1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998
Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware
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(State of incorporation or organization)
91-0837469
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(IRS Employer Identification No.)
3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662
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(Address of Principal Executive Office)
Registrant's telephone number, including area code: (206) 285-4600
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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 497,078 treasury shares)
as of March 31, 1998 50,184,794 shares
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2
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended
March 31
------------------
1998 1997
---- ----
REVENUES:
Domestic $662,518 $562,111
International 87,675 93,411
-------- --------
750,193 655,522
OPERATING EXPENSES:
Transportation purchased 230,323 208,890
Station and ground operations 222,694 200,250
Flight operations and maintenance 117,403 103,783
General and administrative 59,950 51,829
Sales and marketing 17,399 16,178
Depreciation and amortization 44,888 42,271
-------- --------
692,657 623,201
-------- --------
EARNINGS FROM OPERATIONS 57,536 32,321
INTEREST, NET 3,916 8,447
-------- --------
EARNINGS BEFORE INCOME TAXES 53,620 23,874
INCOME TAXES 21,260 9,500
-------- --------
NET EARNINGS 32,360 14,374
======== ========
NET EARNINGS PER SHARE:
BASIC $ .65 $ .34
======== ========
DILUTED $ .63 $ .31
======== ========
DIVIDENDS PER SHARE $ .038 $ .038
======== ========
See notes to consolidated financial statements.
3
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31 December 31
------------ ------------
1998 1997
---- ----
(Unaudited) (Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 22,166 $ 25,525
Trade accounts receivable,
less allowance of $10,290 and $10,290 320,121 322,549
Spare parts and fuel inventory 39,387 37,966
Deferred income tax assets 15,477 14,530
Prepaid expenses and other 23,676 25,982
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TOTAL CURRENT ASSETS 420,827 426,552
PROPERTY AND EQUIPMENT, NET 922,080 916,331
EQUIPMENT DEPOSITS and OTHER ASSETS 26,546 23,090
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TOTAL ASSETS $1,369,453 $1,365,973
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 136,584 $ 143,966
Salaries, wages and related taxes 60,762 80,154
Accrued expenses 84,137 100,126
Income taxes payable 12,475 5,440
Current portion of debt 386 381
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TOTAL CURRENT LIABILITIES 294,344 330,067
LONG-TERM DEBT 248,993 250,559
DEFERRED INCOME TAX LIABILITIES 72,711 65,322
OTHER LIABILITIES 47,987 49,110
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 50,681,872 and 50,428,548 shares 50,682 50,429
Additional paid-in capital 290,935 287,208
Retained earnings 364,567 334,083
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706,184 671,720
Treasury stock, 497,078 and 522,300 (766) (805)
shares, at cost ---------- ----------
705,418 670,915
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,369,453 $1,365,973
========== ==========
See notes to consolidated financial statements.
4
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31
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1998 1997
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OPERATING ACTIVITIES:
Net Earnings $ 32,360 $ 14,374
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 41,302 39,284
Provision for aircraft engine overhauls 3,586 2,987
Deferred income taxes 6,442 2,578
Other (1,076) (1,252)
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CASH PROVIDED BY OPERATIONS 82,614 57,971
Change in:
Receivables 2,428 (16,014)
Inventories and prepaid expenses 885 (1,623)
Accounts payable (7,382) (5,473)
Accrued expenses, salaries and taxes payable (28,005) 8,201
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,540 43,062
INVESTING ACTIVITIES:
Additions to property and equipment (47,949) (39,668)
Disposition of property and equipment 136 47
Expenditures for engine overhauls (4,238) (2,585)
Proceeds from insurance on aircraft accident -- 18,000
Other (2,088) 260
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (54,139) (23,946)
FINANCING ACTIVITIES:
Payments on bank notes, net (1,500) (43,000)
Principal payments on debt (62) (57)
Proceeds from common stock issuance 3,678 400
Dividends paid (1,876) (1,597)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 240 (44,254)
-------- --------
NET DECREASE IN CASH (3,359) (25,138)
CASH AT JANUARY 1 25,525 35,816
-------- --------
CASH AT MARCH 31 $ 22,166 $ 10,678
======== ========
See notes to consolidated financial statements.
5
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 (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
1998 presentation.
NOTE B--LONG-TERM DEBT:
Long-term debt consists of the following:
March 31 December 31
1998 1997
---- ----
(In thousands)
Senior debt:
Notes payable $ 28,500 $ 30,000
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 7,678 7,740
-------- --------
249,378 250,940
Less current portion 385 381
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$248,993 $250,559
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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.
Diluted earnings per share for the three months ended March 31, 1997,
assumes conversion of the Company's convertible subordinated debentures as
well as the dilutive common equivalent shares applicable to the assumed
exercise of stock options. Net earnings as adjusted for the elimination of
interest expense, net of applicable taxes was $15,438,000.
6
Weighted average shares outstanding used in earnings per share computations
were as follows:
Three Months Ended
------------------
March 31
-------
1998 1997
---- ----
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 50,026,298 42,637,255
Diluted 51,181,203 49,533,160
/TABLE
7
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 1998 resulted
in operating income and net earnings significantly higher than the first
quarter of 1997. Strong growth in domestic shipments, and a growth rate in
domestic revenue that exceeded the growth rate in shipments were positive
factors impacting operating results. The operating margin of 7.7% is the
strongest first quarter performance experienced by the Company.
Net earnings for the first quarter of 1998 were $32.4 million, or $.63 per
share on a diluted basis, compared to net earnings of $14.4 million, or
$.31 per share for the comparable period of 1997.
The following table sets forth selected shipment and revenue data for the
periods indicated:
Three Months Ended March 31
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1998 1997
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Shipments (in thousands):
Domestic
Overnight 45,759 39,639
Next Afternoon Service 14,383 12,164
Second Day Service 18,011 15,809
100 Lbs. and Over 91 74
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Total Domestic 78,244 67,686
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International
Express 1,389 1,181
Freight 110 116
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Total International 1,499 1,297
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Total Shipments 79,743 68,983
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Average Pounds per Shipment:
Domestic 4.36 4.30
International 44.15 49.99
Average Revenue per Pound:
Domestic $ 1.92 $ 1.92
International $ 1.31 $ 1.41
Average Revenue per Shipment:
Domestic $ 8.46 $ 8.29
International $58.49 $72.02
Total shipments increased 15.6% in the first quarter of 1998 compared to
8.4% in the first quarter of 1997. Total revenues increased 14.4% in the
first quarter of 1998 compared to 9.6% in the first quarter of 1997.
Domestic revenue growth for the first quarter of 1998 continued to be
positively impacted by strong growth in higher yielding overnight shipments
and the Company's continuing focus on yield enhancement. Domestic revenues
increased 17.9% in the first quarter of 1998 compared to 11.1% in the first
quarter of 1997. A growth rate in domestic revenue that exceeded the
growth rate in shipments had a significant positive impact on domestic
operating margins in the first quarter of 1998. The average revenue per
domestic shipment increased 2.1% to $8.46 in the first quarter of 1998
compared to the first quarter of 1997.
Domestic revenues in the first quarter of 1997 included $4.9 million of
revenue from a fuel surcharge which was implemented on February 17, 1997
for most domestic business and was repealed effective July 1, 1997. This
8
fuel surcharge revenue accounted for approximately $.05 per share in the
first quarter of 1997.
Overnight shipments accounted for 58.5% of total domestic shipments in the
first quarter of 1998, comparable to the overnight shipment percentage
achieved in the first quarter of 1997. The higher yielding overnight
shipments increased 15.4% in the first quarter of 1998, compared to 11.1%
in the corresponding 1997 period. The Company's deferred service products
also experienced strong growth, increasing 15.8% on a combined basis in the
first quarter of 1998 compared to 4.8% in the corresponding period of 1997.
International revenues decreased 6.1% in the first quarter of 1998,
primarily the result of economic troubles in parts of Asia. This compares
to a 1.8% increase in revenues in the first quarter of 1997. Shipments in
the heavier weight, higher revenue per shipment freight segment decreased
5.2% in the first quarter. Mitigating some of the weakness in freight
volumes, the Company experienced strong growth in its international express
segment. International express shipments increased 17.6% in the first
quarter of 1998 compared to 11.6% in the corresponding period of 1997.
Operating expenses as a percentage of revenues were 92.3% for the first
quarter of 1998 compared to 95.1% in the corresponding period of 1997 and
92.3% for all of 1997. Operating cost per shipment handled decreased 3.9%
to $8.69 for the first quarter of 1998 compared to the first quarter of
1997. The Company experienced a 6.8% improvement in productivity for the
first quarter of 1998, compared to the first quarter of 1997, as measured
by shipments handled per paid employee hour. Continued strong productivity
improvement and continued emphasis on cost control were significant factors
having a positive impact on 1998 operating results. Comparisons of certain
operating expense components are discussed below.
Transportation purchased decreased as a percentage of revenues to 30.7% in
the first quarter of 1998 compared to 31.9% in the comparable period of
1997. This decrease was primarily due to commercial airline costs which,
although higher in total, were lower as a percentage of total revenues in
the first quarter of 1998 due to the lower growth in international freight
shipments discussed above. The suspension of the Federal Aviation Excise
Tax reduced costs in the first quarter of 1997 by $4.3 million. The
Aviation Excise Tax moratorium was effective through March 6, 1997,
subsequent to which the tax became effective once again; therefore, no cost
reduction was realized in 1998.
Station and ground expense as a percentage of revenues decreased to 29.7%
in the first quarter of 1998 compared to 30.5% in the first quarter of
1997. Strong productivity improvement had a positive impact on this
category of expense measured as a percentage of revenues.
Flight operations and maintenance expense as a percentage of revenues
during the first quarter of 1998 was 15.6%, compared to 15.8% in the first
quarter of 1997. The average aviation fuel price for the first quarter of
1998 was $.62 per gallon compared to $.82 per gallon in the first quarter
of 1997. Aviation fuel consumption increased to 44.1 million gallons in
the first quarter of 1998, a 9.3% increase over the first quarter of 1997.
As a result of fuel hedging contracts, the Company incurred $1.0 million of
expense in the first quarter of 1998 compared to a $1.7 million benefit in
the first quarter of 1997. Offsetting the lower fuel costs were higher
costs associated with periodic aircraft maintenance checks.
The increase in depreciation and amortization expense in the first quarter
of 1998 is due in large part to the increased number of aircraft in service
since the first quarter of 1997.
Interest expense in the first quarter of 1998 was significantly lower than
the same period of 1997. This is attributable to the significant reduction
in average outstanding borrowings in the first quarter of 1998, compared to
the corresponding period of 1997.
The Company's effective tax rate was 39.6% in the first quarter of 1998
compared to 39.8% in the first quarter of 1997 and 39.2% for all of 1997.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of change in working capital increased for
the first quarter of 1998 to $51 million, compared to $43 million in the
first quarter of 1997. This increased liquidity is primarily the result of
the significant increase in profitability in 1998.
9
Capital expenditures continue to be a primary factor affecting the
financial condition of the Company. The Company anticipates total capital
expenditures to approximate $274 million in 1998. During the first quarter
of 1998, total capital expenditures net of dispositions were $48 million.
Cash provided by operations was the primary source for funding capital
expenditures.
The Company's strong operating cash flow has become the major source of
liquidity, whereas, the Company's $250 million unsecured revolving bank
credit agreement had traditionally been used as the 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. Reliance on the bank facilities has decreased
commensurately, with a total of $28.5 million outstanding at March 31, 1998
under the revolving bank credit and money market credit lines, compared to
$30.0 million outstanding at December 31, 1997 and $145.5 million
outstanding at March 31, 1997.
In management's opinion, the available capacity under the bank credit
agreements coupled with internally generated cash flow from remaining 1998
operations should provide adequate flexibility to finance anticipated
capital expenditures for the balance of 1998.
10
PART II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of Airborne Freight Corporation was held at Cavanaugh's
on Fifth Avenue, 1415 Fifth Avenue, Seattle, Washington 98101 on April 28,
1998, at which a total of 45,474,266 shares were represented at the meeting
comprising 89.9% of the outstanding shares of the Company entitled to vote
at the meeting on the record date (February 23, 1998).
The following directors were duly elected for terms ending in 2001, in each
case by an affirmative vote in excess of 99.1% of the shares represented at
the meeting:
Number of Shares
Voted For
---------
Andrew Brimmer 45,114,648
Harold M. Messmer, Jr. 45,106,118
Mary Agnes Wilderotter 45,115,890
The following are continuing directors with terms expiring as indicated:
Terms Expiring in 1999 Terms Expiring in 2000
---------------------- ----------------------
Robert G. Brazier Robert S. Cline
James H. Carey Richard M. Rosenberg
Andrew B. Kim William Swindells
The shareholders, by an affirmative vote in excess of 79.9% of the
outstanding shares, approved the amendment of the Restated Certificate of
Incorporation of the Company to increase the number of authorized shares of
Common Stock from 60,000,000 to 120,000,000. 40,078,459 votes were cast
for the proposal, 5,259,962 against, with 135,845 abstentions.
The shareholders, by an affirmative vote in excess of 50.3% of the votes
cast at the meeting, approved the Airborne Freight Corporation 1998 Key
Employee Stock Option Plan. 19,680,692 votes were cast for the proposal,
19,200,755 against, with 179,240 abstentions and 6,413,579 broker nonvotes.
The Airborne Board of Directors on the same date, April 28, 1998, reelected
all existing executive officers, including Robert S. Cline as Chairman and
Chief Executive Officer, and Robert G. Brazier as President and Chief
Operating Officer.
The Board of Directors declared a quarterly cash dividend of $.04 per share
on the Common Stock of the Company payable on May 26, 1998 to shareholders
of record on May 12, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
EXHIBIT NO. 3 The Restated Certificate of Incorporation of the Company,
dated as of April 28, 1998.
EXHIBIT NO. 27 Financial Data Schedule
11
SIGNATURES
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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
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(Registrant)
Date: 5/14/98 /s/Roy C. Liljebeck
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Roy C. Liljebeck
Executive Vice President,
Chief Financial Officer
Date: 5/14/98 /s/Lanny H. Michael
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Lanny H. Michael
Senior Vice President,
Treasurer and Controller
/TABLE