<del> ABF 10Q </del> UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31,June 30, 2000Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State(State or other jurisdiction
of incorporation or organization)91-0837469
(I.R.S.(I.R.S. Employer
Identification No.)3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662(Address(Address of principal executive offices)Registrant's telephone number, including area code:(206) 285-4600
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes/x//x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report.
Class
Outstanding
Common Stock, $1.00 par value
49,013,50548,034,725
(net(net of
2,244,5263,244,526 treasury shares)
as ofMarch 31,June 30, 2000
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS (Dollars in thousands except per share data) (Unaudited)Three Months EndedMarch 31Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES: Domestic$725,252 $681,261$716,301 $686,395 $1,441,553 $1,367,656 International87,212 88,08794,726 92,605 181,938 180,692 -------- --------812,464 769,348---------- ---------- 811,027 779,000 1,623,491 1,548,348 OPERATING EXPENSES: Transportation purchased248,354 233,975254,273 238,197 502,627 472,172 Station and ground operations254,937 241,317257,682 238,517 512,619 479,834 Flight operations and maintenance142,963 122,183139,101 123,620 282,064 245,803 General and administrative63,197 59,08463,800 61,250 126,997 120,334 Sales and marketing20,019 18,34820,521 18,603 40,540 36,951 Depreciation and amortization49,569 49,61350,307 50,980 99,876 100,593 -------- --------779,039 724,520---------- ---------- 785,684 731,167 1,564,723 1,455,687 -------- -------- ---------- ---------- EARNINGS FROM OPERATIONS33,425 44,82825,343 47,833 58,768 92,661 OTHER INCOME (EXPENSE): Interest, net(4,914) (3,632)(5,177) (4,047) (10,091) (7,679) Other503 1482,202 385 2,705 534 -------- -------- ---------- ---------- EARNINGS BEFORE INCOME TAXES29,014 41,34422,368 44,172 51,382 85,516 INCOME TAXES11,115 16,1008,610 17,150 19,725 33,250 -------- -------- ---------- ---------- NET EARNINGS BEFORE CHANGE INACCTG 17,899 25,244ACCOUNTING 13,758 27,022 31,657 52,266 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING(NET OF TAX)- - 14,206 - -------- -------- ---------- ---------- NET EARNINGS $32,10513,758 $25,24427,022 $ 45,863 $ 52,266 ======== ======== ========== ========== NET EARNINGS PER SHARE: BASIC Before change in accounting $0.370.28 $0.520.56 $ 0.65 $ 1.08 Cumulative effect of changein accounting- - $ 0.29$- -------- -------- ---------- ---------- NetearningsEarnings $0.660.28 $0.520.56 $ 0.94 $ 1.08 ======== ======== ========== ========== DILUTED Before change in accounting $0.360.28 $0.510.55 $ 0.64 $ 1.06 Cumulative effect of changein accounting- - $ 0.29$- -------- -------- ---------- ---------- NetearningsEarnings $0.650.28 $0.510.55 $ 0.93 $ 1.06 ======== ======== ========== ========== DIVIDENDS PER SHARE $ 0.04 $ 0.04 $ 0.08 $ 0.08 ======== ======== ========== ========== See notes to consolidated financial statements.AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)March 31June 30 December 31 2000 1999--------------------- ----------- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash $23,31931,037 $ 28,678 Trade accounts receivable, less allowance of$9,187$9,105 and $9,640348,750343,403 339,044 Spare parts and fuel inventory45,90545,277 44,263 Deferred income tax assets27,42227,120 31,950 Prepaid expenses and other22,18221,057 26,135--------------------- ----------- TOTAL CURRENT ASSETS467,578467,894 470,070 PROPERTY AND EQUIPMENT, NET1,223,4331,268,492 1,115,712 EQUIPMENT DEPOSITS and OTHER ASSETS53,79251,410 57,468--------------------- ----------- TOTAL ASSETS$1,744,803 $1,643,250 ==========$ 1,787,796 $ 1,643,250 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $134,212150,931 $ 142,087 Salaries, wages and related taxes75,32668,005 65,276 Accrued expenses84,02784,608 78,755 Income taxes payable7,227909 3,282 Current portion of debt451459 442--------------------- ----------- TOTAL CURRENT LIABILITIES301,243304,912 289,842 LONG-TERM DEBT356,591399,473 314,707 DEFERRED INCOME TAX LIABILITIES107,655112,152 99,169 OTHER LIABILITIES85,04786,315 81,325 SHAREHOLDERS' EQUITY: Preferred Stock, without par value - Authorized 5,200,000 shares, no shares issued Common stock, par value $1 per share - Authorized 120,000,000 shares Issued51,258,03151,279,251 and 51,176,018 shares51,25851,279 51,176 Additional paid-in capital303,560303,880 298,742 Retained earnings577,117588,914 546,962 Accumulated other comprehensive income1,544745 918---------------------933,479----------- 944,818 897,798 Treasury stock,2,244,5263,244,526 and 2,491,078 shares, at cost(39,212)(59,874) (39,591)---------------------894,267----------- 884,944 858,207 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,744,803 $1,643,250 ==========$ 1,787,796 $ 1,643,250 =========== =========== See notes to consolidated financial statements.AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)ThreeSix Months EndedMarch 31 ------------------June 30 ---------------- 2000 1999-------- ------------ ---- OPERATING ACTIVITIES: Net Earnings $32,10545,863 $25,24452,266 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting (14,206) - Depreciation and amortization49,569 44,74599,876 90,632 Deferred income taxes4,307 7929,106 770 Provision for aircraft engine overhauls -4,8689,961 Other8,135 6,4079,599 11,190 -------- -------- CASH PROVIDED BY OPERATIONS79,910 82,056150,238 164,819 Change in: Receivables(9,706) (4,753)(4,359) 2,561 Inventories and prepaid expenses2,311 (2,102)4,064 (5,161) Accounts payable(7,875) (17,212)8,844 (18,003) Accrued expenses, salariesand& taxes payable19,267 (8,675)6,209 (6,384) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES83,907 49,314164,996 137,832 INVESTING ACTIVITIES: Additions to property and equipment(129,395) (80,327) Disposition(222,691) (147,748) Dispositions of property and equipment1,138 291,660 390 Expenditures for engine overhauls -(4,918)(8,620) Other(1,864) (1,130)(3,069) (2,334) -------- -------- NET CASH USEDINBY INVESTING ACTIVITIES(130,121) (86,346)(224,100) (158,312) FINANCING ACTIVITIES: Proceedsonfrom bank notes, net42,000 33,00085,000 20,000 Principal payments on debt(107) (66)(217) (167) Repurchase of common stock (20,662) - Proceeds from common stock issuance912 4,8021,253 5,148 Dividends paid(1,950) (1,941)(3,911) (3,886) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES40,855 35,79561,463 21,095 -------- -------- NETDECREASEINCREASE IN CASH(5,359) (1,237)2,359 615 CASH AT JANUARY 1 28,678 18,679 -------- -------- CASH ATMARCH 31JUNE 30 $23,31931,037 $17,44219,294 ======== ======== See notes to consolidated financial statements.AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31,June 30, 2000 (Unaudited)NOTE A-SUMMARY OF FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements included herein are unaudited but include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods reported.
Certain amounts for prior periods have been reclassified to conform to the 2000 presentation.
NOTE B-LONG-TERM DEBT:
Long-term debt consists of the following:March 31June 30 December 31 2000 1999 ---- ---- (In thousands) Senior debt: Revolving bank credit $125,000160,000 $ 95,000 Notes payable12,00020,000 - Senior notes 200,000 200,000 Revenue bonds 13,200 13,200 Other debt6,8426,732 6,949---------- ---------- 357,042--------- --------- 399,932 315,149 Less current portion451459 442---------- ------------------- --------- $356,591399,473 $ 314,707========== =================== =========NOTE
C-EARNINGSC - EARNINGS PER SHARE:Basic earnings per share are based upon the weighted average number of common shares outstanding during the interim period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the interim period plus dilutive common equivalent shares applicable to the assumed exercise of outstanding stock options.
Weighted average shares outstanding used in earnings per share computations were as follows:
Three Months EndedMarch 31Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999----------- ----------2000 1999 ---- ---- ---- ---- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic48,785,792 48,479,07348,728,096 48,616,630 48,756,944 48,547,851 Diluted49,206,767 49,352,65849,160,869 49,333,901 49,183,818 49,343,279NOTE D-SEGMENT
INFORMATIONINFORMATION:The Company has organized its business into two reportable operating segments. The domestic segment derives its revenues from the door-to-door delivery of small packages and documents throughout the United States, Canada, and Puerto Rico. Domestic operations are supported principally by Company operated aircraft and facilities. The international segment derives its revenues from express door-to-door delivery and a variety of freight services. International revenues are recognized on shipments where the origin and/or destination is outside of locations supported by the domestic segment. The Company uses a variable cost approach to delivering international services through use of existing commercial airline capacity in connection with its domestic network and independent express and freight agents in locations not currently served by Company-owned foreign operations.
The following is a summary of key segment information (in thousands): Three Months EndedMarch 31Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- SEGMENT REVENUES: Domestic$725,252 $681,261$ 716,301 $ 686,395 $1,441,553 $1,367,656 International87,212 88,087 -------- -------- $812,464 $769,348 ======== ========94,726 92,605 181,938 180,692 ---------- ---------- ---------- ---------- $ 811,027 $ 779,000 $1,623,491 $1,548,348 ========== ========== ========== ========== SEGMENT EARNINGS FROM OPERATIONS: Domestic $35,57526,151 $44,20046,054 $ 61,726 $ 90,254 International(2,150) 628 -------- --------(808) 1,779 (2,958) 2,407 ---------- ---------- ---------- ---------- $33,42525,343 $44,828 ======== ========47,833 $ 58,768 $ 92,661 ========== ========== ========== ==========NOTE E-OTHER COMPREHENSIVE
INCOMEINCOME:Other comprehensive income includes the following transactions and tax effects for the three and six month
periodsperiod endedMarch 31,June 30, 2000and 1999, respectively(in thousands):Three Months Ended Six Months Ended June 30, 2000 June 30, 2000 ----------------------- ----------------------- Income Income Before Tax Net of Before(Expense)Tax Net of Tax (Expense) Tax Tax (Expense) Tax or or BenefitTaxBenefit ------ -----------------------2000 - ---------- ------- ------ Unrealized securitiesgainslosses arising during the period$1,572$(1,121) $(605)432 $967(689) $ 450 $ (173) $ 277 Less: Reclassification adjustment for gains realized in net income(305) 117 (188)(216) 83 (133) (521) 201 (320) ------- ------- ------ ------------ Net unrealized securities gains 1,267 (488) 779 Foreign currency translation adjustments (249) 96 (153) ------ ------ ------ Other comprehensive income $1,018 $ (392) $ 626 ====== ====== ====== Income Tax Before (Expense) Net of Tax or Benefit Tax----------------- ------ 1999 - ---- Unrealized securities losses arising during the period $ (361) $ 139 $ (222) Less: Reclassification adjustment for gains realized in net income (65) 25 (40) ------ ------------ Net unrealized securities losses(426) 164 (262)(1,337) 515 (822) (71) 28 (43) Foreign currency translation adjustments(6) 3 (3)39 (15) 24 (210) 81 (129) ------- ------- ------ ------ ------- ------ Other comprehensive income $(1,298) $(432)500 $167(798) $(265)(281) $ 109 $ (172) ======= ======= ====== ====== ======= ======NOTE F-CHANGE IN ACCOUNTING:
Effective January 1, 2000, the Company changed its method of accounting for major engine overhaul costs on DC-9 aircraft from the accrual method to the direct expense method where costs are expensed as incurred. Previously, these costs were accrued in advance of the next scheduled overhaul based upon engine usage and estimates of overhaul costs. The Company believes that this new method is preferable because it is more consistent with industry practice and appropriate given the relatively large size of its DC- 9 fleet.
The cumulative effect of this change in accounting resulted in a non-cash credit of $14,206,000, net of taxes, or $.29 per share on a diluted basis being recognized in the
quarter ending March 31,first half of 2000. Excluding the cumulative effect, this change increased net earnings for the second quarter and firstquartersix months of 2000 by approximately$1.2$1.4 million, net of tax or$.02$.03 pershare.share, and $2.8 million, net of tax or $.06 per share, respectively. If the accounting change for engine overhaul costs had been retroactively applied, earnings from continuing operations for thethree monthsthree- and six-month periods endedMarch 31,June 30, 1999 would have been as follows:Threemonths ended March 31Months Six Months Ended Ended June 30, 1999----June 30, 1999 ------------- ------------- As Reported: Earnings from continuing operations $44,82847,833 $ 92,661 Diluted earnings per share $0.510.56 $ 1.06 Proforma continuing operations: Earnings from continuing operations $45,18149,966 $ 95,147 Diluted earnings per share $0.520.59 $ 1.09NOTE G-NEW ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities"
As amended by. SFAS No. 137 amended this statementwill beby delaying the effectivefordate to fiscal year 2001. In addition, SFAS No. 138 amended this statement by addressing a limited number of issues causing implementation difficulties. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.
TheWhile the Company had no outstanding fuel contracts atMarch 31, 2000. The Company has, in the past, utilizedJune 30, 2000, it may utilize contracts with financial institutions to limit its exposure to volatility in jet fuelprices. Under terms of the contracts, the Company either makes or receives payments if the market price of heating oil, as determined by an index of monthly NYMEX Heating Oil futures contracts, is lower or exceeds certainpricesagreed to between the Company and the financial institutions. The contracts, which have no cost basis, are accounted for as hedges since there has historically existed a high correlation between the changesin theNYMEX index and the price of jet fuel. Settlements are made in cash and are recordedfuture. If contracts become outstanding in theearnings statement in the period of settlement as either an increase or decrease to fuel expense.
Underfuture, under the cash flow hedge provisions of SFAS No. 133, the Company will be required to record outstanding fuel contracts at fair value, with corresponding changes in fair value recorded as a component of other comprehensive income if the hedges are determined to be effective. The Company has not adopted the provisions of SFAS No. 133 as ofMarch 31,June 30, 2000 and is currently evaluating the future impact of this pronouncement on the financial statements and related disclosures.MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONRESULTS OF OPERATIONS:
The Company's operating performance in the second quarter and the first six months of 2000 resulted in operating income and net earnings below that of the comparable periods of 1999. The weaker operating results are primarily caused by the lack of growth in domestic shipment volumes. While the revenue yield on domestic shipments has continued to improve, the lack of shipment growth precludes realizing productivity gains necessary to offset cost increases. As a result, average operating cost per shipment increased at a faster rate than average revenue per shipment.
Net earnings for the
firstsecond quarter of 2000 were$32.1$13.8 million, or$.65$.28 pershare on adilutedbasis, which includes a credit due to a change in accounting for certain engine overhaul costs. Net earnings before this nonrecurring credit were $17.9 million, or $.36 pershare. This compares to net earnings of$25.2$27.0 million, or$.51$.55 per share reported in the second quarter of 1999. The second quarter earnings for 2000 included a non-recurring gain from the sale of securities of $1.9 million, $.02 per share. The Company, as a policyholder, received stock securities of Metropolitan Life when that insurance company demutualized. These securities were sold resulting in the gain.Net earnings for the first six months of 2000 were $45.9 million, or $.93 per share, compared to $52.3 million, or $1.06 per share for the
first quarter ofcorresponding period in 1999.Effective at the beginning of 2000, the Company changed from the accrual method of accounting for DC-9 engine overhaul costs to the direct expense method where costs are expensed as incurred. The cumulative effect of this change
in accountingresulted in a non-cash credit of $14.2 million, net of taxes, or $.29 pershare.share, being recorded in the first quarter and included in net earnings for the first six months of 2000.Operating
results were negativelycosts for the first six months of 2000 have continued to be impacted by thecontinued escalatinghigh cost of jet fuelduringwhich began to escalate in thefirstthird quarter of2000. The net cost increase for jet fuel in the first quarter of 2000 verses 1999 was $18.0 million, equal to a net increase of approximately $.395 per gallon.1999. To helpoffsetaddress this cost increasein jet fuelthe Company implemented a 3% fuel surchargebeginningon revenue effective in early February7,2000, under whichresulted$19.9 million and $32.5 million of surcharge revenues were recorded during the second quarter and first six months of 2000, respectively. Jet fuel costs increased approximately $15.0 million, or $.33 per gallon in$12.5the second quarter of 2000 and $33.0 million,being billedor $.36 per gallon for the first six months of 2000 versus comparable periods in 1999. Higher fuel costs have also impacted ground related linehaul and cartage operations. While the fuel surcharge has been adequate to offset these higher fuel related costs during the second quarter of 2000, it has not fully offset the impact of all fuel related increases incurred in the firstquartersix months of 2000.
The Company experienced total shipment growth in the first quarter of 2000 of 3.5% comparedAlso, fuel prices continue tothe first quarter of 1999. On a per day basis, total shipment growth was approximately 0.5% in the first quarter of 2000 compared to 1999 first quarter, as there were two additional operating days in this years first quarter. Although the growth achievedbe at historically high levels, which ismodest, this was the first quarter in the last four quarters that some shipment growth was experienced. The Company is encouraged by this positive trend and hopes it is a sustainable trend that can be built upon.not an encouraging trend.The following table sets forth selected shipment and revenue data for the periods indicated:
Three Months EndedMarch 31 ---------------------------Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999 Change 2000 1999 Change ---- ---- ------ ---- ---- ------ Shipments (in thousands): Domestic Overnight47,979 46,32146,175 46,422 (0.5%) 94,154 92,743 1.5% Next Afternoon 13,680 14,132 (3.2%) 27,614 28,816 (4.2%) Service13,934 14,684Second Day Service19,771 17,81419,161 17,897 7.1% 38,932 35,711 9.0% 100 Lbs. and Over6775 73 2.7% 142 148 (4.1%) ------ ------ ------- ------- Total Domestic81,751 78,89479,091 78,524 0.7% 160,842 157,418 2.2% International Express1,529 1,5771,549 1,636 (5.3%) 3,078 3,213 (4.2%) Freight94 99101 101 - 195 200 (2.5%) ------ ------ ------- ------- Total International1,623 1,6761,650 1,737 (5.0%) 3,413 3,273 (4.1%) ------ ------ ------- ------- Total Shipments83,374 80,57080,741 80,261 0.6% 164,115 160,831 2.0% ====== ====== ======= ======= Average Pounds per Shipment: Domestic4.21 4.214.32 4.18 3.3% 4.27 4.19 1.8% International47.87 43.1249.52 44.68 10.8% 48.70 43.92 10.9% Average Revenue per Pound: Domestic$ 2.07 $ 2.02$2.07 $2.06 0.4% $2.07 $2.04 1.5% International$ 1.11 $ 1.20$1.13 $1.18 (4.0%) $1.12 $1.19 (5.9%) Average Revenue per Shipment: Domestic $8.879.02 $8.648.74 3.2% $ 8.94 $ 8.69 2.9% International$53.74 $52.55$57.41 $53.31 7.7% $55.59 $52.94 5.0%Total revenues increased
5.6%4.1% and 4.9% in the second quarter and firstquarterhalf of 2000, respectively, compared to2.6% inthefirst quartersame periods of 1999. Domestic revenues increased6.5%4.4% in thefirstsecond quarter, of2000 comparedwhich 2.9% was due to2.8% inthecomparable period of 1999. Duringfuel surcharge. For the firstquartersix months of 2000, domestic revenues increased 5.4% with the fuel surchargerevenue of $12.5 million accountedaccounting for1.9%2.4% of thedomestic revenuegrowth.The Company is encouraged by the increased revenue growth and by the fact that it exceeded the growth rate in shipments, which continues a positive trend related to the Company's continuing focus on yield enhancements.The average revenue per domestic shipment increased2.8% to $8.873.2% in the second quarter of 2000 and 2.9% for the firstquartersix months of 2000 compared to thefirst quartercomparable periods of 1999. The Company is encouraged by the stability in revenue per shipment yields, which is a positive trend relating to the continuing focus on yields.Domestic shipments increased
3.6%.7% in the second quarter and 2.2% in the firstquarterhalf of 2000comparedin comparison to0.8%the same periods inthe first quarter of1999. Overnight shipments accounted for58.7%58.4% of total domestic shipments in thefirstsecond quarterof 2000, comparablecompared tothe overnight shipment percentage achieved59.1% in thefirstsecond quarter of 1999. The higher yielding overnight shipmentsincreased 3.6%decreased .5% in thefirstsecond quarter,of 2000, comparedcomparable to1.2%the decline experienced in thecorresponding 1999 period.same period of 1999. The Company's Next Afternoon Service shipments decreased5.1%3.2% compared to a decrease of 4.0% in thefirstsecond quarter of2000 compared to an increase of 2.1% in1999.TheSecond Day Service shipments increased11.0%7.1% in2000the second quarter compared to adecrease of 1.1%1.3% growth rate experienced in thefirst quartersame period of 1999. The Second Day Service category includes554,000shipmentsin the first quarter of 2000associated with the Company's newresidential deliveryproduct,airborne@home. This product,airborne@home, which was introduced in late 1999targets newto service expanding e- commerce and businessfrom internet retailersto residential delivery markets. airborne@home shipment volumes were 1,188,000 in the second quarter andcatalog fulfillment providers.1,742,000 for the first six months of 2000. The Companyiscontinues to be encouraged by the business opportunities of this new product which offers shippers a competitive combination of service and pricing, while providing the Company an efficient way to accomplish residential deliveries through an arrangement with the U.S. Postal Service.International revenues
decreased 1.0%increased 2.3% and .7% in the second quarter and firstquartersix months of 2000, respectively, compared toan increaseincreases of0.5%1.3% and .9% in the comparableperiodperiods of 1999. Total international shipments decreased3.2%5.0% in the second quarter and 4.1% in the firstquarterhalf of 2000 compared toan increase of 11.8% inthecomparable periodsame periods of 1999. International express shipmentsposted a decline of 3.0%decreased 5.3% in the second quarter and 4.2% for the firstquarterhalf of 2000 primarily due to the loss of a major customer.This compares to an increaseInternational freight shipments were flat in the second quarter of13.6% for express shipments2000 and decreased 2.5% in the firstquarterhalf of 2000 compared to the corresponding periods in 1999.Heavier weight internationalThe Company is encouraged, however, by the 7.5% improvement in freight shipmentsalso declined inwhen compared to the first quarter of 2000. The international segment contribution to earnings from operations wasnegative $2.1a loss of $.8 million and $3.0 million for the second quarter and firstquarterhalf of 2000, respectively, compared toa contributionincome of$.6$1.8 million and $2.4 million in thesimilar periodcomparable periods of 1999.Operating expenses as a percentage of revenues were
95.9%96.9% and 96.4% in the second quarter and first six months of 2000, respectively, compared to 93.8% and 94.0% for thefirst quarter of 2000 compared to 94.2%corresponding periods inthe corresponding period of1999 and 94.9% for all of 1999. Operating cost per shipment handled increased 6.8% in the second quarter of 2000 to $9.73 compared to the second quarter of 1999. TheCompany experienced a 1.0% improvement in productivityoperating cost per shipment for the firstquartersix months of 2000 increased 5.3% to $9.53 compared to the same period in 1999. The significantly higher cost of jet fuel is a major factor impacting operating costs in the firstquartersix months of1999,2000. Additionally, productivity, as measured by shipments handled per paid employeehour. Operating cost per shipment handled increased 3.9% to $9.34hour, experienced a decline of 1.8% and .4% for the second quarter and firstquarterhalf of 2000,comparedrespectively. The Company continues tothe first quartermanage productivity levels sufficient to maintain a high level of1999. The significantly higher cost of jet fuel was a major factor negatively impacting operating costs so far in 2000.overall service integrity with its customers. Comparisons of certain operating expense components are discussed below.Transportation purchased increased as a percentage of revenues to
30.6%31.0% in the firstquartersix months of 2000 compared to30.4%30.5% in the comparable period of 1999. This increase was primarily due tothe increaseincreases in farmed outcartagepickup and delivery, international airline and surfaceline haullinehaul costs.Station and ground expense
of 31.4%increased to 31.6% of revenues in the firstquartersix months of 2000was comparablecompared to 31.0% in the firstquartersix months of 1999.IncreasedThe decline in productivityhelped to offsetcombined with wage related cost increasesinhad a negative effect on this category of expense.Flight operations and maintenance expense as a percentage of revenues during the first
quarterhalf of 2000 was17.6%,17.4% compared to 15.9% in the first six months of 1999. Aviation fuel consumption increased to 45.5 million gallons in the second quarter, a 2.3% increase over the second quarter of 1999. For the first six months of 2000, aviation fuel consumption of 91.2 million gallons increased 2.4% from the first six months of 1999. The average aviation fuel price for the second quarter and firstquartersix months of 2000 was$.94$.91 and $.93 per gallon,which is 91% higher than the $.49respectively, compared to $.58 and $.54 per gallon,experiencedrespectively, in thefirst quarter of 1999. Aviation fuel consumption increased to 45.7 million gallons in the first quarter of 2000, a 2.5% increase over the similar periodcomparable periods of 1999. As a result of fuel hedging contracts, the Company incurred $2.4 million of expense, equal to approximately$.05$.03 per gallon, in the firstquartersix months of 1999, with nocomparable cost incurredhedging settlements occurring in the firstquartersix months of 2000.Effective January 1, 2000, the Company began to expense DC-9 engine overhaul costs directly to maintenance expense as costs are incurred.
Beginning in 2000, theseEngine overhaul costsare expensedcurrently charged to expense as incurred and included in the flight operations and maintenancecategory. Prior to 2000, the Company used the accrual method with estimated engine overhaul costs providedcategory were previously accrued in advance of the next scheduledoverhaul. In 1999overhaul andprior, engine overhaul cost provisions were included incharged to thedepreciationdeprecation and amortizationexpensecategory.General and administrative expense was 7.8% of revenues in the first
quartersix months of 2000,compared to 7.7%the same as reported in the comparable period of 1999. This category of cost has stayed relatively constant as a percentage of revenues primarily due to the continued strong cost controls over labor and discretionary costs.Depreciation and amortization expense
was 6.1%decreased to 6.2% of revenuesinfor the firstquartersix months of 2000 compared to6.4%6.5% inthe first quarter of1999.Although there was higher depreciationDepreciation expense in the firstquartersix months of 2000 increased compared to the comparable period in 1999 due to the increased number of 767 aircraft placed in service since thefirstsecond quarter of1999, this1999. This increase was offset by theeliminationeffect ofthe expense due tothe change in accounting for enginereservesoverhaul costs discussed above.Interest expense in the first
quartersix months of 2000 was higher than the firstquartersix months of 1999 as the impact of higher levels of average outstanding borrowings offset the effect of lower average effective interestrates inrates. Capitalized interest was $3.4 million for the firstquarterhalf of 2000 compared tothe first quarter of 1999. Capitalized interest was $1.5 million compared to $1.3$2.4 million in the first half of 1999.Other income in the second quarter includes a nonrecurring gain of
2000 versus 1999, respectively.$1.9 million on the sale of the securities received in connection with the demutualization of Metropolitan Life.The Company's effective tax rate was
38.3%38.4% in the firstquartersix months of 2000 compared to 38.9% in the firstquarterhalf of 1999 and 38.1% for all of 1999.LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of the change in working capital for the first
quartersix months of 2000 was$83.9$165.0 million, compared to$49.3$137.8 million in the firstquarterhalf of 1999.Capital expenditures continue to be a primary factor affecting the financial condition of the Company. The Company anticipates total capital expenditures to approximate $380 million in 2000. During the first
quarterhalf of 2000, total capital expenditures net of dispositions were$128.3$221.0 million compared to$80.3$147.4 million during the firstquartersix months of 1999. Cash provided by operations and bank borrowings were the primary sources for funding capital expenditures in the firstquarterhalf of 2000.The Company completed a share repurchase of 1 million shares of common stock in early June for approximately $20.7 million, which were added to the Company's treasury stock. The shares were repurchased pursuant to a 4 million stock repurchase program authorized by the Board of Directors in 1998. The Company has no current plans to purchase additional shares under the remaining repurchase authorization.
The Company's strong operating cash flow is a major source of liquidity. Also, the Company's
$250 millionunsecured revolving bank credit agreement has traditionally been used as a major source of liquidity. In July 2000, the Company replaced its revolving bank credit facility under a new agreement that resulted in an increase in borrowing capacity from $250 million to $275 million for a five-year term expiring June 30, 2005. The Company also has available$40$25 million under unsecured uncommitted money market lines of credit with several banks used in conjunction with the revolving credit agreement to facilitate settlement and accommodate short-term borrowing fluctuations. With the higher level of capital expenditures in 1999 and the firstquarterhalf of 2000, compared to 1998 and prior levels, reliance on the bank facilities has increased. A total of$137$180 million was outstanding atMarch 31,June 30, 2000 under the revolving bank credit and money market credit lines, compared to $95 million outstanding at December 31, 1999 and$62$49 million outstanding atMarch 31,June 30, 1999.The Company's ratio of long-term debt to total capitalization was
26.25%28.6% atMarch 31,June 30, 2000, compared to24.1%22.7% atMarch 31,June 30, 1999 and 24.7% at December 31, 1999.In management's opinion, the available capacity under the bank credit agreements coupled with internally generated cash flow from remaining 2000 operations should provide adequate flexibility to finance anticipated capital expenditures for the balance of 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
There have been no material changes in the Company's market risk sensitive instruments and positions since its disclosure in its Annual Report on Form 10-K for the year ended December 31, 1999. See Note F of the Notes to Consolidated Financial Statements to this Form 10-Q for further discussion regarding the Company's fuel hedging activities.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of Airborne Freight Corporation was held at The Westin Hotel, 1900 Fifth Avenue, Seattle, Washington 98101 on April 25, 2000. A total of 44,496,445 shares were represented at the meeting comprising 91% of the outstanding shares of the Company entitled to vote at the meeting on the record date (February 21, 2000).
The following directors were duly elected for terms ending in 2003, in each case by an affirmative vote in excess of 96% of the shares represented at the meeting:Number of Shares Voted For ---------------- Robert S. Cline 43,535,682 Richard M. Rosenberg 43,494,739 William Swindells 43,065,478The following are continuing directors with terms expiring as indicated:Terms Expiring in 2001 Terms Expiring in 2002 --------------------- ---------------------- Rosalie J. Wolf Robert G. Brazier Harold M. Messmer James H. Carey Mary Agnes Wilderotter Andrew B. KimThe shareholders, by an affirmative vote in excess of 95% of the shares represented at the meeting and entitled to vote, approved the material terms of the 2000-2004 Executive Incentive Compensation Plan ("EICP"). The EICP provides for annual cash bonuses to certain executives of the Company and its subsidiaries for each of calendar years 2000 through 2004.
The shareholders, by an affirmative vote of 66% of the shares represented at the meeting and entitled to vote, approved the Airborne Freight Corporation 2000 Director Stock Option Plan ("Plan"). The Plan provides automatic annual grants of stock options to non-employee directors of the Company.
The shareholders, by an affirmative vote of 73% of the shares represented at the meeting and entitled to vote, approved the proposal to urge the Board of Directors to take all necessary steps, in compliance with state law, to declassify the Board for the purpose of director elections.
The shareholders, by an affirmative vote of approximately 18% of the shares represented at the meeting and entitled to vote, rejected a proposal to recommend that the Company adopt all necessary governing documents for the policy that the Board must have at least one independent director with five years of significant airline flight-operations management experience.
The Airborne Board of Directors on the same date, April 25, 2000, reelected all existing executive officers, including Robert S. Cline as Chairman and Chief Executive Officer, and Robert G. Brazier as President and Chief Operating Officer.
The Board of Directors also declared a quarterly cash dividend of $0.04 per share on the Common Stock of the Company payable on May 23, 2000 to shareholders of record on May 9, 2000.Item 6. Exhibits and Reportsonor Form 8-K. (a) Exhibits - EXHIBIT NO. 10 Material Contracts - ---------------------------------Executive Compensation PlansOther Material Contracts ------------------------ 10(a) $275,000,000 Credit Agreement dated as of July 27, 2000 among the Company, as borrower, andAgreements ------------------------------------------- 10(a) Executive Group Incentive Compensation Plan 10(b) Executive Incentive Compensation Plan EXHIBIT NO. 18 Letter Re: Change in Accounting Principles - ----------------------------------------------------------- 18 Letter Re: Change in Accounting PrinciplesWachovia Bank, N.A., as administrative agent, with U.S. Bank, as documentation agent, Bank of America, N.A., as syndication agent, and Wachovia Securities, Inc., as lead arranger. EXHIBIT NO. 27 Financial Data Schedule - ----------------------------------------27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data ScheduleSIGNATURES ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: AIRBORNE FREIGHT CORPORATION ---------------------------- (Registrant) Date:5/11/00 /s/Roy C. Liljebeck ------- -------------------- Roy C. Liljebeck Executive Vice President, Chief Financial Officer Date: 5/11/8/14/00 /s/Lanny H. Michael --------------------------------------------------- Lanny H. Michael Senior Vice President,Treasurer and ControllerChief Financial Officer