SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1998
Commission file number: 1-8306
AIR EXPRESS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2074327
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
120 Tokeneke Road, Darien, Connecticut 06820
(203) 655-7900
(Address of, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
NONE
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 3 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 registrant's classes of
common stock, as of the latest practicable date (applicable only to corporate
registrants).
The number of shares of common stock outstanding as of August 11, 1998 was
34,623,163 (Net of 350,086 Treasury Shares).
AIR EXPRESS INTERNATIONAL CORPORATION
June 1998 Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as at
June 30, 1998 and December 31, 1997......................... 2
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1998
and 1997..................................................... 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997...................... 4
Notes to Condensed Consolidated Financial
Statements................................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
Part II - Other Information
Item 1. Legal Proceedings............................................. 12
Item 6. Exhibits and Reports on Form 8-K.............................. 12
Page 2
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, 1998 Dec 31, 1997
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ............................ $ 76,881 $ 67,576
Accounts receivable, (less allowance for
doubtful accounts of $4,459 and $4,224) .......... 338,384 366,159
Other current assets .............................. 7,770 8,344
Total current assets ........................ 423,035 442,079
Investment in unconsolidated affiliates .............. 26,975 19,174
Restricted funds ..................................... 9,854 15,957
Property, plant and equipment (less accumulated
depreciation and amortization of $63,068
and $57,235) ........................................ 66,729 60,441
Deposits and other assets ............................ 18,625 17,386
Goodwill (less accumulated amortization
of $13,589 and $12,424) ............................. 95,717 83,104
Total assets ................................ $ 640,935 $ 638,141
Liabilities and stockholders' investment
Current Liabilities:
Current portion of long-term debt ................. $ 2,683 $ 2,654
Bank overdrafts payable ........................... 1,479 315
Transportation payables ........................... 151,540 174,125
Accounts payable .................................. 62,323 58,373
Accrued liabilities ............................... 61,204 61,263
Income taxes payable .............................. 8,598 10,168
Total current liabilities ................... 287,827 306,898
Long-term debt .................................... 36,121 31,008
Other liabilities ................................. 9,710 8,673
Total liabilities ........................... 333,658 346,579
Stockholders' Investment:
Capital stock-
Preferred (authorized 1,000,000 shares,
none outstanding) ................................ -- --
Common, $.01 par value (authorized 100,000,000
shares, issued 34,953,748 and 34,676,626 shares .. 349 347
Additional paid-in capital ........................ 146,529 142,674
Accumulated other comprehensive income ............ (36,456) (28,961)
Retained earnings ................................. 200,453 180,887
310,875 294,947
Less: 140,086 and 132,388 shares of treasury
stock, at cost ................................. (3,598) (3,385)
Total stockholders' investment .................... 307,277 291,562
Total liabilities and stockholders' investment .... $ 640,935 $ 638,141
The accompanying notes are an integral part
of these financial statements.
Page 3
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except
per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues ....................... $378,494 $386,591 $750,870 $737,746
Operating expenses:
Transportation ................ 255,459 264,325 509,982 503,049
Terminal ...................... 66,806 64,387 133,932 128,513
Selling, general and
administrative ............... 36,592 38,468 74,163 74,486
Operating profit ............... 19,637 19,411 32,793 31,698
Other income:
Interest, net ................. 633 270 990 478
Other, net .................... 1,586 1,074 3,641 2,352
2,219 1,344 4,631 2,830
Income before provision
for income taxes .............. 21,856 20,755 37,424 34,528
Provision for income taxes ..... 8,195 7,713 14,033 12,947
Net income ..................... $ 13,661 $ 13,042 $ 23,391 $ 21,581
Income per common share:
Basic ..................... $ .39 $ .38 $ .67 $ .63
Diluted ................... $ .39 $ .37 $ .66 $ .62
Weighted average number
of common shares:
Basic ..................... 34,753 34,283 34,694 34,235
Diluted ................... 35,343 35,058 35,329 34,952
The accompanying notes are an integral part
of these financial statements.
Page 4
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollars in thousands)
1998 1997
Cash flows from operating activities:
Net income ............................................ $ 23,391 $ 21,581
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ...................... 6,945 6,170
Amortization of goodwill ........................... 1,262 1,296
Deferred income taxes .............................. 954 538
Equity in earnings of unconsolidated affiliates .... (1,898) (1,614)
(Gains) losses on sales of assets, net .............. (23) 34
Changes in assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable, net .... 28,859 (2,708)
Decrease (increase) in other current assets ........ 1,277 (978)
(Increase) in other assets .......................... (637) (1,887)
(Decrease) increase in transportation payables ...... (23,537) 3,378
(Decrease) in accounts payable ...................... (1,063) (2,370)
(Decrease) in accrued liabilities ................... (369) (2,894)
(Decrease) in income taxes payable .................. (1,291) (3,319)
Increase (decrease) in other liabilities ........... 192 (18)
Total adjustments .............................. 10,671 (4,372)
Net cash provided by operating activities .......... 34,062 17,209
Cash flows from investing activities:
Acquisitions, net of cash acquired ..................... (9,532) --
Restricted funds ....................................... 6,103 --
Other investing activities ............................. 1,370 387
Proceeds from sales of assets .......................... 674 300
Capital expenditures ................................... (14,494) (6,382)
Investment in unconsolidated affiliates ................ (7,102) (3,596)
Net cash used in investing activities .............. (22,981) (9,291)
Cash flows from financing activities:
Net borrowings (repayments) in bank overdrafts payable 1,132 (425)
Payment of long-term debt ............................. (792) (959)
Issuance of common stock .............................. 2,959 1,978
Payment of cash dividends ............................. (3,464) (2,732)
Purchase of treasury stock ............................ (213) (234)
Net cash used by financing activities .............. (378) (2,372)
Effect of foreign currency exchange rates on cash ......... (1,398) (1,025)
Net increase in cash and cash equivalents ................. 9,305 4,521
Cash and cash equivalents at beginning of period .......... 67,576 46,516
Cash and cash equivalents at end of period ................ $ 76,881 $ 51,037
The accompanying notes are an integral part
of these financial statements.
Page 5
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. The consolidated balance sheet at June 30, 1998, the consolidated
statements of operations for the three-month and six-month periods ended
June 30, 1998 and 1997, and the consolidated statements of cash flows for
the six-month periods ended June 30, 1998 and 1997 were prepared by the
Company without audit. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations,
and cash flows for the interim periods were made. Certain items in the June
30, 1997 financial statements were reclassified to conform to the
classification of June 30, 1998 financial statements.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, were condensed or omitted. Accordingly, these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's annual report to stockholders for the year ended December 31,
1997.
Statements included herein which are not historical facts are
forward-looking statements. These statements are based upon information
available to the Company on the date hereof. Inherent in these statements
are a variety of risks and other factors, both known and unknown, which may
cause the Company's actual results to differ materially from those in
forward-looking statements. Accordingly, the realization of forward-looking
statements is not certain, and all such statements should be evaluated
based upon the applicable risks and uncertainties affecting the Company.
Consequently, the results of operations for the three-month and six-month
periods ended June 30, 1998 are not necessarily indicative of the results
of operations expected for the full year ending December 31, 1998.
B. Interest, net was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Interest expense ....... $(343) $(396) $ (666) $ (779)
Interest income ........ 976 666 1,656 1,257
$ 633 $ 270 $ 990 $ 478
C. Other, net was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Equity in earnings of
unconsolidated affiliates .. $1,196 $ 905 $2,770 $ 1,617
Foreign exchange gains ....... 367 230 840 769
Other ........................ 23 (61) 31 (34)
$1,586 $ 1,074 $3,641 $ 2,352
Page 6
D. Supplemental disclosures of cash flow information:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Interest and income
taxes paid:
Interest ............ $ 295 $ 287 $ 517 $ 551
Income taxes ........ 8,037 9,626 12,502 14,444
$8,332 $ 9,913 $ 13,019 $ 14,995
Non-cash investing and financing activities:
During the second quarter of 1998, as part of an acquisition, the Company
issued a $6.0 million note. See Note F.
E. Comprehensive income:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Net income .................. $13,661 $13,042 $23,391 $21,581
Other comprehensive
income:
Translation of foreign
currency financial
statements ................. (5,496) (2,863) (7,357) (4,887)
Income tax (expense)
benefit .................... (276) -- (138) 681
(5,772) (2,863) (7,495) (4,206)
Comprehensive income ........ $ 7,889 $10,179 $15,896 $17,375
Page 7
F. Acquisitions:
During the second quarter of 1998, the Company made two acquisitions - Aero
Expreso Internacional ("Aero Expreso") and Gulf Coast Drawback Services,
Inc. ("Gulf Coast"). Aero Expreso, based in Buenos Aires, is a long-time
agent of the Company and the largest inbound forwarder and customs broker
in Argentina. Gulf Coast is the largest provider of specialized duty
drawback services in the United States. The total paid for these
acquisitions was approximately $17.8 million, which was comprised of $11.8
million of cash and a $6.0 million note. The acquisitions were accounted
for as purchases. Accordingly, the purchase price was allocated on the
basis of the estimated fair market value of the assets acquired and the
liabilities assumed. The total cost in excess of the net assets acquired
was approximately $15.1 million, which is being amortized over 40 years.
The results of operations for these acquisitions were included in the
Consolidated Statement of Operations from the dates of acquisition and had
no material pro forma impact on the Company's results of operations or
financial position.
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company considers its total business to represent a single segment
comprised of three major services: airfreight forwarding, ocean freight
forwarding, and customs brokerage and other services, all of which are fully
integrated. The following table sets forth the gross revenues and net revenues
(gross revenues minus transportation expenses) for each of these three service
categories, as well as the Company's internal operating expenses (terminal,
selling, general and administrative expenses) and operating profit:
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Gross Revenues:
Airfreight ..................... $ 291.5 $ 296.6 $ 583.0 $ 569.2
Ocean freight .................. 51.7 53.5 94.9 97.8
Customs brokerage and other .... 35.3 36.5 73.0 70.7
Total Gross Revenues ......... $ 378.5 $ 386.6 $ 750.9 $ 737.7
Net Revenues:
Airfreight ..................... $ 78.0 $ 77.0 $ 152.6 $ 146.4
Ocean freight .................. 16.6 15.3 29.1 28.5
Customs brokerage and other .... 28.4 30.0 59.2 59.8
Total Net Revenues ........... 123.0 122.3 240.9 234.7
Internal Operating Expenses:
Terminal ....................... 66.8 64.4 133.9 128.5
Selling, general and
administrative ................ 36.6 38.5 74.2 74.5
Total Internal Operating
Expenses .................... 103.4 102.9 208.1 203.0
Operating Profit ................. $ 19.6 $ 19.4 $ 32.8 $ 31.7
Consolidated gross revenues for the second quarter and first six months of
1998, decreased 2.1% to $378.5 million and increased 1.8% to $750.9 million,
respectively, over the comparable periods in 1997. Additionally, gross revenues
for the quarter and six months were negatively impacted by approximately $26.5
million and $46.9 million, respectively, due to the effect of a stronger U.S.
dollar when converting foreign currency revenues into U.S. dollars for financial
reporting purposes. Consolidated net revenues for the second quarter and first
six months of 1998 increased .6% to $123.0 million and 2.6% to $240.9 million,
respectively, over the comparable 1997 periods.
Gross airfreight revenues for the second quarter and first six months of
1998 decreased 1.7% to $291.5 million and increased 2.4% to $583.0 million,
respectively, over the comparable 1997 periods. The decrease in gross airfreight
revenues for the quarter was mainly attributable to economic difficulties in
Southeast Asian economies and declines in shipping volumes from the Company's
computer-related customers. The increase in gross airfreight revenues for the
Page 9
first six months of 1998 over the first six months of 1997 was attributable to
the increases in shipments and the weight of cargo shipped of 5.3% and 8.6%,
respectively. The gross margin (net revenues as a percentage of gross revenues)
for the second quarter and first six months of 1998 increased .8% to 26.8% and
.5% to 26.2%, respectively, over the comparable 1997 periods. The increases were
mainly due to increased yields associated with improved product mix allowing for
better utilization of airfreight containers.
Ocean freight gross revenues for the second quarter and first six months of
1998 decreased $1.8 million (3.4%) and $2.9 million (3.0%), respectively, over
the comparable 1997 periods. Ocean freight net revenues for the second quarter
and first six months of 1998 increased $1.3 million (8.5%) and $.6 million
(2.1%), respectively, over the comparable 1997 periods. Excluding the effects
from both the sale of the Company's 60.0% - owned foreign subsidiary, which was
sold during the fourth quarter of 1997, and a $.8 million reclassification from
customs brokerage and other gross revenues in the second quarter of 1998, ocean
freight gross revenues for the second quarter and first six months of 1998
increased $2.7 million (5.6%) and $6.7 million (7.6%), respectively, over the
comparable 1997 periods. Additionally, ocean freight net revenues for the same
periods increased $1.5 million (10.5%) and $2.4 million (9.0%). The comparable
increases in both gross and net ocean freight revenues were due to increased
shipping volumes from existing customers and the Company's continuing expansion
into the ocean freight market.
Customs brokerage and other revenues for the second quarter and first six
months of 1998 decreased 3.3% to $35.3 million and increased 3.3% to $73.0
million, respectively, over the comparable 1997 periods. Customs brokerage and
other net revenues for both the second quarter and first six months of 1998
decreased 5.3% to $28.4 million and 1.0% to $59.2 million, respectively, over
the comparable 1997 periods. Excluding the previously noted $.8 million
reclassification, customs brokerage and other gross and net revenues for the
second quarter declined 1.1% and 2.7%, respectively. The slight decline in the
quarter reflects the decrease in foreign brokerage activity. The increase in
customs brokerage and other gross revenues for the first six months of 1998 was
mainly attributable to the increase in brokerage activity in the United States
during the first quarter of 1998.
Internal operating expenses for the second quarter of 1998 increased
marginally over the second quarter of 1997. For the first six months of 1998,
internal operating expenses increased $5.1 million or 2.5% over the comparable
1997 period. These increases were mainly attributable to the additional expenses
incurred in connection with greater shipping volumes.
Operating profit for the second quarter of 1998 increased marginally over
the second quarter of 1997. For the first six months of 1998, operating profit
increased $1.1 million or 3.5% over the comparable 1997 period.
Other, net for the second quarter and first six months of 1998 increased
$.5 million and $1.3 million, respectively, over the comparable 1997 periods.
These increases were mainly attributable to the results from the Company's
equity in the earnings of its unconsolidated affiliates.
Page 10
The effective income tax rate for the second quarter of 1998 was marginally
higher than the second quarter of 1997. For both the first six months of 1998
and 1997, the effective income tax rate was 37.5%.
Liquidity and Capital Resources
At June 30, 1998, cash and cash equivalents increased approximately $9.3
million to $76.9 million from $67.6 million at December 31, 1997. For the first
six months of 1998, the Company's primary sources of cash were $34.1 million
from operating activities and $6.1 million from restricted funds, while its
primary uses were for: capital expenditures of $14.5 million, acquisitions of
$9.5 million, investment in unconsolidated affiliates of $7.1 million and
dividend payments of $3.5 million. Cash flow provided by operating activities
increased approximately $16.9 million when compared with the first six months of
1997. The increase resulted mainly from the decline in the Company's trade
receivables resulting from improved collections. Working capital increased
marginally for the first six months to $135.2 million.
Capital expenditures increased approximately $8.1 million from $6.4 million
for the first six months of 1997 to $14.5 million for the first six months of
1998. Approximately $6.1 million of the capital expenditures relates to the
construction of a freight terminal at New York's John F. Kennedy International
Airport, with the remaining balance primarily for improvement and expansion of
facilities and management information services. Capital expenditures for 1998
are estimated to be approximately $33.0 million.
At June 30, 1998, the Company had available for future borrowings
approximately $71.8 million of its $75.0 million revolving credit facility. The
Company utilized approximately $3.2 million under this facility for letters of
credit issued in connection with its insurance programs. Additionally, various
of the Company's foreign subsidiaries maintained overdraft facilities with
foreign banks, aggregating approximately $23.1 million, of which approximately
$1.5 million was outstanding.
During the second quarter of 1998, the company made two acquisitions for
approximately $17.8 million comprised of $11.8 million of cash and $6.0 million
of debt. See Note F.
In June 1998, the Company's Board of Directors authorized an increase in
the quarterly cash dividend from five cents ($.05) to six cents ($.06) per
share.
Management believes that the Company's available cash and sources of
credit, together with expected future sources of credit and cash generated from
operations, will be sufficient to satisfy its anticipated needs for working
capital, capital expenditures and dividends.
Page 11
Year 2000
In 1997, the Company undertook an assessment to determine the impact of
Year 2000 compliance on its computer systems. This assessment resulted in
preliminary plans to prepare the Company for Year 2000 readiness. These plans
include remediation of certain systems and the upgrading and replacement of
certain other of the Company's systems. In accordance with Issue 96-14 of the
Emerging Issues Task Force of the Financial Accounting Standards Board, which
requires the costs associated with modifying computer software for the Year 2000
to be expensed as incurred, the Company will expense the costs incurred to
remediate the applicable systems. These costs are estimated to be in the range
of $5.0 to $7.0 million. The estimated costs will vary as the remediation and
testing of the Company's systems progresses. The Company believes that the
remediation, upgrade and replacement of its systems will be ready for Year 2000
prior to any impact on its operations. If, however, the remediation, upgrade or
replacement of the Company's systems is not completed timely, and negatively
impacts the Company's Year 2000 readiness, the Company's operations may be
materially affected. Additionally, in connection with this effort, the Company
has initiated a program to communicate with its many customers and suppliers to
determine the level of Year 2000 readiness of these entities and the potential
impact on the Company's operations if these entities' computer systems are not
ready. This program is ongoing and the Company has not determined the potential
impact if these entities' computer systems are not ready.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. The statement
establishes accounting and financial reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company does not anticipate that the
adoption of this statement will have a material impact on either its results of
operations or financial position.
Page 12
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
The Company is involved in various legal proceedings generally incidental to its
business. While the result of any litigation contains an element of uncertainty,
the Company presently believes that the outcome of any known pending or
threatened legal proceeding or claim, or all of them combined, will not have a
material adverse effect on its results of operations or consolidated financial
position.
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 3 - Certificate of Amendment of Certificate of Incorporation.
Exhibit 11 - Computation of Earnings Per Common Share.
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K:
None.
Page 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Air Express International Corporation
(Registrant)
Date: August 13, 1998 /s/ Dennis M. Dolan
Dennis M. Dolan
Vice President and
Chief Financial Officer
(Principal Financial Officer
Date: August 13, 1998 /s/ Martin J. McDonnell
Martin J. McDonnell
Vice President - Controller
(Principal Accounting Officer)