UNITED STATES
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 Quarter Ended September 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5424
DELTA AIR LINES, INC.
State of Incorporation: Delaware
IRS Employer Identification No.: 58-0218548
Hartsfield Atlanta International Airport, Atlanta, Georgia 30320
Telephone: (404) 715-2600
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Number of shares outstanding by each class of common stock,
as of October 31, 1994:
Common Stock, $3.00 par value - 50,606,339 shares outstanding
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
DELTA AIR LINES, INC.
Consolidated Balance Sheets (Unaudited)
(In Millions)
September 30 June 30
ASSETS 1994 1994
- -------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 782 $ 1,302
Short-term investments 906 408
Accounts and notes receivable, net 883 886
Maintenance and operating supplies 75 67
Deferred income taxes 341 336
Prepaid expenses and other 210 224
------------- -------------
Total current assets 3,197 3,223
------------- -------------
PROPERTY AND EQUIPMENT:
Flight equipment owned 9,045 9,063
Less: Accumulated depreciation 3,971 3,880
------------- -------------
5,074 5,183
------------- -------------
Flight equipment under capital leases 173 173
Less: Accumulated amortization 146 142
------------- -------------
27 31
------------- -------------
Ground property and equipment 2,424 2,398
Less: Accumulated depreciation 1,281 1,250
------------- -------------
1,143 1,148
------------- -------------
Advance payments for equipment 282 241
------------- -------------
6,526 6,603
------------- -------------
OTHER ASSETS:
Marketable equity securities 414 351
Deferred income taxes 430 560
Investments in associated companies 225 219
Cost in excess of net assets acquired 281 283
Leasehold and operating rights, net 195 207
Non-operating property, net 145 211
Other 527 239
------------- -------------
2,217 2,070
------------- -------------
$ 11,940 $ 11,896
============= =============
The accompanying notes are an integral part of these balance sheets.
-2-
DELTA AIR LINES, INC.
Consolidated Balance Sheets (Unaudited)
(In Millions except Share Amounts)
September 30 June 30
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1994
- ------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 27 $ 227
Current obligations under capital leases 10 11
Accounts payable and accrued liabilities 1,696 1,654
Air traffic liability 1,150 1,247
Accrued vacation pay 206 196
Accrued rent 202 195
Accrued income taxes 18 6
------------- -------------
Total current liabilities 3,309 3,536
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt 3,135 3,142
Postretirement benefits 1,661 1,641
Accrued rent 527 541
Capital leases 86 86
Other 472 395
------------- -------------
5,881 5,805
------------- -------------
DEFERRED CREDITS:
Deferred gain on sale and leaseback transactions 909 923
Manufacturers and other credits 54 63
------------- -------------
963 986
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
EMPLOYEE STOCK OWNERSHIP PLAN
PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock,
$1.00 par value, $72.00 stated and liquidation value;
Issued and outstanding 6,866,104 shares at September 30,
1994 and 6,878,292 shares at June 30, 1994 494 495
Less: Unearned compensation under
employee stock ownership plan 380 393
------------- -------------
114 102
------------- -------------
STOCKHOLDERS' EQUITY:
Series C Convertible Preferred Stock,
$1.00 par value, $50,000 liquidation preference;
Issued and outstanding 23,000 shares at September 30, 1994
and June 30, 1994 - -
Common stock, $3.00 par value;
Authorized, 150,000,000 shares;
Issued 54,472,758 shares at September 30, 1994
and 54,469,491 shares at June 30, 1994 163 163
Additional paid-in capital 2,013 2,013
Net unrealized gain on marketable equity securities 90 53
Accumulated deficit (332) (490)
Less: Treasury stock at cost, 3,867,629 shares at
September 30, 1994 and 4,016,219 shares at June 30, 1994 261 272
------------- -------------
1,673 1,467
------------- -------------
$ 11,940 $ 11,896
============= =============
The accompanying notes are an integral part of these balance sheets.
-3-
DELTA AIR LINES, INC.
Consolidated Statements of Income
(Unaudited)
(In Millions, except Share Data)
Three Months Ended
September 30
------------------------------------
1994 1993
------------------------------------
OPERATING REVENUES:
Passenger $ 2,933 $ 2,942
Cargo 138 129
Other, net 86 67
------------ ------------
Total operating revenues 3,157 3,138
------------ ------------
OPERATING EXPENSES:
Salaries and related costs 1,138 1,161
Aircraft fuel 362 383
Passenger commissions 322 311
Aircraft rent 172 190
Depreciation and amortization 164 166
Selling expenses 150 139
Passenger service 137 140
Contracted services 116 114
Aircraft maintenance materials and repairs 111 105
Facilities and other rent 102 92
Landing fees 73 69
Other 156 146
------------ ------------
Total operating expenses 3,003 3,016
------------ ------------
OPERATING INCOME 154 122
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (76) (78)
Interest capitalized 7 9
Interest income 22 12
Gain on disposition of flight equipment 1 1
Miscellaneous income, net 13 13
------------ ------------
(33) (43)
------------ ------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 121 79
INCOME TAXES PROVIDED, NET (49) (18)
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 72 61
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX 114 -
------------ ------------
NET INCOME 186 61
PREFERRED STOCK DIVIDENDS (22) (28)
------------ ------------
NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS $ 164 $ 33
============ ============
PRIMARY INCOME PER SHARE:
Before cumulative effect of accounting change $1.00 $0.65
Cumulative effect of accounting change 2.25 -
------------ ------------
$3.25 $0.65
============ ============
FULLY DILUTED INCOME PER SHARE:
Before cumulative effect of accounting change $0.99 $0.65
Cumulative effect of accounting change 1.43 -
------------ ------------
$2.42 $0.65
============ ============
AVERAGE SHARES USED IN PER SHARE COMPUTATION:
Primary 50,558,882 50,170,102
Fully Diluted 79,680,800 50,170,102
DIVIDENDS PAID PER COMMON SHARE $0.05 $0.05
============ ============
The accompanying notes are an integral part of these statements.
-4-
DELTA AIR LINES, INC.
Statistical Summary
(Unaudited)
Three Months Ended
September 30
-------------------------------
1994 1993
---------- ----------
Statistical Summary:
Available Seat Miles (000) 33,563,888 34,826,066
Available Ton Miles (000) 4,679,976 4,832,867
Revenue Passengers Enplaned 23,490,082 22,531,706
Revenue Passenger Miles (000) 23,652,375 22,999,627
Cargo Ton Miles (000) 360,012 312,428
Revenue Ton Miles (000) 2,727,032 2,615,060
Passenger Load Factor 70.47% 66.04%
Breakeven Load Factor 66.77% 63.31%
Fuel Gallons Consumed (000) 659,688 669,352
Average Price Per Fuel Gallon 54.80cents 57.21cents
Cost Per Available Seat Mile 8.95cents 8.66cents
Passenger Mile Yield 12.40cents 12.79cents
Operating Revenue per Available Seat Mile 9.41cents 9.01cents
-5-
DELTA AIR LINES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(In Millions)
Three Months Ended
September 30
------------------------------------
1994 1993
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 186 $ 61
Adjustments to reconcile net income to cash
provided by operating activities:
Cumulative effect of accounting change (114) -
Depreciation and amortization 164 166
Deferred income taxes 35 11
Amortization of deferred gain on sale and
leaseback transactions (14) (14)
Gain on disposition of flight equipment (1) (1)
Rental expense in excess of (less than) payments (7) 5
Pension expense less than funding (18) (28)
Compensation under ESOP 12 10
Other postretirement benefits expense in excess
of payments 20 28
Changes in certain assets and liabilities:
Decrease in receivables 3 26
Decrease in other current assets 7 35
Decrease in air traffic liability (97) (112)
Increase in accounts payable and accrued liabilities 42 104
Increase in other payables 22 25
Decrease in other noncurrent liabilities (17) -
Other, net 10 5
-------------- --------------
Net cash provided by operating activities 233 321
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (49) (331)
Ground property and equipment (37) (44)
Increase in short-term investments, net (498) -
Proceeds from sale of flight equipment 68 3
-------------- --------------
Net cash used in investing activities (516) (372)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (215) (262)
Long-term borrowings - 6
Net short-term borrowings - 21
Cash dividends (22) (22)
Proceeds from sale and leaseback transactions - 284
-------------- --------------
Net cash provided (used) by financing activities (237) 27
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (520) (24)
Cash and cash equivalents at beginning of period 1,302 1,180
--------------- --------------
Cash and cash equivalents at end of period $ 782 $ 1,156
=============== ==============
The accompanying notes are an integral part of these statements.
-6-
DELTA AIR LINES, INC.
Notes to Consolidated Financial Statements
September 30, 1994
(Unaudited)
1. ACCOUNTING AND REPORTING POLICIES:
The Company's accounting and reporting policies are summarized in Note 1
(page 27) of the Notes to Consolidated Financial Statements in Delta's
1994 Annual Report to Stockholders. These interim financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's 1994 Annual Report to Stockholders. In
the opinion of management, the accompanying unaudited financial statements
reflect all adjustments, consisting of normal recurring accruals, necessary
for a fair statement of results for the interim periods.
Effective July 1, 1994, Delta began recording as reductions of revenue
certain air transportation price adjustments which had previously been
recorded as commissions expense. Certain amounts in the Consolidated
Statements of Income for the three months ended September 30, 1993, have
been reclassified to conform with the current financial statement
presentation.
2. EMPLOYEE STOCK OWNERSHIP PLAN:
Effective July 1, 1994, Delta adopted American Institute of Certified
Public Accountants Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans" (SOP 93-6). This standard changed the
Company's method of accounting for certain dividends on the Series B ESOP
Convertible Preferred Stock (ESOP Preferred Stock) and also altered the way
such dividends are included in the earnings per share calculations. The
adoption of SOP 93-6 increased reported net income available to common
stockholders shown on the Consolidated Statements of Income by $2 million
for the quarter ended September 30, 1994 and increased primary and fully
diluted earnings per share for that period by $0.05 and $0.12,
respectively. The provisions of SOP 93-6 require that it be adopted
prospectively.
3. POSTEMPLOYMENT BENEFITS:
The Company provides certain benefits to its former or inactive employees
after employment but before retirement. Such benefits primarily include
those related to disability and survivorship plans. Effective July 1, 1994,
Delta adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (SFAS 112), which
requires recognition of the liability for postemployment benefits during
the period of employment.
-7-
Adoption of SFAS 112 resulted in a cumulative after-tax transition benefit
of $114 million for the quarter ended September 30, 1994, primarily due to
the net overfunded status of the Company's disability and survivorship
plans. Future period expenses will vary based on actual claims experience
and the return on plan assets.
4. INVESTMENTS IN DEBT AND EQUITY SECURITIES:
At September 30, 1994, the gross unrealized gain on the Company's
investment in Singapore Airlines was $163 million and the gross unrealized
loss on the Company's investment in Swissair was $15 million. The
$93 million net unrealized gain, net of the related $55 million deferred
tax provision, on these investments is reflected in stockholders' equity.
Delta's other investments in available-for-sale securities are recorded as
short-term investments in the Company's Consolidated Balance Sheets. The
proceeds from sales of these securities during the September 1994 quarter
totaled $248 million, which resulted in realized losses, computed on a
specific identification basis, of less than $1 million. The amount of net
unrealized losses reflected in stockholders' equity at September 30, 1994
on short-term investments was $3 million, net of the related tax benefit.
5. SALE OF RECEIVABLES:
During fiscal 1994, the Company entered into a revolving accounts
receivable facility providing for the sale of $489 million of a defined
pool of accounts receivable through a wholly-owned subsidiary to a trust
in exchange for a Senior Certificate in the principal amount of
$300 million and a Subordinate Certificate in the principal amount of
$189 million. The subsidiary retained the Subordinate Certificate and the
Company received $300 million in cash from the sale of the Senior
Certificate to a third party. The principal amount of the Subordinate
Certificate fluctuates daily depending upon the volume of receivables sold,
and is payable to the subsidiary only to the extent the collections
received on the receivables exceed amounts due on the Senior Certificate.
At September 30, 1994, the principal amount of the Subordinate Certificate
was $288 million and is included in accounts receivable on the Company's
Consolidated Balance Sheets.
6. INCOME TAXES:
Income taxes are provided at the estimated annual effective tax rate, which
differs from the federal statutory rate of 35%, primarily due to state
income taxes and the effect of certain expenses that are not deductible for
income tax purposes.
-8-
The Company made tax payments in excess of refunds received of less than
$1 million during the three months ended September 30, 1994, and received
tax refunds in excess of income tax payments of $2 million during the three
months ended September 30, 1993.
7. CONTINGENCIES:
On March 6, 1992, Pan Am Corporation and certain of its subsidiaries,
debtors-in-possession under the Bankruptcy Code (Pan Am) and the Official
Committee of Unsecured Creditors of Pan Am (Creditors Committee), together
with the Ad Hoc Committee of Administrative and Priority Creditors of Pan
Am, filed a consolidated amended complaint (the Complaint) against Delta
relating to Delta's participation in Pan Am's proposed plan of
reorganization. The Complaint alleges, among other things, that Delta
breached its contractual obligations and promises to participate in the
plan of reorganization; violated its duty of good faith and fair dealing;
breached its fiduciary duties to Pan Am and its creditors; and acted in bad
faith. In the Complaint, the plaintiffs seek to disallow, or to subordinate
to the claims of Pan Am's general unsecured creditors, all claims Delta may
have against Pan Am, including the repayment of the $115 million principal
amount of debtor-in-possession financing Delta provided to Pan Am; to
impose a constructive trust for the benefit of Pan Am's creditors on the
profits Delta receives or should have received from the assets Delta
purchased from Pan Am under the asset purchase agreement dated July 27,
1991, as amended; to recover at least $2.5 billion in compensatory damages
plus punitive damages, costs and attorneys' fees; and to obtain such other
relief as the Court deems appropriate. In addition, in the Complaint, the
Creditors Committee seeks, independently and in its own right, unspecified
compensatory and punitive damages for, among other things, loss of its
potential equity interest in, and loss of employment by Pan Am employees
with, a reorganized Pan Am. The trial of liability issues (but not possible
damages) in this lawsuit occurred between May 4, 1994 and June 10, 1994
before the United States District Court for the Southern District of New
York, which has not yet issued its decision or indicated when such a
decision may be forthcoming. Several other lawsuits have been filed against
Delta relating to its participation in Pan Am's proposed plan of
reorganization.
Delta believes that it complied with all of its obligations to Pan Am and
the Creditors Committee and that the actions filed against it are without
merit, and it intends to continue to defend these matters vigorously.
Although the ultimate outcome of these matters cannot be predicted with
certainty and could have a material adverse effect on Delta's consolidated
financial condition, results of operations or liquidity, management
presently believes that the resolution of these actions is not likely to
have a material adverse effect on Delta's consolidated financial condition,
results of operations or liquidity.
-9-
The Company is also a defendant in certain legal actions relating to
alleged employment discrimination practices, other matters concerning past
and present employees, environmental issues and other matters concerning
the Company's business. Given the unsettled status of the law in many of
the areas involved, the ultimate outcome of these matters cannot be
predicted with certainty. Although the ultimate outcome of these matters
could have a material adverse effect on Delta's consolidated financial
condition, results of operations or liquidity, management presently
believes that the resolution of these actions is not likely to have a
material adverse effect on Delta's consolidated financial condition,
results of operations or liquidity.
8. LONG-TERM DEBT:
During the September 1994 quarter, the Company voluntarily repurchased and
retired $202 million principal amount of its long-term debt. As a result of
these transactions, the Company recognized a net pretax gain of $7 million
during the quarter ended September 30, 1994; this amount is included in
miscellaneous income on the Company's Consolidated Statements of Income.
At September 30, 1994, no borrowings were outstanding under the Company's
1991 and 1992 Bank Credit Agreements, but there is currently outstanding
under the 1992 Bank Credit Agreement a letter of credit in the amount of
$634 million to credit enhance the Guaranteed Serial ESOP Notes. This
letter of credit is utilizing $634 million of the available
commitment under the 1992 Bank Credit Agreement. The 1991 and 1992 Bank
Credit Agreements provide for unsecured borrowings by the Company on a
revolving basis of up to $500 million until December 19, 1994, and $1
billion until December 4, 1996, respectively. For additional information
regarding Delta's long-term debt, including the 1991 and 1992 Bank Credit
Agreements and the Guaranteed Serial ESOP Notes, see Note 5 (page 28) of
the Notes to Consolidated Financial Statements in Delta's 1994 Annual
Report to Stockholders.
During the three months ended September 30, 1994 and 1993, Delta made cash
interest payments, net of interest capitalized, of $44 million and
$45 million, respectively.
-10-
9. AIRCRAFT PURCHASE AND SALE COMMITMENTS:
At September 30, 1994, the Company's aircraft fleet, purchase commitments
and options were:
CURRENT FLEET
------------------------------
Aircraft Type Owned Leased Total Orders Options
------------- ----- ------ ----- ------ -------
A310-200 3 1 4 - -
A310-300 - 9 9 - -
B-727-200 106 28 134 - -
B-737-200 1 57 58 - -
B-737-300 - 13 13 52 56
B-757-200 43 41 84 6 37
B-767-200 15 - 15 - -
B-767-300 2 24 26 2 -
B-767-300ER 7 7 14 5 10
L-1011-1 32 - 32 - -
L-1011-200 1 - 1 - -
L-1011-250 6 - 6 - -
L-1011-500 17 - 17 - -
MD-11 4 7 11 4 27
MD-88 63 57 120 - 45
MD-90 - - - 55 50
-- -- --- --- ---
300 244 544 124 225
=== === === === ===
The aircraft orders include 22 B-737-300 aircraft and 24 MD-90 aircraft
scheduled for delivery after fiscal 2001 and fiscal 1996, respectively,
that are subject to reconfirmation by Delta. The MD-88 aircraft options may
be converted to MD-90 aircraft orders, the B-737-300 aircraft orders and
options may be converted to B-737-400 or B-737-500 aircraft orders, the
B-767-300ER aircraft options and 3 of the B-767-300ER aircraft orders may
be converted to B-767-300 aircraft orders, all at Delta's election.
During the quarter ended September 30, 1994, Delta returned four B-727-200
aircraft to their lessors, and sold two B-737-300 aircraft.
-11-
Future expenditures for aircraft and engines on firm order at September 30,
1994, are estimated to be $3.1 billion, excluding aircraft orders subject
to reconfirmation by Delta, as follows:
AMOUNT
YEARS ENDING JUNE 30 (IN MILLIONS)
-------------------- -------------
Nine months ending June 30, 1995 $ 370
1996 410
1997 900
1998 700
1999 300
After 1999 400
------
Total $3,080
======
10. STOCKHOLDERS' EQUITY:
During the September 1994 quarter, the Company issued 3,267 common shares,
at an average price of $47.57 per share, under the Dividend Reinvestment
and Stock Purchase Plan. Also during the September 1994 quarter, the
Company transferred from its treasury, at an average cost of $67.75 per
share, 148,566 common shares to the Delta Family-Care Savings Plan and 24
common shares under the 1989 Stock Incentive Plan.
At September 30, 1994, 5,922,734 common shares were reserved for issuance
under the 1989 Stock Incentive Plan; 5,889,744 common shares were reserved
for conversion of the Series B ESOP Convertible Preferred Stock; 17,490,494
common shares were reserved for conversion of the Series C Convertible
Preferred Stock; and 10,149,072 common shares were reserved for conversion
of the 3.23% Convertible Subordinated Notes due 2003.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------------
Results of Operations
---------------------
FINANCIAL CONDITION
During the three months ended September 30, 1994, Delta invested $49 million in
flight equipment and $37 million in ground property and equipment; made payments
of $215 million on long-term debt and capital lease obligations, which included
the voluntary repurchase and retirement of $202 million principal amount of
long-term debt; and paid $22 million in cash dividends. The principal sources of
these funds were $233 million from operations and $68 million from the sale of
flight equipment. Cash and cash equivalents and short-term investments totaled
$1.7 billion at September 30, 1994 and June 30, 1994.
As of September 30, 1994, the Company had negative working capital of
$112 million, compared to negative working capital of $313 million at June 30,
1994. A negative working capital position is normal for Delta and does not
indicate a lack of liquidity. The Company expects to meet its current
obligations as they become due through available cash and internally
generated funds, supplemented as necessary by debt financings and proceeds
from sale and leaseback transactions.
At September 30, 1994, long-term debt and capital lease obligations, including
current maturities, totaled $3.3 billion, compared to $3.5 billion at June 30,
1994. Stockholders' equity was $1.7 billion at September 30, 1994, compared to
$1.5 billion at June 30, 1994. The Company's debt-to-equity position, including
current maturities, was 66% debt and 34% equity at September 30, 1994, compared
to 70% debt and 30% equity at June 30, 1994.
At September 30, 1994, there was outstanding $421 million principal amount of
Guaranteed Serial ESOP Notes (ESOP Notes) guaranteed by Delta. The terms of the
ESOP Notes require Delta to purchase the ESOP Notes at the option of the holders
thereof if the credit rating of Delta's long-term senior unsecured debt falls
below certain levels (Purchase Event), unless Delta obtains within a specified
period of a Purchase Event certain credit enhancements (Approved Credit
Enhancement) that result in the ESOP Notes being rated A3 or higher by Moody's
and A- or higher by S&P (Required Ratings). As a result of Moody's rating action
on May 11, 1993, a Purchase Event occurred, and Delta became obligated to
purchase on September 15, 1993 any ESOP Notes properly tendered to it. Prior to
September 15, 1993, Delta obtained an Approved Credit Enhancement in the form of
a letter of credit under its 1992 Bank Credit Agreement which, as of September
30, 1994, was in the face amount of $634 million. Due to the issuance of the
letter of credit, the ESOP Notes received the Required Ratings. Accordingly,
Delta no longer has an obligation to purchase ESOP Notes as a result of the
Purchase Event that occurred on May 11, 1993. There can be no assurance that
Delta will
-13-
not be required to purchase the ESOP Notes at a later date. See Note 5 of the
Notes to Consolidated Financial Statements in Delta's 1994 Annual Report to
Stockholders. On November 14, 1994, the Delta Family-Care Savings Plan and Delta
terminated the exchange offers for the ESOP Notes discussed on page 2 of
Delta's Current Report on Form 8-K dated October 19, 1994.
During 1991, Delta provided certain debtor-in-possession financing to Pan Am
(DIP Loan). At September 30, 1994, there was outstanding and reflected as an
asset in the Company's Consolidated Balance Sheets the $115 million principal
amount of the DIP Loan plus accrued interest of $35 million. For additional
information concerning the DIP Loan, including certain litigation relating
thereto, see Notes 15 and 16 (page 36) of the Notes to Consolidated Financial
Statements in Delta's 1994 Annual Report to Stockholders.
At its regular meeting on October 27, 1994, Delta's Board of Directors declared
cash dividends of five cents per common share and $875.00 per share of Series C
Convertible Preferred Stock ($0.875 per depositary share), both payable December
1, 1994, to stockholders of record on November 9, 1994.
During the quarter ended September 30, 1994, the Company reduced its staffing by
3,756 personnel and made cash payments of $10 million related to Leadership 7.5
initiatives. For additional information concerning Leadership 7.5, see Note 14
(page 35) of the Consolidated Financial Statements in Delta's 1994 Annual Report
to Stockholders.
-14-
RESULTS OF OPERATIONS
Three Months Ended September 30, 1994 and 1993
- ----------------------------------------------
For the quarter ended September 30, 1994, Delta recorded unaudited net income of
$186 million ($3.25 primary and $2.42 fully diluted earnings per common share
after preferred stock dividend requirements) and operating income of
$154 million. For the quarter ended September 30, 1993, the Company recorded net
income of $61 million ($0.65 primary and fully diluted earnings per common share
after preferred stock dividend requirements) and operating income of $122
million.
Net income for the September 1994 quarter includes a one-time $114 million after
tax benefit ($2.25 primary and $1.43 fully diluted benefit per common share)
related to the adoption, effective July 1, 1994, of SFAS 112, "Employers'
Accounting for Postemployment Benefits" (see Note 3 of Notes to Consolidated
Financial Statements). Excluding the effect of this accounting change, net
income for the September 1994 quarter totaled $72 million ($1.00 primary and
$0.99 fully diluted earnings per common share after preferred stock dividend
requirements), up 18% from the September 1993 quarter.
The 26% improvement in operating results for the September 1994 quarter compared
to the September 1993 quarter reflects a less than 1% increase in operating
revenues and a less than 1% decrease in operating expenses. The increase in
operating revenues is due to an increase in cargo and other revenue, partially
offset by a decrease in passenger revenue. The reduction in operating expenses
is primarily due to a reduction in the average level of employment and a decline
in jet fuel prices.
Operating revenues in the September 1994 quarter totaled $3.16 billion, an
increase of less than 1% from $3.14 billion recorded in the September 1993
quarter. Passenger revenue declined less than 1% to $2.93 billion, the result of
a 3% increase in revenue passenger miles offset by a 3% decrease in the
passenger mile yield. The growth in passenger traffic and reduction in passenger
mile yield is mainly due to discount fare promotions in domestic and
international markets and the increasing presence of low-cost, low-fare carriers
in many of the domestic markets served by Delta. Cargo revenues increased 7% to
$138 million, as cargo ton miles grew 15% and the ton mile yield decreased 7%.
All other revenues increased 28% to $86 million, primarily due to increased
revenue from joint marketing programs.
Operating expenses were $3.00 billion in the September 1994 quarter, down less
than 1% from the September 1993 quarter. Operating capacity decreased 4% to
33.57 billion available seat miles, which resulted in operating cost per
available seat mile increasing 3% to 8.95 cents.
-15-
Salaries and related costs decreased 2%, due to lower employee benefits expenses
and an 8% reduction in the average level of employment. The reduction in the
average level of employment was primarily due to workforce reductions of 3,756
personnel under the Company's Leadership 7.5 Program, and an early retirement
program under which approximately 1,500 employees elected to retire effective
November 1, 1993. Aircraft fuel expense decreased 5%, as fuel consumption
decreased 1%, while the average price per fuel gallon declined 4% to 54.80
cents, Delta's lowest average fuel price per gallon in a September quarter since
1988. Passenger commissions rose 4%, mainly due to an increase in international
traffic, where commission rates are higher than in domestic markets. Aircraft
rent expense decreased 9% due to the return of certain aircraft to their
lessors. Depreciation and amortization expense decreased 1%, primarily due to
lower amortization of leasehold and operating rights and lower ground equipment
depreciation, partially offset by higher amortization of software development
costs. Selling expenses increased 8%, reflecting higher credit card service
charges and increased booking fee payments, offset by decreased advertising and
promotion expense. Passenger service expense decreased 2%, primarily due to the
continuation of cost control programs implemented during fiscal year 1993.
Contracted services increased 2%, the result of increased outsourcing of certain
airport functions. Aircraft maintenance materials and repairs expense rose 6%,
reflecting higher engine material and outside engine repair expense. Facilities
and other rent increased 11%, primarily due to higher terminal facility lease
expenses in certain hub cities. Landing fees increased 6%, mainly reflecting
rate increases at international locations. All other operating expenses
increased 7%, primarily reflecting insurance rate increases from the previous
year and higher professional and technical fees.
Nonoperating expense in the September 1994 quarter totaled $33 million, compared
to $43 million in the September 1993 quarter. Interest expense decreased 3% to
$76 million, due to a lower average level of long-term debt. Capitalized
interest decreased 22%, resulting from a decline in the balance of advance
payments for aircraft purchases. Interest income increased 83%, due to a higher
average level of short-term investments. The Company recorded a pretax gain of
$1 million on the disposition of flight equipment in the September 1994 and
September 1993 quarters.
Pretax income of $121 million for the September 1994 quarter resulted in an
income tax provision of $49 million. After recording a one-time, after-tax
benefit from the adoption of SFAS 112 and a $22 million provision for the
preferred stock dividends, net income available to common stockholders was
$164 million.
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ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
the Board of Directors of
Delta Air Lines, Inc.:
We have reviewed the accompanying consolidated balance sheet of DELTA
AIR LINES, INC. (a Delaware Corporation) as of September 30, 1994 and the
related consolidated statements of income and cash flows for the three-month
periods ended September 30, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Delta Air Lines, Inc. as of
June 30, 1994 (not presented herein), and in our report dated August 12, 1994,
we expressed an unqualified opinion on that balance sheet. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of June
30, 1994 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Atlanta, Georgia
November 10, 1994
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
On October 11, 1994, Delta and seven other U.S. airlines agreed to settle,
without admitting liability, the allegations to be asserted against them by
state and local government entities nationwide in a class action lawsuit
expected to be filed in November 1994 in the United States District Court for
the District of Columbia. For additional information regarding this settlement,
which is subject to the approval of the District Court, see page 3 of Delta's
Current Report on Form 8-K dated October 19, 1994.
As reported on page 17 of Delta's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994, on May 16, 1994, a purported class action complaint was
filed in the United States District Court for the Northern District of Georgia
against Delta and certain Delta officers in their capacity as members of the
Administrative Committee responsible for administering certain Company employee
benefit plans. The plaintiffs, who have requested a jury trial, are 21 former
Delta employees who seek to represent the class consisting of the approximately
1,800 former non-pilot employees of Delta who retired from active service
between July 23, 1992 and January 1, 1993. The complaint alleges that Delta
violated the Employee Retirement Income Security Act by (1) modifying health
benefits for this group of retirees in spite of alleged oral and written
representations that it would not make any such modifications; (2) breaching its
fiduciary duties and interfering with plaintiffs' benefits by making such
modifications and by allegedly giving false assurances that no enhanced
retirement benefit incentives were being considered or would be offered in the
future; and (3) discriminating against certain benefit plan participants. The
complaint also alleges, among other things, that Delta breached a contract with
plaintiffs by amending Delta's pass policy to suspend the flight privileges of a
retiree during any period such retiree is employed by certain other airlines. On
November 4, 1994, the District Court (1) denied the plaintiffs' motion for class
action certification; and (2) granted Delta's motion to dismiss plaintiffs'
claim concerning Delta's pass policy for lack of subject matter jurisdiction.
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Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At Delta's Annual Meeting of Stockholders held on October 27, 1994, the holders
of Delta's Common Stock and Series B ESOP Convertible Preferred Stock, voting
together as a single class, took the following actions:
1. Elected the persons named below to Delta's Board of Directors by the
following vote:
FOR WITHHELD
--- --------
Ronald W. Allen 45,926,252 3,577,877
Edwin L. Artzt 48,046,747 1,457,382
Henry A. Biedenharn, III 48,108,572 1,395,557
James L. Broadhead 48,047,735 1,456,394
Edward H. Budd 48,102,777 1,401,352
George D. Busbee 47,864,815 1,639,314
R. Eugene Cartledge 48,123,980 1,380,149
Mary Johnson Evans 48,094,087 1,410,042
Gerald Grinstein 48,044,406 1,459,723
Jesse Hill, Jr. 47,992,507 1,511,622
Andrew J. Young 47,248,774 2,255,355
There were no broker non-votes on this matter.
2. Ratified the appointment of Arthur Andersen LLP as independent auditors
of Delta for fiscal year 1995 by a vote of 48,121,814 FOR; 853,694
AGAINST; and 528,621 ABSTENTIONS. There were no broker non-votes on this
matter.
3. Defeated a stockholder proposal relating to the location of future
Annual Meetings of Stockholders by a vote of 8,341,380 FOR; 34,796,154
AGAINST; and 1,145,992 ABSTENTIONS. There were 5,220,603 broker non-
votes on this matter.
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
10. Amendments to Purchase Agreement No. DAC 90-10-D between
McDonnell Douglas Corporation and Delta relating to MD-90
aircraft.
11. Statement regarding computation of per share earnings.
12. Statement regarding computation of ratio of earnings to fixed
charges.
15. Letter from Arthur Andersen LLP regarding unaudited interim
financial information.
27. Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended September 30, 1994, Delta did not file any
Current Reports on Form 8-K. Subsequent to September 30, 1994, Delta
filed a Current Report on Form 8-K dated October 19, 1994, concerning
(i) the exchange offers discussed in Item 2 of Part I of this Form 10-Q;
(ii) restructuring charges relating to Delta's Leadership 7.5 program;
and (iii) the antitrust settlement described in Item 1 of Part II of
this Form 10-Q.
-20-
SIGNATURE
---------
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.
Delta Air Lines, Inc.
--------------------------------
(Registrant)
By: /s/ Thomas J. Roeck, Jr.
-----------------------------
Thomas J. Roeck, Jr.
Senior Vice President - Finance
and Chief Financial Officer
November 14, 1994
- --------------------
(Date)
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