UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TOUNDER SECTION 13 OR 15(d)15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedQuarter Ended September 30, 20002001
Commission File Number 1-6512
Delaware
3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662
| Registrant’s telephone number, including area code: | (206) 285-4600 |
Registrant's telephone number, including area code:(206) 285-4600
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes /x/ No / /days. YES x NO o
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock as of the close of the period covered by this report.
| Common Stock, par value $1 per share | |||
| | | ||
| Outstanding (net of as of September 30, | 48,103,545 shares |
AIRBORNE,
FREIGHT CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS(Dollars
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES: Domestic $705,977 $696,116 $2,147,530 $2,063,772 International 98,552 89,192 280,490 269,884 -------- -------- ---------- ---------- 804,529 785,308 2,428,020 2,333,656 OPERATING EXPENSES: Transportation purchased 262,718 240,738 765,345 712,910 Station and ground operations 263,768 242,083 776,387 721,917 Flight operations and maintenance 143,665 129,565 425,729 375,368 General and administrative 64,312 59,755 191,309 180,089 Sales and marketing 20,200 20,504 60,740 57,455 Depreciation and amortization 52,892 53,852 152,768 154,445 -------- -------- ---------- ---------- 807,555 746,497 2,372,278 2,202,184 EARNINGS (LOSS) FROM OPERATIONS (3,026) 38,811 55,742 131,472 OTHER INCOME (EXPENSE): Interest, net (6,544) (4,709) (16,635) (12,388) Other 406 372 3,111 906 -------- -------- ---------- ---------- EARNINGS (LOSS) BEFORE INCOME TAXES (9,164) 34,474 42,218 119,990 INCOME TAX EXPENSE (BENEFIT) (3,655) 12,870 16,070 46,120 -------- -------- ---------- ---------- NET EARNINGS (LOSS) BEFORE CHANGE IN ACCOUNTING (5,509) 21,604 26,148 73,870 -------- -------- ---------- ---------- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - - 14,206 - -------- -------- ---------- ---------- NET EARNINGS (LOSS) $ (5,509) $ 21,604 $ 40,354 $ 73,870 ======== ======== ========== ========== NET EARNINGS (LOSS) PER SHARE: BASIC Before change in accounting $ (0.11) $ 0.44 $ 0.54 $ 1.52 Cumulative effect of change - - 0.29 - -------- -------- ---------- ---------- Net earnings (loss) $ (0.11) $ 0.44 $ 0.83 $ 1.52 ======== ======== ========== ========== DILUTED Before change in accounting $ (0.11) $ 0.44 $ 0.54 $ 1.50 Cumulative effect of change - - 0.29 - -------- -------- ---------- ---------- Net earnings (loss) $ (0.11) $ 0.44 $ 0.83 $ 1.50 ======== ======== ========== ========== DIVIDENDS PER SHARE $ 0.04 $ 0.04 $ 0.12 $ 0.12 ======== ======== ========== ==========
Three Months Ended Nine Months Ended September 30 September 30 2001 2000 2001 2000 REVENUES: Domestic $ 682,522 $ 705,977 $ 2,132,856 $ 2,147,530 International 90,266 98,552 275,678 280,490 772,788 804,529 2,408,534 2,428,020 OPERATING EXPENSES: Transportation purchased 254,080 262,718 787,204 765,345 Station and ground operations 255,688 263,768 796,070 776,387 Flight operations and maintenance 133,286 143,665 428,658 425,729 General and administrative 62,767 64,312 200,427 191,309 Sales and marketing 21,689 20,200 69,020 60,740 Depreciation and amortization 51,655 52,892 156,977 152,768 Federal legislation compensation (7,800 ) — (7,800 ) — 771,365 807,555 2,430,556 2,372,278 EARNINGS(LOSS)FROM OPERATIONS 1,423 ) (3,026 ) (22,022 ) 55,742 OTHER INCOME (EXPENSE): Interest, net (4,924 ) (6,544 ) (13,875 ) (16,635 ) Discount onsales of receivables (2,006 ) — (7,993 ) — Other 8,778 406 11,355 3,111 EARNINGS(LOSS)BEFORE INCOME TAXES 3,271 (9,164 ) (32,535 ) 42,218 INCOME TAX BENEFIT(EXPENSE) 1,558 (3,655 ) (10,892 ) 16,070 NET EARNINGS(LOSS) BEFORE
CHANGE IN ACCOUNTING
1,713
$
(5,509
)
(21,643
)
26,148CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING, NET OF TAX
—
—
—
14,206NET EARNINGS(LOSS) $ 1,713 $ (5,509 ) $ (21,643 ) $ 40,354 NET EARNINGS (LOSS) PER SHARE: BASIC Before change in accounting $ 0.04 $ (0.11 ) $ (0.45 ) $ 0.54 Cumulative effect of change in accounting — — — $ 0.29 Net Earnings(Loss) $ 0.04 $ (0.11 ) $ (0.45 ) $ 0.83 DILUTED Before change in accounting $ 0.04 $ (0.11 ) $ (0.45 ) $ 0.54 Cumulative effect of change in accounting — — — 0.29 Net Earnings(Loss) $ 0.04 $ (0.11 ) $ (0.45 ) $ 0.83 DIVIDENDS PER SHARE $ 0.04 $ 0.04 $ 0.12 $ 0.12
See notes to consolidated financial statements.2
AIRBORNE,
FREIGHT CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(Dollars
(Dollars in thousands)
September 30 December 31 2000 1999 ---- ---- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash $ 26,567 $ 28,678 Trade accounts receivable, less allowance of $9,510 and $9,640 353,381 339,044 Spare parts and fuel inventory 46,032 44,263 Refundable income taxes 10,763 1,679 Deferred income tax assets 26,640 31,950 Prepaid expenses and other 20,228 24,456 ---------- ---------- TOTAL CURRENT ASSETS 483,611 470,070 PROPERTY AND EQUIPMENT, NET 1,295,004 1,115,712 EQUIPMENT DEPOSITS and OTHER ASSETS 52,993 57,468 TOTAL ASSETS $1,831,608 $1,643,250 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 155,296 $ 142,087 Salaries, wages and related taxes 76,721 65,276 Accrued expenses 80,666 78,755 Income taxes payable - 3,282 Current portion of debt 459 442 ---------- ---------- TOTAL CURRENT LIABILITIES 313,142 289,842 LONG-TERM DEBT 429,361 314,707 DEFERRED INCOME TAX LIABILITIES 119,701 99,169 OTHER LIABILITIES 91,570 81,325 SHAREHOLDERS' EQUITY: Preferred Stock, without par value - Authorized 5,200,000 shares, no shares issued Common stock, par value $1 per share - Authorized 120,000,000 shares Issued 51,279,651 and 51,176,018 shares 51,280 51,176 Additional paid-in capital 303,885 298,742 Retained earnings 581,484 546,962 Accumulated other comprehensive income 1,059 918 ---------- ---------- 937,708 897,798 Treasury stock, 3,244,526 and 2,491,078 shares, at cost (59,874) (39,591) ---------- ---------- 877,834 858,207 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,831,608 $1,643,250 ========== ==========
September 30 December 31 2001 2000 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 139,107 $ 40,390 Trade accounts receivable, less allowance of $11,528 and $10,290 123,768 218,685 Spare parts and fuel inventory 41,487 43,231 Refundable income taxes 23,943 21,595 Deferred income tax assets 28,454 28,839 Prepaid expenses and other 41,956 20,809 TOTAL CURRENT ASSETS 398,715 373,549 PROPERTY AND EQUIPMENT, NET 1,269,380 1,324,345 EQUIPMENT DEPOSITS and OTHER ASSETS 42,904 48,025 TOTAL ASSETS $ 1,710,999 $ 1,745,919 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 128,207 $ 180,623 Salaries, wages and related taxes 77,647 71,179 Accrued expenses 135,930 83,518 Current portion of debt 6,963 477 TOTAL CURRENT LIABILITIES 348,747 335,797 LONG-TERM DEBT 318,506 322,230 DEFERRED INCOME TAX LIABILITIES 137,070 125,444 POSTRETIREMENT LIABILITIES 35,098 62,360 OTHER LIABILITIES 36,566 37,233 SHAREHOLDERS’ EQUITY: Preferred Stock, without par value - Authorized 5,200,000 shares, no shares issued Common stock, par value $1 per share - Authorized 120,000,000 shares Issued 51,363,241 and 51,279,651 shares 51,344 51,280 Additional paid-in capital 304,603 303,885 Retained earnings 540,284 567,700 Accumulated other comprehensive income (1,351 ) (136 ) 894,880 922,729 Treasury stock, 3,240,526 and 3,244,526 shares, at cost (59,868 ) (59,874 ) 835,012 862,855 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,710,999 $ 1,745,919 See notes to consolidated financial statements.
3
AIRBORNE,
FREIGHT CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30 ------------ 2000 1999 ---- ---- OPERATING ACTIVITIES: Net Earnings $ 40,354 $ 73,870 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting (14,206) - Depreciation and amortization 152,768 139,300 Deferred income taxes 17,135 5,952 Provision for aircraft engine overhauls - 15,145 Other 15,485 8,526 -------- -------- CASH PROVIDED BY OPERATIONS 211,536 242,793 Change in: Receivables (14,337) (2,124) Inventories and prepaid expenses (6,625) (8,409) Accounts payable 13,209 (18,912) Accrued expenses, salaries & taxes payable 10,074 (19,581) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 213,857 193,767 INVESTING ACTIVITIES: Additions to property and equipment (302,390) (226,429) Dispositions of property and equipment 4,037 1,855 Expenditures for engine overhauls - (13,054) Other (7,051) (3,296) -------- -------- NET CASH USED BY INVESTING ACTIVITIES (305,404) (240,924) FINANCING ACTIVITIES: Proceeds from bank notes, net 115,000 50,000 Principal payments on debt (329) (270) Repurchase of common stock (20,662) - Proceeds from common stock issuance 1,259 5,230 Dividends paid (5,832) (5,832) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 89,436 49,128 -------- -------- NET (DECREASE) INCREASE IN CASH (2,111) 1,971 CASH AT JANUARY 1 28,678 18,679 -------- -------- CASH AT SEPTEMBER 30 $ 26,567 $ 20,650 ======== ========
Nine Months Ended September 30 2001 2000 OPERATING ACTIVITIES: Net Earnings(Loss) $ (21,643 ) $ 40,354 Adjustments to reconcile net earnings(loss) to net cash provided by operating activities: Cumulative effect of change in accounting — (14,206 ) Depreciation and amortization 156,977 152,768 Deferred income taxes 12,010 17,135 Postretirement obligations (2,515 ) 7,584 Other (527 ) 7,901 CASH PROVIDED BY OPERATIONS 144,302 211,536 Change in: Proceeds from receivable securitization facility 50,000 — Receivables 44,917 (14,337 ) Inventories and prepaid expenses (19,403 ) (6,625 ) Refundable income taxes (2,348 ) — Accounts payable (52,416 ) 13,209 Accrued expenses, salaries & taxes payable 34,132 10,074 NET CASH PROVIDED BY OPERATING ACTIVITIES 199,184 213,857 INVESTING ACTIVITIES: Additions to property and equipment (99,455 ) (302,390 ) Dispositions of property and equipment 1,113 4,037 Other 2,391 (7,051 ) NET CASH USED BY INVESTING ACTIVITIES (95,951 ) (305,404 ) FINANCING ACTIVITIES: Proceeds(repayments)from bank notes, net (103,000 ) 115,000 Principal payments on debt (902 ) (329 ) Issuance of debt 1,596 — Proceeds on sale leaseback transactions, net 102,775 — Repurchase of common stock — (20,662 ) Proceeds from common stock issuance 788 1,259 Dividends paid (5,773 ) (5,832 ) NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (4,516 ) 89,436 NET (DECREASE) INCREASE IN CASH 98,717 (2,111 ) CASH AT JANUARY 1 40,390 28,678 CASH AT SEPTEMBER 30 $ 139,107 $ 26,567 See notes to consolidated financial statements.
4
AIRBORNE, FREIGHT CORPORATIONINC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20002001 (Unaudited)
NOTE A-SUMMARYA—SUMMARY OF FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements included herein are unaudited but include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods reported.
Certain amounts for prior periods have been reclassified to conform to the 20002001 presentation.
NOTE B-LONG-TERMB—LONG-TERM DEBT:
of $200 million were secured in connection with the amended revolving credit agreement.Long-term debt consists of the following:
September 30 December 31 2001 2000 (In thousands) Senior debt: Senior notes $ 200,000 $ 200,000 Aircraft Leases 102,837 — Revenue bonds 13,200 13,200 Revolving bank credit — 75,000 Notes payable — 28,000 Other debt 9,432 6,507 325,469 322,707 Less current portion 6,963 477 $ 318,506 $ 322,230 The Company has a revolving credit agreement providing for a total commitment of $275 million. In June 2001, the agreement was amended to, among other requirements, provide certain assets as collateral to secure the commitment, reduce available borrowing capacity by the amount of outstanding letters of credit, establish revised covenants and amend the expiration date to June 2004. Capacity under the facility is dependent on a borrowing base determined by the amount of collateral pledged, with a maximum commitment of $275 million. At September 30,
December 31 2000 1999 ---- ---- (In thousands) Senior debt: Revolving bank2001 no borrowings were outstanding under the agreement and the Company was in compliance with restrictive covenants. With the current level of collateral pledged, available capacity under the agreement, net of outstanding letters of credit,$ 190,000 $ 95,000 Notes payable 20,000 - Seniorwas $43.6 million as of September 30, 2001. In June 2001, the outstanding senior notes200,000 200,000 Revenue bonds 13,200 13,200 Other debt 6,620 6,949 --------- --------- 429,820 315,149 Less current portion 459 442 --------- --------- $ 429,361 $ 314,707 ========= =========
NOTE C - C—EARNINGS PER SHARE:
Basic earnings per share are based upon the weighted average number of common shares outstanding during the interim period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the interim period plus dilutive common equivalent shares applicable to the assumed exercise of outstanding stock options.
Weighted average shares outstanding used in earnings per share computations were as follows:
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 48,034,899 48,642,297 48,516,263 48,579,333 Diluted 48,185,156 49,222,452 48,850,931 49,303,004 5
| Three Months Ended | Nine Months Ended | |||||||
| September 30 | September 30 | |||||||
| 2001 | 2000 | 2001 | 2000 | |||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||
| Basic | 48,103,545 | 48,034,899 | 48,081,524 | 48,516,263 | ||||
| Diluted | 48,128,062 | 48,185,156 | 48,104,026 | 48,850,931 | ||||
NOTE D-SEGMENT INFORMATION:D—SEGMENT INFORMATION
The Company has organized its business into two reportable operating segments. The domestic segment derives its revenues from the door-to-door delivery of small packages and documents throughout the United States, Canada, and Puerto Rico. Domestic operations are supported principally by Company operated aircraft and facilities. The international segment derives its revenues from express door-to-door delivery and a variety of freight services. International revenues are recognized on shipments where the origin and/or destination is outside of locations supported by the domestic segment. The Company uses a variable cost approach to delivering international services through use of existing commercial airline capacity in connection with its domestic network and independent express and freight agents in locations not currently served by Company-owned foreign operations.
The following is a summary of key segment information (in thousands):
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- SEGMENT REVENUES: Domestic $705,977 $696,116 $2,147,530 $2,063,772 International 98,552 89,192 280,490 269,884 -------- -------- ---------- ---------- $804,529 $785,308 $2,428,020 $2,333,656 ======== ======== ========== ========== SEGMENT EARNINGS (LOSS) FROM OPERATIONS: Domestic $ 55 $39,488 $61,786 $129,779 International (3,081) (677) (6,044) 1,693 ------- ------- ------- -------- $(3,026) $38,811 $55,742 $131,472 ======= ======= ======= ========
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30 | September 30 | ||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||
| SEGMENT REVENUES: | |||||||||||||||
| Domestic | $ | 682,522 | 705,997 | $ | 2,132,856 | $ | 2,147,530 | ||||||||
| International | 90,266 | 98,552 | 275,678 | 280,490 | |||||||||||
| $ | 772,788 | $ | 804,529 | $ | 2,408,534 | $ | 2,428,020 | ||||||||
| SEGMENT EARNINGS(Loss) FROM OPERATIONS: | |||||||||||||||
| Domestic | $ | 920 | $ | 55 | $ | (20,230 | ) | $ | 61,786 | ||||||
| International | 503 | (3,081 | ) | (1,792 | ) | (6,044 | ) | ||||||||
| $ | 1,423 | $ | (3,026 | ) | $ | (22,022 | ) | $ | 55,742 | ||||||
NOTE E-OTHERE—OTHER COMPREHENSIVE INCOME:
Other comprehensive income includes the following transactions and tax effects for the three and nine month periodsperiod ended September 30, 2001 and 2000 (in thousands):
(in thousands):Three Months Ended Nine Months Ended
Three Months Ended Nine Months Ended September 30, 2001 September 30, 2001 Before
TaxIncome Tax
(Expense)
or BenefitNet of
TaxBefore
TaxIncome Tax
(Expense)
or BenefitNet of
TaxUnrealized securities losses
arising during the period$ (1,724 ) $ 664 $ (1,060 ) $ (1,557 ) $ 599 $ (958 ) Less: Reclassification
adjustment for gains
realized in net income— — — (32 ) 12 (20 ) Net unrealized securities
losses(1,724 ) 664 (1,060 ) (1,589 ) 611 (978 ) Foreign currency translation
adjustments(41 ) 16 (25 ) (351 ) 114 (237 ) Other comprehensive
income (loss)$ (1,765 ) $ 680 $ (1,085 ) $ (1,940 ) $ 725 $ (1,215 )
Three Months Ended Nine Months Ended September 30, 2000 September 30, 2000 Before
TaxIncome Tax
(Expense)
or BenefitNet of
TaxBefore
TaxIncome Tax
(Expense)
or BenefitNet of
TaxUnrealized securities losses
arising during the period$ 593 $ (228 ) $ 365 $ 1,043 $ (401 ) $ 642 Less: Reclassification
adjustment for gains
realized in net income(67 ) 26 (41 ) (588 ) 227 (361 ) Net unrealized securities
losses526 (202 ) 324 455 (174 ) 281 Foreign currency translation
adjustments(16 ) 6 (10 ) (227 ) 87 (140 ) Other comprehensive
income (loss)$ 510 $ (196 ) $ 314 $ 228 $ (87 ) $ 141 NOTE F—OTHER INCOME:
Other income includes the following transactions for the three and nine month period ended September 30, 2001 and 2000
September 30, 2000 Income Income Before Tax Net of Before Tax Net of Tax (Expense) Tax Tax (Expense) Tax or or Benefit Benefit ------ ------- ------ ------ ------- ------ Unrealized securities gains arising during the period $ 593 $ (228) $ 365 $1,043 $ (401) $ 642 Less: Reclassification adjustment for gains realized in net income (67) 26 (41) (588) 227 (361) ------ ------ ------ ------ ------ ------ Net unrealized securities gains 526 (202) 324 455 (174) 281 Foreign currency translation adjustments (16) 6 (10) (227) 87 (140) ------ ------ ------ ------ ------ ------ Other comprehensive income $ 510 $ (196) $ 314 $ 228 $ (87) $ 141 ====== ====== ====== ====== ====== ====== 6
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30 | September 30 | ||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||
| OTHER INCOME: | |||||||||||||
| Gain on sales of radio frequencies | $ | 6,232 | $ | — | $ | 8,303 | $ | — | |||||
| Gain on sale of securities | 2,117 | — | 2,117 | 1,913 | |||||||||
| Other | 429 | 406 | 935 | 1,198 | |||||||||
| $ | 8,778 | $ | 406 | $ | 11,355 | $ | 3,111 | ||||||
NOTE F-CHANGEG—CHANGE IN ACCOUNTING:
Effective January 1, 2000, the Company changed its method of accounting for major engine overhaul costs on DC-9 aircraft from the accrual method to the direct expense method where costs are expensed as incurred. Previously, these costs were accrued in advance of the next scheduled overhaul based upon engine usage and estimates of overhaul costs. The Company believes that this new method is preferable because it is more consistent with industry practice and appropriate given the relatively large size of its DC- 9DC-9 fleet.
The cumulative effect of this change in accounting resulted in a non-cash credit of $14,206,000, net of taxes, or $.29 per share on a diluted basis being recognized in the first nine months ofquarter ending March 31, 2000. Excluding the cumulative effect, this change increased net earnings for the third quarter and first nine months of 2000 by approximately $1.4 million, net of tax or $.03 per share, and $4.2 million, net of tax or $.09 per share, respectively. If the accounting change for engine overhaul costs had been retroactively applied, earnings from continuing operations for the three and nine month periods ended September 30, 1999 would have been as follows:
Three Months Ended Nine Months Ended September 30, September 30, 1999 1999 ---- ---- As Reported: Earnings from continuing operations $38,811 $131,472 Diluted earnings per share $ 0.44 $ 1.50 Proforma continuing operations: Earnings from continuing operations $40,109 $134,311 Diluted earnings per share $ 0.47 $ 1.56
NOTE G-NEWH-NEW ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In June 1998, theThe Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting StandardsStandard ("SFAS") No. 133,141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets", SFAS No. 143 "Accounting for Derivative InstrumentsAsset Retirement Obligations" and Hedging Activities". In June 2000, the FASB issued SFAS No. 138,144 "Accounting for the Impairment or Disposal of Long-Lived assets". SFAS No. 141 requires that all business combinations initiated after July 1, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill and some intangible assets be charged to expense through the testing and measuring of these items for impairment as opposed to periodic amortization over the estimated useful life of the assets. SFAS No. 143 requires entities to recognize the fair value of a liability for an asset retirement obligation in the period in which amended certain provisionsit is incurred assuming a reasonable estimate of fair value can be made. SFAS 133 to clarify areas causing difficulties in implementation.
The Company has appointed a team to implementNo. 144 expands and clarifies previous accounting standards regarding the disposal of long-lived assets. SFAS 133. This team is responsible for developing appropriate management reports, educating both financialNo. 141, No. 142, No. 143 and non-financial personnel, completing an inventory of embedded derivatives and addressing various other SFAS 133 related issues. The Company will adopt SFAS 133 and the corresponding amendments under SFAS 138 on January 1, 2001. SFAS 133, as amended by SFAS 138, isNo. 144 are not expected to have a material impact on the Company'sCompany’s consolidated results of operations, financial position or cash flows.
7
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company reported net income for the third quarter of 2001 of $1.7 million, or $.04 per diluted share. This compares to a net loss of $5.5 million or $.11 per share for the third quarter of 2000 and a net loss of $6.4 million or $.13 per share reported in the 2nd quarter of 2001. For the first nine months of 2001, the net loss was $21.6 million or $.45 per share compared to net earnings before a change in accounting of $26.1 million or $.54 per share for the first nine months of 2000. Net earnings reported for the first nine months of 2000, below thatincluding a $.29 per share credit for a change in accounting were, $40.4 million or $.83 per share.
The third quarter of 2001 included non-recurring gains on the comparable periodsale of certain securities and FCC licensed radio frequencies totaling $8.3 million ($5.4 million after tax or $.11 per share). One time gains for frequency sales and securities gains for the first nine months of 2001 totaled $10.4 million ($6.8 million after tax or $.14 per share compared to $.02 per share in 1999, and experienced a net lossthe first nine months of 2000).
The results for the third quarter of this year. The weaker operating results are primarily causedyear include pre-tax losses of approximately $13 million associated with lost business as a result of the September 11th terrorist attacks.The two day closure of the Company’s air network by order of the lackFederal government following the attacks resulted in lost revenue and additional costs.The Company was able to partially adjust its network and continue business operations through the temporary expansion of growth in domesticits ground linehaul, hub and sort operations.During the week of the attacks shipment volumes. Whilevolumes declined 27% compared to year earlier levels. In the revenue yield on domestic shipments hasweeks following the attacks shipment volumes improved although fourth quarter volumes through early November continued to improve,be approximately 3%on average below volumes of the lackcomparable period of shipment growth precludes realizing productivity gains necessary2000.
The Company recorded a $7.8 million credit for compensation provided under the Air Transportation Safety and System Stabilization Act ("Act"). The Act, authorized by Congress shortly after the attacks, will provide compensation to offset cost increases. Aseligible air carriers for certain direct losses associated with the closure of the national air system for the period beginning September 11th and for incremental losses as a result average operating cost perof these attacks and ending on December 31, 2001. The Company anticipates being eligible for additional compensation in the 4th quarter.
Operating results have been negatively impacted by a declining economy, which appears to be experiencing further slowing since the events of September 11th. The Company has experienced shipment increased atvolume declines in its higher yielding domestic products and a faster rate than averageshift in volume mix towards lighter weight lower yielding deferred products. These factors have hampered revenue per shipment.
The net loss forgrowth. Despite the negative revenue growth, earnings from operations improved $6.6 million over the second quarter of 2001 and $4.4 million over the third quarter of 2000 was $5.5 million, or $.11 per diluted share. This compares2000. The improved results are due primarily to net earnings of $21.6 million, or $.44 per share reported in the third quarter of 1999.
Net earnings for the first nine months of 2000 were $40.4 million, or $.83 per share, compared to $73.9 million, or $1.50 per share for the corresponding period in 1999. Earnings for 2000 include a non-recurring gain from the sale of securities of $1.9 million, or $.02 per share recorded in the second quarter. Effective at the beginning of 2000,cost reduction actions the Company changed from the accrual method of accounting for DC-9 engine overhaul costs to the direct expense method where costs are expensed as incurred. The cumulative effect of this change resulted in a non-cash credit of $14.2 million, net of taxes, or $.29 per share, being recorded in the first quarter and included in net earnings for the first nine months of 2000.
Operating costs for the first nine months of 2000 have continued to be impacted by the high cost of jet fuel, which began to escalate in the third quarter of 1999. To help address this cost increase the Company implemented a 3% fuel surcharge on domestic revenue effective in early February 2000, under which $19.5 million and $51.9 million of surcharge revenues were recorded during the third quarter and first nine months of 2000, respectively. Jet fuel costs increased approximately $15.5 million, or $.35 per gallon in the third quarter of 2000 and $48.5 million, or $.36 per gallon for the first nine months of 2000 versus comparable periods in 1999. Higher fuel costs have also impacted ground related linehaul and cartage operations. While the fuel surcharge has been adequate to offset these higher fuel related costs during the third quarter of 2000, it has not fully offset the impact of all fuel-related increases incurred in the first nine months of 2000. Also, fuel prices continue to be at historically high levels, which is not an encouraging trend. To assist in mitigating these continued high prices, effective October 16, 2000, the fuel surcharge was increased from 3 percent to 4 percent of domestic revenue.taken.
The following table sets forth selected shipment and revenue data for the periods indicated:
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2000 1999 Change 2000 1999 Change ---- ---- ------ ---- ---- ------ Shipments (in thousands):
Three Months Ended Nine Months Ended September 30 September 30 2001 2000 Change 2001 2000 Change Shipments (in thousands): Domestic Overnight 40,389 45,540 (11.3 %) 130,148 139,694 (6.8 %) Next Afternoon Service 12,327 13,430 (8.2 %) 38,963 41,044 (5.1 %) Second Day Service 21,983 19,466 12.9 % 70,524 58,398 20.8 % Ground Delivery Service 1,517 - N/A 1,848 - N/A 100 Lbs. And Over 57 72 (20.8 %) 184 214 (14.0 %) Total Domestic 76,273 78,508 (2.8 %) 241,667 239,350 1.0 % International Express 1,375 1,506 (8.7 %) 4,524 4,584 (1.3 %) Freight 95 102 (6.8 %) 299 297 0.7 % Total International 1,470 1,608 (8.6 %) 4,823 4,881 (1.2 %) Total Shipments 77,743 80,116 (3.0 %) 246,490 244,231 0.9 % Average Pounds per Shipment: Domestic 4.24 4.27 (0.7 %) 4.17 4.27 (2.3 %) International 60.55 55.69 8.7 % 55.03 51.01 7.9 % Average Revenue per Pound: Domestic $ 2.04 $ 2.07 (1.4 %) $ 2.06 $ 2.07 (0.5 %) International $ 0.99 $ 1.09 (9.2 %) $ 1.02 $ 1.11 (8.1 %) Average Revenue per Shipment Domestic $ 8.82 $ 8.91 (1.0 %) $ 8.74 $ 8.93 (2.1 %) International $ 61.41 $ 61.29 0.2 % $ 57.16 $ 57.47 (0.5 %) Domestic
Overnight 45,540 46,496 (2.1%) 139,694 139,239 0.3% Next Afternoon Service 13,430 13,722 (2.1%) 41,044 42,538 (3.5%) Second Day Service 19,466 18,733 3.9% 58,398 54,444 7.3% 100 Lbs.revenues decreased 3.3% andOver 72 69 4.3% 214 217 (1.4%) ------ ------ ------- ------- Total Domestic 78,508 79,020 (0.6%) 239,350 236,438 1.2% International Express 1,506 1,699 (11.4%) 4,584 4,912 (6.7%) Freight 102 96 6.3% 297 296 0.3% ------ ------ ------- ------- Total International 1,608 1,795 (10.4%) 4,881 5,208 (6.3%) 8 Total Shipments 80,116 80,815 (0.9%) 244,231 241,646 1.1% ====== ====== ======= ======= Average Pounds per Shipment: Domestic 4.27 4.24 0.7% 4.27 4.21 1.4% International 55.69 43.44 28.2% 51.01 43.75 16.6% Average Revenue per Pound: Domestic $2.07 $2.04 1.5% $2.07 $2.04 1.5% International $1.09 $1.14 (4.4%) $1.11 $1.17 (5.1%) Average Revenue per Shipment: Domestic $8.91 $8.81 1.1% $8.93 $8.73 2.3% International $61.29 $49.69 23.3% $57.47 $51.82 10.9%
Total revenues increased 2.4% and 4.0%.7% in the third quarter and first nine months of 2000,2001, respectively, compared to the same periods in 1999. Domestic revenues increased 1.5% in the third quarter, and 4.1% for the first nine months of 2000. The fuel surcharge accounted for 2.5% of the year to date growth in domestic revenue. The average revenue per domestic shipment increased 1.1% in the third quarter of 2000 and 2.3% for the first nine months of 2000 compared to the comparable periods of 1999. The Company remains encouraged by the stability in domestic revenue per shipment yields.
Domestic shipments decreased .6% in the third quarter and increased 1.2% in the first nine months of 2000 in comparison to the same periods in 1999. The2000. Average domestic revenue per shipment declined 1.0% to $8.82 in the third quarter and 2.1% to $8.74 for the first nine months of 2001. The yield decreases are due to declines in higher yielding overnight express shipments coupled with slightly lower average shipment weights in all product categories. Domestic revenues have been aided by a fuel surcharge on revenue of 3% that was originally implemented in February 2000 and was raised to 4% beginning October 2000. In the third quarter and for the first nine months of 2001 fuel surcharge revenues were $22.4 million and $70.7 million, respectively. This compares to fuel surcharge revenues of$19.5 million and $51.9 million being recognized in the third quarter and first nine months of 2000. In January 2001 the Company announced a new pricing structure for its domestic services that included a rate increase, a shift to zone-based pricing and a non-scheduled pickup fee. These actions were targeted to improve yields and increase revenues. However, the lack of shipment growth and the shift by domestic customers to lower yielding, less time sensitive deferred services has diluted the impact.
Domestic shipments decreased 2.8% in the third quarter and increased 1.0% in the first nine months of 2001 compared to the same periods of 2000. The first nine months of 2001 had one less operating day than the comparable period in 1999. On a per day basis, domestic shipments increased .9% to 1,246,000 shipments per day. The first nine months of 2000 had one additional operating day than in 1999. Overnight2000. Higher yielding overnight shipments accounted for 58.0%53.0% of total domestic shipments in the third quarter compared to 58.8%58.0% in the third quarter of 1999. The higher yielding overnight2000. Overnight shipments decreased 2.1%declined 11.3% in the third quarter comparedand 6.8% for the first nine months of 2001. Total shipments for the quarter and year to a decline of .6% experienced indate periods include the same period of 1999. The Company's Next Afternoon Service shipments decreased 2.1% compared to a decrease of 6.3% in the third quarter of 1999. Second Day Service shipments increased 3.9% in the third quarter compared to a 7.1% growth rate experienced in the same period of 1999. The Second Day Service category includes shipments associated with the Company's newCompany’s airborne@home product, airborne@home, which was introduced in late 1999 to service expandingthe e-commerce and business to residential deliveryconsumer markets. airborne@home shipment volumes were 1,758,000These shipments, included in the Second Day Service category for reporting purposes, totaled 4.7 million in the third quarter and 3,500,00015.5 million in the first nine months of 2001 compared to 1.8 million and 3.5 million shipments in the comparable periods in 2000.
In April 2001 the Company expanded its service portfolio by introducing a new product, Ground Delivery Service (GDS). The new product leverages the Company’s sort and linehaul infrastructure and is being marketed to a target customer base. The Company believes GDS is an important initiative that is targeted to establish growth both from the deferred ground segment where it has not previously participated, and from the ability to leverage GDS with the cross marketing of higher yielding air express shipments. GDS totaled 1.5 million shipments in the third quarter and 1.8 million for the first nine months of 2001. The Company is targeting GDS volumes of between 50,000 and 60,000 shipments per day in the fourth quarter of 2001.
International revenues decreased 8.4% in the third quarter and 1.7% for the first nine months of 2001 compared to a year ago. Total international shipments decreased 8.6% in the third quarter of 2001 compared to 2000 and were 1.2% lower in the first nine months of 2001 compared to 2000.International revenues and shipments in the third quarter were negatively impacted by the terrorist attacks which not only suspended domestic flights but closed U.S. borders and suspended flight schedules that disrupted international operations for approximately two weeks. The slow economic environment and a typhoon in the Far East also hampered shipment volumes. Despite these events the international segments contribution to earnings for the third quarter was a profit of $.5 million compared to a loss of $3.1 million in 2000. The Company continuessegment loss was $1.8 million in the first nine months of 2001 compared to be encouraged by$6.0 million in the business opportunitiescomparable period of this new product which offers shippers a competitive combination2000. This improved segment performance was due primarily to improvement in margins on the international heavy weight freight product.
Operating expenses were 99.8% and 100.9% of service and pricing, while providing the Company an efficient way to accomplish residential deliveries through an arrangement with the U.S. Postal Service.
International revenues increased 10.5% and 3.9% in the third quarter and first nine months of 2000,2001, respectively, compared to a decrease of 1.1%100.4% and 97.7% for the corresponding periods in 2000. Operating cost per shipment decreased 1.4% to $9.92 in the third quarter compared to $10.07 in the third quarter of 1999 and an increase of .3% in the first nine months of 1999. Total international shipments decreased 10.4% in the third quarter and 6.3% in the first nine months of 2000 compared to the same periods in 1999. International express shipments decreased 11.4% in the third quarter and 6.7% for the first nine months of 2000 due primarily to the loss of a major customer early in 2000. International freight shipments increased 6.3% and .3% in the third quarter and first nine months of 2000, respectively, compared to the corresponding periods in 1999. The Company is encouraged by the recent strength in freight shipments in the second and third quarters of 2000. Although international revenues showed strength in the third quarter, the shift in the mix toward import business, and the overall cost increases from airlines on international segments created significant cost pressures, and resulted in a deterioration in margins and international segment profitability. Typically, our U.S. export business has a higher margin than imports. The international segment contribution to earnings from operations was a loss of $3.0 million
9
and $6.0 million for the third quarter and first nine months of 2000, respectively, compared to a loss of $.7 million for the third quarter of 1999 and operating earnings of $1.7 million in the first nine months of 1999.
Operating expenses exceeded revenues in the third quarter and were 97.7% of revenues for the first nine months of 2000. This compares to 95.1% and 94.4% for the corresponding three and nine month periods in 1999 and 94.9% for all of 1999. Operating cost per shipment increased 9.1% in the third quarter of 2000 to $10.08 compared to $9.24 in the third quarter of 1999. The operating cost per shipment for the first nine months of 20002001 increased 6.6%1.5% to $9.71$9.86 compared to the same period in 1999. The significantly higher cost of jet fuel is a major factor impacting operating costs in the first nine months of 2000. Excluding the cost of jet fuel, operatingOperating cost per shipment increased 7.4%information and operating costs expressed as a percentage of revenues for the third quarter were negatively impacted by the loss of business due to the events of September 11th. However, all categories of operating costs, except for sales and 4.6% formarketing category, decreased in the first nine monthsthird quarter compared to the second quarter of 2000. Additionally,2001 as a result of the continued cost reduction initiatives.
The Company has been aggressively managing costs through a number of cost cutting measures to assist in improving operating results. The Company has reduced and combined flight segments, reduced labor hours, and cut discretionary expenses to achieve cost efficiencies. Specifically, labor hours have been reduced which resulted in a 3.9% improvement in productivity, as measured by shipments handled per paid employee hour, experienced a decline of 2.6% and 1.2% forduring the third quarter, over levels incurred during the same period of 2000. Hours paid during the third quarter of 2001 were approximately 3.3% and 5.8% less than those paid during the second and first quarters of 2001, respectively. Productivity for the first nine months of 2000, respectively. The2001 showed an improvement of 3.2% compared to the first nine months of 2000.The Company continues to manage productivity at levels sufficient to maintain a high level of overall service integrity with its customers. At this time, maintaining service is a priority and no plans exist to reduce service to cut costs in the short term. Comparisons of certain operating expense components are discussed below.customer service.
Transportation purchased increased as a percentage of revenues was 32.9% in the third quarter of 2001 compared to 31.5% in32.7% a year ago. This category of expense was 32.7% of revenues for the first nine months of 20002001 compared to 30.5%31.5% in the comparable period2000. The increase in costs as a percentage of 1999. This increaserevenues was primarily due to increases inincreased farmed out pickup and delivery, surface linehaul costs and delivery costs paid to the U.S. Postal Service for delivery of shipments. These increases were partially offset by lower international commercial airline and surface linehaul rates as well as fuel surcharges on these services.offshore agent related costs, in part due to lower shipment volumes.
Station and ground expense increasedwas 33.1% of revenues in the third quarter compared to 32.0%32.8% a year ago. Station and ground expense was 33.1% of revenues in the first nine months of 2000 compared to 30.9%2001 versus 32.0% for the same period in 2000. Total costs in this category decreased $6.8 million from the level incurred in the second quarter of 2001 and $22.2 million from the first nine monthsquarter of 1999. The2001. Reductions in labor hours incurred for pickup and delivery, sort and other field operations were the primary factors for the decline in productivity combined with wage related cost increases had a negative effect on this categoryexpense in comparison to the second and first quarter of expense.2001 levels.
Flight operations and maintenance expense as a percentage of revenues during the first nine months of 2000 was 17.5% compared to 16.1% in the first nine months of 1999. Aviation fuel consumption decreased to 44.6 million gallons in the third quarter, a 1.3% decrease over the third quarter of 1999.2001 decreased to 17.2% as compared to 17.9% in the same period of 2000 and 17.7% in the 2nd quarter of 2001. For the first nine months of 2000, aviation fuel consumption2001 flight operations costs were 18.1% of 135.8 million gallons increased 1.2% fromrevenues compared to 17.4% in the first nine monthscomparable period of 1999.2000. The average aviation fuel price for the third quarter and first nine months of 20002001 was $.91 and $.95 per gallon, respectively, compared to $1.03 and $.96 per gallon, respectively compared to $.68 and $.58 per gallon, respectively, infor the comparable periods in 2000. Aviation fuel consumption in the third quarter decreased 15.2% to 37.8 million gallons compared to 44.6 million gallons in the third quarter of 1999. As a result2000. Consumption in the second and first quarters of fuel hedging contracts, the Company incurred $2.42001 was 40.5 million of expense, equal to approximately $.02 per gallon, inand 43.6 million gallons, respectively.For the first nine months of 1999, with no hedging settlements occurring in the first nine months2001, aviation fuel consumption of 2000.122.0 million
Effective January 1, 2000, the Company began to expense DC-9 engine overhaul costs directly to maintenance expense as costs are incurred. Engine overhaul costs currently charged to expense as incurred and included in the flight operations and maintenance category were previously accrued in advance of the next scheduled overhaul and charged to the depreciation and amortization category.
General and administrative expensegallons was 7.9% of revenues in the first nine months of 2000, compared to 7.7% in 1999. This category of cost has increased as a percentage of revenues primarily due to wage and compensation cost pressures.
Depreciation and amortization expense decreased to 6.3% of revenues10.2% less than consumption for the first nine months of 2000 compared to 6.6% in 1999. Depreciation expense in the first nine months of 2000 increased compared to the comparable period in 19992000. The decrease in consumption both sequentially and year over year is due, in part, to management efforts to reduce and combine certain flight segments to control costs beginning in the second quarter of 2001. Additionally, fuel consumption was lower due to the increased numbertwo day grounding of aircraft in September. Also, the Company has placed five additional 767 aircraft placed in service since the third quarter of 1999. This increase was offset by2000 thereby allowing less fuel-efficient DC-8 aircraft to be moved to shorter lane segments, backup status or to be removed from service. Maintenance costs decreased during the effectthird quarter compared to a year ago but increased during the first nine months of 2001 as a result of having additional 767 aircraft in service compared to the same periods of last year. The Company had 118 aircraft in service (19 Boeing 767s, 25 DC-8’s and 74 DC-9’s) at the end of the changethird quarter compared to 117 aircraft at the end of the third quarter of 2000.
General and administrative expense was 8.1% and 8.3% of revenues for the third quarter and first nine months of 2001, respectively. This compares to 8.0% and 7.9% of revenues for the third quarter and first nine months of 2000, respectively. Inclusive in accountingthis cost category of expense is a one-time charge of $2.9 million, recorded in the second quarter of 2001, for engine overhaulseverance and restructuring costs discussed above.associated with the announced reduction in force effective June 1st. The Company has aggressively reduced costs in this category of expense in 2001 and continues to employ strong cost controls over labor and discretionary costs.
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Interest expenseSales and marketing costs were 2.8% of revenues in the third quarter and 2.5% in the first nine months of 2000 was2001 compared to 2.5% in the comparable periods of 2000. Increased sales personnel and compensation costs as well as expanded marketing efforts to attract new business have resulted in higher thanlevels of expenditures in this category.
Depreciation and amortization expense constituted 6.7% of revenues in the third quarter and 6.5% in the first nine months of 1999 due2001. This compares to higher levels6.6% of average outstanding borrowings. Effective interest ratesrevenues for the third quarter and 6.3% in the first nine months of 2000. Depreciation expense in the third quarter of 2001 decreased slightly from the amounts recorded a year ago due to lower levels of capital expenditures in 2001 coupled with certain aircraft becoming fully depreciated. These declines offset the depreciation effects of placing additional 767 aircraft in service since the end of the third quarter of last year.
Interest expense in the third quarter and first nine months of 2001 was lower than in 2000 due, in part, to lower average borrowings outstanding. Additionally, interest capitalized was comparable$2.0 million in the first nine months of 2001 compared to $5.0 million in the samelike period of 2000. The lower level of average borrowings was a result of the off balance sheet refinancing of $200 million of long-term debt under an accounts receivable securitization facility that was implemented in 1999. CapitalizedDecember 2000. Debt levels were increased in August 2001 when the Company completed two sale-leaseback transactions for five 767 aircraft, accounted for as capitalized leases, which provided proceeds of $102.8 million.
Discounts associated with recording the obligation to fund the purchaser’s costs under the Company’s accounts receivable securitization facility were $2.0 million in the third quarter of 2001 and $8.0 million for the year to date period. The Company considers this expense to be an interest was $5.0type of financing cost. Because of the sales recognition treatment associated with this type of financing, the cost is recorded separate from interest expense.
Included in other income were non-recurring gains associated from the sales of FCC licensed radio frequencies totaling $6.2 million in the third quarter of 2001 and $8.3 million for the first nine months of 2000 compared2001. The Company is in the process of converting from voice to $3.1digital communication technology to support its pickup and delivery operations. The Company anticipates recording an additional $1.0 million in gains in the first nine monthsfourth quarter of 1999.
Other income includes2001 that will substantially complete the sale of these frequencies for the foreseeable future. Additionally, a nonrecurringnon-recurring gain of $1.9$2.1 million was recorded and included in other income during the third quarter of 2001 from the sale of shares of Equant N.V.These shares were acquired through the Company’s participation in SITA, a cooperative of major airline companies, which primarily provides data communication services to the air transport industry. The Company had no cost basis in these shares. In the second quarter of 2000, a $1.9 million non-recurring gain was recorded on the sale of securities received in connection with the demutualization of Metropolitan Life. The Company, as policyholder, received stock securities of Metropolitan Life when the insurance company demutualized.
The Company'sCompany’s effective tax benefit rate wasof 33.5% for the first nine months of 2001 compared to an effective tax expense rate of 38.1% recorded in the first nine months of 20002000. The effective tax expense rate was 47.6% for the third quarter of 2001 compared to 38.4%a tax benefit rate of 39.9% in the third quarter of 2000. The lower tax benefit rate recorded for the first nine months of 19992001 as compared to the tax expense rate incurred in 2000 is a function of the provision impact of non-deductible expenses and 38.1%state taxes. The effective tax rate for all2001 is difficult to determine due to the provision impact and levels of 1999.nondeductible expenses and state taxes in relation to earnings.
The strength of the U.S. and global economies will have an impact on the results of operations for the balance of 2001 and into 2002 and beyond. The current lack of visibility regarding economic growth has caused the Company announced a numberto expect continued pressure on shipment and revenue growth, particularly in its higher yielding overnight express product. While the Company is continuing to aggressively manage costs, it will be difficult to make reductions of new initiativesthe magnitude made over the past two quarters. The Company has taken actions to improvesubstantially reduce its cost structure, so that it is positioned to benefit from an economic rebound and resulting volume growth when that occurs.
Liquidity and profitability. These initiatives include marketing targeted toward enhancing the suite of products offered, pursuing the small market business market, improving sales effectiveness, expanding third party logistics capabilities and increasing online offerings. Among these initiatives is also the introduction of a ground delivery service, which allows customers to consolidate their distribution process with the Company. The new service, which is scheduled to begin in April 2001, will leverage our existing infrastructure and excess capacity and is expected to provide a sound competitive offering in the marketplace.
LIQUIDITY AND CAPITAL RESOURCES:Capital Resources:
Cash provided by operations net of the change in working capital for the first nine months of 20002001 was $211.5$149.2 million compared(exclusive of $50 million in proceeds from the receivable securitization facility). This compares to $227.6$213.9 million recorded in the first nine months of 1999.2000.
Capital expenditures continue to be a primary factor affecting the financial condition of the Company. The Company anticipates total capital expenditures to approximate $370 million in 2000. During the first nine months of 2000,2001, total capital expenditures net of dispositions were $298.3$98.3 million compared to $224.6$298.4 million during the first nine monthscorresponding period of 1999. Cash provided by operations2000. Capital spending has been reduced significantly in 2001 compared to 2000 due to management efforts to maintain spending at levels that better match the lower level of operating performance and bank borrowings were the primary sources for fundingshipment volume growth. The Company currently anticipates 2001 capital expenditures into be approximately $130 million, down from the first nine monthsprevious target of 2000.$170 million.
The Company completed a share repurchase of 1 million shares of common stock in June 2000 for approximately $20.7 million, which were added to the Company's treasury stock. The shares were repurchased pursuant to a 4 million stock repurchase program authorized by the Board of Directors in 1998. The Company has no current plans to purchase additional shares under the remaining repurchase authorization.
The Company'sCompany’s operating cash flow is a major source of liquidity. Also, the Company's unsecured revolving bank credit agreement has traditionally been used as a major sourceAdditional liquidity of liquidity. In July 2000, the Company replaced its revolving bank credit facility under a new agreement that resulted in an increase in borrowing capacity from $250$50 million to $275 million for a five-year term expiring June 30, 2005. The Company also has available $25 million under unsecured uncommitted money market lines of credit with several banks used in conjunction with the revolving credit agreement to facilitate settlement and accommodate short-term borrowing fluctuations. With the higher level of capital expenditureswas provided in the first nine months of 2000, compared2001 through the accounts receivable securitization facility implemented in December 2000. In July 2001, this facility was amended to 1999 and prior levels, andprovide for a maximum of $250 million in proceeds from the decreased operating cash flows, reliance onsale of eligible receivables in addition to extending the bank facilities has increased. Aterm of the liquidity facility for a three-year period as opposed to the 364-day term of the previous agreement. As of the end of September 2001, a total of $210$200 million wasof receivables had been sold under this facility with eligible receivables supporting total advances of $216 million.
The Company also completed a renegotiation of its $275 million revolving credit agreement in June 2001. The renegotiated facility, which expires in June 2004, is collateralized by certain assets, reduces borrowing capacity by the amount of outstanding atletters of credit and established new restrictive covenants. At September 30, 20002001, the Company had pledged collateral to support approximately $141 million of the $275 million commitment and has the ability to pledge additional collateral. As of September 30, 2001, no borrowings were outstanding, letter of credit commitments were $98 million and available capacity was $43 million. The Company was in compliance with restrictive covenants under the revolving bank creditagreement.
In July 2001, the Company arranged a TRAC (Terminal Rental Adjustment Clause) Lease facility for prospective vehicle acquisitions of up to $20 million in 2001. Historically, the Company has purchased its vehicles. With the TRAC Lease, Airborne has the option to purchase the delivery vehicles at the end of the lease term. As of September 30, 2001 the Company had placed $3.4 million of vehicle acquisitions under this arrangement.
In August 2001, the Company completed two sale-leaseback transactions on five Boeing 767-200 aircraft and received proceeds of $102.8 million. The transactions were accounted for as capitalized leases for financial reporting purposes. The Company used these proceeds to increase cash reserves and invested amounts in short-term commercial paper and money market credit lines, compared to $95 million outstanding at December 31, 1999 and $79 million outstanding at September 30, 1999.
11instruments.
The Company'sCompany’s ratio of long-term debt to total capitalization (exclusive of the receivable securitization) was 24.7% at September 30, 2001 compared to 24.6% at December 31, 2000 and 30.1% at September 30, 2000, compared to 24.1% at September 30, 1999 and 24.7% at December 31, 1999.2000.
In management'smanagement’s opinion, theexisting cash reserves, internally generated cashflows from operations coupled with resources available capacity under the bankaccounts receivable securitization facility and the revolving credit agreements coupled with internally generated cash flow from remaining 2000 operationsagreement should provide adequate flexibility to finance anticipated capital expenditures and meet other liquidity requirements for the balance of 2000.2001 and into 2002.
FORWARD-LOOKINGFORWARD LOOKING STATEMENTS:
Certain statementsStatements contained herein and in other parts of this report, which are not historical facts, are considered "forward-looking statements" as theforward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995.1995). Such statements relaterelating to views of future events and operating performance based upon information currently available to management. Forward-looking statements that are not historical facts are generally identified by the use of terminology which includes "believes", "expects", "anticipates", "intends", "plans" or other words with similar intent. Forward-looking statements involve risks and uncertainties, which are inherently difficult to predict.predict, including statements regarding future shipment growth and product acceptance, compensation expected under the Air Transportation Safety and System Stabilization Act, capacity requirements, capital expenditure levels and the adequacy of available financing capacity. Actual results, could materially differ from those expressed in the forward-looking statements.
Many factors could cause actual results to differ materially from the views expressed by the forward-looking statements. Those factors include, but are not limited to the following:
- Economic conditions in the U.S. and international markets in which the Company operates. - Competition from other providershowever, may vary because oftransportation and related services. - The ability to adapt to changingcompetitor pricing initiatives, customer demandpatterns, includingfor time-definite and deferred services,theeffect on demand resulting from technology developments. - Theability of management to successfully implementsalesgrowth and profitability initiatives, economic andother business strategies in a cost-effective manner. - Customer acceptance of new business initiativesregulatory conditions, the ability to secure adequate financing, fuel volatility andpricing programs. - Retention and maintenance of key customer relationships. - Disruption of service due tolabor disputes.- Changes in government regulation, including federal and local regulation governing the operation of the Company's aircraft. - Increase in fuel prices. - The ability to obtain financing on reasonable terms. - Weather related disruptions of service, and customer demand and related impacts.
The Company does not intend to publicly revise or update any of its forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
There have been no material changes in the Company's market risk sensitive instruments and positions since its disclosure in its Annual Report on Form 10-K for the year ended December 31, 1999.
12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits -EXHIBIT NO.
27 Financial Data Schedule 1310 Material Contracts
| 10(a) | Employment Agreement dated April 24, 2001 between the Company and Mr. Robert T. Christensen. Substantially identical agreements exist between the Company and most of its officers. | |
| 10(b) | Employment Agreement dated April 24, 2001 between the Company and Mr. Lanny H. Michael, Senior Vice President, Chief Financial Officer. Substantially identical agreements exist between the Company and eight other of its executive officers. |
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
AIRBORNE FREIGHT CORPORATION
----------------------------
(Registrant)
Date: 11/14/00 /s/Lanny H. Michael
------- -------------------------
Lanny H. Michael
Senior Vice President,
Chief Financial Officer
/s/Robert T. Christensen
-------------------------
Robert T. Christensen
Vice President,
Corporate Controller
14
| AIRBORNE, INC. | ||||
| (Registrant) | ||||
| Date: | 11/14/01 | /s/ Lanny H. Michael | ||
| Lanny H. Michael | ||||
| Senior Vice President & Chief Financial Officer | ||||
| Date: | 11/14/01 | /s/ Robert T. Christensen | ||
| Robert T. Christensen Chief Accounting Officer | ||||