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FedEx Reports Strong Revenue: Kinko's Sees Seasonal Improvement

Press release from the issuing company

MEMPHIS, Tenn.--Dec. 16, 2004-- FedEx Corporation 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 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. ---- "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 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. 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.

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