UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 34-0-17570
AMERICAN FREIGHTWAYS CORPORATION
(Exact name of registrant as specified in its charter)
Arkansas 74-2391754
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2200 Forward Drive, Harrison, Arkansas 72601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (870) 741-9000
Not Applicable
(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 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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of common stock outstanding at June 30, 1998:
31,635,418.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN FREIGHTWAYS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
JUNE 30, December 31,
1998 1997
----------- -----------
(UNAUDITED) (Note)
ASSETS
Current assets
Cash and cash equivalents $ 5,598 $ 1,755
Trade receivables, less
Allowance for doubtful
accounts (1998-$1,911; 1997-$1,774) 88,063 78,700
Operating supplies and inventories 3,849 2,882
Prepaid expenses 13,761 8,671
Deferred income taxes 16,835 13,306
Income taxes receivable - 1
----------- -----------
Total current assets 128,106 105,315
Property and equipment 735,653 699,176
Accumulated depreciation and
amortization (257,896) (230,870)
----------- -----------
477,757 468,306
Other assets 2,112 1,952
----------- -----------
$ 607,975 $ 575,573
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 12,316 $ 12,910
Accrued expenses 67,260 54,114
Federal and state income taxes 3,278 -
Current portion of long-term debt 11,530 11,497
----------- -----------
Total current liabilities 94,384 78,521
Long-term debt, less
current portion (Note B) 209,920 210,411
Deferred income taxes 64,743 59,225
Shareholders' equity
Common stock, par value $.01 per share--
authorized 250,000 shares; issued and outstanding
31,635 in 1998 and 31,568 in 1997 316 316
Additional paid-in capital 105,515 104,832
Retained earnings 133,097 122,268
----------- -----------
238,928 227,416
----------- -----------
$ 607,975 $ 575,573
=========== ===========
Note: The condensed consolidated balance sheet at December 31, 1997,
has been derived from the audited consolidated financial statements
at that date.
See notes to condensed consolidated financial statements.
AMERICAN FREIGHTWAYS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(000'S OMITTED, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
------------------------------------
OPERATING REVENUE $246,402 $219,088 $477,051 $412,140
OPERATING EXPENSES AND COSTS
Salaries, wages and benefits 149,547 130,272 292,977 248,577
Operating supplies and expenses 20,163 18,663 40,180 37,175
Operating taxes and licenses 10,446 8,877 20,441 17,478
Insurance 7,376 6,732 14,517 13,414
Communications and utilities 4,756 3,581 8,711 7,076
Depreciation and amortization 13,772 13,024 27,581 25,870
Rents and purchased
transportation 14,416 13,607 27,435 23,497
Other 10,039 8,760 20,017 17,079
------------------ ------------------
230,515 203,516 451,859 390,166
------------------ ------------------
OPERATING INCOME 15,887 15,572 25,192 21,974
OTHER INCOME (EXPENSE)
Interest expense (3,925) (4,174) (8,013) (8,260)
Interest income 65 67 129 122
Gain on disposal of assets 820 16 841 33
Other, net 24 9 52 19
------------------ ------------------
(3,016) (4,082) (6,991) (8,086)
INCOME BEFORE INCOME TAXES 12,871 11,490 18,201 13,888
------------------ ------------------
FEDERAL AND STATE INCOME TAXES
Current 4,156 2,088 5,383 3,381
Deferred 1,057 2,416 1,988 2,063
------------------ ------------------
5,213 4,504 7,371 5,444
------------------ ------------------
NET INCOME $ 7,658 $ 6,986 $ 10,830 $ 8,444
================== ==================
PER SHARE (NOTE D)
Net income-basic $ 0.24 $ 0.22 $ 0.34 $ 0.27
Net income-assuming dilution $ 0.24 $ 0.22 $ 0.34 $ 0.27
================== ==================
AVERAGE SHARES OUTSTANDING (NOTE D)
Basic 31,612 31,301 31,590 31,280
Assuming dilution 31,752 31,597 31,688 31,544
================== ==================
See notes to condensed consolidated financial statements.
AMERICAN FREIGHTWAYS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
Six Months Ended
June 30
1998 1997
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 39,892 $ 33,690
INVESTING ACTIVITIES
Proceeds from sales of assets 1,963 67
Capital expenditures (38,223) (27,983)
----------- -----------
Net cash used by investing activities (36,260) (27,916)
FINANCING ACTIVITIES
Principal payments on long-term debt (15,665) (55,694)
Proceeds from notes payable
and long-term borrowings 15,208 48,400
Proceeds from issuance of common stock 668 1,188
----------- -----------
Net cash provided (used)
by financing activities 211 (6,106)
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 3,843 $ (332)
=========== ===========
See notes to condensed consolidated financial statements.
AMERICAN FREIGHTWAYS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results of the six month period ended June
30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further
information, refer to the Company's consolidated financial statements
and footnotes thereto included in Form 10-K for the year ended
December 31, 1997.
NOTE B - LONG-TERM DEBT
As of June 30, 1998, the Company has outstanding borrowings of
$65,000,000 under its existing $160,000,000 unsecured revolving line
of credit. The proceeds of these borrowings were used for the
purchase of revenue equipment and for the purchase and construction of
Customer Center facilities. At June 30, 1998, the amount available
for borrowing under the line of credit was $95,000,000. In addition
to this credit facility, the Company has obtained letters of credit
totaling $3,976,000 to provide collateral on its self-insurance plan.
As of June 30, 1998, the Company has outstanding borrowings of
$129,250,000 under an uncommitted Master Shelf Agreement which
provides for the issuance of up to $140,000,000 of senior promissory
notes with an average life not to exceed twelve years. In addition,
the Company has outstanding an unsecured senior note for $20,000,000
payable in equal annual installments of $5,000,000 through November
2001.
NOTE C - COMMITMENTS
Commitments for the purchase of revenue equipment and the purchase or
construction of Customer Centers aggregated approximately $53,794,000
at June 30, 1998.
NOTE D - EARNINGS PER SHARE
Net income for purposes of basic earnings per share and earnings per
share--assuming dilution was $7,658,000 and $6,986,000 for the three
month periods ended June 30, 1998 and 1997, respectively. For the six
month periods ended June 30, 1998 and 1997, net income for purposes of
basic earnings per share and earnings per share--assuming dilution was
$10,830,000 and $8,444,000, respectively. A reconciliation of average
shares outstanding for these periods is presented below:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------
(In Thousands) (In Thousands)
Average shares outstanding-basic 31,612 31,301 31,590 31,280
Effect of dilutive stock options 140 296 98 264
Average shares outstanding
-assuming dilution 31,752 31,597 31,688 31,544
========= ========= ========= =========
NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS
The impact of adoption of Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" which is effective for
fiscal years beginning after December 15, 1997 was not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages of operating expenses and other items to operating
revenue:
Three Months Six Months
Ended Ended
June 30 June 30
1998 1997 1998 1997
------------------------------
Operating revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses and costs:
Salaries, wages and benefits 60.7% 59.5% 61.4% 60.3%
Operating supplies and expenses 8.2% 8.5% 8.4% 9.0%
Operating taxes and licenses 4.2% 4.1% 4.3% 4.2%
Insurance 3.0% 3.1% 3.0% 3.3%
Communications and utilities 1.9% 1.6% 1.8% 1.7%
Depreciation and amortization 5.6% 5.9% 5.8% 6.3%
Rents and purchased transportation 5.9% 6.2% 5.8% 5.7%
Other 4.1% 4.0% 4.2% 4.2%
----- ----- ----- -----
Total operating expenses
and costs 93.6% 92.9% 94.7% 94.7%
----- ----- ----- -----
Operating income 6.4% 7.1% 5.3% 5.3%
Interest expense (1.6%) (1.9%) (1.7%) (2.0%)
Other income, net 0.4% 0.1% .2% 0.1%
----- ----- ----- -----
Income before income taxes 5.2% 5.3% 3.8% 3.4%
Income taxes 2.1% 2.1% 1.5% 1.3%
----- ----- ----- -----
Net income 3.1% 3.2% 2.3% 2.1%
===== ===== ===== =====
RESULTS OF OPERATIONS
Operating Revenue
Operating revenue for the six months ended June 30, 1998 was
$477,051,000, up 15.7%, compared to $412,140,000 for the six months
ended June 30, 1997. Operating revenue for the three months ended
June 30, 1998 was $246,402,000, up 12.5%, compared to $219,088,000 for
the three months ended June 30, 1997. The growth in operating revenue
was primarily the result of increased revenue per hundred weight and
increased tonnage from new and existing customers.
Tonnage handled by the Company during the six and three months ended
June 30, 1998, increased 12.8% and 9.3%, respectively, over the same
time periods of 1997. This increase in tonnage was mainly a result of
the following:
- - The Company continued to increase its market penetration into
existing service territories, particularly those geographic areas
added during 1995, 1996 and 1997. During 1995, the Company expanded
its all-points coverage to the states of Colorado, Florida, Iowa,
Nebraska, North Carolina, South Carolina and Wisconsin. 1996
expansions included the states of Delaware, Maryland, Minnesota,
Virginia and West Virginia. Effective August 4, 1997, all-points
coverage was added to the state of New Mexico.
- - The continued increase in intrastate tonnage following the
deregulation of intrastate commerce effective January 1, 1995.
- - Effective January 1, 1998, the Company increased its all-points
coverage to 28 states with the addition of the state of Michigan.
Revenue per hundred weight for the first six months of 1998 was up
2.3% from levels experienced in the first six months of 1997. Factors
contributing to the increase in revenue per hundred weight were:
- - A general rate increase of approximately 5.5% effective January
1, 1998. General rate increases initially affect approximately 45% of
the Company's customers. The remaining customers' rates are
determined by contracts and guarantees and are negotiated throughout
the year.
- - A fuel surcharge was in effect during the first six months of
1997, but not in effect for the majority of 1998. The Company
initiated a fuel surcharge beginning September 6, 1996 to help recover
the increased costs of fuel. This surcharge is tied to the Department
of Energy's National Diesel Fuel Index and ranged from 0.7% to 1.3%
for LTL shipments as of June 30, 1997. The surcharge is designed to
suspend at the time this national index moves below $1.15 per gallon.
Effective January 7, 1998, the fuel surcharge was suspended and
remains suspended as of June 30, 1998.
- - The percentage of the Company's total revenue that was derived
from truckload shipments (greater than 10,000 pounds) declined to 5.7%
during the six months ended June 30, 1998 as compared to 5.8% during
the six months ended June 30, 1998.
Even though inventory adjustments in the softening consumer goods
sector of the economy appeared to have reduced demand for less-than-
truckload services during the second quarter of 1998, management
expects that growth in operating revenue is sustainable in the near
term. The Company's expansions of service territory during 1998 and
1997 were less aggressive than those initiated in prior years, and the
primary focus for growth in operating revenue in the near term will be
further penetration of existing markets. As a result, any near-term
percentage growth in operating revenue will likely be less than that
experienced in recent years. The foregoing statement concerning the
sustainability of revenue growth is subject to a number of factors,
including LTL industry capacity, increased tonnage and general
economic conditions.
Operating Expenses
Operating expenses as a percentage of operating revenue were 94.7% for
the six months ended June 30, 1998 and 1997. Operating expenses as a
percentage of operating revenue increased to 93.6% in the three months
ended June 30, 1998 from 92.9% in the three months ended June 30,
1997. The following categories of expenses declined as a percentage
of revenue for the first six months of 1998 as compared to the same
time period during 1997:
- - Operating supplies and expenses as a percentage of operating
revenue decreased to 8.4% in the six months ended June 30, 1998 from
9.0% in the six months ended June 30, 1997. This improvement was due
to reduced fuel costs resulting from lower fuel prices and the
increased use of purchased transportation. This improvement in fuel
costs was partially offset by increased costs of maintaining equipment
and facilities. In the near term, management expects this gradual
upward trend in maintenance costs to continue as the Company's fleet
ages.
- - Depreciation and amortization as a percentage of operating
revenue improved to 5.8% in the six months ended June 30, 1998 from
6.3% in the six months ended June 30, 1997. This improvement was
largely due to the increased usage of purchased transportation and
operating lease financing of revenue equipment.
- - Insurance as a percentage of operating revenue decreased to 3.0%
in the six months ended June 30, 1998 from 3.3% in the six months
ended June 30, 1997. This improvement was largely due to improved
experience involving vehicle accidents and cargo claims. Management
does not expect this downward trend to continue. Rather, it is
expected that insurance costs as a percentage of operating revenue
will stabilize or gradually increase during 1998.
These improvements in operating expenses as a percentage of operating
revenue were partially offset by increases in the following areas:
- - Salaries, wages and benefits as a percentage of operating revenue
increased to 61.4% in the six months ended June 30, 1998 from 60.3% in
the six months ended June 30, 1997. This increase was largely the
result of increased costs in the areas of workmen's compensation and
health care. After benefiting from relatively low claims in these
areas during the first six months of 1997, the level of claims
returned to a level more typically experienced by the Company.
Management expects that during the remainder of 1998, these expenses
will remain at current levels. Comparing the first six months of 1998
to the same period of 1997, salaries and wages as a percentage of
operating revenue remained relatively flat despite a general wage
increase of 3.5% in March 1998. During the remainder of 1998,
management anticipates that ongoing educational programs and changes
in operations will result in productivity gains in the form of
improved pickup and delivery density, increased line haul load factor
and more direct line haul schedules. However, these gains cannot be
assured and are subject to a variety of factors which may or may not
be within the control of management.
- - Rents and purchased transportation as a percentage of operating
revenue increased to 5.8% in the six months ended June 30, 1998 from
5.7% in the six months ended June 30, 1997. This increase was a
result of the increased use of operating lease financing and the
utilization of purchased transportation in selected line haul lines in
order to improve asset utilization and decrease overall costs of
operations. Management expects rents and purchased transportation as
a percentage of operating revenue to remain at current levels.
Other
Interest expense as a percentage of operating revenue decreased to
1.7% in the six months ended June 30, 1998, compared to 2.0% in the
six months ended June 30, 1997. This improvement is primarily the
result of lower interest rates and of reducing total debt to
$221,450,000 as of June 30, 1998 from $230,945,000 as of June 30,
1997.
The quarter and year to date results for 1998 were favorably impacted
by $822,000 before taxes as a result of the sale of a surplus
property.
The effective tax rate of the Company was 40.5% for the six months
ended June 30, 1998, up from 39.2% for the same time period of 1997.
This increase was due to increased federal tax rates on higher levels
of income, as well as higher state tax rates.
Net income for the six months ended June 30, 1998, was $10,830,000, up
28.3%, from $8,444,000 for the six months ended June 30, 1997. Net
income for the three months ended June 30, 1998, was $7,658,000, up
9.6%, from $6,986,000 for the three months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Capital requirements during the six months ended June 30, 1998
consisted primarily of $36,260,000 in investing activities. The
Company invested $38,223,000 in capital expenditures during the six
months ended June 30, 1998 comprised of $4,862,000 in additional
revenue equipment, $20,116,000 in new Customer Center facilities or
the expansion of existing facilities and $13,245,000 in other
equipment. Management expects capital expenditures for the full year
of 1998 will be approximately $100,000,000. However, the amount of
capital expenditures required in 1998 will be dependent on the growth
rate of the Company and the timing and size of any future expansions
of service territory. At June 30, 1998, the Company had commitments
for land, Customer Centers, revenue and other equipment of
approximately $53,794,000. These commitments were mostly for the
completion of projects in process at June 30, 1998.
The Company provided for its capital resource requirements in the six
months ended June 30, 1998 predominantly with cash from operations.
Cash from operations totaled $39,892,000 in the six months ended June
30, 1998 compared to $33,690,000 provided by operations in the six
months ended June 30, 1997. Net financing activities provided an
additional $211,000 of cash flow in the six months ended June 30,
1998. Two primary sources of credit financing were available to the
Company: the revolving line of credit and the Master Shelf facility.
- - The Company experiences periodic cash flow fluctuations common to
the industry. Cash outflows are heaviest during the first part of
any given year while cash inflows are normally weighted towards the
last two quarters of the year. To smooth these fluctuations and to
provide flexibility to fund future growth, the Company utilizes a
variable-rate, unsecured revolving line of credit of $160,000,000
provided by NationsBank of Texas, N.A. (agent), Chase Bank of
Texas, N.A., Wachovia Bank of Georgia, N.A., ABN-AMRO Bank N.V. and
The First National Bank of Chicago. At June 30, 1998, $65,000,000
was outstanding on the revolving line of credit, leaving
$95,000,000 available for borrowing. The Company also had
$10,000,000 available under its short-term, unsecured revolving
$10,000,000 line of credit with NationsBank of Texas, N.A. In
addition, the Company maintains a $10,000,000 line of credit with
NationsBank of Texas, N.A. to obtain letters of credit required for
its self-insurance program. At June 30, 1998, the Company had
obtained letters of credit totaling $3,976,000 for this purpose.
-To assist in financing longer-lived assets, the Company has an
uncommitted Master Shelf Agreement with the Prudential Insurance
Company of America which provides for the issuance of up to
$140,000,000 in medium to long-term unsecured notes at an interest
rate calculated at issuance. At June 30, 1998, the Company had
$129,250,000 outstanding under this facility.
Management expects that the Company's existing working capital and its
available lines of credit are sufficient to meet the Company's
commitments as of June 30, 1998, and to fund current operating and
capital needs. However, if additional financing is required,
management believes it will be available.
The Company uses off-balance sheet financing in the form of operating
leases primarily in the following areas; land and structures, revenue
equipment and other equipment. At June 30, 1998, future rental
commitments on operating leases were $97,735,000. The Company prefers
to utilize operating leases for these areas and plans to use them in
the future when such financing is available and suitable.
Future rental commitments on operating leases are as follows:
Land and Revenue Other
Total Structures Equipment Equipment
------------------------------------------
1998 $15,457 $ 2,783 $ 4,917 $ 7,757
1999 25,240 3,842 9,833 11,565
2000 22,549 2,472 9,833 10,244
2001 14,365 1,833 9,057 3,475
2002 10,537 1,036 9,303 198
Thereafter 9,587 1,981 7,606 ---
------------------------------------------
Total $97,735 $13,947 $ 50,549 $ 33,239
------------------------------------------
YEAR 2000 ISSUES
The Company has assessed the impact of the Year 2000 issues on its
computer software systems and applications, and determined that
although many of its applications are already compliant the Company
will have to modify or replace other applications. The Company
expects to have all applications fully compliant by the end of 1998.
The Company also has initiated discussions with its significant
customers and suppliers to determine the extent to which the Company's
interface systems would be vulnerable to those third parties' failure
to remediate their own Year 2000 issues. There is no assurance that
the systems of other companies on which the Company's systems rely
will be timely converted and would not have an adverse effect on the
Company's systems. Expenditures related to the Company's Year 2000
initiatives have not been and are not expected to be material to the
Company's results of operations or financial position.
ENVIRONMENTAL
At June 30, 1998, the Company had no outstanding inquiries with any
state or federal environmental agency.
INDEX
AMERICAN FREIGHTWAYS CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets--June 30, 1998 and December
31, 1997
Condensed consolidated statements of income-Three months ended
June 30, 1998 and 1997; Six months ended June 30, 1998 and 1997
Condensed consolidated statements of cash flows--Six months ended
June 30, 1998 and 1997
Notes to condensed consolidated financial statements--June 30,
1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(10) Fifth Amendment to Amended and Restated Credit Agreement among
NationsBank of Texas, N.A., as Agent, the Registrant and its
Subsidiary dated May 15, 1998.
Amended and Restated Appointed Non-Employee Director
Stock Option Plan
Amended and Restated Elected Non-Employee Director
Stock Option Plan
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three month period ended June 30, 1998.
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.
AMERICAN FREIGHTWAYS CORPORATION
(Registrant)
Date: July 20, 1998 /s/Frank Conner
Frank Conner
Executive Vice President
Accounting & Finance
and Chief Financial Officer