 2005, primarily
due to the writedown of certain individually immaterial invest-
ments and foreign exchange transaction losses.

Our effective tax rate was 37.4% in 2005, 36.5% in 2004, and
38.0% in 2003. The 37.4% effective tax rate in 2005 was favorably
impacted ($12 million tax benefit or $0.04 per diluted share) by
the one-time reduction of a valuation allowance on foreign tax
credits arising from certain of our international operations as a
result of the passage of the American Jobs Creation Act of 2004
and by a lower effective state tax rate. The lower effective rate
in 2004 was primarily attributable to the favorable decision in the
tax case discussed below, stronger than anticipated interna-
tional 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 for-
eign governments on foreign income against U.S. income taxes
on the same income, thereby mitigating the exposure to double
taxation. For 2006, we expect the effective tax rate to be approx-
imately 38%. The actual rate, however, will depend on a number
of factors, including the amount and source of operating income.

In February 2005, the Sixth Circuit Court of Appeals reaffirmed
the favorable ruling from the U.S. District Court in Memphis
regarding the tax treatment of jet engine maintenance costs,
previously received during the first quarter of 2004. The period
during which the U.S. Department of Justice could appeal the
decision lapsed in May 2005, making the decision final. The dis-
trict court held that these costs were ordinary and necessary
business expenses and properly deductible in our income tax
returns. Neither the Sixth Circuit’s decision nor the government’s
decision not to pursue an appeal had any impact on our finan-
cial condition, results of operations or tax rate during 2005. As a
result of the District Court ruling, we recognized a one-time ben-
efit of $26 million, net of tax, or $0.08 per diluted share in the first
quarter of 2004, primarily related to the reduction of accruals
and the recognition of interest earned on amounts previously
paid to the IRS. These adjustments affected both net interest
expense ($30 million pretax) and income tax expense ($7 mil-
lion). We expect to receive a refund payment of approximately
$80 million (before income taxes of approximately $16 million)
from the U.S. government in the first quarter of 2006, which is
included in current receivables.

Business Realignment Costs
During the first half of 2004, voluntary early retirement incentives
with enhanced pension and postretirement healthcare benefits
were offered to certain groups of employees at FedEx Express

FEDEX CORPORATION

who were age 50 or older. Voluntary cash severance incentives
were also offered to eligible employees at FedEx Express. These
programs were limited to eligible U.S. salaried staff employees
and managers. Approximately 3,600 employees accepted offers
under these programs. Costs were also incurred for the elimina-
tion of certain management positions, primarily at FedEx Express
and FedEx Services, based on the staff reductions from the vol-
untary 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 activities were
recognized in the period incurred.

We recognized $435 million of business realignment costs during
2004. No material costs for these programs were incurred in 2005.
At May 31, 2004, we had remaining business realignment related
accruals of $28 million. The remaining accruals relate to man-
agement severance agreements, which are payable over future
periods. At May 31, 2005, these accruals had decreased to $7
million due predominantly to cash payments made in 2005.

Over the past few years, we have taken many steps to bring our
expense growth in line with revenue growth, particularly at FedEx
Express, while maintaining our industry-leading service levels.
The business realignment programs were another step in this
ongoing process of reducing our cost structure to increase our
competitiveness, meet the future needs of our employees and
provide the expected financial returns for our shareholders.

Airline Stabilization Act Charge
During the second quarter of 2005, the United States Department
of Transportation (“DOT”) issued a final order in its administrative
review of the FedEx Express claim for compensation under the Air
Transportation Safety and System Stabilization Act (“Act”). Under
its interpretation of the Act, the DOT determined that FedEx
Express was entitled to $72 million of compensation, an increase
of $3 million from its initial determination. Because we had previ-
ously received $101 million under the Act, the DOT demanded
repayment of $29 million, which was made in December 2004.
Because we could no longer conclude that collection of the
entire $119 million of such compensation recorded in 2002 was
probable, we recorded a charge of $48 million in the second
quarter of 2005 ($31 million net of tax, or $0.10 per diluted share),
representing the DOT’s repayment demand of $29 million and the
write-off of a $19 million receivable. We are vigorously contesting
this determination judicially and will continue to aggressively pur-
sue our compensation claim. Should any additional amounts
ultimately be recovered by FedEx Express on this matter, they will
be recognized in the period that they are realized.

Outlook
Our outlook for 2006 is based on the expectation of continued,
albeit slower, growth in the U.S. economy. While comparisons
will be more difficult against a very strong 2005, we expect con-
tinued revenue and earnings growth across all FedEx operating
companies. We also expect a stable global economy in 2006,

supported by stable worldwide monetary policy and continued
growth in corporate profitability in the U.S. and Asia.

Volatility in fuel costs may pressure quarterly earnings growth as
the trailing impact of adjustments to the FedEx Express fuel sur-
charge can significantly affect earnings in the short term.
Incremental costs associated with the new westbound around-
the-world flight at FedEx Express will be significant in 2006, and a
competitive pricing environment may limit base U.S. domestic
yield growth, particularly in our package businesses. U.S. domes-
tic pension costs are expected to increase by more than $60
million in 2006 based on a declining discount rate.

Our management teams continue to examine additional cost
reduction and operational productivity opportunities as we focus
on optimizing our networks, improving our service offerings and
enhancing the customer experience. These opportunities include
initiatives to improve pickup and delivery efficiency, increase
cross-operating company collaboration, and manage the growth
of employee salaries and benefits. During 2006, we expect con-
tinued strong growth of international volumes and yields at FedEx
Express. We expect modest growth in U.S. domestic revenue 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. We expect that FedEx Kinko’s will generate
revenue growth from the transition of FedEx World Service
Centers to FedEx Kinko’s Ship Centers, the growth of current lines
of business and expansion of our retail network.

Investments in our highest margin service lines will accelerate
in 2006 as we add incremental international routes, deploy new
productivity-enhancing technologies and broaden the size of our
aircraft fleet and sortation capacity to meet future growth. While
these investments will increase costs, we still expect improve-
ment in operating margin and cash flows in 2006.

The pilots of FedEx Express, which represent a small number of
FedEx Express total employees, are employed under a collective
bargaining agreement that became amendable on May 31, 2004.
In accordance with applicable labor law, we will continue to
operate under our current agreement while we negotiate with
our pilots. Contract negotiations with the pilots’ union began in
March 2004 and are ongoing. We cannot estimate the financial
impact, if any, the results of these negotiations may have on our
future results of operations.

Increased security requirements for air cargo carriers have not
had a material impact on our operating results for the peri-
ods presented. In November 2004, the Transportation Security
Administration (“TSA”) proposed new rules enhancing many of the
security requirements for air cargo on both passenger and all-
cargo aircraft. Because the TSA’s proposed rules are subject to
comment, any final rules may differ significantly from the proposed
rules. Accordingly, it is not yet possible to estimate the impact, if

MANAGEMENT’S DISCUSSION AND ANALYSIS

any, that the adoption of new rules by the TSA or any other addi-
tional security requirements may have on our results of operations.
However, it is possible that increased security requirements could
impose substantial incremental costs on us and our competitors.

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
initiatives and our ability to successfully conclude contract nego-
tiations with our pilots and defend against challenges to our
independent contractor model described in Note 19 to the
accompanying consolidated financial statements. In addition,
adjustments to our fuel surcharges lag changes in actual fuel
prices paid. Therefore, our operating income could be materially
affected should the price of fuel suddenly change by a significant
amount. See “Forward-Looking Statements” for a more complete
discussion of potential risks and uncertainties that could materi-
ally affect our future performance.

Seasonality of Business
Our businesses are seasonal in nature. The transportation and
business services industries are affected directly by the state of
the overall domestic and international economies. Seasonal fluc-
tuations affect volumes, revenues and earnings. Historically, the
U.S. express package business experiences an increase in vol-
umes 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. Normally, the fall is the busiest shipping
period for FedEx Ground, while late December, June and July are
the slowest periods. For FedEx Freight, the spring and fall are the
busiest periods and the latter part of December, January and
February are the slowest periods. For FedEx Kinko’s, the summer
months are normally the slowest periods. Shipment levels, oper-
ating costs and earnings for each of our companies can also be
adversely affected by inclement weather.

NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS 123R, “Share-Based Payment.” SFAS 123R
is a revision of SFAS 123 and supersedes APB 25. The new stan-
dard requires companies to record compensation expense for
stock-based awards using a fair value method and is effective for
annual periods beginning after June 15, 2005 (effective in 2007 for
FedEx). Compensation expense will be recorded over the requi-
site service period, which is typically the vesting period of the
award. We plan to adopt this standard using the modified
prospective method.

The impact of the adoption of SFAS 123R cannot be predicted at
this time because it will depend on levels of share-based payments
granted in the future, as well as the assumptions and the fair value

model used to value them, and the market value of our common
stock. If applied to the years ended May 31, 2005 and 2004, the
impact of that standard would have materially approximated that of
SFAS 123 as presented in Note 1 to the accompanying consolidated
financial statements (reducing earnings per diluted share in 2005
and 2004 by $0.12 and $0.08, respectively). SFAS 123R also requires
the benefits of tax deductions in excess of recognized compensa-
tion cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current standards. Based
on historical experience, we do not expect the impact of adopting
SFAS 123R to be material to our reported consolidated cash flows.

REPORTABLE SEGMENTS
FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s
form the core of our reportable segments. Our reportable seg-
ments include the following businesses:

FedEx Express Segment FedEx Express (express transportation)

FedEx Trade Networks

(global trade services)

FedEx Ground Segment

FedEx Ground (small-package

ground delivery)
FedEx SmartPost

(small-parcel consolidator)
FedEx Supply Chain Services

(contract logistics)

FedEx Freight Segment

FedEx Freight (LTL freight

transportation)

FedEx Custom Critical

(time-critical transportation)
Caribbean Transportation Services

(airfreight forwarding)

FedEx Kinko’s Segment

FedEx Kinko’s (document solutions

and business services)

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 or estimated services pro-
vided. We believe these allocations approximate the cost of
providing these functions. The operating expenses line item
“Intercompany charges” on the accompanying financial sum-
maries of our reportable segments includes the allocations from
FedEx Services to FedEx Express, FedEx Ground, FedEx Freight
and FedEx Kinko’s. The “Intercompany charges” caption also
includes allocations for services provided between operating
companies and certain other costs such as corporate manage-
ment fees related to services received for general corporate
oversight, including executive officers and certain legal and
finance functions. Management evaluates segment financial
performance based on operating income.

In addition, certain FedEx operating companies provide trans-
portation and related services for other FedEx companies outside

FEDEX CORPORATION

their reportable segment. Billings for such services are based on
negotiated rates, which we believe approximate fair value, and
are reflected as revenues of the billing segment. Such inter-
segment revenues and expenses are not separately identified
in the following segment information as the amounts are not
material and are eliminated in the consolidated results.

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

2005

2004

2003

$ 5,969

$ 5,558

$ 5,432

1,798
2,799

1,700
2,592

1,715
2,510

10,566

9,850

9,657

6,134

5,131

4,367

16,700

14,981

14,024

1,854
381
2,235
550
19,485

1,609
393
2,002
514
17,497

1,564
400
1,964
479
16,467

Revenues:

Package:

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

Total U.S. domestic
package revenue

International
Priority (IP)
Total package
revenue

Freight:
U.S.
International
Total freight revenue

Other(1)

Total revenues

Operating expenses:

Salaries and

Percent Change
2004/
2003

2005/
2004

6
8

15
(3)
12
7
11

(1)
3

3
(2)
2
7
6

employee benefits

7,704

7,403

7,001

Purchased

transportation

Rentals and

landing fees
Depreciation and
amortization

Fuel
Maintenance and repairs
Business realignment

costs

Intercompany charges
Other

Total operating
expenses
Operating income
Operating margin

843

694

609

1,608

1,531

1,557

(2)

798
2,012
1,276

–
1,509
2,321(2)

810
1,343
1,193

428
1,442
2,024

818
1,231
1,087

(1)
50
7

(1)
9
10

– NM NM
9
5
(1)
15

1,328
2,053

18,071
$ 1,414

7.3%(2)

16,868(3)
$ 629

15,684
783
$
4.8%
3.6%(3)

7
125

8
(20)

(1) Other revenues includes FedEx Trade Networks.
(2) Includes $48 million related to an Airline Stabilization Act charge, described herein,
which reduced operating margin by 25 basis points.
(3) The $428 million of business realignment costs, described herein, reduced operating
margin by 244 basis points.

The following table compares selected statistics (in thousands,
except yield amounts) for the years ended May 31:

2005

2004

2003

Percent Change
2004/
2003

2005/
2004

Package Statistics (1)

Average daily package volume (ADV):

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

domestic ADV

Total ADV
Revenue per package (yield):

1,184

1,179

1,176

680
958

2,822
437
3,259

667
925

2,771
396
3,167

679
897

2,752
369
3,121

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

$ 19.77
10.37
11.46

$ 18.49
10.00
10.99

$ 18.18
9.95
11.02

U.S. domestic
composite

Composite

14.69
55.07

13.94
50.75

13.82
46.59

package yield

20.10

18.55

17.69

Freight Statistics (1)

Average daily freight pounds:

U.S.
International

8,885
1,914

8,519
2,093

8,969
2,174

Total average daily
freight pounds

Revenue per pound (yield):

10,799

10,612

11,143

U.S.
International
Composite

$ 0.82
0.78

0.74
0.74

$ 0.69
0.72

freight yield

0.81

0.74

0.69

–

2
4

2
10
3

7
4
4

5
9

4
(9)

11
5

–

(2)
3

1
7
1

2
1
–

1
9

(5)
(4)

(5)

7
3

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

FedEx Express Segment Revenues
FedEx Express segment total revenues increased in 2005, princi-
pally due to higher IP revenues (particularly in Asia, U.S. outbound
and Europe) and higher U.S. domestic package revenues. During
2005, IP revenues experienced solid growth of 20% on volume
growth of 10% and a 9% increase in yield. Asia experienced
strong average daily volume growth during 2005 while outbound
shipments from the United States, Europe and Latin America con-
tinued to improve. IP yield increased across all regions during
2005 due to higher fuel surcharge revenue, an increase in inter-
national average weight per package and favorable exchange
rate differences, partially offset by a decline in international aver-
age rate per pound.

MANAGEMENT’S DISCUSSION AND ANALYSIS

U.S. domestic composite yield increased 5% in 2005, due to
higher fuel surcharge revenue and increases in average weight
per package and average rate per pound. U.S. domestic volumes
at FedEx Express increased 2% in 2005 after several years of flat
to negative growth. Freight revenue increased during 2005 due to
higher yields and growth in U.S. domestic freight volumes, which
more than offset the effect of lower international freight volumes.
As capacity is added to our international network, we may see
higher international freight volume until higher yielding IP ship-
ment traffic grows into added capacity. We continue to prioritize
sales efforts to fill the space on international flights with higher
yielding IP shipments. In January 2005, we implemented an aver-
age list price increase of 4.6% on FedEx Express U.S. domestic
shipments and U.S. outbound international shipments, while we
lowered our fuel surcharge index by 2%.

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 of
7% and yield growth of 9%. Asia experienced strong average
daily volume growth, 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 com-
posite 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
volumes 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 inter-
national shipments, an average list price increase of 2.5%, along
with certain surcharge increases, became effective January
2004. Freight revenue increased in 2004 due to increased yields
related to service mix, despite lower volumes.

Fuel surcharge revenue increased in both 2005 and 2004 primar-
ily due to higher jet fuel prices. Our fuel surcharge is indexed to
the spot price for jet fuel. Using this index, the U.S. domestic and
outbound fuel surcharge and the international fuel surcharges
ranged as follows for the years ended May 31:

U.S. Domestic and Outbound Fuel Surcharge

2005

2004

2003

Low
High
Average

International Fuel Surcharges

Low
High
Average

6.00%
13.00
8.96

3.00%
6.50
4.38

2.00%
5.50
3.54

3.00
13.00
8.60

2.00
6.50
3.97

–
6.00
3.08

FedEx Express Segment Operating Income
Operating income at the FedEx Express segment increased
significantly during 2005 as we benefited from a full year of sav-
ings from our business realignment programs (versus a half year
in 2004.) During 2004, operating income included $428 million of
costs related to these programs. The savings from these pro-
grams were reflected in lower growth of salaries and employee
benefits costs in 2005. During 2005, increases in revenues, sav-
ings from our business realignment programs, the timing of
adjustments to fuel surcharges and ongoing cost control efforts
more than offset higher fuel costs, incentive compensation, pur-
chased transportation and maintenance costs and an Airline
Stabilization Act charge of $48 million (included in other operat-
ing expenses). During 2004, operating income decreased 20%
due to business realignment costs (partially offset by approxi-
mately $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
ongoing cost control efforts during the year.

Salaries and benefits were higher during 2005 due to higher
incentive compensation, increased medical benefit costs and
wage rate increases. The increase in 2004 was due to higher
incentive compensation, increased pension costs and wage rate
increases. The increases in both 2005 and 2004 were partially off-
set by savings from the business realignment initiatives.

Purchased transportation costs increased at a greater rate than
total revenues in both 2005 and 2004, led by IP volume growth
requirements and higher utilization of contract pickup and deliv-
ery services. Higher fuel costs incurred by these transportation
providers were partially passed through and included as part of
purchased transportation costs which also led to the dispropor-
tionate increase in 2005. Higher maintenance costs during 2005
were driven by higher utilization of aircraft and a higher average
age of certain types of our aircraft. Other expense increased due
primarily to the Airline Stabilization Act charge of $48 million,
higher aviation insurance expense and increased expenses to
support volume growth. The 2004 increase in maintenance costs
was primarily due to the timing of scheduled aircraft mainte-
nance events, higher utilization of aircraft related to USPS
volumes (included in U.S. freight revenues) and a higher average
age of certain types of aircraft. Intercompany charges increased
during both 2005 and 2004 due to higher salaries and benefits and
advertising and promotion expenses at FedEx Services.

FEDEX CORPORATION

During 2005, fuel costs were higher due to a 47% increase in the
average price per gallon of aircraft fuel, while gallons consumed
increased 4%. Fuel costs were higher in 2004 due to a 10%
increase in the average price per gallon of aircraft fuel, as fuel
consumption was flat. However, fuel surcharge revenue more
than offset higher jet fuel prices in both 2005 and 2004.

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 17 to the accompanying consol-
idated 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 decreased in both
2005 and 2004, reflecting lower capital spending over the past
several years.

FedEx Express Segment Outlook
We expect continued revenue growth at FedEx Express during
2006 in both the domestic and international markets. Revenue
increases will be led by IP, where we expect volume and yield
growth, particularly in Asia, U.S. outbound and Europe. We
expect slight U.S. domestic revenue growth at FedEx Express,
driven by expected increases in U.S. domestic yields.

We expect continued operating margin improvement at FedEx
Express during 2006. We anticipate additional improvement
due to IP volume growth, with solid incremental margins and
increased yields benefiting from a favorable product mix trend.
In addition, programs to improve operational efficiency are
expected to contribute to margin growth, partially offset by
costs associated with international route expansion. Capital
expenditures at FedEx Express are expected to be higher in 2006
due to planned aircraft purchases to support IP volume growth
and vehicle replacements.

FedEx Express recently launched the express industry’s first
direct flight from mainland China to Europe. The westbound
around-the-world flight launched in late 2005 was the initial
phase of a plan which extends our global connectivity leadership.
We believe these investments will enhance our growth prospects
for these highly profitable services.

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:

2005

2004

2003

Percent Change
2004/
2003

2005/
2004

Revenues
Operating expenses:
Salaries and

$ 4,680

$3,910

$ 3,581

employee benefits

845
Purchased transportation 1,791
Rentals
122
Depreciation and
amortization

Fuel
Maintenance and repairs
Business realignment

costs

Intercompany charges
Other

Total operating
expenses
Operating income
Operating margin
Average daily package

740
1,465
98

154
16
95

1
432
387

709
1,327
88

155
11
89

14
22
24

14
200
16

4
10
11

(1)
45
7

– NM NM
25
12
7
30

346
362

176
48
110

–
482
502

4,076
$ 604

3,388
$ 522

3,087
$ 494

12.9%

13.4%

13.8%

volume (1)

2,609

2,285

2,168

Revenue per package

(yield) (1)

$ 6.68

$ 6.48

$ 6.25

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

20
16

10
6

FedEx Ground Segment Revenues
Revenues increased during 2005 principally due to strong volume
growth. While the rise in average daily volume was led by con-
tinued growth of our home delivery service, average daily
volumes increased across virtually all of our service lines. The
results of operations of FedEx SmartPost have been included
from the date of its acquisition, September 12, 2004, and con-
tributed nominally to revenue growth in 2005.

Revenue growth in 2004 was due to higher volumes and yield
improvement, led by increased usage of our home delivery ser-
vice. Average daily volume increased at a lower rate in 2004 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.

Yield increased during 2005 primarily due to higher extra service
revenue and general rate increases, partially offset by higher
customer discounts and a lower average weight per package. In
January 2005, we implemented an average list price increase of
2.9%. Additionally, we reintroduced an indexed fuel surcharge for
all shipments effective January 3, 2005. The fuel surcharge had
been previously discontinued on January 5, 2004.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Yield increased in 2004 primarily due to general rate increases
and an increase in extra services revenue, partially offset by
higher customer discounts and the elimination of the fuel sur-
charge in January.

FedEx Ground reintroduced an indexed fuel surcharge in January
2005 that ranged between 1.8% and 2.5% and averaged 2.0% dur-
ing 2005. Before its elimination in January 2004, our dynamic fuel
surcharge ranged between 1.3% and 1.5% and averaged 1.4%
during 2004. In 2003, the dynamic fuel surcharge ranged between
0.8% and 2.0% and averaged 1.2%.

On September 12, 2004, we acquired the assets and assumed
certain liabilities of FedEx SmartPost (formerly known as Parcel
Direct), a division of a privately held company, for $122 million in
cash. FedEx SmartPost is a leading small-parcel consolidator and
broadens our portfolio of services by allowing us to offer a cost
effective option for delivering low-weight, less time-sensitive
packages to U.S. residences through the U.S. Postal Service. The
financial results of FedEx SmartPost are included in the FedEx
Ground segment from the date of its acquisition and were not
material to 2005 results.

FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 16% during
2005 as revenue growth and field productivity more than offset
higher operating expenses. Purchased transportation increased
at a higher rate than revenue primarily due to the impact of higher
fuel costs on contractor settlements, the acquisition of FedEx
SmartPost and a change in the mix of business at FedEx Supply
Chain Services. Salaries and employee benefits, as well as other
operating costs, increased at a faster rate in 2005 principally due
to increases in staffing and facilities to support volume growth.
Intercompany charges increased during 2005 due to higher
salaries, advertising and promotion expenses and incentive
compensation at FedEx Services. During 2005, FedEx Supply
Chain Services incurred a $10 million charge in other operating
expenses for the termination of a vendor agreement. The
decrease in operating margin is primarily attributable to operat-
ing losses at FedEx SmartPost, the increase in purchased
transportation and the one-time charge associated with FedEx
Supply Chain Services.

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, and their allocation of these costs
increased accordingly. Furthermore, the cost of providing
these services increased due to higher salaries and benefits,
advertising and promotions expenses at FedEx Services.
Operating margin for the segment was also negatively affected
by operating losses at FedEx Supply Chain Services.

FedEx Ground Segment Outlook
We expect the FedEx Ground segment to have continued revenue
growth in 2006, led by increased home delivery and next-business-
day package volume and modest yield improvement. Yield
improvements are expected from list price increases, improve-
ment in residential and commercial delivery area surcharges and
the full year of the fuel surcharge.

Slight growth in operating margin is expected in 2006, driven by
productivity gains and yield improvements. During 2006, we
expect continued growth in capital spending at FedEx Ground as
we continue to focus on network capacity expansion. During
2006, the multi-phase expansion plan includes the addition of one
new hub, five hub expansions and relocations of 35 ground and
16 home delivery facilities. We will continue to vigorously defend
challenges to our independent contractor model as described in
Note 19 to the accompanying consolidated financial statements.

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

2005

2004

2003

Percent Change
2004/
2003

2005/
2004

$3,217

$2,689

$2,443

Revenues
Operating expenses:

Salaries and employee

benefits

Purchased transportation
Rentals and landing fees
Depreciation and
amortization

Fuel
Maintenance and repairs
Intercompany charges
Other

Total operating
expenses
Operating income
Operating margin
Average daily LTL shipments

1,650
315
99

1,427
254
100

1,303
224
105

102
257
128
26
286

92
172
116
21
263

88
154
115
17
244

2,863
$ 354

2,445
$ 244

2,250
$ 193

11.0%

9.1%

7.9%

16
24
(1)

11
49
10
24
9

17
45

9
–

10
13
(5)

5
12
1
24
8

9
26

4
1

(in thousands)

63
Weight per LTL shipment (lbs) 1,132
LTL yield (revenue per
hundredweight)

$15.48

58
1,127

56
1,114

$14.23

$ 13.40

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

FEDEX CORPORATION

A project to rebrand our two regional LTL carriers under the com-
mon name “FedEx Freight” began in the fourth quarter of 2002
and was completed in 2005. Cumulative rebranding expenses
totaled $41 million ($10 million in 2005). These costs, which were
expensed as incurred, consisted primarily of incremental costs
for rebranding tractors and trailers.

FedEx Freight Segment Outlook
We expect revenue growth to continue in 2006 due to both LTL
yield improvement and LTL shipment growth. A general rate
increase and a stable industry-pricing environment are expected
to contribute to LTL yield improvement. An LTL general rate
increase of 5.6% was implemented on May 16, 2005. Our LTL
no-fee money-back guarantee (initiated in September 2003)
continues to be a differentiating feature in the marketplace. The
guarantee has been well received and we expect it to contribute
to sustained market share growth throughout 2006. We also
expect continued consolidation among LTL carriers and sus-
tained positive economic conditions to provide additional
opportunities for FedEx Freight to promote its regional service
and other freight solutions.

FEDEX KINKO’S SEGMENT
The following table shows revenues, operating expenses and
operating income and operating margin (dollars in millions) for
the year ended May 31, 2005 and for the three months ended May
31, 2005 and 2004:

Year Ended
2005

Three Months Ended
2004

2005

Percent
Change

$2,066

$553

$ 521

Revenues
Operating expenses:

Salaries and employee

benefits

Rentals
Depreciation and
amortization

Maintenance and repairs
Intercompany charges
Other operating expenses:

Supplies, including paper

742
427

138
55
6

189
100

38
19
1

185
115

33
9
–

and toner

Other

Total operating expenses
Operating income
Operating margin

305
293
1,966
$ 100

4.8%

73
92
512
41
7.4%

69
71
482
$ 39

7.5%

2
(13)

15
111
NM

6
30
6
5

FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 20% in 2005 due to
year-over-year growth in average daily LTL shipments (9%) and
LTL yield (9%). Market share gains, driven in part by brand
awareness, along with a stronger economy, contributed to the
significant increase in average daily LTL shipments. LTL yield
grew during 2005, reflecting incremental fuel surcharges due to
higher fuel prices, higher rates, growth in our interregional freight
service and a stable pricing environment. The LTL fuel surcharge,
which applies to the majority of our revenue, is based on the
average of the national U.S. on-highway average prices for a gal-
lon of diesel fuel, as published by the Department of Energy.
Using this index, the approximate LTL fuel surcharge ranged as
follows for the years ended May 31:

Low
High
Average

2005

7.60%
14.00
10.90

2004

3.20%
8.40
5.30

2003

2.10%
6.70
3.50

The increase in FedEx Freight segment revenues during 2004 was
primarily due to increases in LTL yield and LTL average daily
shipments, which reflected a strengthening economy and market
share gains. LTL yield grew 6% during the year, reflecting incre-
mental fuel surcharges due to higher fuel prices, growth in our
interregional freight service and higher rates.

FedEx Freight Segment Operating Income
FedEx Freight segment operating income increased 45% in 2005
primarily due to LTL yield and shipment growth, as well as our
ability to manage costs during a period of substantial growth.
Higher fuel surcharges and productivity gains contributed to
improved operating margin in 2005 in spite of higher salaries and
employee benefits, purchased transportation and fuel costs.
Purchased transportation costs increased due to growth in our
interregional freight service, efforts to supplement our linehaul
operations and higher fuel surcharges from contract carriers.

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 management and operational productivity gains outpaced
increased incentive compensation, fuel, insurance and claims,
pension and healthcare costs. Purchased transportation costs
increased primarily due to the growth of our interregional freight
service. Operating margin improved more than 100 basis points
in 2004 on strong revenue growth.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FedEx Kinko’s Segment Operating Results
The results of operations for 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
its efforts on integrating a full range of FedEx service offerings
and attracting a larger share of the commercial document
solutions and business services markets.

During 2005, revenues reflect commission revenue from FedEx
Express and FedEx Ground for package acceptance, continued
international expansion and strong demand for signs and
graphics and retail services, while the demand for domestic copy
products has weakened. Domestic commission revenue from
package acceptance experienced significant growth for the
fourth quarter of 2005 as FedEx Kinko’s benefited from a full quar-
ter of shipping services and the conversion of certain FedEx
World Service Centers to FedEx Kinko’s Ship Centers. In the
fourth quarter of 2005, international revenue grew, led by strong
growth in Asia in part due to favorable exchange rate differences.
Revenue for retail services and signs and graphics continued to
grow, increasing 10% in the fourth quarter of 2005, while domes-
tic copy product revenue declined 2%.

Fourth quarter 2005 operating margin benefited from a significant
increase in commission revenue from package acceptance.
Additionally, our efforts to optimize production machines within
each store location resulted in reduced rental costs. Operating
margin during all periods presented was adversely impacted by
integration activities, including facility rebranding expenses,
ramp-up costs associated with the offering of packaging and ship-
ping services and the centralization of FedEx Kinko’s corporate
support operations. Rebranding costs associated with the inte-
gration of FedEx Kinko’s totaled $11 million in 2005, $5 million in the
fourth quarter of 2005 and $3 million for the fourth quarter of 2004.

FedEx Kinko’s Segment Outlook
During 2006, we expect FedEx Kinko’s revenue growth, which will
be led by the full year impact of the transition of FedEx World
Service Centers to FedEx Kinko’s Ship Centers, the growth of
current lines of business and the expansion of our retail network.

We expect the 2006 operating margin will be comparable to 2005,
as the completion of rebranding and increased productivity
efforts will be partially offset by costs related to growth initiatives.
Decreased capital spending is expected during 2006 due pri-
marily to the completion of rebranding and other integration
initiatives. Capital spending in 2006 will be directed toward
systems enhancements and new retail locations.

FINANCIAL CONDITION

LIQUIDITY
Cash and cash equivalents totaled $1.039 billion at May 31, 2005,
compared to $1.046 billion at May 31, 2004 and $538 million at
May 31, 2003. The following table provides a summary of our cash
flows for the years ended May 31 (in millions):

Operating activities:

Net income
Noncash charges and credits
Changes in operating

assets and liabilities

Net cash provided by

operating activities

Investing activities:

Business acquisitions,
net of cash acquired
Capital expenditures and

2005

2004

2003

$ 1,449
1,662

$ 838
1,516

$ 830
1,805

666

(764)

3,117

3,020

1,871

(122)

(2,410)

–

other investing activities

(2,226)

(1,252)

(1,490)

Net cash used in investing

activities

Financing activities:

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

financing activities

Net (decrease) increase in

(2,348)

(3,662)

(1,490)

–
(791)
–
(84)
99

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

–
(10)
(186)
(60)
82

(776)

1,150

(174)

cash and cash equivalents

(7)

$ 508

$ 207

Cash Provided by Operating Activities.The $97 million increase
in cash flows from operating activities in 2005 was largely attrib-
utable to increased earnings and improvement in accounts
receivable collections, partially offset by a $140 million increase
in voluntary contributions to our U.S. domestic pension plans
and a decrease in the growth of operating liabilities. The $1.149
billion increase in cash flows from operating activities in 2004
was largely attributable to lower pension contributions. Working
capital management in 2004 more than offset cash paid related
to the business realignment initiatives.

Pension Contributions.Net cash provided by operating activities
reflects voluntary U.S. domestic pension plan contributions of
$460 million during 2005 (compared to $320 million during 2004 and
$1.1 billion during 2003).

FEDEX CORPORATION

Cash Used for Business Acquisitions.During the second quarter
of 2005, we acquired FedEx SmartPost for $122 million in cash.
On February 12, 2004, we acquired all of the common stock of
FedEx Kinko’s for approximately $2.4 billion in cash. See “Debt
Financing Activities” for further discussion of the FedEx Kinko’s
acquisition. See Note 3 of the accompanying audited financial
statements for further discussion of these acquisitions.

Cash Used for Capital Investments. Capital expenditures were
higher in 2005 than the prior year primarily due to planned aircraft
expenditures at FedEx Express to support IP volume growth. We
also made opportunistic purchases of aircraft in order to take
advantage of favorable pricing conditions in the used aircraft
market for certain strategically valuable aircraft types. 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. See “Capital Resources”
for further discussion.

Debt Financing Activities. During 2005, $600 million of senior
unsecured notes matured and were repaid and $45 million in tax
exempt bonds were called and prepaid. During 2004, $250 million
of senior unsecured notes matured and were repaid and $25 mil-
lion of unsecured debt at FedEx Express matured and was repaid.
Our commercial paper program is backed by unused commit-
ments under two revolving credit agreements, totaling $1 billion,
and any commercial paper borrowings reduces the amount
available under these agreements. In 2004, 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 six-month, $2 billion credit agreement. 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”) regulations. Net
proceeds from these borrowings were used to repay our com-
mercial paper borrowings backed by the six-month facility. We
canceled the six-month credit facility in March 2004. At May 31,
2005 and 2004, no commercial paper borrowings were outstand-
ing and the entire $1 billion under the revolving credit agreements
was available for future borrowings.

Our credit agreements contain covenants requiring us to main-
tain certain fixed charge coverage and leverage ratios. We are
in compliance with all covenants of our credit agreements and
do not expect the covenants to significantly affect our operations
or ability to pay dividends. In addition, we use capital and operat-
ing leases to finance a portion of our aircraft as well as our other
facility and equipment needs. For more information regarding our
credit facilities, see Note 7 of the accompanying consolidated
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.We did not repurchase any
shares in 2005. During 2004, our Board of Directors authorized us
to buy back a total of 15 million shares of common stock. During
the first half of 2004, we repurchased 2.6 million shares at an
average price of $68.14 per share, which decreased cash flows
by approximately $179 million. 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. Based on our current
financing strategy, we are issuing new shares in connection
with our equity compensation programs rather than utilizing
treasury shares. A total of 5.75 million shares remains under
existing share repurchase authorizations.

Dividends.Dividends paid in 2005, 2004 and 2003 were $84 million,
$66 million and $60 million, respectively. On May 27, 2005, our
Board of Directors declared a dividend of $0.08 per share of com-
mon stock, an increase of $0.01 per share. The dividend was paid
on July 1, 2005 to stockholders of record as of the close of busi-
ness on June 10, 2005. 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 our existing cash and
cash equivalents, cash flow from operations, our commercial
paper program, revolving bank credit facilities and shelf registra-
tion statement with the SEC will adequately meet our working
capital and capital expenditure needs for the foreseeable future.

In the past we have been successful in obtaining investment
capital, both domestically and internationally, although the mar-
ketplace for such capital can become restricted depending on a
variety of economic factors. We believe the capital resources
available to us provide flexibility to access the most efficient
markets for our financing needs, including capital acquisitions,
and are adequate for our future capital needs.

We have a senior unsecured debt credit rating from Standard &
Poor’s of BBB and a commercial paper rating of A-2. Moody’s
Investors Service has assigned us a senior unsecured debt credit
rating of Baa2 and a commercial paper rating of P-2. Moody’s and
Standard & Poor’s both characterize our ratings outlook as
“stable.” If our credit ratings drop, our interest expense may
increase; similarly, we anticipate that our interest expense may
decrease if our credit ratings are raised. If our commercial paper
ratings drop below current levels, we may have difficulty utilizing
the commercial paper market. If our senior unsecured debt rat-
ings drop below investment grade, our access to financing may
become more limited.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

The following table compares capital expenditures by asset
category and reportable segment for the years ended May 31
(in millions):

2005

2004

2003

Percent Change
2004/
2003

2005/
2004

Aircraft and related

equipment

Facilities and sort

equipment

Information technology
Vehicles
Other equipment
Total capital

expenditures
FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment
Other, principally
FedEx Services
Total capital

$ 990

$ 372

$ 762

166

(51)

496
331
261
158

332
249
212
106

254
273
116
106

$ 2,236
$ 1,195
456
217
152

$1,271
$ 592
314
130
36

$1,511
$ 917
252
139
–

49
33
23
49

31
(9)
83
–

76
102
45
67

(16)
(35)
25
(6)
NM NM

216

199

203

(2)

continue to invest in infrastructure upgrades and productivity-
enhancing technologies, the multi-year capacity expansion of the
FedEx Ground network and growth and replacement vehicle
needs at FedEx Freight. We currently expect to fund our 2006
capital requirements with cash generated from operations.

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.
While we also pursue market opportunities to purchase aircraft
when they become available, we must make commitments
regarding our airlift requirements years before aircraft are actu-
ally 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 contin-
uing to invest strategically in growing service lines.

CONTRACTUAL CASH OBLIGATIONS
As required under SEC rules and regulations, the following table
sets forth a summary of our contractual cash obligations as of
May 31, 2005. Certain of these contractual obligations are
reflected in our balance sheet, while others are disclosed as
future obligations under accounting principles generally accepted
in the United States. Except for the current portion of long-term
debt and capital lease obligations, this table does not include
amounts already recorded on our balance sheet as current
liabilities at May 31, 2005. Accordingly, this table is not meant to
represent a forecast of our total cash expenditures
for any of the periods presented.

Payments Due by Fiscal Year

expenditures

$ 2,236

$1,271

$1,511

(16)

(in millions)

2006

2007

2008

2009

2010

There-
after

Total

Capital expenditures during 2005 were 76% higher than the prior
year primarily due to planned aircraft expenditures at FedEx
Express to support IP volume growth. We also made opportunis-
tic purchases of aircraft in order to take advantage of favorable
pricing conditions in the used aircraft market for certain strategi-
cally valuable aircraft types. Also, additional investments were
made in the FedEx Ground and FedEx Freight networks to support
growth in customer demand. In addition, capital expenditures
during 2005 include a full year of FedEx Kinko’s. Capital expendi-
tures were 16% lower in 2004, with the year-over-year decrease
due to lower aircraft expenditures at FedEx Express, partially off-
set by an
in network capacity expansion
at FedEx Ground. FedEx Ground continues to expand its network
and is on track to increase daily package pickup capacity to
approximately five million by 2010.

increase

Our capital expenditures are expected to be approximately $2.5
billion in 2006, with much of the year-over-year increase coming
from planned aircraft and vehicle expenditures at FedEx Express
to support future IP volume growth and replace vehicles. We also

Amounts reflected in Balance Sheet:
Long-term debt $ 265 $ 844 $
Capital lease

– $ 499 $

– $

787 $ 2,395

obligations(1)

121

130

479

Other cash obligations not reflected in Balance Sheet:
Unconditional
purchase
obligations(2)

595

312

930

665

253

861

3,616

Interest on

long-term debt

107
Operating leases 1,646 1,518
Total

2,137
65
83
14,005
1,356 1,191 1,045
$ 3,097 $2,803 $ 1,791 $2,449 $1,801 $10,691 $22,632

1,664
7,249

135

(1) Capital lease obligations represent principal and interest payments.
(2) See Note 18 to the accompanying consolidated 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.

FEDEX CORPORATION

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

We have other long-term liabilities reflected in our balance sheet,
including deferred income taxes, nonqualified pension and
postretirement healthcare liabilities and self-insurance accruals.
The payment obligations associated with these liabilities are not
reflected in the table above due to the absence of scheduled
maturities. Therefore, the timing of these payments cannot be
determined, except for amounts estimated to be payable within
12 months 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. In addition, we have committed to modify our DC10
aircraft for passenger-to-freighter and two-man cockpit config-
urations, which is reflected in the table above. Commitments to
purchase aircraft in passenger configuration do not include the
attendant costs to modify these aircraft for cargo transport.
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.

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

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, 2005. 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 or 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 information
concerning minimum lease payments required for our operating
leases to calculate our debt capacity. In addition, we have guar-
antees under certain operating leases, amounting to $37 million
as of May 31, 2005, for the residual values of vehicles and facili-
ties at the end of the respective operating lease periods.
Although we expect that some of these leased assets will have a
residual value at the end of the lease term that is 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 material
amounts under the terms of these guarantee arrangements.
Accordingly, no material accruals have been recognized for
these guarantees.

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 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 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, a significant amount of assets in the pension plans,

MANAGEMENT’S DISCUSSION AND ANALYSIS

and the payout of pension benefits will occur over an extended
period in the future. For example, only 6% of the participants cov-
ered under our principal pension plan are retired and currently
receiving benefits and the average remaining service life of our
employees approximates 14 years (normal retirement is at age
60). Total pension cost increased approximately $18 million in 2005
and approximately $115 million in 2004 primarily due to changes to
these estimates. Pension cost in 2006 for our U.S. domestic plans
is expected to increase $63 million. Pension cost is included in
the salaries and employee benefits caption in our consolidated
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
Recognized actuarial losses
Other amortization

2005

$ 417
579
(707)
60
12
$ 361

2004

$ 376
490
(597)
62
12
$ 343

2003

$ 374
438
(594)
–
10
$ 228

Following is a discussion of the estimates we consider most
critical 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 and the accumulated benefit obliga-
tion) 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 pension cost. A decrease in the
discount rate has a negative effect on pension expense.

This assumption is highly sensitive, as the following table
illustrates:

Sensitivity (in millions)(2)

Discount

2006
2005
2004
2003

Rate(1)

n/a
6.285%
6.78%
6.99%

Expense

$2.1
1.8
1.7
1.0

ABO

n/a
$14
11
10

(1) The discount rate in effect at the end of the fiscal years affects the current year’s
accumulated benefit obligation (ABO) and the succeeding year’s pension expense.
(2) Sensitivities show the impact on expense and the ABOof a one-basis-point change in
the discount rate.

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 actu-
aries, who calculate the yield on a theoretical portfolio of
high-grade corporate bonds (rated Aa or better) with cash flows
that generally match our expected benefit payments. To the extent
scheduled bond proceeds exceed the estimated benefit payments
in a given period, the yield calculation assumes those excess

proceeds are reinvested at the one-year forward rates implied by
the Citigroup Pension Discount Curve. This methodology is con-
sistently 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 available in the marketplace.

Plan Assets.Pension plan assets are invested primarily in listed
securities. Our pension plans hold only a minimal investment in
FedEx common stock that is entirely at the discretion of third-
party pension fund investment managers. 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
required to be the expected future long-term rate of earnings on
plan assets. At February 28, 2005, with approximately $8.7 billion
of plan assets, a one-basis-point change in this assumption for
our domestic pension plans affects pension cost by approxi-
mately $870,000 (a decrease in the assumed expected long-term
rate of return increases pension expense). We have assumed a
9.10% compound geometric long-term rate of return on our prin-
cipal U.S. domestic pension plan assets since 2004 and anticipate
using the same assumption for 2006.

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 geometric return we
can reasonably 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 asset/liability studies performed by third-party professional
investment advisors and actuaries. These studies project our esti-
mated 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.

We last performed a detailed asset/liability study for 2004 based
on the introduction of the Portable Pension Account (discussed
below) which will reduce our liability duration over time, the sig-
nificant additional contributions we made into the plans and the

FEDEX CORPORATION

continuing deterioration of the equity markets. That study sup-
ported a long-term return on assets of 9.10%. The results of
this study were reaffirmed for 2005 and 2006 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

Percent of Plan Assets

Actual

Target

53%
20
2
75
15
10
100%

53%
17
5
75
15
10
100%

The actual compound geometric return on our pension plan
assets was 10.0%, net of investment manager fees, for the 15-
year period ended February 28, 2005. In 2003, we assumed a
long-term rate of return on pension assets of 10.1%. We reduced
that estimate to 9.1% in 2004. The 100-basis-point decrease in the
expected long-term rate of return for 2004 negatively affected our
2004 pension cost by approximately $65 million.

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 pension cost by approximately $106 million. The
application of the calculated-value method approximated the
result from applying the market-value method for 2005.

Salary Increases. The assumed future increase in salaries and
wages is also a key estimate in determining pension cost.
Generally, we correlate changes in estimated future salary
increases to changes in the discount rate (since that is an indi-
cator of general inflation and cost of living adjustments) and
general estimated levels of profitability (since most incentive
compensation is a component of pensionable wages). While the
discount rate has declined in each of the past three years, we
have held the estimated rate of future salary increases at 3.15%
because the current rate is deemed to be at or near the floor
based on current pay structures and improving our performance.
For 2006 pension cost, a one-basis-point change in the rate of
estimated future salaries affects pension cost by approximately
$1.1 million (a decrease in this rate will decrease pension cost).
We currently expect to hold this assumption constant for deter-
mination of 2006 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, 2005 and 2004 (in millions):

2005

2004

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

$ 8,534
399
$ 8,933
$ 10,401
8,826
(1,575)

2,500
100
$ 1,025

$ 1,272
(247)
(63)
63
$ 1,025

$
$

489
194

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

1,694
113
$ 907

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

$ 335
$ 136

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) have significantly impacted the funded status of our
plans. However, our plans remain adequately funded to provide
benefits to our employees as they come due and current benefit
payments are nominal compared to our total plan assets (benefit
payments for 2005 were approximately 2% of plan assets).
Furthermore, our plan assets were sufficient to fully fund the accu-
mulated benefit obligation of our qualified U.S. domestic plans in
2005 and 2004 despite the continuing decline in the discount rate.

Although not legally required, we made $460 million in contribu-
tions to our qualified U.S. pension plans in 2005 compared to total
contributions of $320 million in 2004. Currently, we do not expect
any contributions for 2006 will be legally required. However, we
currently expect to make tax-deductible voluntary contributions
to our qualified plans in 2006 at levels comparable to 2005.

Cumulative unrecognized actuarial losses were approximately
$2.5 billion through February 28, 2005, compared to $1.7 billion at
February 29, 2004. 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, unless they are below
a corridor amount, these unrecognized actuarial losses are

MANAGEMENT’S DISCUSSION AND ANALYSIS

required to be amortized and recognized in future periods. For
example, projected U.S. domestic plan pension expense for 2006
includes $107 million of amortization of these actuarial losses
versus $60 million in 2005 and $62 million in 2004.

The net amounts reflected in our balance sheet related to pen-
sion 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 accrue benefits
under the Portable Pension Account formula. Eligible employees
as of May 31, 2003 were able to choose between continuing 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 con-
version 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 liabilities and costs.

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 inter-
est credit rate will vary from year to year based on the selected
U.S. Treasury index, with a 4% minimum and a maximum based
on a government rate. Employees are fully vested on completion
of five years of service.

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, 2005 there were
approximately $1.1 billion of self-insurance accruals reflected in
our balance sheet ($1.03 billion at May 31, 2004). At May 31, 2004
and 2003, approximately 43% of these accruals are classified as
current liabilities.

The measurement of these costs requires the consideration of
historical cost experience, judgments about the present and
expected levels of cost per claim and retention levels. We
account for these costs primarily 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. We self-insure
up to certain limits that vary by operating company and type of
risk. Periodically, we evaluate the level of insurance coverage
and adjust insurance levels based on risk tolerance and pre-
mium expense. Historically, it has been infrequent that incurred
claims exceeded our self-insured limits. Other acceptable meth-
ods of accounting for these accruals include measurement of
claims outstanding and projected payments based on historical
development factors.

We believe the use of actuarial methods to account for these
liabilities provides a consistent and effective way to measure
these highly judgmental accruals. However, the use of any esti-
mation 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 severity, insurance retention levels and other
factors can materially affect the estimates for these liabilities.

LONG-LIVED ASSETS
Property and Equipment. Our key businesses are capital inten-
sive with more than 45% of our total assets 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 or are
part of the cost of acquiring the asset are expensed as incurred.
However, consistent with industry practice, we capitalize certain
aircraft-related major maintenance costs on one of our aircraft fleet
types and amortize these costs over their estimated service lives.

FEDEX CORPORATION

The future commitments for operating leases are not reflected as
a liability in our balance sheet because these 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. We believe we have well-defined and controlled
processes for making this evaluation, including obtaining third-
party appraisals for material transactions.

On February 7, 2005, the SEC posted to its Web site a letter from
the Chief Accountant of the SEC to the AICPA Center for Public
Company Audit Firms discussing three lease accounting issues
that have been the cause of several recent public company
restatements. Of specific concern is the appropriate accounting
for: (1) the amortization of leasehold improvements by a lessee in
an operating lease with lease renewals; (2) the pattern of recog-
nition of rent when the lease term in an operating lease contains a
period where there are free or reduced rents (commonly referred
to as “rent holidays”); and (3) incentives related to leasehold
improvements provided by a landlord/lessor to a tenant/lessee in
an operating lease. We evaluated our accounting for the three
lease accounting issues identified by the SEC and believe that we
are in compliance with the SEC’s guidance.

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. Accounting standards require that we do not
amortize goodwill but review it for impairment on at least
an annual basis.

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 margins; 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 pro-
ject expected results of operations. Using this data, we complete
a separate fair-value analysis for each of our reporting units.
Changes in forecasted 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. We performed our annual impairment tests in
the fourth quarter of 2005. Because the fair value of each of our
reporting units exceeded its carrying value, including goodwill,
no impairment charge was necessary.

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 relatively long
periods (the majority of aircraft costs are depreciated over 15 to 18
years), we periodically evaluate whether adjustments to our esti-
mated service lives or salvage values are necessary to ensure
these estimates properly match the economic use of the asset.
This evaluation may result in changes in the estimated lives and
residual values used to depreciate our aircraft and other equip-
ment. These estimates affect the amount of depreciation expense
recognized in a period and, ultimately, the gain or loss on the dis-
posal of the asset. Historically, gains and losses on operating
equipment have not been material (typically less than $10 million
annually). However, such amounts may differ materially in the
future due to technological obsolescence, accident frequency,
regulatory changes and other factors beyond our control.

Because of the lengthy lead times for aircraft manufacture and
modifications, we must anticipate volume levels and plan our
fleet requirements years in advance and make commitments for
aircraft based on those projections. These activities create risks
that asset capacity may exceed demand and that an impairment
of our assets may occur. In addition, opportunistic aircraft pur-
chases (primarily aircraft in passenger configuration) that have
not been placed in service totaled $348 million and $106 million at
May 31, 2005 and 2004, respectively. We plan to modify these
assets in the future to place them into operation.

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 undiscounted 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 significant 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 pro-
jections 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 2005,
2004 or 2003.

Leases. We utilize operating leases to finance certain of our
aircraft and facilities. Such arrangements 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 8 to the accompanying consolidated
financial statements, at May 31, 2005 we had approximately $14
billion (on an undiscounted basis) of future commitments for pay-
ments under operating leases. The weighted average remaining
lease term of all operating leases outstanding at May 31, 2005
was approximately six years.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Intangible Asset with an Indefinite Life. We have an intangible
asset of $567 million associated with the Kinko’s trade name. This
intangible asset is not amortized because it has an indefinite
remaining useful life. We must review this asset for impairment on
at least 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 materially affect this estimate. However, once an impairment
of this intangible asset has been recorded, it cannot be reversed.
We performed our annual impairment test in the fourth quarter of
2005 which determined that the fair value of the trade name
exceeded its carrying value; therefore, no impairment charge
was necessary. The recoverability of recorded intangible assets,
including goodwill, at FedEx Kinko’s is dependent upon achieving
projected expansion and growth plans for this reporting unit.

REVENUE RECOGNITION
We believe the policies adopted to recognize revenue are critical
because an understanding of the accounting applied in this area
is fundamental to assessing our overall financial performance and
because revenue and revenue growth are key measures of finan-
cial performance in the marketplace. Our businesses 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 account-
ing 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
business services, logistics and trade services businesses, upon
the completion of services. Transportation industry practice
includes four acceptable methods for revenue recognition for
shipments in process at the end of an accounting period, two of
which are predominant: (1) recognize all revenue and the related
delivery costs when shipments are delivered or (2) recognize a
portion of the revenue earned for shipments 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 balance 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.

Our contract logistics, global trade services and certain trans-
portation businesses engage in some transactions wherein they
act as agents. Revenue from these transactions is recorded on a
net basis. Net revenue includes billings to customers less third-
party charges, including transportation or handling costs, fees,
commissions, taxes and duties.

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. There is a time lag between the completion of
a shipment and the generation of an invoice that varies by cus-
tomer and operating company. Accordingly, unbilled revenue is
recognized through estimates using actual shipment volumes and
historical trends of shipment size and length of haul. These esti-
mates are adjusted in subsequent months to the actual amounts
invoiced. Due to strong system controls and shipment visibility,
there is a low level of subjectivity inherent in these accrual
processes and the estimates have historically not varied signifi-
cantly from actual amounts subsequently invoiced.

Shipments in Process. The majority of our shipments have short
cycle times; so, less than 5% of a total month’s revenue is typi-
cally 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
completion) and current trends in our average price for the
respective services. We believe these estimates provide a rea-
sonable approximation of the actual revenue earned at the end
of a period.

Future Adjustments to Revenue and Accounts Receivable.In the
transportation industry, pricing that is put in place may be subse-
quently adjusted due to continued negotiation of contract terms,
earned discounts triggered by certain shipment volume thresh-
olds, and/or no fee money-backed guarantee refunds caused by
on-time service failures. We account for estimated future rev-
enue adjustments through a reserve against accounts receivable
that takes into consideration historical experience and current
trends. While write-offs related to bad debts do occur from time
to time, they are small compared to our total revenue and
accounts receivable balances due to the small value of individual
shipping transactions, sales to a large number of customers, our
short credit terms and our credit and collection practices.

For 2005 and 2004, revenue adjustments as a percentage of total
revenue averaged approximately 3%. Due to our reliable on-time
service, close communication with customers, strong revenue
systems, and minimal volume discounts in place, we have main-
tained a consistently low revenue adjustment percentage. A
one-basis-point change in the revenue adjustment percentage
would increase or decrease revenue adjustments by approxi-
mately $3 million. For 2005 and 2004, bad debt expense associated
with credit losses has averaged approximately 0.4% of total
revenue and reflects our strong credit management processes.

FEDEX CORPORATION

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. Effective January 3, 2005, we
reintroduced an indexed fuel surcharge for FedEx Ground ship-
ments. 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 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.

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 approxi-
mately $125 million of outstanding floating-rate borrowings at
May 31, 2005. We have not employed interest rate hedging to mit-
igate the risks with respect to these borrowings. A hypothetical
10% increase in the interest rate on our outstanding floating-rate
borrowings would not have a material effect on our results of
operations. As disclosed in Note 7 to the accompanying consoli-
dated financial statements, we had outstanding fixed-rate,
long-term debt (exclusive of capital leases) of $2.3 billion at both
May 31, 2005 and May 31, 2004. 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 $44 million as of May 31, 2005 and $49
million as of May 31, 2004. 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 transac-
tions 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 2005 and 2004, 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, 2005, 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 $116 million for
2006 (the comparable amount in the prior year was approxi-
mately $79 million). This increase is primarily due to the strong
growth of our international operations. This theoretical calcula-
tion assumes that each exchange rate would change in the same
direction relative to the U.S. dollar.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD-LOOKING STATEMENTS

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

• economic conditions in the domestic and international markets

in which we operate;

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

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

• our ability to manage our cost structure for capital expenditures
and operating expenses and match them, especially those 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 maintain or 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, customer demand for our various ser-
vices or the prices we obtain for our services;

• our ability to successfully defend against challenges to our

independent contractor model;

• 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

• 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 guaran-
tee of future events or circumstances and those future events or
circumstances may not occur. You should not place undue
reliance on the forward-looking statements, which speak only as
of the date of this report. We are under no obligation, and we
expressly disclaim any obligation, to update or alter any forward-
looking statements, whether as a result of new information,
future events or otherwise.

FEDEX CORPORATION

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes,
among other things, defined policies and procedures for conducting and governing our business, sophisticated information systems for
processing transactions and a properly staffed, professional internal audit department. Mechanisms are in place to monitor the
effectiveness of our internal control over financial reporting and actions are taken to correct deficiencies identified. Our procedures for
financial reporting include the active involvement of senior management, our Audit Committee and a staff of highly qualified financial and
legal professionals.

Management, with the participation of our principal executive and financial officers, assessed our internal control over financial
reporting as of May 31, 2005, the end of our fiscal year. Management based its assessment on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).

Based on this assessment, management has concluded that our internal control over financial reporting was effective as of
May 31, 2005.

Our independent registered public accounting firm, Ernst & Young LLP, audited management’s assessment and the effectiveness of our
internal control over financial reporting. Ernst & Young has issued their report concurring with management’s assessment, which is
included in this Annual Report.

FEDEX CORPORATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
FedEx Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial
Reporting, that FedEx Corporation maintained effective internal control over financial reporting as of May 31, 2005, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). FedEx Corporation’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting
based on our audit.

We conducted our audit 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 effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over finan-
cial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted account-
ing principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding pre-
vention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that FedEx Corporation maintained effective internal control over financial reporting as of
May 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, FedEx Corporation maintained, in
all material respects, effective internal control over financial reporting as of May 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the con-
solidated balance sheets of FedEx Corporation as of May 31, 2005 and 2004 and 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, 2005 of
FedEx Corporation and our report dated July 12, 2005 expressed an unqualified opinion thereon.

Memphis, Tennessee
July 12, 2005

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
Other

OPERATING INCOME
Other Income (Expense):

Interest expense
Interest income
Other, net

Income Before Income Taxes
Provision for Income Taxes
NET INCOME
BASIC EARNINGS PER COMMON SHARE
DILUTED EARNINGS PER COMMON SHARE

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

2005

$29,363

11,963
2,935
2,314
1,462
2,317
1,680
–
4,221
26,892

2,471

(160)
21
(19)
(158)
2,313
864
$ 1,449
4.81
$
4.72
$

Years ended May 31,

2004

$ 24,710

10,728
2,407
1,918
1,375
1,531
1,523
435
3,353
23,270

1,440

(136)
20
(5)
(121)
1,319
481
838
2.80
2.76

$
$
$

2003

$ 22,487

9,778
2,155
1,803
1,351
1,396
1,398
–
3,135
21,016

1,471

(124)
6
(15)
(133)
1,338
508
830
2.79
2.74

$
$
$

FEDEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

ASSETS
Current Assets

Cash and cash equivalents
Receivables, less allowances of $125 and $151
Spare parts, supplies and fuel, less allowances of $142 and $124
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
Computer and electronic equipment
Vehicles
Facilities and 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; 302 million shares issued for 2005

and 300 million shares issued for 2004

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.

May 31,

2005

2004

$ 1,039
3,297
250
510
173
5,269

7,610
3,366
3,893
1,994
5,154
22,017
12,374
9,643

2,835
1,272
1,385
5,492
$20,404

369
1,275
1,739
1,351
4,734
2,427

1,206

828
621
532

400
68
3,655

30
1,241
8,363
(17)
9,617
29
9,588
$20,404

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

7,001
3,395
3,537
1,919
4,459
20,311
11,274
9,037

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

750
1,062
1,615
1,380
4,807
2,837

1,106

768
591
503

426
60
3,454

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

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
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
Capital expenditures
Business acquisitions, net of cash acquired
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 (used in) provided by financing activities
CASH AND CASH EQUIVALENTS
Net (decrease) 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.

2005

Years ended May 31,
2004

2003

$ 1,449

838

830

1,462
101
63
36

(235)
(26)
(118)
365
20
3,117

(2,236)
(122)
12
(2)
(2,348)

(791)
–
99
(84)
–
–
(776)

1,375
106
(8)
43

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

(1,271)
(2,410)
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)

(7)
1,046
$ 1,039

508
538
$ 1,046

207
331
538

FEDEX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ INVESTMENT
AND COMPREHENSIVE INCOME

(In millions, except share data)

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
Net income
Foreign currency translation adjustment,

net of deferred taxes of $5

Minimum pension liability adjustment,

net of deferred taxes of $1

Total comprehensive income
Cash dividends declared ($0.29 per share)
Employee incentive plans and other

(2,767,257 shares issued)

Amortization of deferred compensation
BALANCE AT MAY 31, 2005

Common
Stock

$30
–

Additional
Paid-in
Capital

$ 1,144
–

Accumulated
Other
Comprehensive
Loss

$(53)
–

Retained
Earnings

$ 5,465
830

Treasury
Stock

Deferred
Compensation

$ (20)
–

$(21)
–

Total

$ 6,545
830

–

–
–

–
–
30
–

–

–
–

–
–
30
–

–

–
–

(56)
–
1,088
–

–

–
–

(9)
–
1,079
–

–

–
(45)

–
–
6,250
838

–

–
(87)

–
–
7,001
1,449

–

(87)

(14)

–
–

–
–
(30)
–

(16)

–
–

–
–
(46)
–

–

(186)
–

181
–
(25)
–

–

(179)
–

204
–
–
–

–

–
–

(16)
12
(25)
–

–

–
–

(18)
15
(28)
–

–

(14)
853
(186)
(45)

109
12
7,288
838

(16)
822
(179)
(87)

177
15
8,036
1,449

2
1,478
(87)

–
–
$30

162
–
$ 1,241

–
–
$8,363

–
–
$(17)

(1)
–
$ (1)

(16)
16
$(28)

145
16
$ 9,588

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

FEDEX CORPORATION

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 through operating
companies that compete collectively and are managed collabo-
ratively under the respected FedEx brands. 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”), a leading
provider of small-package ground delivery services; 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 ser-
vices company; FedEx SmartPost, Inc. (“FedEx SmartPost”), a
small-parcel consolidator; 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, marketing and
information technology functions, primarily for FedEx Express
and FedEx Ground.

FISCAL YEARS
Except as otherwise specified, references to years indicate
our fiscal year ended May 31, 2005 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.

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

CREDIT RISK
We routinely grant credit to many of our customers for transporta-
tion 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 and current eval-
uation of the composition of accounts receivable. 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 money-back service guarantees and billing correc-
tions. Delivery costs are accrued as incurred.

ADVERTISING
Advertising costs are expensed as incurred and are classified in
other operating expenses. Advertising expenses were $326 million,
$284 million and $249 million in 2005, 2004 and 2003, 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 or are part of the cost of acquiring the asset.
Maintenance and repairs are charged to expense as incurred,
except for certain aircraft-related major maintenance costs on one
of our aircraft fleet types, which are capitalized and amortized over
their estimated service lives. The net book value of these capital-
ized major maintenance costs at May 31, 2005 and 2004 was $60
million and $71 million, respectively. We capitalize certain direct
internal and external costs associated with the development of
internal use software. Gains and losses on sales of property used
in operations are classified with depreciation and amortization.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. For income tax
purposes, depreciation is generally computed using accelerated
methods. The depreciable lives and net book value of our property
and equipment is as follows (dollars in millions):

Range

Net Book Value at May 31,
2004

2005

15 to 25 years

$ 3,948

$ 3,587

Wide-body aircraft

and related equipment
Narrow-body and feeder

aircraft and
related equipment
Package handling and

5 to 15 years

ground support equipment

3 to 30 years

Computer and

electronic equipment

Vehicles
Facilities and other

3 to 10 years
3 to 12 years
2 to 40 years

330

938

758
718
2,951

332

1,135

769
711
2,503

Substantially all property and equipment have no material resid-
ual values. The majority of aircraft costs are depreciated on a
straight-line basis over 15 to 18 years. We periodically evaluate
the estimated service lives and residual values used to depreci-
ate our property and equipment. This evaluation may result
in changes in the estimated lives and residual values. Such
changes did not materially affect depreciation expense in any
period presented. Depreciation expense, excluding gains and
losses on sales of property and equipment used in operations,
was $1.438 billion, $1.361 billion and $1.334 billion in 2005, 2004 and
2003, respectively. Depreciation and amortization expense
includes amortization of assets under capital lease.

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 if the asset
is actively under construction. Capitalized interest was $22 mil-
lion in 2005, $11 million in 2004 and $16 million in 2003.

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
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 theoretical
bond models that select high-grade corporate bonds with cash
flows that correlate to the expected payouts of the applicable lia-
bilities. 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 by comparing the fair value of each reporting unit
with its carrying value (including attributable goodwill). Fair value
is determined using a discounted cash flow methodology. Unless
circumstances otherwise dictate, we perform our annual impair-
ment testing in the fourth quarter.

INTANGIBLE ASSETS
Amortizable intangible assets include customer relationships,
technology assets and contract-based intangibles acquired
in business combinations. Amortizable intangible assets are
amortized over periods ranging from 2 to 15 years, either on a
straight-line basis or an accelerated basis depending upon the
pattern in which the economic benefits are realized. Non-
amortizing intangible assets consist of 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 lia-
bility method is used to account for income taxes, which requires
deferred taxes to be recorded at the statutory rate 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 2005, 2004, and 2003 were approximately $636 million,
$430 million and $140 million, respectively, which represent only a
portion of total results associated with international shipments.

FEDEX CORPORATION

December 2004. Because we could no longer conclude that col-
lection of the entire $119 million recorded in 2002 was probable,
we recorded a charge of $48 million in the second quarter of 2005,
representing the DOT’s repayment demand of $29 million and the
write-off of a $19 million receivable. We are vigorously contesting
this determination judicially and will continue to aggressively pur-
sue our compensation claim. Should any additional amounts
ultimately be recovered by FedEx Express on this matter, they will
be recognized in the period that they are realized.

STOCK COMPENSATION
We currently apply Accounting Principles Board Opinion No.
(“APB”) 25, “Accounting for Stock Issued to Employees,” and its
related interpretations to measure compensation expense for
stock-based compensation plans. As a result, no compensation
expense is recorded for stock options when the exercise price is
equal to or greater than the market price of our common stock at
the date of grant. For awards of restricted stock and to deter-
mine the pro forma effects of stock options set forth below, we
recognize the fair value of the awards ratably over their explicit
service period.

If compensation cost for stock-based compensation plans had
been determined under Statement of Financial Accounting
Standards No. (“SFAS”) 123, “Accounting for Stock Based
Compensation,” stock option compensation expense, pro forma
net income and basic and diluted earnings per common share for
2005, 2004 and 2003 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

2005

$1,449

Years ended May 31,
2004

$ 838

2003

$ 830

–

40
$1,413

$ 4.81
$ 4.69
$ 4.72
$ 4.60

37
$ 811

$ 2.80
$ 2.71
$ 2.76
$ 2.68

34
$ 796

$ 2.79
$ 2.67
$ 2.74
$ 2.63

See Note 10 for a discussion of the assumptions underlying the
pro forma calculations above.

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 benefits.
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 liability, employee healthcare claims and
long-term disability are included in accrued expenses. We self-
insure up to certain limits that vary by operating company and
type of risk. Periodically, we evaluate the level of insurance
coverage and adjust insurance levels based on risk tolerance
and premium expense.

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 that became amendable on May 31, 2004.
In accordance with applicable labor law, we will continue to
operate under our current agreement while we negotiate with
our pilots. Contract negotiations with the pilots’ union began in
March 2004 and are ongoing. We cannot estimate the financial
impact, if any, the results of these negotiations may have on our
future results of operations.

AIRLINE STABILIZATION ACT CHARGE
During the second quarter of 2005, the United States Department
of Transportation (“DOT”) issued a final order in its administra-
tive review of the FedEx Express claim for compensation under
the Air Transportation Safety and System Stabilization Act
(“Act”). Under its interpretation of the Act, the DOT determined
that FedEx Express was entitled to $72 million of compensation,
an increase of $3 million from its initial determination. Because
we had previously received $101 million under the Act, the
DOT demanded repayment of $29 million which was made in

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 gains and
(losses) in accumulated other comprehensive loss were $14 mil-
lion, ($13) million and ($13) million at May 31, 2005, 2004 and
2003, respectively.

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;
tax liabilities; accounts receivable allowances; obsolescence of
spare parts; contingent liabilities; and impairment assessments
on long-lived assets (including goodwill and indefinite lived
intangible assets).

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the Financial Accounting Standards
Board (“FASB”) issued SFAS 123R, “Share-Based Payment.”
SFAS 123R is a revision of SFAS 123 and supersedes APB 25. The
new standard requires companies to record compensation
expense for stock-based awards using a fair value method and
is effective for annual periods beginning after June 15, 2005
(effective in 2007 for FedEx). Compensation expense will be
recorded over the requisite service period, which is typically the
vesting period of the award. We plan to adopt this standard
using the modified prospective basis.

The impact of the adoption of SFAS 123R cannot be predicted at
this time because it will depend on levels of share-based payments
granted in the future, as well as the assumptions and the fair value
model used to value them, and the market value of our common
stock. If applied to 2005 and 2004, the impact of that standard
would have materially approximated that of SFAS 123 as presented
in Note 1 (reducing earnings per diluted share in 2005 and 2004 by
$0.12 and $0.08, respectively.) SFAS 123R also requires the bene-
fits of tax deductions in excess of recognized compensation cost

to be reported as a financing cash flow, rather than as an operat-
ing cash flow as required under current standards. Based on
historical experience, we do not expect the impact of adopting
SFAS 123R to be material to our reported cash flows.

NOTE 3: BUSINESS COMBINATIONS

FEDEX SMARTPOST
On September 12, 2004, we acquired the assets and assumed
certain liabilities of FedEx SmartPost (formerly known as Parcel
Direct), a division of a privately held company, for $122 million in
cash. FedEx SmartPost is a leading small-parcel consolidator and
broadens our portfolio of services by allowing us to offer a cost
effective option for delivering low-weight, less time-sensitive
packages to U.S. residences through the U.S. Postal Service. The
financial results of FedEx SmartPost are included in the FedEx
Ground segment from the date of its acquisition and are not mate-
rial to reported or pro forma results of operations of any period.

The excess cost over the estimated fair value of the assets
acquired and liabilities assumed (approximately $20 million) has
been recorded as goodwill, which is entirely attributed to FedEx
Ground. The allocation of the purchase price to the fair value of
the assets acquired, liabilities assumed and goodwill was based
primarily on internal estimates and independent appraisals.

The purchase price was allocated as follows (in millions):

Current assets, primarily accounts receivable
Property and equipment
Intangible assets
Goodwill
Current liabilities

Total purchase price

$ 10
91
10
20
(9)
$122

FEDEX KINKO’S
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
document solutions and business services. Its network of world-
wide locations offers access to color printing, finishing and
presentation services, Internet access, videoconferencing,
outsourcing, managed services, Web-based printing and docu-
ment 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
assets and contract-based intangibles.

FEDEX CORPORATION

Approximately $1.8 billion was recorded as goodwill, as the acqui-
sition 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 network of retail locations. Because this was an
acquisition of stock, goodwill is not deductible for tax purposes.
Approximately $130 million of the goodwill was attributed to the
FedEx Express segment and $70 million was attributed to the
FedEx Ground segment based on the expected increase in each
segment’s fair value as a result of the acquisition.

The purchase price was allocated as follows (in millions):

Current assets, primarily accounts receivable

and inventory

Property and equipment
Goodwill
Intangible asset with an indefinite life
Amortizing intangible assets
Other long-term assets
Total assets aquired

Current liabilities
Deferred income taxes
Long-term capital lease obligations and other

long-term liabilities
Total liabilities assumed
Total purchase price

$ 241
328
1,751
567
82
52
3,021
(298)
(267)

(36)
(601)
$ 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 our plans for continued use of the Kinko’s brand.

Amortizable intangible assets. These intangible assets represent
the fair value associated with the business expected to be gen-
erated from existing customer relationships and contracts as of
the acquisition date. The fair value of these assets was primarily
determined 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
an 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 customer attrition patterns.

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 addi-
tional 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):

Years ended May 31,

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

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
realignment costs and a $37 million, net of tax, nonrecurring tax benefit at FedEx.

We paid a portion of the purchase price from available cash bal-
ances. To finance the remainder of the purchase price, we issued
commercial paper backed by a six-month $2 billion credit 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 facility. We canceled the six-month credit
facility in March 2004. See Note 7 for further discussion.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4: GOODWILL AND INTANGIBLES

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

(1) FedEx Kinko’s acquisition.
(2) FedEx SmartPost acquisition.

May 31,
2003
$ 397
–
666
–
$1,063

Goodwill
Acquired During
2004
$ 130(1)
70(1)
–
1,539
$1,739

May 31,
2004
$ 527
70
666
1,539
$ 2,802

Goodwill
Acquired During
2005
$ –

20(2)
–
–
$ 20

Purchase
Adjustments and
Other
$ 1
–
–
12
$13

May 31,
2005

$ 528
90
666
1,551
$ 2,835

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

May 31, 2005
Gross Carrying Accumulated
Amount Amortization

May 31, 2004
Gross Carrying Accumulated
Amount Amortization

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

Amortizable

intangible assets
Customer relationships
Contract related
Technology related

and other
Total

Non-amortizing

intangible asset
Kinko’s trade name

$ 77
79

51
$ 207

$(16)
(50)

(23)
$(89)

$ 72
79

45
$196

$ (3)
(43)

(17)
$ (63)

Accrual balances at

May 31, 2003
Charged to expense
Cash paid
Amounts charged to other

–
202
(8)

assets/liabilities(2)

(194)

$ 567

$ –

$567

$ –

Amortization expense for intangible assets was $26 million in
2005, $14 million in 2004 and $13 million in 2003. Estimated amorti-
zation expense for the next five years is as follows (in millions):

2006
2007
2008
2009
2010

$ 25
23
21
18
16

NOTE 5: BUSINESS REALIGNMENT COSTS

During the first half of 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 were limited to eligible U.S. salaried staff employees
and managers. Approximately 3,600 employees accepted offers
under these programs. Costs were also incurred for the elimina-
tion of certain management positions, primarily at FedEx Express
and FedEx Services, based on the staff reductions from the vol-
untary 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 activities were
recognized in the period incurred.

–
158
(152)

$ –
75
(31)

–
435
(191)

–

(22)

(216)

$ 22

$ 28

Accrual balances
at May 31, 2004

–

(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.
(2) Amounts charged to other assets and liabilities relate primarily to incremental pension
and healthcare benefits.

No material costs related to these programs were incurred dur-
ing 2005. At May 31, 2004, we had remaining business realignment
related accruals of $28 million. The remaining accruals relate to
management severance agreements, which are payable over
future periods. At May 31, 2005, these accruals had decreased to
$7 million due predominantly to cash payments made during 2005.

NOTE 6: SELECTED CURRENT LIABILITIES

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

May 31,

2005

2004

Accrued Salaries and Employee Benefits

Salaries
Employee benefits
Compensated absences

Accrued Expenses

Self-insurance accruals
Taxes other than income taxes
Other

$ 171
689
415
$1,275

$ 483
288
580
$1,351

$ 163
496
403
$1,062

$ 442
291
647
$1,380

FEDEX CORPORATION

NOTE 7: LONG-TERM DEBT AND OTHER FINANCING
ARRANGEMENTS

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

May 31,

Unsecured debt
Capital lease obligations
Other debt, interest rates of 2.46% to 9.98%

due through 2008

Less current portion

2005

$ 2,255
401

140
2,796
369
$ 2,427

2004

$2,855
534

198
3,587
750
$2,837

At May 31, 2005 and 2004, we had two revolving bank credit facil-
ities totaling $1 billion which were undrawn. One revolver
provides for $750 million through September 28, 2006. The second
is a 364-day facility providing for $250 million which expires on
September 22, 2005 and is extendable for one additional year
through September 21, 2006. Interest rates on borrowings 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 certain 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 facilities and
reduces the amounts available under the facilities. As of May 31,
2005 and 2004, no commercial paper borrowings were outstand-
ing and the entire $1 billion under the revolving credit agreements
was available.

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

May 31,

2005

2004

Senior unsecured debt

Interest rate of three-month LIBOR

(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

Other notes, due through 2007

–
200
500
499

499
299
239
19
$2,255

$ 600
200
500
499

499
299
239
19
$2,855

To finance our acquisition of FedEx Kinko’s in 2004, we entered
into a six-month $2 billion credit facility. 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 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.

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 facil-
ities and equipment. These bonds require interest payments at
least annually, with principal payments due at the end of the
related lease agreements. In addition, during 2004, FedEx
Express amended two leases for MD11 aircraft, 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 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. Two of these aircraft
were paid off in 2005 when the purchase obligation became due.

Other long-term debt includes $125 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 17
for further discussion.

We issue other financial instruments in the normal course of
business to support our operations. Letters of credit at May 31,
2005 were $580 million. The amount unused under our letter of
credit facility totaled approximately $39 million at May 31, 2005.
This facility expires in May of 2006. These instruments are gen-
erally required under certain U.S. self-insurance programs and
are used in the normal course of international operations. The
underlying liabilities 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 capi-
tal leases, for the five years subsequent to May 31, 2005, are as
follows (in millions):

2006
2007
2008
2009
2010

$265
844
–
499
–

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-term debt, exclusive of capital leases, had carrying values of
$2.4 billion and $3.0 billion at May 31, 2005 and 2004, respectively,
compared with estimated fair values of approximately $2.6 billion
and $3.2 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 8: 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

Vehicles
Other, principally facilities

Less accumulated amortization

2005

$232

167
36
167
602
329
$273

2004

$ 344

168
39
230
781
390
$ 391

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

A summary of future minimum lease payments under noncan-
celable operating leases (principally aircraft, retail locations and
facilities) with an initial or remaining term in excess of one year
at May 31, 2005 is as follows (in millions):

2006
2007
2008
2009
2010
Thereafter

Aircraft and Related
Equipment

Facilities and
Other

$ 607
606
585
555
544
4,460
$ 7,357

$ 1,039
912
771
636
501
2,789
$ 6,648

Total

$ 1,646
1,518
1,356
1,191
1,045
7,249
$14,005

The weighted-average remaining lease term of all operating leases
outstanding at May 31, 2005 was approximately six years. While
certain of our lease agreements contain covenants governing the
use of the leased assets or require us to maintain certain levels of
insurance, none of our lease agreements include material finan-
cial covenants or limitations.

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

NOTE 9: PREFERRED STOCK

Our Certificate of Incorporation authorizes the Board of Directors,
at its discretion, to issue up to 4,000,000 shares of preferred stock.
The stock is issuable in series, which may vary as to certain
rights and preferences, and has no par value. As of May 31, 2005,
none of these shares had been issued.

For years ended May 31,

NOTE 10: COMMON STOCKHOLDERS’ INVESTMENT

Minimum rentals
Contingent rentals

2005

$1,793
235
$2,028

2004

$1,560
143
$1,703

2003

$1,522
107
$1,629

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

Contingent rentals are based on equipment usage.

A summary of future minimum lease payments under capital leases
at May 31, 2005 is as follows (in millions):

2005
2004
2003

–
2,625,000
3,275,000

Average Price
Per Share

–
68.14
56.66

2006
2007
2008
2009
2010
Thereafter

Less amount representing interest
Present value of net minimum lease payments

$ 121
22
99
11
96
130
479
78
$ 401

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, 2005 and 2004, respectively, 18,111 and 4,760 shares remained
outstanding in treasury.

FEDEX CORPORATION

STOCK COMPENSATION PLANS

Stock Options Plan
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 discre-
tion 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, 2005, there were 3,589,600 shares available for future
grants under these plans.

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.

The weighted-average fair value of these grants, calculated
using the Black-Scholes valuation method under the assumptions
indicated below, was $20.37, $18.02 and $17.12 per option in 2005,
2004 and 2003, respectively.

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.

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 three years ended May 31, and a discus-
sion of our methodology for developing each of the assumptions
used in the valuation model:

Expected lives
Expected volatility
Risk-free interest rate
Dividend yield

2005

4 years

27%
3.559%
0.3215%

2004
4 years

2003
4 years

35%
32%
2.118%
4.017%
0.3102% 0.3785%

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%.

The following table summarizes information about our 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

2005

2004

2003

Weighted-
Average
Exercise
Price

$46.39
76.21
39.14
63.27
51.96
42.34

17,349,307
2,718,651
(2,540,324)
(168,252)
17,359,382
9,660,334

Weighted-
Average
Exercise
Price

$38.88
64.96
31.05
46.71
46.39
38.28

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
33.58

17,306,014
3,261,800
(2,951,154)
(301,544)
17,315,116
8,829,515

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about stock options outstanding at May 31, 2005:

Range of
Exercise Price

$15.34 – $23.01
23.17 – 34.76
35.00 – 52.50
53.46 – 80.19
84.98 – 100.20
15.34 – 100.20

Options Outstanding

Weighted-
Average
Remaining
Contractual Life

1.1 years
2.7 years
5.6 years
7.5 years
9.5 years
6.3 years

Number
Outstanding

595,402
2,035,885
4,861,199
9,464,196
402,700
17,359,382

Weighted-
Average
Exercise
Price

$19.35
29.84
40.23
62.99
94.12
51.96

Options Exercisable

Number
Exercisable

595,402
2,035,885
3,886,522
3,142,525
–
9,660,334

Weighted-
Average
Exercise
Price

$19.35
29.84
39.85
57.89
–
42.34

Total equity compensation shares outstanding or available for grant represented approximately 6.8% and 7.1% of total outstanding com-
mon and equity compensation shares and equity compensation shares available for grant at May 31, 2005 and May 31, 2004, respectively.

Stock Options Expensed. Under our business realignment programs discussed in Note 5, we recognized approximately $6 million and
$16 million of expense ($4 million and $10 million, net of tax) during 2005 and 2004, respectively, 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 over the explicit service period.

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

Awarded
Forfeited

2005

2004

2003

Weighted-
Average
Fair Value

$80.24
55.41

218,273
21,354

Weighted-
Average
Fair Value

$ 67.11
43.41

282,423
10,000

Weighted-
Average
Fair Value

$ 47.56
48.01

343,500
17,438

At May 31, 2005, there were 550,634 shares available for future awards under these plans. Annual compensation cost for the restricted
stock plans was approximately $16 million for 2005, $14 million for 2004, and $12 million for 2003.

NOTE 11: 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 fol-
lows (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

2005

$1,449
301

18
(12)
307
$ 4.81
$ 4.72

2004

$ 838
299

19
(14)
304
$ 2.80
$ 2.76

2003

$ 830
298

15
(10)
303
$ 2.79
$ 2.74

FEDEX CORPORATION

NOTE 12: INCOME TAXES

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

2005

2004

2003

Current provision
Domestic:
Federal
State and local

Foreign

Deferred provision (benefit)

Domestic:
Federal
State and local

Foreign

$634
65
103
802

67
(4)
(1)
62
$864

$371
54
85
510

(22)
(7)
–
(29)
$481

$ 112
28
39
179

304
25
–
329
$ 508

A reconciliation of the statutory federal income tax rate to the
effective 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

2005

35.0%

2004

35.0%

2003

35.0%

1.7
0.7
37.4%

2.3
(0.8)
36.5%

2.6
0.4
38.0%

The 37.4% effective tax rate in 2005 was favorably impacted ($12
million tax benefit or $0.04 per diluted share) by the one-time
reduction of a valuation allowance on foreign tax credits arising
from certain of our international operations as a result of the pas-
sage of the American Jobs Creation Act of 2004 and by a lower
effective state tax rate. The lower 36.5% effective rate in 2004
was primarily attributable to the favorable decision in the tax
case discussed below, stronger than anticipated international
results and the results of tax audits in 2004. Our stronger than
anticipated international results, along with other factors,
increased our ability to credit income taxes paid to foreign gov-
ernments on foreign income against U.S. income taxes on the
same income, thereby mitigating the exposure to double taxation.

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

2005

2004

Deferred

Deferred
Tax Assets Tax Liabilities

Deferred

Deferred
Tax Assets Tax Liabilities

$ 301
397
311
319

54
(42)
$1,340

$1,455
453
–
128

–
–
$2,036

$ 310
386
297
277

47
(52)
$1,265

$1,372
406
–
104

–
–
$1,882

The net deferred tax liability of $696 million for 2005 and $617
million for 2004 has been classified in the balance sheet as a
current deferred tax asset of $510 million and $489 million, and
a noncurrent deferred tax liability of $1,206 million and $1,106
million, respectively.

The valuation allowance primarily represents amounts reserved
for operating loss and tax credit carryforwards, which expire over
varying periods starting in 2006. 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 decrease in the valuation
allowance of $10 million was principally due to the reduction of the
valuation allowance against certain foreign tax credits as a result
of the passage of the American Jobs Creation Act of 2004, noted
above, partially offset by an increase in the valuation allowance on
certain capital loss and net operating loss carryover items.

In February 2005, the Sixth Circuit Court of Appeals reaffirmed the
favorable ruling from the U.S. District Court in Memphis regarding
the tax treatment of jet engine maintenance costs, previously
received during the first quarter of 2004. The period during which
the U.S. Department of Justice could appeal the decision lapsed
in May 2005, making the decision final. The district court held that
these costs were ordinary and necessary business expenses and
properly deductible in our income tax returns. Neither the Sixth
Circuit’s decision nor the government’s decision not to pursue an
appeal had any impact on our financial condition, results of oper-
ations or tax rate during 2005. As a result of the District Court
ruling, we recognized a one-time benefit of $26 million, net of tax,
or $0.08 per diluted share in the first quarter of 2004, primarily
related to the reduction of accruals and the recognition of inter-
est earned on amounts previously paid to the IRS. These
adjustments affected both net interest expense ($30 million pre-
tax) and income tax expense ($7 million). We expect to receive a
refund payment of approximately $80 million (before income taxes
of approximately $16 million) from the U.S. government in the first
quarter of 2006, which is included in current receivables.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13: 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 provided
under the traditional formula are based on average earnings and
years of service. Under the Portable Pension Account, the retire-
ment 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 previ-
ously accrued under the traditional pension benefit formula and
continue to receive the benefit of future salary increases on ben-
efits 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 28, 2005 was as follows:

Domestic equities
International equities
Private equities
Total equities

Long duration fixed income securities
Other fixed income securities

Actual

Target

53%
20
2
75
15
10
100%

53%
17
5
75
15
10
100%

The investment strategy for pension plan assets is to utilize a
diversified 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 and the expected long-term rate of
return on plan assets. A substantial increase in the value of plan
assets as a result of investment gains and contributions at the
measurement date for 2005 pension expense (February 27, 2004)
almost completely offset the effect of a slightly lower discount rate
and other actuarial losses.

Management reviews the assumptions used to measure pension
costs on an annual basis. Economic and market conditions at the
measurement date impact these assumptions from year to year
and it is reasonably possible that material changes in pension
cost may be experienced in the future.

Actuarial gains or losses are generated to the extent that actual
results differ from those assumed. These actuarial gains and
losses are amortized over the remaining average service lives
of our active employees if they exceed a corridor amount in
the aggregate.

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 2004 supported the reasonableness of our 9.10%
return assumption used for 2004 based on our liability duration
and market conditions at the time we set this assumption (in
2004). The results of this study were reaffirmed for 2005 by our
third-party professional investment advisors and actuaries.

Postretirement Healthcare Plans
Certain of our subsidiaries offer medical, dental and vision cov-
erage to eligible U.S. retirees and their eligible dependents. U.S.
employees covered by the principal plan become eligible for
these benefits at age 55 and older, if they have permanent, con-
tinuous 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.

FEDEX CORPORATION

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, 2005 and a statement of the funded status as of May 31, 2005 and 2004 (in millions):

Accumulated Benefit Obligation (“ABO”)

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

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

Actual return 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
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

Pension Plans

2005

$ 8,933

$ 8,683
417
579
907
(194)
–
9
$ 10,401

$ 7,783
746
489
(194)
2
$ 8,826

$ (1,575)
2,500
104
(4)
$ 1,025

$ 1,272
(247)
(63)
52
11
$ 1,025

2004

$ 7,427

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

$ 5,825
1,751
335
(136)
8
$ 7,783

$ (900)
1,694
118
(5)
$ 907

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

Postretirement
Healthcare Plans

2005

2004

$ 496
37
32
–
(36)
–
8
$ 537

–
–
28
(36)
8
–

$(537)
(1)
4
–
$(534)

–
(534)
–
–
–
$(534)

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

–
–
16
(23)
7
–

$ (496)
(1)
1
–
$ (496)

–
(496)
–
–
–
$ (496)

(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 5 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our pension plans included the following components at May 31, 2005 and 2004 (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

2005

2004

$ 8,534
$ 9,937
8,699
$(1,238)
2,414
86
(5)
$ 1,257

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

U.S. Plans

Nonqualified

2005

$ 166
$ 181
–
$ (181)
27
14
–
$ (140)

2004

$ 166
$ 179
–
$ (179)
32
20
–
$ (127)

International Plans
2004
2005

Total

2005

2004

$ 233
$ 283
127
$ (156)
59
4
1
$ (92)

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

$ 8,933
$10,401
8,826
$ (1,575)
2,500
104
(4)
$ 1,025

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

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 actuar-
ial present value of benefits attributable to employee service
rendered 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. Although not legally required, we made
$460 million in contributions to our qualified U.S. pension plans in
2005 compared to total contributions of $320 million in 2004.
Currently, we do not expect any contributions for 2006 will be

legally required. However, we currently expect to make tax-
deductible voluntary contributions to our qualified plans in 2006
at levels comparable to 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 aggregat-
ing approximately $399 million at May 31, 2005 and $358 million at
May 31, 2004, with assets of $127 million at May 31, 2005 and $105
million at May 31, 2004. Plans with this funded status resulted in
the recognition of a minimum pension liability in our balance
sheets. This minimum liability was $63 million at May 31, 2005 and
$67 million at May 31, 2004.

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
Recognized actuarial losses
Other amortization

2005

$ 417
579
(707)
60
12
$ 361

Pension Plans
2004

$ 376
490
(597)
62
12
$ 343

2003

$ 374
438
(594)
–
10
$ 228

Postretirement Healthcare Plans
2004

2005

$ 37
32
–
–
(1)
$ 68

$ 35
25
–
–
–
$ 60

2003

$ 27
25
–
–
(2)
$ 50

Increases in pension costs from the prior year are primarily the result of changes in discount rate.

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

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

2005

6.285%
3.15
9.10

Pension Plans
2004

6.78%
3.15
9.10

2003

6.99%
3.15
10.10

Postretirement Healthcare Plans
2004

2003

2005

6.16%
–
–

6.57%
–
–

6.75%
–
–

FEDEX CORPORATION

The expected long-term rate of return assumptions for each
asset class are selected based on historical relationships
between the asset classes and the economic and capital mar-
ket environments, updated for current conditions. Additional
information about our pension plan can be found in the Critical
Accounting Policies section of Management’s Discussion
and Analysis.

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

NOTE 14: BUSINESS SEGMENT INFORMATION

Our operations for the periods presented are primarily repre-
sented 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 SmartPost, FedEx Supply Chain Services,
FedEx Custom Critical and Caribbean Transportation Services.
Management evaluates segment financial performance based on
operating income.

Our reportable segments include the following businesses:

2006
2007
2008
2009
2010
2011-2015

$ 228
263
283
321
375
2,718

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 13% during 2006, 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 6.75% during 2006,
decreasing to an annual growth rate of 5% in 2013 and thereafter.
Our postretirement healthcare cost is capped at 150% of the 1993
per capita projected 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, 2005, or 2005 benefit expense.

Defined Contribution Plans
Profit sharing and other defined contribution plans are in place
covering a majority of U.S. employees. The majority of U.S.
employees are covered under 401(k) plans to which we provide
discretionary matching contributions based on employee contri-
butions. In addition, some employees are covered under profit
sharing plans which provide for discretionary contributions, as
determined annually by those business units. Expense under
these plans was $97 million in 2005, $89 million in 2004 and $82
million in 2003.

FedEx Express Segment

FedEx Ground Segment

FedEx Freight Segment

FedEx Express
FedEx Trade Networks

FedEx Ground
FedEx SmartPost
FedEx Supply Chain Services

FedEx Freight
FedEx Custom Critical
Caribbean Transportation Services

FedEx Kinko’s Segment

FedEx Kinko’s

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 3, 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.

Certain operating companies provide transportation and related
services for other FedEx companies outside their reportable seg-
ment. Billings for such services are based on negotiated rates
which we believe approximate fair value and are reflected as
revenues of the billing segment. Such intersegment revenues and
expenses are not separately identified in the following segment
information as the amounts are not material and are eliminated
in the consolidated results.

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
2005
2004
2003
Depreciation and amortization
2005
2004
2003
Operating income
2005 (3)
2004(4)
2003
Segment assets(5)
2005
2004
2003

FedEx
Express
Segment

$19,485
17,497
16,467

798
810
818

$ 1,414
629
783

$13,130
12,443
11,188

FedEx
Ground
Segment

$ 4,680
3,910
3,581

$ 176
154
155

$ 604
522
494

$ 2,776
2,248
1,846

FedEx
Freight
Segment

$ 3,217
2,689
2,443

$ 102
92
88

$ 354
244
193

$ 2,047
1,924
1,825

FedEx
Kinko’s
Segment (1)

Other and
Eliminations (2)

Consolidated
Total

$ 2,066
521
–

$ 138
33
–

$ 100
39
–

$ 2,987
2,903
–

$ (85)
93
(4)

$ 248
286
290

(1)
6
1

$ (536)
(384)
526

$ 29,363
24,710
22,487

$ 1,462
1,375
1,351

$ 2,471
1,440
1,471

$ 20,404
19,134
15,385

(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 oper-
ating income).
(3) Includes $48 million related to an Airline Stabilization Act charge.
(4) 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.
(5) 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):

2005
2004
2003

FedEx
Express
Segment

$ 1,195
592
917

FedEx
Ground
Segment

$ 456
314
252

FedEx
Freight
Segment

$ 217
130
139

FedEx
Kinko’s
Segment

$152
36
–

Other

$ 216
199
203

Consolidated
Total

$ 2,236
1,271
1,511

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

2005

2004

2003

$ 5,969
1,798
2,799

$ 5,558
1,700
2,592

$ 5,432
1,715
2,510

10,566
6,134
16,700

1,854
381
2,235
550
19,485
4,680
3,217
2,066
(85)
$ 29,363

$ 22,146
7,217
$ 29,363

$ 13,020
2,115
$ 15,135

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

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

(1) Includes the operations of FedEx Kinko’s from the formation of the FedEx Kinko’s seg-
ment 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 15: 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

2005

$162
824

2004

$151
364

2003

$125
53

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 air-
craft under the provisions of FIN46. The consolidation of this
entity in September 2003 resulted in an increase in our fixed
assets and long-term liabilities of approximately $140 million.
See Note 17.

NOTE 16: 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 pro-
spective 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.

With the exception of residual value guarantees in certain oper-
ating 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 guaran-
tees and indemnifications cannot be reasonably estimated.
Historically, we have not been required to make significant pay-
ments under our guarantee or indemnification obligations and
no amounts have been recognized in our financial statements for
the underlying fair value of these obligations.

We have guarantees under certain operating leases, amounting
to $37 million as of May 31, 2005, 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As a result of this consolidation, the accompanying May 31, 2005
balance sheet includes an additional $120 million of fixed assets
and $125 million of long-term liabilities. The May 31, 2004 balance
sheet includes an additional $126 million of fixed assets and $133
million of long-term liabilities.

NOTE 18: COMMITMENTS

Annual purchase commitments under various contracts as of
May 31, 2005 were as follows (in millions):

2006
2007
2008
2009
2010
Thereafter

Aircraft

$ 111
115
131
567
517
625

Aircraft-
Related(1)

$ 237
91
74
61
56
70

Other(2)

$ 582
106
48
37
22
166

Total

$ 930
312
253
665
595
861

(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. Commitments to purchase aircraft in passenger con-
figuration do not include the attendant costs to modify these
aircraft for cargo transport. Open purchase orders that are can-
celable are not considered unconditional purchase obligations
for financial reporting purposes.

As of May 31, 2005, FedEx Express is committed to purchase four
Airbus A300s, two Airbus A310s, nine ATR-72s, one MD11 and 10
Airbus A380s (a new high-capacity, long-range aircraft). FedEx
Express expects to take delivery of the MD11, four A300s, all of
the ATR-72s and one Airbus A310 in 2006. The remaining Airbus
A310 is expected to be delivered in 2007. FedEx Express expects
to take delivery of three of the 10 A380 aircraft in each of 2009,
2010 and 2011 and the remaining one in 2012. Deposits and
progress payments of $29 million have been made toward these
purchases and other planned aircraft-related transactions. In
addition, we have committed to modify our DC10 aircraft for pas-
senger-to-freighter and two-man cockpit configurations.
Payments related to these activities are included in the table
above. Aircraft and aircraft-related contracts are subject to
price escalations.

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

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.

FedEx’s publicly held debt (approximately $1.7 billion) is guaran-
teed by our subsidiaries. The guarantees are full and
unconditional, joint and several and any subsidiaries that are not
guarantors are minor as defined by Securities and Exchange
Commission 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
municipalities primarily to finance the acquisition and construc-
tion of various airport facilities and equipment. In certain cases,
the bond proceeds were loaned to FedEx Express and are includ-
ed 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 $760 million in principal of these
bonds (with total future principal and interest payments of
approximately $1.3 billion as of May 31, 2005) is unconditionally
guaranteed by FedEx Express. Of the $760 million bond principal,
$204 million was in capital lease obligations at May 31, 2005 and
the remainder was in operating leases.

NOTE 17: 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, 2005, 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).

FEDEX CORPORATION

NOTE 19: CONTINGENCIES

NOTE 20: RELATED PARTY TRANSACTIONS

Wage-and-Hour. We are a defendant in a number of lawsuits
filed in federal or California state courts containing various class-
action allegations under federal or California wage-and-hour
laws. The plaintiffs in these lawsuits are 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 or other benefits. The plaintiffs generally seek unspeci-
fied monetary damages, injunctive relief, or both.

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.

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 naming of the new arena where the
Grizzlies play as FedExForum. 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 portion 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 is
constructing 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% own-
ership 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.

To date, one of these wage-and-hour cases, Foster v. FedEx
Express, has been certified as a class action. The plaintiffs rep-
resent a class of hourly FedEx Express employees in California
from October 14, 1998 to present. The plaintiffs allege that hourly
employees are routinely required to work “off the clock” and are
not paid for this additional work. The court issued a ruling on
December 13, 2004 granting class certification on all issues.
The ruling, however, does not address whether we will ultimately
be held liable.

We have denied any liability with respect to these claims and
intend to vigorously defend ourself in these cases. However, it is
reasonably possible that material losses could be incurred on
one or more of these matters as these cases develop.

Independent Contractor. FedEx Ground is involved in numerous
purported class-action lawsuits and other proceedings in which
the threshold issue is whether some or all of FedEx Ground’s
owner-operators are in fact employees, rather than independent
contractors. Adverse determinations in these matters could,
among other things, entitle certain of our contractors to the
reimbursement of certain expenses and to the benefit of
wage-and-hour laws and result in employment and withholding
tax liability for FedEx Ground. We have filed a motion with the
Judicial Panel on Multi-District Litigation to transfer and consol-
idate all the class-action lawsuits for administration by a single
federal court. All but one of these lawsuits has been stayed pend-
ing a ruling on our motion.

We strongly believe that FedEx Ground’s owner-operators are
properly classified as independent contractors and that we will
prevail in these proceedings. Given the nature and preliminary
status of the claims, we cannot yet determine the amount or a
reasonable range of potential loss in these matters, if any.

Other. FedEx and its subsidiaries are subject to other legal pro-
ceedings that arise in the ordinary course of their business. In the
opinion of management, the aggregate liability, if any, with
respect to these other actions will not materially adversely affect
our financial position, results of operations or cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21: SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)

(In millions, except per share amounts)

2005
Revenues
Operating income
Net income
Basic earnings per common share(7)
Diluted earnings per common share

2004(3)
Revenues
Operating income
Net income
Basic earnings per common share(7)
Diluted earnings per common share

First
Quarter

$ 6,975
579
330
1.10
1.08

Second
Quarter

$ 7,334

600(1)
354(1)(2)
1.18
1.15(1)(2)

$ 5,687

$ 5,920

200(4)
128(4)(5)
0.43(4)(5)
0.42(4)(5)

183(6)
91(6)
0.31(6)
0.30(6)

Third
Quarter

$ 7,339
552
317
1.05
1.03

$ 6,062
372
207
0.69
0.68

Fourth
Quarter

$ 7,715
740
448
1.48
1.46

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

(1) Includes $48 million ($31 million, net of tax, $0.10 per basic and diluted share) related to an Airline Stabilization Act charge described in Note 1.
(2) Includes an $11 million ($0.04 per basic and diluted share) benefit from an income tax adjustment described in Note 12.
(3) Includes FedEx Kinko’s from February 12, 2004 (date of acquisition). See Note 3.
(4) 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 5.
(5) 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 12.
(6) 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 5.
(7) 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.

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, 2005 and 2004, 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, 2005. 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 finan-
cial 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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended May 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effec-
tiveness of FedEx Corporation’s internal control over financial reporting as of May 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
July 12, 2005 expressed an unqualified opinion thereon.

Memphis, Tennessee
July 12, 2005

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2005. 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 in this Report.

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

2005(1)(2)

2004(3)(4)(5)

2003

2002

2001(6) (7)

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(8)
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(8)

Assuming dilution:

Income before cumulative effect of change in

accounting principle

Cumulative effect of change in accounting for goodwill(8)

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

$ 29,363
2,471
2,313
1,449
–
$ 1,449

4.81
–
4.81

4.72
–
4.72
301
307
0.29

$ 9,643
20,404
2,427
9,588

670
215,838

$ 24,710
1,440
1,319
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

$ 22,487
1,471
1,338
830
–
830

2.79
–
2.79

2.74
–
2.74
298
303
0.15

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

643
190,918

$ 20,607
1,321
1,160
725
(15)
710

2.43
(0.05)
2.38

2.39
(0.05)
2.34
298
303
0.05

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

$ 19,629
1,071
927
584
–
584

2.02
–
2.02

1.99
–
1.99
289
293
–

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

647
184,953

640
176,960

(1) Results for 2005 include $48 million ($31 million, net of tax, $0.10 per diluted share) related to an Airline Stabilization Act charge. See Note 1 to the accompanying consolidated
financial statements.
(2) Results for 2005 include a $12 million or $0.04 per diluted share benefit from an income tax adjustment. See Note 12 to the accompanying consolidated financial statements.
(3) Results for 2004 include $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs. See Note 5 to the accompanying consolidated financial statements.
(4) Results for 2004 include the financial results of FedEx Kinko’s from February 12, 2004 (the date of acquisition). See Note 3 to the accompanying consolidated financial statements.
(5) 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 12 to the accompanying consolidated financial statements.
(6) Results for 2001 include the financial results of FedEx Freight East from January 1, 2001 (the date of acquisition for financial reporting purposes).
(7) Results for 2001 include 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.
(8) 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.

FEDEX CORPORATION

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

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

Charles T. Manatt(2)
Partner and Co-founder
Manatt, Phelps & Phillips, 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

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)(4)
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

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

Christine P. Richards
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 Segment

FedEx Express

David J. Bronczek
President and Chief Executive Officer

FedEx Ground Segment

FedEx Ground

Daniel J. Sullivan
President and Chief Executive Officer

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

Rodger G. Marticke
Executive Vice President and Chief Operating Officer

Michael L. Ducker
Executive Vice President, International

FedEx Trade Networks

G. Edmond Clark
President and Chief Executive Officer

FedEx Freight Segment

FedEx Freight

Douglas G. Duncan
President and Chief Executive Officer

Patrick L. Reed
Executive Vice President and Chief Operating Officer

FedEx Custom Critical

John G. Pickard
President and Chief Executive Officer

Caribbean Transportation Services

Rick A. Faieta
President and Chief Executive Officer

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

FedEx SmartPost

Ward B. Strang
President and Chief Executive Officer

FedEx Supply Chain Services

Douglas E. Witt
President and Chief Executive Officer

FedEx Kinko’s Segment

FedEx Kinko’s

Gary M. Kusin
President and Chief Executive Officer

Kenneth A. May
Executive Vice President and Chief Operating Officer

John M. McDonald
Executive Vice President, Commercial Document Solutions

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 Peabody Grand Ballroom at The Peabody hotel,
149 Union Avenue, Memphis, Tennessee 38103, on Monday,
September 26, 2005, 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 11, 2005, there were 18,277 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 2005 and 2004.

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

FY 2005
High
Low
Dividend

FY 2004
High
Low
Dividend

$83.47
72.28
0.07

$68.96
59.01
0.05

$96.63
81.88
0.07

$78.05
63.70
0.05

$100.92
89.75
0.07

$75.15
64.84
0.06

$101.87
83.11
0.07

$76.07
65.88
0.06

Dividends: FedEx paid a cash dividend on July 1, 2005 ($0.08 per
share). We expect to continue to pay regular quarterly cash divi-
dends, 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.
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.
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. We
have also filed with the New York Stock Exchange the most
recent Annual CEO Certification as required by section
303A.12(a) of the NYSE Listed Company Manual.

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

Customer Inquiries: Call 1-800-Go-FedEx or visit the
Customer Support section of fedex.com:
http://www.fedex.com/us/customersupport/

Media Inquiries: Contact FedEx Media Relations,
942 South Shady Grove Road, Memphis, Tennessee 38120,
(901) 434-8100 or visit the About FedEx section of fedex.com:
http://www.fedex.com/us/about/

Shareowner Account Inquiries: Contact Computershare
Investor Services, 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
Computershare at (800) 446-2617 or visit their direct stock
purchase plan Web site at equiserve.com. This plan provides
an alternative to traditional retail brokerage methods of pur-
chasing, holding and selling FedEx common stock. This plan
also permits shareowners to automatically reinvest their divi-
dends to purchase 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®, FedEx Trade
Networks®, FedEx Services® and Caribbean Transportation
Services®. 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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We’ve helped you stay at
the leading edge of change
because we see farther, too.

Whatever you can see,
we can make possible.

How far can you see?

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