1<ins> ABF 10Q </ins> UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
UNDERPURSUANT TO SECTION 13 OR15 (d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For
Quarter Endedthe quarterly period ended September 30,19981999Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
------------------------------------------------------ (Exact
(Exact name of registrant as specified in its charter)Delaware ---------------------------------------- (State of incorporation or organization) 91-0837469 --------------------------------- (IRS Employer Identification No.)
Delaware
(State or other jurisdiction
of incorporation or organization)91-0837469
(I.R.S. Employer
Identification No.)3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662------------------------------
(Address ofPrincipal Executive Office)principal executive offices)Registrant's telephone number, including area code: (206) 285-4600
--------------Indicate by check mark whether the
registrantRegistrant (1) has filed all reports requiredto be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that theregistrantRegistrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days. Yes: XXX No: --- ---days: Yes /x/ 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 September 30, 1998 48,286,791 shares -----------------2
Class Outstanding Common Stock, $1.00 par value 48,641,606
(net of 2,491,078 treasury shares)
as of September 30, 1999
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF NET EARNINGS
Consolidated Statements of Net Earnings
(Dollars in thousands except per sharedata)amounts)
(Unaudited)
Three Months Ended
September 30Nine Months Ended ------------------ -----------------
September 30September 30 ------------ ------------
1999
19981997
1999
19981997 ---- ---- ---- ----
REVENUES: Domestic $678,650 $687,549 $2,013,546 $1,861,659$ 696,116 $ 678,650 $ 2,063,772 $ 2,013,546 International 89,482 90,432 101,049270,565 269,866 295,245 -------- -------- ---------- ----------785,598 769,082 788,5982,334,337 2,283,412 2,156,904OPERATING EXPENSES: Transportation purchased 240,738 237,503 242,521712,910 702,623 680,074Station and ground operations 242,083 228,339 224,945721,917 679,315 636,051Flight operations and maintenance 129,565 121,102 110,949375,368 355,985 315,645General and administrative 59,673 62,811 64,842179,864 184,701 173,942Sales and marketing 20,504 18,288 19,74257,455 53,256 53,821Depreciation and amortization 53,852 45,954 41,688154,445 136,024 126,169 -------- -------- ---------- ----------746,415 713,997 704,6872,201,959 2,111,904 1,985,702 -------- -------- ---------- ----------EARNINGS FROM OPERATIONS 39,183 55,085 83,911132,378 171,508 171,202INTEREST, NET 4,709 3,005 7,02612,388 9,881 23,522 -------- -------- ---------- ----------EARNINGS BEFORE INCOME TAXES 34,474 52,080 76,885119,990 161,627 147,680INCOME TAXES 12,870 19,267 30,26646,120 62,627 58,400 -------- -------- ---------- ----------NET EARNINGS $ 21,604 $ 32,813 46,619$ 73,870 $ 99,000 89,280 ======== ======== ========== ==========NET EARNINGS PER SHARESHARE:
Basic$ .44 $ .66 $ 1.051.52 $ 1.98 Diluted $ 2.06 ======== ======== ========== ========== Diluted.44 $ .65 $ .941.50 $ 1.94 $ 1.84 ======== ======== ========== ==========DIVIDENDS PER SHARE $ .040 $ .038.040 $ .120 $ .118 $ .113 ======== ======== ========== ========== See notes to consolidated financial statements.3See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
Consolidated Balance Sheets
(Dollars in thousands)September 30,
1999December 31, ------------ -----------
1998
(unaudited) ASSETS 1998 1997 ------ ---- ---- (Unaudited) (Unaudited)CURRENT ASSETS: Cash $ 14,08820,650 $ 25,52518,679 Trade accounts receivable,
less allowance of$9,990$9,840 and$10,290 316,589 322,549$10,140325,302 323,178 Spare parts and fuel inventory 38,960 37,96646,089 39,726 Deferred income tax assets 16,407 14,53031,715 28,508 Prepaid expenses and other 26,329 25,982 ---------- ----------27,743 25,697 TOTAL CURRENT ASSETS 412,373 426,552451,499 435,788
PROPERTY AND EQUIPMENT, NET976,107 916,331
1,106,106
1,021,885
EQUIPMENT DEPOSITS and OTHER ASSETS 36,585 23,090 ---------- ----------45,741 43,904 TOTAL ASSETS $1,425,065 $1,365,973 ========== ==========$ 1,603,346 $ 1,501,577
LIABILITIES AND SHAREHOLDERS' EQUITY------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 142,366134,088 $ 143,966153,000 Salaries, wages and related taxes 67,099 80,15469,119 77,030 Accrued expenses 90,974 100,12688,860 93,997 Income taxes payable 3,130 5,4402,287 8,820 Current portion of debt 400 381 ---------- ----------431 410 TOTAL CURRENT LIABILITIES 303,969 330,067294,785 333,257 LONG-TERM DEBT 250,289 250,559298,858 249,149 DEFERRED INCOME TAX LIABILITIES 81,383 65,32297,997 88,838 OTHER LIABILITIES 57,506 49,11069,568 61,181
SHAREHOLDERS' EQUITY:Preferred Stock, without par value -
Authorized 5,200,000 shares, no shares issuedCommon stock,Stock, par value $1 per share -
Authorized120,000,000shares 120,000,000
Issued50,783,86951,132,684 and50,428,54850,818,493 shares50,784 50,42951,133 50,819 Additional paid-in capital 293,549 287,208298,535 293,629 Retained earnings 427,186 334,083 ---------- ---------- 771,519 671,720531,577 463,539 Accumulated other comprehensive income 484 766 881,729 808,753 Treasury stock, 2,497,0782,491,078 and522,3002,497,078 shares, at cost(39,601) (805) ---------- ---------- 731,918 670,915 ---------- ----------(39,591 ) (39,601 ) 842,138 769,152 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,425,065 $1,365,973 ========== ========== See notes to consolidated financial statements.$ 1,603,346 $ 1,501,577 4See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars
Consolidated Statements of Cash Flows
(unaudited, in thousands)(Unaudited)Nine Months Ended -----------------
September 30-----------------
1999
1998 1997 ---- ----
OPERATING ACTIVITIES: Net Earnings $ 73,870 $ 99,000 $ 89,280Adjustments to reconcile net earnings to
net cash provided by operating activities:Depreciation and amortization 139,300 124,002 116,303Provision for aircraft engine overhauls 15,145 12,022 9,866Deferred income taxes 5,952 14,184 17,903Other 8,526 8,535 2,411 -------- --------CASH PROVIDED BY OPERATIONS 242,793 257,743 235,763Change in: Receivables (2,124 ) 5,960 (57,859)Inventories and prepaid expenses (1,341) (2,760)(8,409 ) (1,341 ) Accounts payable (1,600) (1,063)(18,912 ) (1,600 ) Accrued expenses salaries and taxes payable (24,176) 49,788 -------- --------(19,581 ) (24,176 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 193,767 236,586 223,869
INVESTING ACTIVITIES:
Additions to property and equipment (193,497) (135,433) Disposition(226,429 ) (193,497 ) Dispositions of property and equipment 1,855 951 4,425Expenditures for engine overhauls (15,521) (8,821) Proceeds from insurance on aircraft accident -- 18,000(13,054 ) (15,521 ) 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) -------- --------(3,296 ) (1,367 ) NET CASH USED BY INVESTING ACTIVITIES (240,924 ) (209,434 )
FINANCING ACTIVITIES:
Proceeds (payments) on bank notes, net 50,000 — Principal payments on debt (270 ) (251 ) Proceeds from Common Stock issuance 5,230 6,394 Dividends paid (5,832 ) (5,897 ) Repurchase of common stock — (38,835 ) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (38,589) (115,914) -------- --------49,128 (38,589 ) NET DECREASEINCREASE (DECREASE) IN CASH(11,437) (13,660)1,971 (11,437 ) CASH AT JANUARY 1 18,679 25,525 35,816 -------- --------CASH AT SEPTEMBER 30 $ 20,650 $ 14,088 $ 22,156 ======== ======== See notes to consolidated financial statements.5See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTE A - SUMMARY OF FINANCIAL STATEMENT PREPARATION:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements
September 30,1998 (Unaudited)1999
(unaudited)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:September 30 December 31 ------------ ------------ 1998 1997 ---- ---- (In thousands)Senior debt: Notes payable 30,000 30,000 Senior notes 200,000 200,000 Revenue bonds 13,200 13,200 Other debt 7,489 7,740 --------- --------- 250,689 250,940 Less current portion 400 381 --------- --------- $ 250,289 $ 250,559 ========= =========Long-term debt consists of the following: September 30 December 31 ------------ ----------- 1999 1998 ---- ---- (In thousands) Senior debt: Revolving bank credit $65,000 $ - Notes payable 14,000 29,000 Senior notes 200,000 200,000 Revenue bonds 13,200 13,200 Other debt 7,089 7,359 -------- -------- 299,289 249,559 Less current portion 431 410 -------- -------- $298,858 $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.
DilutedWeighted average shares outstanding used in earnings per share computations were as follows: Three Months Ended Nine Months Ended ------------------ ---------------- September 30 September 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 48,642 49,921 48,579 50,056 Diluted 49,222 50,682 49,303 51,051NOTE 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 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- SEGMENT REVENUES: Domestic $696,116 $678,650 $2,063,772 $2,013,546 International 89,482 90,432 270,565 269,866 --------- --------- ---------- ---------- $785,598 $769,082 $2,334,337 $2,283,412 ========= ========= ========== ========== SEGMENT EARNINGS FROM OPERATIONS: Domestic $39,850 $54,481 $134,097 $172,992 International (667) 604 (1,719) (1,484) --------- --------- --------- --------- $39,183 $55,085 $132,378 $171,508 ========= ========= ========== ==========NOTE E-OTHER COMPREHENSIVE INCOME:Other comprehensive income includes the following transactions and tax effects for the three and nineNOTEmonthsmonth period ended September 30,1997 assumes conversion1999 (in thousands): Three Months Ended Nine Months Ended September 30, 1999 September 30, 1999 ------------------------------- ------------------------------ Income Income Tax Tax (Expense) (Expense) Before or Net ofthe Company's convertible subordinated debentures asBefore or Net ofthe beginning ofTax Benefit Tax Tax Benefit Tax ------ --------- ------ ------ --------- ------ Unrealized securities gains (losses) arising during the periodas well as the dilutive common equivalent shares applicable to the assumed exercise of stock options.$(303) $117 $(186) $(452) $174 $(278) Less: Reclassification adjustment for gains realized in net income (81) 31 (50) (223) 86 (137) ---- ---- ---- ---- ---- ---- Netearnings as adjusted for the elimination of interest expense, net of6 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.unrealized securities gains (losses) (384) 148 (236) (675) 260 (415) Foreign currency translation adjustments 202 (64) 138 216 (83) 133 ----- ----- ----- ----- ----- ----- Other comprehensive income $(182) $ 84 $ (98) $(459) $177 $(282) ===== ===== ===== ===== ===== =====
Weighted average shares outstanding used in earnings per share computations were as follows:Three Months Ended Nine Months Ended ------------------ ----------------- September 30 September 30 ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ----WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 49,921 44,325 50,056 43,246 Diluted 50,682 50,631 51,051 50,099E - NEWF-NEW ACCOUNTING PRONOUNCEMENTS:ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In
June1998, 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 year2000.2001. 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 September 30,
1998.1999. However, if the provisions of the statement had been adopted, a cumulative charge of$1,000,000,$405,000, net of tax, would have been recorded to shareholders' equity and a credit to comprehensive income of approximately$1,300,000$269,000 and $2,969,000 would have been reported for the three and nine monthperiodperiods ended September 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 CONDITIONRESULTS OF OPERATIONS:
The Company's operating performance in the third quarter and the first nine 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 half of 1999 continued through the third quarter. Without domestic shipment growth the Company did not experience any productivity gains to offset cost increases. 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, in part because the cost of jet fuel has increased significantly compared to both the second quarter of 1999 and the third quarter of 1998. These combined factors had a negative impact on operating performance in the third quarter and in the first nine months of 1999.
Net earnings for the third quarter of
19981999 were$32.8$21.6 million, or$.65$.44 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$786 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$32.8 million, or$.94$.65 perdilutedshare 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$769 million, for the thirdquarter 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 secondquarter of 1998. Net earnings for the first nine months of1998 increased 10.9%1999 were $73.9 million, or $1.50 per share on revenues of $2.33 billion, compared to $99.0 million, or $1.94 perdilutedsharecompared to $89.3 million, or $1.84 per shareon revenues of $2.28 billion for the corresponding period in 1998.The following table sets forth selected shipment and revenue data for the periods indicated: Three Months Ended Nine Months Ended ------------------ ---------------- September 30 September 30 ------------ % ------------ % 1999 1998 Change 1999 1998 Change ---- ---- ------ ---- ---- ------ Shipments (in thousands): Domestic Overnight 46,496 46,792 (0.6%) 139,239 139,183 0.0% Next Afternoon Service 13,722 14,640 (6.3%) 42,538 43,741 (2.8%) Second Day Service 18,733 17,497 7.1% 54,444 53,181 2.4% 100 Lbs. and Over 69 91 (24.2%) 217 269 (19.3%) ------- ------- ----- ------- ------- ----- Total Domestic 79,020 79,020 0.0% 236,438 236,374 0.0% International Express 1,699 1,522 11.6% 4,912 4,418 11.2% Freight 96 105 (8.6%) 296 328 (9.8%) ------- ------- ----- ------- ------- ----- Total International 1,795 1,627 10.3% 5,208 4,746 9.7% ------- ------- ----- ------- ------- ----- Total Shipments 80,815 80,647 0.2% 241,646 241,120 0.2% ====== ====== ======= ======= Average Pounds per Shipment: Domestic 4.24 4.26 (0.5%) 4.21 4.28 (1.6%) International 43.44 41.06 5.8% 43.75 42.23 3.6% Average Revenue per Pound: Domestic $2.04 $1.98 3.0% $2.04 $1.96 4.1% International $1.14 $1.34 (14.9%) $1.17 $1.33 (12.0%) Average Revenue per Shipment: Domestic $8.81 $8.59 2.6% $8.73 $8.51 2.6% International $49.85 $55.58 (10.3%) $51.95 $56.86 (8.6%)Total revenues increased 2.1% and 2.2% in the third quarter and first nine months of1997. Total revenues for the first nine months1999, respectively. This compares to a decrease of1998 were $2.283 billion, a 5.9% increase over the comparable 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.
The following table sets forth selected shipment and revenue data for the periods indicated:Three Months Ended Nine Months Ended ------------------ ----------------- September 30 September 30 ------------ % ----------- % 1998 1997 Change 1998 1997 Change ---- ---- ------ ---- ---- ------Shipments (in thousands): Domestic Overnight 46,792 45,675 2.4% 139,183 127,601 9.1% Next Afternoon Service 14,640 14,026 4.4% 43,741 39,907 9.6% Second Day Service 17,497 19,482 -10.2% 53,181 51,948 2.4% 100 Lbs. & Over 91 96 -5.2% 269 250 7.6% ------ ------ ------- ------- Total Domestic 79,020 79,279 -0.3% 236,374 219,706 7.6% ------ ------ ------- ------- International Express 1,522 1,351 12.7% 4,418 3,803 16.2% Freight 105 118 -11.0% 328 356 -7.9% ------ ------ ------- ------- Total International 1,627 1,469 10.8% 4,746 4,159 14.1% ------ ------ ------- ------- Total Shipments 80,647 80,748 -0.1% 241,120 223,865 7.7% ====== ====== ======= ======= Average Pounds per Shipment: Domestic 4.26 4.71 -9.6% 4.28 4.45 -3.8% International 41.06 50.32 -18.4% 42.23 51.33 -17.7% Average Revenue per Pound: Domestic $1.98 $1.82 8.8% $1.96 $1.89 3.7% International $1.34 $1.34 -- $1.33 $1.36 -2.2% Average Revenue per Shipment: Domestic $8.59 $8.67 -0.9% $8.51 $8.46 0.6% International $55.58 $68.79 -19.2% $56.86 $70.99 -19.9%9 Domestic shipments decreased .3%2.5% in the third quarter of 1998but increased 7.6% inand an increase of 5.9% for the first nine months of 1998 compared to the same periodsinof 1997.DomesticTotal shipmentcomparisonsgrowth was .2% for1998 over 1997 are less meaningful due to the effect of the UPS strike inthe third quarter of1997 referred1999 compared toabove. The growth rate in the higher yielding domestic overnight segment increased 2.4% inthe third quarter of 1998 and9.1% 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 third quarter of 1998, compared to the second quarter of 1998, and to $8.51 per shipmentalso for the first nine months of1998. Overnight shipments accounted for approximately 59.2% of total domestic shipments in1999 over thethird quarter of 1998 compared to 57.6% in the comparable period 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 andfirst nine months of1998, respectively, versus comparable periods in 1997, primarily the result1998. This compares to total shipment growth ofslower global economic conditions prevailing, especially in parts of Asia. 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. 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. International express shipments increased 12.7% and 16.2% in the third quarter and first nine months of 1998, respectively, compared to the corresponding periods of 1997. Operating expenses as a percentage of revenues were 92.5%7.7% for the first nine months of 1998compared to 92.1% in the first nine months ofover 1997, and92.3% for alla decrease of1997. Operating cost per shipment handled decreased 1.3% to $8.76 for the first nine months of 1998 compared to the first nine months of 1997. The operating cost per shipment for the third quarter of 1998 increased 1.4% to $8.85, compared to the third quarter of 1997 while operating expense as 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. The Company experienced a 2.1% decline in productivity.1% for the third quarter of 1998 compared to the third quarter of 1997. Domestic shipment and revenue comparisons for 1998 over 1997 are less meaningful due to a UPS strike in the third quarter of 1997 which increased the Company's business during that period.Domestic revenue growth for the third quarter and the first nine months of 1999 was impacted by the flat growth in total domestic shipments. Domestic revenues increased 2.6% and 2.5% in the third quarter and first nine months of 1999, respectively, compared to a decrease of 1.3% in the third quarter of 1998 and to an increase of 8.2% for the first nine months of 1998. The fact that the growth rate in domestic revenue exceeded the growth rate in shipments for the first nine months of 1999the year continues to be a positive trend. The average revenue per domestic shipment increased 2.6% to $8.81 in the third quarter of 1999 compared to the third quarter of 1998.
Overnight shipments accounted for 58.8% of total domestic shipments in the third quarter of 1999, compared to 59.2% in the third quarter of 1998. The higher yielding overnight shipments decreased 0.6% in the third quarter of 1999, compared to a 2.4% increase in the corresponding 1998 period. The Company's Next Afternoon Service shipments decreased 6.3% and the Second Day Service shipments increased 7.1% in the third quarter of 1999 compared to an increase of 4.3% and a decrease of 10.2%, respectively, in the third 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 destined for residential addresses. Delivery of this product will be accomplished through an arrangement with the U.S. Postal Service. The pilot program for Airborne@Home will continue to be evaluated on an ongoing basis to determine longer-term application.
International revenues decreased 1.1% in the third quarter, and increased .3% in the first nine months of 1999, respectively, compared to a decrease of 10.5% and 8.6% in the comparable periods of 1998. The Company experienced strong growth in its international express segment, with shipments increasing 11.6% in the third quarter and 11.2% for the first nine months of 1999. The Company continued to experience a decline in shipments in the heavier weight, higher revenue per shipment freight segment, which decreased 8.6% in the third quarter and 9.8% in the first nine months of 1999.
Operating expenses as a percentage of revenues were 95.0% and 94.3% for the third quarter and first nine months of 1999, respectively, compared to 92.8% in the third quarter and 92.5% in the first nine months of 1998, and 92.5% for all of 1998. Operating cost per shipment handled increased 4.0% to $9.11 for the first nine months of 1999 compared to the first nine months of 1998. The operating cost per shipment for the third quarter of 1999 increased 4.3% to $9.24, compared to the third quarter of 1998. Flat shipment growth had a negative impact on productivity. The Company experienced a decline of 2.2% and 2.6% in productivity for the third quarter and first nine months of 1999, respectively, compared to the same periods of 1998, as measured by shipments handled per paid employee hour.
It was difficultThe decline in year toachievedate productivity,improvement given the overall stagnant shipment growth experienced duringadditional first quarter 1999 weather related costs, and higher jet fuel costs, particularly in the third 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 improvementwere significant factors having apositivenegative impact on1998year to date 1999 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 nine months of19981999 compared to31.5%30.8% in the comparable period of1997.1998. This decrease was primarily due to commercial airline costs which were lower in total and as a percentage of total revenues in the first nine months of19981999 due to thelower volumes ofdecline in international freightshipments 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 30.9% of revenuesto 29.7% forin the first nine months of19981999 compared to29.5%29.8% in thesame periodfirst nine months of1997, primarily1998. The decline in productivity and theresultweather related costs incurred in the first quarter had a negative impact on this category oflower productivity.10expense.Flight operations and maintenance expense as a percentage of revenues during the first nine months of
19981999 was15.6%16.1%, compared to14.6%15.6% in the first nine months of1997, and was 15.7%1998. Aviation fuel consumption decreased to 45.2 million gallons in the third quarter of1998 compared to 14.1% in 1997. During1999, a 2.3% decrease over thesecond andthirdquartersquarter of1997, costs associated with periodic aircraft maintenance were lower as a percentage1998. For the first nine months ofrevenues versus1999, aviation fuel consumption of 134.2 million gallons decreased 1.3% from thecomparable quartersfirst nine months of1998, due to fewer maintenance checks performed.1998. The average aviation fuel price for the third quarterand first nine monthsof19981999 was $.68 per gallon compared to $.58 per gallon in the second quarter of 1999 and $.55 per gallonand $.58 per gallon, respectively, compared to $.70 per gallon and $.74 per gallon for the comparable periods of 1997. Aviation fuel consumption increased to 136.0 million gallonsin thefirst nine monthsthird quarter of1998, a 8.7% increase over the comparable period of 1997.1998. As a result of fuel hedging contracts, the Company incurredsettlement$2.4 million of expenseequivalent to approximately $.06 per gallon in the third quarter of 1998, and $.04 per gallonin the first nine months of19981999 compared to$.01 per gallon benefit realized$5.9 million in the first nine months of1997.1998.General and administrative expense
as a percentagewas 7.7% of revenues in the first nine months of1998 was1999 compared to 8.1%which wasin the comparableto the sameperiod of1997.1998. This category ofexpensecost decreasedas a percentage of revenues as well asin totalcost 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 costand as a percentage of revenues primarily due to2.3%lower profit sharing and management incentive compensation costs. These lower costs are a result of reduced levels of operating earnings in comparison to the first nine months of 1998.Sales and Marketing expense was 2.5% of revenues in the first nine months of
19981999 compared to2.5% in2.3% for the first nine months of1997.1998. Thisdeclineincrease isprimarilydue in part tolowerhigher sales incentivecompensation associated with slower shipment and revenue growth.compensation.The increase in depreciation and amortization expense in the first nine months of
19981999 is due in large part to the increased number of Boeing 767 aircraft in servicesinceduring thethird quarterfirst nine months of1997.1999 versus the comparable period of 1998.Interest expense in the first nine months of
19981999 wassignificantly lowerhigher thanthe same period of 1997. This is primarily attributable to the significant reduction in average outstanding borrowings duringthe first nine months of 1998,compared toprimarily as thecorresponding periodresult of1997.higher levels of average outstanding borrowings which offset the benefit of lower average effective interest rates realized.The Company's effective tax rate was 38.4% in the first nine months of 1999 compared to 38.7% in the first nine months of 1998
compared to 39.5% in the first nine months of 1997and39.2%38.0% for all of1997.1998. The effective tax rate for the third quarter of 1999 was 37.3%, which was impacted by lower state tax accruals than in the previous year. The Company anticipates the effective tax rate for all of 1999 will be in a range comparable to the1998 annual period will approximate 38.5%.first nine 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 softwareand related testing will bewere substantially completebyat the end of 1998.RemediationTesting of these critical systems and software as well as remediation efforts and related testing on less critical applicationsare scheduled to be completed by early 1999.has also been substantially completed.As part of the compliance program, the Company has also
initiatedhad communications with third parties(primarily- primarily customers, vendors, airport authorities, and other governmental agencies (domestic and foreign), including the Federal AviationAdministration)Administration - whose failure to have Year 2000 compliant systems could have an adverse impact on the Company's operations. The Companyis scheduling testing of customerhas tested interfaces of shipment information with curtain customers as this data is critical to providing timely services and billing.11Although 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. Ifnon-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 ofoperation. 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 developed contingency plans, and continues to refine these plans, regarding critical systems should they fail to become Year 2000 compliant. These plansare focusingfocus on the Company's own critical operational and financial systems as well as customer interfaces of shipment information.ContingencyThe contingency planscoveringinclude, among other things, thefailuredevelopment ofmaterial third partysystemswill alsorollover check plans and manual procedures to bedeveloped asperformed by field and headquarters personnel in thestatus 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$3.8 million, of which$1$3.6 million hascumulativelybeen incurred through September 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 thescope or schedule of itscompliance program issignificantly altered.from internal cash flows.LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of
changeschange in working capitalincreasedfor the first nine months of1998 to $2371999 was $194 million, compared to$224$237 million in the first nine months of1997. This increased liquidity is primarily the result of the increase in profitability in1998.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 in1998, down from the original estimate of $274 million.1999. During the first nine months of1998,1999, total capital expenditures net of dispositions were$193$225 million. Cash provided by operationswasand bank borrowings were the primarysourcesources for funding capitalexpenditures. In August 1998,expenditures in theBoardfirst three quarters ofDirectors 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 ofliquidity, whereas,liquidity. Also, the Company's $250 million unsecured revolving bank credit agreement has traditionally been used asthea 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$79.0 millionwasoutstanding at September 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$30.0 million outstanding at September 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 Reportsonor Form 8-K. (a) Exhibits - Exhibit No. 27 - Financial Data Schedule13SIGNATURES
----------Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized: AIRBORNE FREIGHT CORPORATION ---------------------------- (Registrant)authorized.
Date: 11/13/98 /s/AIRBORNE FREIGHT CORPORATION
(Registrant)
Dated: November 12, 1999 By: /s/ Roy C. Liljebeck -------- -------------------
Roy C. Liljebeck
Executive Vice President,Chief
(Chief FinancialOfficer Date: 11/13/98 /s/Officer)
Dated: November 12, 1999 /s/ Lanny H. Michael -------- -------------------
Lanny H. Michael
Senior Vice President,Treasurer
(Treasurer andControllerController)