UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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 JuneSeptember 30, 2000
Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 91-0837469
|
3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662
(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/ 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, |
| |
| | (net of 3,244,526 treasury shares) |
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS (Dollars in thousands except per share data) (Unaudited)Three Months EndedSixNine Months EndedJuneSeptember 30JuneSeptember 30------------------ ---------------------------- ------------ 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES: Domestic$716,301 $686,395 $1,441,553 $1,367,656$705,977 $696,116 $2,147,530 $2,063,772 International94,726 92,605 181,938 180,69298,552 89,192 280,490 269,884 -------- -------- ---------- ----------811,027 779,000 1,623,491 1,548,348804,529 785,308 2,428,020 2,333,656 OPERATING EXPENSES: Transportation purchased254,273 238,197 502,627 472,172262,718 240,738 765,345 712,910 Station and ground operations257,682 238,517 512,619 479,834263,768 242,083 776,387 721,917 Flight operations and maintenance139,101 123,620 282,064 245,803143,665 129,565 425,729 375,368 General and administrative63,800 61,250 126,997 120,33464,312 59,755 191,309 180,089 Sales and marketing20,521 18,603 40,540 36,95120,200 20,504 60,740 57,455 Depreciation and amortization50,307 50,980 99,876 100,59352,892 53,852 152,768 154,445 -------- -------- ---------- ----------785,684 731,167 1,564,723 1,455,687807,555 746,497 2,372,278 2,202,184 EARNINGS (LOSS) FROM OPERATIONS (3,026) 38,811 55,742 131,472 OTHER INCOME (EXPENSE): Interest, net (6,544) (4,709) (16,635) (12,388) Other 406 372 3,111 906 -------- -------- ---------- ---------- EARNINGSFROM OPERATIONS 25,343 47,833 58,768 92,661 OTHER INCOME (EXPENSE): Interest, net (5,177) (4,047) (10,091) (7,679) Other 2,202 385 2,705 534 -------- -------- ---------- ---------- EARNINGS(LOSS) BEFORE INCOME TAXES22,368 44,172 51,382 85,516(9,164) 34,474 42,218 119,990 INCOMETAXES 8,610 17,150 19,725 33,250TAX EXPENSE (BENEFIT) (3,655) 12,870 16,070 46,120 -------- -------- ---------- ---------- NET EARNINGS (LOSS) BEFORE CHANGE IN ACCOUNTING13,758 27,022 31,657 52,266(5,509) 21,604 26,148 73,870 -------- -------- ---------- ---------- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - - 14,206 - -------- -------- ---------- ---------- NET EARNINGS (LOSS) $13,758(5,509) $27,02221,604 $45,86340,354 $52,26673,870 ======== ======== ========== ========== NET EARNINGS (LOSS) PER SHARE: BASIC Before change in accounting $0.28(0.11) $0.560.44 $0.650.54 $1.081.52 Cumulative effect of change - -$0.29 - -------- -------- ---------- ---------- NetEarningsearnings (loss) $0.28(0.11) $0.560.44 $0.940.83 $1.081.52 ======== ======== ========== ========== DILUTED Before change in accounting $0.28(0.11) $0.550.44 $0.640.54 $1.061.50 Cumulative effect of change - -$0.29 - -------- -------- ---------- ---------- NetEarningsearnings (loss) $0.28(0.11) $0.550.44 $0.930.83 $1.061.50 ======== ======== ========== ========== DIVIDENDS PER SHARE $ 0.04 $ 0.04 $0.080.12 $0.080.12 ======== ======== ========== ========== See notes to consolidated financial statements. 2AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)JuneSeptember 30 December 31 2000 1999----------- --------------- ---- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash $31,03726,567 $ 28,678 Trade accounts receivable, less allowance of$9,105$9,510 and $9,640343,403353,381 339,044 Spare parts and fuel inventory45,27746,032 44,263 Refundable income taxes 10,763 1,679 Deferred income tax assets27,12026,640 31,950 Prepaid expenses and other21,057 26,135 ----------- -----------20,228 24,456 ---------- ---------- TOTAL CURRENT ASSETS467,894483,611 470,070 PROPERTY AND EQUIPMENT, NET1,268,4921,295,004 1,115,712 EQUIPMENT DEPOSITS and OTHER ASSETS51,41052,993 57,468----------- -----------TOTAL ASSETS$ 1,787,796 $ 1,643,250 =========== ===========$1,831,608 $1,643,250 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $150,931155,296 $ 142,087 Salaries, wages and related taxes68,00576,721 65,276 Accrued expenses84,60880,666 78,755 Income taxes payable909- 3,282 Current portion of debt 459 442----------- --------------------- ---------- TOTAL CURRENT LIABILITIES304,912313,142 289,842 LONG-TERM DEBT399,473429,361 314,707 DEFERRED INCOME TAX LIABILITIES112,152119,701 99,169 OTHER LIABILITIES86,31591,570 81,325 SHAREHOLDERS' EQUITY: Preferred Stock, without par value - Authorized 5,200,000 shares, no shares issued Common stock, par value $1 per share - Authorized 120,000,000 shares Issued51,279,25151,279,651 and 51,176,018 shares51,27951,280 51,176 Additional paid-in capital303,880303,885 298,742 Retained earnings588,914581,484 546,962 Accumulated other comprehensive income7451,059 918----------- ----------- 944,818---------- ---------- 937,708 897,798 Treasury stock, 3,244,526 and 2,491,078 shares, at cost (59,874) (39,591)----------- ----------- 884,944---------- ---------- 877,834 858,207 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$ 1,787,796 $ 1,643,250 =========== ===========$1,831,608 $1,643,250 ========== ========== See notes to consolidated financial statements. 3AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)SixNine Months EndedJuneSeptember 30---------------------------- 2000 1999 ---- ---- OPERATING ACTIVITIES: Net Earnings $45,86340,354 $52,26673,870 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting (14,206) - Depreciation and amortization99,876 90,632152,768 139,300 Deferred income taxes9,106 77017,135 5,952 Provision for aircraft engine overhauls -9,96115,145 Other9,599 11,19015,485 8,526 -------- -------- CASH PROVIDED BY OPERATIONS150,238 164,819211,536 242,793 Change in: Receivables(4,359) 2,561(14,337) (2,124) Inventories and prepaid expenses4,064 (5,161)(6,625) (8,409) Accounts payable8,844 (18,003)13,209 (18,912) Accrued expenses, salaries & taxes payable6,209 (6,384)10,074 (19,581) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES164,996 137,832213,857 193,767 INVESTING ACTIVITIES: Additions to property and equipment(222,691) (147,748)(302,390) (226,429) Dispositions of property and equipment1,660 3904,037 1,855 Expenditures for engine overhauls -(8,620)(13,054) Other(3,069) (2,334)(7,051) (3,296) -------- -------- NET CASH USED BY INVESTING ACTIVITIES(224,100) (158,312)(305,404) (240,924) FINANCING ACTIVITIES: Proceeds from bank notes, net85,000 20,000115,000 50,000 Principal payments on debt(217) (167)(329) (270) Repurchase of common stock (20,662) - Proceeds from common stock issuance1,253 5,1481,259 5,230 Dividends paid(3,911) (3,886)(5,832) (5,832) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES61,463 21,09589,436 49,128 -------- -------- NET (DECREASE) INCREASE IN CASH2,359 615(2,111) 1,971 CASH AT JANUARY 1 28,678 18,679 -------- -------- CASH ATJUNESEPTEMBER 30 $31,03726,567 $19,29420,650 ======== ======== See notes to consolidated financial statements. 4AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJuneSeptember 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:JuneSeptember 30 December 31 2000 1999 ---- ---- (In thousands) Senior debt: Revolving bank credit $160,000190,000 $ 95,000 Notes payable 20,000 - Senior notes 200,000 200,000 Revenue bonds 13,200 13,200 Other debt6,7326,620 6,949 --------- ---------399,932429,820 315,149 Less current portion 459 442 --------- --------- $399,473429,361 $ 314,707 ========= =========NOTE C - 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 EndedSixNine Months EndedJuneSeptember 30JuneSeptember 30------------------ ---------------------------- ------------ 2000 1999 2000 1999 ---- ---- ---- ---- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic48,728,096 48,616,630 48,756,944 48,547,85148,034,899 48,642,297 48,516,263 48,579,333 Diluted49,160,869 49,333,901 49,183,818 49,343,27948,185,156 49,222,452 48,850,931 49,303,004 5NOTE D-SEGMENT INFORMATION:
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 EndedSixNine Months EndedJuneSeptember 30JuneSeptember 30------------------ ---------------------------- ------------ 2000 1999 2000 1999 ---- ---- ---- ---- SEGMENT REVENUES: Domestic$ 716,301 $ 686,395 $1,441,553 $1,367,656$705,977 $696,116 $2,147,530 $2,063,772 International94,726 92,605 181,938 180,69298,552 89,192 280,490 269,884 -------- -------- ---------- -------------------- ---------- $ 811,027 $ 779,000 $1,623,491 $1,548,348 ========== ==========$804,529 $785,308 $2,428,020 $2,333,656 ======== ======== ========== ========== SEGMENT EARNINGS (LOSS) FROM OPERATIONS: Domestic $26,151 $ 46,054 $ 61,726 $ 90,25455 $39,488 $61,786 $129,779 International(808) 1,779 (2,958) 2,407 ---------- ---------- ---------- ---------- $ 25,343 $ 47,833 $ 58,768 $ 92,661 ========== ========== ========== ==========(3,081) (677) (6,044) 1,693 ------- ------- ------- -------- $(3,026) $38,811 $55,742 $131,472 ======= ======= ======= ========NOTE E-OTHER COMPREHENSIVE INCOME:
Other comprehensive income includes the following transactions and tax effects for the three and
sixnine monthperiodperiods endedJuneSeptember 30, 2000 (in thousands):Three Months EndedSixNine Months EndedJuneSeptember 30, 2000JuneSeptember 30, 2000----------------------- -----------------------Income Income Before Tax Net of Before Tax Net of Tax (Expense) Tax Tax (Expense) Tax or or Benefit Benefit ------ ------- ------ ------ ------- ------ Unrealized securitieslossesgains arising during the period$(1,121)$432593 $(689)(228) $450365 $1,043 $(173)(401) $277642 Less: Reclassification adjustment for gains realized in net income(216) 83 (133) (521) 201 (320) ------- -------(67) 26 (41) (588) 227 (361) ------ ------------------- ------ ------ ------ Net unrealized securitieslosses (1,337) 515 (822) (71) 28 (43)gains 526 (202) 324 455 (174) 281 Foreign currency translation adjustments39 (15) 24 (210) 81 (129) ------- -------(16) 6 (10) (227) 87 (140) ------ ------------------- ------ ------ ------ Other comprehensive income$(1,298)$500510 $(798)(196) $(281)314 $109228 $(172) ======= =======(87) $ 141 ====== =================== ====== ====== ====== 6NOTE 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 first
halfnine months of 2000. Excluding the cumulative effect, this change increased net earnings for thesecondthird quarter and firstsixnine months of 2000 by approximately $1.4 million, net of tax or $.03 per share, and$2.8$4.2 million, net of tax or$.06$.09 per share, respectively. If the accounting change for engine overhaul costs had been retroactively applied, earnings from continuing operations for thethree-three andsix-monthnine month periods endedJuneSeptember 30, 1999 would have been as follows:Three MonthsSixEnded Nine Months EndedEnded JuneSeptember 30, September 30, 1999June 30,1999------------- ----------------- ---- As Reported: Earnings from continuing operations$ 47,833 $ 92,661$38,811 $131,472 Diluted earnings per share $0.560.44 $1.061.50 Proforma continuing operations: Earnings from continuing operations$ 49,966 $ 95,147$40,109 $134,311 Diluted earnings per share $0.590.47 $1.091.56NOTE G-NEW ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard (SFAS)Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities".SFAS No. 137 amended this statement by delayingIn June 2000, theeffective date to fiscal year 2001. In addition,FASB issued SFAS No. 138, which amendedthis 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.
While the Company had no outstanding fuel contracts at June 30, 2000, it may utilize contracts with financial institutions to limit its exposure to volatility in jet fuel prices in the future. If contracts become outstanding in the future, under the cash flow hedgecertain provisions of SFASNo.133the Company will be requiredtorecord outstanding fuel contracts at fair value, with corresponding changesclarify areas causing difficulties infair value recorded as a component of other comprehensive income if the hedges are determined to be effective.implementation.The Company has
not adoptedappointed a team to implement SFAS 133. This team is responsible for developing appropriate management reports, educating both financial and non-financial personnel, completing an inventory of embedded derivatives and addressing various other SFAS 133 related issues. The Company will adopt SFAS 133 and theprovisions ofcorresponding amendments under SFASNo.138 on January 1, 2001. SFAS 133, asof June 30, 2000 andamended by SFAS 138, iscurrently evaluating the futurenot expected to have a material impactof this pronouncementon the Company's consolidated results of operations, financialstatements and related disclosures.position or cash flows.7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONRESULTS OF OPERATIONS:
The
Company's operating performance in the second quarter andCompany reported net earnings for the firstsixnine months of 2000resulted in operating income and net earningsbelow that of the comparableperiodsperiod in 1999, and experienced a net loss for the third quarter of1999.this year. 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 earningsThe net loss for thesecondthird quarter of 2000were $13.8was $5.5 million, or$.28$.11 per diluted share. This compares to net earnings of$27.0$21.6 million, or$.55$.44 per share reported in thesecondthird quarter of 1999.The second quarterNet earnings for the first nine months of 2000
includedwere $40.4 million, or $.83 per share, compared to $73.9 million, or $1.50 per share for the corresponding period in 1999. Earnings for 2000 include a non-recurring gain from the sale of securities of $1.9 million, or $.02 pershare. The Company, as a policyholder, received stock securities of Metropolitan Life when that insurance company demutualized. These securities were sold resultingshare recorded in thegain.
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 corresponding period in 1999.second quarter. 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 resulted in a non-cash credit of $14.2 million, net of taxes, or $.29 per share, being recorded in the first quarter and included in net earnings for the firstsixnine months of 2000.Operating costs for the first
sixnine months of 2000 have continued to be impacted by the high cost of jet fuel, which began to escalate in the third quarter of 1999. To help address this cost increase the Company implemented a 3% fuel surcharge on domestic revenue effective in early February 2000, under which$19.9$19.5 million and$32.5$51.9 million of surcharge revenues were recorded during thesecondthird quarter and firstsixnine months of 2000, respectively. Jet fuel costs increased approximately$15.0$15.5 million, or$.33$.35 per gallon in thesecondthird quarter of 2000 and$33.0$48.5 million, or $.36 per gallon for the firstsixnine 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 thesecondthird quarter of 2000, it has not fully offset the impact of allfuel relatedfuel-related increases incurred in the firstsixnine months of 2000. Also, fuel prices continue to be at historically high levels, which is not an encouraging trend. To assist in mitigating these continued high prices, effective October 16, 2000, the fuel surcharge was increased from 3 percent to 4 percent of domestic revenue.The following table sets forth selected shipment and revenue data for the periods indicated:
Three Months EndedSixNine Months EndedJuneSeptember 30JuneSeptember 30------------------ ---------------------------- ------------ 2000 1999 Change 2000 1999 Change ---- ---- ------ ---- ---- ------ Shipments (in thousands): Domestic Overnight46,175 46,422 (0.5%45,540 46,496 (2.1%)94,154 92,743 1.5%139,694 139,239 0.3% Next Afternoon13,680 14,132 (3.2%Service 13,430 13,722 (2.1%)27,614 28,816 (4.2%41,044 42,538 (3.5%)ServiceSecond Day Service19,161 17,897 7.1% 38,932 35,711 9.0%19,466 18,733 3.9% 58,398 54,444 7.3% 100 Lbs. and Over75 73 2.7% 142 148 (4.1%72 69 4.3% 214 217 (1.4%) ------ ------ ------- ------- Total Domestic79,091 78,524 0.7% 160,842 157,418 2.2%78,508 79,020 (0.6%) 239,350 236,438 1.2% International Express1,549 1,636 (5.3%1,506 1,699 (11.4%)3,078 3,213 (4.2%4,584 4,912 (6.7%) Freight101 101 - 195 200 (2.5%)102 96 6.3% 297 296 0.3% ------ ------ ------- ------- Total International1,650 1,737 (5.0%1,608 1,795 (10.4%)3,413 3,273 (4.1%4,881 5,208 (6.3%)------ ------ ------- -------8 Total Shipments80,741 80,261 0.6% 164,115 160,831 2.0%80,116 80,815 (0.9%) 244,231 241,646 1.1% ====== ====== ======= ======= Average Pounds per Shipment: Domestic4.32 4.18 3.3%4.274.19 1.8%4.24 0.7% 4.27 4.21 1.4% International49.52 44.68 10.8% 48.70 43.92 10.9%55.69 43.44 28.2% 51.01 43.75 16.6% Average Revenue per Pound: Domestic $2.07$2.06 0.4%$2.04 1.5% $2.07 $2.04 1.5% International$1.13 $1.18 (4.0%$1.09 $1.14 (4.4%)$1.12 $1.19 (5.9%$1.11 $1.17 (5.1%) Average Revenue per Shipment: Domestic$ 9.02 $ 8.74 3.2% $ 8.94 $ 8.69 2.9%$8.91 $8.81 1.1% $8.93 $8.73 2.3% International$57.41 $53.31 7.7% $55.59 $52.94 5.0%$61.29 $49.69 23.3% $57.47 $51.82 10.9%Total revenues increased
4.1%2.4% and4.9%4.0% in thesecondthird quarter and firsthalfnine months of 2000, respectively, compared to the same periodsofin 1999. Domestic revenues increased4.4%1.5% in thesecondthird quarter,of which 2.9% was due to the fuel surcharge. Forand 4.1% for the firstsixnine months of2000, domestic revenues increased 5.4% with the2000. The fuel surchargeaccountingaccounted for2.4%2.5% of thegrowth.year to date growth in domestic revenue. The average revenue per domestic shipment increased3.2%1.1% in thesecondthird quarter of 2000 and2.9%2.3% for the firstsixnine months of 2000 compared to the comparable periods of 1999. The Companyisremains encouraged by the stability in domestic revenue per shipmentyields, which is a positive trend relating to the continuing focus onyields.Domestic shipments
increased .7%decreased .6% in thesecondthird quarter and2.2%increased 1.2% in the firsthalfnine months of 2000 in comparison to the same periods in 1999. The third quarter of 2000 had one less operating day than the comparable period in 1999. On a per day basis, domestic shipments increased .9% to 1,246,000 shipments per day. The first nine months of 2000 had one additional operating day than in 1999. Overnight shipments accounted for58.4%58.0% of total domestic shipments in thesecondthird quarter compared to59.1%58.8% in thesecondthird quarter of 1999. The higher yielding overnight shipments decreased.5%2.1% in thesecondthird quarter,comparablecompared tothea decline of .6% experienced in the same period of 1999. The Company's Next Afternoon Service shipments decreased3.2%2.1% compared to a decrease of4.0%6.3% in thesecondthird quarter of 1999. Second Day Service shipments increased7.1%3.9% in thesecondthird quarter compared to a1.3%7.1% growth rate experienced in the same period of 1999. The Second Day Service category includes shipments associated with the Company's new product, airborne@home, which was introduced in late 1999 to service expandinge- commercee-commerce and business to residential delivery markets. airborne@home shipment volumes were1,188,0001,758,000 in thesecondthird quarter and1,742,0003,500,000 for the firstsixnine months of 2000. The Company continues 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 increased
2.3%10.5% and.7%3.9% in thesecondthird quarter and firstsixnine months of 2000, respectively, compared toincreasesa decrease of1.3% and .9%1.1% in thecomparable periodsthird quarter of 1999 and an increase of .3% in the first nine months of 1999. Total international shipments decreased5.0%10.4% in thesecondthird quarter and4.1%6.3% in the firsthalfnine months of 2000 compared to the same periodsofin 1999. International express shipments decreased5.3%11.4% in thesecondthird quarter and4.2%6.7% for the firsthalfnine months of 2000 due primarilydueto the loss of a majorcustomer.customer early in 2000. International freight shipmentswere flatincreased 6.3% and .3% in thesecondthird quarter and first nine months of 2000,and decreased 2.5% in the first half of 2000respectively, compared to the corresponding periods in 1999. The Company is encouragedhowever,by the7.5% improvementrecent strength in freight shipmentswhen compared toin thefirstsecond and third quarters of 2000. Although international revenues showed strength in the third quarter,of 2000.the shift in the mix toward import business, and the overall cost increases from airlines on international segments created significant cost pressures, and resulted in a deterioration in margins and international segment profitability. Typically, our U.S. export business has a higher margin than imports. The international segment contribution to earnings from operations was a loss of$.8$3.0 million9
and
$3.0$6.0 million for thesecondthird quarter and firsthalf of 2000, respectively, compared to income of $1.8 million and $2.4 million in the comparable periods of 1999.
Operating expenses as a percentage of revenues were 96.9% and 96.4% in the second quarter and first sixnine months of 2000, respectively, compared to93.8% and 94.0%a loss of $.7 million for the third quarter of 1999 and operating earnings of $1.7 million in the first nine months of 1999.Operating expenses exceeded revenues in the third quarter and were 97.7% of revenues for the first nine months of 2000. This compares to 95.1% and 94.4% for the corresponding three and nine month periods in 1999 and 94.9% for all of 1999. Operating cost per shipment
handledincreased6.8%9.1% in thesecondthird quarter of 2000 to$9.73$10.08 compared to $9.24 in thesecondthird quarter of 1999. The operating cost per shipment for the firstsixnine months of 2000 increased5.3%6.6% to$9.53$9.71 compared to the same period in 1999. The significantly higher cost of jet fuel is a major factor impacting operating costs in the firstsixnine months of 2000. Excluding the cost of jet fuel, operating cost per shipment increased 7.4% for the third quarter and 4.6% for the first nine months of 2000. Additionally, productivity, as measured by shipments handled per paid employee hour, experienced a decline of1.8%2.6% and.4%1.2% for thesecondthird quarter and firsthalfnine months of 2000, respectively. The Company continues to manage productivity at levels sufficient to maintain a high level of overall service integrity with its customers. At this time, maintaining service is a priority and no plans exist to reduce service to cut costs in the short term. Comparisons of certain operating expense components are discussed below.Transportation purchased increased as a percentage of revenues to
31.0%31.5% in the firstsixnine months of 2000 compared to 30.5% in the comparable period of 1999. This increase was primarily due to increases in farmed out pickup and delivery, international airline and surface linehaulcosts.rates as well as fuel surcharges on these services.Station and ground expense increased to
31.6%32.0% of revenues in the firstsixnine months of 2000 compared to31.0%30.9% in the firstsixnine months of 1999. The decline in productivity combined with wage related cost increases had a negative effect on this category of expense.Flight operations and maintenance expense as a percentage of revenues during the first
halfnine months of 2000 was17.4%17.5% compared to15.9%16.1% in the firstsixnine months of 1999. Aviation fuel consumptionincreaseddecreased to45.544.6 million gallons in thesecondthird quarter, a2.3% increase1.3% decrease over thesecondthird quarter of 1999. For the firstsixnine months of 2000, aviation fuel consumption of91.2135.8 million gallons increased2.4%1.2% from the firstsixnine months of 1999. The average aviation fuel price for thesecondthird quarter and firstsixnine months of 2000 was$.91$1.03 and$.93$.96 per gallon, respectively, compared to$.58$.68 and$.54$.58 per gallon, respectively, in the comparable periods of 1999. As a result of fuel hedging contracts, the Company incurred $2.4 million of expense, equal to approximately$.03$.02 per gallon, in the firstsixnine months of 1999, with no hedging settlements occurring in the firstsixnine 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. Engine overhaul costs currently charged to expense as incurred and included in the flight operations and maintenance category were previously accrued in advance of the next scheduled overhaul and charged to the
deprecationdepreciation and amortization category.General and administrative expense was
7.8%7.9% of revenues in the firstsixnine months of 2000,the same as reportedcompared to 7.7% inthe comparable period of1999. This category of cost hasstayed relatively constantincreased as a percentage of revenues primarily due tothe continued strongwage and compensation costcontrols over labor and discretionary costs.pressures.Depreciation and amortization expense decreased to
6.2%6.3% of revenues for the firstsixnine months of 2000 compared to6.5%6.6% in 1999. Depreciation expense in the firstsixnine months of 2000 increased compared to the comparable period in 1999 due to the increased number of 767 aircraft placed in service since thesecondthird quarter of 1999. This increase was offset by the effect of the change in accounting for engine overhaul costs discussed above.10
Interest expense in the first
sixnine months of 2000 was higher than in the firstsixnine months of 1999as the impact ofdue to higher levels of average outstandingborrowings offsetborrowings. Effective interest rates for theeffectfirst nine months oflower average effective interest rates.2000 was comparable to the same period in 1999. Capitalized interest was$3.4$5.0 million for the firsthalfnine months of 2000 compared to$2.4$3.1 million in the firsthalfnine months of 1999.Other income
in the second quarterincludes a nonrecurring gain of $1.9 million recorded in the second quarter on the sale ofthesecurities received in connection with the demutualization of Metropolitan Life.The Company's effective tax rate was
38.4%38.1% in the firstsixnine months of 2000 compared to38.9%38.4% in the firsthalfnine months of 1999 and 38.1% for all of 1999.The Company announced a number of new initiatives to improve volume growth and profitability. These initiatives include marketing targeted toward enhancing the suite of products offered, pursuing the small market business market, improving sales effectiveness, expanding third party logistics capabilities and increasing online offerings. Among these initiatives is also the introduction of a ground delivery service, which allows customers to consolidate their distribution process with the Company. The new service, which is scheduled to begin in April 2001, will leverage our existing infrastructure and excess capacity and is expected to provide a sound competitive offering in the marketplace.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of the change in working capital for the first
sixnine months of 2000 was$165.0$211.5 million, compared to$137.8$227.6 million in the firsthalfnine months 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$370 million in 2000. During the firsthalfnine months of 2000, total capital expenditures net of dispositions were$221.0$298.3 million compared to$147.4$224.6 million during the firstsixnine months of 1999. Cash provided by operations and bank borrowings were the primary sources for funding capital expenditures in the firsthalfnine months of 2000.The Company completed a share repurchase of 1 million shares of common stock in
earlyJune 2000 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
strongoperating cash flow is a major source of liquidity. Also, the Company's unsecured 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 $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 in1999 andthe firsthalfnine months of 2000, compared to19981999 and prior levels, and the decreased operating cash flows, reliance on the bank facilities has increased. A total of$180$210 million was outstanding atJuneSeptember 30, 2000 under the revolving bank credit and money market credit lines, compared to $95 million outstanding at December 31, 1999 and$49$79 million outstanding atJuneSeptember 30, 1999.11
The Company's ratio of long-term debt to total capitalization was
28.6%30.1% atJuneSeptember 30, 2000, compared to22.7%24.1% atJuneSeptember 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.
FORWARD-LOOKING STATEMENTS:
Certain statements contained in this report are considered "forward-looking statements" as the term is defined in the Private Securities Litigation Reform Act of 1995. Such statements relate to views of future events and operating performance based upon information currently available to management. Forward-looking statements that are not historical facts are generally identified by the use of terminology which includes "believes", "expects", "anticipates", "intends", "plans" or other words with similar intent. Forward-looking statements involve risks, which are inherently difficult to predict. Actual results could materially differ from those expressed in the forward-looking statements.
Many factors could cause actual results to differ materially from the views expressed by the forward-looking statements. Those factors include, but are not limited to the following:
- Economic conditions in the U.S. and international markets in which the Company operates. - Competition from other providers of transportation and related services. - The ability to adapt to changing customer demand patterns, including the effect on demand resulting from technology developments. - The ability of management to successfully implement sales growth initiatives and other business strategies in a cost-effective manner. - Customer acceptance of new business initiatives and pricing programs. - Retention and maintenance of key customer relationships. - Disruption of service due to labor disputes. - Changes in government regulation, including federal and local regulation governing the operation of the Company's aircraft. - Increase in fuel prices. - The ability to obtain financing on reasonable terms. - Weather related disruptions of service, and customer demand and related impacts.The Company does not intend to publicly revise or update any of its forward-looking statements.
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.12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reportsoron Form 8-K. (a) Exhibits - EXHIBIT NO.10 Material Contracts - --------------------------------- Other Material Contracts ------------------------ 10(a) $275,000,000 Credit Agreement dated as of July 27, 2000 among the Company, as borrower, and Wachovia 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- ----------------------------------------13 SIGNATURES ---------- Pursuant to the requirements of the SecuritiesandExchange 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:8/11/14/00 /s/Lanny H. Michael ------- ------------------------- Lanny H. Michael Senior Vice President, Chief Financial Officer /s/Robert T. Christensen ------------------------- Robert T. Christensen Vice President, Corporate Controller 14