FedEx reports strong revenue and earnings growth in second quarter

FedEx Corporation (NYSE: FDX) reported earnings of $1.15 per diluted share for the second quarter ended November 30, consistent with the company's previous guidance of $1.10 to $1.20 per share. Earnings in last year's second quarter were $0.30 per diluted share.

FedEx Corp. reported the following consolidated results for the second quarter:

— Revenue of $7.33 billion, up 24% from $5.92 billion the previous year

— Operating income of $600 million, up from $183 million a year ago

— Operating margin of 8.2%, up from last year's 3.1%

— Net income of $354 million, up from $91 million the previous year

"We have very strong momentum across our business segments," said Frederick W. Smith, chairman, president and chief executive officer. "Global and U.S. economic conditions remain favorable, and businesses are replenishing inventories and investing at a healthy pace. The demand for FedEx services is strong and we are highly optimistic about our growth and profitability during the second half of our fiscal year."

FedEx expects third quarter earnings to be $0.90 to $1.00 per diluted share and has increased its earnings guidance for the year to $4.60 to $4.70 per diluted share, compared to previous guidance of $4.40 to $4.60 per diluted share. The capital spending forecast for fiscal 2005 is approximately $2.2 billion.

"We expect to produce strong cash flow this year despite the additional investments we are making in our networks to accommodate growth and a voluntary $300 million contribution to our pension plan," said Alan B. Graf, Jr., executive vice president and chief financial officer. "We remain committed to improving margins, returns and cash flow."

Total average daily package volume at FedEx Express and FedEx Ground combined grew more than 8% year over year for the quarter, led by double-digit growth in ground and FedEx International Priority(R) shipments and a return to growth in U.S. domestic express shipments. FedEx Freight average daily less-than-truckload (LTL) shipment volume increased 12%. Revenue per package increased at both FedEx Express and FedEx Ground, while LTL revenue per hundredweight grew at FedEx Freight.

Second quarter revenues included $524 million from FedEx Kinko's, which was acquired in February 2004. A $48 million or $0.10 per diluted share one-time charge was taken during the quarter following the Department of Transportation's issuance of a final order in its administrative review of the FedEx Express claim for compensation under the Air Transportation Safety and System Stabilization Act. Partially offsetting this charge during the quarter was a $0.04 per diluted share tax benefit resulting from the passage of the American Jobs Creation Act of 2004. Last year's second quarter included $283 million or $0.57 per diluted share of business realignment expenses associated with voluntary early retirement and severance programs.

FedEx Express Segment

For the second quarter, the FedEx Express segment reported:

— Revenue of $4.83 billion, up 13% from last year's $4.28 billion

— Operating income of $333 million, up from a loss of $19 million a year ago

— Operating margin of 6.9%, up from (0.4)% the previous year

FedEx International Priority (IP) revenue continued its strong growth, increasing more than 22% for the quarter. IP average daily package volume grew 12%, led by strong growth in Asia, U.S. export and Europe. IP revenue per package grew 10%, primarily due to fuel surcharges, an increase in average weight per package and favorable exchange rate differences. U.S. domestic express package revenue increased 9%, as revenue per package increased 7% due to higher fuel surcharge revenue and increases in average weight per package and average rate per pound. U.S. domestic average daily package volume increased 1%.

Operating income improved dramatically year over year, benefiting from revenue growth, savings from business realignment programs and ongoing cost control efforts, offset by the $48 million charge related to the Department of Transportation. Also, the second quarter of fiscal 2004 included $279 million of costs related to business realignment.

On November 22, 2004, FedEx Express entered into a fifth addendum to its transportation agreement with the U.S. Postal Service, allowing the company to continue carrying higher committed volumes through May 31, 2006 than required under the original seven year agreement which began in August 2001.

Air Cargo World magazine for the second straight year ranked FedEx Express number one in its recent "World's Top 50 Cargo Airlines" list. The magazine's research shows FedEx Express has the largest share of the global air cargo market, based on scheduled freight ton kilometers flown during 2003.

FedEx Ground Segment

For the second quarter, the FedEx Ground segment reported:

— Revenue of $1.17 billion, up 20% from last year's $978 million

— Operating income of $135 million, even with a year ago

— Operating margin of 11.5%, down from 13.8% the previous year

FedEx Ground average daily package volume grew at a robust 16% rate year over year in the second quarter. Yield improved 2% primarily due to an increase in extra services revenue, partially offset by a lower average weight per package and the elimination of the FedEx Ground fuel surcharge in January 2004. A fuel surcharge will be reinstated on January 3, 2005.

Despite significantly improved field productivity, the FedEx Ground segment operating margin was lower due to increased fuel costs, the absence of a fuel surcharge and a $10 million charge for termination of a vendor agreement at FedEx Supply Chain Services. Overall, these items negatively impacted operating margin by approximately three percentage points.

Results of FedEx SmartPost, formerly Parcel Direct, are included in the FedEx Ground segment beginning September 12, 2004. FedEx SmartPost was acquired on that date from a privately held company and is a leading small-parcel consolidator. The financial results of FedEx SmartPost did not materially affect revenue, operating profit or margin during the quarter.

FedEx Freight Segment

For the second quarter, the FedEx Freight segment reported:

— Revenue of $820 million, up 23% from last year's $664 million

— Operating income of $102 million, up 55% from $66 million a year ago

— Operating margin of 12.5%, up from 10.0% the previous year

Average daily LTL shipments increased 12% year over year due to market share gains and increased demand for services. LTL yield improved 9% year over year due to incremental fuel surcharges, growth in interregional freight service and higher rates. Operating margin was up significantly compared to the previous year due to volume growth, higher fuel surcharges and productivity gains.

FedEx Kinko's Segment

For the second quarter, the FedEx Kinko's segment reported:

— Revenue of $524 million

— Operating income of $29 million

— Operating margin of 5.7%

FedEx Kinko's revenue and operating margin during the second quarter reflect an increase in business levels as compared to the first quarter, due to the seasonal improvement resulting from back-to-school and pre-holiday demand. Second quarter revenue reflects continued international expansion and strong demand from signs and graphics, retail services and retail products.

Operating margin was impacted by integration activities, which includes costs associated with the launch of pack and ship services at each U.S. location, the centralization of the FedEx Kinko's corporate office and store rebranding. Costs associated with the integration of FedEx Kinko's will continue throughout the remainder of fiscal 2005.

During the quarter, FedEx Kinko's launched packing services in approximately 1,100 FedEx Kinko's Office and Print Centers nationwide. The introduction created a complete pack and ship solution that further expands FedEx Kinko's industry-leading range of services. FedEx Kinko's is also focusing its efforts on attracting a larger share of the commercial document solutions and business services market.

Tax Rate

The company's effective tax rate was 36% for the second quarter and is anticipated to be approximately 38% for the full year. The lower tax rate was primarily due to an improvement in the company's ability to utilize its foreign tax credits to reduce double taxation on certain international operations as a result of the passage of the American Jobs Creation Act of 2004. The reduction provided a $0.04 per diluted share benefit to the second quarter.

Corporate Overview

FedEx Corp. (NYSE: FDX) provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $27 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Consistently ranked among the world's most admired and trusted employers, FedEx inspires its more than 250,000 employees and contractors to remain "absolutely, positively" focused on safety, the highest ethical and professional standards and the needs of their customers and communities. For more information, visit fedex.com.

Additional information and operating data are contained in the company's annual report, Form 10-K, Form 10-Qs and second quarter FY2005 Statistical Book. These materials, as well as a Webcast of the earnings release conference call to be held at 8:30 a.m. EST on December 16 are available on the company's Web site at www.fedex.com/us/investorrelations. A replay of the conference call Webcast will be posted on our Web site following the call.

Certain statements in this press release may be considered forward-looking statements, such as statements relating to management's views with respect to future events and financial performance. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, any impacts on our business resulting from the duration and magnitude of the U.S. domestic economic recovery, new U.S. domestic or international government regulation, the impact from any terrorist activities or international conflicts, our ability to effectively operate, integrate and leverage the FedEx Kinko's business, the impact of changes in fuel prices and currency exchange rates, our ability to match capacity to shifting volume levels and other factors which can be found in FedEx Corp.'s and its subsidiaries' press releases and filings with the SEC.

FEDEX CORP. FINANCIAL HIGHLIGHTS

Second Quarter Fiscal 2005
(In millions, except earnings per share and FTEs)
(Unaudited)

Three Months Ended Six Months Ended
November 30 November 30
——————– ——————–
2004 2003 % 2004 2003 %
—— —— —- —— —— —-
Revenue:
FedEx Express segment $4,834 $4,279 13% $9,450 $8,416 12%
FedEx Ground segment 1,174 978 20% 2,247 1,892 19%
FedEx Freight segment 820 664 23% 1,627 1,301 25%
FedEx Kinko's segment 524 — NM 1,014 — NM
Other & eliminations (18) (1) NM (29) (2) NM
—— —— —— ——
Total Revenue 7,334 5,920 24% 14,309 11,607 23%

Operating Expenses:
Salaries and employee
benefits 2,930 2,559 14% 5,850 5,129 14%
Purchased transportation 747 598 25% 1,428 1,153 24%
Rentals and landing fees 584 447 31% 1,143 876 30%
Depreciation and
amortization 363 336 8% 723 670 8%
Fuel 592 352 68% 1,075 686 57%
Maintenance and repairs 415 370 12% 835 734 14%
Airline Stabilization Act
charge 48 — NM 48 — NM
Business realignment
costs — 283 NM — 415 NM
Other 1,055 792 33% 2,028 1,561 30%
—— —— —— ——
Total Operating
Expenses 6,734 5,737 17% 13,130 11,224 17%

Operating Income (Loss):
FedEx Express segment 333 (19) NM 643 4 NM
FedEx Ground segment 135 135 — 282 251 12%
FedEx Freight segment 102 66 55% 205 127 61%
FedEx Kinko's segment 29 — NM 48 — NM
Other & eliminations 1 1 NM 1 1 NM
—— —— —— ——
Total Operating
Income 600 183 228% 1,179 383 208%

Other Income (Expense):
Interest, net (38) (35) 9% (77) (40) 93%
Other, net (8) (2) 300% (14) (1) NM
—— —— —— ——
Total Other Income
(Expense) (46) (37) 24% (91) (41) 122%

Pretax Income 554 146 279% 1,088 342 218%

Provision for Income Taxes 200 55 264% 404 123 228%
—— —— —— ——

Net Income $354 $91 289% $684 $219 212%
====== ====== ====== ======

Diluted Earnings Per Share $1.15 $0.30 283% $2.23 $0.72 210%
====== ====== ====== ======

Weighted Average Common and
Common Equivalent Shares 307 304 1% 306 304 1%

Capital Expenditures $781 $308 154% $1,175 $608 93%

Average Full-Time
Equivalents (FTEs in
thousands)(1) 216 191 13% 214 190 13%

(1) The three-month and six-month periods ended November 30, 2004
include FedEx Kinko's.

Note: Certain prior period amounts have been reclassified to conform
to the current period's presentation.

FEDEX CORP. CONDENSED CONSOLIDATED BALANCE SHEETS

Second Quarter Fiscal 2005
(In millions)

Nov. 30, 2004
(Unaudited) May 31, 2004
————— ————-
ASSETS
——

Current Assets:
Cash and cash equivalents $ 939 $ 1,046
Other current assets 4,194 3,924
——– ——–
Total Current Assets 5,133 4,970

Net Property and Equipment 9,346 9,037

Other Long-Term Assets 5,558 5,127
——– ——–

$ 20,037 $ 19,134
======== ========

LIABILITIES AND STOCKHOLDERS' INVESTMENT
—————————————-

Current Liabilities:
Current portion of long-term debt $ 775 $ 750
Other current liabilities 4,139 3,982
——– ——–
Total Current Liabilities 4,914 4,732

Long-Term Debt, Less Current Portion 2,740 2,837

Other Long-Term Liabilities 3,587 3,529

Total Common Stockholders' Investment 8,796 8,036
——– ——–

$ 20,037 $ 19,134
======== ========

FEDEX CORP. CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS

Second Quarter Fiscal 2005
(In millions)
(Unaudited)

Six Months Ended
November 30
———————
2004 2003
——— ———
Operating Activities:
Net income $684 $219
Noncash charges (credits):
Depreciation and amortization 723 670
Other, net (7) 64
Changes in operating assets and liabilities,
net (161) 307
——— ———

Net cash provided by operating activities 1,239 1,260

Investing Activities:
Capital expenditures (1,175) (608)
Business acquisition, net of cash acquired (122) —
Proceeds from asset dispositions 5 12
——— ———

Net cash used in investing activities (1,292) (596)

Financing Activities:
Dividends paid (42) (30)
Other, net (12) (142)
——— ———

Net cash used in financing activities (54) (172)
——— ———

Net (decrease) increase in cash and cash
equivalents (107) 492

Cash and cash equivalents at beginning of
period 1,046 538
——— ———
Cash and cash equivalents at end of period $939 $1,030
========= =========

FEDEX EXPRESS SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS

Second Quarter Fiscal 2005
(Dollars in millions)
(Unaudited)

Three Months Ended Six Months Ended
November 30 November 30
——————– ——————–
FINANCIAL HIGHLIGHTS 2004 2003 % 2004 2003 %
——————– —— —— —- —— —— —-

Revenue $4,834 $4,279 13% $9,450 $8,416 12%

Operating Expenses:
Salaries and employee
benefits 1,873 1,806 4% 3,762 3,640 3%
Purchased transportation 206 169 22% 397 327 21%
Rentals and landing fees 399 384 4% 782 754 4%
Depreciation and
amortization 199 203 (2%) 399 407 (2%)
Fuel 513 310 65% 935 603 55%
Maintenance and repairs 322 293 10% 647 578 12%
Airline Stabilization
Act charge 48 — NM 48 — NM
Business realignment
costs — 279 NM — 411 NM
Intercompany charges 374 347 8% 736 689 7%
Other 567 507 12% 1,101 1,003 10%
—— —— —— ——
Total Operating
Expenses 4,501 4,298 5% 8,807 8,412 5%
—— —— —— ——

Operating Income (Loss) $333 ($19) NM $643 $4 NM
====== ====== ====== ======

Operating Margin 6.9% (0.4%) 6.8% 0.0%

OPERATING STATISTICS
——————–

Operating Weekdays 63 63 — 128 127 1%

AVG DAILY VOLUME / POUNDS
————————-
Average Daily Package Volume
(000s):

U.S. Overnight Box 1,179 1,169 1% 1,164 1,169 (0%)
U.S. Overnight Envelope 663 655 1% 663 668 (1%)
U.S. Deferred 941 924 2% 901 898 0%
—— —— —— ——
Total U.S. Domestic
Package 2,783 2,748 1% 2,728 2,735 (0%)
International Priority 443 397 12% 430 383 12%
—— —— —— ——
Total Average Daily
Packages 3,226 3,145 3% 3,158 3,118 1%
====== ====== ====== ======

Average Daily Freight Pounds
(000s):

U.S. 9,008 8,649 4% 8,605 8,270 4%
International 1,874 2,092 (10%) 1,867 2,185 (15%)
—— —— —— ——
Total Avg Daily
Freight Pounds 10,882 10,741 1% 10,472 10,455 0%
====== ====== ====== ======

YIELD
—–
Revenue Per Package:

U.S. Overnight Box $19.81 $18.29 8% $19.59 $18.15 8%
U.S. Overnight Envelope 10.33 9.90 4% 10.27 9.90 4%
U.S. Deferred 11.51 10.74 7% 11.54 10.81 7%
—— —— —— ——
Total U.S. Domestic
Package 14.74 13.75 7% 14.67 13.72 7%
International Priority 55.13 50.30 10% 54.04 49.57 9%
—— —— —— ——
Composite Package
Yield $20.28 $18.37 10% $20.03 $18.13 10%
====== ====== ====== ======

Revenue Per Freight Pound:

U.S. $0.83 $0.74 12% $0.81 $0.73 11%
International 0.77 0.74 4% 0.76 0.73 4%
—— —— —— ——
Composite Freight
Yield $0.82 $0.74 11% $0.80 $0.73 10%
====== ====== ====== ======

Average Full-Time
Equivalents (000s) 122 122 — 122 122 —

FEDEX GROUND SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS

Second Quarter Fiscal 2005
(Dollars in millions)
(Unaudited)

Three Months Ended Six Months Ended
November 30 November 30
——————– ——————–
FINANCIAL HIGHLIGHTS 2004 2003 % 2004 2003 %
——————– —— —— —- —— —— —-

Revenue $1,174 $978 20% $2,247 $1,892 19%

Operating Expenses:
Salaries and employee
benefits 213 187 14% 410 364 13%
Purchased transportation 456 367 24% 866 709 22%
Rentals 32 26 23% 58 46 26%
Depreciation and
amortization 43 39 10% 83 76 9%
Fuel 13 3 333% 20 5 300%
Maintenance and repairs 26 24 8% 52 47 11%
Intercompany charges 119 103 16% 234 205 14%
Other 137 94 46% 242 189 28%
—— —— —— ——
Total Operating
Expenses 1,039 843 23% 1,965 1,641 20%
—— —— —— ——

Operating Income $135 $135 — $282 $251 12%
====== ====== ====== ======

Operating Margin 11.5% 13.8% 12.6% 13.3%

OPERATING STATISTICS
——————–

Operating Weekdays 63 63 — 128 127 1%

Average Daily Package
Volume(1) (000s) 2,725 2,342 16% 2,584 2,228 16%
Yield (Revenue Per
Package)(1) $6.48 $6.37 2% $6.51 $6.40 2%

(1) Package statistics exclude FedEx SmartPost.

FEDEX FREIGHT SEGMENT FINANCIAL AND OPERATING HIGHLIGHTS

Second Quarter Fiscal 2005
(Dollars in millions)
(Unaudited)

Three Months Ended Six Months Ended
November 30 November 30
——————– ——————–
2004 2003 % 2004 2003 %
—— —— —- —— —— —-
FINANCIAL HIGHLIGHTS
——————–

Revenue $820 $664 23% $1,627 $1,301 25%

Operating Expenses:
Salaries and employee
benefits 406 345 18% 816 685 19%
Purchased transportation 88 64 38% 172 120 43%
Rentals and landing fees 26 25 4% 51 49 4%
Depreciation and
amortization 26 24 8% 50 45 11%
Fuel 65 39 67% 119 78 53%
Maintenance and repairs 31 29 7% 62 56 11%
Intercompany charges 7 4 75% 13 10 30%
Other 69 68 1% 139 131 6%
—— —— —— ——
Total Operating
Expenses 718 598 20% 1,422 1,174 21%
—— —— —— ——

Operating Income $102 $66 55% $205 $127 61%
====== ====== ====== ======

Operating Margin 12.5% 10.0% 12.6% 9.8%

OPERATING STATISTICS
——————–

LTL Operating Weekdays 62 62 — 127 126 1%

LTL Shipments
Per Day (000s) 65 58 12% 65 57 14%
Weight Per LTL
Shipment (lbs) 1,130 1,119 1% 1,129 1,119 1%
LTL Revenue/CWT $15.55 $14.32 9% $15.26 $14.14 8%

Note: Certain prior period amounts have been reclassified to conform
to the current period's presentation.

FEDEX KINKO'S SEGMENT FINANCIAL HIGHLIGHTS

Second Quarter Fiscal 2005
(Dollars in millions)
(Unaudited)

Three Months Ended Six Months Ended
November 30 November 30
—————— ——————
2004 2004
—— ——
FINANCIAL HIGHLIGHTS
——————–

Revenue $524 $1,014

Operating Expenses:
Salaries and employee benefits 186 368
Rentals 114 224
Depreciation and amortization 32 64
Maintenance and repairs 10 19
Intercompany charges 3 6
Other operating expenses:
Supplies, including paper
and toner 85 162
Other 65 123
—— ——
Total Operating
Expenses 495 966
—— ——

Operating Income $29 $48
====== ======

Operating Margin 5.7% 4.8%

Note: The FedEx Kinko's segment was formed in the fourth quarter of
fiscal 2004.