UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended May 31, 2014.

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)

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class				Name of each exchange on which registered
None				None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Rule 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

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 x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date 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). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 filer ¨	Accelerated filer ¨	Non-accelerated filer x	Smaller reporting company ¨
		(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). Yes ¨ No x

The Registrant is a wholly owned subsidiary of FedEx Corporation, a Delaware corporation, and there is no market for the Registrant’s common stock, par value $0.10 per share. As of July 14, 2014, 1,000 shares of the Registrant’s common stock were outstanding.

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

TABLE OF CONTENTS


PART I			Page

ITEM 1. Business			3

ITEM 1A. Risk Factors			11

ITEM 1B. Unresolved Staff Comments			11

ITEM 2. Properties			12

ITEM 3. Legal Proceedings			15

ITEM 4. Mine Safety Disclosures			15

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			16

ITEM 6. Selected Financial Data			16

ITEM 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition			16

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk			16

ITEM 8. Financial Statements and Supplementary Data			16

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			16

ITEM 9A. Controls and Procedures			16

ITEM 9B. Other Information			17

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance			18

ITEM 11. Executive Compensation			18

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			18

ITEM 13. Certain Relationships and Related Transactions, and Director Independence			18

ITEM 14. Principal Accountant Fees and Services			18

PART IV

ITEM 15. Exhibits, Financial Statement Schedules			20

FINANCIAL SECTION

Table of Contents			23

Management’s Discussion and Analysis			24

Consolidated Financial Statements			40

Other Financial Information			70

EXHIBITS

Exhibit Index			E-1

Exhibit 12

Exhibit 23

Exhibit 24

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

EX-101 INSTANCE DOCUMENT

EX-101 SCHEMA DOCUMENT

EX-101 CALCULATION LINK BASE DOCUMENT

EX-101 DEFINITIONS LINK BASE DOCUMENT

EX-101 LABELS LINK BASE DOCUMENT

EX-101 PRESENTATION LINK BASE DOCUMENT

PART I

ITEM 1. BUSINESS

Overview

Federal Express Corporation (“FedEx Express”) invented express distribution 40 years ago in 1973 and remains the industry leader, providing rapid, reliable, time-definite delivery of packages and freight to more than 220 countries and territories through one integrated global network. FedEx Express is a wholly owned subsidiary of FedEx Corporation (“FedEx”), which was incorporated in Delaware on October 2, 1997 to serve as the parent holding company of FedEx Express. We offer a wide range of U.S. domestic and international shipping services for delivery of package and freight, connecting markets that generate more than 90% of the world’s gross domestic product through door-to-door, customs-cleared service, with a money-back guarantee. Our unmatched air route authorities and extensive transportation infrastructure, combined with leading-edge information technologies, make us the world’s largest express transportation company. We employ approximately 162,000 employees and have approximately 55,500 drop-off locations (including FedEx Office centers), 650 aircraft and approximately 55,000 vehicles and trailers in our integrated global network.

FedEx Corporate Services, Inc. (“FedEx Services”), a wholly owned subsidiary of FedEx, provides us and other FedEx subsidiaries with sales, marketing, information technology, communications, customer service and certain other back-office support. FedEx Services and its subsidiary FedEx TechConnect, Inc. provide a convenient single point of access for many customer support functions, enabling FedEx to more effectively sell the entire portfolio of transportation services and to help ensure a consistent and outstanding experience for our customers.

FedEx’s wholly owned subsidiary FedEx Office and Print Services, Inc. (“FedEx Office”) provides customer access to our shipping services. FedEx Office has approximately 1,800 locations and its network of locations provides convenient access points to our services for higher margin retail customers. In addition, FedEx Office offers packing services, and packing supplies and boxes are included in its retail product assortment.

We have a multi-year agreement with OfficeMax to offer U.S. domestic FedEx Express and FedEx Ground shipping services at all U.S. OfficeMax retail locations (more than 800 locations). These additional staffed drop-off locations complement FedEx’s existing retail network, including FedEx Office centers, and further expand customer access to our services.

Except as otherwise specified, any reference to a year indicates our fiscal year ended May 31 of the year referenced.

Services

We offer a wide range of U.S. domestic and international shipping services for delivery of packages and freight. Overnight and deferred package services are backed by money-back guarantees and extend to nearly the entire U.S. population. We offer three U.S. overnight package delivery services: FedEx First Overnight, FedEx Priority Overnight and FedEx Standard Overnight. FedEx SameDay service is available for urgent shipments up to 70 pounds to virtually any U.S. destination. We also offer U.S. express overnight and deferred freight services backed by money-back guarantees to handle the needs of the time-definite freight market. Additionally, FedEx One Rate was introduced in October 2013 and gives U.S. customers a simple, predictable flat rate shipping option that is calculated based on the packaging type, service selected and destination.

International express and deferred package delivery with a money-back guarantee is available to more than 220 countries and territories, with a variety of time-definite services to meet distinct customer needs. FedEx International Priority package services provide time-definite delivery within one, two or three business days worldwide. FedEx International Economy package services provide time-definite delivery within five business days worldwide. FedEx International First provides a time-definite, customs-cleared, door-to-door express service with a pre-defined delivery commitment as early as 8:00 a.m. in the U.S., 9:00 a.m. in Europe, and 10:00 a.m. in Asia, Canada and Latin America, covering 19 destination countries. We also offer domestic pickup-and-delivery services within certain non-U.S. countries, including the United Kingdom, Canada, China, India, Mexico, Brazil, France, Poland and South Africa. In addition, we offer comprehensive international express and deferred freight services, backed by a money-back guarantee, real-time tracking and advanced customs clearance.

We also provide FedEx Delivery Manager, which allows our U.S. residential customers to customize home deliveries to fit their schedule by providing a range of options to schedule dates, locations and times of delivery. By signing up at fedex.com, customers can receive notification of packages en route to their homes, and can choose various delivery options.

We provide our customers with a high level of service quality, as evidenced by our ISO 9001 certification for our global express and ground operations. ISO 9001 registration is required by thousands of customers around the world. Our global certification enhances our single-point-of-access strategy and solidifies our reputation as the quality leader in the transportation industry. ISO 9001 is currently the most rigorous international standard for Quality Management and Assurance. ISO standards were developed by the International Organization for Standardization in Geneva, Switzerland to promote and facilitate international trade. More than 150 countries, including European Union members, the U.S. and Japan, recognize ISO standards.

Information regarding our e-shipping tools and solutions can be found below (“Customer Technology”). In addition, detailed information about all of our delivery services, e-shipping tools and solutions and FedEx’s citizenship efforts can be found on the FedEx website, fedex.com. The information on the FedEx website, however, is not incorporated by reference in, and does not form a part of, this Report.

International Expansion

We are focused on the long-term expansion of our international presence, especially in key markets such as China, India, Europe, Latin America and Southern Africa. In 2014 we made a strategic move in Southern Africa by acquiring the businesses operated by our service provider in the following seven countries: South Africa, Botswana, Malawi, Mozambique, Namibia, Swaziland and Zambia.

This acquisition, along with our 2013 acquisitions of transportation companies in Poland, France and Brazil and our 2012 acquisition of a Mexican domestic express package delivery company, gives us more robust transportation networks within these countries and added capabilities in these important international markets, continues our strategic European, Latin American and African growth plans and is expected to provide important contributions to our long-term growth, productivity and profitability. Additionally, in May 2014, we reached a significant milestone in our European growth program when we opened our 100th new station — in Seville, southern Spain.

Since we began serving mainland China in 1984, we have expanded our service to cover more than 400 cities across the country and, in 2009, we began operations at our new Asia-Pacific hub at the Guangzhou Baiyun International Airport in southern China. Our new North Pacific regional hub at the Kansai International Airport in Osaka, Japan, which opened in April 2014, serves as a consolidation point for shipments from northern Asia to the U.S., and operates as an international gateway for customers in

western Japan. Additionally, in October 2012, we announced plans to establish a new International Express and Cargo Hub in Shanghai. This new facility, with designated onsite customs clearance, will be located at Shanghai’s Pudong International Airport and is slated for completion in early 2017. These hubs will allow us to continue to better serve our global customers doing business in the Asia-Pacific markets.

To facilitate the use of our growing international network, we offer a full range of international trade consulting services and a variety of online tools that enable customers to more easily determine and comply with international shipping requirements.

Profit Improvement Initiatives

During 2013, we saw challenging global economic conditions, as ongoing shifts from priority to deferred shipping services significantly impacted profitability. In response to these trends, in 2013 we announced profit improvement programs targeting annual profitability improvement of $1.6 billion. Our plans position FedEx Express to exit 2016 with a run rate of $1.6 billion of additional operating profit from the 2013 base business. Our profit improvement programs include multiple initiatives that are reducing our overall cost structure.

For example, in 2014 we completed a voluntary program offering cash buyouts to eligible U.S.-based employees in certain staff functions. We are also streamlining support functions and eliminating redundant systems and processes. At the same time, in addition to modernizing our air fleet, we are transforming our U.S. domestic express network by closing and realigning regional and district facilities, reorganizing pickup and delivery operations while maintaining our outstanding service levels, improving flight and crew scheduling, refining aircraft maintenance processes and improving fuel efficiency of our vehicle fleet. Internationally, we are working to improve the quality of our international revenue as customers continue to make more economical choices in a low-growth global economy by moving the line-haul of certain slower-moving shipments to third-party transportation providers and better leveraging capacity within our international network through, for example, the reduction of flights to and from Asia. Recent international acquisitions will also help drive increases in international domestic revenues. Lastly, we are improving revenue quality by adding value for our customers with innovative and market-leading solutions, such as expanding our small and medium-size customer base and adding services for vertical industries, including healthcare and aerospace. Our way forward is clear, as we continue to make FedEx Express an even leaner, more efficient business.

Customer Technology

We are a world leader in technology, and our founder Frederick W. Smith’s vision that “the information about a package is as important as the delivery of the package itself” remains at the core of our comprehensive technology strategy. In fact, FedEx won first place in the category of Productivity Innovation, and ranked No. 14 overall on the 2014 InformationWeek Elite 100 list – a compilation of the top business technology innovators in the U.S.

Our technology strategy is driven by our desire for customer satisfaction. Through FedEx Services, we strive to build technology solutions that will solve our customers’ business problems with simplicity, convenience, speed and reliability. The focal point of our strategy is the award-winning FedEx website, together with our customer integrated solutions.

The fedex.com website was launched nearly 20 years ago, and during that time, customers have shipped and tracked billions of packages at fedex.com. The fedex.com website is widely recognized for its speed, ease of use and customer-focused features. At fedex.com, our customers ship packages, determine international documentation requirements, track package status and pay invoices. The advanced tracking capability within FedEx Tracking provides customers with a consolidated view of inbound and outbound shipments.

FedEx Mobile is a suite of services available on most web-enabled mobile devices, such as the BlackBerry^® and Android™ smartphones, and includes enhanced support for Apple products, such as the iPhone^®, iPod touch^® and iPad^® devices. The FedEx Mobile website has expanded to more than 220 countries and territories and 26 languages. FedEx Mobile allows customers to track the status of packages, create shipping labels, get account-specific rate quotes and access drop-off location information. FedEx Office has its own iPhone^®, iPad^® and Android™ apps that allow customers to print directly from their smartphones to any FedEx Office location in the U.S. or have the order delivered right to their door, while also allowing customers to get account-specific pricing, track print orders or packages, or find the nearest FedEx Office location. FedEx Office self-serve printers give customers even more flexibility by allowing direct USB access to print documents, as well as the ability to retrieve documents submitted via Google Cloud Print, HP ePrint, Breezy and Canon Forms & Print Services for Salesforce with a secure retrieval code. In addition, FedEx Office self-serve printers and mobile applications give customers the ability to login to their Google Drive, Box and Dropbox cloud accounts, select a document and print. We also use wireless data collection devices to scan bar codes on shipments, thereby enhancing and accelerating the package information available to our customers.

FedEx innovation continued in 2014 with our FedEx Ship&Get^® pilot program, which is a new shipping and delivery option available at select retail locations that allows customers to use stand-alone kiosks and lockers that are managed electronically to ship or pick up packages at their convenience.

Our e-commerce tools and solutions are designed to be easily integrated into our customers’ applications, as well as into third-party software developed by leading e-procurement, systems integration and enterprise resource planning companies. The FedEx Ship Manager suite of solutions offers a wide range of options to help our customers manage their parcel and LTL shipping and associated processes.

Marketing

The FedEx brand name is symbolic of outstanding service, reliability and speed. Emphasis is placed on promoting and protecting the FedEx brand, one of our most important assets. As a result, FedEx is one of the most widely recognized brands in the world. In addition to television, print and digital advertising, we promote the FedEx brand through corporate sponsorships and special events. For example, FedEx sponsors:

•

PGA TOUR and the Champions Tour golf organizations, as the “Official Shipping Company,” and FedExCup, a season-long points competition for PGA TOUR players

•

The Title sponsor of the FedEx St. Jude Classic, a PGA TOUR event that raises millions of dollars for St. Jude Children’s Research Hospital

•

The National Football League (NFL), as its “Official Delivery Service Sponsor” and “Official Office Services Provider of the NFL”

•

FedExField in Washington, DC

•

The #11 Joe Gibbs Racing Toyota Camry driven by Denny Hamlin in the NASCAR Sprint Cup Series

•

ATP World Tour men’s professional tennis circuit and French Open tennis tournament

•

FedExForum in Memphis, TN

U.S. Postal Service Agreement

In 2013, we entered into a new seven-year agreement with the USPS for the provision of domestic air transportation services to the USPS for its First Class, Priority and Express Mail that runs through September 2020. We also provide transportation and delivery for the USPS’s international delivery service called Global Express Guaranteed (GXG) under a separate agreement.

Pricing

We periodically publish list prices in our Service Guides for the majority of our services. In general, U.S. shipping rates are based on the service selected, destination zone, weight, size, any ancillary service charge and whether the customer charged the shipment to a FedEx account. International rates are based on the type of service provided and vary with size, weight, destination and, whenever applicable, whether the customer charged the shipment to a FedEx account. We offer our customers discounts generally based on actual or potential average daily revenue produced.

We have an indexed fuel surcharge for U.S. domestic and U.S. outbound shipments and for shipments originating internationally, where legally and contractually possible. The surcharge percentage is subject to monthly adjustment based on a rounded average of a certain spot price for jet fuel. For example, the fuel surcharge for June 2014 was based on the average spot price for jet fuel published for April 2014. Changes to our fuel surcharge, when calculated according to the average spot price for jet fuel and our trigger points, are applied effective from the first Monday of the month. These trigger points may change from time to time, but information on the fuel surcharge for each month is available at fedex.com approximately two weeks before the surcharge is applicable. The weighted average U.S. domestic and U.S. outbound fuel surcharge as a percentage of the base rates for the past three years was: 2014 — 9%; 2013 — 12%; and 2012 — 14%. These percentages reflect certain fuel surcharge reductions that are associated with our annual base rate increases.

Operations

Our primary sorting facility, located in Memphis, serves as the center of our multiple hub-and-spoke system. A second national hub facility is located in Indianapolis. In addition to these national hubs, we operate regional hubs in Newark, Oakland, Fort Worth and Greensboro and major metropolitan sorting facilities in Los Angeles and Chicago.

Facilities in Anchorage, Paris, Guangzhou, Cologne/Bonn and Osaka serve as sorting facilities for express package and freight traffic moving to and from Asia, Europe and North America. Additional major sorting and freight handling facilities are located at Narita Airport in Tokyo, Stansted Airport outside London and Pearson Airport in Toronto. The facilities in Guangzhou, Paris, Cologne/Bonn and Osaka are also designed to serve as regional hubs for their respective market areas. A facility in Miami — the Miami Gateway Hub — serves our South Florida, Latin American and Caribbean markets.

Throughout our worldwide network, we operate city stations and employ a staff of customer service agents, cargo handlers and couriers who pick up and deliver shipments in the station’s service area. In some international areas, independent agents (Global Service Participants) have been selected to complete deliveries and to pick up packages. For more information about our sorting and handling facilities, see Part I, Item 2 of this Annual Report on Form 10-K under the caption “Sorting and Handling Facilities.”

FedEx Office offers retail access to our shipping services at all of its U.S. and Canadian retail locations. We also have alliances with certain other retailers to provide in-store drop-off sites. Our unmanned FedEx Drop Boxes provide customers the opportunity to drop off packages in office buildings, shopping centers and corporate or industrial parks.

Fuel Supplies and Costs

During 2014, we purchased jet fuel from various suppliers under contracts that vary in length and which provide for estimated amounts of fuel to be delivered. The fuel represented by these contracts is purchased at market prices. Because of our indexed fuel surcharge, we do not have any jet fuel hedging contracts. See “Pricing.”

The following table sets forth our costs for jet fuel and its percentage of our total revenues for the last five fiscal years:


Fiscal Year	Total Jet Fuel Cost (in millions)		Percentage of Total Revenues
2014	$	3,506		13.5	%
2013		3,683		14.0
2012		3,867		15.0
2011		3,178		13.2
2010		2,342		11.0

Most of our vehicle fuel needs are satisfied by retail purchases with various discounts.

Competition

As described in Item 1A of this Annual Report on Form 10-K (“Risk Factors”), the express package and freight markets are both highly competitive and sensitive to price and service, especially in periods of little or no macro-economic growth. The ability to compete effectively depends upon price, frequency, capacity and speed of scheduled service, ability to track packages, extent of geographic coverage, reliability and innovative service offerings.

Competitors within the U.S. include other package delivery concerns, principally United Parcel Service, Inc. (“UPS”), passenger airlines offering express package services, regional express delivery concerns, air freight forwarders and the USPS. Our principal international competitors are DHL, UPS, TNT Express, foreign postal authorities, freight forwarders, passenger airlines and all-cargo airlines. Many of our international competitors are government-owned, -controlled or -subsidized carriers, which may have greater resources, lower costs, less profit sensitivity and more favorable operating conditions than we do.

Employees

We are headquartered in Memphis, Tennessee. David J. Bronczek is our President and Chief Executive Officer. As of May 31, 2014, we employed approximately 112,000 permanent full-time and approximately 50,000 permanent part-time employees, of which 13% are employed in the Memphis area. Our international employees in the aggregate represent 37% of all employees.

Our pilots, who constitute a small percentage of our total employees, are represented by the Air Line Pilots Association, International (“ALPA”), and are employed under a collective bargaining agreement. This agreement became amendable in March 2013, and the parties are currently in negotiations.

Attempts by other labor organizations to organize certain other groups of employees occur from time to time. Although these organizing attempts have not resulted in any certification of a U.S. domestic collective bargaining representative (other than ALPA), we cannot predict the outcome of these labor activities or their effect, if any, on us or our employees. Certain of our non-U.S. employees are unionized. We believe our employee relations are excellent.

Trademarks

The “FedEx” trademark, service mark and trade name is essential to our worldwide business. FedEx and FedEx Express, among others, are trademarks, service marks and trade names of Federal Express Corporation for which registrations, or applications for registration, are on file, as applicable. We have authorized, through licensing arrangements, the use of certain of our trademarks, service marks and trade names by our Global Service Participants to support our business. In addition, we license the use of certain of our trademarks, service marks and trade names on promotional items for the primary purpose of enhancing brand awareness.

Regulation

Air. Under the Federal Aviation Act of 1958, as amended, both the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration (“FAA”) exercise regulatory authority over us.

The FAA’s regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards and maintenance, as well as personnel and ground facilities, which may from time to time affect our ability to operate our aircraft in the most efficient manner. We hold an air carrier certificate granted by the FAA pursuant to Part 119 of the federal aviation regulations. This certificate is of unlimited duration and remains in effect so long as we maintain our standards of safety and meet the operational requirements of the regulations.

In September 2010, the FAA proposed rules that would significantly reduce the maximum number of hours on duty and increase the minimum amount of rest time for our pilots, and thus require us to hire additional pilots and modify certain of our aircraft. When the FAA issued final regulations in December 2011, all-cargo carriers, including us, were exempt from these new pilot fatigue requirements, and instead required to continue complying with previously enacted flight and duty time rules. In December 2012, the FAA reaffirmed the exclusion of us from the new rule. It is reasonably possible, however, that future security or flight safety requirements could impose material costs on us.

The DOT’s authority relates primarily to economic aspects of air transportation. The DOT’s jurisdiction extends to aviation route authority and to other regulatory matters, including the transfer of route authority between carriers. We hold various certificates issued by the DOT, authorizing us to engage in U.S. and international air transportation of property and mail on a worldwide basis.

Under the Aviation and Transportation Security Act of 2001, as amended, the Transportation Security Administration (“TSA”), an agency within the Department of Homeland Security, has responsibility for aviation security. The TSA continues to require us to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static, but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. It is reasonably possible that these rules or other future security requirements could impose material costs on us.

We participate in the Civil Reserve Air Fleet (“CRAF”) program. Under this program, the U.S. Department of Defense may requisition for military use certain of our wide-bodied aircraft in the event of a declared need, including a national emergency. We are compensated for the operation of any aircraft requisitioned under the CRAF program at standard contract rates established each year in the normal course of awarding contracts. Through our participation in the CRAF program, we are entitled to bid on peacetime military cargo charter business. We, together with a consortium of other carriers, currently contract with the U.S. Government for charter flights.

Ground. The ground transportation performed by us is integral to our air transportation services. The enactment of the Federal Aviation Administration Authorization Act of 1994 abrogated the authority of states to regulate the rates, routes or services of intermodal all-cargo air carriers and most motor carriers. States may now only exercise jurisdiction over safety and insurance. We are registered in those states that require registration.

Like other interstate motor carriers, we are subject to certain DOT safety requirements governing interstate operations. In addition, vehicle weight and dimensions remain subject to both federal and state regulations.

International. Our international authority permits us to carry cargo and mail from points in our U.S. route system to numerous points throughout the world. The DOT regulates international routes and practices and is authorized to investigate and take action against discriminatory treatment of U.S. air carriers abroad. The right of a U.S. carrier to serve foreign points is subject to the DOT’s approval and generally requires a bilateral agreement between the U.S. and the foreign government. In addition, the carrier must then be granted the permission of such foreign government to provide specific flights and services. The regulatory environment for global aviation rights may from time to time impair our ability to operate our air network in the most efficient manner. Additionally, global air cargo carriers, such as us, are subject to current and potential additional aviation security regulation by foreign governments.

Our operations outside of the U.S., such as our growing international domestic operations, are also subject to current and potential regulations, including certain postal regulations and licensing requirements, that restrict, make difficult and sometimes prohibit, our ability to compete effectively in parts of the international domestic transportation and logistics market.

Communication. Because of the extensive use of radio and other communication facilities in our aircraft and ground transportation operations, we are subject to the Federal Communications Commission Act of 1934, as amended. Additionally, the Federal Communications Commission regulates and licenses our activities pertaining to satellite communications.

Environmental. Pursuant to the Federal Aviation Act, the FAA, with the assistance of the U.S. Environmental Protection Agency, is authorized to establish standards governing aircraft noise. Our aircraft fleet is in compliance with current noise standards of the federal aviation regulations. In addition to federal regulation of aircraft noise, certain airport operators have local noise regulations, which limit aircraft operations by type of aircraft and time of day. These regulations have had a restrictive effect on our aircraft operations in some of the localities where they apply but do not have a material effect on any of our significant markets. Congress’s passage of the Airport Noise and Capacity Act of 1990 established a National Noise Policy, which enabled us to plan for noise reduction and better respond to local noise constraints. Our international operations are also subject to noise regulations in certain of the countries in which we operate.

Concern over climate change, including the impact of global warming, has led to significant U.S. and international legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions, including our aircraft emissions. For example, during 2009, the European Commission approved the extension of the European Union Emissions Trading Scheme (“ETS”) for GHG emissions, to the

airline industry. Under this decision, all of our flights that are wholly within the European Union are now covered by the ETS requirements, and each year we are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such flights. For a description of such efforts and their potential effect on our cost structure and operating results, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

We are subject to federal, state and local environmental laws and regulations relating to, among other things, the shipment of dangerous goods, contingency planning for spills of petroleum products and the disposal of waste oil. Additionally, we are subject to numerous regulations dealing with underground fuel storage tanks, hazardous waste handling, vehicle and equipment emissions and noise and the discharge of effluents from our properties and equipment. We have environmental management programs to ensure compliance with these regulations.

Labor. All of our U.S. employees are covered by the Railway Labor Act of 1926, as amended (the “RLA”), while labor relations within the U.S. at most of FedEx’s companies are governed by the National Labor Relations Act of 1935, as amended (the “NLRA”). Under the RLA, groups that wish to unionize must do so across nationwide classes of employees. The RLA also requires mandatory government-led mediation of contract disputes supervised by the National Mediation Board before a union can strike or an employer can replace employees or impose contract terms. This part of the RLA helps minimize the risk of strikes that would shut down large portions of the economy. Under the NLRA, employees can unionize in small localized groups, and government-led mediation is not a required step in the negotiation process.

The RLA was originally passed to govern railroad and express carrier labor negotiations. As transportation systems evolved, the law expanded to cover airlines, which are the dominant national transportation systems of today. As an air express carrier with an integrated air/ground network, we and our employees have been covered by the RLA since the founding of the company in 1971. The purpose of the RLA is to offer employees a process by which to unionize (if they choose) and engage in collective bargaining while also protecting global commerce from damaging work stoppages and delays. Specifically, the RLA ensures that an entire transportation system, such as ours, cannot be shut down by the actions of a local segment of the network.

The U.S. Congress has, in the past, considered adopting changes in labor laws that would make it easier for unions to organize units of our employees. For example, there is always a possibility that Congress could remove most of our employees from the jurisdiction of the RLA, thereby exposing our network to sporadic labor disputes and the risk that small groups of employees could disrupt our entire air/ground network. In addition, federal and state governmental agencies have and may continue to take actions that could make it easier for our employees to organize under the RLA. For a description of these potential labor law changes, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

ITEM 1A. RISK FACTORS

We present information about our risk factors on pages 33 through 37 of this Annual Report on Form 10-K.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our principal owned and leased properties include our aircraft, vehicles, national, regional and metropolitan sorting facilities, administration buildings, FedEx Drop Boxes and data processing and telecommunications equipment.

Aircraft and Vehicles

As of May 31, 2014, our aircraft fleet consisted of the following:


Description	Owned		Leased		Total			Maximum Gross Structural Payload (Pounds per Aircraft) ⁽¹⁾

Boeing B777F		25		0		25			233,300
Boeing MD11		38		26		64			192,600
Boeing MD10-30		15		1		16			175,900
Boeing MD10-10		45		0		45			137,500
Boeing 767F		4		0		4			127,100
Airbus A300-600		35		36		71			106,600
Airbus A310-200/300		29		0		29			83,170
Boeing B757-200		106		0		106	⁽²⁾		63,000
ATR 72-202/212		21		0		21			17,970
ATR 42-300/320		26		0		26			12,070
Cessna 208B		243		0		243			2,830

Total		587		63		650

⁽¹⁾	Maximum gross structural payload includes revenue payload and container weight.

⁽²⁾	Includes 18 aircraft not currently in operation and awaiting completion of modification.

•

The B777Fs are two-engine, wide-bodied cargo aircraft that have a longer range and larger capacity than any other aircraft we operate.

•

The MD11s are three-engine, wide-bodied aircraft that have a longer range and larger capacity than MD10s.

•

The MD10s are three-engine, wide-bodied aircraft that have received an Advanced Common Flightdeck (ACF) modification, which includes a conversion to a two-pilot cockpit, as well as upgrades of electrical and other systems.

•

The B767Fs are two-engine, long-range, wide-bodied cargo aircraft.

•

The A300s and A310s are two-engine, wide-bodied aircraft that have a longer range and more capacity than B757s.

•

The B757s are two-engine, narrow-bodied aircraft configured for cargo service.

•

The ATR and Cessna 208 turbo-prop aircraft are leased to independent operators to support FedEx Express operations in areas where demand does not justify use of a larger aircraft.

An inventory of spare engines and parts is maintained for each aircraft type.

In addition, we lease smaller aircraft to operators, and these operators use the aircraft to move FedEx packages to and from airports served by our larger jet aircraft. The lease agreements generally call for the lessee to provide the flight crews, maintenance, fuel and other supplies required to operate the aircraft, and we reimburse the lessee for these items. Our lease agreements are for terms not exceeding one year and are generally cancelable upon 30 days’ notice.

At May 31, 2014, we operated approximately 55,000 ground transport vehicles, including pickup and delivery vans, larger trucks called container transport vehicles and over-the-road tractors and trailers.

Aircraft Purchase Commitments

The following table is a summary of the number and type of aircraft we were committed to purchase as of May 31, 2014, with the year of expected delivery:


	B757		B767F⁽¹⁾		B777F ⁽²⁾		Total

2015		13		12		—		25
2016		—		11		2		13
2017		—		11		—		11
2018		—		10		2		12
2019		—		4		2		6
Thereafter		—		—		12		12

Total		13		48		18		79

⁽¹⁾	As of May 31, 2014, our obligation to purchase four of these aircraft was conditioned upon there being no event that causes us and our employees to not be covered by the RLA.

⁽²⁾	As of May 31, 2014, our obligation to purchase nine of these aircraft was conditioned upon there being no event that causes us and our employees to not be covered by the RLA.

As of May 31, 2014, deposits and progress payments of $396 million had been made toward aircraft purchases and other planned aircraft-related transactions. Also see Note 14 of the accompanying consolidated financial statements for more information about our purchase commitments.

Sorting and Handling Facilities

At May 31, 2014, we operated the following major sorting and handling facilities:


Location	Acres		Square Feet		Sorting Capacity (per hour) ⁽¹⁾		Lessor	Lease Expiration Year

National
Memphis, Tennessee		784		3,663,000		475,000	Memphis-Shelby County Airport Authority	2036

Indianapolis, Indiana		316		2,509,000		214,000	Indianapolis Airport Authority	2028

Regional
Fort Worth, Texas		168		948,000		76,000	Fort Worth Alliance Airport Authority	2021

Newark, New Jersey		70		595,000		156,000	Port Authority of New York and New Jersey	2030

Oakland, California		75		448,935		63,000	City of Oakland	2036

Greensboro, N. Carolina		165		593,000		29,000	Piedmont Triad Airport Authority	2031

Metropolitan
Chicago, Illinois		66		597,000		23,000	City of Chicago	2018/2028⁽⁵⁾

Los Angeles, California		34		305,300		57,000	City of Los Angeles	2021/2025⁽⁶⁾

International
Anchorage, Alaska ⁽²⁾		64		332,000		25,000	State of Alaska, Department of Transportation and Public Facilities	2023

Paris, France ⁽³⁾		111		1,238,000		63,000	Aeroports de Paris	2029

Cologne, Germany ⁽³⁾		7		325,000		20,000	Cologne Bonn Airport	2040

Guangzhou, China ⁽⁴⁾		155		873,006		64,000	Guangdong Airport Management Corp.	2029

Osaka, Japan ⁽⁴⁾		17		425,206		9,000	New Kansai International Airport Co., Ltd.	2024

⁽¹⁾	Documents and packages.

⁽²⁾	Handles international express package and freight shipments to and from Asia, Europe and North America.

⁽³⁾	Handles intra-Europe express package and freight shipments, as well as international express package and freight shipments to and from Europe.

⁽⁴⁾	Handles intra-Asia express package and freight shipments, as well as international express package and freight shipments to and from Asia.

⁽⁵⁾	Property is held under two separate leases — lease for original hub expires in 2018, and lease for new facility expires in 2028.

⁽⁶⁾	Property is held under two separate leases — lease for sorting and handling facility expires in 2021, and lease for ramp expansion expires in 2025.

Our primary sorting facility, which serves as the center of our multiple hub-and-spoke system, is located at the Memphis International Airport. Our facilities at the Memphis International Airport also include aircraft hangars, aircraft ramp areas, vehicle parking areas, flight training and fuel facilities, administrative offices and warehouse space. We lease these facilities from the Memphis-Shelby County Airport Authority (the “Authority”). The lease obligates us to maintain and insure the leased property and to pay all related taxes, assessments and other charges. The lease is subordinate to, and our rights thereunder could be affected by, any future lease or agreement between the Authority and the U.S. Government.

We have additional international sorting-and-handling facilities located at Narita Airport in Tokyo, Stansted Airport outside London and Pearson Airport in Toronto. We also have a substantial presence at airports in Hong Kong, Taiwan, Dubai and Miami.

Administrative and Other Properties and Facilities

Our World Headquarters is located in southeastern Shelby County, Tennessee. We own our headquarters campus, which comprises nine separate buildings with approximately 1.3 million square feet of space. We also lease 39 facilities in the Memphis area for administrative offices and warehouses. We and FedEx Services lease state-of-the-art technology centers in Collierville, Tennessee, Irving, Texas, Colorado Springs, Colorado, and Orlando, Florida. These facilities house personnel responsible for strategic software development and other functions that support FedEx’s technology and e-commerce solutions.

We own or lease 641 facilities for city station operations in the U.S. In addition, 618 city stations are owned or leased throughout our international network. The majority of these leases are for terms of five to ten years. City stations serve as a sorting and distribution center for a particular city or region. We believe that suitable alternative facilities are available in each locale on satisfactory terms, if necessary.

As of May 31, 2014, we had approximately 40,000 Drop Boxes. We also have approximately 14,200 FedEx Authorized ShipCenters and other types of staffed drop-off locations, such as FedEx Office centers. Internationally, we had approximately 6,000 drop-off locations.

ITEM 3.

LEGAL PROCEEDINGS

FedEx Express and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business. For a description of material pending legal proceedings, see Note 15 of the accompanying consolidated financial statements.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

FedEx Express is a wholly owned subsidiary of FedEx, and there is no market for FedEx Express’s common stock.

ITEM 6.

SELECTED FINANCIAL DATA

Omitted under the reduced disclosure format permitted by General Instruction I(2)(a) of Form 10-K.

ITEM 7.

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

Management’s discussion and analysis of results of operations and financial condition is presented on pages 24 through 37 of this Annual Report on Form 10-K.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative information about market risk is presented on page 70 of this Annual Report on Form 10-K.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FedEx Express’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 14, 2014 thereon, are presented on pages 40 through 69 of this Annual Report on Form 10-K.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure 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 May 31, 2014 (the end of the period covered by this Annual Report on Form 10-K).

Assessment of Internal Control Over Financial Reporting

Management’s report on our internal control over financial reporting is presented on page 38 of this Annual Report on Form 10-K. The report of Ernst & Young LLP with respect to our internal control over financial reporting is presented on page 39 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

During our fiscal quarter ended May 31, 2014, 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.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

ITEM 11.

EXECUTIVE COMPENSATION

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

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Of the fees Ernst & Young LLP billed FedEx for services provided during 2014 and 2013, we estimate that the following amounts were for services related to FedEx Express. These amounts (in thousands) represent the fees that Ernst & Young LLP directly billed to FedEx Express, as well as that portion of Ernst & Young LLP’s fees that FedEx allocated to FedEx Express through management fees.


	2014		2013

Audit fees	$	9,518	$	9,363
Audit-related fees		527		607
Tax fees		364		562
All other fees		7		3

Total	$	10,416	$	10,535

•

Audit Fees. Represents fees for professional services provided for the audit of FedEx Express’s annual financial statements and review of FedEx Express’s quarterly financial statements, for the audit of FedEx Express’s internal control over financial reporting and for audit services provided in connection with other statutory or regulatory filings.

•

Audit-Related Fees. Represents fees for assurance and other services related to the audit of FedEx Express’s financial statements. The fees for 2014 and 2013 include fees for benefit plan audits and international accounting and reporting compliance.

•

Tax Fees. Represents fees for professional services provided primarily for domestic and international tax compliance and advice. Tax compliance and preparation fees totaled $149,000 in 2014 and $192,000 in 2013.

•

All Other Fees. Represents fees for products and services not otherwise included in the categories above. The amounts shown for 2014 and 2013 include fees for online technical resources.

To help ensure the independence of our independent registered public accounting firm, the Audit Committee of the Board of Directors of FedEx has adopted a Policy on Engagement of Independent Auditor, which is available in the Corporate Governance section of the Investor Relations page of our website at http://investors.fedex.com.

Pursuant to the Policy on Engagement of Independent Auditor, the Audit Committee preapproves all audit services and non-audit services to be provided to FedEx by its independent registered public accounting firm. The Audit Committee may delegate to one or more of its members the authority to grant the required approvals, provided that any exercise of such authority is presented at the next Audit Committee meeting.

The Audit Committee may preapprove for up to one year in advance the provision of particular types of permissible routine and recurring audit-related, tax and other non-audit services, in each case described in reasonable detail and subject to a specific annual monetary limit also approved by the Audit Committee. The Audit Committee must be informed about each such service that is actually provided. In cases where a service is not covered by one of those approvals, the service must be specifically preapproved by the Audit Committee no earlier than one year prior to the commencement of the service.

Each audit or non-audit service that is approved by the Audit Committee (excluding tax services performed in the ordinary course of FedEx’s business and excluding other services for which the aggregate fees are expected to be less than $25,000) will be reflected in a written engagement letter or writing specifying the services to be performed and the cost of such services, which will be signed by either a member of the Audit Committee or by an officer of FedEx authorized by the Audit Committee to sign on behalf of FedEx.

The Audit Committee will not approve any prohibited non-audit service or any non-audit service that individually or in the aggregate may impair, in the Audit Committee’s opinion, the independence of the independent registered public accounting firm.

In addition, FedEx’s independent registered public accounting firm may not provide any services, including financial counseling and tax services, to any FedEx officer, Audit Committee member or FedEx managing director (or its equivalent) in the Finance department or to any immediate family member of any such person.

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2) Financial Statements; Financial Statement Schedules

FedEx Express’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 14, 2014 thereon, are listed on page 23 and presented on pages 40 through 69 of this Annual Report on Form 10-K. FedEx Express’s “Schedule II — Valuation and Qualifying Accounts,” together with the report of Ernst & Young LLP dated July 14, 2014 thereon, is presented on pages 71 through 72 of this Annual Report on Form 10-K. All other financial statement schedules have been omitted because they are not applicable or the required information is included in FedEx Express’s consolidated financial statements or the notes thereto.

(a)(3) Exhibits

See the Exhibit Index on pages E-1 through E-6 for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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

Dated: July 14, 2014	By:	/s/ DAVID J. BRONCZEK
		David J. Bronczek
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.


Signature	Capacity	Date

/s/ DAVID J. BRONCZEK David J. Bronczek	President, Chief Executive Officer and Director (Principal Executive Officer)	July 14, 2014

/s/ CATHY D. ROSS Cathy D. Ross	Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)	July 14, 2014

/s/ FREDERICK W. SMITH * Frederick W. Smith	Chairman of the Board of Directors	July 14, 2014

/s/ ROBERT B. CARTER * Robert B. Carter	Director	July 14, 2014

/s/ MICHAEL L. DUCKER * Michael L. Ducker	Executive Vice President and Chief Operating Officer and Director	July 14, 2014

/s/ T. MICHAEL GLENN * T. Michael Glenn	Director	July 14, 2014


Signature	Capacity	Date

/s/ ALAN B. GRAF, JR. * Alan B. Graf, Jr.	Director	July 14, 2014

/s/ JAMES R. PARKER * James R. Parker	Executive Vice President – Air Operations and Director	July 14, 2014

/s/ CHRISTINE P. RICHARDS * Christine P. Richards	Director	July 14, 2014

FINANCIAL SECTION TABLE OF CONTENTS


	PAGE
Management’s Discussion and Analysis of Results of Operations and Financial Condition

Overview of Financial Section		24

Results of Operations		26

Recent Accounting Guidance		33

Risk Factors		33

Forward-Looking Statements		37

Consolidated Financial Statements

Management’s Report on Internal Control over Financial Reporting		38

Reports of Independent Registered Public Accounting Firm		39

Consolidated Balance Sheets May 31, 2014 and 2013		41

Consolidated Statements of Income Years Ended May 31, 2014, 2013 and 2012		43

Consolidated Statements of Comprehensive Income Years Ended May 31, 2014, 2013 and 2012		44

Consolidated Statements of Cash Flows Years Ended May 31, 2014, 2013 and 2012		45

Consolidated Statements of Changes in Owner’s Equity Years Ended May 31, 2014, 2013 and 2012		46

Notes to Consolidated Financial Statements		47

Other Financial Information

Quantitative and Qualitative Disclosures about Market Risk		70

Report of Independent Registered Public Accounting Firm		71

Schedule II – Valuation and Qualifying Accounts		72

Computation of Ratio of Earnings to Fixed Charges		73

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

OVERVIEW OF FINANCIAL SECTION

The financial section of the Federal Express Corporation (“FedEx Express”) Annual Report on Form 10-K (“Annual Report”) consists of the following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”), the Consolidated Financial Statements and the notes to the Consolidated Financial Statements, and Other Financial Information, all of which include information about our significant accounting policies, practices and the transactions that underlie our financial results. The following MD&A is abbreviated pursuant to General Instruction I(2)(a) of Form 10-K. Our MD&A includes an overview of our consolidated 2014 results compared to 2013, and 2013 results compared to 2012. Our MD&A also includes a discussion of key actions and events that impacted our results, as well as a discussion of our outlook for 2015. For additional information, including a discussion of liquidity, capital resources and contractual cash obligations, as well as our critical accounting estimates, see the Annual Report on Form 10-K for the fiscal year ended May 31, 2014 of our parent company, FedEx Corporation (“FedEx”). The discussion in the financial section should be read in conjunction with the other sections of this Annual Report, particularly “Item 1: Business” and our detailed discussion of risk factors included in this MD&A.

DESCRIPTION OF BUSINESS

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, communications and certain back-office support, as well as retail access for our customers through FedEx Office and Print Services, Inc. (“FedEx Office”) and customer service, technical support and billing and collection services through FedEx TechConnect, Inc.

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. For the international regions of FedEx Express, similar functions are performed on a regional basis by FedEx Express and reported in expense line items outside of intercompany charges. “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 approximate the net cost of providing these functions. FedEx allocation methodologies are refined as necessary to reflect changes in our business.

Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates that we believe approximate fair value and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such affiliated company revenues and expenses are not separately identified in the following financial 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 based on macro-economic factors and the global economy;

•

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 yield (revenue per package or pound);

•

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. The line item “Other operating expenses” predominantly includes costs associated with outside service contracts (such as security, facility services, and cargo handling), professional fees, uniforms, insurance and advertising.

Our aircraft maintenance and repairs costs are largely driven by aircraft utilization and required periodic maintenance events. When newer aircraft are introduced into our operating fleet, less maintenance costs are incurred. As a part of our fleet modernization program, we have retired older, less efficient aircraft prior to required periodic maintenance events and have introduced newly manufactured aircraft into the fleet. In addition, our global air and ground network includes a fleet of 650 aircraft (including approximately 300 supplemental aircraft) that provide delivery of packages and freight to more than 220 countries and territories through a wide range of U.S. and international shipping services. While certain aircraft are utilized in primary geographic areas (U.S. versus international), we operate an integrated global network, and utilize our aircraft and other modes of transportation to achieve the lowest cost of delivery while maintaining our service commitments to our customers. Because of the integrated nature of our global network, our aircraft are interchangeable across routes and geographies, giving us flexibility with our fleet planning to meet changing global economic conditions and maintain and modify aircraft as needed.

Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2014 or ended May 31 of the year referenced and comparisons are to the prior year.

RESULTS OF OPERATIONS

We offer a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. 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 years ended May 31:


										Percent Change
	2014			2013			2012			2014/ 2013			2013/ 2012
Revenues:
Package:
U.S. overnight box	$	6,555		$	6,513		$	6,546			1			(1	)
U.S. overnight envelope		1,636			1,705			1,747			(4	)		(2	)
U.S. deferred		3,188			3,020			3,001			6			1

Total U.S. domestic package revenue		11,379			11,238			11,294			1			—
International priority		6,451			6,586			6,849			(2	)		(4	)
International economy		2,229			2,046			1,859			9			10

Total international export package revenue		8,680			8,632			8,708			1			(1	)
International domestic⁽¹⁾		1,446			1,398			853			3			64

Total package revenue		21,505			21,268			20,855			1			2
Freight:
U.S.		2,355			2,562			2,498			(8	)		3
International priority		1,594			1,678			1,827			(5	)		(8	)
International airfreight		205			276			307			(26	)		(10	)

Total freight revenue		4,154			4,516			4,632			(8	)		(3	)
Other		389			409			279			(5	)		47

Total revenues		26,048			26,193			25,766			(1	)		2
Operating expenses:
Salaries and employee benefits		9,600			9,730			9,365			(1	)		4
Purchased transportation		1,767			1,649			1,357			7			22
Rentals and landing fees		1,678			1,659			1,657			1			—
Depreciation and amortization		1,476			1,338			1,157			10			16
Fuel		3,943			4,129			4,304			(5	)		(4	)
Maintenance and repairs		1,177			1,239			1,327			(5	)		(7	)
Business realignment, impairment and other charges⁽²⁾		—			243			134			NM			NM
Intercompany charges⁽³⁾		2,000			2,344			2,163			(15	)		8
Other⁽⁴⁾		3,264			3,308			3,054			(1	)		8

Total operating expenses		24,905			25,639			24,518			(3	)		5

Operating income	$	1,143		$	554		$	1,248			106			(56	)


Operating margin⁽⁵⁾		4.4	%		2.1	%		4.8	%		230	bp		(270	)bp

Other income (expense):
Interest, net		22			42			34			(48	)		24
Other, net		(106	)		(88	)		(45	)		20			96

		(84	)		(46	)		(11	)		83			NM


Income before income taxes		1,059			508			1,237			108			(59	)

Provision for income taxes		355			178			429			99			(59	)


Net income	$	704		$	330		$	808			113			(59	)


	Percent of Revenue
	2014			2013			2012
Operating expenses:
Salaries and employee benefits		36.9	%		37.2	%		36.3	%
Purchased transportation		6.8			6.3			5.3
Rentals and landing fees		6.4			6.3			6.4
Depreciation and amortization		5.7			5.1			4.5
Fuel		15.1			15.8			16.7
Maintenance and repairs		4.5			4.7			5.2
Business realignment, impairment and other charges⁽²⁾		—			0.9			0.5
Intercompany charges⁽³⁾		7.7			9.0			8.4
Other⁽⁴⁾		12.5			12.6			11.9

Total operating expenses		95.6			97.9			95.2


Operating margin⁽⁵⁾		4.4	%		2.1	%		4.8	%

⁽¹⁾	International domestic revenues represent our international intra-country express operations including countries such as Mexico and Brazil.

⁽²⁾

2013 includes $143 million of predominantly severance costs associated with our voluntary buyout program and a $100 million impairment charge resulting from the decision to retire 10 aircraft and related engines. 2012 represents impairment charges resulting from the decision to retire 24 aircraft and related engines.

⁽³⁾	Includes allocations of $258 million in 2013 for business realignment costs.

⁽⁴⁾	Includes predominantly costs associated with outside service contracts (such as security, facility services and cargo handling), professional fees, uniforms, insurance and advertising. 2012 includes reversal of a $66 million legal reserve that was initially recorded in 2011.

⁽⁵⁾	The direct and indirect charges described in notes (2) and (3) above reduced 2013 operating margin by 190 basis points. The charges and credit described in notes (2) and (4) above reduced 2012 operating margin by 30 basis points.

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


							Percent Change
	2014		2013		2012		2014/ 2013			2013/ 2012
Package Statistics
Average daily package volume (ADV):
U.S. overnight box		1,164		1,134		1,146		3			(1	)
U.S. overnight envelope		538		574		586		(6	)		(2	)
U.S. deferred		869		835		845		4			(1	)

Total U.S. domestic ADV		2,571		2,543		2,577		1			(1	)
International priority		410		421		421		(3	)		—
International economy		170		155		138		10			12

Total international export ADV		580		576		559		1			3
International domestic⁽¹⁾		819		785		495		4			59

Total ADV		3,970		3,904		3,631		2			8

Revenue per package (yield):
U.S. overnight box	$	22.18	$	22.52	$	22.31		(2	)		1
U.S. overnight envelope		11.97		11.66		11.65		3			—
U.S. deferred		14.44		14.18		13.87		2			2
U.S. domestic composite		17.42		17.33		17.12		1			1
International priority		61.88		61.28		63.47		1			(3	)
International economy		51.75		51.77		52.77		—			(2	)
International export composite		58.92		58.72		60.83		—			(3	)
International domestic⁽¹⁾		6.95		6.99		6.74		(1	)		4
Composite package yield		21.32		21.36		22.44		—			(5	)
Freight Statistics
Average daily freight pounds:
U.S.		7,854		7,612		7,487		3			2
International priority		2,922		3,048		3,303		(4	)		(8	)
International airfreight		798		1,066		1,171		(25	)		(9	)

Total average daily freight pounds		11,574		11,726		11,961		(1	)		(2	)

Revenue per pound (yield):
U.S.	$	1.18	$	1.32	$	1.30		(11	)		2
International priority		2.15		2.16		2.16		—			—
International airfreight		1.01		1.01		1.02		—			(1	)
Composite freight yield		1.41		1.51		1.51		(7	)		—

⁽¹⁾	International domestic statistics represent our international intra-country express operations, including countries such as Mexico and Brazil.

Revenues

Our revenues decreased 1% in 2014 due to lower fuel surcharges, lower freight revenue, lower exchange rates and one fewer operating day, partially offset by revenue growth in our U.S. and international export package base business. In addition, the continuing demand shift from our priority international services to our economy international services dampened revenue growth.

Freight yields decreased 7% in 2014 due to lower fuel surcharges and lower rates. Freight average daily pounds decreased by 1% in 2014 due to weakness in global economic conditions and capacity reductions. U.S. domestic yields increased 1% in 2014 primarily due to higher rates and weight per package, partially offset by lower fuel surcharges. International export package revenues increased 1% in 2014 as base business growth was offset by lower fuel surcharges and the demand shift to our lower-yielding economy services. International priority yields increased 1% in 2014, while international priority volumes declined 3%. Within this category, volumes for lower-yielding distribution services declined, while international priority volumes, excluding these distribution services, increased 1%. International domestic average daily volumes increased 4% in 2014 primarily due to prior year international business acquisitions.

Our revenues increased 2% in 2013 primarily due to the impact of international acquisitions during the year. Core revenue growth was constrained by global economic conditions as revenue growth from higher international export volume was offset by decreased yields due to shifts in demand from our priority international services to our economy international services and lower rates. In 2013, international domestic revenues increased 64% due to acquisitions in Brazil, France and Poland. International export revenues were down in 2013 as revenue per package decreased 3% due to the demand shift to our lower-yielding economy services as well as lower rates, while volume increased 3% driven by our economy services. A decrease in U.S. domestic package volumes more than offset an increase in U.S. domestic package yield, resulting in slightly lower U.S. domestic package revenues in 2013. Total average daily freight pounds decreased 2% in 2013 due to weakness in economic global conditions.

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 years ended May 31:


	2014			2013			2012
U.S. Domestic and Outbound Fuel Surcharge:
Low		8.00	%		10.00	%		11.50	%
High		10.50			14.50			16.50
Weighted-average		9.47			11.84			14.23

International Fuel Surcharges:
Low		12.00			12.00			13.50
High		19.00			20.50			23.00
Weighted-average		16.26			17.02			17.45

In January 2014, we implemented a 3.9% average list price increase for our U.S. domestic, U.S. export and U.S. import services. In January 2013, we implemented a 5.9% average list price increase for our U.S. domestic, U.S. export and U.S. import services, while we lowered our fuel surcharge index by two percentage points.

Operating Income

Our operating income and operating margin in 2014 were positively impacted by the inclusion in 2013 of costs associated with our business realignment program and an aircraft impairment charge as discussed below. In addition, our results in 2014 benefited from the revenue growth in our U.S. and international export package business, lower pension expense, our voluntary employee severance program and lower maintenance expense. These factors were partially offset by lower freight revenues, a significant negative net impact of fuel and higher depreciation expense. In addition, operating income in 2014 reflects one fewer operating day and year-over-year negative impact of severe weather.

In 2014, salaries and employee benefits decreased 1% due to lower pension expense, the delayed timing or absence of annual merit increases for many of our employees, benefits from our voluntary employee severance program and lower variable incentive compensation. Intercompany charges decreased 15% in 2014 due to the inclusion in the prior year results of costs associated with the business realignment program at FedEx Services, as well as lower allocated sales and information technology costs. Depreciation and amortization expense increased 10% during 2014 as a result of $74 million of year-over-year incremental accelerated depreciation due to the shortened life of certain aircraft scheduled for retirement, and aircraft recently placed into service. Purchased transportation costs increased 7% in 2014 due to higher utilization of third-party transportation providers, including recent business acquisitions.

of aircraft and related engines, as well as the timing of major maintenance events. Maintenance and repairs costs decreased 7% in 2013 due to the benefits from the retirement of aircraft and related engines, as well as the timing of major maintenance events.

Fuel costs decreased 5% in 2014 due to lower aircraft fuel prices and usage. 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 significant negative impact on operating income in 2014. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for our services.

Our operating results in 2013 were negatively impacted by $401 million of costs associated with our business realignment program, both directly and through intercompany allocations. Additionally, results for 2013 were negatively impacted by a $100 million impairment charge as a result of the decision to retire 10 aircraft and related engines from service. We incurred $69 million in year-over-year incremental accelerated depreciation costs in 2013 due to the decision in 2012 to shorten the lives of certain aircraft scheduled for retirement. Operating income and operating margin also decreased in 2013 due to the demand shift toward lower-yielding international services. Operating comparisons were also impacted by an aircraft impairment charge in 2012 and a reversal of a legal reserve that was initially recorded in 2011.

Salaries and benefits increased 4% in 2013 due to international acquisitions during the year and higher pension costs, partially offset by lower incentive compensation accruals. Purchased transportation costs increased 22% in 2013 due to international acquisitions. Other operating expenses increased 8% due to the impact of international acquisitions and the negative year-over-year comparison of the legal reserve accrual reversal in 2012. Depreciation and amortization expense increased 16% in 2013 as a result of additional aircraft placed into service and accelerated depreciation due to the shortened life of certain aircraft.

Fuel costs decreased 4% in 2013 due to lower jet fuel prices and lower aircraft fuel usage. 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 slightly positive impact in 2013.

Other Income and Expense and Income Taxes

Net interest income decreased in 2014 primarily due to a decrease in capitalized interest related to progress payments on aircraft purchases. Other expense increased in 2014 primarily due to higher management fees from FedEx. Other expense increased in 2013 primarily driven by foreign currency translation due to global currency volatility and higher management fees from FedEx.

Our effective tax rate was 33.6% in 2014, 35.0% in 2013 and 34.6% in 2012. Our 2013 and 2012 rates were negatively impacted by the allocation of operating costs from FedEx Office. Our 2012 rate was favorably impacted by the conclusion of the Internal Revenue Service audit of our 2007-2009 consolidated income tax returns. Our permanent reinvestment strategy with respect to unremitted earnings of our foreign subsidiaries provided a 3.8% benefit to our 2014 effective tax rate. Our cumulative permanently reinvested foreign earnings were $1.6 billion at the end of 2014 and $1.3 billion at the end of 2013.

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


	2014			2013			2012
Current	$	(79	)	$	(123	)	$	(510	)
Deferred		208			180			753

Total Federal Provision	$	129		$	57		$	243

Our current federal income tax expenses in 2012, and to a lesser extent 2013 and 2014, were significantly reduced by accelerated depreciation deductions we claimed under provisions of the American Taxpayer Relief Act of 2013 and the Tax Relief and the Small Business Jobs Acts of 2010. Those Acts, designed to stimulate new business investment in the U.S., accelerated our depreciation deductions for qualifying investments, such as our Boeing 777 Freighter (“B777F”) aircraft. These were timing benefits only, in that depreciation benefits accelerated into an earlier year are foregone in later years.

For 2015, we expect our effective tax rate to be between 35.0% and 36.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income. We also expect our current federal income tax expense to increase in 2015 due to expected higher earnings, along with other items such as lower accelerated depreciation benefits.

Additional information on income taxes, including our effective tax rate reconciliation, liabilities for uncertain tax positions and global tax profile can be found in Note 9 of the accompanying consolidated financial statements.

Business Acquisitions

On May 1, 2014, we expanded our international service offerings by completing our acquisition of the businesses operated by our previous service provider Supaswift (Pty) Ltd. in seven countries in Southern Africa, for $36 million in cash from operations. A significant amount of the purchase price was allocated to goodwill. This acquisition gives us an established regional ground network and extensive knowledge of the Southern African region.

In 2013, we completed our acquisitions of Rapidão Cometa Logística e Transporte S.A., a Brazilian transportation and logistics company, for $398 million; TATEX, a French express transportation company, for $55 million; and Opek Sp. z o.o., a Polish domestic express package delivery company, for $54 million.

In 2012, we completed our acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million.

These acquisitions were completed using cash from operations. The financial results of these acquired businesses are included in our results from the date of acquisition and were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.

Profit Improvement Programs

During 2013, FedEx announced profit improvement programs primarily through initiatives at FedEx Express and FedEx Services targeting annual profitability improvement of $1.6 billion at FedEx Express. We expect the majority of the benefits from our profit improvement programs to occur in 2015 and 2016 as our various cost reduction and efficiency initiatives gain traction. Our plans position us to exit 2016 with a run rate of $1.6 billion in additional operating profit from the 2013 base business. Our ability to achieve the profit improvement target and other benefits from these programs is dependent upon a number of factors, including the health of the global economy and future customer demand.

During 2014, FedEx completed a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain staff functions. Costs of the benefits provided under the voluntary employee severance program were recognized in 2013 when eligible employees accepted their offers. Payments under this program were made at the time of departure.

The direct costs of the program are included in the caption “Business realignment, impairment and other charges” while the allocated costs are included in the caption “Intercompany charges” in our consolidated statements of income. Also included in those captions are other external costs directly attributable to our business realignment activities, such as professional fees. See Note 1 of the accompanying consolidated financial statements for further discussion of the voluntary employee severance program.

In addition, actions in 2012 and 2013 related to aircraft fleet modernization resulted in a depreciation expense increase of $69 million in 2013 and an additional $74 million in year-over-year accelerated depreciation expense in 2014.

In 2013, we retired from service two Airbus A310-200 aircraft and four related engines, three Airbus A310-300 aircraft and two related engines and five Boeing MD10-10 aircraft and 15 related engines, to align with our plans to modernize our aircraft fleet and improve our global network. As a consequence of this decision, a noncash impairment charge of $100 million was recorded in 2013. All of these aircraft were temporarily idled and not in revenue service.

Outlook

We expect our revenues and earnings to increase during 2015 primarily due to improved U.S. domestic and international export package yields, as we continue to focus on revenue quality while managing costs. In addition, we expect operating income to improve through ongoing execution of our profit improvement programs, including managing network capacity to match customer demand, reducing structural costs, modernizing our fleet and driving productivity increases throughout our U.S. and international operations. These benefits will be partially offset by higher maintenance expense due to the timing of engine maintenance events, higher salaries and wages as we reinstate merit increases for many employees, and higher depreciation expense driven by ongoing accelerated depreciation due to fleet modernization.

Capital expenditures are expected to increase in 2015 driven by our aircraft fleet modernization programs. In connection with our profit improvement program, we will continue to modernize our aircraft fleet during 2015 by adding newer aircraft that are more reliable, fuel-efficient and technologically advanced, and retiring older, less-efficient aircraft.

See “Risk Factors” for a discussion of potential risks and uncertainties that could materially affect our future performance.

Seasonality of Business

Our business is cyclical in nature, as seasonal fluctuations affect volumes, revenues and earnings. Historically, the U.S. express package business experiences an increase in volumes in late November and December. International business, particularly in the Asia-to-U.S. market, peaks in October and November in advance of the U.S. holiday sales season. Our first and third fiscal quarters, because they are summer vacation and post winter-holiday seasons, have historically experienced lower volumes relative to other periods. Shipment levels, operating costs and earnings for our company can also be adversely affected by inclement weather, particularly the impact of severe winter weather in our third fiscal quarter.

Contractual Cash Obligations

Our expected capital expenditures for 2015 include $1.6 billion in investments for delivery of aircraft as well as progress payments toward future aircraft deliveries. We have several aircraft modernization programs underway which are supported by the purchase of B777F, Boeing 767-300 Freighter (“B767F”) and Boeing 757 (“B757”) aircraft. These aircraft are significantly more fuel-efficient per unit than the aircraft types previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to replace older aircraft. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements. During 2014, we entered into an agreement to purchase two B767F aircraft, the delivery of which will occur in 2016 and 2017. We also deferred 11 existing options to purchase B777F aircraft by two years. Additionally in 2014, we entered into supplemental agreements to purchase 16 B757 option aircraft pursuant to an agreement originally entered into in March 2013, the delivery of which began in 2014 and will continue through 2015.

RECENT ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

On June 1, 2013, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) requiring additional information about reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. We have adopted this guidance by including expanded accumulated other comprehensive income disclosure requirements in Note 8 of our consolidated financial statements.

On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under US GAAP (and International Financial Reporting Standards). This standard will be effective for us beginning in fiscal 2018. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. Based on our preliminary assessment, we do not anticipate that the new guidance will fundamentally change our revenue recognition policies, practices or systems.

We believe that no other new accounting guidance was adopted or issued during 2014 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.

RISK FACTORS

Our financial and operating results are subject to many risks and uncertainties, as described below.

We are directly affected by the state of the economy. While macro-economic risks apply to most companies, we are particularly vulnerable. The transportation industry is highly cyclical and especially susceptible to trends in economic activity. Our primary business is to transport goods, so our business levels are directly tied to the purchase and production of goods — key macro-economic measurements. When individuals and companies purchase and produce fewer goods, we transport fewer goods, and as companies expand the number of distribution centers and move manufacturing closer to consumer markets, we transport goods shorter distances. In addition, we have a relatively high fixed-cost structure, which is difficult to quickly adjust to match shifting volume levels. Moreover, as we continue to grow our international business, we are increasingly affected by the health of the global economy and the typically more volatile economies of emerging markets. In 2014, we saw a continued customer preference for slower, less costly shipping services – particularly for international shipments – which had a negative impact on our profitability.

Our business depends on our strong reputation and the value of the FedEx brand. The FedEx brand name symbolizes high-quality service, reliability and speed. FedEx is one of the most widely recognized, trusted and respected brands in the world, and the FedEx brand is one of our most important and valuable assets. In addition, we have a strong reputation among customers and the general public for high standards of social and environmental responsibility and ethics. The FedEx brand name and our reputation are powerful sales and marketing tools, and we devote significant resources to promoting and protecting them. Adverse publicity (whether or not justified) relating to activities by our employees or agents, such as customer service mishaps or noncompliance with laws, could tarnish our reputation and reduce the value of our brand. With the increase in the use of social media outlets such as YouTube and Twitter, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to defend against. Damage to our reputation and loss of brand equity could reduce demand for our services and thus have an adverse effect on our financial condition, liquidity and results of operations, as well as require additional resources to rebuild our reputation and restore the value of the FedEx brand.

We rely heavily on information and technology to operate our transportation and business networks, and any disruption to FedEx’s technology infrastructure or the Internet could harm our operations and our reputation among customers. Our ability to attract and retain customers and to compete effectively depends in part upon the sophistication and reliability of FedEx’s technology network, including the ability to provide features of service that are important to our customers. External and internal risks, such as malware, code anomalies, “Acts of God,” attempts to penetrate FedEx’s networks, data leakage and human error, pose a direct threat to FedEx’s services and data. Any disruption to the Internet or FedEx’s complex, global technology infrastructure, including those impacting FedEx’s computer systems and fedex.com, could adversely impact our customer service, volumes and revenues and result in increased costs. These types of adverse impacts could also occur in the event the confidentiality, integrity or availability of company and customer information was compromised due to a data loss by FedEx or a trusted third party. While FedEx has invested and continues to invest in technology security initiatives, information technology risk management and disaster recovery plans, these measures cannot fully insulate FedEx from technology disruptions or data loss and the resulting adverse effect on our operations and financial results. Additionally, the cost and operational consequences of implementing further data or system protection measures could be significant.

Our transportation business is impacted by the price and availability of fuel. We must purchase large quantities of fuel to operate our aircraft and vehicles, and the price and availability of fuel can be unpredictable and beyond our control. To date, we have been mostly successful in mitigating over time the expense impact of higher fuel costs through our indexed fuel surcharges, as the amount of the surcharges is closely linked to the market prices for fuel. If we are unable to maintain or increase our fuel surcharges because of competitive pricing pressures or some other reason, fuel costs could adversely impact our operating results. Even if we are able to offset the cost of fuel with our surcharges, high fuel surcharges could move our customers away from our higher-yielding services to our lower-yielding services or even reduce customer demand for our services altogether. In addition, disruptions in the supply of fuel could have a negative impact on our ability to operate our transportation network.

Our business is capital intensive, and we must make capital decisions based upon projected volume levels. We make significant investments in aircraft, vehicles, technology, package handling facilities, sort equipment and other assets to support our network. We also make significant investments to rebrand, integrate and grow the companies that we acquire. The amount and timing of capital investments depend on various factors, including our anticipated volume growth. We must make commitments to purchase or modify aircraft years before the aircraft are actually needed. We must predict volume levels and fleet requirements and make commitments for aircraft based on those projections. Missing our projections could result in too much or too little capacity relative to our shipping volumes. Overcapacity could lead to asset dispositions or write-downs and undercapacity could negatively impact service levels. For example, in 2013, we made a decision to retire from service certain aircraft and excess aircraft engines and thus recorded a noncash impairment charge of $100 million.

We face intense competition. The express transportation market is both highly competitive and sensitive to price and service, especially in periods of little or no macro-economic growth. Some of our competitors have more financial resources than we do, or they are controlled or subsidized by foreign governments, which enables them to raise capital more easily. We also compete with regional transportation providers that operate smaller and less capital-intensive transportation networks. We believe we compete effectively with these companies — for example, by providing more reliable service at compensatory prices. However, an irrational pricing environment can limit our ability not only to maintain or increase our prices (including our fuel surcharges in response to rising fuel costs), but also to maintain or grow our market share.

If we do not effectively operate, integrate, leverage and grow acquired businesses, our financial results and reputation may suffer. Our strategy for long-term growth, productivity and profitability depends in part on our ability to make prudent strategic acquisitions and to realize the benefits we expect when we make those acquisitions. In furtherance of this strategy, over the past three years, we have acquired businesses in Europe, Latin America and Africa. While we expect our past and future acquisitions to enhance our value proposition to customers and improve our long-term profitability, there can be no assurance that we will realize our expectations within the time frame we have established, if at all.

Labor organizations attempt to organize groups of our employees from time to time, and potential changes in labor laws could make it easier for them to do so. If we are unable to continue to maintain good relationships with our employees and prevent labor organizations from organizing groups of our employees, our operating costs could significantly increase and our operational flexibility could be significantly reduced. Despite continual organizing attempts by labor unions, other than our pilots, all of our U.S. employees have thus far chosen not to unionize. The U.S. Congress has, in the past, considered adopting changes in labor laws, however, that would make it easier for unions to organize units of our employees. For example, there is always a possibility that Congress could remove most of our employees from the purview of the Railway Labor Act of 1926, as amended (the “RLA”). For additional discussion of the RLA, see Part I, Item 1 of this Annual Report on Form 10-K under the caption “Regulation.” Such legislation could expose our customers to the type of service disruptions that the RLA was designed to prevent — local work stoppages in key areas that interrupt the timely flow of shipments of time-sensitive, high-value goods throughout our global network. Such disruptions could threaten our ability to provide competitively priced shipping options and ready access to global markets. In addition, federal and state governmental agencies, such as the National Labor Relations Board, have and may continue to take actions that could make it easier for our employees to organize under the RLA.

We may not be able to achieve our profit improvement goal by the end of 2016. In 2013, we announced profit improvement programs that include cost reductions, modernization of our aircraft fleet, transformation of our U.S. domestic operations and international profit improvements. To this end, we retired from service 10 aircraft and related engines, and we shortened the depreciable lives of an additional 76 aircraft and related engines, in an effort to modernize our aircraft fleet and improve our global network. Additionally, during 2014, we completed a voluntary buyout program offering cash buyouts to eligible U.S.-based employees. We will continue to work towards our goal of annual profitability improvement of $1.6 billion by the end of 2016. Our ability to achieve this objective is dependent on a number of factors, including the health of the global economy and future customer demand. In light of these factors, we may not be able to achieve our goal.

The transportation infrastructure continues to be a target of terrorist activities. Because transportation assets continue to be a target of terrorist activities, governments around the world are adopting or are considering adopting stricter security requirements that will increase operating costs and potentially slow service for businesses, including those in the transportation industry. For example, the U.S. Transportation Security Administration continues to require us to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static, but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. Thus, it is reasonably possible that these rules or other future security requirements could impose material costs on us. Moreover, a terrorist attack directed at FedEx or other aspects of the transportation infrastructure could disrupt our operations and adversely impact demand for our services.

The regulatory environment for global aviation or other transportation rights may impact our operations. Our extensive air network is critical to our success. Our right to serve foreign points is subject to the approval of the Department of Transportation and generally requires a bilateral agreement between the U.S. and foreign governments. In addition, we must obtain the permission of foreign governments to provide specific flights and services. Our growing international domestic operations are also subject to current and potential regulations, including certain postal regulations and licensing requirements, that restrict, make difficult and sometimes prohibit, our ability to compete effectively in parts of the international domestic transportation and logistics market. Regulatory actions affecting global aviation or transportation rights or a failure to obtain or maintain aviation or other transportation rights in important international markets could impair our ability to operate our network.

We may be affected by global climate change or by legal, regulatory or market responses to such change. Concern over climate change, including the impact of global warming, has led to significant U.S. and international legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions, including our aircraft emissions. For example, during 2009, the European Commission approved the extension of the European Union Emissions Trading Scheme (“ETS”) for GHG emissions, to the airline industry. Under this decision, all our flights that are wholly within the European Union are now covered by the ETS requirements, and each year we are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such flights. In addition, the U.S. Congress has, in the past, considered bills that would regulate GHG emissions, and some form of federal climate change legislation is possible in the future. Increased regulation regarding GHG emissions, especially aircraft emissions, could impose substantial costs on us. These costs include an increase in the cost of the fuel and other energy we purchase and capital costs associated with updating or replacing our aircraft or vehicles prematurely. Until the timing, scope and extent of such regulation becomes known, we cannot predict its effect on our cost structure or our operating results. It is reasonably possible, however, that it could impose material costs on us. Moreover, even without such regulation, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the airline and transportation industries could harm our reputation and reduce customer demand for our services. Finally, given the broad and global scope of our operations and our susceptibility to global macro-economic trends, we are particularly vulnerable to the physical risks of climate change that could affect all of humankind, such as shifts in weather patterns and world ecosystems.

A localized disaster in a key geography could adversely impact our business. While we operate an integrated network with assets distributed throughout the world, there are concentrations of key assets within our network that are exposed to localized risks from natural or manmade disasters such as tornados, floods, earthquakes or terrorist attacks. The loss of a key location such as our Memphis super hub or one of FedEx’s information technology centers could cause a significant disruption to our operations and cause us to incur significant costs to reestablish or relocate these functions. Moreover, resulting economic dislocations, including supply chain and fuel disruptions, could adversely impact demand for our services.

Our business may be adversely impacted by disruptions or modifications in service by the USPS. The USPS is a significant customer of ours, and thus, disruptions or modifications in services by the USPS as a consequence of the USPS’s current financial difficulties or any resulting structural changes to its operations, network, service offerings or pricing could have an adverse effect on our operations and financial results.

We are also subject to other risks and uncertainties that affect many other businesses, including:

•

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

•

the increasing costs of compliance with federal, state and foreign governmental agency mandates (including the Foreign Corrupt Practices Act and the U.K. Bribery Act) and defending against inappropriate or unjustified enforcement or other actions by such agencies;

•

the impact of any international conflicts 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;

•

any impacts on our business resulting from new domestic or international government laws and regulation;

•

changes in foreign currency exchange rates, especially in the Chinese yuan, euro, Brazilian real, the British pound and Canadian dollar, 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 or governmental proceedings;

•

the outcome of future negotiations to reach new collective bargaining agreements — including with the union that represents our pilots (the current pilot contract became amendable in March 2013, and the parties are currently in negotiations);

•

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

•

governmental underinvestment in transportation infrastructure, which could increase our costs and adversely impact our service levels due to traffic congestion or sub-optimal routing of our vehicles and aircraft;

•

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

•

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

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including (but not limited to) those contained in “Outlook” and the “Retirement Plans” and “Contingencies” notes to the consolidated financial statements, 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, the risk factors identified above and the other risks and uncertainties you can find in FedEx’s press releases and other SEC filings.

As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or 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.

MANAGEMENT’S REPORT ON INTERNAL

CONTROL OVER FINANCIAL REPORTING

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

Management, with the participation of our principal executive and financial officers, assessed our internal control over financial reporting as of May 31, 2014, the end of our fiscal year. Management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria).

Based on this assessment, management has concluded that our internal control over financial reporting was effective as of May 31, 2014.

The effectiveness of our internal control over financial reporting as of May 31, 2014, has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K. Ernst & Young LLP’s report on the Company’s internal control over financial reporting is included in this Annual Report on Form 10-K.

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder

Federal Express Corporation

We have audited Federal Express Corporation’s internal control over financial reporting as of May 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Federal Express Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

In our opinion, Federal Express Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Federal Express Corporation as of May 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in owner’s equity and cash flows for each of the three years in the period ended May 31, 2014 of Federal Express Corporation and our report dated July 14, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Memphis, Tennessee

July 14, 2014

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder

Federal Express Corporation

We have audited the accompanying consolidated balance sheets of Federal Express Corporation as of May 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in owner’s equity and cash flows for each of the three years in the period ended May 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal Express Corporation at May 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Federal Express Corporation’s internal control over financial reporting as of May 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated July 14, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Memphis, Tennessee

July 14, 2014

FEDERAL EXPRESS CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)


	May 31,
	2014		2013
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	858	$	769
Receivables, less allowances of $80 and $84		1,705		1,595
Spare parts, supplies and fuel, less allowances of $211 and $204		395		385
Deferred income taxes		401		359
Due from parent company and other FedEx subsidiaries		502		430
Prepaid expenses and other		103		94


Total current assets		3,964		3,632

PROPERTY AND EQUIPMENT, AT COST

Aircraft and related equipment		15,632		14,716
Package handling and ground support equipment		2,861		2,713
Vehicles		2,279		2,173
Computer and electronic equipment		865		832
Facilities and other		4,115		3,950

		25,752		24,384
Less accumulated depreciation and amortization		12,272		11,538


Net property and equipment		13,480		12,846

OTHER LONG-TERM ASSETS
Goodwill		1,561		1,526
Other assets		959		959


Total other long-term assets		2,520		2,485


	$	19,964	$	18,963

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

FEDERAL EXPRESS CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)


	May 31,
	2014			2013
LIABILITIES AND OWNER’S EQUITY

CURRENT LIABILITIES
Accrued salaries and employee benefits	$	902		$	990
Accounts payable		1,394			1,270
Accrued expenses		1,019			972
Due to other FedEx subsidiaries		910			1,064


Total current liabilities		4,225			4,296

LONG-TERM DEBT, LESS CURRENT PORTION		239			240

OTHER LONG-TERM LIABILITIES
Deferred income taxes		3,196			2,833
Pension, postretirement healthcare and other benefit obligations		1,208			1,120
Self-insurance accruals		667			650
Deferred lease obligations		643			683
Deferred gains, principally related to aircraft transactions		203			223
Other liabilities		96			100


Total other long-term liabilities		6,013			5,609

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		8,944			8,246
Accumulated other comprehensive loss		(65	)		(36	)


Total owner’s equity		9,487			8,818


	$	19,964		$	18,963

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

FEDERAL EXPRESS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(IN MILLIONS)


	Years ended May 31,
	2014			2013			2012

REVENUES	$	26,048		$	26,193		$	25,766

OPERATING EXPENSES:
Salaries and employee benefits		9,600			9,730			9,365
Purchased transportation		1,767			1,649			1,357
Rentals and landing fees		1,678			1,659			1,657
Depreciation and amortization		1,476			1,338			1,157
Fuel		3,943			4,129			4,304
Maintenance and repairs		1,177			1,239			1,327
Business realignment, impairment and other charges		—			243			134
Intercompany charges		2,000			2,344			2,163
Other		3,264			3,308			3,054

		24,905			25,639			24,518


OPERATING INCOME		1,143			554			1,248

OTHER INCOME (EXPENSE):
Interest income		22			42			34
Other, net		(106	)		(88	)		(45	)

		(84	)		(46	)		(11	)


INCOME BEFORE INCOME TAXES		1,059			508			1,237

PROVISION FOR INCOME TAXES		355			178			429


NET INCOME	$	704		$	330		$	808

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

FEDERAL EXPRESS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN MILLIONS)


	Years Ended May 31,
	2014			2013			2012

NET INCOME	$	704		$	330		$	808

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments, net of tax expense of $1 in 2014 and tax benefit of $13 and $22 in 2013 and 2012		(23	)		36			(84	)
Amortization of unrealized pension actuarial (losses) gains and other, net of tax benefit of $6, $14, and $42		(6	)		(2	)		(104	)

		(29	)		34			(188	)


COMPREHENSIVE INCOME	$	675		$	364		$	620

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

FEDERAL EXPRESS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)


	Years ended May 31,
	2014			2013			2012
Operating Activities:
Net income	$	704		$	330		$	808
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		1,476			1,338			1,157
Provision for uncollectible accounts		100			135			117
Deferred income taxes and other noncash items		246			128			734
Business realignment, impairment and other charges		—			174			134
Changes in assets and liabilities:
Receivables		(179	)		(12	)		(194	)
Other current assets		(104	)		44			152
Accounts payable and other liabilities		(129	)		845			16
Other, net		(1	)		3			(5	)


Cash provided by operating activities		2,113			2,985			2,919

Investing Activities:
Capital expenditures		(1,985	)		(2,055	)		(2,680	)
Proceeds from asset dispositions and other		3			25			11
Business acquisitions, net of cash acquired		(36	)		(483	)		(116	)


Cash used in investing activities		(2,018	)		(2,513	)		(2,785	)

Financing Activities:
Principal payments on debt		(4	)		(417	)		(29	)


Cash used in financing activities		(4	)		(417	)		(29	)


Effect of exchange rate changes on cash		(2	)		2			(19	)

Net increase in cash and cash equivalents		89			57			86
Cash and cash equivalents at beginning of period		769			712			626


Cash and cash equivalents at end of period	$	858		$	769		$	712

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

FEDERAL EXPRESS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN OWNER’S EQUITY

(IN MILLIONS)


	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Owner’s Equity

Balance at May 31, 2011	$	—	$	608	$	7,107		$	118		$	7,833

Net income		—		—		808			—			808
Other comprehensive loss, net of tax of $64		—		—		—			(188	)		(188	)
Transfer from other FedEx subsidiaries		—		—		1			—			1

Balance at May 31, 2012		—		608		7,916			(70	)		8,454

Net income		—		—		330			—			330
Other comprehensive gain, net of tax of $27		—		—		—			34			34

Balance at May 31, 2013		—		608		8,246			(36	)		8,818

Net income		—		—		704			—			704
Other comprehensive loss, net of tax of $5		—		—		—			(29	)		(29	)
Transfer to other FedEx subsidiaries		—		—		(6	)		—			(6	)

Balance at May 31, 2014	$	—	$	608	$	8,944		$	(65	)	$	9,487

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

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

DESCRIPTION OF BUSINESS. Federal Express Corporation (“FedEx Express”) is the world’s largest express transportation company and a wholly owned subsidiary of FedEx Corporation (“FedEx”).

FISCAL YEARS. Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2014 or ended May 31 of the year referenced.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of FedEx Express and its subsidiaries, substantially all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. We are not the primary beneficiary of, nor do we have a controlling financial interest in, any variable interest entity. Accordingly, we have not consolidated any variable interest entity.

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

Certain of our revenue-producing transactions are subject to taxes, such as sales tax, assessed by governmental authorities. We present these revenues net of tax.

ACCOUNTS RECEIVABLE ARRANGEMENT. We maintain an accounts receivable arrangement with FedEx TechConnect, Inc. (“FedEx TechConnect”), a subsidiary of FedEx Corporate Services, Inc. (“FedEx Services”). FedEx Services is a wholly owned subsidiary of FedEx. Under this arrangement, FedEx TechConnect records and collects receivables associated with our domestic package delivery functions, while we continue to recognize revenue for the transportation services provided. Our net receivables recorded by FedEx TechConnect totaled $1.7 billion at May 31, 2014 and $1.6 billion at May 31, 2013. See Note 16 for further discussion of this arrangement.

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

ADVERTISING. Advertising and promotion costs are expensed as incurred and are classified in other operating expenses. Advertising and promotion expenses were $85 million in 2014, $109 million in 2013 and $102 million in 2012. In addition, FedEx Services performs marketing functions for us and the related charges are allocated to us and are reflected on the line item “Intercompany charges” on the consolidated statements of income. We believe the total amounts allocated approximate the costs of providing such services.

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

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SPARE PARTS, SUPPLIES AND FUEL. Spare parts (principally aircraft-related) are reported at weighted-average cost. Allowances for obsolescence are provided for spare parts expected to be on hand at the date the aircraft are retired from service. These allowances are provided over the estimated useful life of the related aircraft and engines. Additionally, allowances for obsolescence are provided for spare parts currently identified as excess or obsolete. These allowances are based on management estimates, which are subject to change, although historically changes in these estimates have been minimal. Supplies are reported at standard cost and fuel is reported at weighted average cost.

PROPERTY AND EQUIPMENT. Expenditures for major additions, improvements and flight equipment modifications are capitalized when such costs are determined to extend the useful life of the asset or are part of the cost of acquiring the asset. Expenditures for equipment overhaul costs of engines or airframes prior to their operational use are capitalized as part of the cost of such assets as they are costs required to ready the asset for its intended use. Maintenance and repairs costs are charged to expense as incurred, except for certain aircraft engine maintenance costs incurred under third-party service agreements. These agreements, which became effective June 1, 2014, will result in costs being expensed based on cycles or hours flown and are subject to annual escalation. These service contracts transfer risk to third party service providers and generally fix the amount we pay for maintenance to the service provider as a rate per cycle or flight hour, in exchange for maintenance and repairs under a predefined maintenance program. We capitalize certain direct internal and external costs associated with the development of internal-use software. Gains and losses on sales of property used in operations are classified within operating expenses.

For financial reporting purposes, we record depreciation and amortization of property and equipment on a straight-line basis over the asset’s service life or related lease term, if shorter. For income tax purposes, depreciation is computed using accelerated methods when applicable. The depreciable lives and net book value of our property and equipment are as follows (dollars in millions):


			Net Book Value at May 31,
	Range		2014		2013
Wide-body aircraft and related equipment		15 to 30 years	$	7,223	$	7,191
Narrow-body and feeder aircraft and related equipment		5 to 18 years		2,639		2,284
Package handling and ground support equipment		5 to 30 years		723		676
Vehicles		3 to 12 years		913		798
Computer and electronic equipment		2 to 10 years		212		224
Facilities and other		2 to 30 years		1,770		1,673

Substantially all property and equipment have no material residual values. The majority of aircraft costs are depreciated on a straight-line basis over 15 to 30 years. We periodically evaluate the estimated service lives and residual values used to depreciate our property and equipment. This evaluation may result in changes in the estimated lives and residual values as it did in 2013 and 2012 with certain aircraft. In May 2013, we made the decision to accelerate the retirement of 76 aircraft and related engines to aid in our fleet modernization and improve our global network. In May 2012, we shortened the depreciable lives for 54 aircraft and related engines to accelerate the retirement of these aircraft, resulting in a depreciation expense increase of $69 million in 2013. As a result of these accelerated retirements, we had an additional $74 million in year-over-year depreciation expense in 2014.

Depreciation expense, excluding gains and losses on sales of property and equipment used in operations, was $1.5 billion in 2014, $1.3 billion in 2013 and $1.2 billion in 2012. Depreciation and amortization expense includes amortization of assets under capital lease.

CAPITALIZED INTEREST. Interest on funds used to finance the acquisition and modification of aircraft, including purchase deposits and construction of certain facilities up to the date the asset is ready for its intended use is capitalized and included in the cost of the asset if the asset is actively under construction. Capitalized interest was $25 million in 2014, $43 million in 2013 and $80 million in 2012.

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

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We operate an integrated transportation network, and accordingly, cash flows for most of our operating assets are assessed at a network level, not at an individual asset level, for our analysis of impairment.

In the normal management of our aircraft fleet, we routinely idle aircraft and engines temporarily due to maintenance cycles and adjustments of our network capacity to match seasonality and overall customer demand levels. Temporarily idled assets are classified as available-for-use, and we continue to record depreciation expense associated with these assets. These temporarily idled assets are assessed for impairment on a quarterly basis. The criteria for determining whether an asset has been permanently removed from service (and, as a result, impaired) include, but are not limited to, our global economic outlook and the impact of our outlook on our current and projected volume levels, including capacity needs during our peak shipping seasons; the introduction of new fleet types or decisions to permanently retire an aircraft fleet from operations; or changes to planned service expansion activities. At May 31, 2014, we had 10 aircraft temporarily idled, one of which was fully depreciated. These aircraft have been idled for an average of three months and are expected to return to revenue service.

In 2013, we retired from service two Airbus A310-200 aircraft and four related engines, three Airbus A310-300 aircraft and two related engines and five Boeing MD10-10 aircraft and 15 related engines. As a consequence of this decision, a noncash impairment charge of $100 million was recorded in 2013. All of these aircraft were temporarily idled and not in revenue service.

In 2012, we retired from service 18 Airbus A310-200 aircraft and 26 related engines, as well as six Boeing MD10-10 aircraft and 17 related engines. As a consequence of this decision, a noncash impairment charge of $134 million was recorded in 2012.

GOODWILL. Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. Several factors give rise to goodwill in our acquisitions, such as the expected benefit from synergies of the combination and the existing workforce of the acquired business. Goodwill is reviewed at least annually for impairment. In our evaluation of goodwill impairment, we perform a qualitative assessment to determine if it is more likely than not that the fair value of our company is less than its carrying amount. If the qualitative assessment is not conclusive, we proceed to a two-step process to test goodwill for impairment including comparing the fair value with its carrying value (including attributable goodwill). Fair value is determined using an income or market approach incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures. Fair value determinations may include both internal and third-party valuations. Unless circumstances otherwise dictate, we perform our annual impairment testing in the fourth quarter, and at May 31, 2014 we do not believe that our goodwill is at risk.

PENSION AND POSTRETIREMENT HEALTHCARE PLANS. Our defined benefit plans are measured using actuarial techniques that reflect management’s assumptions for discount rate, expected long-term investment returns on plan assets, salary increases, expected retirement, mortality, employee turnover and future increases in healthcare costs. We determine the discount rate (which is required to be the rate at which the projected benefit obligation could be effectively settled as of the measurement date) with the assistance of actuaries, who calculate the yield on a theoretical portfolio of high-grade corporate bonds (rated Aa or better) with cash flows that are designed to match our expected benefit payments in future years. A calculated-value method is employed for purposes of determining the asset values for our tax-qualified U.S. domestic pension plans. Our expected rate of return is a judgmental matter which is reviewed on an annual basis and revised as appropriate.

A majority of our employees are covered by the FedEx Corporation Employees’ Pension Plan, which is sponsored by our parent, FedEx. Additionally, we also sponsor or participate in nonqualified benefit plans covering certain employee groups and other pension plans covering certain of our international groups. The accounting guidance related to employers’ accounting for defined benefit pension and other postretirement plans requires recognition in the balance sheet of the funded status of defined benefit pension and

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

other postretirement benefit plans, and the recognition in other comprehensive income (“OCI”) of unrecognized gains or losses and prior service costs or credits.

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

We recognize liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the related provision.

We classify interest related to income tax liabilities as interest expense and, if applicable, penalties are recognized as a component of income tax expense. The income tax liabilities and accrued interest and penalties that are due within one year of the balance sheet date are presented as current liabilities. The noncurrent portion of our income tax liabilities and accrued interest and penalties are recorded in the caption “Other liabilities” in the accompanying consolidated balance sheets.

SELF-INSURANCE ACCRUALS. We are self-insured for costs associated with workers’ compensation claims, vehicle accidents and general business liabilities, and benefits paid under employee healthcare and long-term disability programs. Accruals are primarily based on the actuarially estimated cost of claims, which includes incurred-but-not-reported claims. Current workers’ compensation claims, vehicle and general liability, employee healthcare claims and long-term disability are included in accrued expenses. We self-insure up to certain limits that vary by type of risk. Periodically, we evaluate the level of insurance coverage and adjust insurance levels based on risk tolerance and premium expense.

LEASES. We lease certain aircraft, facilities, equipment and vehicles under capital and operating leases. The commencement date of all leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the property. In addition to minimum rental payments, certain leases provide for contingent rentals based on equipment usage, principally related to aircraft leases. Rent expense associated with contingent rentals is recorded as incurred. Certain of our leases contain fluctuating or escalating payments and rent holiday periods. The related rent expense is recorded on a straight-line basis over the lease term. The cumulative excess of rent payments over rent expense is accounted for as a deferred lease asset and recorded in “Other assets” in the accompanying consolidated balance sheets. The cumulative excess of rent expense over rent payments is accounted for as a deferred lease obligation. Leasehold improvements associated with assets utilized under capital or operating leases are amortized over the shorter of the asset’s useful life or the lease term.

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

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOREIGN CURRENCY TRANSLATION. Translation gains and losses of foreign operations that use local currencies as the functional currency are accumulated and reported, net of applicable deferred income taxes, as a component of accumulated other comprehensive income within owner’s equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local currency are included in the caption “Other, net” in the accompanying consolidated statements of income and were immaterial for each period presented.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. Our pilots, which represent a small number of our total employees, are employed under a collective bargaining agreement. The contract became amendable in March 2013, and the parties are currently in negotiations. In addition to our pilots, certain non-U.S. employees are unionized.

STOCK-BASED COMPENSATION. We participate in the stock-based compensation plans of our parent, FedEx. We recognize compensation expense for stock-based awards under the provisions of the accounting guidance related to share-based payments. This guidance requires recognition of compensation expense for stock-based awards using a fair value method.

FedEx uses the Black-Scholes pricing model to calculate the fair value of stock options. Our total share-based compensation expense was $39 million in 2014, $36 million in 2013 and $33 million in 2012.

BUSINESS REALIGNMENT COSTS. During 2013, FedEx announced profit improvement programs primarily through initiatives at FedEx Express and FedEx Services and completed a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain staff functions. Costs of the benefits provided under the voluntary program were recognized as special termination benefits in the period that eligible employees accepted their offers. Payments under this program were made at the time of departure.

The voluntary buyout program included voluntary severance payments and funding to healthcare reimbursement accounts, with the voluntary severance calculated based on four weeks of gross base salary for every year of FedEx service up to a maximum payment of two years of pay. Eligible employees vacated positions in phases during 2013 and 2014.

We incurred costs of $401 million during 2013 associated with our business realignment activities, both directly and through intercompany allocations primarily from FedEx Services. These costs related primarily to severance for employees who accepted voluntary buyouts in the third and fourth quarters of 2013. The direct costs of the buyout program are included in the caption “Business realignment, impairment and other charges” while the allocated costs are included in the caption “Intercompany charges” in our consolidated statements of income. Also included in those captions are other external costs directly attributable to our business realignment activities, such as professional fees.

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

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2: RECENT ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

NOTE 3: BUSINESS COMBINATIONS

In 2012, we completed our acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million.

These acquisitions were completed using cash from operations. The financial results of these acquired businesses are included our results from the date of acquisition and were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL. The carrying amount of goodwill and changes therein are as follows (in millions):


Balance as of May 31, 2012	$	1,155

Goodwill acquired⁽¹⁾		351
Purchase adjustments and other⁽²⁾		20

Balance as of May 31, 2013		1,526

Goodwill acquired⁽¹⁾		24
Purchase adjustments and other⁽²⁾		11

Balance as of May 31, 2014⁽³⁾	$	1,561

⁽¹⁾	Goodwill acquired relates to the acquisitions of transportation companies in Poland, France and Brazil in 2013 and the acquisition of transportation companies in Southern Africa in 2014. See Note 3 for related disclosures.

⁽²⁾	Primarily currency translation adjustments and acquired goodwill related to immaterial acquisitions.

⁽³⁾	We do not have any accumulated impairment losses associated with our goodwill.

OTHER INTANGIBLE ASSETS. The net book value of our other intangible assets was $56 million at May 31, 2014 and $63 million at May 31, 2013. Amortization expense for intangible assets was $15 million in 2014, $22 million in 2013 and $11 million in 2012. Estimated amortization expense is expected to be immaterial in 2015 and beyond.

NOTE 5: SELECTED CURRENT LIABILITIES

The components of selected current liability captions at May 31 were as follows (in millions):


	2014		2013

Accrued Salaries and Employee Benefits
Salaries	$	200	$	216
Employee benefits, including variable compensation		221		298
Compensated absences		481		476

	$	902	$	990


Accrued Expenses
Self-insurance accruals	$	313	$	313
Taxes other than income taxes		247		266
Other		459		393

	$	1,019	$	972

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6: LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

The components of long-term debt (net of discounts), along with maturity dates for the years subsequent to May 31, 2014, are as follows (in millions):


	May 31,
	2014		2013
Senior unsecured debt
Interest rate of 7.60%, due in 2098	$	239	$	239

		239		239
Capital lease obligations		—		1

		239		240

Interest on our fixed-rate notes is paid semi-annually. Long-term debt, exclusive of capital leases, had estimated fair values of $326 million at May 31, 2014 and $344 million at May 31, 2013. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

FedEx issues other financial instruments in the normal course of business to support our operations. We had letters of credit at May 31, 2014 of $352 million issued on our behalf by FedEx and $376 million in outstanding surety bonds placed by third-party insurance providers. These instruments are required under certain U.S. self-insurance programs and are also used in the normal course of international operations. The underlying liabilities insured by these instruments are reflected in our balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds themselves.

NOTE 7: LEASES

We utilize certain aircraft, land, facilities and equipment under capital and operating leases that expire at various dates through 2046. We leased 10% of our total aircraft fleet under operating leases as of May 31, 2014 and May 31, 2013. A portion of our supplemental aircraft are leased by us under agreements that provide for cancellation upon 30 days’ notice. Our leased facilities include national, regional and metropolitan sorting facilities and administrative buildings.

Rent expense under operating leases for the years ended May 31 was as follows (in millions):


	2014		2013		2012

Minimum rentals	$	1,292	$	1,287	$	1,279
Contingent rentals⁽¹⁾		138		123		133

	$	1,430	$	1,410	$	1,412

⁽¹⁾	Contingent rentals are based on equipment usage.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at May 31, 2014 is as follows (in millions):


	Operating Leases
	Aircraft and Related Equipment		Facilities and Other		Total Operating Leases

2015	$	448	$	802	$	1,250
2016		453		661		1,114
2017		392		831		1,223
2018		326		517		843
2019		273		446		719
Thereafter		550		3,771		4,321

Total	$	2,442	$	7,028	$	9,470

Property and equipment recorded under capital leases and future minimum lease payments under capital leases were immaterial at May 31, 2014 and 2013. The weighted-average remaining lease term of all operating leases outstanding at May 31, 2014 was approximately seven years. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

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.

We are the lessee in a series of operating leases covering a portion of our leased aircraft. The lessors are trusts established specifically to purchase, finance and lease aircraft to us. These leasing entities meet the criteria for variable interest entities. We are not the primary beneficiary of the leasing entities as the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates us to absorb decreases in value or entitles us to participate in increases in the value of the aircraft. As such, we are not required to consolidate these entities as the primary beneficiary. Our maximum exposure under these leases is included in the summary of future minimum lease payments shown above.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table provides changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax, reported in our financial statements for the years ended May 31 (in millions; amounts in parentheses indicate debits to AOCI):


	2014			2013			2012
Foreign currency translation gain (loss):
Balance at beginning of period	$	90		$	54		$	138
Translation adjustments		(23	)		36			(84	)

Balance at end of period		67			90			54

Retirement plans adjustments:
Balance at beginning of period		(126	)		(124	)		(20	)
Net loss and other arising during period		(11	)		(6	)		(99	)
Reclassifications from AOCI		5			4			(5	)

Balance at end of period		(132	)		(126	)		(124	)

Accumulated other comprehensive loss at end of period	$	(65	)	$	(36	)	$	(70	)

Due to its immateriality, the table presenting details of reclassifications from AOCI has been excluded from this disclosure.

NOTE 9: INCOME TAXES

Our operations are included in the consolidated federal income tax return of FedEx. Our income tax provision approximates the amount which would have been recorded on a separate return basis. The components of the provision for income taxes for the years ended May 31 were as follows (in millions):


	2014			2013			2012
Current provision (benefit)
Domestic:
Federal	$	(79	)	$	(123	)	$	(510	)
State and local		(7	)		(6	)		6
Foreign		184			159			174

		98			30			(330	)


Deferred provision (benefit)
Domestic:
Federal		208			180			753
State and local		30			9			6
Foreign		19			(41	)		—

		257			148			759

	$	355		$	178		$	429

Our current federal income tax expenses in 2012, and to a lesser extent 2013 and 2014, were significantly reduced by accelerated depreciation deductions we claimed under provisions of the American Taxpayer Relief Act of 2013 and the Tax Relief and the Small Business Jobs Acts of 2010. Those Acts, designed to stimulate new business investment in the U.S., accelerated our depreciation deductions for qualifying investments, such as our Boeing 777 Freighter (“B777F”) aircraft. These were timing benefits only, in that depreciation accelerated into an earlier year is foregone in later years.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pre-tax earnings (loss) of foreign operations for 2014, 2013 and 2012 were $367 million, $(84) million and $308 million, respectively. These amounts represent only a portion of total results associated with international shipments and accordingly, do not represent our international results of operations.

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


	2014			2013			2012

Statutory U.S. income tax rate		35.0	%		35.0	%		35.0	%
Increase (decrease) resulting from:
Allocation of FedEx Office and Print Services, Inc. operating costs		(0.1	)		1.2			1.2
State and local income taxes, net of federal benefit		1.4			0.3			0.7
Foreign operations		(3.6	)		(4.7	)		(3.3	)
Non-deductible expenses		2.5			5.4			2.5
Other, net		(1.6	)		(2.2	)		(1.5	)

Effective tax rate		33.6	%		35.0	%		34.6	%

Our 2013 and 2012 rates were negatively impacted by the allocation of operating costs from FedEx Office and Print Services, Inc. Our 2012 rate was favorably impacted by the conclusion of the Internal Revenue Service (“IRS”) audit of our 2007-2009 consolidated income tax returns.

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


	2014					2013
	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Property, equipment, leases and intangibles	$	117		$	2,884	$	154		$	2,795
Employee benefits		578			10		566			10
Self-insurance accruals		343			—		338			—
Other		200			1,140		165			983
Net operating loss/credit carryforwards		275			—		252			—
Valuation allowances		(194	)		—		(161	)		—

	$	1,319		$	4,034	$	1,314		$	3,788

The net deferred tax liabilities as of May 31 have been classified in the balance sheets as follows (in millions):


	2014			2013

Current deferred tax assets	$	401		$	359
Noncurrent deferred tax assets⁽¹⁾		80			—
Noncurrent deferred tax liabilities		(3,196	)		(2,833	)

	$	(2,715	)	$	(2,474	)

⁽¹⁾	Noncurrent deferred tax assets are included in the line item Other Assets in our consolidated Balance Sheet.

We have $885 million of net operating loss carryovers in various foreign jurisdictions and $150 million of state operating loss carryovers. The valuation allowances primarily represent amounts reserved for operating loss and tax credit carryforwards, which expire over varying periods starting in 2015. As a result of this and other factors, we believe that a substantial portion of these deferred tax assets may not be realized.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Permanently reinvested earnings of our foreign subsidiaries amounted to $1.6 billion at the end of 2014 and $1.3 billion at the end of 2013. We have not recognized deferred taxes for U.S. federal income tax purposes on those earnings. In 2014, our permanent reinvestment strategy with respect to unremitted earnings of our foreign subsidiaries provided a 3.8% benefit to our effective tax rate. Were the earnings to be distributed, in the form of dividends or otherwise, these earnings could be subject to U.S. federal income tax and non-U.S. withholding taxes. Unrecognized foreign tax credits potentially could be available to reduce a portion of any U.S. tax liability. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits. Cash in offshore jurisdictions associated with our permanent reinvestment strategy totaled $471 million at the end of 2014 and $420 million at the end of 2013.

As a U.S. airline, we are required by Federal Aviation Administration and other rules to conduct our air operations, domestic and international, through a U.S. company. However, we serve more than 220 countries and territories around the world, and are required to establish legal entities in many of them. Most of our entities in those countries are operating entities, engaged in picking up and delivering packages and performing other transportation services. We are continually expanding our global network to meet our customers’ needs, which requires increasing investment outside the U.S. We typically use cash generated overseas to fund these investments and have a foreign holding company which manages our investments in several foreign operating companies.

We are subject to taxation in the U.S. and various U.S. state, local and foreign jurisdictions. The IRS has completed its examination of our 2010 and 2011 federal income tax returns with insignificant adjustments taken to appeals. The IRS is currently examining our 2012 and 2013 tax returns. It is reasonably possible that certain income tax return proceedings 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.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):


	2014			2013			2012

Balance at beginning of year	$	44		$	45		$	56
Increases for tax positions taken in the current year		1			1			4
Increases for tax positions taken in prior years		1			3			2
Decreases for tax positions taken in prior years		(4	)		(2	)		(30	)
Settlements		(4	)		(7	)		(1	)
Increases due to acquisitions		—			4			15
Decreases from lapse of statute of limitations		(4	)		(2	)		—
Changes due to currency translation		(1	)		2			(1	)

Balance at end of year	$	33		$	44		$	45

Our liabilities recorded for uncertain tax positions include $30 million at May 31, 2014 and $41 million at May 31, 2013 associated with positions that if favorably resolved would provide a benefit to our effective tax rate. We classify interest related to income tax liabilities as interest expense and, if applicable, penalties are recognized as a component of income tax expense. The balance of accrued interest and penalties was $17 million on May 31, 2014 and $27 million on May 31, 2013. Total interest and penalties included in our consolidated statements of income are immaterial.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

It is difficult to predict the ultimate outcome or the timing of resolution for tax positions. Changes may result from the conclusion of ongoing audits, appeals or litigation in state, local, federal and foreign tax jurisdictions, or from the resolution of various proceedings between the U.S. and foreign tax authorities. Our liability for uncertain tax positions includes no matters that are individually or collectively material to us. It is reasonably possible that the amount of the benefit with respect to certain of our unrecognized tax positions will increase or decrease within the next 12 months, but an estimate of the range of the reasonably possible changes cannot be made. However, we do not expect that the resolution of any of our uncertain tax positions will have a material effect on us.

NOTE 10: RETIREMENT PLANS

RETIREMENT PLANS SPONSORED BY FEDEX

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. The accounting for pension and postretirement healthcare plans includes numerous assumptions, such as: discount rates; expected long-term investment returns on plan assets; future salary increases; employee turnover; mortality, and retirement ages. These assumptions most significantly impact our U.S. domestic pension plan.

A summary of our retirement plans costs over the past three years is as follows (in millions):


	2014		2013		2012
Pension plans sponsored by FedEx	$	268	$	431	$	321
Other U.S. domestic and international pension plans		54		46		43
U.S. domestic and international defined contribution plans		237		233		220
U.S. domestic and international postretirement healthcare plans		62		62		56

	$	621	$	772	$	640

PENSION PLANS. A majority of our employees are covered by the FedEx Corporation Employees’ Pension Plan (“FedEx Plan”), a defined benefit pension plan sponsored by our parent, FedEx. The plan covers certain U.S. employees age 21 and over, with at least one year of service. Pension benefits for most employees are accrued under a cash balance formula we call the Portable Pension Account. Under the Portable Pension Account, the retirement benefit is expressed as a dollar amount in a notional account that grows with annual credits based on pay, age and years of credited service, and interest on the notional account balance. The Portable Pension Account benefit is payable as a lump sum or an annuity at retirement at the election of the employee. The plan interest credit rate varies from year to year based on a U.S. Treasury index and corporate bond rates. Prior to 2009, certain employees earned benefits using a traditional pension formula (based on average earnings and years of service). Benefits under this formula were capped on May 31, 2008 for most employees. 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. Our employees comprise approximately 72% of the participants in the FedEx Plan. For more information about this plan and the related accounting assumptions, refer to the financial statements of FedEx included in its Form 10-K for the year ended May 31, 2014.

PENSION PLAN ASSUMPTIONS. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations and the expected long-term rate of return on plan assets.

We use a measurement date of May 31 for our pension and postretirement healthcare plans. Management reviews the assumptions used to measure pension costs on an annual basis. Economic and market conditions at the measurement date impact these assumptions from year to year. Actuarial gains or losses are generated for changes in assumptions and to the extent that actual results differ from those assumed. These actuarial gains and losses are amortized over the remaining average service lives of our active employees if they exceed a corridor amount in the aggregate.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted-average actuarial assumptions for the FedEx Plan were as follows:


	Pension Plans
	2014			2013			2012

Discount rate used to determine benefit obligation		4.60	%		4.79	%		4.44	%
Discount rate used to determine net periodic benefit cost		4.79			4.44			5.76
Rate of increase in future compensation levels used to determine benefit obligation		4.56			4.54			4.62
Rate of increase in future compensation levels used to determine net periodic benefit cost		4.54			4.62			4.58
Expected long-term rate of return on assets		7.75			8.00			8.00

We incurred a net periodic benefit cost of $258 million in 2014, $420 million in 2013 and $308 million in 2012, for our participation in the FedEx Plan. Pension costs in 2014 were lower than 2013 due to the favorable impact of a higher discount rate at our May 31, 2013 measurement date and higher returns on plan assets. Pension costs in 2013 were higher than 2012 due to the negative impact of a significantly lower discount rate at our May 31, 2012 measurement date.

Information regarding the funded status of the FedEx Plan at May 31 was as follows (in millions):


	2014			2013
Projected benefit obligation (“PBO”)	$	22,737		$	20,922
Fair value of plan assets		20,814			18,526

Funded status	$	(1,923	)	$	(2,396	)

Certain of our employees participate in a nonqualified defined benefit pension plan sponsored by FedEx. Our participants in this nonqualified defined benefit plan make up approximately 31% of the participants in the plan. FedEx has accumulated benefit obligations (“ABOs”) aggregating approximately $236 million at May 31, 2014 and $274 million at May 31, 2013 and PBOs aggregating approximately $237 million at May 31, 2014 and $278 million at May 31, 2013 related to this plan. This plan is not funded because such funding provides no current tax deduction and would be deemed current compensation to plan participants.

DEFINED CONTRIBUTION PLANS. Defined contribution plans are in place covering a majority of U.S. employees and certain international employees. Most U.S. employees are covered under the FedEx 401(k) plan. Pilots are covered under a 401(a) money purchase pension plan, as well as their own 401(k) plan. Expense for our employees under these plans was $237 million in 2014, $233 million in 2013 and $220 million in 2012.

RETIREMENT PLANS SPONSORED BY FEDEX EXPRESS

PENSION PLANS. We also sponsor nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans covering certain of our international employees. The nonqualified benefit plans are not funded because such funding provides no current tax deduction and would be deemed current compensation to plan participants. The international defined benefit pension plans provide benefits primarily based on earnings and years of service and are funded in compliance with local laws and practices. Beginning April 6, 2012, the United Kingdom pension plan formula changed for future benefit accruals to a cash balance formula, which is expressed as an amount in a notional account that grows with annual credits based on pay and interest on the notional account balance and is converted to a pension with an insurance company at retirement. Prior benefits were accrued using a traditional pension formula (based on final earnings and years of service). In addition, employees earning benefits under the cash balance design are eligible to contribute into a defined contribution plan where the company matches 200% of the employee’s contribution up to 6%. For the plans sponsored by us, our assets are primarily invested in equities and fixed income securities.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair value disclosures have not been provided for these international defined benefit pension plans since the assets are primarily managed at an individual country level. The amount of assets in these plans having significant unobservable inputs (Level 3), if any, would be immaterial to our financial statements.

POSTRETIREMENT HEALTHCARE PLANS. We sponsor a plan offering medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents. For Medicare eligible non-pilot retirees and their eligible dependents, we only provide a fixed subsidy toward a Health Reimbursement Account (HRA) with Extend Health, which may be used for the premium payment for a Medigap policy. U.S. employees become eligible for these benefits at age 55 and older, if they have permanent, continuous service of at least 10 years after attainment of age 45 if hired prior to January 1, 1988, or at least 20 years after attainment of age 35 if hired on or after January 1, 1988. Postretirement healthcare benefits are capped at 150% of the 1993 per capita projected employer cost, which has been reached and therefore, these benefits are not subject to additional future inflation.

The accounting guidance related to postretirement benefits requires recognition in the balance sheet of the funded status of defined benefit pension and other postretirement benefit plans, and the recognition in accumulated other comprehensive income (“AOCI”) of unrecognized gains or losses and prior service costs or credits. The funded status is measured as the difference between the fair value of the plan’s assets and the PBO or APBO of the plan.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the plans currently sponsored by us, the following table provides a reconciliation of the changes in the pension and postretirement healthcare plans’ benefit obligations and fair value of assets for our employees over the two-year period ended May 31, 2014 and a statement of the funded status as of May 31, 2014 and 2013 (in millions):


	Pension Plans						Postretirement Healthcare Plans
	2014			2013			2014			2013

Accumulated Benefit Obligation (“ABO”)	$	722		$	627


Changes in Projected Benefit Obligation (“PBO”) and Accumulated Postretirement Benefit Obligation (“APBO”)
PBO/APBO at the beginning of year	$	763		$	659		$	659		$	644
Service cost		39			32			30			33
Interest cost		29			27			32			29
Actuarial loss (gain)		20			71			5			(25	)
Benefits paid		(22	)		(20	)		(60	)		(52	)
Settlements		(2	)		(1	)		—			—
Participant contributions		3			3			33			26
Other		45			(8	)		—			4

PBO/APBO at the end of year	$	875		$	763		$	699		$	659


Change in Plan Assets
Fair value of plan assets at the beginning of year	$	386		$	322		$	—		$	—
Actual return on plan assets		24			54			—			—
Company contributions		36			39			27			26
Benefits paid		(22	)		(20	)		(60	)		(52	)
Settlements		(2	)		(1	)		—			—
Other		41			(8	)		33			26

Fair value of plan assets at the end of year	$	463		$	386		$	—		$	—


Funded Status of the Plans	$	(412	)	$	(377	)	$	(699	)	$	(659	)


Amount Recognized in the Balance Sheet at May 31: Noncurrent asset	$	5
Current pension, postretirement healthcare and other benefit obligations		(10	)	$	(11	)	$	(31	)	$	(30	)
Noncurrent pension, postretirement healthcare and other benefit obligations		(407	)		(366	)		(668	)		(629	)

Net amount recognized	$	(412	)	$	(377	)	$	(699	)	$	(659	)


Amounts Recognized in AOCI and not yet reflected in Net Periodic Benefit Cost:
Net actuarial loss (gain)	$	229		$	207		$	(13	)	$	(18	)
Prior service (credit) cost and other		(28	)		(27	)		1			1

Total	$	201		$	180		$	(12	)	$	(17	)


Amounts Recognized in AOCI and not yet reflected in Net Periodic Benefit Cost expected to be amortized in next year’s Net Periodic Benefit Cost:
Net actuarial loss	$	11		$	10		$	—		$	—
Prior service credit and other		(3	)		(3	)		—			—

Total	$	8		$	7		$	—		$	—

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents plans sponsored by us on a disaggregated basis to show those plans (as a group) in an unfunded position. The fair value of plan assets for pension plans with a PBO or ABO in excess of plan assets at May 31 were as follows (in millions):


	PBO Exceeds the Fair Value of Plan Assets
	2014			2013
Pension Benefits
Fair value of plan assets	$	99		$	386
PBO		(516	)		(763	)

Net funded status	$	(417	)	$	(377	)


	ABO Exceeds the Fair Value of Plan Assets
	2014			2013
Pension Benefits
ABO⁽¹⁾	$	364		$	599

Fair value of plan assets		98			357
PBO		(515	)		(733	)

Net funded status	$	(417	)	$	(376	)

⁽¹⁾	ABO not used in determination of funded status.

In the plans currently sponsored by us, net periodic benefit cost for FedEx Express employees for the three years ended May 31 were as follows (in millions):


	Pension Plans									Postretirement Healthcare Plans
	2014			2013			2012			2014		2013		2012

Service cost	$	39		$	32		$	29		$	30	$	33	$	28
Interest cost		29			27			27			32		29		29
Expected return on plan assets		(22	)		(21	)		(20	)		—		—		—
Recognized actuarial losses (gains) and other		8			8			7			—		—		(1	)

Net periodic benefit cost	$	54		$	46		$	43		$	62	$	62	$	56

Amounts recognized in OCI for the years ended May 31 were as follows (in millions):


	2014										2013
	Pension Plans						Postretirement Healthcare Plans				Pension Plans						Postretirement Healthcare Plans
	Gross Amount			Net of Tax Amount			Gross Amount		Net of Tax Amount		Gross Amount			Net of Tax Amount			Gross Amount			Net of Tax Amount
Net loss (gain) and other arising during period	$	17		$	10		$	2	$	1	$	38		$	26		$	(15	)	$	(20	)
Amortizations:
Actuarial (losses) gains and other		(7	)		(5	)		—		—		(7	)		(4	)		—			—

Total recognized in OCI	$	10		$	5		$	2	$	1	$	31		$	22		$	(15	)	$	(20	)

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted-average actuarial assumptions for the plans sponsored by us were as follows:


	Pension Plans									Postretirement Healthcare Plans
	2014			2013			2012			2014			2013			2012

Discount rate used to determine benefit obligation		3.59	%		3.66	%		4.08	%		4.74	%		4.91	%		4.55	%
Discount rate used to determine net periodic benefit cost		3.66			4.08			4.79			4.91			4.55			5.67
Rate of increase in future compensation levels used to determine benefit obligation		3.38			3.30			3.00			—			—			—
Rate of increase in future compensation levels used to determine net periodic benefit cost		3.30			3.00			4.02			—			—			—
Expected long-term rate of return on assets		5.14			6.41			6.52			—			—			—

Benefit payments for FedEx Express employees in the plans sponsored by us, which reflect expected future service, are expected to be paid as follows for the years ending May 31 (in millions):


	Pension Plans		Postretirement Healthcare Plans
2015	$	24	$	31
2016		25		32
2017		28		34
2018		29		35
2019		31		37
2020-2024		199		217

We expect to make pension plan contributions in 2015 approximating $37 million. These estimates are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.

Future medical benefit claims costs are estimated to increase at an annual rate of 7.5% during 2015, decreasing to an annual growth rate of 4.5% in 2029 and thereafter. A 1% change in these annual trend rates would not have a significant impact on the APBO at May 31, 2014 or 2014 benefit expense because the level of these benefits is capped.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11: BUSINESS SEGMENT INFORMATION

We are engaged in a single line of business and operate in one business segment – the worldwide express transportation and distribution of time-sensitive shipments. We are the world’s largest express transportation company, and use a global air-and-ground network to speed delivery of time-sensitive shipments. We operate an integrated transportation network in providing these worldwide services and use our network assets (particularly aircraft) interchangeably around the world as demand and other circumstances dictate a need.

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

REVENUE BY SERVICE TYPE


	2014		2013		2012
Package:
U.S. overnight box	$	6,555	$	6,513	$	6,546
U.S. overnight envelope		1,636		1,705		1,747
U.S. deferred		3,188		3,020		3,001

Total U.S. domestic package revenue		11,379		11,238		11,294
International priority		6,451		6,586		6,849
International economy		2,229		2,046		1,859

Total international export package revenue		8,680		8,632		8,708

International domestic⁽¹⁾		1,446		1,398		853

Total package revenue		21,505		21,268		20,855

Freight:
U.S.		2,355		2,562		2,498
International priority		1,594		1,678		1,827
International airfreight		205		276		307

Total freight revenue		4,154		4,516		4,632

Other		389		409		279

	$	26,048	$	26,193	$	25,766


GEOGRAPHICAL INFORMATION⁽²⁾

Revenues:
U.S.	$	13,775	$	13,837	$	13,821
International		12,273		12,356		11,945

	$	26,048	$	26,193	$	25,766


Noncurrent assets:
U.S.	$	13,317	$	12,717	$	12,206
International		2,683		2,614		1,928

	$	16,000	$	15,331	$	14,134

⁽¹⁾	International domestic revenues represent our international intra-country express operations, including countries such as Mexico and Brazil.

⁽²⁾

International revenue includes shipments that either originate in or are destined to locations outside the United States. Noncurrent assets include property and equipment, goodwill and other long-term assets. Our flight equipment is registered in the U.S. and is included as U.S. assets; however, many of our aircraft operate internationally.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION

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


	2014			2013			2012
Cash payments for:
Income taxes	$	235		$	243		$	256
Income tax refunds received		(182	)		(213	)		(546	)

Cash tax payments, net	$	53		$	30		$	(290	)

NOTE 13: GUARANTEES AND INDEMNIFICATIONS

In conjunction with certain transactions, primarily the lease, sale or purchase of operating assets or services in the ordinary course of business, we may provide routine guarantees or indemnifications (e.g., environmental, fuel tax and software infringement), the terms of which range in duration, and often they are not limited and have no specified maximum obligation. As a result, the overall maximum potential amount of the obligation under such guarantees and indemnifications cannot be reasonably estimated. Historically, we have not been required to make significant payments under our guarantee or indemnification obligations and no amounts have been recognized in our financial statements for the underlying fair value of these obligations.

We provide guarantees on certain FedEx unsecured debt instruments aggregating $4.5 billion at May 31, 2014, 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 $1.0 billion revolving credit agreement, which backs its commercial paper program. At May 31, 2014, no commercial paper was outstanding and the entire $1.0 billion under the revolving credit agreement was available for future borrowings. The guarantees are full and unconditional and are required by the lenders since FedEx has no independent assets or operations.

Special facility revenue bonds have been issued by certain municipalities primarily to finance the acquisition and construction of various airport facilities and equipment. These facilities were leased to us and are accounted for as operating leases. We have unconditionally guaranteed $528 million in principal of these bonds (with total future principal and interest payments of approximately $649 million as of May 31, 2014) through these leases.

NOTE 14: COMMITMENTS

Annual purchase commitments under various contracts as of May 31, 2014 were as follows (in millions):


	Aircraft and Aircraft-Related		Other⁽¹⁾		Total

2015	$	1,147	$	61	$	1,208
2016		1,248		34		1,282
2017		956		24		980
2018		1,368		21		1,389
2019		859		8		867
Thereafter		4,498		81		4,579

	$	10,076	$	229	$	10,305

⁽¹⁾	Primarily advertising and promotions contracts.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of May 31, 2014, our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and nine B777F aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended. 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 have several aircraft modernization programs underway which are supported by the purchase of B777F, B767F and Boeing 757 (“B757”) aircraft. These aircraft are significantly more fuel-efficient per unit than the aircraft types previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to replace older aircraft. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements.

During 2014, we entered into an agreement with The Boeing Company for the purchase of two B767F aircraft, the delivery of which will occur in 2016 and 2017. We also deferred 11 existing options to purchase B777F aircraft by two years. Additionally in 2014, we entered into supplemental agreements to purchase 16 B757 option aircraft pursuant to an agreement originally entered into in March 2013, the delivery of which began in 2014 and will continue through 2015.

We had $396 million in deposits and progress payments as of May 31, 2014 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the B757 aircraft 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 May 31, 2014, with the year of expected delivery:


	B757		B767F		B777F		Total

2015		13		12		—		25
2016		—		11		2		13
2017		—		11		—		11
2018		—		10		2		12
2019		—		4		2		6
Thereafter		—		—		12		12

Total		13		48		18		79

NOTE 15: CONTINGENCIES

Environmental Matters. SEC regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that management reasonably believes could exceed $100,000.

On January 14, 2014, the U.S. Department of Justice (“DOJ”) issued a Grand Jury Subpoena to FedEx Express relating to an asbestos matter previously investigated by the U.S. Environmental Protection Agency. On May 1, 2014, the DOJ informed us that it had determined to continue to pursue the matter as a criminal case, citing seven asbestos-related regulatory violations associated with removal of roof materials from a hangar in Puerto Rico during cleaning and repair activity, as well as violation of waste disposal requirements. Loss is reasonably possible, however, the amount of any loss is expected to be immaterial.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Matters. In August 2010, a third-party consultant who works with shipping customers to negotiate lower rates filed a lawsuit in federal district court in California against FedEx and United Parcel Service, Inc. (“UPS”) alleging violations of U.S. antitrust law. This matter was dismissed in May 2011, but the court granted the plaintiff permission to file an amended complaint, which FedEx received in June 2011. In November 2011, the court granted our motion to dismiss this complaint, but again allowed the plaintiff to file an amended complaint. The plaintiff filed a new complaint in December 2011, and the matter remains pending before the court. In February 2011, shortly after the initial lawsuit was filed, we received a demand for the production of information and documents in connection with a civil investigation by the DOJ into the policies and practices of FedEx and UPS for dealing with third-party consultants who work with shipping customers to negotiate lower rates. In November 2012, the DOJ served a civil investigative demand on the third-party consultant seeking all pleadings, depositions and documents produced in the lawsuit. We are cooperating with the investigation, do not believe that we have engaged in any anti-competitive activities and will vigorously defend ourselves in any action that may result from the investigation. While the litigation proceedings and the DOJ investigation move forward, and the amount of loss, if any, is dependent on a number of factors that are not yet fully developed or resolved, the amount of any loss is expected to be immaterial.

We have received requests for information from the DOJ in the Northern District of California in connection with a criminal investigation relating to the transportation of packages for online pharmacies that may have shipped pharmaceuticals in violation of federal law. We responded to grand jury subpoenas issued in June 2008 and August 2009 and to periodic subsequent requests for additional information related to those subpoenas, and we continue to respond and cooperate with the investigation. We believe that our employees have acted in good faith at all times. We do not believe that we have engaged in any illegal activities and will vigorously defend ourselves in any action that may result from the investigation. The investigation may lead to a criminal indictment and, if we are convicted, remedies could include fines, penalties, financial forfeiture and compliance conditions. We cannot estimate the amount or range of loss, if any, as such analysis would depend on facts and law that are not yet fully developed or resolved.

On June 30, 2014, we received a Statement of Objections from the French Competition Authority (“FCA”) addressed to FedEx Express France, formerly known as TATEX, regarding an investigation by the FCA into anticompetitive behavior that is alleged to have occurred primarily in the framework of trade association meetings that included the former general managers of TATEX prior to our acquisition of that company in July 2012. Given the early stage of this matter, we cannot yet determine the amount or range of potential loss; however, it is reasonably possible that it could be material.

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.

NOTE 16: 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. 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 $1.7 billion at May 31, 2014 and $1.6 billion at May 31, 2013.

The costs of FedEx Services, FedEx TechConnect and FedEx Office and Print Services, Inc., as well as charges for management fees from our parent, are allocated to us and are included in the expense line item “Intercompany charges, net” based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of providing the functions.

FEDERAL EXPRESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 17: SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)


(in millions)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter

2014
Revenues	$	6,346	$	6,546	$	6,426	$	6,730
Operating income		230		322		126		465
Net income		146		198		64		296

2013 ⁽¹⁾
Revenues	$	6,396	$	6,607	$	6,462	$	6,728
Operating income		200		228		125		1
Net income		126		143		74		(13	)

⁽¹⁾

The fourth quarter of 2013 includes $356 million of direct and allocated business realignment costs and an impairment charge of $100 million resulting from the decision to retire 10 aircraft and related engines. The third quarter of 2013 includes $34 million and the second quarter of 2013 includes $8 million of direct and allocated business realignment costs.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATES. While we currently have market risk sensitive instruments related to interest rates, we have no significant exposure to changing interest rates on our long-term debt because the interest rates are fixed on all of our long-term debt. As disclosed in Note 6 to the accompanying consolidated financial statements, we had outstanding fixed-rate, long-term debt (exclusive of capital leases) with estimated fair values of $326 million at May 31, 2014 and $344 million at May 31, 2013. Market risk for fixed-rate, long-term debt is estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates and amounts to $18 million as of May 31, 2014 and $19 million as of May 31, 2013. The underlying fair values of our long-term debt were estimated based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

We have interest rate risk with respect to our pension and postretirement benefit obligations. Changes in interest rates impact our liabilities associated with these benefit plans, as well as the amount of pension and postretirement benefit expense recognized. Declines in the value of plan assets could diminish the funded status of our pension plans and potentially increase our requirement to make contributions to the plans. Substantial investment losses on plan assets will also increase pension expense in the years following the losses.

FOREIGN CURRENCY. While we are a global provider of transportation services, the substantial majority of our transactions are denominated in U.S. dollars. The principal foreign currency exchange rate risks to which we are exposed are in the Chinese yuan, euro, Brazilian real, British pound and the Canadian dollar. Historically, our exposure to foreign currency fluctuations is more significant with respect to our revenues than our expenses, as a significant portion of our expenses are denominated in U.S. dollars, such as aircraft and fuel expenses. During 2014, foreign currency fluctuations had a slightly negative impact on operating income. The impact of foreign currency fluctuations was slightly positive in 2013. However, favorable foreign currency fluctuations also may have had an offsetting impact on the price we obtained or the demand for our services, which is not quantifiable. At May 31, 2014, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which our transactions are denominated would result in a decrease in operating income of $23 million for 2015. This theoretical calculation required under SEC guidelines assumes that each exchange rate would change in the same direction relative to the U.S. dollar, which is not consistent with our actual experience in foreign currency transactions. In addition to the direct effects of changes in exchange rates, fluctuations in exchange rates also affect the volume of sales or the foreign currency sales price as competitors’ services become more or less attractive. The sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

COMMODITY. While we have market risk for changes in the price of jet fuel, this risk is largely mitigated by our variable fuel surcharges because our fuel surcharges are closely linked to market prices for jet fuel. Therefore, a hypothetical 10% change in the price of jet fuel would not be expected to materially affect our earnings over the long term.

However, our fuel surcharges have a timing lag of six to eight weeks before they are adjusted for changes in fuel prices. Our fuel surcharge index also allows fuel prices to fluctuate approximately 2% before an adjustment to the fuel surcharge occurs. Therefore, our operating income may be affected should the spot price of jet fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges.

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

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder

Federal Express Corporation

We have audited the consolidated financial statements of Federal Express Corporation as of May 31, 2014 and 2013, and for each of the three years in the period ended May 31, 2014, and have issued our report thereon dated July 14, 2014 (included elsewhere in this Annual Report on Form 10-K). Our audits also included the financial statement schedule listed in Item 15(a) in this Annual Report on Form 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Memphis, Tennessee

July 14, 2014

SCHEDULE II

FEDERAL EXPRESS CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED MAY 31, 2014, 2013, AND 2012

(IN MILLIONS)


			ADDITIONS
DESCRIPTION	BALANCE AT BEGINNING OF YEAR		CHARGED TO EXPENSES		CHARGED TO OTHER ACCOUNTS		DEDUCTIONS			BALANCE AT END OF YEAR

Accounts Receivable Reserves:

Allowance for Doubtful Accounts

2014	$	32	$	100	$	—	$	109	(a)	$	23

2013		33		135		—		136	(a)		32

2012		37		117		—		121	(a)		33

/s/ CATHY D. ROSS

Cathy D. Ross

Attorney-in-Fact

July 14, 2014

FEDERAL EXPRESS CORP 10-K