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 September 30, 1999
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 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 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 November 8, 1999
was 33,597,834 (Net of 1,797,660 Treasury Shares).
AIR EXPRESS INTERNATIONAL CORPORATION
September 1999 Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as at
September 30, 1999 and December 31, 1998......................2
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1999
and 1998......................................................3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998.................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...............................................14
Item 6. Exhibits and Reports on Form 8-K................................14
Page 2
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Sept 30,1999 Dec 31,1998
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents .................... $ 46,806 $ 60,246
Accounts receivable (less allowance for
doubtful accounts of $5,683 and $5,112) ..... 404,827 366,417
Marketable securities ........................ -- 7,188
Other current assets ......................... 6,241 7,096
Total current assets ................... 457,874 440,947
Investment in unconsolidated affiliates ......... 30,392 29,507
Restricted funds ................................ 994 2,126
Property, plant and equipment (less accumulated
depreciation of $79,190 and $70,515) ........... 91,963 81,178
Deposits and other assets ....................... 18,774 13,937
Goodwill (less accumulated amortization of
$17,306 and $15,331) ........................... 111,021 107,783
Total assets ........................... $ 711,018 $ 675,478
Liabilities and stockholders' investment
Current Liabilities:
Current portion of long-term debt ............ $ 4,108 $ 4,337
Bank overdrafts payable ...................... 7,893 4,432
Transportation payables ...................... 182,585 157,763
Accounts payable ............................. 57,361 66,023
Accrued liabilities .......................... 65,543 72,780
Income taxes payable ......................... 6,495 6,644
Total current liabilities .............. 323,985 311,979
Long-term debt ............................... 51,250 42,578
Other liabilities ............................ 8,746 10,050
Total liabilities ...................... 383,981 364,607
Stockholders' Investment:
Capital stock-
Preferred (authorized 1,000,000 shares,
none outstanding) ........................... -- --
Common, $.01 par value (authorized
100,000,000 shares, issued 35,370,690
and 35,028,154 shares) ...................... 354 350
Additional paid-in capital ................... 152,612 147,544
Accumulative other comprehensive income ...... (39,336) (28,192)
Retained earnings ............................ 249,187 216,763
362,817 336,465
Less: 1,797,660 and 1,217,586 shares of
treasury stock, at cost.................... (35,780) (25,594)
Total stockholders' investment ............... 327,037 310,871
Total liabilities and stockholders'
investment .................................. $ 711,018 $ 675,478
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues ................. $ 407,538 $ 372,961 $1,135,485 $1,123,831
Operating expenses:
Transportation ......... 274,566 249,068 755,490 759,050
Terminal ............... 73,672 67,027 213,488 200,959
Selling, general and
administrative ........ 40,208 38,236 116,766 112,399
Operating profit ......... 19,092 18,630 49,741 51,423
Other (expense) income:
Interest, net .......... (150) 566 (37) 1,556
Other, net ............. 1,356 1,208 12,392 4,849
1,206 1,774 12,355 6,405
Income before provision
for income taxes ...... 20,298 20,404 62,096 57,828
Provision for income taxes 7,511 7,394 22,976 21,427
Net income ............... $ 12,787 $ 13,010 $ 39,120 $ 36,401
Income per common share:
Basic .............. $ .38 $ .38 $ 1.17 $ 1.05
Diluted ............ $ .38 $ .38 $ 1.15 $ 1.04
Weighted average number
of common shares:
Basic .............. 33,531 34,314 33,573 34,530
Diluted ............ 34,082 34,633 33,971 35,006
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands)
1999 1998
Cash flows from operating activities:
Net Income .............. .......................... $ 39,120 $ 36,401
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense .......................... 13,721 10,256
Amortization of goodwill ...................... 2,317 2,001
Deferred income taxes ......................... 2,381 3,158
Equity in earnings of unconsolidated
affiliates ................................... (1,317) (2,059)
(Gains) on sales of assets, net ................ (25) (15)
(Gain) on sale of marketable securities ........ (7,852) --
Changes in assets and liabilities, net of
business acquisitions:
(Increase) decrease in accounts receivable,
net .......................................... (42,432) 4,109
Decrease in other current assets .............. 753 2,048
(Increase) in other assets ..................... (1,884) (945)
Increase (decrease) in transportation
payables ..................................... 20,828 (22,554)
(Decrease) increase in accounts payable ........ (6,447) 8,374
(Decrease) increase in accrued liabilities ..... (7,342) 2,051
Increase (decrease) in income taxes payable ... 920 (1,119)
Increase in other liabilities ................. 131 157
Total adjustments .......................... (26,248) 5,462
Net cash provided by operating activities ...... 12,872 41,863
Cash flows from investing activities:
Acquisitions, net of cash acquired ................ (6,321) (10,568)
Restricted funds .................................. 1,132 10,921
Other investing activities ........................ (1,269) 1,370
Proceeds from sales of assets ..................... 95 968
Proceeds from sale of marketable securities ....... 7,877 --
Capital expenditures .............................. (25,100) (24,442)
Investment in unconsolidated affiliates ........... (1,781) (7,101)
Net cash used by investing activities .......... (25,367) (28,852)
Cash flows from financing activities:
Net borrowings in bank overdrafts payable ......... 3,181 1,490
Additions to long-term debt ....................... 11,754 271
Payment of long-term debt ......................... (1,935) (1,455)
Issuance of common stock .......................... 3,605 3,402
Payment of cash dividends ......................... (6,376) (5,553)
Purchase of treasury stock ........................ (9,692) (22,209)
Net cash provided (used) by financing
activities .................................... 537 (24,054)
Effect of foreign currency exchange rates on cash ..... (1,482) (663)
Net decrease in cash and cash equivalents ............. (13,440) (11,706)
Cash and cash equivalents at beginning of period ...... 60,246 67,576
Cash and cash equivalents at end of period ............ $ 46,806 $ 55,870
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 September 30, 1999, the consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1999 and 1998, and the consolidated statements of cash flows
for the nine-month periods ended September 30, 1999 and 1998 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
September 30, 1998 financial statements were reclassified to conform to the
classification of September 30, 1999 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,
1998.
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 nine-month
periods ended September 30, 1999 are not necessarily indicative of the
results of operations expected for the year ending December 31, 1999.
B. Marketable securities:
During the first quarter of 1999, the Company sold 30% of its investment in
the equity securities of Equant, N.V., an international data network
service provider, for a pre-tax gain of approximately $7.9 million (See
Note D) and an after-tax gain of approximately $4.9 million or $.14 per
diluted share. The remaining shares are not currently marketable and are
carried at a cost of approximately $.1 million in the accompanying balance
sheet.
C. Interest, net was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Interest expense ...... $ (776) $ (380) $(1,993) $(1,046)
Interest income ...... 626 946 1,956 2,602
$ (150) $ 566 $ (37) $ 1,556
Page 6
D. Other, net was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Gain on the sale of marketable
securities..................... $ -- $ -- $ 7,852 $ --
Equity in earnings of
unconsolidated affiliates ..... 1,211 1,132 3,597 3,902
Foreign exchange gains .......... 82 92 918 932
Other ........................... 63 (16) 25 15
$ 1,356 $ 1,208 $ 12,392 $ 4,849
E. Comprehensive income:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Net income ................... .... $ 12,787 $ 13,010 $ 39,120 $ 36,401
Other comprehensive income:
Translation of foreign currency
financial statements .. ......... 174 3,472 (7,678) (3,885)
Income tax (expense) benefit ...... (126) (394) 661 (532)
48 3,078 (7,017) (4,417)
Reclassification adjustment for
gain on sale of marketable
securities included in net
income........................... -- -- (7,019) --
Income tax expense ................ -- -- 2,892 --
-- -- (4,127) --
Comprehensive income .............. $ 12,835 $ 16,088 $ 27,976 $ 31,984
F. Acquisitions:
During the third quarter of 1999, the Company purchased Team Fret, an ocean
freight forwarder headquartered in Marseilles, France. The acquisition has
been accounted for as a purchase. Accordingly, the cost of the acquisition
has been allocated on the basis of the estimated fair market value of the
assets acquired and the liabilities assumed. This allocation has resulted
in goodwill of approximately $7.5 million which will be amortized over 40
years. The results of operations for this acquisition were included in the
Consolidated Statements of Operations from the date of acquisition and had
no material pro forma impact on the Company's results of operations or
financial position. On October 18, 1999, the Company announced the
acquisition of the business and certain assets of the CMS group of
companies (CMS). Founded in 1983, CMS is a leader in international cargo
consolidation services in the Trans-Pacific trades, specializing in
purchase order management and consolidation services primarily for United
States based retailers and manufacturers of retail products working with
multiple vendors throughout Asia.
Page 7
G. Regional Operations:
The Company operates its integrated logistics business as a single segment
comprised of three major services: airfreight forwarding, ocean freight
forwarding, and customs brokerage and other services, all of which are
fully integrated.
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues by service:
Airfreight ...................$ 299,004 $ 282,171 $ 843,427 $ 865,186
Ocean freight ................ 65,471 52,523 170,450 147,375
Customs brokerage & other .... 43,063 38,267 121,608 111,270
Total revenues ...............$ 407,538 $ 372,961 $1,135,485 $1,123,831
Revenues by geographic area:
U.S.A ........................$ 152,143 $ 144,960 $ 438,438 $ 464,729
United Kingdom .............. 39,242 40,708 110,200 118,998
Other ....................... 85,445 80,785 234,892 232,724
Europe ....................... 124,687 121,493 345,092 351,722
Asia and Others .............. 130,708 106,508 351,955 307,380
Total foreign .............. 255,395 228,001 697,047 659,102
Total revenues ...............$ 407,538 $ 372,961 $1,135,485 $1,123,831
Operating profit by
geographic area:
U.S.A ........................$ 7,123 $ 5,165 $ 20,374 $ 16,782
Europe ....................... 5,055 5,646 9,967 16,576
Asia and Others .............. 6,914 7,819 19,400 18,065
Total foreign .............. 11,969 13,465 29,367 34,641
Total operating profit .......$ 19,092 $ 18,630 $ 49,741 $ 51,423
H. Supplemental disclosures of cash flow information:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Interest and income taxes paid:
Interest ....................... $ 701 $ 197 $ 1,479 $ 714
Income taxes ................... 5,465 5,960 19,137 18,462
$ 6,166 $ 6,157 $ 20,616 $19,176
Noncash investing and financing activities:
During the second quarter of 1998, as part of an acquisition, the Company
issued a $6.0 million note.
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company operates its integrated logistics business as 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 Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Gross Revenues:
Airfreight ...........................$299.0 $ 282.2 $ 843.4 $ 865.2
Ocean freight ........................ 65.5 52.5 170.5 147.4
Customs brokerage and other .......... 43.0 38.3 121.6 111.2
Total Gross Revenues ...............$407.5 $ 373.0 $ 1,135.5 $1,123.8
Net Revenues:
Airfreight ...........................$ 79.8 $ 77.5 $ 231.6 $ 230.1
Ocean freight ........................ 18.6 16.1 51.2 45.1
Customs brokerage and other .......... 34.6 30.3 97.2 89.6
Total Net Revenues ................. 133.0 123.9 380.0 364.8
Internal Operating Expenses:
Terminal ............................. 73.7 67.0 213.5 201.0
Selling, general and administrative .. 40.2 38.3 116.8 112.4
Total Internal Operating Expenses .. 113.9 105.3 330.3 313.4
Operating Profit .......................$ 19.1 $ 18.6 $ 49.7 $ 51.4
Consolidated gross revenues for the third quarter and first nine months of
1999 increased 9.2% to $407.5 million and 1.0% to $1,135.5 million,
respectively, over the comparable periods in 1998. Additionally, gross revenues
for the quarter and nine months were negatively impacted by approximately $2.0
million and $8.7 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 third quarter and first
nine months of 1999 increased 7.3% to $133.0 million and 4.2% to $380.0 million,
respectively, over the comparable 1998 periods.
Gross airfreight revenues for the third quarter and first nine months of
1999 increased 6.0% to $299.0 million and decreased 2.5% to $843.4 million,
respectively, compared to the same periods in 1998. The increase in gross
airfreight revenues for the third quarter of 1999 was attributable to increases
in both shipping volumes and weight of cargo shipped. Gross airfreight revenues
Page 9
in all regions either equaled or exceeded the third quarter of 1998 with the
strongest growth occurring in the Asia and Others region. The decrease in gross
airfreight revenues for the first nine months of 1999 resulted from softness
during the first half of the year in both the United States and European
region's airfreight exports combined with lower selling rates. Airfreight net
revenues for the third quarter and first nine months of 1999 increased 3.0% to
$79.8 million and .7% to $231.6 million, respectively, over the comparable 1998
periods. The increase in airfreight net revenues for the third quarter resulted
from improvement in transportation costs and customer selling rates. The
increase in airfreight net revenues for the first nine months of 1999 was mainly
due to lower transportation costs and improved routing and mix of cargo during
the first six months of 1999.
Ocean freight gross revenues for the third quarter and first nine months of
1999 increased 24.8% to $65.5 million and 15.7% to $170.5 million, respectively,
over the comparable 1998 periods. Ocean freight net revenues for the third
quarter and first nine months of 1999 increased 15.5% to $18.6 million and 13.5%
to $51.2 million, respectively, over the third quarter and first nine months of
1998. The increases in both gross and net ocean freight revenues were mainly due
to increased shipping volumes from existing customers and continuing expansion
into the ocean freight market.
Customs brokerage and other gross revenues for the third quarter and first
nine months of 1999 increased 12.3% to $43.0 million and 9.4% to $121.6 million,
respectively, over the comparable 1998 periods. Customs brokerage and other net
revenues for the third quarter and first nine months of 1999 increased 14.2% to
$34.6 million and 8.5% to $97.2 million, respectively, over the comparable 1998
periods. The increases in customs brokerage and other gross and net revenues for
the third quarter resulted from increased brokerage activity, particularly in
the United States, coupled with improvement in both customs duty drawback and
warehouse and distribution operations. The increases in customs brokerage and
other gross and net revenues for the first nine months of 1999 resulted from
inclusion of business from companies acquired during the second quarter of 1998
and increased brokerage activity which was offset by lower warehouse and
distribution activity during the first half of 1999.
Internal operating expenses for the third quarter and first nine months of
1999 increased 8.2% to $113.9 million and 5.4% to $330.3 million, respectively,
over the comparable 1998 periods. The increase in internal operating expense for
the third quarter was mainly attributable to operations in the Netherlands and
United States where personnel expenses increased to handle increased volumes,
coupled with additional expense incurred in advance preparation of two new
logistics contracts in Europe and with higher levels of management information
systems expenses. The increase in internal operating expenses for the first nine
months of 1999 reflect the inclusion of expenses from companies acquired in 1998
combined with the factors previously mentioned for the third quarter.
Consolidated operating profit for the third quarter of 1999 increased
marginally over the third quarter of 1998 to $19.1 million. For the first nine
months of 1999, consolidated operating profit decreased 3.3% to $49.7 million
compared to the first nine months of 1998. The decline was mainly the result of
lower operating profit in the European region (See Note G).
Page 10
Interest, net for the third quarter and first nine months of 1999 declined
$.7 million and $1.6 million, respectively, compared to the same 1998 periods.
The declines resulted from higher interest expense associated with the increase
in long-term debt and lower interest income due to the reduced amount of excess
cash available for investment (See Note C).
Other, net for the third quarter of 1999 increased marginally over the
third quarter of 1998. For the first nine months of 1999, Other, net increased
$7.5 million over the first nine months of 1998. The increase resulted primarily
from a $7.9 million gain on the sale of marketable securities (See Note D),
which was offset by a $.4 million decline which was mainly attributable to the
results from the Company's equity in the earnings of unconsolidated affiliates.
The effective income tax rate for the third quarter of 1999 increased .8%
to 37.0% compared to the third quarter of 1998. In the third quarter of 1998,
the effective tax rate was lowered to 36.2% in order to reduce the full year
effective income tax rate to 37.0%, which resulted from a change in the
geographic composition of the worldwide earnings to countries with lower
effective income tax rates. For both the first nine months of 1999 and 1998, the
effective income tax rate was 37.0%.
United States gross revenues for the third quarter and first nine months of
1999 increased $7.2 million (5.0%) to $152.1 million and decreased $26.3 million
(5.7%) to $438.4 million, respectively, compared to the third quarter and first
nine months of 1998. The increase in the third quarter was comprised of a $2.1
million (1.9%) increase in airfreight revenues, a $1.3 million (7.4%) increase
in ocean freight revenues and a $3.8 million (24.8%) increase in customs
brokerage and other revenues. The decrease in the first nine months of 1999 was
comprised of a $34.2 million (9.4%) decrease in airfreight revenues which was
partially offset by a $.9 million (1.6%) increase in ocean freight revenues and
a $7.0 million (15.2%) increase in customs brokerage and other revenues. The
increase in airfreight revenues for the third quarter was primarily the result
of increased export shipments. The decrease in airfreight revenues for the first
nine months of 1999 was mainly attributable to soft airfreight exports and lower
selling prices when compared with the 1998 period. The increases in ocean
freight revenues for both the third quarter and first nine months of 1999 were
due to greater shipping volumes from new and existing customers. The increase
in customs brokerage and other revenues for the third quarter resulted from
increased brokerage activity with improvement in both the drawback and warehouse
and distribution operations. For the first nine months of 1999, the increase in
customs brokerage and other revenues resulted from an increase in brokerage
activity and the inclusion of the results of an acquisition which was made
subsequent to the second quarter of 1998.
United States operating profit for the third quarter increased $2.0 million
(37.9%) to $7.1 million compared to the third quarter of 1998. For the first
nine months of 1999, operating profit increased $3.6 million (21.4%) to $20.4
million compared to the first nine months of 1998. The increase in the third
quarter operating profit resulted from improvement in all service categories.
The increase in operating profit for the first nine months of 1999 was mainly
the result of improved margins during the first six months of 1999 from
improvement in the mix of cargo and lower transportation costs, and the
inclusion of a business acquired subsequent to the second quarter of 1998.
Page 11
Foreign gross revenues for the third quarter and first nine months of 1999
increased $27.4 million (12.0%) to $255.4 million and $37.9 million (5.8%) to
$697.1 million, respectively, over the comparable 1998 periods. The overall
effect of exchange rates reduced European gross revenues for the third quarter
and first nine months of 1999 by approximately $5.7 million and $8.7 million,
respectively; Asia and Others gross revenues increased approximately $3.7
million for the third quarter with minimal impact on the first nine months of
1999. European gross revenues for the third quarter increased $3.2 million
(2.6%) to $124.7 million. The increase was comprised of a $2.1 million (13.3%)
increase in ocean freight revenues, a $1.0 million (8.9%) increase in customs
brokerage and other revenues, and $.1 million (.1%) increase in airfreight
revenues. For the first nine months of 1999, European gross revenues declined
$6.6 million (1.9%) to $345.1 million which was comprised of a $12.0 million
(4.4%) decrease in airfreight revenues offset by increases in ocean freight
revenues and customs brokerage and other revenues of $3.9 million (9.1%) and
$1.5 million (4.6%), respectively. The decrease in airfreight revenues which
occurred during the first six months of 1999 resulted from lower export
shipments and selling prices. The increase in ocean freight revenues was
attributable to greater shipping volumes from new and existing customers. The
increase in customs brokerage and other revenues resulted from increases in
brokerage activity. Asia and Others gross revenues for the third quarter
increased $24.2 million (22.7%) over the third quarter of 1998. The increase was
comprised of a $14.6 million (19.3%) increase in airfreight revenues, a $9.5
million (50.6%) increase in ocean freight revenues and a $.1 million (.3%)
increase in customs brokerage and other revenues. For the first nine months of
1999, gross revenues increased $44.5 million (14.5%) over the comparable 1998
period. The increase was comprised of a $24.4 million (10.9%) increase in
airfreight revenues, an $18.3 million (36.7%) increase in ocean freight revenues
and a $1.8 million (5.7%) increase in customs brokerage and other revenues. The
increases in airfreight and ocean freight revenues were due to greater shipping
volumes from new and existing customers.
Foreign operating profit for the third quarter of 1999 decreased $1.5
million (11.1%) to $12.0 million compared to the third quarter of 1998. For the
first nine months of 1999, operating profit declined $5.3 million (15.2%) to
$29.3 million compared to the first nine months of 1998. The European region's
operating profit for the third quarter of 1999 decreased $.6 million (10.5%)
compared to the third quarter of 1998. For the first nine months of 1999, the
European region's operating profit decreased $6.6 million (39.9%) compared to
the first nine months of 1998. The declines were mainly the result of weakness
in airfreight business and lower selling rates throughout the region with the
Company's operations in The Netherlands, Belgium and France reporting
significant declines. The Asia and Others region's operating profit for the
third quarter of 1999 decreased $.9 million (11.6%) compared to the third
quarter of 1998. For the first nine months of 1999, the Asia and Others region's
operating profit increased $1.3 million (7.4%) over the first nine months of
1998. The decrease in the third quarter was attributable to lower results in
South America, South Pacific and Canada.
Page 12
Liquidity and Capital Resources
At September 30, 1999, cash and cash equivalents decreased approximately
$13.4 million to $46.8 million from $60.2 million at December 31, 1998. For the
first nine months of 1999, the Company's primary sources of cash consisted of
$12.9 million from operating activities, $11.8 million from long-term borrowings
and $7.9 million from the sale of marketable securities, while the primary uses
of cash consisted of $25.1 million for capital expenditures, $9.7 million for
purchases of treasury stock, $6.3 million for an acquisition, and $6.4 million
for the payment of dividends. Cash from operating activities decreased
approximately $29.0 million compared to the first nine months of 1998. The
decline resulted mainly from the increase in trade receivables due to the
increase in revenues during the third quarter of 1999.
Capital expenditures for the first nine months of 1999 increased marginally
over the first nine months of 1998 to $25.1 million. The capital expenditures
were primarily for management information services and for improvement and
expansion of facilities.
At September 30, 1999, the Company had available for future borrowings
approximately $63.8 million of its $75.0 million revolving credit facility. The
Company utilized approximately $11.2 million under this facility. The
utilization consisted of $8.0 million for an acquisition (See Note F),
classified as long-term debt, and $3.2 million for letters of credit issued in
connection with insurance programs. Additionally, various of the Company's
foreign subsidiaries maintained overdraft facilities with foreign banks,
aggregating approximately $27.5 million, of which approximately $7.9 million was
outstanding.
The Company's Board of Directors has authorized the purchase from time to
time in the open market of up to 2,000,000 shares of the Company's common stock.
During the first nine months of 1999, the Company purchased 557,500 of its
common shares at a cost of approximately $9.7 million. As of September 30, 1999,
the Company has purchased 1,635,000 of the 2,000,000 shares authorized at a cost
of approximately $31.7 million. Additionally, in June 1999, the Company's Board
of Directors authorized an increase in the quarterly cash dividend from six
cents ($.06) to seven cents ($.07) 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.
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
included remediation, upgrading or replacement of the Company's various systems
including those utilizing embedded technology. In accordance with Issue 96-14 of
the Emerging Issues Task Force of the Financial Accounting Standards Board,
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which requires the costs associated with modifying computer software for the
Year 2000 to be expensed as incurred, the Company has and will continue to
expense the costs incurred to remediate the applicable systems. For 1997, the
Company incurred approximately $1.0 million of expense and approximately $3.6
million of expense in 1998. Year 2000 expense for 1999 is anticipated to be
approximately $2.5 million with approximately $1.9 million expended in the first
nine months of 1999.
The remediation of the Company's systems was 100% completed by the end of
the first quarter of 1999. Systems testing was completed in the middle of July
1999. The systems testing verified existing functionality and system operation
before, during and after January 1, 2000. The testing placed particular emphasis
on the high risk dates of September 9, 1999, December 31, 1999, January 1, 2000,
February 28, 2000, February 29, 2000, March 1, 2000, February 28, 2001 and March
1, 2001. The Company believes that the remediation, upgrade and replacement of
its systems have been materially completed in July 1999; however, the Company
intends to continue testing its systems for the remainder of 1999.
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
encompasses contacting the Company's major customers and its significant
suppliers - airlines, steamship lines, trucking companies, handling agents,
customs authorities and other governmental agencies and financial institutions.
During the third quarter and early fourth quarter of 1998, questionnaires were
sent to the Company's significant suppliers. As of October 31, 1999, the Company
surveyed approximately 1,400 of its significant suppliers, approximately 97% of
those suppliers surveyed have advised the Company that they are currently Year
2000 compliant or expect to be compliant. The Company has participated in
evaluation programs established by its major customers for Year 2000 readiness.
These customers' programs include communication by the Company, the customers'
readiness for Year 2000, including customers' internal systems and the
evaluation of their third party suppliers and customers. Through the Company's
participation in the customer evaluation programs it appears that the Company's
major customers are prepared for Year 2000.
The Company has identified those suppliers who have either not responded to
the questionnaires or will not be compliant and it will either discontinue
utilizing those suppliers or minimize usage of these suppliers in December 1999.
Additionally, during the third quarter of 1999, detailed contingency plans were
formulated within each country where the Company operates to minimize the risk
of significant service disruptions due to a Year 2000 failure by supplier(s).
The contingency plans were communicated to the Company's major customers in the
third quarter and early fourth quarter. Contingency plans will include:
redeployment of existing personnel and employing additional personnel to process
transactions that were automated and may require manual intervention due to Year
2000 non-compliance. Selection of alternative airlines, steamship lines,
trucking companies together with customer notification of possible service
disruptions in markets where carriers or customs authorities may not be Year
2000 compliant.
The Company does not warrant as true and accurate any assurance it receives
from customers and suppliers regarding the compliance of their systems. The
Company relies entirely on its transportation suppliers, airlines, steamship
lines and independent trucking firms to transport its customers' cargo
throughout its network. To the degree that the operations of any number of
Page 14
transportation providers are adversely affected by Year 2000, disruptions in the
Company's business may occur which may have a material adverse effect on the
Company's operations. Management believes that Year 2000 - related matters for
the Company's internal systems will not have a material adverse effect on the
Company's operations or financial position; however, the ultimate degree to
which the Company's systems may be affected by Year 2000 is uncertain.
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, 2000. 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.
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 11 - Computation of Earnings Per Common Share.
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K:
None.
Page 15
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: November 12, 1999 /s/ Dennis M. Dolan
Dennis M. Dolan
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999 /s/ Martin J. McDonnell
Martin J. McDonnell
Vice President - Controller
(Principal Accounting Officer)