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 March 31, 1996 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 315,150 treasury shares) as of March 31, 1996 21,129,224 shares ----------------- AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS (Dollars in thousands except per share data) (Unaudited) Three Months Ended March 31 ------------------ 1996 1995 ---- ---- REVENUES: Domestic $506,121 $442,177 International 91,788 87,739 -------- -------- 597,909 529,916 OPERATING EXPENSES: Transportation purchased 202,532 188,785 Station and ground operations 192,317 165,114 Flight operations and maintenance 94,769 78,061 General and administrative 43,262 37,494 Sales and marketing 15,448 15,631 Depreciation and amortization 38,861 34,802 -------- -------- 587,189 519,887 -------- -------- EARNINGS FROM OPERATIONS 10,720 10,029 INTEREST, NET 8,341 6,725 -------- -------- EARNINGS BEFORE INCOME TAXES 2,379 3,304 INCOME TAXES 1,065 1,424 -------- -------- NET EARNINGS 1,314 1,880 PREFERRED STOCK DIVIDENDS 68 71 -------- -------- NET EARNINGS AVAILABLE $ 1,246 $ 1,809 TO COMMON SHAREHOLDERS ======== ======== NET EARNINGS PER COMMON SHARE $ .06 $ .09 ======== ======== DIVIDENDS PER COMMON SHARE $ .075 $ .075 ======== ======== See notes to consolidated financial statements. AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31 December 31 ------------ ----------- 1996 1995 ---- ---- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash $ 12,163 $ 17,906 Trade accounts receivable, 260,123 259,408 less allowance of $7,875 and $7,750 Spare parts and fuel inventory 33,039 33,792 Deferred income tax assets 17,075 16,135 Prepaid expenses 23,457 24,887 ---------- ---------- TOTAL CURRENT ASSETS 345,857 352,128 PROPERTY AND EQUIPMENT, NET 836,715 842,703 EQUIPMENT DEPOSITS and OTHER ASSETS 28,789 22,553 ---------- ---------- TOTAL ASSETS $1,211,361 $1,217,384 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 126,938 $ 136,987 Salaries, wages and related taxes 47,727 49,106 Accrued expenses 68,664 66,679 Income taxes payable 2,270 1,967 Current portion of debt 1,711 5,790 ---------- ---------- TOTAL CURRENT LIABILITIES 247,310 260,529 LONG-TERM DEBT 372,736 364,621 SUBORDINATED DEBT 115,000 115,000 DEFERRED INCOME TAX LIABILITIES 38,289 38,242 OTHER LIABILITIES 27,635 28,729 REDEEMABLE PREFERRED STOCK 3,948 3,948 SHAREHOLDERS' EQUITY: Preferred Stock, without par value - Authorized 5,200,000 shares, no shares issued Common stock, par value $1 per share - Authorized 60,000,000 shares Issued 21,444,374 and 21,397,865 shares 21,444 21,398 Additional paid-in capital 186,368 185,947 Retained earnings 199,602 199,941 ---------- ---------- 407,414 407,286 Treasury stock, 315,150 shares, at cost (971) (971) ---------- ---------- 406,443 406,315 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,211,361 $1,217,384 ========== ========== See notes to consolidated financial statements. AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Three Months Ended March 31 ------------------ 1996 1995 ---- ---- OPERATING ACTIVITIES: Net Earnings $ 1,314 $ 1,880 Adjustments to reconcile net earnings to net cash provided by provided by operating activities: Depreciation and amortization 35,867 32,335 Provision for aircraft engine overhauls 2,994 2,467 Deferred income taxes (893) (1,150) Other (1,048) (3,175) -------- -------- CASH PROVIDED BY OPERATIONS 38,234 32,357 Change in: Receivables (715) 4,153 Inventories and prepaid expenses 2,183 (3,113) Accounts payable (10,049) 4,285 Accrued expenses, salaries 909 1,720 and taxes payable -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 30,562 39,402 INVESTING ACTIVITIES: Additions to property and equipment (34,681) (55,588) Dispositions of property and equipment -- 55 Expenditures for engine overhauls (3,861) (2,555) Other (613) (291) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (39,155) (58,379) FINANCING ACTIVITIES: Proceeds on bank notes, net 8,200 33,700 Principal payments on debt (4,164) (12,893) Proceeds from common stock issuance 467 320 Dividends paid (1,653) (1,653) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,850 19,474 -------- -------- NET INCREASE (DECREASE) IN CASH (5,743) 497 CASH AT JANUARY 1 17,906 10,318 -------- -------- CASH AT MARCH 31 $ 12,163 $ 10,815 ======== ======== See notes to consolidated financial statements. AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 (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 1996 presentation. NOTE B--LONG-TERM DEBT: Long-term debt consists of the following: March 31 December 31 1996 1995 ---- ---- (In thousands) Senior debt: Revolving bank credit $135,000 $115,000 Notes payable 16,500 28,300 Senior notes 200,000 200,000 Revenue bonds 13,200 13,200 Other debt 9,747 10,331 -------- -------- 374,447 366,831 Subordinated debt: Senior subordinated notes 115,000 115,000 Convertible subordinated debentures -- 3,580 -------- -------- 115,000 118,580 -------- -------- Total long-term debt 489,447 485,411 Less current portion 1,711 5,790 -------- -------- $487,736 $479,621 ======== ======== NOTE C--EARNINGS PER COMMON SHARE: Net earnings per common share are computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the interim period plus dilutive common equivalent shares applicable to the assumed exercise of employee stock options. Fully diluted earnings per common share are the same as net earnings per common share for the interim periods presented herein. Average common shares outstanding used in earnings per share computations at March 31, 1996 and 1995 were 21,328,000 and 21,184,000, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS: The Company's operating performance in the first quarter of 1996 was negatively impacted by extreme and extended winter weather conditions. These conditions impeded normal operations and resulted in lost business and significantly higher operating costs during the quarter. Net earnings available to common shareholders for the first quarter of 1996 were $1.2 million, or $0.06 per share, compared to $1.8 million, or $0.09 per share for the first quarter of 1995. Management estimates the combination of lost business and incremental operating costs had the effect of reducing earnings from operations by approximately $12 to $13 million. In addition, the Federal Excise Tax on aviation fuel, which was effective October 1, 1995, added $1.7 million to operating expenses in the first quarter of 1996. Offsetting these negative impacts was the reduction in operating costs by $5.5 million as a result of the suspension of the Aviation Excise Tax on January 1, 1996. The following table sets forth selected shipment and revenue data for the periods indicated: Three Months Ended March 31 --------------------------- 1996 1995 ---- ---- Shipments (in thousands): Domestic Overnight Letters 9,527 9,130 0-2 Lbs. 13,830 12,013 3-99 Lbs. 12,317 10,472 ------ ------ 35,674 31,615 Deferred 0-2 Lbs. 17,190 13,903 3-99 Lbs. 9,507 7,676 ------ ------ 26,697 21,579 100 Lbs. and over 73 81 ------ ------ Total Domestic 62,444 53,275 ------ ------ International Express 1,058 936 All Other 146 130 ------ ------ Total International 1,204 1,066 ------ ------ Total Shipments 63,648 54,341 ====== ====== Average Pounds per Shipment: Domestic 4.5 4.5 International 58.4 67.8 Average Revenue per Pound: Domestic $ 1.80 $ 1.82 International $ 1.29 $ 1.22 Average Revenue per Shipment: Domestic $ 8.08 $ 8.29 International $76.24 $82.31 Total shipments increased 17.1% in the first quarter of 1996 compared to 20.1% in the first quarter of 1995. Total revenues increased 12.8% in the first quarter of 1996 compared to 13.6% in the first quarter of 1995. Domestic shipments increased 17.2% in the first quarter of 1996 compared to 20.2% for the same period of 1995. Domestic shipment growth during the first quarter of 1996 was positively impacted by the higher growth rate of overnight shipments which was 12.8% compared to 9.4% in the first quarter of 1995. Growth in the Company's deferred service products which provide next afternoon and second day delivery service also continues to aid domestic growth. For the first quarter of 1996, deferred service accounted for over 42.7% of total domestic shipments, compared to 40.5% for the first quarter of 1995. Domestic revenues increased 14.5% in the first quarter of 1996, compared to 11.4% in the first quarter of 1995. First quarter 1996 domestic revenue growth was positively impacted by a comparatively stronger growth in higher yielding overnight shipments and the Company's continuing focus on yield enhancement initiated during the latter half of 1995. These factors combined to produce a more stable domestic yield environment in the first quarter of 1996 compared to the first quarter of 1995. International shipments increased 12.9% in the first quarter of 1996 compared to 16.4% in the comparable quarter of 1995. International revenues increased 4.6% in the first quarter of 1996 compared to 25.9% in the first quarter of 1995. International revenue per shipment and the average weight per shipment decreased significantly as a result of the lower unit growth in higher yielding freight shipments in the first quarter of 1996 compared to 1995. The weakness in heavier weight freight shipments was primarily for shipments from the Far East to the United States. The Company is encouraged by the positive domestic yield environment as the Company and competitors remain focused on improving operating margins. This environment should have a positive effect through the balance of the year. The Company also expects to continue its focus on improving international margins. Operating expenses as a percentage of revenues were 98.2% for the first quarter of 1996 compared to 98.1% in the first quarter of 1995 and 96.9% for all of 1995. Operating cost per shipment handled decreased 3.6% for the first quarter of 1996 compared to 3.5% decrease in the first quarter of 1995. Operating expenses were negatively impacted by severe winter weather conditions in January and February of 1996. These weather conditions impeded operations throughout much of the northeast and midwest U.S., including the Company's central hub operation in Wilmington, Ohio. This resulted in lost business, diminished productivity improvements, and added significantly to operating costs. The Company experienced a 3.2% improvement in productivity for the first quarter of 1996, as measured by shipments handled per paid employee hour, compared to 9.5% in first quarter of 1995. Comparisons of certain operating expense components are discussed below. Transportation purchased decreased as a percentage of revenues to 33.9% in the first quarter of 1996 compared to 35.6% in 1995. This decrease was primarily due to two factors. Commercial airline costs, although higher in total, were lower as a percentage of total revenues due to the lower growth in international freight shipments discussed above. Also, the suspension of the Federal Aviation Excise Tax on January 1, 1996 reduced costs in the first quarter by $5.5 million, compared to the first quarter of 1995. Station and ground expense as a percentage of revenues was 32.2% in the first quarter of 1996 compared to 31.2% in the first quarter of 1995. This category of expense was negatively impacted by the weather, resulting in lower productivity improvement than in previous periods, and additional costs. Flight operations and maintenance expense as a percentage of revenues during the first quarter of 1996 was 15.9%, compared to 14.7% in the first quarter of 1995. The average aviation fuel price for the first quarter of 1996 was $0.70 per gallon (including the $0.043 per gallon Federal Excise Tax implemented October 1, 1995) compared to $0.59 per gallon in the first quarter of 1995. Aviation fuel consumption increased to 40.2 million gallons in the first quarter of 1996, a 19.5% increase compared to the first quarter of 1995. The increase in fuel consumption is a result of additional Company operated aircraft placed in service since the first quarter of 1995. The increased number of aircraft in service also accounted for a large portion of the increase in depreciation and amortization expense in the first quarter of 1996. General and administrative and sales and marketing expenses on a combined basis decreased as a percentage of revenues in the first quarter of 1996 compared to 1995. This was primarily the result of continuing productivity gains and a strong focus on all discretionary spending. Interest expense in the first quarter of 1996 was higher than the same period of 1995 due to higher average outstanding borrowings in the 1996 period. The Company's effective tax rate was 44.8% in the first quarter of 1996 compared to 43.1% in the first quarter of 1995 and 39.9% for all of 1995. The higher effective tax rate for the first quarter of 1996 was a result of certain taxes that are not directly related to the level of earnings, resulting in a higher rate in periods of lower earnings. LIQUIDITY AND CAPITAL RESOURCES: Capital expenditures and associated financing continue to be the primary factors affecting the financial condition of the Company. The Company anticipates total capital expenditures to approximate $225 million in 1996, of which a significant portion is related to the acquisition and modification of aircraft. During the first quarter of 1996, total capital expenditures net of dispositions were $35 million. The principal sources of liquidity for financing capital expenditures during the first quarter of 1996 were cash provided by operations and financing under the Company's bank lines of credit. The Company's $250 million unsecured revolving bank credit agreement has traditionally been used as a 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. At March 31, 1996, a total of $151.5 million was outstanding under the revolving bank credit and money market credit lines. The Company amended its revolving bank credit agreement effective May 1, 1996, resulting in the agreement being effective for a five-year term through May 31, 2001. In management's opinion, the available capacity under the bank credit agreements coupled with internally generated cash flow from remaining 1996 operations and other sources of borrowing should provide adequate flexibility to finance anticipated capital expenditures for the balance of 1996. PART II. OTHER INFORMATION -------------------------- Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - EXHIBIT NO. 27 Financial Data Schedule (b) Reports on form 8-K - A Form 8-K dated April 23, 1996, has been duly filed. The form included the following information: (1) Election of Directors for terms expiring in 1999. (2) Approval of the selection of Deloitte & Touche LLP as the independent public accountants for the ensuing year. (3) Declared dividends on common and preferred stock. 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: 5/14/96 /s/Roy C. Liljebeck ------- -------------------- Roy C. Liljebeck Executive Vice President, Chief Financial Officer Date: 5/14/96 /s/Lanny H. Michael ------- ------------------- Lanny H. Michael Senior Vice President, Treasurer and Controller