Federal Express 10-Q 2012 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED November 30, 2011

OR

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

FOR THE TRANSITION PERIOD FROM                    TO                    

Commission File Number: 1-7806

FEDERAL EXPRESS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	71-0427007 (I.R.S. Employer Identification No.)
3610 Hacks Cross Road
Memphis, Tennessee	38125
(Address of principal executive offices)	(ZIP Code)

(901) 369-3600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ Noo

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

Large accelerated filero	Accelerated filero	Non-accelerated filerþ	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares of common stock outstanding as of December 14, 2011 was 1,000. The Registrant is a wholly owned subsidiary of FedEx Corporation, and there is no market for the Registrant’s common stock.

The Registrant meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H(2).

FEDERAL EXPRESS CORPORATION

INDEX

	PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets November 30, 2011 and May 31, 2011		3
Condensed Consolidated Statements of Income Three and Six Months Ended November 30, 2011 and 2010		5
Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, 2011 and 2010		6
Notes to Condensed Consolidated Financial Statements		7
Report of Independent Registered Public Accounting Firm		12
ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition		13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		20
ITEM 4. Controls and Procedures		20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings		21
ITEM 1A. Risk Factors		21
ITEM 5. Other Information		21
ITEM 6. Exhibits		21
Signature		23
Exhibit Index		E-1
Exhibit 12.1
Exhibit 15.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

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FEDERAL EXPRESS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

	November 30,
	2011		May 31,
	(Unaudited)		2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	675	$	626
Receivables, less allowances of $91 and $83		1,648		1,645
Spare parts, supplies and fuel, less allowances of $176 and $169		364		367
Deferred income taxes		416		398
Due from parent company and other FedEx subsidiaries		228		607
Prepaid expenses and other		98		90
Total current assets		3,429		3,733
PROPERTY AND EQUIPMENT, AT COST		22,990		21,622
Less accumulated depreciation and amortization		11,430		11,110
Net property and equipment		11,560		10,512
OTHER LONG-TERM ASSETS
Goodwill		1,158		1,085
Other assets		1,055		1,016
Total other long-term assets		2,213		2,101
	$	17,202	$	16,346

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

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

	November 30,
	2011		May 31,
	(Unaudited)		2011
LIABILITIES AND OWNER’S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt	$	428	$	17
Accrued salaries and employee benefits		906		836
Accounts payable		1,125		1,092
Accrued expenses		1,056		1,084
Due to other FedEx subsidiaries		456		283
Total current liabilities		3,971		3,312
LONG-TERM DEBT, LESS CURRENT PORTION		239		655
OTHER LONG-TERM LIABILITIES
Deferred income taxes		2,129		1,994
Pension, postretirement healthcare and other benefit obligations		892		867
Self-insurance accruals		633		631
Deferred lease obligations		812		695
Deferred gains, principally related to aircraft transactions		232		244
Other liabilities		140		115
Total other long-term liabilities		4,838		4,546
COMMITMENTS AND CONTINGENCIES
OWNER’S EQUITY
Common stock, $0.10 par value; 1,000 shares authorized, issued and outstanding		—		—
Additional paid-in capital		608		608
Retained earnings		7,514		7,107
Accumulated other comprehensive income		32		118
Total owner’s equity		8,154		7,833
	$	17,202	$	16,346

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

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FEDERAL EXPRESS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)
(IN MILLIONS)

	Three Months Ended						Six Months Ended
	November 30,						November 30,
	2011			2010			2011			2010
REVENUES	$	6,406		$	5,841		$	12,815		$	11,610
OPERATING EXPENSES:
Salaries and employee benefits		2,306			2,187			4,648			4,381
Purchased transportation		339			307			675			597
Rentals and landing fees		415			421			833			819
Depreciation and amortization		285			263			564			515
Fuel		1,039			802			2,115			1,556
Maintenance and repairs		352			319			731			669
Intercompany charges, net		541			505			1,082			1,011
Other		790			782			1,546			1,456
		6,067			5,586			12,194			11,004
OPERATING INCOME		339			255			621			606
OTHER INCOME (EXPENSE):
Interest, net		12			1			20			4
Other, net		(7	)		(19	)		(20	)		(37	)
		5			(18	)		—			(33	)
INCOME BEFORE INCOME TAXES		344			237			621			573
PROVISION FOR INCOME TAXES		123			85			215			209
NET INCOME	$	221		$	152		$	406		$	364

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

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FEDERAL EXPRESS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

	Six Months Ended
	November 30,
	2011			2010
Operating Activities:
Net income	$	406		$	364
Noncash charges:
Depreciation and amortization		564			515
Other, net		184			113
Changes in assets and liabilities, net		664			661
Cash provided by operating activities		1,818			1,653
Investing Activities:
Capital expenditures		(1,623	)		(1,601	)
Business acquisition, net of cash acquired		(114	)		—
Other		3			5
Cash used in investing activities		(1,734	)		(1,596	)
Financing Activities:
Principal payments on debt		(17	)		(12	)
Cash used in financing activities		(17	)		(12	)
Effect of exchange rate changes on cash		(18	)		24
Net increase in cash and cash equivalents		49			69
Cash and cash equivalents at beginning of period		626			512
Cash and cash equivalents at end of period	$	675		$	581

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

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FEDERAL EXPRESS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1)General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.These interim financial statements of Federal Express Corporation (“FedEx Express”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2011 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of November 30, 2011, the results of our operations for the three- and six-month periods ended November 30, 2011 and 2010 and cash flows for the six-month periods ended November 30, 2011 and 2010. Operating results for the three- and six-month periods ended November 30, 2011 are not necessarily indicative of the results that may be expected for the year ending May 31, 2012.

We are a wholly owned subsidiary of FedEx Corporation (“FedEx”) engaged in a single line of business and operate in one business segment — the worldwide express transportation and distribution of goods and documents.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2012 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

BUSINESS ACQUISITION.On July 25, 2011, FedEx completed its acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million in cash from operations. The financial results of the acquired business are included in our results from the date of acquisition and were not material to our results of operations or financial condition. Substantially all of the purchase price was allocated to goodwill.

STOCK-BASED COMPENSATION.FedEx has two types of equity-based compensation: stock options and restricted stock. The key terms of the stock option and restricted stock awards granted under FedEx’s incentive stock plans are set forth in FedEx’s Annual Report.

Our stock-based compensation expense was $7 million for the three-month period ended November 30, 2011 and $19 million for the six-month period ended November 30, 2011. Our stock-based compensation expense was $7 million for the three-month period ended November 30, 2010 and $17 million for the six-month period ended November 30, 2010. This amount represents the amount charged to us by FedEx for awards granted to our employees.

LONG-TERM DEBT.Long-term debt, exclusive of capital leases, had carrying values of $539 million at November 30, 2011 and May 31, 2011, compared with estimated fair values of $625 million at November 30, 2011 and $620 million at May 31, 2011. The estimated fair values were determined based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

NEW ACCOUNTING GUIDANCE.New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. See our Annual Report for a discussion of the impact of new accounting guidance issued but not yet effective as of May 31, 2011. We believe that no new accounting guidance was adopted or issued during the first half of 2012 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

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(2)Comprehensive Income

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

	Three Months Ended
	2011			2010
Net income	$	221		$	152
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $23 in 2011 and $11 in 2010		(103	)		42
Comprehensive income	$	118		$	194

	Six Months Ended
	2011			2010
Net income	$	406		$	364
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $20 in 2011 and $16 in 2010		(86	)		69
Comprehensive income	$	320		$	433

(3)Retirement Plans

We sponsor or participate in programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. A majority of our employees are covered by the FedEx Corporation Employees’ Pension Plan (“FedEx Plan”), a defined benefit pension plan sponsored by FedEx. The FedEx Plan covers certain U.S. employees age 21 and over with at least one year of service and provides benefits primarily based on earnings, age and years of service. Defined contribution plans covering a majority of U.S. employees and certain international employees are in place. We also sponsor or participate in nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans covering certain of our international employees. For more information, refer to the financial statements of FedEx included in its Form 10-Q for the quarter ended November 30, 2011.

Our retirement plans costs for the periods ended November 30 were as follows (in millions):

	Three Months Ended				Six Months Ended
	2011		2010		2011		2010
Pension plans sponsored by FedEx	$	80	$	81	$	160	$	161
Other U.S. domestic and international pension plans		11		11		21		21
U.S. domestic and international defined contribution plans		52		37		108		75
Postretirement healthcare plans		14		12		28		24
	$	157	$	141	$	317	$	281

The three- and six-month periods ended November 30, 2011 reflect the full restoration on January 1, 2011 of company-matching contributions for our 401(k) plans.

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The components of the net periodic benefit cost of the pension and postretirement healthcare plans currently sponsored by us were individually immaterial for all periods presented. No material contributions were made during the first six months of 2012 or 2011 to pension plans sponsored by us, and we do not expect to make material contributions in 2012.

(4)Commitments

As of November 30, 2011, our purchase commitments under various contracts for the remainder of 2012 and annually thereafter were as follows (in millions):

	Aircraft and
	Aircraft-
	Related		Other(1)		Total
2012 (remainder)	$	389	$	10	$	399
2013		983		12		995
2014		780		12		792
2015		555		8		563
2016		580		33		613
Thereafter		3,225		105		3,330

⁽¹⁾ Primarily advertising and promotions contracts.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. Our obligation to purchase 15 Boeing 777 Freighters (“B777F”) is conditioned upon there being no event that causes us or our employees not to be covered by the Railway Labor Act of 1926, as amended (“RLA”). Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

We had $678 million in deposits and progress payments as of November 30, 2011 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our condensed consolidated balance sheets. In addition to our commitment to purchase B777Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations.

The following table is a summary of the key aircraft we are committed to purchase as of November 30, 2011, with the year of expected delivery:

	B777F(1)		B757		Total
2012 (remainder)		2		8		10
2013		4		6	��	10
2014		7		—		7
2015		3		—		3
2016		3		—		3
Thereafter		9		—		9
Total		28		14		42

⁽¹⁾ Reflects the deferral during the second quarter of 2012 of the delivery of two B777F aircraft from 2013 to after 2016.

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On December 14, 2011, we entered into an agreement with The Boeing Company for the purchase of 27 new Boeing 767-300 Freighter aircraft, with the first three arriving in 2014 followed by six per year from 2015 to 2018. We are also delaying the delivery of nine B777F aircraft, five of which will be deferred from 2014 and one per year from 2015 to 2018. (Including the two deferrals that occurred in the second quarter of 2012, this brings the total B777F deferrals to 11 aircraft.) Additionally, we removed the RLA condition from two of the 15 B777F aircraft discussed above and also exercised two B777F options for aircraft to be delivered at the end of the delivery schedule. These aircraft transactions are not reflected in the tables above, as they occurred subsequent to the end of the second quarter of 2012.

A summary of future minimum lease payments under capital leases and noncancelable operating leases with an initial or remaining term in excess of one year at November 30, 2011 is as follows (in millions):

			Operating Leases
			Aircraft				Total
	Capital		and Related		Facilities		Operating
	Leases		Equipment		and Other		Leases
2012 (remainder)	$	14	$	370	$	352	$	722
2013		118		499		640		1,139
2014		—		473		551		1,024
2015		—		455		517		972
2016		—		458		403		861
Thereafter		—		1,545		3,585		5,130
Total		132	$	3,800	$	6,048	$	9,848
Less amount representing interest		4
Present value of net minimum lease payments	$	128

(5)Contingencies

ATA Airlines.In October 2010, a jury returned a verdict in favor of ATA Airlines in its breach of contract lawsuit against us and awarded damages of $66 million, and in January 2011, the court awarded ATA pre-judgment interest of $5 million. While we do not agree with the verdict or the amount of damages awarded and have appealed the matter to the U.S. Court of Appeals for the Seventh Circuit, accounting standards required an accrual of a $66 million loss in the second quarter of 2011. We did not accrue the $5 million of interest as a loss because we have additional arguments on appeal that lead us to believe that loss of that amount is not probable. The Seventh Circuit heard oral argument on our appeal in November 2011.

California Paystub Class Action. A federal court in California ruled in April 2011 that paystubs for certain FedEx Express employees in California did not meet that state’s requirements to reflect pay period begin date, total overtime hours worked and the correct overtime wage rate. The ruling came in a class action lawsuit filed by a former courier seeking damages on behalf of herself and all other FedEx Express employees in California that allegedly received noncompliant paystubs. The court certified the class in June 2011. The court has ruled that we are liable to the State of California, and there will be a ruling as to whether we are liable to class members who can prove they were injured by the paystub deficiencies. The judge has not yet decided on the amount, if any, of liability to the State of California or to the class, but has wide discretion. Prior to any decision on the amount of liability, we reached an agreement to settle this matter for an immaterial amount in October 2011, subject to approval by the court.

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

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(6)Parent/Affiliate Transactions

Affiliate company balances that are currently receivable or payable relate to charges for services provided to or by other FedEx affiliates, which are settled on a monthly basis, or the net activity from participation in FedEx’s consolidated cash management program. In addition, we are allocated net interest on these amounts at market rates.

We maintain an accounts receivable arrangement with FedEx TechConnect, Inc. (“FedEx TechConnect”), a wholly owned subsidiary of FedEx Corporate Services, Inc. (“FedEx Services”). FedEx Services is a wholly owned subsidiary of FedEx. Under this arrangement, we recognize revenue for the transportation services provided to our U.S. customers and factor the related receivables to FedEx TechConnect for collection. We have no continuing involvement with the receivables transferred to FedEx TechConnect. Our net receivables recorded by FedEx TechConnect totaled $1.4 billion at November 30, 2011 and May 31, 2011.

The costs of the FedEx Services segment are allocated to us and are included in the expense line item “Intercompany charges” based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of the functions provided by the FedEx Services segment.

(7)Supplemental Cash Flow Information

Cash paid for interest expense and income taxes for the six-month periods ended November 30 was as follows (in millions):

	2011			2010
Cash payments for:
Income taxes	$	149		$	190
Income tax refunds received		(50	)		(50	)
Cash tax payments, net	$	99		$	140

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder
Federal Express Corporation

We have reviewed the condensed consolidated balance sheet of Federal Express Corporation as of November 30, 2011, and the related condensed consolidated statements of income for the three-month and six-month periods ended November 30, 2011 and 2010 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2011 and 2010. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Federal Express Corporation as of May 31, 2011, and the related consolidated statements of income, changes in owner’s equity and comprehensive income, and cash flows for the year then ended not presented herein, and in our report dated July 12, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee
December 16, 2011

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

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition, which describes the principal factors affecting the results of operations and financial condition of Federal Express Corporation (“FedEx Express”), is abbreviated pursuant to General Instruction H(2)(a) of Form 10-Q. This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2011 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results. For additional information, including a discussion of outlook, liquidity, capital resources, contractual cash obligations and critical accounting estimates, see the Quarterly Report on Form 10-Q of our parent, FedEx Corporation (“FedEx”), for the quarter ended November 30, 2011.

We are the world’s largest express transportation company. Our sister company FedEx Corporate Services, Inc. (“FedEx Services”) provides us and our other sister companies, including FedEx Ground Package System, Inc. (“FedEx Ground”), with customer-facing sales, marketing, information technology and customer service support, as well as retail access for our customers through FedEx Office and Print Services, Inc. (“FedEx Office”).

The operating expenses line item “Intercompany charges” on the financial summary represents an allocation that primarily includes salaries and benefits, depreciation and other costs for the sales, marketing, information technology and customer service support provided to us by FedEx Services and FedEx Office’s net operating costs. These costs are allocated based on metrics such as relative revenues or estimated services provided. “Intercompany charges” also includes allocated charges from our parent for management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe the total amounts allocated reasonably reflect the cost of providing these functions.

The key indicators necessary to understand our operating results include:

• the overall customer demand for our various services;

• the volume of shipments transported through our network, as measured by our average daily volume and shipment weight;

• the mix of services purchased by our customers;

• the prices we obtain for our services, as measured by average revenue per package (yield);

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

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

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

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2012 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

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RESULTS OF OPERATIONS

The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income, net income and operating margin (dollars in millions) for the periods ended November 30:

	Three Months Ended						Percent			Six Months Ended						Percent
	2011			2010			Change			2011			2010			Change
Revenues:
Package:
U.S. overnight box	$	1,623		$	1,489			9		$	3,263		$	2,980			9
U.S. overnight envelope		421			416			1			872			848			3
U.S. deferred		731			666			10			1,462			1,327			10
Total U.S. domestic package revenue		2,775			2,571			8			5,597			5,155			9
International priority		2,171			2,009			8			4,369			3,983			10
International domestic(1)		217			165			32			424			313			35
Total package revenue		5,163			4,745			9			10,390			9,451			10
Freight:
U.S.		628			530			18			1,219			1,053			16
International priority		470			435			8			919			841			9
International airfreight		74			69			7			151			139			9
Total freight revenue		1,172			1,034			13			2,289			2,033			13
Other		71			62			15			136			126			8
Total revenues		6,406			5,841			10			12,815			11,610			10
Operating expenses:
Salaries and employee benefits		2,306			2,187			5			4,648			4,381			6
Purchased transportation		339			307			10			675			597			13
Rentals and landing fees		415			421			(1	)		833			819			2
Depreciation and amortization		285			263			8			564			515			10
Fuel		1,039			802			30			2,115			1,556			36
Maintenance and repairs		352			319			10			731			669			9
Intercompany charges		541			505			7			1,082			1,011			7
Other		790			782	(2)		1			1,546			1,456	(2)		6
Total operating expenses		6,067			5,586			9			12,194			11,004			11
Operating income	$	339		$	255			33		$	621		$	606			2
Operating margin		5.3	%		4.4	%	90		bp		4.8	%		5.2	%	(40		)bp
Other income (expense):
Interest, net		12			1		NM				20			4		NM
Other, net		(7	)		(19	)		(63	)		(20	)		(37	)		(46	)
		5			(18	)		NM			—			(33	)		NM
Income before income taxes		344			237			45			621			573			8
Provision for income taxes		123			85			45			215			209			3
Net income	$	221		$	152			45		$	406		$	364			12

(1)	International domestic revenues include our international intra-country operations, including our February 2011 business acquisition in India and our July 2011 business acquisition in Mexico.
(2)	Includes a $66 million legal reserve associated with the ATA Airlines lawsuit.

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	Percent of Revenue						Percent of Revenue
	Three			Three			Six			Six
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	2011			2010			2011			2010
Operating expenses:
Salaries and employee benefits		36.0	%		37.4	%		36.3	%		37.7	%
Purchased transportation		5.3			5.3			5.3			5.2
Rentals and landing fees		6.5			7.2			6.5			7.1
Depreciation and amortization		4.4			4.5			4.4			4.4
Fuel		16.2			13.7			16.5			13.4
Maintenance and repairs		5.5			5.5			5.7			5.8
Intercompany charges		8.5			8.6			8.4			8.7
Other		12.3			13.4	(1)		12.1			12.5	(1)
Total operating expenses		94.7			95.6			95.2			94.8
Operating margin		5.3	%		4.4	%		4.8	%		5.2	%

⁽¹⁾ Includes a $66 million legal reserve associated with the ATA Airlines lawsuit.

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

	Three Months Ended				Percent			Six Months Ended				Percent
	2011		2010		Change			2011		2010		Change
Package Statistics
Average daily package volume (ADV):
U.S. overnight box		1,168		1,196		(2	)		1,151		1,182		(3	)
U.S. overnight envelope		582		626		(7	)		589		625		(6	)
U.S. deferred		838		865		(3	)		834		855		(2	)
Total U.S. domestic ADV		2,588		2,687		(4	)		2,574		2,662		(3	)
International priority		569		585		(3	)		556		575		(3	)
International domestic(1)		529		354		49			486		339		43
Total ADV		3,686		3,626		2			3,616		3,576		1
Revenue per package (yield):
U.S. overnight box	$	22.05	$	19.75		12		$	22.15	$	19.70		12
U.S. overnight envelope		11.48		10.54		9			11.56		10.59		9
U.S. deferred		13.84		12.24		13			13.70		12.12		13
U.S. domestic composite		17.01		15.19		12			16.99		15.13		12
International priority		60.56		54.54		11			61.42		54.12		13
International domestic(1)		6.51		7.39		(12	)		6.81		7.22		(6	)
Composite package yield		22.23		20.77		7			22.45		20.65		9
Freight Statistics
Average daily freight pounds:
U.S.		7,630		7,459		2			7,295		7,179		2
International priority		3,451		3,320		4			3,289		3,171		4
International airfreight		1,213		1,243		(2	)		1,188		1,242		(4	)
Total average daily freight pounds		12,294		12,022		2			11,772		11,592		2
Revenue per pound (yield):
U.S.	$	1.31	$	1.13		16		$	1.31	$	1.15		14
International priority		2.16		2.08		4			2.18		2.07		5
International airfreight		0.97		0.88		10			0.99		0.87		14
Composite freight yield		1.51		1.36		11			1.52		1.37		11

⁽¹⁾ International domestic statistics include our international intra-country operations, including our February 2011 business acquisition in India and our July 2011 business acquisition in Mexico.

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Revenues

Our revenues increased 10% in both the second quarter and the first half of 2012 primarily due to an increase in U.S. domestic and IP package yields. U.S. domestic package yields increased in the second quarter and first half of 2012 primarily due to higher fuel surcharges and increased rate per pound. IP package yields increased in the second quarter of 2012 due to higher fuel surcharges, increased rate per pound, and increased weights. In the first half of 2012, IP package yields increased primarily due to higher fuel surcharges, increased rate per pound and favorable exchange rates. However, on-going weakness in global growth continued to be reflected in reduced demand for our U.S. domestic and IP package services.

Our fuel surcharges are indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the periods ended November 30:

	Three Months Ended						Six Months Ended
	2011			2010			2011			2010
U.S. Domestic and Outbound Fuel Surcharge:
Low		14.00	%		7.00	%		14.00	%		7.00	%
High		15.50			8.50			16.50			10.00
Weighted-average		14.67			7.82			15.10			8.17
International Fuel Surcharges:
Low		14.00			7.00			14.00			7.00
High		21.00			13.50			23.00			14.00
Weighted-average		17.33			10.59			17.63			10.83

On September 22, 2011, we announced a 5.9% average list price increase effective January 2, 2012, for FedEx Express U.S. domestic, U.S. export and U.S. import services, while we lowered our fuel surcharge index by two percentage points. In September 2010, we announced a 5.9% average list price increase effective January 3, 2011, for FedEx U.S. domestic and U.S. outbound express package and freight shipments and made various changes to other surcharges, while we lowered our fuel surcharge index by two percentage points.

Operating Income

Our operating income increased during the second quarter and first half of 2012 as a result of the benefit from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust. However, operating margin decreased in the first half of 2012 due to lower volumes in our U.S. domestic package and higher-yielding IP package services. The year-over-year comparison of the results was favorably impacted by the inclusion in the second quarter of 2011 of a $66 million legal reserve associated with the ATA Airlines lawsuit (see Note 5 of the accompanying unaudited condensed consolidated financial statements).

Salaries and employee benefits increased 5% in the second quarter and 6% in the first half of 2012 due to higher incentive compensation accruals and the reinstatement of full 401(k) company-matching contributions effective January 1, 2011. Purchased transportation costs increased 10% in the second quarter of 2012 and 13% in the first half of 2012 due to higher utilization of third-party transportation providers, primarily in Europe, and recent business acquisitions in India and Mexico. Maintenance and repair expense increased 10% in the second quarter of 2012 and 9% in the first half of 2012 due to timing of aircraft maintenance activities.

Fuel costs increased 30% in the second quarter of 2012 and 36% in the first half of 2012 due to increases in the average price per gallon of fuel. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a positive impact on operating income in both the second quarter and first half of 2012. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates we charge for our services.

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Other Income and Income Taxes

Interest income increased during the second quarter and first half of 2012 primarily due to increased capitalized interest related to aircraft and lower interest expense. Other non-operating expense decreased in the second quarter and first half of 2012 primarily due to the impact of foreign currency exchange rates.

Our effective tax rate was 35.8% for the second quarter of 2012 and 34.6% for the first half of 2012, compared with 35.8% for the second quarter of 2011 and 36.5% for the first half of 2011. For the remainder of 2012, we expect the effective tax rate to be between 36.0% and 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

Other than tax risks and related indemnifications recorded in connection with the business acquisition described below, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2011. We anticipate that certain income tax return proceedings, including an Internal Revenue Service audit of our 2007-2009 U.S. income tax returns, will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements.

Business Acquisition

On July 25, 2011, FedEx completed its acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million in cash from operations. The financial results of the acquired business are included in our results from the date of acquisition and were not material to our results of operations or financial condition. Substantially all of the purchase price was allocated to goodwill.

NEW ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. See our Annual Report for a discussion of the impact of new accounting guidance issued but not yet effective as of May 31, 2011. We believe that no new accounting guidance was adopted or issued during the first half of 2012 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

FORWARD-LOOKING STATEMENTS

Certain statements in this report are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:

• economic conditions in the global markets in which we operate;

• damage to our reputation or loss of brand equity;

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

• the price and availability of jet and vehicle fuel;

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

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

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

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

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

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

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

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

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

• market acceptance of our new service and growth initiatives;

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

• the outcome of future negotiations to reach new collective bargaining agreements — including with the union that represents our pilots (the current pilot contract is scheduled to become amendable in March 2013 unless the union exercises its option to shorten the contract, in which case the agreement would be amendable in March 2012);

• any impact on our business from disruptions or modifications in service by the United States Postal Service (“USPS”), which is a significant customer and vendor of ours, as a consequence of the USPS’s current financial difficulties or any resulting structural changes to its operations, network, service offerings or pricing;

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

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

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

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

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

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Omitted under the reduced disclosure format permitted by General Instruction H(2)(c) of Form 10-Q.

Item 4. Controls and Procedures

Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of November 30, 2011 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended November 30, 2011, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of all material pending legal proceedings, see Note 5 of the accompanying unaudited condensed consolidated financial statements.

In February 2011, we received a demand for production of information and documents in connection with a civil investigation by the Antitrust Division of the U.S. Department of Justice into the policies and practices of FedEx and United Parcel Service, Inc. for dealing with third-party consultants who work with shipping customers to negotiate lower rates. Related antitrust litigation with one of these third-party consultants was dismissed in late May 2011, but the court granted the plaintiff permission to file an amended complaint, which FedEx received in late June 2011. In November 2011, the court granted FedEx’s motion to dismiss this complaint, but again allowed the plaintiff to file an amended complaint. The plaintiff filed a new complaint on December 12, 2011.

Item 1A. Risk Factors

With the exception of the inclusion in “Forward-Looking Statements” of a risk factor relating to our relationship, as a significant customer and vendor, with the USPS, there have been no material changes from the risk factors disclosed in our Annual Report (under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition”) in response to Part I, Item 1A of Form 10-K.

Item 5. Other Information

On December 14, 2011, we entered into an agreement with The Boeing Company for the purchase of 27 new B767F aircraft. The agreement provides for delivery of three of the 27 B767F aircraft in 2014 and six B767F aircraft in each year thereafter through 2018. The agreement also provides us with an option to purchase an additional 30 767F aircraft. Most of the purchase price for each aircraft is due upon delivery of the aircraft. A copy of the purchase agreement will be filed as an exhibit to our quarterly report on Form 10-Q for the fiscal quarter ending February 29, 2012.

In the second quarter of fiscal 2012, we delayed the delivery of two B777F aircraft from 2013, and in conjunction with the execution of the B767F aircraft purchase agreement, are also delaying the delivery of nine B777F aircraft, five of which will be deferred from 2014 and one per year from 2015 to 2018, to better align air network capacity with demand. We also exercised two B777F options for aircraft to be delivered at the end of the delivery schedule.

Item 6. Exhibits

Exhibit
Number		Description of Exhibit
	10.1	Supplemental Agreement No.19 (and related side letter) dated as of October 27, 2011, amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006 between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.2 to FedEx Corporation’s FY12 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
	10.2	Letter Agreement dated September 9, 2011, amending the Transportation Agreement dated July 31, 2006 between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.3 to FedEx Corporation’s FY12 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)

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Exhibit
Number		Description of Exhibit
	12.1	Computation of Ratio of Earnings to Fixed Charges.
	15.1	Letter re: Unaudited Interim Financial Statements.
	31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.1	Interactive Data Files.

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SIGNATURE

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

	FEDERAL EXPRESS CORPORATION
Date: December 16, 2011	/s/ J. RICK BATEMAN
	J. RICK BATEMAN
	VICE PRESIDENT AND WORLDWIDE CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)

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EXHIBIT INDEX

Exhibit
Number		Description of Exhibit
	10.1	Supplemental Agreement No.19 (and related side letter) dated as of October 27, 2011, amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006 between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.2 to FedEx Corporation’s FY12 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
	10.2	Letter Agreement dated September 9, 2011, amending the Transportation Agreement dated July 31, 2006 between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.3 to FedEx Corporation’s FY12 Second Quarter Report on Form 10-Q, and incorporated herein by reference.)
	12.1	Computation of Ratio of Earnings to Fixed Charges.
	15.1	Letter re: Unaudited Interim Financial Statements.
	31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.1	Interactive Data Files.

E-1