FEDEX CORP (FDX) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

ORGANIZATION OF INFORMATION

This Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) of FedEx Corporation (“FedEx”) is composed of three major sections: Results of Operations and Outlook, Financial Condition, and Critical Accounting Estimates. These sections include the following information:

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Results of operations includes an overview of our consolidated 2024 results compared to 2023 results. This section also includes a discussion of key actions and events that impacted our results. Discussion and analysis of 2022 results and year-over-year comparisons between 2023 results and 2022 results can be found in “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition” of our Annual Report on Form 10-K (“Annual Report”) for the year ended May 31, 2023.

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The overview is followed by a discussion of both historical operating results for our business segments in place during 2024 and 2023 and our outlook for 2025, as well as a financial summary and analysis for each of our transportation segments in place during 2024 and 2023.

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Our financial condition is reviewed through an analysis of key elements of our liquidity and capital resources, financial commitments, and liquidity outlook for 2025.

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Critical accounting estimates discusses those financial statement elements that we believe are most important to understanding the material judgments and assumptions incorporated in our financial results.

The discussion in MD&A should be read in conjunction with the other sections of this Annual Report, particularly “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 8. Financial Statements and Supplementary Data.”

DESCRIPTION OF BUSINESS SEGMENTS

We provide a broad portfolio of transportation, e-commerce, and business services, offering integrated business solutions utilizing our flexible, efficient, and intelligent global network. During 2024 and 2023, our primary operating companies were Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight Corporation and its less-than-truckload (“LTL”) operating subsidiary FedEx Freight, Inc. (“FedEx Freight”), a leading North American provider of LTL freight transportation services. For these periods, those companies represented our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), constituted our reportable segments. Our FedEx Services segment provided sales, marketing, information technology, communications, customer service, technical support, billing and collection services, and certain back-office functions that supported our operating segments. The operating costs of the FedEx Services segment were allocated to the business units it served during 2024 and 2023.

This MD&A is based on our segment reporting that was in effect during 2024 and 2023. In connection with our one FedEx consolidation, on June 1, 2024, FedEx Ground and FedEx Services were merged into Federal Express Corporation (“Federal Express”), becoming a single company operating a unified, fully integrated air-ground express network under the respected FedEx brand. FedEx Freight continues to provide LTL freight transportation services as a separate subsidiary. Beginning in the first quarter of 2025, Federal Express and FedEx Freight represent our major service lines and constitute our reportable segments. Additionally, the results of FedEx Custom Critical, Inc. (“FedEx Custom Critical”) will be included in the FedEx Freight segment instead of the Federal Express segment in 2025. Prior-year amounts will be revised to reflect this presentation. See “Reportable Segments” below and “Item 1. Business” for additional information.

The key indicators necessary to understand our operating results include:

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the overall customer demand for our various services based on macroeconomic factors and the global economy;

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the volumes of transportation services provided through our networks, primarily measured by our average daily volume and shipment weight and size;

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the mix of services purchased by our customers;

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the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per shipment or hundredweight for LTL freight shipments);

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

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

Trends Affecting Our Business

The following trends significantly affect the indicators discussed above, as well as our business and operating results. See the risk factors identified under Part I, Item 1A. “Risk Factors” for more information. Additionally, see “Results of Operations and Outlook – Consolidated Results – Business Optimization and Realignment Costs and – Outlook” and “Results of Operations and Outlook – Financial Condition – Liquidity Outlook” below for additional information on efforts we are taking to mitigate adverse trends.

Macroeconomic Conditions

While macroeconomic 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 and the rate of global trade growth. The decline in U.S. imports of consumer goods that started in late 2022, along with slowed global industrial production, has contributed to weakened economic conditions for the transportation industry. Consequently, this environment has led to lower freight and package volumes at FedEx Express and FedEx Freight, negatively affecting our results in 2024.

Inflation and Interest Rates

During 2024, global inflation decelerated year-over-year but continues to be above historical levels. Additionally, global interest rates remained elevated in an effort to curb inflation. We are experiencing a decline in demand for our transportation services as inflation and high interest rates are negatively affecting consumer and business spending. We expect inflation and high interest rates to continue to negatively affect our results in 2025.

Fuel

We must purchase large quantities of fuel to operate our aircraft and vehicles, and the price and availability of fuel is beyond our control and can be highly volatile. The timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges can significantly affect our operating results either positively or negatively in the short-term. Lower fuel prices negatively affected yields through lower fuel surcharges and drove a decrease in fuel expense during 2024 at all of our transportation segments.

Geopolitical Conflicts

Given the nature of our business and our global operations, geopolitical conflicts may adversely affect our business and results of operations. While we do not expect ongoing geopolitical conflicts between Russia and Ukraine and in the Middle East to have a direct material impact on our business or results of operations, the broader consequences are adversely affecting the global economy and may also have the effect of heightening other risks disclosed under Part I, Item 1A. “Risk Factors.”

RESULTS OF OPERATIONS AND OUTLOOK

Many of our operating expenses are directly affected by revenue and volume levels, and we expect these operating expenses to fluctuate on a year-over-year basis consistent with changes in revenue and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends affecting expenses other than those factors strictly related to changes in revenue and volumes. The line item “Other operating expense” includes costs associated with outside service contracts (such as information technology services, facility services, temporary labor, and security), insurance, professional fees, and operational supplies.

Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2024 or ended May 31 of the year referenced, and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, the FedEx Express segment, the FedEx Ground segment, and the FedEx Freight segment.

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CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the years ended May 31:

The following table shows changes in revenue and operating results by reportable segment for 2024 compared to 2023 (in millions):

(1)
The following is a summary of the effects of the (costs) benefits of certain items affecting our financial results for the years ended May 31 (in millions):

Overview

Operating income improved in 2024 due to the execution of our DRIVE program initiatives and our continued focus on revenue quality, partially offset by reduced demand and lower fuel surcharges, driven by challenging macroeconomic conditions. Our DRIVE initiatives in 2024 included network rationalization through structural flight takedowns and route optimization, along with improvements in hub sort efficiency at FedEx Express, as well as continued benefits from increasing linehaul efficiencies and improving dock productivity at FedEx Ground.

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Operating income in 2024 and 2023 includes $157 million ($120 million, net of tax, or $0.48 per diluted share) and $70 million ($54 million, net of tax, or $0.21 per diluted share), respectively, of asset impairment charges associated with the decision to permanently retire certain aircraft and related engines at FedEx Express. Operating income in 2023 also includes $47 million ($44 million, net of tax, or $0.17 per diluted share) of goodwill and other asset impairment charges associated with the ShopRunner, Inc. (“ShopRunner”) acquisition at FedEx Dataworks, Inc. (“FedEx Dataworks”). See the “Goodwill and Other Asset Impairment Charges” section of this MD&A for more information.

Operating income in 2024 includes $582 million ($444 million, net of tax, or $1.77 per diluted share) of expenses associated with our DRIVE business optimization strategy announced in 2023. Operating income in 2023 includes $273 million ($209 million, net of tax, or $0.81 per diluted share) of expenses under this program, and also includes business realignment costs of $36 million ($27 million, net of tax, or $0.11 per diluted share) associated with our workforce reduction plan in Europe announced in 2021. See the “Business Optimization and Realignment Costs” section of this MD&A for more information.

Operating income in 2024 includes a $57 million benefit ($44 million, net of tax, or $0.17 per diluted share) for insurance recoveries in connection with a FedEx Ground legal matter. Operating income in 2023 includes a $35 million charge ($26 million, net of tax, or $0.10 per diluted share) related to a separate FedEx Ground legal matter. These amounts are included in “Corporate, other, and eliminations.”

Net income includes a pre-tax, noncash gain of $561 million in 2024 ($426 million, net of tax, or $1.69 per diluted share) and a gain of $650 million in 2023 ($493 million, net of tax, or $1.92 per diluted share) associated with our MTM retirement plans accounting adjustments. See the “Retirement Plans MTM Adjustments” section of this MD&A and Note 13 of the accompanying consolidated financial statements for more information.

Net income in 2024 includes a $54 million ($0.21 per diluted share) tax expense related to the remeasurement of state deferred income taxes under the new one FedEx structure. Net income in 2023 includes a $46 million ($0.18 per diluted share) tax expense from a revaluation of certain foreign tax assets. See the “Income Taxes” section of this MD&A and Note 12 of the accompanying consolidated financial statements for more information.

We completed an accelerated share repurchase (“ASR”) transaction with a bank during the fourth quarter of 2024 to repurchase $500 million of FedEx common stock. During 2024, we repurchased 9.8 million shares of our common stock under ASR agreements at an average price of $255.34 per share for a total of $2.5 billion. Share repurchases had a benefit of $0.34 per diluted share in 2024. As of July 15, 2024, $4.1 billion remained available to be used for repurchases under the stock repurchase program approved by our Board of Directors in March 2024. See Note 1 of the accompanying consolidated financial statements and the “Financial Condition—Liquidity” section of this MD&A for additional information on our stock repurchases.

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The following graphs for FedEx Express, FedEx Ground, and FedEx Freight show selected volume trends (in thousands) for the years ended May 31:

(1)
International domestic average daily package volume relates to our international intra-country operations. International export average daily package volume relates to our international priority and economy services.

(2)
Ground commercial average daily volume is calculated on a 5-day-per-week basis, while home delivery and economy average daily package volumes are calculated on a 7-day-per-week basis. 2021 statistical information has been revised to conform to the current year presentation.

(3)
International average daily freight pounds relate to our international priority, economy, and airfreight services.

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The following graphs for FedEx Express, FedEx Ground, and FedEx Freight show selected yield trends for the years ended May 31:

(1)
International export revenue per package relates to our international priority and economy services. International domestic revenue per package relates to our international intra-country operations.

(2)
International freight revenue per pound relates to our international priority, economy, and airfreight services.

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Revenue

Revenue decreased 3% in 2024 primarily due to lower fuel surcharges at all of our transportation segments, decreased volumes at FedEx Express and FedEx Freight, and reduced demand surcharges at FedEx Express, partially offset by base yield improvement at FedEx Ground and FedEx Freight.

FedEx Express revenue decreased 4% in 2024 primarily due to volume declines, lower fuel surcharges, and reduced demand surcharges. Revenue at Corporate, other, and eliminations decreased in 2024 primarily due to lower yields and reduced volume at FedEx Logistics, Inc. (“FedEx Logistics”). FedEx Freight revenue decreased 6% in 2024 primarily due to lower shipments, weight per shipment, and fuel surcharges, partially offset by base yield improvement. FedEx Ground revenue increased 2% in 2024 primarily due to base yield improvement and higher volume, partially offset by lower fuel surcharges.

Goodwill and Other Asset Impairment Charges

In 2024, we made the decision to permanently retire from service 22 Boeing 757-200 aircraft and seven related engines to align with the plans of FedEx Express to modernize its aircraft fleet, improve its global network, and better align air network capacity to match current and anticipated shipment volumes. As a consequence of this decision, a noncash impairment charge of $157 million ($120 million, net of tax, or $0.48 per diluted share) was recorded in 2024.

In 2023, we made the decision to permanently retire from service 12 Boeing MD-11F aircraft and 25 related engines, four Boeing 757-200 aircraft and one related engine, and two Airbus A300-600 aircraft and eight related engines for the same reasons stated above. As a consequence of this decision, a noncash impairment charge of $70 million ($54 million, net of tax, or $0.21 per diluted share) was recorded in 2023.

In 2023, we also recorded a noncash impairment charge of $36 million ($36 million, net of tax, or $0.14 per diluted share) for all of the goodwill attributable to FedEx Dataworks. The key factors contributing to the goodwill impairment were underperformance of the ShopRunner business during 2023, including base business erosion, and the failure to attain the level of operating synergies and revenue and profit growth anticipated at the time of acquisition. We also recorded an $11 million ($8 million, net of tax, or $0.03 per diluted share) noncash intangible asset impairment charge related to the ShopRunner acquisition at FedEx Dataworks. For additional information regarding these impairment charges, see the “Critical Accounting Estimates” section of this MD&A and Note 4 of the accompanying consolidated financial statements.

Business Optimization and Realignment Costs

In the second quarter of 2023, FedEx announced DRIVE, a comprehensive program to improve the company’s long-term profitability. This program includes a business optimization plan to drive efficiency among our transportation segments, lower our overhead and support costs, and transform our digital capabilities. We have commenced our plan to consolidate our sortation facilities and equipment, reduce pickup-and-delivery routes, and optimize our enterprise linehaul network by moving beyond discrete collaboration to an end-to-end optimized network through Network 2.0, the multi-year effort to improve the efficiency with which FedEx picks up, transports, and delivers packages in the U.S. and Canada.

In the fourth quarter of 2023, we announced one FedEx, a consolidation plan to bring FedEx Ground and FedEx Services into Federal Express Corporation, becoming a single company operating a unified, fully integrated air-ground express network under the respected FedEx brand. FedEx Freight continues to provide LTL freight transportation services as a separate subsidiary. The organizational redesign was implemented in phases with full legal implementation effective June 1, 2024. One FedEx will help facilitate our DRIVE transformation program to improve long-term profitability.

FedEx is making progress with Network 2.0, as the company has implemented Network 2.0 optimization in more than 50 locations in the U.S. Contracted service providers will handle the pickup and delivery of packages in some locations while employee couriers will handle others.

We incurred costs associated with our business optimization activities of $582 million ($444 million, net of tax, or $1.77 per diluted share) in 2024. These costs were primarily related to professional services and severance, and are included in Corporate, other, and eliminations, FedEx Express, and FedEx Ground. We incurred costs associated with our business optimization activities of $273 million ($209 million, net of tax, or $0.81 per diluted share) in 2023. These costs were primarily related to consulting services, severance, professional fees, and idling our operations in Russia, and are included in Corporate, other, and eliminations and FedEx Express. The identification of these costs as business optimization-related expenditures is subject to our disclosure controls and procedures. We expect the aggregate pre-tax cost of our business optimization activities to be approximately $1.5 billion through 2025. The timing and amount of our business optimization expenses may change as we revise and implement our plans.

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In 2021, FedEx Express announced a workforce reduction plan in Europe related to the network integration of TNT Express. The plan affected approximately 5,000 employees in Europe across operational teams and back-office functions and was completed during 2023. We incurred costs of $36 million ($27 million, net of tax, or $0.11 per diluted share) in 2023 associated with our business realignment activities. These costs were related to certain employee severance arrangements. Payments under this program totaled approximately $118 million in 2023. The pre-tax cost of our business realignment activities was approximately $430 million. We did not incur any costs related to business realignment activities in 2024.

Operating Expenses

The following table compares operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the years ended May 31:

(1)
Includes asset impairment charges in 2024 associated with the FedEx Express operating segment. Includes goodwill and other asset impairment charges in 2023 associated with the FedEx Express and FedEx Dataworks operating segments.

(2)
Includes costs associated with our DRIVE program in 2024 and 2023 and the workforce reduction plan in Europe in 2023.

(3)
Includes a $57 million benefit in 2024 for insurance recoveries in connection with a FedEx Ground legal matter. Includes a $35 million charge in 2023 related to a separate FedEx Ground legal matter.

Operating income increased in 2024 primarily due to our DRIVE program initiatives and base yield improvements at FedEx Ground and FedEx Freight, which more than offset volume declines at FedEx Freight and FedEx Express. Our DRIVE initiatives included continued benefits from network rationalization at FedEx Express, including structural flight takedowns and route optimization, and improvements in hub sort efficiency, as well as increasing linehaul efficiencies and improving dock productivity at FedEx Ground. Lower volumes contributed to reductions in salaries and employee benefits, fuel expense, purchased transportation, and rentals and landing fees. The effect of volume declines on salaries and employee benefits was offset by higher wages and variable incentive compensation. Other operating expenses decreased primarily due to lower bad debt accruals, professional fees, and self-insurance accruals.

We recognized $157 million and $70 million of asset impairment charges in 2024 and 2023, respectively, associated with the decision to permanently retire certain aircraft and related engines at FedEx Express. Our 2023 results also include $47 million of goodwill and other asset impairment charges associated with the ShopRunner acquisition at FedEx Dataworks. See the “Goodwill and Other Asset Impairment Charges” section of this MD&A for more information.

Fuel

We apply a fuel surcharge on our air and ground services, most of which are adjusted on a weekly basis. The fuel surcharge is based on a weekly fuel price from ten days prior to the week in which it is assessed. Some FedEx Express international fuel surcharges are updated on a monthly basis. We routinely review our fuel surcharges and periodically update the tables used to determine our fuel surcharges at all of our transportation segments.

While fluctuations in fuel surcharge percentages can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price, and extra service charges we obtain for these services and level of pricing discounts offered.

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Fuel expense decreased 20% during 2024 due to lower fuel prices and usage. In addition to variability in usage and market prices, the manner in which we purchase fuel also influences our results. For example, our contracts for jet fuel purchases at FedEx Express are tied to various indices, including the U.S. Gulf Coast index. While many of these indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for jet fuel. Furthermore, under these contractual arrangements, approximately 60% of our jet fuel is purchased based on the index price for the preceding week, with the remainder of our purchases tied primarily to the index price for the preceding month and preceding day, rather than based on daily spot rates. These contractual provisions mitigate the impact of rapidly changing daily spot rates on our jet fuel purchases.

Because of the factors described above, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term. For more information, see “Item 1A. Risk Factors.”

Other Income and Expense

Interest income and interest expense increased $172 million and $51 million, respectively, in 2024 primarily due to an increase in interest rates.

Retirement Plans MTM Adjustments

In 2024, we incurred a pre-tax, noncash MTM gain of $561 million ($426 million, net of tax, or $1.69 per diluted share) related to the year-end actuarial adjustments of pension and postretirement healthcare plans’ assets and liabilities. These actuarial adjustments were due to higher discount rates, partially offset by changes to the actuarial assumptions regarding rates of retirement and short-term cash balance interest credits.

In 2023, we incurred a pre-tax, noncash MTM gain of $650 million ($493 million, net of tax, or $1.92 per diluted share) related to the year-end actuarial adjustments of pension and postretirement healthcare plans’ assets and liabilities. These actuarial adjustments were due to higher discount rates, partially offset by lower-than-expected asset returns and demographic experience.

For more information, see the “Critical Accounting Estimates” section of this MD&A and Note 1 and Note 13 of the accompanying consolidated financial statements.

Income Taxes

Our effective tax rate was 25.8% for 2024, compared to 25.9% for 2023. The 2024 tax provision includes an income tax expense of $54 million ($0.21 per diluted share) from the remeasurement of U.S. state deferred tax balances related to the merger of FedEx Ground and FedEx Services into Federal Express Corporation. The 2023 tax provision was impacted by an expense of $46 million ($0.18 per diluted share) related to a write-down and valuation allowance on certain foreign tax credit carryforwards due to operational changes which impacted the determination of the realizability of the deferred tax asset.

Several countries in which the company operates have adopted the Organization for Economic Cooperation and Development’s global framework implementing a 15% corporate minimum tax, commonly referred to as Pillar Two. The company will be subject to Pillar Two beginning in 2025. Based on currently issued guidance, we do not believe this will have a material effect on the company’s 2025 income tax provision. We will continue to monitor additional guidance as it is released.

We are subject to taxation in the U.S. and various U.S. state, local, and foreign jurisdictions. We are currently under examination by the Internal Revenue Service (“IRS”) for the 2016 through 2021 tax years. 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. However, we believe we have recorded adequate amounts of tax, including interest and penalties, for any adjustments expected to occur.

During 2021, we filed suit in U.S. District Court for the Western District of Tennessee challenging the validity of a tax regulation related to the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of the Tax Cuts and Jobs Act (“TCJA”). Our lawsuit seeks to have the court declare this regulation invalid and order the refund of overpayments of U.S. federal income taxes for 2018 and 2019 attributable to the denial of foreign tax credits under the regulation. We have recorded a cumulative benefit of $226 million attributable to our interpretation of the TCJA and the Internal Revenue Code. In March 2023, the District Court ruled that the regulation is invalid and contradicts the plain terms of the tax code. We continue to work towards obtaining a final judgment for the applicable refund amounts due to the regulation being invalid. Once the District Court enters a final judgment, the U.S. government could file an appeal with the U.S. Court of Appeals for the Sixth Circuit. If we are ultimately unsuccessful in defending our position, we may be required to reverse the benefit previously recorded.

For more information on income taxes, see the “Critical Accounting Estimates” section of this MD&A and Note 12 of the accompanying consolidated financial statements.

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Equity Investments

As of May 31, 2024 and 2023, the carrying value of our equity investments were $360 million and $302 million, respectively. For more information on equity investments, see Note 19 of the accompanying consolidated financial statements.

Outlook

During 2025, we expect revenue to increase, with service mix shifting further toward deferred service offerings. We will continue to execute on our DRIVE program initiatives focused on reducing our permanent cost structure, aligning our cost base with demand, and increasing the flexibility of our network. We will also continue to execute on our revenue quality strategy to mitigate yield pressures through surcharge management and optimizing our customer and service mix. We expect the benefits from DRIVE and revenue quality initiatives to be partially offset by expense headwinds related to higher global inflation, the unfavorable impact of the expiration of the contract for Federal Express to provide the U.S. Postal Service (“USPS”) domestic transportation services in September 2024, and two fewer operating days.

See the “Business Optimization and Realignment Costs” section of this MD&A for additional information on our DRIVE program and other cost savings initiatives.

Our capital expenditures for 2025 are expected to be approximately $5.2 billion, in line with 2024, as we continue to reduce our capital intensity relative to revenue. Aircraft spend is expected to decline, partially offset by increased investments in network optimization and modernization of our facilities. Our expected capital expenditures for 2025 include continued investments related to Network 2.0, as well as the continued modernization of the Federal Express Memphis World Hub and expansion and modernization of the Federal Express Indianapolis Hub.

We will continue to evaluate our investments in critical long-term strategic projects to ensure our capital expenditures are expected to generate high returns on investment and are balanced with our outlook for global economic conditions. For additional details on key 2025 capital projects, refer to the “Financial Condition – Capital Resources” and “Financial Condition – Liquidity Outlook” sections of this MD&A.

In June 2024, FedEx Express announced a workforce reduction plan in Europe as part of its ongoing measures to reduce structural costs. The plan will impact between 1,700 and 2,000 employees in Europe across back-office and commercial functions. The execution of the plan is subject to a consultation process that is expected to occur over an 18-month period in accordance with local country processes and regulations. We expect the pre-tax cost of the severance benefits and legal and professional fees to be provided under and related to the plan to range from $250 million to $375 million in cash expenditures. These charges are expected to be incurred through fiscal 2026 and will be classified as business optimization expenses. We expect savings from the plan to be between $125 million and $175 million on an annualized basis beginning in 2027.

In June 2024, we announced that FedEx’s management and Board of Directors are conducting an assessment of the role of FedEx Freight in the company’s portfolio structure.

The uncertainty of a slowing global economy, global inflation, geopolitical challenges including the ongoing conflicts between Russia and Ukraine and in the Middle East, and the effect these factors will have on the rate of growth of global trade, supply chains, fuel prices, and our business in particular, make any expectations for 2025 inherently less certain. See “Item 1A. Risk Factors” for more information.

See “Forward-Looking Statements,” “Item 1A. Risk Factors,” “Trends Affecting Our Business,” and “Critical Accounting Estimates” for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.

Seasonality of Business

Our businesses are cyclical in nature, as seasonal fluctuations affect volumes, revenue, 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. Historically, the fall was the busiest shipping period for FedEx Ground, while late December, June and July were the slowest periods. For FedEx Freight, the spring and fall are the busiest periods and the latter part of December through February is the slowest period. Shipment levels, operating costs, and earnings for each of our companies can also be adversely affected by inclement weather, particularly the impact of severe winter weather in our third fiscal quarter. See “Item 1A. Risk Factors” for more information.

RECENT ACCOUNTING GUIDANCE

See Note 2 of the accompanying consolidated financial statements for a discussion of recent accounting guidance.

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REPORTABLE SEGMENTS

During 2024 and 2023, FedEx Express, FedEx Ground, and FedEx Freight represented our major service lines and, along with FedEx Services, constituted our reportable segments. Our reportable segments for these periods included the following businesses:

In the fourth quarter of 2023, we announced one FedEx, a consolidation plan to bring FedEx Ground and FedEx Services into Federal Express Corporation, becoming a single company operating a unified, fully integrated air-ground express network under the respected FedEx brand. The organizational redesign was implemented in phases with full legal implementation effective June 1, 2024. FedEx Freight continues to provide LTL freight transportation services as a separate subsidiary. During the implementation process in fiscal 2024, each of our reportable segments continued to have discrete financial information that was regularly reviewed when evaluating performance and making resource allocation decisions, and aligned with our management reporting structure and our internal financial reporting.

Beginning in the first quarter of 2025, Federal Express and FedEx Freight represent our major service lines and constitute our reportable segments. Additionally, the results of FedEx Custom Critical will be included in the FedEx Freight segment instead of the Federal Express segment. This change was made to reflect our new management reporting structure. Prior-year amounts will be revised to reflect this presentation.

FEDEX SERVICES SEGMENT

During 2024 and 2023, the FedEx Services segment provided direct and indirect support to our operating segments, and we allocated all of the net operating costs of the FedEx Services segment to reflect the full cost of operating our businesses in the results of those segments. We reviewed and evaluated the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance was evaluated based on the effect of its total allocated net operating costs on our operating segments.

Operating expenses for each of our transportation segments included the allocations from the FedEx Services segment to the respective transportation segments. These allocations included charges and credits for administrative services provided between operating companies. The allocations of net operating costs were based on metrics such as relative revenue or estimated services provided. We believe these allocations approximated the net cost of providing these functions. Our allocation methodologies were refined periodically, as necessary, to reflect changes in our businesses.

CORPORATE, OTHER, AND ELIMINATIONS

Corporate and other includes corporate headquarters costs for executive officers and certain legal and finance functions, including certain other costs and credits not attributed to our core business, and certain costs associated with developing integrated business solutions through our FedEx Dataworks operating segment. FedEx Dataworks is focused on creating solutions to transform the digital and physical experiences of our customers and team members.

Also included in Corporate and other is the FedEx Office and Print Services, Inc. (“FedEx Office”) operating segment, which provides an array of document and business services and retail access to our customers for our package transportation businesses, and the FedEx Logistics operating segment, which provides specialty transportation, customs brokerage, and global ocean and air freight forwarding, as well as integrated supply chain management solutions through FedEx Supply Chain Distribution, Inc. (“FedEx Supply Chain”).

The results of Corporate, other, and eliminations are not allocated to the other business segments. There will be no changes to Corporate, other, and eliminations in 2025 following the one FedEx consolidation.

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In 2024, the improvement in operating results in Corporate, other, and eliminations was primarily due to decreased professional fees and business optimization expenses at FedEx Corporate and improved operating results at FedEx Logistics. The improved operating results at FedEx Logistics were primarily due to lower purchased transportation and bad debt expense, partially offset by decreased revenue. The comparison of operating loss between 2024 and 2023 at Corporate, other, and eliminations is affected by goodwill and other asset impairment charges of $47 million associated with the ShopRunner acquisition at FedEx Dataworks in 2023.

Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment in order to optimize our resources. For example, during 2024 FedEx Ground provided delivery support for certain FedEx Express packages as part of our last-mile optimization efforts, and FedEx Freight provided road and intermodal support for both FedEx Ground and FedEx Express. In addition, FedEx Express worked with FedEx Logistics to secure air charters and other cargo space for U.S. customers. Billings for such services are based on negotiated rates, and are reflected as revenue of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenue and expenses are eliminated in our consolidated results and are not separately identified in the following segment information because the amounts are not material.

FEDEX EXPRESS SEGMENT

FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority, deferred, and economy services, which provide delivery on a time-definite or day-definite basis. The following table compares revenue, operating expenses, operating income (dollars in millions), operating margin, and operating expenses as a percent of revenue for the years ended May 31:

(1)
International domestic revenue relates to our international intra-country operations.

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

(1)
International domestic statistics relate to our international intra-country operations.

FedEx Express Segment Revenue

FedEx Express segment revenue decreased 4% in 2024 primarily due to volume declines, lower fuel surcharges, and reduced demand surcharges.

Global average daily freight pounds decreased 13% in 2024 primarily as a result of weak global economic conditions as well as lower volume from the USPS. U.S. domestic average daily package volumes declined 4% in 2024 as global economic factors led to reduced demand for our services. These declines were partially offset by an increase in international export package volume of 4% in 2024 driven by a mix shift toward our deferred product offerings, partially offset by a global decline in international priority package volume.

Lower fuel surcharges had a significant negative effect on yield across package and freight services during 2024. In addition, international export composite package yield decreased 5% in 2024 driven by reduced demand surcharges, a larger mix of e-commerce volume, and an increase in lower-yielding deferred volume related to the full reopening of the international economy service. Composite freight yield decreased 4% in 2024 due to reduced demand surcharges and an increased mix of deferred freight, also driven by the reopening of international economy service.

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FedEx Express Segment Operating Income

FedEx Express segment operating income decreased 27% in 2024 primarily due to reduced revenue, partially offset by lower operating expenses. Operating expenses declined in 2024 as a result of continued benefits from DRIVE initiatives that drove a reduction in our permanent cost structure, as well as lower volumes. These initiatives include network rationalization through structural flight takedowns and route optimization, along with improvements in hub sort efficiency. Currency exchange rates had a positive effect on revenue and a negative effect on expenses and operating income in 2024.

Fuel expense decreased 20% in 2024 due to decreases in fuel prices and usage. Other operating expense decreased 8% in 2024 primarily due to lower bad debt expense and lower outside service contracts expense resulting from a decrease in temporary labor usage. Fewer aircraft leases as a result of lower volumes drove a decrease in rentals and landing fees of 10% in 2024. Maintenance and repairs expense decreased 5% in 2024 primarily due to lower aircraft maintenance resulting from an increase in aircraft temporarily parked. Salaries and employee benefits expense decreased 1% primarily due to decreased staffing to align with lower volume, partially offset by higher wage rates and increased variable incentive compensation.

FedEx Express segment results in 2024 include $157 million of asset impairment charges associated with the decision to permanently retire certain aircraft and related engines and business optimization costs of $143 million associated with our plan to drive efficiency and lower our overhead and support costs. FedEx Express segment results in 2023 include $70 million of asset impairment charges associated with the decision to permanently retire certain aircraft and related engines, $36 million associated with our workforce reduction plan in Europe, and $11 million of business optimization costs which includes costs associated with idling our business in Russia. See the “Business Optimization and Realignment Costs” and “Goodwill and Other Asset Impairment Charges” sections of this MD&A for more information.

In July 2023, FedEx Express’s pilots failed to ratify the tentative successor agreement that was approved by the Air Line Pilots Association, International’s FedEx Master Executive Council in the prior month. The ongoing bargaining process has no effect on our operations. For more information, see Note 1 of the accompanying consolidated financial statements.

FEDEX GROUND SEGMENT

During 2024 and 2023, FedEx Ground service offerings included day-certain delivery to businesses in the U.S. and Canada and to 100% of U.S. residences. The following table compares revenue, operating expenses, operating income (dollars in millions), operating margin, selected package statistics (in thousands, except yield amounts), and operating expenses as a percent of revenue for the years ended May 31:

(1)
Ground commercial ADV is calculated on a 5-day-per-week basis, while home delivery and economy ADV are calculated on a 7-day-per-week basis.

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FedEx Ground Segment Revenue

FedEx Ground segment revenue increased 2% in 2024 primarily due to yield improvement and higher volumes. FedEx Ground yield increased 1% in 2024 primarily due to base yield improvement, partially offset by lower fuel surcharges. Total average daily volume increased 1% in 2024 primarily due to increased demand for our commercial and economy services.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 29% in 2024 primarily due to yield improvement, higher volume, lower self-insurance accruals, and lower purchased transportation expense. FedEx Ground lowered operating costs in 2024 through continued benefits from DRIVE initiatives focused on increasing linehaul efficiencies and improving dock productivity. In addition, FedEx Ground continued to realize benefits from reduced Sunday deliveries and consolidated sort operations in 2024.

Purchased transportation expense decreased 3% in 2024 primarily due to lower fuel prices and increased third-party rail usage, partially offset by higher base rates. Other operating expense decreased 5% in 2024 primarily due to lower self-insurance accruals. Depreciation and rentals expense increased 10% and 4%, respectively, in 2024 primarily due to the completion of previously committed multi-year expansion projects. Maintenance and repairs expense increased 10% in 2024 primarily due to higher costs associated with outside vendor labor, vehicle parts, and facility maintenance. Salaries and employee benefits expense increased 1% in 2024 primarily due to higher wage rates and variable incentive compensation, partially offset by an increase in productivity.

FedEx Ground results include business optimization costs of $108 million in 2024 associated with our plan to drive efficiency and lower our overhead and support costs. See the “Business Optimization and Realignment Costs” section of this MD&A for more information.

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FEDEX FREIGHT SEGMENT

FedEx Freight LTL service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following table compares revenue, operating expenses, operating income (dollars in millions), operating margin, selected statistics, and operating expenses as a percent of revenue for the years ended May 31:

FedEx Freight Segment Revenue

FedEx Freight segment revenue decreased 6% in 2024 primarily due to lower shipments.

Average daily shipments decreased 6% in 2024 due to reduced demand for our services, primarily resulting from macroeconomic conditions. Revenue per shipment decreased 1% in 2024 primarily due to lower weight per shipment and fuel surcharges, partially offset by base yield improvement from our continued focus on revenue quality.

FedEx Freight Segment Operating Income

FedEx Freight segment operating income decreased 6% in 2024 due to decreased revenue, partially offset by lower volume-related operating expenses.

Fuel and purchased transportation expense decreased 24% and 15%, respectively, in 2024 due to lower fuel prices and decreased shipments. Salaries and employee benefits expense decreased 3% in 2024 primarily due to lower staffing to align with decreased shipments and an increase in productivity, partially offset by higher wage rates and variable incentive compensation. Other operating expense decreased 9% in 2024 primarily due to lower self-insurance accruals.

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FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $6.5 billion at May 31, 2024, compared to $6.9 billion at May 31, 2023. The following table provides a summary of our cash flows for the years ended May 31 (in millions):

Cash Provided by Operating Activities. Cash flows from operating activities decreased $0.5 billion in 2024 primarily due to working capital changes, driven by an increase in accounts receivable, partially offset by an increase in accrued incentive compensation, as well as lower net income (net of noncash items).

Cash Used in Investing Activities. Capital expenditures were 16% lower in 2024 primarily due to decreased spending on package handling and ground support equipment and information technology. See “Capital Resources” below for a more detailed discussion of capital expenditures during 2024.

Financing Activities. We completed four ASR transactions with banks in 2024 to repurchase an aggregate of $2.5 billion of our common stock. A total of 9.8 million shares were repurchased under the agreements.

During 2023, we completed an ASR transaction with a bank to repurchase an aggregate of $1.5 billion of our common stock, and 9.2 million shares were delivered.

The following table provides a summary of repurchases of our common stock for the periods ended May 31 (dollars in millions, except per share amounts):

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We executed an ASR agreement with two banks in June 2024 to repurchase $1 billion of our common stock with a completion date no later than the end of the first quarter of 2025. As of July 15, 2024, $4.1 billion remained available to be used for repurchases under the stock repurchase program approved by our Board of Directors in March 2024, which is the only program that currently exists. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities” and Note 1 of the accompanying consolidated financial statements for additional information.

CAPITAL RESOURCES

Our operations are capital intensive, characterized by significant investments in aircraft, package handling and sort equipment, vehicles and trailers, technology, and facilities. The amount and timing of capital investments depend on various factors, including pre-existing contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, availability of satisfactory financing, and actions of regulatory authorities.

The following table compares capital expenditures by asset category and reportable segment for the years ended May 31 (in millions):

Capital expenditures decreased $1.0 billion during 2024 primarily due to decreased spending on package handling and ground support equipment at FedEx Ground, information technology at FedEx Services, facilities and other at FedEx Ground, vehicles and trailers at FedEx Freight, and aircraft and related equipment at FedEx Express, partially offset by increased spending on facilities and other and vehicles and trailers at FedEx Express.

GUARANTOR FINANCIAL INFORMATION

We are providing the following information in compliance with Rule 13-01 of Regulation S-X, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” with respect to our senior unsecured debt securities and Pass-Through Certificates, Series 2020-1AA (the “Certificates”).

The $19.2 billion principal amount of senior unsecured notes were issued by FedEx under a shelf registration statement and are guaranteed by certain direct and indirect subsidiaries of FedEx (“Guarantor Subsidiaries”). FedEx owns, directly or indirectly, 100% of each Guarantor Subsidiary. The guarantees are (1) unsecured obligations of the respective Guarantor Subsidiary, (2) rank equally with all of their other unsecured and unsubordinated indebtedness, and (3) are full and unconditional and joint and several. If we sell, transfer, or otherwise dispose of all of the capital stock or all or substantially all of the assets of a Guarantor Subsidiary to any person that is not an affiliate of FedEx, the guarantee of that Guarantor Subsidiary will terminate, and holders of debt securities will no longer have a direct claim against such subsidiary under the guarantee.

Additionally, FedEx fully and unconditionally guarantees the payment obligation of FedEx Express in respect of the $788 million principal amount of the Certificates. See Note 6 of the accompanying consolidated financial statements for additional information regarding the terms of the Certificates.

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The following tables present summarized financial information for FedEx (as Parent) and the Guarantor Subsidiaries on a combined basis after transactions and balances within the combined entities have been eliminated.

Parent and Guarantor Subsidiaries

The following table presents the summarized balance sheet information as of May 31, 2024 (in millions):

The following table presents the summarized statement of income information as of May 31, 2024 (in millions):

The following tables present summarized financial information for FedEx (as Parent Guarantor) and FedEx Express (as Subsidiary Issuer) on a combined basis after transactions and balances within the combined entities have been eliminated.

Parent Guarantor and Subsidiary Issuer

The following table presents the summarized balance sheet information as of May 31, 2024 (in millions):

The following table presents the summarized statement of income information as of May 31, 2024 (in millions):

LIQUIDITY OUTLOOK

In response to current business and economic conditions as referenced above in the “Outlook” section of this MD&A, we are continuing to actively manage and optimize our capital allocation in response to the slowdown in the economy, inflationary pressures, changing fuel prices, and geopolitical conflicts. We held $6.5 billion in cash at May 31, 2024 and have $3.5 billion in available liquidity under our $1.75 billion three-year credit agreement (the “Three-Year Credit Agreement) and $1.75 billion five-year credit agreement (the “Five-Year Credit Agreement” and together with the Three-Year Credit Agreement, the “Credit Agreements”), and we believe that our cash and cash equivalents, cash flow from operations, and available financing sources are adequate to meet our liquidity needs, which include operational requirements, expected capital expenditures, voluntary pension contributions, dividend payments, and stock repurchases.

As announced on June 25, 2024, we expect to repurchase $2.5 billion of our common stock in 2025. We executed an ASR agreement with two banks in June 2024 to repurchase $1 billion of our common stock with a completion date no later than the end of the first quarter of 2025.

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Our cash and cash equivalents balance at May 31, 2024 includes $2.5 billion of cash in foreign jurisdictions associated with our permanent reinvestment strategy. We are able to access the majority of this cash without a material tax cost and do not believe that the indefinite reinvestment of these funds impairs our ability to meet our U.S. domestic debt or working capital obligations.

Our capital expenditures for 2025 are expected to be approximately $5.2 billion, in line with 2024, as we continue to reduce our capital intensity relative to revenue. Aircraft spend is expected to decline, partially offset by increased investments in network optimization and modernization of our facilities. Our expected capital expenditures for 2025 include continued investments related to Network 2.0, as well as the continued modernization of the Federal Express Memphis World Hub and expansion and modernization of the Federal Express Indianapolis Hub. Our expected capital expenditures for 2025 also include $1.3 billion for delivery of aircraft and related equipment and progress payments toward future aircraft deliveries at Federal Express.

We have several aircraft modernization programs under way that are supported by the purchase of Boeing 777 Freighter and Boeing 767-300 Freighter 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.

We have additional obligations as part of our ordinary course of business, beyond those committed for capital expenditures, which consist of debt obligations, lease obligations, and obligations and commitments for purchases of goods and services. Refer to Note 6, Note 7, and Note 18 of the accompanying consolidated financial statements for more information. In addition, we have certain tax positions that are further discussed in Note 12 of the accompanying consolidated financial statements. We do not have any guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on our financial condition or liquidity.

We have a shelf registration statement filed with the Securities and Exchange Commission (“SEC”) that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock and allows pass-through trusts formed by Federal Express to sell, in one or more future offerings, pass-through certificates.

The Three-Year Credit Agreement and the Five-Year Credit Agreement expire in March 2027 and March 2029, respectively. Each of the Credit Agreements has a $125 million letter of credit sublimit. The Credit Agreements are available to finance our operations and other cash flow needs. See Note 6 of the accompanying consolidated financial statements for a description of the terms and significant covenants of the Credit Agreements.

We made voluntary contributions of $100 million to our tax-qualified U.S. domestic pension plan (“U.S. Pension Plan”) in June 2024 and anticipate making $700 million of additional voluntary contributions during the remainder of 2025. There are currently no required minimum contributions to our U.S. Pension Plan, and we maintain a credit balance related to our cumulative excess voluntary pension contributions over those required that exceeds $3.0 billion. The credit balance is subtracted from plan assets to determine the minimum funding requirements. Therefore, we have the flexibility to eliminate all required contributions to our principal U.S. Pension Plan for several years. Our U.S. Pension Plan has ample funds to meet expected benefit payments.

On June 10, 2024, our Board of Directors declared a quarterly cash dividend of $1.38 per share of common stock. The dividend was paid on July 9, 2024 to stockholders of record as of the close of business on June 24, 2024. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis. There are no material restrictions on our ability to declare dividends, nor are there any material restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans, or advances.

Standard & Poor’s has assigned us a senior unsecured debt credit rating of BBB, a Certificates rating of AA-, a commercial paper rating of A-2, and a ratings outlook of “stable.” Moody’s Investors Service has assigned us an unsecured debt credit rating of Baa2, a Certificates rating of Aa3, a commercial paper rating of P-2, and a ratings outlook of “stable.” Our interest expense may increase in the event of a reduction in our credit rating. If our unsecured debt or commercial paper ratings are reduced to below investment grade, our access to the capital markets may become limited.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.

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The estimates discussed below include the financial statement elements that are either the most judgmental or involve the selection or application of alternative accounting policies and are material to our results of operations and financial condition. Management has discussed the development and selection of these critical accounting estimates with the Audit and Finance Committee of our Board of Directors and with our independent registered public accounting firm.

PENSION PLANS

The rules for pension accounting are complex and can produce volatility in our earnings, financial condition, and liquidity. Our defined benefit pension plans are measured using actuarial techniques that reflect management’s assumptions for expected returns on assets (“EROA”), discount rate, and demographic experience such as salary increases, expected retirement, mortality, and employee turnover. Differences between these assumptions and actual experience are recognized in our earnings through MTM accounting.

Our annual MTM adjustment is highly sensitive to the discount rate and EROA assumptions, which are as follows:

The following sensitivity analysis shows the impact of a 50-basis-point change in the EROA and discount rate assumptions for our largest pension plan and the resulting increase (decrease) in our projected benefit obligation (“PBO”) as of May 31, 2024 and expense for the year ended May 31, 2024 (in millions):

See Note 13 of the accompanying consolidated financial statements for further information about our pension plans.

INCOME TAXES

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our income taxes are a function of our income, tax planning opportunities available to us, statutory tax rates, and the income tax laws in the various jurisdictions in which we operate. These tax laws are complex and subject to different interpretations by us and the respective governmental taxing authorities. As a result, significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. Also, our effective tax rate is significantly affected by the earnings generated in each jurisdiction, so unexpected fluctuations in the geographic mix of earnings could significantly impact our tax rate. Our intercompany transactions are based on globally accepted transfer pricing principles, which align profits with the business operations and functions of the various legal entities in our international business.

We evaluate our tax positions quarterly and adjust the balances as new information becomes available. These evaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax laws or their interpretations, audit activity, and changes in our business. In addition, management considers the advice of third parties in making conclusions regarding tax consequences.

Tax contingencies arise from uncertainty in the application of tax rules throughout the many jurisdictions in which we operate. Despite our belief that our tax return positions are consistent with applicable tax laws, taxing authorities could challenge certain positions. We record tax benefits for uncertain tax positions based upon management’s evaluation of the information available at the reporting date. To be recognized in the financial statements, a tax benefit must be at least more likely than not of being sustained based on the technical merits. The benefit for positions meeting the recognition threshold is measured as the largest benefit more likely than not of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Significant judgment is required in making these determinations and adjustments to unrecognized tax benefits may be necessary to reflect actual taxes payable upon settlement.

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Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss, capital loss, and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These sources of income rely heavily on estimates to make this determination, and as a result there is a risk that these estimates will have to be revised as new information is received. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. We believe we will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets in our consolidated balance sheets that are not subject to valuation allowances. We record the taxes for global intangible low-taxed income as a period cost.

Our income tax positions are based on currently enacted tax laws. As further guidance is issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, any resulting changes to our estimates will be treated in accordance with the relevant accounting guidance.

For more information, see the “Income Taxes” section of this MD&A and Note 12 of the accompanying consolidated financial statements.

SELF-INSURANCE ACCRUALS

Our self-insurance reserves are established for estimates of ultimate loss on all incurred claims, including incurred-but-not-reported claims. Components of our self-insurance reserves included in this critical accounting estimate are workers’ compensation claims, vehicle accidents, property and cargo loss, general business liabilities, and benefits paid under employee disability programs. These reserves are primarily based on the actuarially estimated cost of claims incurred as of the balance sheet date. These estimates include judgment about severity of claims, frequency and volume of claims, healthcare inflation, seasonality, and plan designs. The use of any estimation technique in this area is inherently sensitive given the magnitude of claims involved and the length of time until the ultimate cost is known, which may be several years.

We believe our recorded obligations for these expenses are consistently measured and appropriate. Nevertheless, changes in accident frequency and severity, healthcare costs, insurance retention levels, and other factors can materially affect the estimates for these liabilities and affect our results of operations. Self-insurance accruals reflected in our balance sheet for the period ended May 31 are as follows (in millions):

A five-percent reduction or improvement in the assumed claim severity used to estimate our self-insurance accruals would result in an increase or decrease of approximately $280 million in our reserves and expenses as of and for the year ended May 31, 2024. For more information, see “Item 1A. Risk Factors” of this Annual Report.

LONG-LIVED ASSETS

USEFUL LIVES AND SALVAGE VALUES. Our business is capital intensive, with approximately 60% of our owned assets invested in our transportation and information system infrastructures.

The depreciation or amortization of our capital assets over their estimated useful lives, and the determination of any salvage values, requires management to make judgments about future events. Because we utilize many of our capital assets over relatively long periods (the majority of aircraft costs are depreciated over 18 to 30 years), we periodically evaluate whether adjustments to our estimated service lives or salvage values are necessary to ensure these estimates properly match the economic use of the asset. These evaluations consider usage, maintenance costs, and economic factors that affect the useful life of an asset. This evaluation may result in changes in the estimated lives and residual values used to depreciate our aircraft and other equipment.

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For our aircraft, we consider actual experience with the same or similar aircraft types and future volume projections in estimating the useful lives and expected salvage values. We typically assign no residual value due to the utilization of our aircraft in cargo configuration, which results in little to no value at the end of their useful life. These estimates affect the amount of depreciation expense recognized in a period and, ultimately, the gain or loss on the disposal of the asset. Changes in the estimated lives of assets will result in an increase or decrease in the amount of depreciation recognized in future periods and could have a material impact on our results of operations (as described below). Historically, gains and losses on disposals of operating equipment have not been material. However, such amounts may differ materially in the future due to changes in business levels, technological obsolescence, accident frequency, regulatory changes, and other factors beyond our control.

IMPAIRMENT. As of May 31, 2024, the FedEx Express global air network included a fleet of 698 aircraft (including 309 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.

Because of the lengthy lead times for aircraft manufacture and modifications, we must anticipate volume levels and plan our fleet requirements years in advance, and make commitments for aircraft based on those projections. Furthermore, the timing and availability of certain used aircraft types (particularly those with better fuel efficiency) may create limited opportunities to acquire these aircraft at favorable prices in advance of our capacity needs. These activities create risks that asset capacity may exceed demand. At May 31, 2024, we had three purchased aircraft that were not yet placed into service.

We evaluate our long-lived assets used in operations for impairment when events and circumstances indicate that the undiscounted cash flows to be generated by that asset group are less than the carrying amounts of the asset group and may not be recoverable. If the cash flows do not exceed the carrying value, the asset must be adjusted to its current fair value. We operate integrated transportation networks, 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. Further, decisions about capital investments are evaluated based on the effect on the overall network rather than the return on an individual asset. We make decisions to remove certain long-lived assets from service based on projections of reduced capacity needs or lower operating costs of newer aircraft types, and those decisions may result in an impairment charge. Assets held for disposal must be adjusted to their estimated fair values less costs to sell when the decision is made to dispose of the asset and certain other criteria are met. The fair value determinations for such aircraft may require management estimates, as there may not be active markets for some of these aircraft. Such estimates are subject to revision from period to period.

In the fourth quarter of 2024, we made the decision to permanently retire from service 22 Boeing 757-200 aircraft and seven related engines to align with the plans of FedEx Express to modernize its aircraft fleet, improve its global network, and better align air network capacity to match current and anticipated shipment volumes. As a consequence of this decision, a noncash impairment charge of $157 million ($120 million, net of tax, or $0.48 per diluted share) was recorded in the fourth quarter. Of these aircraft, 16 were temporarily idled and not in revenue service.

In 2023 we accelerated the retirement of the entire Boeing MD-11 fleet by the end of 2028. In the fourth quarter of 2024, FedEx Express permanently retired nine MD-11F aircraft as part of this decision.

During 2023, FedEx Express made the decision to permanently retire from service 12 Boeing MD-11F aircraft and 25 related engines, four Boeing 757-200 aircraft and one related engine, and two Airbus A300-600 aircraft and eight related engines to align with the plans of FedEx Express to modernize its aircraft fleet, improve its global network, and better align air network capacity to match current and anticipated shipment volumes. As a consequence of this decision, a noncash impairment charge of $70 million ($54 million, net of tax, or $0.21 per diluted share) was recorded in 2023.

In addition, during 2023, FedEx Express made the decision to accelerate the retirement of 46 MD-11F aircraft and related engines to aid in our fleet modernization, improve our global network, and better align air network capacity of FedEx Express to match current and anticipated shipment volumes. As a result of this decision, we had a net increase of approximately $12 million in depreciation expense in 2024 and expect the expense impact in 2025 to be immaterial.

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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 and remaining life on a quarterly basis. The criteria for determining whether an asset has been permanently removed from service (and, as a result, is potentially 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; and changes to planned service expansion activities. At May 31, 2024, we had 19 aircraft temporarily idled. These aircraft have been idled for an average of eight months and are expected to return to revenue service in order to meet expected demand.

During 2023, we reviewed long-lived assets at FedEx Dataworks for impairment. Based on our reviews, we recognized an $11 million ($8 million, net of tax, or $0.03 per diluted share) asset impairment charge related to an intangible asset from the ShopRunner acquisition. For more information, see Note 4 of the accompanying consolidated financial statements.

LEASES. We utilize operating leases to finance certain of our aircraft, facilities, and equipment. Such arrangements typically shift the risk of loss on the residual value of the assets at the end of the lease period to the lessor. We had $18 billion in operating lease liabilities and $17 billion in related right-of-use assets on the balance sheet as of May 31, 2024. The weighted-average remaining lease term of all operating leases outstanding at May 31, 2024 was 9.5 years.

Our leases generally contain options to extend or terminate the lease. We reevaluate our leases on a regular basis to consider the economic and strategic incentives of exercising the renewal options, and how they align with our operating strategy. Therefore, substantially all the renewal option periods are not included within the lease term and the associated payments are not included in the measurement of the right-of-use asset and lease liability as the options to extend are not reasonably certain at lease commencement. Short-term leases with an initial term of 12 months or less are not recognized in the right-to-use asset and lease liability on the consolidated balance sheets.

The lease liabilities are measured at the lease commencement date and determined using the present value of the minimum lease payments not yet paid and our incremental borrowing rate, which approximates the rate at which we would borrow, on a collateralized basis, over the term of a lease in the applicable currency environment. The interest rate implicit in the lease is generally not determinable in transactions where we are the lessee.

The determination of whether a lease is accounted for as a finance lease or an operating lease requires management to make estimates primarily about the fair value of the asset and its estimated economic useful life. In addition, our evaluation includes ensuring we properly account for build-to-suit lease arrangements and making judgments about whether various forms of lessee involvement allow the lessee to control the underlying leased asset during the construction period. We believe we have well-defined and controlled processes for making these evaluations, including obtaining third-party appraisals for material transactions to assist us in making these evaluations.

GOODWILL. We had $6.4 billion of recorded goodwill at May 31, 2024 and 2023 from our business acquisitions, representing the excess of the purchase price over the fair value of the net assets acquired. Several factors give rise to goodwill in our acquisitions, such as the expected benefits 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 that requires management judgment and the use of estimates to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity has an unconditional option to bypass the qualitative assessment for any reporting unit and proceed directly to performing the quantitative goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. We performed a qualitative assessment of goodwill in the fourth quarter of 2024 and both qualitative and quantitative assessments of goodwill in the fourth quarter of 2023. The quantitative assessment included comparing the fair value of the reporting unit to its carrying value (including attributable goodwill). Fair value is estimated using standard valuation methodologies (principally the income or market approach classified as Level 3 within the fair value hierarchy) incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, discount rates, and expected capital expenditures. Estimates used by management can significantly affect the outcome of the impairment test. Changes in forecasted operating results and other assumptions could materially affect these estimates.

As part of our qualitative assessment, we consider changes in the macroeconomic environment such as the general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, and other developments in equity and credit markets.

Our reporting units with significant recorded goodwill include FedEx Express, FedEx Ground, and FedEx Freight. We evaluated these reporting units during the fourth quarters of 2024 and 2023 and the estimated fair value of each of these reporting units exceeded their

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carrying values as of the end of 2024 and 2023; therefore, we do not believe that any of these reporting units were impaired as of the balance sheet dates.

In connection with our annual impairment testing of goodwill conducted in the fourth quarter of 2023, we recorded an impairment charge of $36 million ($36 million, net of tax, or $0.14 per diluted share) for all of the goodwill attributable to our FedEx Dataworks reporting unit. The key factors contributing to the goodwill impairment were underperformance of the ShopRunner business during 2023, including base business erosion, and the failure to attain the level of operating synergies and revenue and profit growth anticipated at the time of acquisition. Based on these factors, our outlook for the business changed in the fourth quarter of 2023.

LEGAL AND OTHER CONTINGENCIES

We are subject to various loss contingencies in connection with our operations. Contingent liabilities are difficult to measure, as their measurement is subject to multiple factors that are not easily predicted or projected. Further, additional complexity in measuring these liabilities arises due to the various jurisdictions in which these matters occur, which makes our ability to predict their outcome highly uncertain. Moreover, different accounting rules must be employed to account for these items based on the nature of the contingency. Accordingly, significant management judgment is required to assess these matters and to make determinations about the measurement of a liability, if any. Certain pending loss contingencies are described in Note 20 of the accompanying consolidated financial statements. In the opinion of management, the aggregate liability, if any, of individual matters or groups of related matters not specifically described in Note 20 is not expected to be material to our financial position, results of operations, or cash flows. The following describes our methods and associated processes for evaluating these matters.

Because of the complex environment in which we operate, we are subject to numerous legal proceedings and claims, including those relating to general commercial matters, governmental enforcement actions, employment-related claims, vehicle accidents, and contracted service providers. Accounting guidance for contingencies requires an accrual of estimated loss from a contingency, such as a non-income tax or other legal proceeding or claim, when it is probable (i.e., the future event or events are likely to occur) that a loss has been incurred and the amount of the loss can be reasonably estimated. This guidance also requires disclosure of a loss contingency matter when, in management’s judgment, a material loss is reasonably possible or probable.

During the preparation of our financial statements, we evaluate our contingencies to determine whether it is probable, reasonably possible, or remote that a liability has been incurred. A loss is recognized for all contingencies deemed probable and reasonably estimable. For unresolved contingencies with potentially material exposure that are deemed reasonably possible, we evaluate whether a potential loss or range of loss can be reasonably estimated.

Our evaluation of these matters is the result of a comprehensive process designed to ensure that accounting recognition of a loss or disclosure of these contingencies is made in a timely manner and involves our legal and accounting personnel, as well as external counsel where applicable. The process includes regular communications during each quarter and scheduled meetings shortly before the completion of our financial statements to evaluate any new legal proceedings and the status of existing matters.

In determining whether a loss should be accrued or a loss contingency disclosed, we evaluate, among other factors:

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the current status of each matter within the scope and context of the entire lawsuit or proceeding (e.g., the lengthy and complex nature of class-action matters);

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the procedural status of each matter;

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any opportunities to dispose of a lawsuit on its merits before trial (i.e., motion to dismiss or for summary judgment);

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the amount of time remaining before a trial date;

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the status of discovery;

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the status of settlement, arbitration, or mediation proceedings; and

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our judgment regarding the likelihood of success prior to or at trial.

In reaching our conclusions with respect to accrual of a loss or loss contingency disclosure, we take a holistic view of each matter based on these factors and the information available prior to the issuance of our financial statements. Uncertainty with respect to an individual factor or combination of these factors may impact our decisions related to accrual or disclosure of a loss contingency, including a conclusion that we are unable to establish an estimate of possible loss or a meaningful range of possible loss. We update our disclosures to reflect our most current understanding of the contingencies at the time we issue our financial statements. However, events may arise that were not anticipated and the outcome of a contingency may result in a loss to us that differs materially from our previously estimated liability or range of possible loss.

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Despite the inherent complexity in the accounting and disclosure of contingencies, we believe that our processes are robust and thorough and provide a consistent framework for management in evaluating the potential outcome of contingencies for proper accounting recognition and disclosure.