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.
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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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

(1)General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X, and should be read in conjunction with our Annual Report on Form 10-K, as amended, for the year ended May 31, 2006 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted, as 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 November 30, 2006February 28, 2007 and the results of our operations for the three- and six-monthnine-month periods ended November 30,February 28, 2007 and 2006 and 2005 and our cash flows for the six-monthnine-month periods ended November 30, 2006February 28, 2007 and 2005.2006. Operating results for the three- and six-monthnine-month periods ended November 30, 2006February 28, 2007 are not necessarily indicative of the results that may be expected for the year ending May 31, 2007.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2007 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS.The pilots of FedEx Express, who represent a small number of our total employees, are employed under a collective bargaining agreement. Our net income forIn October 2006, the second quarter and first six months of 2007 includes the impact ofpilots ratified a new four-year labor contract ratified by the pilots on October 17, 2006. The effect of this new agreement on net income for the second quarter of 2007 was approximately $78 million after tax, or $0.25 per diluted share. The new agreement includesthat included signing bonuses and other upfront compensation of approximately $143 million, as well as pay increases and other benefit enhancements. The effect of this new agreement on second quarter of 2007 net income was approximately $78 million after tax, or $0.25 per diluted share. These costs were partially mitigated by reductions in variable incentive compensation.

DIVIDENDS DECLARED PER COMMON SHARE.On November 17, 2006,February 16, 2007, our Board of Directors declared a dividend of $0.09 per share of common stock. The dividend will be paid on JanuaryApril 2, 2007 to stockholders of record as of the close of business on DecemberMarch 12, 2006.2007. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

The funded status recognition and disclosure provisions of SFAS 158 are effective for FedEx as of May 31, 2007. The requirement to measure plan assets and benefit obligations as of our fiscal year-end is effective for FedEx in 2009.

The impact of this standard on our balance sheet will depend on the funded status of our plans based on our February 28, 2007 measurement date. However, if the provisions of SFAS 158 were effective as of May 31, 2006, we estimate that the incremental after-tax impact of adopting SFAS 158 would have been a decrease in assets of approximately $1.4 billion, an increase in liabilities of approximately $400 million, and a decrease in total shareholders’ equity of approximately $1.8 billion. The actual amount of these adjustments at May 31, 2007 could differ materially from the amounts above. However, any adjustments resulting from the adoption of these new rules are not expected to impact our compliance with any current loan covenants or affect our debt ratings, pension funding requirements or our overall liquidity.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which eliminates the diversity in practice surrounding the quantification and evaluation of financial statement errors. The guidance outlined in SAB 108 is effective for FedEx in 2008the fourth quarter of 2007 and is consistent with our historical practices for assessing such matters when circumstances have required such an evaluation. Accordingly, we do not believe that adoption of SAB 108 will have any impact on us.

TheIn February 2007, the FASB issued FASB Interpretation No. (“FIN”) 48, “AccountingSFAS 159, “The Fair Value Option for Uncertainty in Income Taxes,Financial Assets and Financial Liabilities — Including an Amendment of SFAS 115,” in July 2006. This interpretation establishes new standardswhich allows for the option to measure financial statement recognition, measurementinstruments and disclosure of uncertain tax positions taken or expected to be takencertain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in income tax returns. The new rules will be effective for FedEx in 2008.earnings. We continue to evaluate this interpretation, but do not presently anticipate its adoptionhave any financial assets or liabilities that we would elect to measure at fair value, and therefore we expect this standard will have a materialno impact on our financial statements.

(2)Business Acquisitions

On June 1, 2006, we adopted the provisions of SFAS 123R, “Share-Based Payment,” which requires recognition of compensation expense for stock-based awards using a fair value method. SFAS 123R is a revision of SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees.” Prior to the adoption of SFAS 123R, we applied APB 25 and its related interpretations to measure compensation expense for stock-based compensation plans. As a result, no compensation expense was recorded for stock options, as the exercise price was equal to the market price of our common stock at the date of grant.

We adopted SFAS 123R using the modified prospective method, which resulted in prospective recognition of compensation expense for all outstanding unvested share-based payments to employees based on the fair value on the original grant date. Under this method of adoption, our financial statement amounts for the prior period presented have not been restated.

Stock option compensation expense, pro forma net income and basic and diluted earnings per common share, if determined under SFAS 123 at fair value using the Black-Scholes method, would have been as follows (in millions, except for per share amounts) for the three- and six-monthnine-month periods ended November 30, 2005:February 28, 2006:

Following is a table of the key weighted-average assumptions used in the valuation calculations under both SFAS 123R and SFAS 123 for the options granted during the six-monthnine-month periods presented. See our Annual Report for a discussion of our methodology for developing each of the assumptions used in the valuation model.

During the sixnine months ended November 30, 2006, 2,778,196February 28, 2007, 3,008,420 stock options vested with a fair value of $56$62 million.

Total equity compensation shares outstanding or available for grant related to equity compensation at November 30, 2006February 28, 2007 represented 7.7%7.5% of the total outstanding common and equity compensation shares and equity compensation shares available for grant.

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

The calculationcalculations of basic and diluted earnings per common share for the three- and six-month periods ended November 30 wasFebruary 28 were as follows (in millions, except per share amounts):

We made tax-deductible voluntary contributions to our qualified U.S. domestic pension plans of $482 million during the first sixnine months of 2007, and $456 million induring the first sixnine months of 2006. Although additional contributions are not required, we may elect to make further voluntary contributions to our qualified plans in 2007.

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently competing collectively and managed collaboratively under the respected FedEx brand. Our operations are primarily represented by Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery services; FedEx Freight Corporation, a leading U.S. provider of LTL freight services; and FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”), a leading provider of document solutions and business services. These businesses form the core of our reportable segments. Management evaluates segment financial performance based on operating income.

FedEx Corporate Services, Inc. (“FedEx Services”) provides customer-facing sales, marketing and information technology support, primarily for FedEx Express and FedEx Ground. The costs for these functions are allocated based on metrics such as relative revenues or estimated services provided. We also allocate costs for administrative functions provided between operating companies and certain other costs, such as coststhose associated with services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe these allocations approximate the cost of providing these functions.

Effective June 1, 2006, we moved the credit, collections and customer service functions with responsibility for FedEx Express domestic and FedEx Ground customer information from FedEx Express into a newly formed subsidiary of FedEx Services named FedEx Customer Information Services, Inc. Also, effective June 1, 2006, we moved FedEx Supply Chain Services, Inc., the results of which were previously reported in the FedEx Ground segment, into a new subsidiary of FedEx Services named FedEx Global Supply Chain Services, Inc. The costs of providing these customer service functions and the net operating costs of FedEx Global Supply Chain Services are allocated back to the FedEx Express and FedEx Ground segments. Prior year amounts have not been reclassified to conform to the current year segment presentation, as the financial results of all segments are materially comparable.

As of November 30, 2006,February 28, 2007, our reportable segments included the following businesses:

The following table provides a reconciliation of reportable segment revenues and operating income to our consolidated financial statement totals (in millions):

As of November 30, 2006,February 28, 2007, our purchase commitments for the remainder of 2007 and annually thereafter under various contracts were as follows (in millions):

A summary of future minimum lease payments under capital leases at November 30, 2006February 28, 2007 is as follows (in millions):

Independent Contractor.FedEx Ground is involved in numerous purported class-action lawsuits and other proceedings that claim that the company’s owner-operators should be treated as employees, rather than independent contractors. These matters includeEstrada v. FedEx Ground, a class action involving single work area contractors that was filed in California state court. Although the trial court granted some of the plaintiffs’ claims for relief in Estrada ($18 million, inclusive of attorney’s fees, plus equitable relief), the appellate court has reversed the trial court’s issuance of equitable relief. The plaintiffs petitioned the California Supreme Court for a review of the appellate court decision, and that petition was denied. We expect to prevail on the rest of the pending appeal as well.

Adverse determinations in these matters could, among other things, entitle certain of our contractors to the reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax liability for FedEx Ground. On August 10, 2005, the Judicial Panel on Multi-District Litigation granted our motion to transfer and consolidate the majority of the class-action lawsuits for administration of the pre-trial proceedings by a single federal court — the U.S. District Court for the Northern District of Indiana. We strongly believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that we will prevail in these proceedings. Given the nature and preliminary status of these claims, we cannot yet determine the amount or a reasonable range of potential loss in these matters, if any.

Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):