Federal Express 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2006 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	71-0427007
(State or other jurisdiction of incorporation or organization)	(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.

Yes  ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o Accelerated filer  o Non-accelerated filer  ý

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

Yes  o  No ý

The number of shares of common stock outstanding as of March 17, 2006 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

PART I. FINANCIAL INFORMATION

	PAGE
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets February 28, 2006 and May 31, 2005	3-4
Condensed Consolidated Statements of Income Three and Nine Months Ended February 28, 2006 and 2005	5
Condensed Consolidated Statements of Cash Flows Nine Months Ended February 28, 2006 and 2005	6
Notes to Condensed Consolidated Financial Statements	7-13
Report of Independent Registered Public Accounting Firm	14
ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	15-20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	21
ITEM 4. Controls and Procedures	21
PART II. OTHER INFORMATION
ITEM 6. Exhibits	22
Signature	23
Exhibit Index	E-1

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FEDERAL EXPRESS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

	February 28,
	2006		May 31,
	(Unaudited)		2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	255	$	257
Receivables, less allowances of $118 and $92	2,766		2,703
Spare parts, supplies and fuel, less allowances of $151 and $142	238		204
Deferred income taxes	427		403
Prepaid expenses and other	70		70
Total current assets	3,756		3,637
PROPERTY AND EQUIPMENT, AT COST	15,412		14,518
Less accumulated depreciation and amortization	8,711		8,310
Net property and equipment	6,701		6,208
OTHER LONG-TERM ASSETS
Due from parent company	2,629		2,277
Goodwill	342		342
Other assets	594		629
Total other long-term assets	3,565		3,248
	$	14,022	$	13,093

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)

	February 28,
	2006				May 31,
	(Unaudited)				2005
LIABILITIES AND OWNER’S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt	$	36			$	109
Accrued salaries and employee benefits	724				809
Accounts payable	1,282				1,171
Accrued expenses	849				907
Due to parent company and other FedEx subsidiaries	267				184
Total current liabilities	3,158				3,180
LONG-TERM DEBT, LESS CURRENT PORTION	951				974
OTHER LONG-TERM LIABILITIES
Deferred income taxes	633				512
Pension, postretirement healthcare and other benefit obligations	673				646
Self-insurance accruals	530				511
Deferred lease obligations	607				520
Deferred gains, principally related to aircraft transactions	378				398
Other liabilities	36				33
Total other long-term liabilities	2,857				2,620
COMMITMENTS AND CONTINGENCIES
OWNER’S EQUITY
Common stock, $0.10 par value; 1,000 shares authorized, issued and outstanding	—				—
Additional paid-in capital	298				298
Retained earnings	6,764				6,036
Accumulated other comprehensive loss	(6			)	(15			)
Total owner’s equity	7,056				6,319
	$		14,022		$		13,093

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						Nine Months Ended
	February 28,			February 28,			February 28,			February 28,
	2006			2005			2006			2005
REVENUES	$	5,304		$	4,885		$	15,720		$	14,273
OPERATING EXPENSES:
Salaries and employee benefits	1,976			1,920			5,822			5,602
Purchased transportation	237			220			713			627
Rentals and landing fees	405			408			1,291			1,185
Depreciation and amortization	200			196			590			588
Fuel	666			498			2,054			1,433
Maintenance and repairs	319			306			1,017			951
Intercompany charges, net	385			381			1,124			1,115
Other	676			618			1,930			1,804
	4,864			4,547			14,541			13,305
OPERATING INCOME	440			338			1,179			968
OTHER INCOME (EXPENSE):
Interest, net	14			(6		)	28			(30		)
Other, net	(11		)	(14		)	(39		)	(47		)
	3			(20		)	(11		)	(77		)
INCOME BEFORE INCOME TAXES	443			318			1,168			891
PROVISION FOR INCOME TAXES	163			120			439			335
NET INCOME	$	280		$	198		$	729		$	556

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)

	Nine Months Ended
	February 28,
	2006			2005
Operating Activities
Net income	$	729		$	556
Noncash charges:
Lease accounting charge	75			—
Depreciation and amortization	588			588
Other, net	76			45
Changes in operating assets and liabilities, net	(27		)	(107		)
Net cash provided by operating activities	1,441			1,082
Investing Activities
Capital expenditures	(1,024		)	(894		)
Proceeds from asset dispositions	30			1
Net cash used in investing activities	(994		)	(893		)
Financing Activities
Principal payments on debt	(97		)	(159		)
Net payments to parent company	(352		)	(27		)
Net cash used in financing activities	(449		)	(186		)
Net (decrease) increase in cash and cash equivalents	(2		)	3
Cash and cash equivalents at beginning of period	257			274
Cash and cash equivalents at end of period	$	255		$	277

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 for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2005. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of February 28, 2006 and the results of our operations for the three- and nine-month periods ended February 28, 2006 and 2005 and our cash flows for the nine-month periods ended February 28, 2006 and 2005. Operating results for the three- and nine-month periods ended February 28, 2006 are not necessarily indicative of the results that may be expected for the year ending May 31, 2006.

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, 2006 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

GUARANTEES.  We provide guarantees on FedEx debt instruments jointly and severally with other affiliated companies in the FedEx consolidated group. In addition, we guarantee, jointly and severally with other affiliated companies in the FedEx consolidated group, FedEx’s $1 billion revolving credit facility, which backs its commercial paper program.

In conjunction with certain transactions, primarily the lease, sale or purchase of operating assets or services in the ordinary course of business, we sometimes provide routine indemnifications (e.g., environmental, fuel, tax and software infringement), the terms of which range in duration and are often not limited. The fair market value of these indemnifications is not believed to be significant.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. Our pilots, who represent a small number of our 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. These negotiations are ongoing and are being mediated through the National Mediation Board. We cannot estimate the financial impact, if any, the results of these negotiations may have on our future results of operations.

LEASE ADJUSTMENT. During the first quarter of 2006, a one-time, non-cash charge of $75 million (before variable compensation effects and income tax) was recorded, which represented the impact on prior years, to adjust the accounting for certain facility leases. The charge related primarily to rent escalations in on-airport facility leases. Because the amounts involved were not material to our financial statements in any individual

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prior period and the cumulative amount is not expected to be material to 2006 results, we recorded the cumulative adjustment in the first quarter, which increased operating expenses by $75 million.

BUSINESS ACQUISITION. On January 24, 2006, we entered into an agreement with Tianjin Datian W. Group Co., Ltd. (“DTW Group”) to acquire DTW Group’s 50% share of the FedEx-DTW International Priority express joint venture (“FedEx-DTW”) and DTW Group’s domestic express network in China for approximately $400 million in cash. This acquisition will convert our joint venture with DTW Group, formed in 1999 and currently accounted for under the equity method, into a wholly owned subsidiary and increase our presence in China in the international and domestic express businesses. The acquisition is expected to be completed in the first half of 2007.

STOCK COMPENSATION. We participate in the stock-based compensation plans of FedEx. Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,” and its related interpretations are applied by FedEx to measure 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 by FedEx of restricted stock to our employees, we recognize the fair value of the awards ratably over their explicit service period.

NEW ACCOUNTING PRONOUNCEMENTS. In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“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 the first quarter of 2007 for FedEx Express). We will record compensation expense over the requisite 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 by FedEx to our employees in the future, the assumptions and the fair value model used to value those future grants, and the market value of FedEx’s common stock. However, FedEx anticipates that the impact of SFAS 123R on a consolidated basis will approximate the pro forma results under SFAS 123. For more information about the pro forma results under SFAS 123, refer to the financial statements of FedEx included in its Form 10-Q for the quarter ended February 28, 2006.

In March 2005, the FASB issued Financial Accounting Standards Board Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143”. FIN 47 clarifies that liabilities associated with asset retirement obligations for which the timing or settlement method is conditional upon future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. We will adopt FIN 47 in the fourth quarter of 2006 and the adoption will not have a material impact on our financial position or results of operations for 2006.

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(2) Comprehensive Income

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

	Three Months Ended
	February 28,		February 28,
	2006		2005
Net income	$	280	$	198
Other comprehensive income:
Foreign currency translation adjustments, net of deferred taxes of $2 and $2	10		(2		)
Comprehensive income	$	290	$	196

	Nine Months Ended
	February 28,			February 28,
	2006			2005
Net income	$	729		$	556
Other comprehensive income:
Foreign currency translation adjustments, net of deferred tax benefit of $3 and deferred taxes of $8	9			36
Comprehensive income	$		738	$		592

(3) Employee Benefit Plans

A majority of our employees are covered by the FedEx Corporation Employees’ Pension Plan, a defined benefit pension plan sponsored by FedEx. The plan covers certain U.S. employees age 21 and over with at least one year of service and provides benefits based on average earnings and years of service. For more information about this plan refer to the financial statements of FedEx included in its Form 10-Q for the quarter ended February 28, 2006.

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We incurred a net periodic benefit cost of $75 million and $224 million for the third quarter and nine months ended February 28, 2006, respectively, for our participation in the FedEx Corporation Employees’ Pension Plan. We incurred a net periodic benefit cost of $64 million and $192 million for the third quarter and nine months ended February 28, 2005, respectively, for our participation in the FedEx Corporation Employees’ Pension Plan. These amounts were paid to FedEx. 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 the plans sponsored by us, the following table summarizes the net periodic benefit cost of the pension and postretirement healthcare (in millions):

	Three Months Ended						Nine Months Ended
	February 28,			February 28,			February 28,			February 28,
	2006			2005			2006			2005
Pension Plans
Service cost	$	4		$	4		$	13		$	12
Interest cost	4			3			11			9
Expected return on plan assets	(2		)	(2		)	(6		)	(6		)
Recognized actuarial losses	1			—			2			2
	$	7		$	5		$	20		$	17
Postretirement Healthcare Plans
Service cost	$	9		$	8		$	27		$	24
Interest cost	7			7			21			21
	$	16		$	15		$	48		$	45

No material contributions were made during the first nine months of 2006 or 2005 to pension plans sponsored by us.

(4) Commitments

As of February 28, 2006, our purchase commitments for the remainder of 2006 and annually thereafter under various contracts were as follows (in millions):

			Aircraft-
	Aircraft		Related(1)		Other(2)		Total
2006 (remainder)	$	31	$	58	$	2	$	91
2007	212		195		12		419
2008	431		99		10		540
2009	463		58		8		529
2010	667		67		8		742
Thereafter	625		71		120		816

⁽¹⁾ Primarily aircraft modifications.

⁽²⁾ Primarily advertising and promotions contracts.

The amounts reflected in the table above for purchase commitments represent non-cancelable agreements to purchase goods or services.  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 non-cancelable commitments to modify such aircraft.  Open purchase orders that are cancelable are not considered unconditional purchase obligations and therefore are not included in the table above. We are committed to purchase certain aircraft. Deposits and progress payments of $31 million have been made toward these purchases and other planned aircraft-related transactions. In addition, we have committed to modify our

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DC10 aircraft for passenger-to-freighter and two-man cockpit configurations. Future payments related to these activities are included in the table above. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of our aircraft purchase commitments as of February 28, 2006 with the year of expected delivery by type:

	A300	A310	A380	Total
2006 (remainder)	1	1	—	2
2007	5	2	—	7
2008	9	—	—	9
2009	2	—	2	4
2010	—	—	4	4
Thereafter	—	—	4	4
Total	17	3	10	30

A summary of future minimum lease payments under capital leases at February 28, 2006 is as follows (in millions):

2006 (remainder)	$	5
2007	19
2008	98
2009	10
2010	95
Thereafter	129
	356
Less amount representing interest	64
Present value of net minimum lease payments	$	292

A summary of future minimum lease payments under non-cancelable operating leases with an initial or remaining term in excess of one year at February 28, 2006 is as follows (in millions):

	Aircraft and Related		Facilities and
	Equipment		Other		Total
2006 (remainder)	$	156	$	136	$	292
2007	606		540		1,146
2008	585		494		1,079
2009	555		410		965
2010	544		322		866
Thereafter	4,460		2,373		6,833
	$	6,906	$	4,275	$	11,181

While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

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We make payments under certain leveraged operating leases that are sufficient to pay principal and interest on certain pass-through certificates. The pass-through certificates are not our direct obligations, nor do we guarantee them.

(5) Contingencies

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 our employees 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 unspecified monetary damages, injunctive relief, or both.

To date, one of these wage-and-hour cases, Foster v. FedEx Express, has been certified as a class action. The plaintiffs represent a class of our hourly 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 in December 2004 granting class certification on all issues. In February 2006, the parties reached a settlement that will be presented to the court for approval. We continue to deny liability, but entered into the settlement to avoid the cost and uncertainty of further litigation. The amount of the proposed settlement was accrued at February 28, 2006 and is not material to FedEx Express.

Race Discrimination. On September 28, 2005, a California federal district court granted class certification in Satchell v. FedEx Express, a lawsuitalleging discrimination in the Western region of the United States against certain current and former minority employees in pay and promotion. The district court’s ruling on class certification is not a decision on the merits of the plaintiffs’ claim and does not address whether we will be held liable. Trial is currently scheduled for February 2007. We have denied any liability and intend to vigorously defend ourself in this case. Given the nature and preliminary status of the claim, we cannot yet determine the amount or a reasonable range of potential loss in this matter, if any. It is reasonably possible, however, that we could incur a material loss as this case develops.

Other. We are subject to other legal proceedings that arise in the ordinary course of our 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.

(6) Parent/Affiliate Transactions

Affiliate company balances that are currently receivable or payable relate to charges for services provided by or to other FedEx affiliates and are settled on a monthly basis. The noncurrent intercompany balance amounts at February 28, 2006 and May 31, 2005 primarily represent the net activity from participation in FedEx’s consolidated cash management program. These net amounts are reflected as financing activities on the statements of cash flows. In addition, we are allocated interest income on these amounts at market rates.

We also receive allocated charges from FedEx Corporate Services, Inc. (“FedEx Services”), a wholly owned subsidiary of FedEx, for sales, marketing and information technology functions and from FedEx for management fees related to services received for general corporate oversight, including executive officers and certain administrative functions. We believe the total amounts allocated approximate the cost of providing such services.

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Customers doing business with FedEx Express, FedEx Ground Package System, Inc. (“FedEx Ground”) and FedEx SmartPost, Inc. (“FedEx SmartPost”), wholly owned subsidiaries of FedEx, are provided the ability to receive a single invoice for their shipping charges. Revenue is recognized by the operating company performing the transportation services and the corresponding total receivable is recorded and collected by us. The net customer balances for transportation services performed by FedEx Ground and FedEx SmartPost are reflected in trade receivables on our balance sheet and totaled $424 million at February 28, 2006 and $383 million at May 31, 2005.

(7) Supplemental Cash Flow Information

	Nine Months Ended
	February 28,		February 28,
	2006		2005
	(In millions)
Cash payments for:
Interest (net of capitalized interest)	$	51	$	69
Income taxes (primarily paid to parent)	417		351

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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 February 28, 2006, and the related condensed consolidated statements of income for the three-month and nine-month periods ended February 28, 2006 and 2005 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 2006 and 2005. 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, 2005, 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, 2005, 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, 2005, 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

March 21, 2006

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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 of 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 unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2005, which include 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 and capital resources, see the Quarterly Report on Form 10-Q of our parent, FedEx Corporation, (“FedEx”), for the quarter ended February 28, 2006. Also, for information regarding our critical accounting policies, see FedEx’s Annual Report on Form 10-K for the year ended May 31, 2005.

FedEx Express is the world’s largest express transportation company. FedEx Services provides the customer-facing sales, marketing and information technology functions of FedEx Express and our sister company FedEx Ground. The costs for these activities are allocated based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the cost of providing these functions. The operating expenses line item “Intercompany charges” on the financial summary below represents an allocation primarily of salaries and benefits, depreciation and other costs for the sales, marketing and information technology functions provided to us by FedEx Services. In addition, “Intercompany charges” includes allocated charges from our parent for management fees related to services received for general corporate oversight, including executive officers and certain administrative functions. We believe the total amounts allocated reasonably reflect the cost of providing such services.

In addition, certain FedEx operating companies provide transportation and related services for FedEx Express. Billings for such services are based on negotiated rates which we believe approximate fair value and are reflected as revenues of the billing company. Such intercompany revenues and expenses are not separately identified in the following information as the amounts are not material.

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, primarily measured by average price per shipment (yield);

•our ability to manage our cost structure for capital expenditures and operating expenses such as salaries and employee benefits and maintenance and repairs and to match such expenses to shifting volume levels; and

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

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2006 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 table compares revenues, operating expenses, operating income and margin (dollars in millions) for the three- and nine-month periods ended February 28:

	Three Months Ended				Percent	Nine Months Ended				Percent
	2006		2005		Change	2006		2005		Change
Revenues:
Package:
U.S. overnight box	$1,598		$1,493		7	$4,762		$4,413		8
U.S. overnight envelope	485		444		9	1,455		1,315		11
U.S. deferred	750		759		(1)	2,138		2,089		2
Total U.S. domestic package revenue	2,833		2,696		5	8,355		7,817		7
International Priority (IP)	1,691		1,514		12	5,082		4,491		13
Total package revenue	4,524		4,210		7	13,437		12,308		9
Freight:
U.S.	574		474		21	1,644		1,366		20
International	107		94		14	329		275		20
Total freight revenue	681		568		20	1,973		1,641		20
Other	99		107		(7)	310		324		(4)
Total revenues	5,304		4,885		9	15,720		14,273		10
Operating expenses:
Salaries and employee benefits	1,976		1,920		3	5,822		5,602		4
Purchased transportation	237		220		8	713		627		14
Rentals and landing fees	405		408		(1)	1,291		1,185		9
Depreciation and amortization	200		196		2	590		588		—
Fuel	666		498		34	2,054		1,433		43
Maintenance and repairs	319		306		4	1,017		951		7
Airline Stabilization Act charge	—		—		—	—		48		NM
Intercompany charges	385		381		1	1,124		1,115		1
Other	676		618		9	1,930		1,756		10
Total operating expenses	4,864		4,547		7	14,541	(1)	13,305		9
Operating income	$440		$338		30	$1,179		$968		22
Operating margin	8.3	%	6.9	%	140bp	7.5	%	6.8	%	70bp

⁽¹⁾   Operating expenses for the first nine months of 2006 include a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases.

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The following table compares selected statistics (in thousands, except yield amounts) for the three- and nine-month periods ended February 28:

	Three Months Ended				Percent	Nine Months Ended				Percent
	2006		2005		Change	2006		2005		Change
Package Statistics
Average daily package volume (ADV):
U.S. overnight box	1,225		1,217		1	1,205		1,182		2
U.S. overnight envelope	711		681		4	708		668		6
U.S. deferred	965		1,086		(11)	916		961		(5)
Total U.S. domestic ADV	2,901		2,984		(3)	2,829		2,811		1
IP	478		435		10	467		432		8
Total ADV	3,379		3,419		(1)	3,296		3,243		2
Revenue per package (yield):
U.S. overnight box	$	21.03	$	19.79	6	$	20.80	$	19.66	6
U.S. overnight envelope	11.01		10.51		5	10.81		10.35		4
U.S. deferred	12.54		11.26		11	12.29		11.44		7
U.S. domestic composite	15.75		14.57		8	15.55		14.63		6
IP	57.00		56.14		2	57.24		54.73		5
Composite package yield	21.59		19.86		9	21.46		19.97		7
Freight Statistics
Average daily freight pounds:
U.S.	9,619		9,331		3	9,343		8,842		6
International	2,177		1,868		17	2,165		1,867		16
Total average daily freight pounds	11,796		11,199		5	11,508		10,709		7
Revenue per pound (yield):
U.S.	$	0.96	$	0.82	17	$	0.93	$	0.81	15
International	0.80		0.81		(1)	0.80		0.78		3
Composite freight yield	0.93		0.82		13	0.90		0.81		11

Revenues

Total revenues increased in the third quarter and nine months of 2006, principally due to increases in International Priority (“IP”), U.S. domestic overnight and U.S. freight revenues. During the third quarter of 2006, IP revenues grew 12% on a 10% increase in volume and yield growth of 2%. During the nine months of 2006, IP revenues grew 13% on an 8% increase in volume and yield growth of 5%. During the third quarter and nine months of 2006, U.S. domestic package revenues grew 5% and 7% due primarily to yield increases of 8% and 6%.

Asia experienced strong average daily volume growth during both the third quarter and nine months of 2006, while outbound shipments from the United States, Europe and Latin America also increased compared to the prior year. IP and international freight capacity has increased significantly as a result of our two around-the-world flights. We may continue to realize increased international freight volume until higher yielding IP traffic can be sold into the added capacity. The U.S. domestic package volume decline in the third quarter resulted from a planned decrease in U.S. domestic deferred volumes, partially offset by growth in our U.S. domestic overnight services.

IP yield increased during the third quarter and nine months of 2006 primarily due to higher fuel surcharges, improved regional mix and an increase in international average weight per package, partially offset by currency exchange rate impacts. U.S. domestic composite yield increases were due to higher fuel surcharge revenue and improved yield on U.S. domestic deferred packages. We continue to manage our U.S. domestic deferred yield to improve the profitability of this service. U.S. freight yield increases were due to an increase in average rate per pound and higher fuel surcharge revenue. In January 2006, we implemented an average list price increase of 5.5% on U.S. domestic shipments and U.S. outbound international shipments, while we lowered our fuel surcharge index by 2%.

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Fuel surcharge revenue was higher in the third quarter and nine months of 2006 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 three- and nine-month periods ended February 28:

	Three Months Ended				Nine Months Ended
	2006		2005		2006		2005
U.S. Domestic and Outbound Fuel Surcharge:
Low	11.00	%	7.50	%	10.50	%	6.00	%
High	20.00		13.00		20.00		13.00
Average	14.17		9.83		13.94		8.78
International Fuel Surcharges:
Low	10.50		7.50		10.00		5.00
High	20.00		13.00		20.00		13.00
Average	13.17		9.46		12.92		8.21

Beginning in November 2005 and continuing into December 2005, we temporarily capped our fuel surcharges in certain regions to ensure that our services remained competitively priced in the marketplace.

Operating Income

During the third quarter and nine months of 2006, our operating income grew as a result of strong revenue growth and improved operating margin. Continued volume growth in higher margin U.S. domestic overnight and IP services contributed to solid yield improvements. Improved yields, combined with productivity gains, allowed us to substantially improve operating margin in the third quarter of 2006. Revenue and margin growth for the third quarter and nine months of 2006 more than offset a one-time adjustment for leases in the first quarter and costs associated with our two around-the-world flights.

During the third quarter and nine months of 2006, fuel costs were higher due to an increase in the average price per gallon of jet fuel, while gallons consumed increased slightly. However, fuel surcharge revenue mitigated higher jet fuel prices. Purchased transportation costs increased in the third quarter and nine months of 2006 driven by IP volume growth, which required a higher utilization of contract pickup and delivery services. The increase in the nine months of 2006 in rentals and landing fees is primarily due to the one-time adjustment for leases of $75 million.

Results for the third quarter of 2006 include a benefit from the settlement of a trade secrets lawsuit against Accu-Sort Systems Inc. This benefit was more than offset, however, by accruals relating to other pending litigation matters. The net effect of these items, either individually or in the aggregate, was not material.

Interest and Income Taxes

Interest income during the third quarter and nine months of 2006 was primarily due to increased intercompany interest income related to higher interest on intercompany receivables and additional capitalized interest due to significant increases in the number of aircraft undergoing modifications.

Our effective tax rate was 36.8% for the third quarter and 37.6% for the nine months of 2006. We expect the effective tax rate to approximate 38% for the fourth quarter of 2006; however, the actual rate will depend on a number of factors, including the amount and source of operating income. Our effective tax rates for the third quarter and nine months of 2005 were 37.8% and 37.6%, respectively.

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Business Acquisition

On January 24, 2006, we entered into an agreement with Tianjin Datian W. Group Co., Ltd. (“DTW Group”) to acquire DTW Group’s 50% share of the FedEx-DTW International Priority express joint venture (“FedEx-DTW”) and DTW Group’s domestic express network in China for approximately $400 million in cash. This acquisition will convert our joint venture with DTW Group, formed in 1999 and currently accounted for under the equity method, into a wholly owned subsidiary and increase our presence in China in the international and domestic express businesses. The acquisition is expected to be completed in the first half of 2007.

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 the financial condition, results of operations, cash flows, plans, objectives, future performance and business of FedEx Express. 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;

•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, or the transportation industry or FedEx Express in particular, and what effects these events will have on our costs or the demand for our services;

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

•the ability of FedEx 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 network, customer demand for our various services or the prices we obtain for our services;

•the outcome of negotiations to reach a new collective bargaining agreement with the union that represents our pilots;

•market acceptance of our new service and growth initiatives;

•competition from other providers of transportation 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;

•technology infrastructure disruptions, including those impacting the Internet or our computer systems and Web site;

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

•adverse weather conditions or natural disasters;

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•widespread outbreak of an illness, such as avian influenza (bird flu), severe acute respiratory syndrome (SARS) or any other communicable disease, or any other public health crisis;

•availability of financing on acceptable terms; and

•other risks and uncertainties you can find in the press releases and SEC filings of FedEx and FedEx Express.

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

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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 February 28, 2006 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended February 28, 2006, 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 6. Exhibits

Exhibit
Number	Description of Exhibit
10.1	Twenty-Sixth Supplemental Lease Agreement dated as of September 1, 2005 between the Memphis-Shelby County Airport Authority and Federal Express Corporation. (Filed as Exhibit 10.1 to FedEx Corporation’s FY06 Third 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.

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SIGNATURE

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

	FEDERAL EXPRESS CORPORATION
Date: March 24, 2006	/s/	JAY L. COFIELD
	JAY L. COFIELD
	VICE PRESIDENT
	WORLDWIDE CONTROLLER
	(PRINCIPAL ACCOUNTING OFFICER)

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EXHIBIT INDEX

Exhibit
Number	Description of Exhibit
10.1	Twenty-Sixth Supplemental Lease Agreement dated as of September 1, 2005 between the Memphis-Shelby County Airport Authority and Federal Express Corporation. (Filed as Exhibit 10.1 to FedEx Corporation’s FY06 Third 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.

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