SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2021 (“Annual Report”). Significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of August 31, 2021, and the results of our operations for the three-month periods ended August 31, 2021 and 2020, cash flows for the three-month periods ended August 31, 2021 and 2020, and changes in common stockholders’ investment for the three-month periods ended August 31, 2021 and 2020. Operating results for the three-month period ended August 31, 2021 are not necessarily indicative of the results that may be expected for the year ending May 31, 2022.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2022 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

Contract assets include billed and unbilled amounts resulting from in-transit shipments, as we have an unconditional right to payment only once all performance obligations have been completed (e.g., packages have been delivered). Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions. Our contract liabilities consist of advance payments and billings in excess of revenue. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions.

Gross contract assets related to in-transit shipments totaled $718 million and $715 million at August 31, 2021 and May 31, 2021, respectively. Contract assets net of deferred unearned revenue were $514 million and $572 million at August 31, 2021 and May 31, 2021, respectively. Contract assets are included within current assets in the accompanying unaudited condensed consolidated balance sheets. Contract liabilities related to advance payments from customers were $11 million and $9 million at August 31, 2021 and May 31, 2021, respectively. Contract liabilities are included within current liabilities in the accompanying unaudited condensed consolidated balance sheets.

The following table provides revenue by service type (in millions) for the periods ended August 31. This presentation is consistent with how we organize our segments internally for making operating decisions and measuring performance.

	Three Months Ended
	2021		2020
REVENUE BY SERVICE TYPE
FedEx Express segment:
Package:
U.S. overnight box	$	2,170	$	1,861
U.S. overnight envelope		482		426
U.S. deferred		1,231		1,096
Total U.S. domestic package revenue		3,883		3,383
International priority		2,839		2,317
International economy		669		616
Total international export package revenue		3,508		2,933
International domestic⁽¹⁾		1,114		1,088
Total package revenue		8,505		7,404
Freight:
U.S.		775		833
International priority		873		653
International economy		414		371
International airfreight		47		75
Total freight revenue		2,109		1,932
Other		352		311
Total FedEx Express segment		10,966		9,647
FedEx Ground segment		7,677		7,040
FedEx Freight segment		2,251		1,826
FedEx Services segment		35		8
Other and eliminations⁽²⁾		1,074		800
	$	22,003	$	19,321

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (“FedEx Express”), who are a small number of its total employees, are employed under a collective bargaining agreement that took effect on November 2, 2015. The collective bargaining agreement is scheduled to become amendable in November 2021. Bargaining for a successor agreement began in May 2021. A small number of our other employees are members of unions.

STOCK-BASED COMPENSATION. We have two types of equity-based compensation: stock options and restricted stock. The key terms of the stock option and restricted stock awards granted under our outstanding incentive stock plans and all financial disclosures about these programs are set forth in our Annual Report.

Our stock-based compensation expense was $69 million for the three-month period ended August 31, 2021 and $75 million for the three-month period ended August 31, 2020. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

BUSINESS REALIGNMENT COSTS. In January 2021, FedEx Express announced a workforce reduction plan in Europe as it nears the completion of the network integration of TNT Express. The plan will impact between 5,500 and 6,300 employees in Europe across operational teams and back-office functions. The execution of the plan is subject to a works council consultation process that will occur over an 18-month period in accordance with local country processes and regulations.

We incurred costs during the first quarter of 2022 of $67 million ($52 million, net of tax, or $0.19 per diluted share) associated with our business realignment activities. We recognized $116 million ($90 million, net of tax, or $0.33 per diluted share) of costs under this program in the second half of 2021. These costs are related to certain employee severance arrangements. Payments under this program totaled approximately $31 million in the first quarter of 2022. We expect the pre-tax cost of our business realignment activities to range from $300 million to $575 million through fiscal 2023. The actual amount and timing of business realignment costs and related cost savings resulting from the workforce reduction plan are dependent on local country consultation processes and regulations and negotiated social plans. For additional information about the business realignment costs, see the section titled “Business Realignment Costs” included in Item 2 of this Form 10-Q (“Management’s Discussion and Analysis of Results of Operations and Financial Condition”).

DERIVATIVE FINANCIAL INSTRUMENTS. Our risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows. In accordance with our risk management policies, we do not hold or issue derivative instruments for trading or speculative purposes. All derivative instruments are recognized in the financial statements at fair value, regardless of the purpose or intent for holding them.

When we become a party to a derivative instrument and intend to apply hedge accounting, we formally document the hedge relationship and the risk management objective for undertaking the hedge, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge.

If a derivative is designated as a cash flow hedge, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in other comprehensive income. For net investment hedges, the entire change in the fair value is recorded in other comprehensive income. Any portion of a change in the fair value of a derivative that is considered to be ineffective, along with the change in fair value of any derivatives not designated in a hedging relationship, is immediately recognized in the income statement. We do not have any derivatives designated as a cash flow hedge for any period presented. As of August 31, 2021, we had €215 million of debt designated as a net investment hedge to reduce the volatility of the U.S. dollar value of a portion of our net investment in a euro-denominated consolidated subsidiary. As of August 31, 2021, the hedge remains effective.

RECENT ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. We believe the following new accounting guidance is relevant to the readers of our financial statements.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate or another reference to be discontinued because of reference rate reform. The expedients and exceptions provided in ASU 2020-04 are optional and may be elected over time individually or in aggregate, through December 31, 2022, as reference rate reform activities occur. Any expedients and exceptions elected must be applied prospectively for all eligible contract modifications. We have not adopted any of the optional expedients or exceptions as of August 31, 2021, but will continue to evaluate the possible adoption of any such expedients or exceptions, as well as the impact on our consolidated financial statements and related disclosures, during the effective period as circumstances evolve.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends lease classification requirements for lessors to align with practice under Topic 840. These changes will be effective June 1, 2022 (fiscal 2023). We expect this new guidance will have minimal impact on our financial reporting.

TREASURY SHARES. In January 2016, our Board of Directors approved a stock repurchase program of up to 25 million shares. Shares under the current repurchase program may be repurchased from time to time in the open market or in privately negotiated transactions. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of FedEx common stock, and general market conditions. No time limit was set for the completion of the program, and the program may be suspended or discontinued at any time.

During the first quarter of 2022, we repurchased 1.9 million shares of FedEx common stock at an average price of $287.51 per share for a total of $549 million. As of August 31, 2021, 3.2 million shares remained available for repurchase under the stock repurchase authorization.

DIVIDENDS DECLARED PER COMMON SHARE. On August 13, 2021, our Board of Directors declared a quarterly dividend of $0.75 per share of common stock. The dividend will be paid on October 1, 2021 to stockholders of record as of the close of business on September 3, 2021. 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.