1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended SeptemberJune 30, 19981999
Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
----------------------------------------
(State of incorporation or organization)
91-0837469
---------------------------------
(IRS Employer Identification No.)
3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662
------------------------------
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (206) 285-4600
--------------
Indicate by check mark whether the registrant (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
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: XXX No:
--- ---
Indicate the number of shares outstanding of each of the issuer'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 2,497,078 treasury shares)
as of SeptemberJune 30, 1998 48,286,7911999 48,635,206 shares
-----------------2
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended NineSix Months Ended
------------------ -----------------
September----------------
June 30 SeptemberJune 30
------------ ------------------- -------
1999 1998 19971999 1998 1997
---- ---- ---- ----
REVENUES:
Domestic $678,650 $687,549 $2,013,546 $1,861,659$686,395 $672,378 $1,367,656 $1,334,896
International 90,432 101,049 269,866 295,24592,913 91,759 181,083 179,434
-------- -------- ---------- ----------
769,082 788,598 2,283,412 2,156,904779,308 764,137 1,548,739 1,514,330
OPERATING EXPENSES:
Transportation purchased 237,503 242,521 702,623 680,074238,197 234,797 472,172 465,120
Station and ground operations 228,339 224,945 679,315 636,051238,517 228,282 479,834 450,976
Flight operations and maintenance 121,102 110,949 355,985 315,645123,620 117,480 245,803 234,883
General and administrative 62,811 64,842 184,701 173,94261,172 61,940 120,191 121,890
Sales and marketing 18,288 19,742 53,256 53,82118,603 17,569 36,951 34,968
Depreciation and amortization 45,954 41,688 136,024 126,16950,980 45,182 100,593 90,070
-------- -------- ---------- ----------
713,997 704,687 2,111,904 1,985,702731,089 705,250 1,455,544 1,397,907
-------- -------- ---------- ----------
EARNINGS FROM OPERATIONS 55,085 83,911 171,508 171,20248,219 58,887 93,195 116,423
INTEREST, NET 3,005 7,026 9,881 23,5224,047 2,960 7,679 6,876
-------- -------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 52,080 76,885 161,627 147,68044,172 55,927 85,516 109,547
INCOME TAXES 19,267 30,266 62,627 58,40017,150 22,100 33,250 43,360
-------- -------- ---------- ----------
NET EARNINGS 32,813 46,619 99,000 89,280$ 27,022 $ 33,827 $ 52,266 $ 66,187
======== ======== ========== ==========
NET EARNINGS PER SHARESHARE:
Basic $ .66.56 $ 1.05.67 $ 1.981.08 $ 2.061.32
======== ======== ========== ==========
Diluted $ .65.55 $ .94.66 $ 1.941.06 $ 1.841.29
======== ======== ========== ==========
DIVIDENDS PER SHARE $ .040 $ .038.040 $ .118.080 $ .113.078
======== ======== ========== ==========
See notes to consolidated financial statements.3
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
SeptemberJune 30 December 31
------------------- -----------
ASSETS1999 1998
1997
------ ---- ----
(Unaudited)
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 14,08819,294 $ 25,52518,679
Trade accounts receivable,
less allowance of $9,990$9,840 and $10,290 316,589 322,549$10,140 320,617 323,178
Spare parts and fuel inventory 38,960 37,96643,160 39,726
Deferred income tax assets 16,407 14,53030,773 28,508
Prepaid expenses and other 26,329 25,98227,424 25,697
---------- ----------
TOTAL CURRENT ASSETS 412,373 426,552441,268 435,788
PROPERTY AND EQUIPMENT, NET 976,107 916,3311,075,786 1,021,885
EQUIPMENT DEPOSITS and OTHER ASSETS 36,585 23,09047,445 43,904
---------- ----------
TOTAL ASSETS $1,425,065 $1,365,973$1,564,499 $1,501,577
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 142,366134,997 $ 143,966153,000
Salaries, wages and related taxes 67,099 80,15481,383 77,030
Accrued expenses 90,974 100,12679,834 93,997
Income taxes payable 3,130 5,44012,246 8,820
Current portion of debt 400 381423 410
---------- ----------
TOTAL CURRENT LIABILITIES 303,969 330,067308,883 333,257
LONG-TERM DEBT 250,289 250,559268,969 249,149
DEFERRED INCOME TAX LIABILITIES 81,383 65,32291,873 88,838
OTHER LIABILITIES 57,506 49,11072,278 61,181
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 50,783,86951,132,284 and 50,428,54850,818,493 shares 50,784 50,42951,132 50,819
Additional paid-in capital 293,549 287,208298,464 293,629
Retained earnings 427,186 334,083511,919 463,539
Accumulated other comprehensive income 582 766
---------- ----------
771,519 671,720862,097 808,753
Treasury stock, 2,497,078 and 522,3002,497,078 (39,601) (39,601)
shares, at cost (39,601) (805)
---------- ----------
731,918 670,915822,496 769,152
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,425,065 $1,365,973$1,564,499 $1,501,577
========== ==========
See notes to consolidated financial statements.4
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NineSix Months Ended
-----------------
September----------------
June 30
---------------------------------
1999 1998 1997
---- ----
OPERATING ACTIVITIES:
Net Earnings $ 99,00052,266 $ 89,28066,187
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 124,002 116,30390,632 82,412
Provision for aircraft engine overhauls 12,022 9,8669,961 7,658
Deferred income taxes 14,184 17,903770 10,649
Other 8,535 2,41111,190 14,695
-------- --------
CASH PROVIDED BY OPERATIONS 257,743 235,763164,819 181,601
Change in:
Receivables 5,960 (57,859)2,561 11,851
Inventories and prepaid expenses (1,341) (2,760)(5,161) (3,613)
Accounts payable (1,600) (1,063)(18,003) 512
Accrued expenses, salaries and& taxes payable (24,176) 49,788(6,384) (37,922)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 236,586 223,869137,832 152,429
INVESTING ACTIVITIES:
Additions to property and equipment (193,497) (135,433)
Disposition(147,748) (126,377)
Dispositions of property and equipment 951 4,425390 633
Expenditures for engine overhauls (15,521) (8,821)
Proceeds from insurance on aircraft accident -- 18,000(8,620) (8,471)
Other (1,367) 214
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (209,434) (121,615)
FINANCING ACTIVITIES:
Payments on bank notes, net -- (117,300)
Principal payments on debt (251) (316)
Repurchase of common stock (38,835) --
Proceeds from common stock issuance 6,394 6,596
Dividends paid (5,897) (4,894)(2,334) (1,811)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (158,312) (136,026)
FINANCING ACTIVITIES (38,589) (115,914)ACTIVITIES:
Proceeds (payments) on bank notes, net 20,000 (27,500)
Principal payments on debt (167) (155)
Proceeds from common stock issuance 5,148 6,535
Dividends paid (3,886) (3,886)
-------- --------
NET DECREASECASH PROVIDED (USED) BY FINANCING 21,095 (25,006)
ACTIVITIES
-------- --------
NET INCREASE (DECREASE) IN CASH (11,437) (13,660)615 (8,603)
CASH AT JANUARY 1 18,679 25,525 35,816
-------- --------
CASH AT SEPTEMBERJUNE 30 $ 14,08819,294 $ 22,15616,922
======== ========
See notes to consolidated financial statements.5
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 19981999
(Unaudited)
NOTE A - 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
19981999 presentation.
NOTE B - LONG-TERM DEBT:
Long-term debt consists of the following:
SeptemberJune 30 December 31
------------ ------------------- -----------
1999 1998 1997
---- ----
(In thousands)
Senior debt:
Revolving bank credit $ 40,000 $ -
Notes payable 30,000 30,0009,000 29,000
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 7,489 7,740
--------- ---------
250,689 250,9407,192 7,359
-------- --------
269,392 249,559
Less current portion 400 381
--------- ---------
$ 250,289 $ 250,559
========= =========423 410
-------- --------
$268,969 $249,149
======== ========
NOTE C - SHARE REPURCHASE:
In August 1998, the Company's Board of Directors authorized the repurchase
of up to 2 million shares of its common stock. The repurchase of 2 million
shares was completed by the end of September for a total purchase price of
$38.8 million. The repurchased shares were not retired or canceled but
rather held as treasury stock.
NOTE D - 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.
Diluted earnings per share for the three and nine months ended September
30, 1997 assumes conversion of the Company's convertible subordinated
debentures as of the beginning of the period as well as the dilutive common
equivalent shares applicable to the assumed exercise of stock options. Net
earnings as adjusted for the elimination of interest expense, net of
6
applicable taxes, relative to the assumed conversion was $47,459,000 for
the three month period and $92,249,000 for the nine month period.
Weighted average shares outstanding used in earnings per share computations
were as follows:
Three Months Ended NineSix Months Ended
------------------ -----------------
September----------------
June 30 SeptemberJune 30
------------ ------------------- -------
1999 1998 19971999 1998 1997
---- ---- ---- ----
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 49,921 44,325 50,056 43,24648,616,630 50,220,364 48,547,851 50,123,331
Diluted 50,682 50,631 51,051 50,09949,333,901 51,288,921 49,343,279 51,235,062
NOTE E - NEWD-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 Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
SEGMENT REVENUES:
Domestic $686,395 $672,378 $1,367,656 $1,334,896
International 92,913 91,759 181,083 179,434
---------- ---------- ---------- ----------
$779,308 $764,137 $1,548,739 $1,514,330
========== ========== ========== ==========
SEGMENT EARNINGS
FROM OPERATIONS:
Domestic $46,442 $57,192 $90,788 $115,541
International 1,777 1,695 2,407 882
---------- ---------- ---------- ----------
$48,219 $58,887 $93,195 $116,423
========== ========== ========== ==========
NOTE E-OTHER COMPREHENSIVE INCOME
Other comprehensive income includes the following transactions and tax effects
for the three and six month period ended June 30, 1999 (in thousands):
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
-------------------------------- ------------------------------
Income Tax Income Tax
Before (Expense) Net of Before (Expense) Net of
Tax or Benefit Tax Tax or Benefit Tax
------ ---------- ------ ------ ---------- ------
Unrealized securities gains
(losses) arising during the period $ 212 $(82) $ 130 $(148) $ 57 $ (91)
Less: Reclassification adjustment
for gains realized in net income (77) 30 (47) (142) 55 (87)
------ ------ ------ ------ ------ ------
Net unrealized securities gains
(losses) 135 (52) 83 (290) 112 (178)
Foreign currency translation
adjustments 20 (22) (2) 14 (20) (6)
------ ------ ------ ------ ------ ------
Other comprehensive income $ 155 $(74) $ 81 $(276) $ 92 $(184)
====== ====== ====== ====== ====== ======
NOTE F-NEW ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which. As amended by SFAS No. 137, this
statement will be effective for fiscal year 2000.2001. SFAS No. 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value.
The Company has entered into certain derivative contracts with financial
institutions to limit its exposure to volatility in jet fuel prices. Under
terms of the contracts, the Company either makes or receives payments if
the market price of heating oil, as determined by an index of monthly NYMEX
Heating Oil futures contracts, is lower or exceeds certain prices agreed to
between the Company and the financial institutions. The contracts, which
have no cost basis, are accounted for as hedges since there has
historically existed a high correlation between the changes in the NYMEX
index and the price of jet fuel. Settlements are made in cash and are
recorded in the earnings statement in the period of settlement as either an
increase or decrease to fuel expense.
Under the cash flow hedge provisions of SFAS No. 133, the Company will be
required to record the contracts at fair value, with corresponding changes
in fair value recorded as a component of other comprehensive income. The
Company has not adopted the provisions of SFAS No. 133 as of SeptemberJune 30, 1998.1999.
However, if the provisions of the statement had been adopted, a cumulative
charge of $1,000,000,$136,000, net of tax, would have been recorded to shareholders'
equity and a credit to comprehensive income of approximately $1,300,000$210,000 and
$2,700,000 would have been reported for the three and six month periodperiods
ended SeptemberJune 30, 1998. A charge to comprehensive income of approximately
$400,000, would have been reported for the nine month period ended
September 30, 1998.
7
OTHER PRONOUNCEMENTS:
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for
reporting information about operating segments and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
which revises disclosures requirements for pension and other postretirement
benefit plans. Both of these pronouncements govern only financial
statement disclosures and will be incorporated into the Company's financial
statements for the year ending December 31, 1998. Implementation of the
pronouncements are not expected to have a material impact on the Company's
financial position or results of operations.
81999, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company's operating performance in the second quarter and the first six
months of 1999 resulted in operating income and net earnings below that of
the comparable periods of 1998. The lack of growth in domestic shipments
experienced in the first quarter of 1999 continued through the second
quarter. While the yield on domestic shipments continued to improve, the
average operating cost per shipment increased at a faster rate than the
average revenue per shipment. These factors combined with a decline in
productivity had a negative impact on operating performance in the first
six months of 1999.
Net earnings for the thirdsecond quarter of 19981999 were $32.8$27.0 million, or $.65$.55 per
share on a diluted basis, on revenues of $769 million. Current period
results are not directly comparable with the prior year in certain
respects, as the Company benefited in the third quarter of 1997 from a
strike at United Parcel Service which added $50 - $55$779 million, in
incremental domestic revenues and increased earnings per share results by
$.28compared to
$.30. Total net earnings for the third quarter of 1997 were $46.6$33.8 million, or $.94$.66 per diluted share on revenues of $789 million.
Because of weaker economic conditions, the Company experienced basically
stagnant third quarter 1998 total shipment and revenue growth on a
sequential basis over second quarter. However, the Company is pleased with
the operating performance achieved$764 million, for the third quarter as signified by
the 7.2% operating margin, despite the slower growth. This strong
performance was primarily due to the improvement in the domestic yield, as
measured by revenue per shipment, which was $8.59 in the third quarter
compared to $8.49 in the
second quarter of 1998. Net earnings for the first ninesix months of 1998 increased 10.9% to
$99.01999 were
$52.3 million, or $1.94$1.06 per diluted share on revenues of $1.55 billion, compared to
$89.3$66.2 million, or $1.84$1.29 per share on revenues of $1.51 billion for the
first nine months of 1997. Total revenues for the
first nine months of 1998 were $2.283 billion, a 5.9% increase over the
comparablecorresponding period of 1997. This 1998 year-to-date performance represents
approximately a 25% increase in earnings per share over 1997, on a
comparative basis when the benefit realized from the 1997 UPS strike is
eliminated, a significant improvement considering the prevailing weak
economic conditions.1998.
The following table sets forth selected shipment and revenue data for the
periods indicated:
Three Months Ended NineSix Months Ended
------------------ -----------------
September----------------
June 30 SeptemberJune 30
-------------------- % ------------------ %
1999 1998 1997 Change 1999 1998 1997 Change
---- ---- ------ ---- ---- ------
Shipments (in thousands):
Domestic
Overnight 46,792 45,675 2.4% 139,183 127,601 9.1%46,422 46,632 (0.5%) 92,743 92,391 0.4%
Next Afternoon Service 14,640 14,026 4.4% 43,741 39,907 9.6%14,132 14,718 (4.0%) 28,816 29,101 (1.0%)
Second Day Service 17,497 19,482 -10.2% 53,181 51,948 2.4%17,897 17,673 1.3% 35,711 35,684 0.1%
100 Lbs. &and Over 91 96 -5.2% 269 250 7.6%73 87 (16.1%) 148 178 (16.9%)
------ ------ ------- -------
Total Domestic 79,020 79,279 -0.3% 236,374 219,706 7.6%78,524 79,110 (0.7%) 157,418 157,354 0.0%
------ ------ ------- -------
International
Express 1,522 1,351 12.7% 4,418 3,803 16.2%1,636 1,507 8.6% 3,213 2,896 10.9%
Freight 105 118 -11.0% 328 356 -7.9%101 113 (10.6%) 200 223 (10.3%)
------ ------ ------- -------
Total International 1,627 1,469 10.8% 4,746 4,159 14.1%1,737 1,620 7.2% 3,413 3,119 9.4%
------ ------ ------- -------
Total Shipments 80,647 80,748 -0.1% 241,120 223,865 7.7%80,261 80,730 (0.6%) 160,831 160,473 0.2%
====== ====== ======= =======
Average Pounds per Shipment:
Domestic 4.26 4.71 -9.6% 4.28 4.45 -3.8%4.18 4.22 (0.9%) 4.19 4.29 (2.3%)
International 41.06 50.32 -18.4% 42.23 51.33 -17.7%44.68 41.62 7.4% 43.92 42.85 2.5%
Average Revenue per Pound:
Domestic $2.06 $1.98 $1.82 8.8% $1.96 $1.89 3.7%4.0% $2.04 $1.95 4.6%
International $1.18 $1.34 $1.34 --(11.9%) $1.19 $1.33 $1.36 -2.2%(10.5%)
Average Revenue per Shipment:
Domestic $8.59 $8.67 -0.9% $8.51 $8.46 0.6%$8.74 $8.49 2.9% $8.69 $8.48 2.5%
International $55.58 $68.79 -19.2% $56.86 $70.99 -19.9%$53.49 $56.64 (5.6%) $53.06 $57.53 (7.8%)
9
Domestic shipments decreased .3%Total revenues increased 2.0% and 2.3% in the thirdsecond quarter and first half
of 1998, but
increased 7.6% in the first nine months of 1998,1999, respectively, compared to the same periods in 1997. Domesticof 1998. Total
shipment comparisonsgrowth was flat for 1998the first half of 1999 over 1997 are less
meaningful due to the effect of the UPS strike in the third quarter of 1997
referred to above.
The growth rate in the higher yielding domestic overnight segment increased
2.4% in the third quarterfirst half of
1998, and 9.1%decreased 0.6% in the first nine months of
1998, a higher growth rate than overall domestic shipment growth. This
helped the domestic revenue per shipment improve to $8.59 per shipment for
the thirdsecond quarter of 1998,1999 compared to the
second quarter of 1998,1998.
Domestic revenue growth for the second quarter and the first half of 1999
was impacted by the relatively flat growth in all categories of domestic
shipments. Domestic revenues increased 2.1% and 2.5% in the second quarter
and first half of 1999, respectively, compared to $8.51 per shipment9.9% and 13.7% in the
comparable periods of 1998. Although the growth rate in domestic revenue
was much lower than last year, the fact that it exceeded the growth rate in
shipments for the first nine monthshalf of the year continues a positive trend. The
average revenue per domestic shipment increased 2.9% to $8.74 in the second
quarter of 1999 compared to the second quarter of 1998.
Overnight shipments accounted for approximately 59.2%59.1% of total domestic shipments in the
thirdsecond quarter of 19981999, comparable to the overnight shipment percentage
achieved in the second quarter of 1998. The higher yielding overnight
shipments decreased 0.5% in the second quarter of 1999, compared to 57.6%a 10.3%
increase in the corresponding 1998 period. The Company's Next Afternoon
Service shipments decreased 4.0% and the Second Day Service shipments
increased 1.3% in 1999 compared to growth of 7.3% and 6.1%, respectively,
in the second quarter of 1998.
The Company began a pilot program in mid-July, 1999 to test a new service
for business to residential delivery. This service, referred to as
Airborne@Home, will target shipments from Internet, catalog, and mail order
businesses which are primarily directed to residential delivery. Delivery
of this product will be accomplished through an arrangement with the U.S.
Postal Service. The pilot program for Airborne@Home will be evaluated on
an ongoing basis to determine longer-term application.
International revenues increased 1.3% and .9% in the second quarter and
first six months of 1999, respectively, compared to a decrease of 9.0% and
7.6% in the comparable periodperiods of 1997.
Domestic revenues for 1997 included $15.5 million of fuel surcharge revenue
which was realized in the first two quarters of 1997. This fuel surcharge
revenue added approximately $.15 per share to 1997 operating results.
International revenues decreased 10.5% and 8.6% in the third quarter and
first nine months of 1998, respectively, versus comparable periods in 1997,
primarily the result of slower global economic conditions prevailing,
especially in parts of Asia.1998. Shipments in the heavier weight,
higher revenue per shipment freight segment continued to decline as measured both
year to year and sequentially over prior quarter.decreased 10.6% in the second
quarter of 1999. Mitigating some of the weakness in freight volumes, the
Company experienced strong growth in its international express segment, resulting in gross margins on overall
international business remaining relatively stable.segment.
International express shipments increased 12.7% and 16.2%8.6% in the thirdsecond quarter of
1999. International segment contribution to earnings from operations was
$1.8 million and $2.4 million for the second quarter and first nine
monthshalf of
1998,1999, respectively, compared to $1.7 million and $.9 million in the
correspondingcomparable periods of 1997.1998.
Operating expenses as a percentage of revenues were 92.5%93.8% and 94.0% for the
second quarter and first ninesix months of 1999, respectively, compared to
92.3% in both the second quarter and first six months of 1998, compared to 92.1% in the first nine months of 1997 and 92.3%92.4%
for all of 1997.1998. Operating cost per shipment handled decreased 1.3%increased 3.9% to
$8.76$9.05 for the first ninesix months of 19981999 compared to the first ninesix months of
1997.1998. The operating cost per shipment for the thirdsecond quarter of 19981999
increased 1.4%4.3% to $8.85,$9.11, compared to the thirdsecond quarter of 1997 while
operating expense as1998.
Relatively flat shipment growth had a percentage of revenues was 92.8%. Most of the
decrease in year-to-date operating cost per shipment was attributable to
lower costs related to lower international freight volumes.negative impact on productivity. The
Company experienced a 2.1% decline of 2.7% and 2.8% in productivity for the
thirdsecond quarter and first half of 1998,1999, respectively, compared to the third quartersame
periods of 1997,1998, as measured by shipments handled per paid employee hour.
It was difficultThe decline in year to achievedate productivity improvement given the overall stagnant shipment growth
experienced during the thirdand additional first quarter of 1998, however, the Company achieved
a 1.9% productivity improvement for the first nine months of 1998.
Continued emphasis on cost control and productivity improvement1999
weather related costs were significant factors having a positivenegative impact on
19981999 operating results. Comparisons of certain operating expense
components are discussed below.
Transportation purchased decreased as a percentage of revenues to 30.8%30.5% in
the first ninesix months of 19981999 compared to 31.5%30.7% in the comparable period of
1997.1998. This decrease was primarily due to commercial airline costs which
were lower in total and as a percentage of total revenues in the first ninesix
months of 19981999 due to the lower volumes ofdecline in international freight shipments
discussed above. The suspension of the Federal Aviation Excise Tax reduced
costs in the first quarter of 1997 by $4.3 million. The Aviation Excise
Tax moratorium was effective through March 6, 1997, subsequent to which the
tax became effective once again; therefore, no cost reduction was realized
in 1998.shipments.
Station and ground expense increased as a percentageto 31.0% of revenues to 29.7%
forin the first ninesix
months of 19981999 compared to 29.5%29.8% in the same periodfirst six months of 1997, primarily1998. The
decline in productivity and the resultweather related costs incurred in the first
quarter had a negative impact on this category of lower productivity.
10expense.
Flight operations and maintenance expense as a percentage of revenues
during the first nine monthshalf of 19981999 was 15.6%15.9%, compared to 14.6%15.5% in the first ninesix
months of 1997, and was 15.7%1998. Aviation fuel consumption decreased to 44.4 million
gallons in the thirdsecond quarter of 1998
compared to 14.1% in 1997. During1999, a 2.6% decrease over the second
and third quartersquarter of 1997,
costs associated with periodic aircraft maintenance were lower as a
percentage1998. For the first six months of revenues versus1999, aviation fuel
consumption of 89.1 million gallons decreased .8% from the comparable quartersfirst six months
of 1998, due to fewer
maintenance checks performed.1998. The average aviation fuel price for the thirdsecond quarter and first
ninesix months of 19981999 was $.55 per gallon$.58 and $.58$.54 per gallon, respectively, compared to
$.70$.57 and $.60 per gallon, and $.74 per gallon
forrespectively, in the comparable periods of 1997. Aviation fuel consumption increased to
136.0 million gallons in the first nine months of 1998, a 8.7% increase
over the comparable period of 1997.1998.
As a result of fuel hedging contracts, the Company incurred settlement$2.4 million of
expense equivalent to approximately $.06
per gallon in the third quarter of 1998, and $.04 per gallon in the first ninesix months of 19981999 compared to $.01 per gallon benefit realized$1.0 million in the
first ninesix months of 1997.1998.
General and administrative expense as a percentagewas 7.8% of revenues in the first ninesix
months of 1998 was 8.1% which was1999 compared to 8.0% in the comparable to the same period of 1997.1998. This
category of expensecost decreased as a percentage of revenues as
well as in total cost in the third quarter of 1998 versus the third quarter
of 1997, primarily the result of higher incremental accrued profit sharing
costs in 1997.
Sales and marketing expense decreased both in total cost and as a percentage of revenues
to 2.3% in the first nine months of 1998 compared to
2.5% in the first nine months of 1997. This decline is primarily due to lower salesprofit sharing and management incentive compensation
associated with slower shipment and
revenue growth.costs. These lower costs are a result of reduced levels of operating
earnings in comparison to the first six months of 1998.
The increase in depreciation and amortization expense in the first ninesix
months of 19981999 is due in large part to the increased number of aircraft in
service since the third quarterfirst half of 1997.1998.
Interest expense in the first ninesix months of 1999 was higher than the first
six months of 1998, was significantly lower
thanprimarily as the same periodresult of 1997. This is primarily attributable to the
significant reduction inhigher levels of average
outstanding borrowings duringwhich offset the first
nine monthsbenefit of 1998 compared to the corresponding period of 1997.lower average effective
interest rates realized.
The Company's effective tax rate was 38.7%38.9% in the first ninesix months of 1999
compared to 39.6% in the first six months of 1998 compared to 39.5% in the first nine months of 1997 and 39.2%38.0% for all of
1997.1998. The Company anticipates the effective tax rate for all of 1999 will
be in a range comparable to the 1998 annual
period will approximate 38.5%.first six months of 1999.
YEAR 2000 ISSUE:
The Company has implemented a compliance program to address the challenges
Year 2000 issues may present to its business. This program includes
computer systems and applications operated by the Company, computer systems
of third parties upon whose data or functionality the Company relies, and
certain other fixed assets, including aircraft, which contain date
sensitive technology critical to their operation.
Management anticipates modificationsModifications to itsthe Company's critical operational and financial systems
and conversions to new software and related testing will bewere substantially complete byat the end of
1998. RemediationTesting of these critical systems and software as well as remediation
efforts and related testing on less critical applications are scheduled to be completed by
early 1999.have been
substantially completed.
As part of the compliance program, the Company has also initiated
communications with third parties (primarily- primarily customers, vendors, airport
authorities, and other governmental agencies (domestic and foreign),
including the Federal Aviation Administration)Administration - whose failure to have Year
2000 compliant systems could have an adverse impact on the Company's
operations. The Company is scheduling testing of customer interfaces of
shipment information as this data is critical to providing services and
billing.
11
Although the Company does not believe the Year 2000 issue will have a
material impact on its operations, there can be no guarantee that the
Company's noror any third party's Year 2000 remediation efforts will be fully
compliant. If non-compliancenoncompliance is extensive and, in the worse case, involves
some form of temporary suspension of operations, this could have a material
adverse effect on the Company's business, financial condition and results
of operation.
In an attempt to mitigateoperations. The Company believes however, the most likely worst case
scenario would include pickup or delivery delays in a particular geographic
location or locations.
To assist in mitigating the risk of noncompliance, the Company is in the
process of developinghas and
continues to develop contingency plans regarding critical systems should
they fail to become Year 2000 compliant. These plans are focusing on the
Company's own critical operational and financial systems as well as
customer interfaces of shipment information. ContingencyThe contingency plans
coveringinclude, among other things, the failuredevelopment of material third party systems will alsorollover check
plans and manual procedures to be developed asperformed by field and headquarters
personnel in the status readiness becomes fully known.event of communications systems failures.
Management estimates the total cost of itsthe Year 2000 compliance program to
be approximately $2.5$4.0 million, of which $1$3.3 million has cumulatively been incurred
through SeptemberJune 30, 1998.1999. Total information technology costs are not expected
to differ from the normal recurring costs that are incurred for systems
development, in part due to the reallocation of internal resources and the
deferral of other projects. These costs could
differ materially if eitherFunding of the scope or schedule of its compliance program is significantly altered.from
internal cash flows.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of changeschange in working capital increased for the first
ninesix months of 1998 to $2371999 was $138 million, compared to $224$152 million in the first
ninesix months of 1997. This increased liquidity is primarily the
result of the increase in profitability in 1998.
Capital expenditures continue to be a primary factor affecting the
financial condition of the Company. The Company anticipates total capital
expenditures to approximate $250$350 million in 1998, down from the original
estimate of $274 million.1999. During the first nine monthshalf of
1998,1999, total capital expenditures net of dispositions were $193$147 million.
Cash provided by operations wasand bank borrowings were the primary sourcesources
for funding capital expenditures.
In August 1998,expenditures in the Boardfirst half of Directors authorized a stock repurchase
program for up to 2 million shares of the Company's common stock. The
Company accomplished the repurchase of 2 million shares by the end of
September for approximately $38.8 million. These shares were added to the
Company's treasury stock.
In November 1998, the Board of Directors authorized a second stock
repurchase program for up to 4 million shares of the Company's common
stock. All shares may be acquired, at management's discretion, over time on
the open market. Shares repurchased will not be retired or canceled, but
will be held as treasury stock.1999.
The Company's strong operating cashflow has become thecash flow is a major source of liquidity, whereas,liquidity.
Also, the Company's $250 million unsecured revolving bank credit agreement
has traditionally been used as thea major source of liquidity for periods
between other financing transactions. The Company also has available $65
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.
AWith the higher level of capital expenditures in 1999 compared to 1998,
reliance on the bank facilities has increased, with a total of $30.0$49.0
million was outstanding at SeptemberJune 30, 19981999 under the revolving bank credit and
money market credit lines, compared to $30.0$29.0 million outstanding at
December 31, 1997,1998 and $71.2$2.5 million outstanding at SeptemberJune 30, 1997.1998.
In management's opinion, the available capacity under the bank credit
agreements coupled with internally generated cash flow from remaining 19981999
operations should provide adequate flexibility to finance anticipated
capital expenditures for the balance of 1999.
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, 1998. 12See Note F of the Notes to
Consolidated Financial Statements to this Form 10-Q for further discussion
regarding the Company's fuel hedging activities.
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports onor Form 8-K.
(a) Exhibits -
Exhibit No. 27 - Financial Data Schedule13
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: 11/13/988/12/99 /s/Roy C. Liljebeck
-------- -------------------------- -------------------------
Roy C. Liljebeck
Executive Vice President,
Chief Financial Officer
Date: 11/13/988/12/99 /s/Lanny H. Michael
-------- -------------------------- -------------------------
Lanny H. Michael
Senior Vice President,
Treasurer and Controller