UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 91-2065027 (I.R.S. Employer Identification No.) |
3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662
(Address of principal executive offices)
Registrant's telephone number, including area code:(206) 285-4600
Indicate by check mark whether the Registrant (1) has filed all reports required 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 /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.
Class | Outstanding | |
Common Stock, par value $1 per share | 48,103,545 | |
| | (net of 3,240,526 treasury shares) as of June 30, 2001 |
AIRBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------ ------------ 2001 2000 2001 2000 ---- ---- ---- ---- REVENUES: Domestic $720,235 $716,301 $1,450,334 $1,441,553 International 91,990 94,726 185,412 181,938 -------- --------- ---------- ---------- 812,225 811,027 1,635,746 1,623,491 OPERATING EXPENSES: Transportation purchased 266,085 254,273 533,124 502,627 Station and ground operations 262,450 257,682 540,382 512,619 Flight operations and maintenance 143,686 139,101 295,372 282,064 General and administrative 69,151 63,800 137,660 126,997 Sales and marketing 23,329 20,521 47,331 40,540 Depreciation and amortization 52,684 50,307 105,322 99,876 -------- --------- ---------- ---------- 817,385 785,684 1,659,191 1,564,723 -------- --------- ---------- ---------- EARNINGS(Loss)FROM OPERATIONS (5,160) 25,343 (23,445) 58,768 OTHER INCOME (EXPENSE): Interest, net (4,454) (5,177) (8,951) (10,091) Other 75 2,202 (3,410) 2,705 -------- --------- ---------- ---------- EARNINGS(Loss)BEFORE INCOME TAXES (9,539) 22,368 (35,806) 51,382 INCOME TAX BENEFIT(Expense) 3,178 (8,610) 12,450 (19,725) -------- --------- ---------- ---------- NET EARNINGS(Loss)BEFORE CHANGE IN ACCOUNTING (6,361) 13,758 (23,356) 31,657 -------- --------- ---------- ---------- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF TAX - - - 14,206 -------- --------- ---------- ---------- NET(Loss)EARNINGS ($ 6,361) $ 13,758 ($ 23,356) $ 45,863 ======== ========= ========== ========== NET EARNINGS(Loss)PER SHARE: BASIC Before change in accounting ($ 0.13) $ 0.28 ($ 0.48) $ 0.65 Cumulative effect of change in accounting - - - 0.29 -------- --------- ---------- ---------- Net Earnings(Loss) ($ 0.13) $ 0.28 ($ 0.48) $ 0.94 ======== ========= ========== ========== DILUTED Before change in accounting ($ 0.13) $ 0.28 ($ 0.48) $ 0.64 Cumulative effect of change in accounting - - - 0.29 -------- --------- ---------- ---------- Net Earnings(Loss) ($ 0.13) $ 0.28 ($ 0.48) $ 0.93 ======== ========= ========== ========== DIVIDENDS PER SHARE $ 0.04 $ 0.04 $ 0.08 $ 0.08 ======== ========= ========== ========== See notes to consolidated financial statements. 2
AIRBORNE,INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30 December 31 2001 2000 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 26,514 $ 40,390 Trade accounts receivable, less allowance of $11,295 and $10,290 143,921 218,685 Spare parts and fuel inventory 43,677 43,231 Refundable income taxes 25,264 21,595 Deferred income tax assets 28,967 28,839 Prepaid expenses and other 25,690 20,809 ---------- ---------- TOTAL CURRENT ASSETS 294,033 373,549 PROPERTY AND EQUIPMENT, NET 1,294,508 1,324,345 EQUIPMENT DEPOSITS and OTHER ASSETS 45,693 48,025 ---------- ---------- TOTAL ASSETS $1,634,234 $1,745,919 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 150,460 $ 180,623 Salaries, wages and related taxes 71,455 71,179 Accrued expenses 100,646 83,518 Current portion of debt 495 477 ---------- ---------- TOTAL CURRENT LIABILITIES 323,056 335,797 LONG-TERM DEBT 236,978 322,230 DEFERRED INCOME TAX LIABILITIES 135,195 125,444 POST RETIREMENT LIABILITIES 65,787 62,360 OTHER LIABILITIES 36,915 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 51,344,071 and 51,279,651 shares 51,344 51,280 Additional paid-in capital 304,597 303,885 Retained earnings 540,496 567,700 Accumulated other comprehensive income (266) (136) ---------- ---------- 896,171 922,729 Treasury stock, 3,240,526 and 3,244,526 shares, at cost (59,868) (59,874) ---------- ---------- 836,303 862,855 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,634,234 $1,745,919 ========== ========== See notes to consolidated financial statements. 3
AIRBORNE,INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six Months Ended June 30 ------------ 2001 2000 ---- ---- OPERATING ACTIVITIES: Net Earnings(Loss) ($ 23,356) $ 45,863 Adjustments to reconcile net earnings(Loss) to net cash provided by operating activities: Cumulative effect of change in accounting - (14,206) Depreciation and amortization 105,322 99,876 Deferred income taxes 9,623 9,106 Postretirement obligations 3,427 12,087 Other (228) (2,488) -------- -------- CASH PROVIDED BY OPERATIONS 94,788 150,238 Change in: Proceeds from receivable securitization facility 50,000 - Receivables 24,764 (4,359) Inventories and prepaid expenses (5,327) 4,064 Refundable income taxes (3,669) - Accounts payable (30,163) 8,844 Accrued expenses, salaries & taxes payable 17,405 6,209 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 147,798 164,996 INVESTING ACTIVITIES: Additions to property and equipment (73,848) (222,691) Dispositions of property and equipment 459 1,660 Other 15 (3,069) -------- -------- NET CASH USED BY INVESTING ACTIVITIES (73,374) (224,100) FINANCING ACTIVITIES: Proceeds(repayments)from bank notes, net (85,000) 85,000 Principal payments on debt (234) (217) Repurchase of common stock - (20,662) Proceeds from common stock issuance 782 1,253 Dividends paid (3,848) (3,911) -------- -------- NET CASH(USED)PROVIDED BY FINANCING ACTIVITIES (88,300) 61,463 -------- -------- NET(DECREASE)INCREASE IN CASH (13,876) 2,359 CASH AT JANUARY 1 40,390 28,678 -------- -------- CASH AT JUNE 30 $ 26,514 $ 31,037 ======== ======== See notes to consolidated financial statements. 4
AIRBORNE,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 (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 2001 presentation.
NOTE B-LONG-TERM DEBT:
Long-term debt consists of the following: June 30 December 31 2001 2000 (In thousands) Senior debt: Revolving bank credit $ 18,000 $ 75,000 Notes payable - 28,000 Senior notes 200,000 200,000 Revenue bonds 13,200 13,200 Other debt 6,273 6,507 -------- -------- 237,473 322,707 Less current portion 495 477 -------- -------- $236,978 $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 June 30, 2001 the capacity of the facility was $220 million of which $18 million was outstanding and $98 million was reserved for issued letters of credit. In June 2001, the outstanding senior notes of $200 million were secured in connection with the amended revolving credit agreement.NOTE 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 Six Months Ended June 30 June 30 2001 2000 2001 2000 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 48,103,545 48,728,096 48,091,590 48,756,944 Diluted 48,103,545 49,160,869 48,092,008 49,183,818NOTE 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 Six Months Ended June 30 June 30 2001 2000 2001 2000 SEGMENT REVENUES: Domestic $ 720,235 $ 716,301 $1,450,334 $1,441,553 International 91,990 94,726 185,412 181,938 ---------- ---------- ---------- ---------- $ 812,225 $ 811,027 $1,635,746 $1,623,491 ========== ========== ========== ========== SEGMENT EARNINGS(Loss)FROM OPERATIONS: Domestic ($ 4,622) $ 26,151 ($ 21,150) $ 61,726 International (538) (808) (2,295) (2,958) ---------- ---------- ---------- ---------- ($ 5,160) $ 25,343 ($ 23,445) $ 58,768 ========== ========== ========== ==========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, 2001 (in thousands): Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 Income Income Before Tax Net of Before Tax Net of Tax (Expense) Tax Tax (Expense) Tax or or Benefit Benefit ------ ------- ------ ------ ------- ------ Unrealized securities losses arising during the period $ 312 $ (120) $ 192 $ 168 $ (65) $ 103 Less: Reclassification adjustment for gains realized in net income - - - (32) 12 (20) ------ ------- ------ ------ ------- ------ Net unrealized securities losses 312 (120) 192 136 (53) 83 Foreign currency translation adjustments (109) 30 (79) (310) 97 (213) ------ ------- ------ ------ ------- ------ Other comprehensive income (Loss) $ 203 $ (90) $ 113 $ (174) $ 44 $ 130 ====== ======= ====== ====== ======= ======NOTE F-OTHER INCOME:
Other income includes the following transactions for the three and six month period ended June 30, 2001 (in thousands): Three Months Ended Six Months Ended June 30 June 30 2001 2000 2001 2000 OTHER INCOME(EXPENSE): Discount on sale of receivables, net $ (2,229) $ - $ (5,987) $ - Gain on sales of radio frequencies 2,071 - 2,071 - Gain on sale of securities - 1,913 - 1,913 Other 233 289 (506) 792 -------- -------- ---------- ---------- $ 75 $ 2,202 $ (3,410) $ 2,705 ======== ======== ========== ==========NOTE G-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- 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 quarter ending March 31, 2000. Excluding the cumulative effect, this change increased net earnings for the second quarter and first six months of 2000 by approximately $1.4 million, net of tax or $.03 per share, and $2.8 million, net of tax or $.06 per share, respectively.NOTE H-NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Conbinations" and SFAS No. 142, "Goodwill and Other Intangible 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 charged to expense by testing and measuring these items for impairment as compared to periodic amortization over the estimated useful life of the assets. SFAS No. 141 and No. 142 are not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company reported a net loss for the second quarter of 2001 of $6.4 million, or $.13 per diluted share. This compares to net earnings of $13.8 million or $.28 per share for the second quarter of 2000 and a net loss of $17.0 million or $.35 per share reported in the first quarter of 2001. For the first six months of 2001, the net loss was $23.4 million or $.48 per share compared to net earnings before a change in accounting of $31.7 million or $.64 per share for the same period in 2000. Net earnings reported for the first half of 2000, including a $.29 per share credit for a change in accounting, were $45.9 million or $.93 per share. The second quarter of 2001 included a severance and restructuring charge of $1.9 million after tax or $.04 per share. Additionally, the Company realized a gain from a sale of radio frequencies of $1.4 million after tax or $.03 per share. One time after tax gains from the sale of certain securities in the second quarter of 2000 totaled $.02 per share. Operating results continue to be negatively affected by the lack of adequate revenue growth due to the slow economy and the resulting lack of shipment growth in the Company's higher yielding domestic products. Additionally, a shift in volume mix towards lighter weight and lower yielding deferred products also has hampered revenue growth. Despite the slow revenue growth, the net loss for the second quarter was reduced $10.6 million compared to the first quarter of 2001. This improvement was due primarily to cost reduction actions the Company has implemented. The Company has reduced labor hours, reduced and combined flight segments and cut discretionary expenses. The combined effect of management's efforts are targeted to save $60-$70 million in annual operating expenses. The following table sets forth selected shipment and revenue data for the periods indicated: Three Months Ended Six Months Ended June 30 June 30 2001 2000 Change 2001 2000 Change Shipments (in thousands): Domestic Overnight 44,141 46,175 (4.4%) 89,759 94,154 (4.7%) Next Afternoon Service 13,208 13,680 (3.5%) 26,636 27,614 (3.5%) Second Day Service 24,326 19,161 27.0% 48,541 38,932 24.7% Ground Delivery Service 331 - N/A 331 - N/A 100 Lbs. And Over 67 75 (10.7%) 127 142 10.6% ------ ------ ----- ------- ------- ----- Total Domestic 82,073 79,091 3.8% 165,394 160,842 2.8% International Express 1,549 1,549 -% 3,149 3,078 2.3% Freight 102 101 (1.0%) 204 195 4.6% ------ ------ ----- ------- ------- ----- Total International 1,651 1,650 (1.0%) 3,353 3,273 2.4% ------ ------ ----- ------- ------- ----- Total Shipments 83,724 80,741 3.7% 168,747 164,115 2.8% ====== ====== ===== ======= ======= ===== Average Pounds per Shipment: Domestic 4.14 4.32 (4.2%) 4.14 4.27 (3.0%) International 53.32 49.52 7.7% 52.61 48.70 (8.0%) Average Revenue per Pound: Domestic $ 2.07 $ 2.07 -% $ 2.07 $ 2.07 -% International $ 1.03 $ 1.13 (8.8%) $ 1.04 $ 1.12 (7.1%) Average Revenue per Shipment: Domestic $ 8.69 $ 9.02 (3.7%) $ 8.71 $ 8.94 (2.5%) International $55.72 $57.41 (2.9%) $55.30 $55.59 0.5% Total revenues were relatively flat in the second quarter and first half of 2001 in comparison to the same periods in 2000. Average revenue per shipment declined 3.7% to $8.69 in the second quarter and 2.5% to $8.71 for the first six months of 2001. The yield decreases were due to declines in higher yielding overnight express shipments coupled with lower average weights per shipment in all shipment 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 second quarter and for the first six months of 2001 fuel surcharge revenues were $23.8 million and $48.4 million, respectively. This compares to fuel surcharge revenues of $19.9 million and $32.5 million recognized in the second quarter and first six months of 2000, respectively. 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; however, the lack of shipment growth and the shift by customers to lower yielding deferred services has diluted the impact. Domestic shipments increased 3.8% in the second quarter and 2.8% in the first half of 2001 compared to the same periods of 2000. The first half of 2001 had one less operating day than 2000. Higher yielding overnight shipments accounted for 53.8% of total domestic shipments in the second quarter compared to 58.4% in the second quarter of 2000. Overnight shipments declined 4.4% in the second quarter and 4.7% for the first six months of 2001. The growth in shipments for the quarter and year to date periods was due primarily to the volume increase in the Company's airborne@home product which was introduced in late 1999 to service the e- commerce and business to residential consumer markets. These shipments, included in the Second Day Service category for reporting purposes, totaled 5.6 million in the second quarter and 10.8 million in the first half of 2001 compared to shipments of 1.2 million and 1.7 million 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 Company intends to leverage the marketing of GDS to customers who also have air express shipments. The new product leverages the Company's sort and linehaul infrastructure and is being marketed initially to a target customer base. The Company believes the introduction of GDS is an important initiative that is targeted to establish growth not only from the deferred ground segment where it has not previously participated, but from the ability to leverage that with the cross marketing of higher yielding air express shipments. Ground shipments totaled 331,000 shipments in the second quarter and achieved the Company's target of 15,000 average shipments per day shortly after the end of the second quarter. The Company has targeted GDS shipments to average 25,000 to 35,000 shipments per day by the end of the third quarter of 2001. The Company also began offering, in April 2001, a new 10:30am delivery option to selected zip codes. This option allows customers to choose an earlier 10:30am delivery for a surcharge fee of up to $5.00. Shippers indicate their choice of a 10:30am delivery or the next morning by noon delivery by using a specially bar-coded label. This service option does not require the Company to incur significant cost increases since it will leverage the existing delivery infrastructure. International revenues decreased 2.9% in the second quarter and increased 1.9% for the first half of 2001 compared to a year ago. Total international shipments were almost the same in the second quarter of 2001 compared to 2000 and 2.4% higher in the first six months of 2001 compared to 2000. The international segment contribution to earnings for the second quarter was a loss of $145,000 before a severance and restructuring charge of $393,000 compared to a loss of $808,000 in 2000. The segment loss was $2.3 million in the first half of 2001 compared to $3.0 million in the comparable period of 2000. Operating expenses were 100.6% and 101.4% of revenues in the second quarter and first six months of 2001, respectively, compared to 96.9% and 96.4% for the corresponding periods in 2000. Operating cost per shipment increased .3% to $9.76 in the second quarter compared to $9.73 in the second quarter of 2000. The operating cost per shipment in the second quarter of $9.76 was significantly lower than the $9.90 per shipment cost incurred in the first quarter of 2001. Operating cost per shipment for the first six months of 2001 increased 3.1% to $9.83 compared to the same period in 2000. The Company has been aggressively managing costs through a number of cost cutting measures to assist in improving operating results. Specifically, labor hours have been reduced which resulted in a 5.5% improvement in productivity during the second quarter, as measured by shipments handled per paid employee hour, over levels incurred during the same period of 2000. This has been achieved through diligent control of labor scheduling throughout the period, and through the reduction in force implemented June 1, 2001. Productivity for the first six months of 2001 showed an improvement of 2.7% compared to the first half of 2000. The Company continues to manage productivity at levels sufficient to maintain a high level of overall customer service. Transportation purchased increased as a percentage of revenues to 32.8% in the second quarter of 2001 compared to 31.4% a year ago. This category comprised 32.6% of costs for the first six months of 2001 compared to 31.0% in 2000. The increases were primarily due to increases in farmed out pickup and delivery, surface linehaul costs and delivery costs paid to the U.S. Postal Service for delivery of airborne@home shipments. Station and ground expense increased to 32.3% as a percentage of revenues in the second quarter compared to 31.8% a year ago and 33.7% in the first quarter of 2001. Station and ground expense was 33.0% of revenues in the first half of 2001 versus 31.6%. Total costs in this category decreased $15.5 million from those incurred in the first quarter of 2001. Productivity achieved for pickup and delivery, sort and other field operations improved performance in this expense category in comparison to the first quarter of 2001. Flight operations and maintenance expense as a percentage of revenues during the second quarter of 2001 were 17.7% as compared to 17.2% in the same period of 2000 and 18.4% in the first quarter of 2001. Year to date 2001 flight operations costs were 18.1% compared to 17.4% in the comparable period of 2000. The average aviation fuel price for the second quarter and first half of 2001 was $.95 and $.98 per gallon, respectively, compared to $.91 and $.93 per gallon, respectively in the comparable periods in 2000. Aviation fuel consumption in the second quarter decreased 10.7% to 40.6 million gallons compared to 45.5 million gallons in the second quarter of 2000. Consumption in the first quarter of 2001 was 43.9 million gallons. For the first six months of 2001, aviation fuel consumption of 84.5 million gallons was 7.4% less than consumption for the comparable period in 2000. The decrease in consumption was due, in part, to management efforts to reduce and combine certain flight segments to control costs beginning in the second quarter of 2001. Additionally, the Company has placed an additional seven 767 aircraft in service since the second quarter of 2000 thereby allowing less fuel-efficient DC-8 aircraft to be moved to shorter lane segments, backup status or charter operations or removed from service. Maintenance costs increased during the second quarter and the first half of 2001 due to the additional 767 aircraft being placed in service as compared to the same periods of last year. The Company had 120 aircraft in service (17 Boeing 767s, 29 DC-8s and 74 DC-9s) at the end of the second quarter 2001 compared to 114 aircraft at the end of the second quarter of 2000. General and administrative expense was 8.5% and 8.4% of revenues for the second quarter and first half of 2001, respectively. This compares to 7.9% and 7.8% of revenues for the second quarter and first half of 2000 respectively. Included in this expense category was a one-time charge of $2.9 million for severance and restructuring costs recorded in the second quarter of 2001. The increase in costs in 2001, exclusive of the one-time charge, was due to wage and compensation cost pressures. Sales and marketing costs were 2.9% of revenues in the second quarter and first half of 2001 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 levels of expenditures in this category. Depreciation and amortization expense constituted 6.5% of revenues in the second quarter and 6.4% in the first six months of 2001. This compares to 6.2% of revenues for the second quarter and first half of 2000. The increase was due to the additional 767 aircraft placed in service since the second quarter of last year. Interest expense in the first half of 2001 was lower than in 2000 due, in part, to lower average borrowings outstanding offset slightly by higher effective interest rates. Additionally, interest capitalized was $1.6 million compared to $3.4 million in the first half of 2001 versus 2000, respectively. 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 December 2000. Included in other expense are discounts associated with the sales of receivables under the accounts receivable securitization facility. Discounts related to recording the obligation to fund the purchaser's costs were $2.2 million in the second quarter of 2001 and $6.0 for the first half of 2001. The Company considers this expense to be an interest type of financing cost. Because this type of financing required the accounting recognition as a sale of asset, the cost is recorded separatly from interest expense. Also included in this category and realized in the second quarter of 2001 were $2.1 million in gains from the sales of radio frequencies. In the second quarter of 2000, a $1.9 million gain was recorded on the sale of securities the Company received as a policyholder in connection with the demutualization of Metropolitan Life. The Company's effective tax benefit rate was 34.8% for the first six months of 2001 compared to an effective tax expense rate of 38.4% recorded in the first half of 2000. The lower tax benefit rate recorded in the first quarter of 2001 as compared to the tax expense rate incurred in 2000 is a function of the provision impact of non-deductible expenses and state taxes. The effective tax rate for the balance of 2001 is difficult to determine due to the provision impact and levels of nondeductible expenses and state taxes in relation to low levels of 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 beyond. The Company previously was optimistic there would be an improvement in the U.S. economic environment during the second half of 2001. However, the current near-term lack of visibility regarding economic growth has caused the Company to expect slow shipment and revenue growth through the remainder of the year and into 2002. While the Company is continuing to aggressively pursue cost reductions, it expects it will be difficult to return to positive net earnings during the remaining quarters of 2001.LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of the change in working capital for the first six months of 2001 was $97.8 million (exclusive of $50 million in proceeds from the receivable securitization facility). This compares to $165.0 million recorded in the first half of 2000. Capital expenditures continue to be a primary factor affecting the financial condition of the Company. During the first half of 2001, total capital expenditures net of dispositions were $73.4 million compared to $221.0 million during the corresponding period of 2000. Due to the low level of operating performance and shipment volume growth, capital-spending plans had been reduced earlier in the year to $200 million. The Company has made further adjustments to reduce its planned capital expenditures for 2001 to approximately $170 million primarily by deferring the acquisition of one 767 aircraft into a future period. The Company's operating cash flow is a major source of liquidity. Additional liquidity of $150 million was provided in December 2000 and an additional $50 million in the first half of 2001 from a $200 million receivable securitization facility implemented in December 2000. In July 2001, this facility was expanded from $200 million to provide for a maximum of $250 million of proceeds from the sale of eligible receivables as well as extending the term of the liquidity facility for a three-year period expiring June 2004 as compared to the 364-day term of the previous agreement. 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 letters of credit and established revised covenants. The Company currently has pledged collateral to support approximately $220 million of the $275 million commitment and is considering pledging additional collateral later in the current fiscal year. As of June 30, 2001, $18 million was outstanding under the agreement, letter of credit commitments were $98 million and available capacity was $104 million. 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, the Company has the option to purchase the delivery vehicles at the end of the lease term. In August 2001, the Company completed sale/leaseback transactions on two Boeing 767-200 aircraft and received proceeds of $40.8 million. The Company is continuing to pursue sale/leaseback transactions and anticipates completing transactions covering five additional 767 aircraft by the end of the third quarter. The Company's ratio of long-term debt to total capitalization (exclusive of the receivable securitization) was 19.6% at June 30, 2001 compared to 24.6% at December 31, 2000 and 28.6% at June 30, 2000. In management's opinion, internally generated cash flows from operations coupled with resources provided under the accounts receivable securitization facility and revolving credit agreement and cash anticipated from leasing transactions should provide adequate flexibility to finance capital expenditures and meet other liquidity requirements for the balance of 2001.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 the Annual Report on Form 10-K for the year ended December 31, 2000.FORWARD LOOKING STATEMENTS:
Statements contained herein and in other parts of this report, which are not historical facts, are considered forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Such statements relating to future events involve risks and uncertainties, which are inherently difficult to predict, including statements regarding future shipment growth and product acceptance, capacity requirements, capital expenditure levels and the adequacy of available financing capacity. Actual results, however, may vary because of competitor pricing initiatives, customer demand for time-definite and deferred services, the ability of management to successfully implement growth and profitability initiatives, economic and regulatory conditions, secure financing, fuel price volatility and labor disputes. PART II. OTHER INFORMATION Item 5. The Company has amended its By-Laws to change the date for the annual meeting of shareholders to the fifth Tuesday in April or, in the absence of such date, the first Tuesday in May, among other things. The date of the Company's 2002 annual meeting of shareholders has changed from April 23, 2002, as stated in the Company's 2001 proxy statement, to April 30, 2002. The amended By-Laws also change the date for a shareholder to give notice of a proposal to be brought before, or a nomination for director at, an annual meeting to 45 days prior to the anniversary of the date the Company mailed its proxy materials for the prior year's annual meeting. The notice date for such proposals and nominations for the 2002 annual meeting will be January 25, 2002. Item 6. Exhibits and Reports or Form 8-K. (a) Exhibits - EXHIBIT NO. 3 Articles of Incorporation and By-Laws 3(a) Amended and Restated By-Laws of Airborne, Inc. EXHIBIT NO. 4 Instruments Defining the Rights of Security Holders Including Indentures 4(a) First Supplemental Indenture dated as of September 15, 1995 between Airborne Express, Inc., ABX Air, Inc., Airborne Forwarding Corporation, Wilmington Air Park, Inc., and Airborne FTZ, Inc., and the Bank of New York, as trustee, relating to the Company's 7.35% notes due 2005. 4(b) Third Supplemental Indenture dated June 29, 2001 between Airborne Express, Inc., ABX Air, Inc., SKY Courier, Inc., Wilmington Air Park, Inc., Airborne FTZ, Inc., and the Bank of New York, as trustee, relating to the Company's 7.35% notes due 2005 (see Exhibits 10(b) through 10(g) for the collateral documents executed in connection with the Third Supplental Indenture). EXHIBIT NO. 10 Material Contracts 10(a) $275,000,000 Amended and Restated Credit Agreement dated as of June 29, 2001 among Airborne, Inc. as parent, Airborne Express, Inc. and ABX Air, Inc., as borrower, and Wachovia Bank, N.A., as administrative and collateral agent, with U.S. Bank, as documentation agent, Bank of America, N.A., as syndication agent, and Wachovia Securities, Inc., as lead arranger, and lenders party thereto (see Exhibits 10(b) through 10(g) for the collateral documents executed in connection with the Amended and Restated Credit Agreement). 10(b) Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents dated June 29, 2001 by ABX Air, Inc. and Wachovia Bank, N.A. 10(c) Stock Pledge Agreement dated June 29, 2001 between Airborne, Inc. and Wachovia Bank, N.A. 10(d) Open-End Mortgage, Assignment of Leases and Rents and Fixture Filing dated June 29, 2001 by ABX Air, Inc., Wilmington Air Park, Inc., Aviation Fuel, Inc., and Wachovia Bank, N.A. 10(e) Security Agreement dated June 29, 2001 between Airborne Express, Inc., ABX Air, Inc., Airborne, Inc., Wilmington Air Park, Inc., Sky Courier, Inc., Aviation Fuel, Inc., Sound Suppression, Inc., Airborne FTZ, Inc., and Wachovia Bank, N.A. 10(f) Trademark Security Agreement dated June 29, 2001 between Airborne Express, Inc. and Wachovia Bank, N.A. 10(g) Assignments of Leases and Rents dated June 29, 2001 between ABX Air, Inc., Wilmington Air Park, Inc., Aviation Fuel, Inc. and Wachovia Bank, N.A. 10(h) Amended and Restated Receivables Purchase Agreement dated August 8, 2001 between Airborne Credit, Inc. as seller; Airborne Express, Inc. as servicer; Blue Ridge Asset Funding Corporation and certain committed investors as named therein; as purchaser, and Wachovia Bank, N.A. as administrative agent. 10(i) Employment Agreement dated April 24, 2001 between the Company and Mr. Robert T. Christensen. A substantial identical agreement exists between the Company and most of its officers. 10(j) Employment Agreement dated April 24, 2001 between the Company and Mr. Lanny H. Michael, Senior Vice President, Chief Financial Officer. A substantial identical agreement exists between the Company and eight 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,INC. ---------------------------- (Registrant) Date: 8/14/01 /s/Lanny H. Michael ------- ------------------------- Lanny H. Michael Senior Vice President & Chief Financial Officer Date: 8/14/01 /s/Robert T. Christensen ------- ------------------------- Chief Accounting Officer