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Kinko's sales drop 3%, Operating income down 43%

Press release from the issuing company

MEMPHIS, Tenn., March 21, 2007 - FedEx Corp. today reported earnings of $1.35 per diluted share for the third quarter ended February 28, compared to $1.38 per diluted share a year ago. Third quarter results were negatively impacted by a slowing economic environment, lower fuel surcharges and severe winter storms, with the storm impact estimated to be $0.06 per diluted share. Results for the quarter also include an $0.08 per diluted share benefit from a reduction in the company’s effective tax rate. FedEx Kinko's Segment For the third quarter, the FedEx Kinko’s segment reported: • Revenue of $485 million, down 3% from last year’s $501 million • Operating income of $4 million, down 43% from $7 million a year ago • Operating margin of 0.8%, down from 1.4% the previous year The FedEx Kinko’s revenue decrease for the quarter was primarily due to declines in copy product revenues, which more than offset higher package acceptance fees paid by FedEx Express and FedEx Ground. Operating margin was negatively impacted by the copy product revenue decline, network expansion costs and higher employee development and training costs. FedEx Kinko’s continues a company-wide effort to refocus resources on core business priorities, including a multi-year network expansion using a lower-cost model. In the first nine months of the fiscal year, the company opened 150 centers and plans for a total of approximately 200 new locations by the end of FY07. In addition, FedEx Kinko’s launched Print Online in October and is excited about the future prospects of this new Web-based, print-on-demand application. ---- FedEx Corp. reported the following consolidated results for the third quarter: • Revenue of $8.59 billion, up 7% from $8.00 billion the previous year • Operating income of $641 million, down 10% from $713 million a year ago • Operating margin of 7.5%, down from last year’s 8.9% • Net income of $420 million, down 2% from $428 million a year ago Total combined average daily package volume at FedEx Express and FedEx Ground grew 4% year over year for the quarter, led by ground and international express package growth. “The U.S. economy grew at a lower rate than we expected in the third quarter, and we saw continued adjustments in the automotive and housing markets. I believe, however, this represents a healthy transition for the economy as it phases into a more sustainable growth rate,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “FedEx is in excellent position to take full advantage of global economic-growth trends and deliver overall outstanding financial results in the long run.” Outlook For the fourth quarter, earnings are expected to be $1.93 to $2.08 per diluted share, while earnings for the full year are expected to be $6.45 to $6.60 per diluted share. Excluding the net impact of the costs associated with the new pilot labor contract, the updated guidance for fiscal 2007 is $6.70 to $6.85 per diluted share, an increase of 12% to 15% year over year excluding the impact of last year’s non-cash lease accounting charge. The capital spending forecast for fiscal 2007 is $3.0 billion. “Long-term we continue to maintain our goal of 10% to 15% annual earnings per share growth,” said Alan B. Graf, Jr., executive vice president and chief financial officer. “However, FedEx earnings growth in our upcoming fiscal 2008, excluding the 2007 net impact of the new pilot contract, may be below our long-term earnings target due to slower economic growth and planned investments in our businesses. Regardless, we remain highly focused on improving margins, cash flow and returns and are confident that we can achieve our long term earnings goals once economic conditions improve.” FedEx Express Segment For the third quarter, the FedEx Express segment reported: • Revenue of $5.52 billion, up 3% from last year’s $5.34 billion • Operating income of $391 million, down 12% from $446 million a year ago • Operating margin of 7.1%, down from 8.4% the previous year FedEx International Priority (IP) revenue grew 7% for the quarter, as IP revenue per package grew 4%, primarily due to favorable exchange rates, an increase in package weights and a higher rate per pound, offset by lower fuel surcharge. IP average daily package volume grew 3%. U.S. domestic revenue per package increased slightly, as increases in rate per pound were offset by lower fuel surcharge and changes in product mix. U.S. domestic average daily package volume declined 2%. Operating margin declined primarily due to lower revenue growth, the timing impact of fuel surcharges and severe winter weather. Last year’s third quarter benefited from the timing lag that exists between when the company purchases fuel and when indexed fuel surcharges automatically adjust. December 2005 fuel surcharges were set during the period fuel prices had spiked following Hurricane Katrina. During the quarter, FedEx completed the acquisitions of ANC Holdings Ltd., a United Kingdom domestic express transportation company, and Prakash Air Freight Pvt. Ltd., its Indian express service company. Neither acquisition materially affected segment financial results for the quarter. However, the increase in purchased transportation was primarily driven by these acquisitions. FedEx Express also completed the acquisition of the express business of China’s DTW Group on March 1 and will initiate a China domestic express service beginning in May 2007. These strategic investments will expand the company’s global service offerings and deliver additional value to shareowners. FedEx Ground Segment For the third quarter, the FedEx Ground segment reported: • Revenue of $1.52 billion up 12% from last year’s $1.36 billion • Operating income of $196 million, up 5% from $187 million a year ago • Operating margin of 12.9%, down from 13.7% the previous year FedEx Ground average daily package volume grew 9% year over year in the third quarter due to increased commercial business and the continued strong growth in the FedEx Home Delivery service. Yield improved 2% primarily due to the impact of general rate increases and extra service revenues. Operating margin was lower due to the timing impact of fuel surcharges, increased purchased transportation costs, severe winter weather and higher expenses associated with network expansion, which more than offset improved results at FedEx SmartPost. FedEx Freight Segment For the third quarter, the FedEx Freight segment reported: • Revenue of $1.10 billion, up 30% from last year’s $848 million • Operating income of $50 million, down 32% from $73 million a year ago • Operating margin of 4.5%, down from 8.6% the previous year Less-than-truckload (LTL) shipments increased 20% year over year due to the Watkins acquisition (now rebranded as FedEx National LTL). Excluding FedEx National LTL, average daily LTL shipments at FedEx Freight regional were down slightly year over year. LTL yield improved 12% year over year reflecting higher yields from longer-haul FedEx National LTL shipments and higher rates. Operating margin declined during the quarter primarily due to operating losses at FedEx National LTL, which resulted from softening volumes and ongoing investments to re-engineer its network. Severe winter weather also impacted operating income and margin. Tax Rate The company’s effective tax rate was reduced to 33.2% for the third quarter and to 36.7% year to date. The rate reduction was primarily attributable to the conclusion of various state and federal audits and appeals. The company’s fourth quarter effective tax rate is expected to be approximately 39% due to tax charges we expect to incur as a result of a reorganization in Asia associated with the company’s acquisition in China. The company’s effective tax rate for all of 2007 is expected to be approximately 37.5%.