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 September 30, 2000March 31, 2001
Commission File Number 1-6512
AIRBORNE, FREIGHT CORPORATIONINC.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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, par value $1 per share | ||
| | | (net of as of |
AIRBORNE, FREIGHT CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30 September 30
------------ ------------March 31
--------
2001 2000 1999 2000 1999
---- ----
---- ----
REVENUES:
Domestic $705,977 $696,116 $2,147,530 $2,063,772$730,099 $725,252
International 98,552 89,192 280,490 269,88493,422 87,212
-------- --------
---------- ----------
804,529 785,308 2,428,020 2,333,656823,521 812,464
OPERATING EXPENSES:
Transportation purchased 262,718 240,738 765,345 712,910267,039 248,354
Station and ground operations 263,768 242,083 776,387 721,917277,932 254,937
Flight operations and maintenance 143,665 129,565 425,729 375,368151,686 142,963
General and administrative 64,312 59,755 191,309 180,08968,509 63,197
Sales and marketing 20,200 20,504 60,740 57,45524,002 20,019
Depreciation and amortization 52,892 53,852 152,768 154,44552,638 49,569
-------- --------
---------- ----------
807,555 746,497 2,372,278 2,202,184841,806 779,039
-------- --------
EARNINGS (LOSS) FROM OPERATIONS (3,026) 38,811 55,742 131,472(18,285) 33,425
OTHER INCOME (EXPENSE):
Interest, net (6,544) (4,709) (16,635) (12,388)(4,497) (4,914)
Other 406 372 3,111 906(3,485) 503
-------- -------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES (9,164) 34,474 42,218 119,990(26,267) 29,014
INCOME TAX EXPENSE (BENEFIT) (3,655) 12,870 16,070 46,120(9,272) 11,115
-------- -------- ---------- ----------
NET EARNINGS (LOSS) BEFORE CHANGE IN (16,995) 17,899
ACCOUNTING (5,509) 21,604 26,148 73,870
-------- -------- ---------- ----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - - 14,206 -
-------- -------- ---------- ----------
NET EARNINGS (LOSS) $ (5,509) $ 21,604 $ 40,354 $ 73,870$(16,995) $32,105
======== ======== ========== ==========
NET EARNINGS (LOSS) PER SHARE:
BASIC
Before change in accounting $ (0.11)(0.35) $ 0.44 $ 0.54 $ 1.520.37
Cumulative effect of change -in
accounting - 0.29
-
-------- -------- ---------- ----------
Net earnings (loss) $ (0.11)(0.35) $ 0.44 $ 0.83 $ 1.520.66
======== ======== ========== ==========
DILUTED
Before change in accounting $ (0.11)(0.35) $ 0.44 $ 0.54 $ 1.500.36
Cumulative effect of change -in
accounting - 0.29
-
-------- -------- ---------- ----------
Net earnings (loss) $ (0.11)(0.35) $ 0.44 $ 0.83 $ 1.500.65
======== ======== ========== ==========
DIVIDENDS PER SHARE $ 0.04 $ 0.04
$ 0.12 $ 0.12
======== ======== ========== ==========
See notes to consolidated financial statements.
2
AIRBORNE, FREIGHT CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30March 31 December 31
2001 2000 1999
---- ----
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 26,56766,890 $ 28,67840,390
Trade accounts receivable,
less allowance of $9,510$10,638 and $9,640 353,381 339,044$10,290 148,562 218,685
Spare parts and fuel inventory 46,032 44,26343,591 43,231
Refundable income taxes 10,763 1,679tax 20,728 21,595
Deferred income tax assets 26,640 31,95028,789 28,839
Prepaid expenses and other 20,228 24,45623,286 20,809
---------- ----------
TOTAL CURRENT ASSETS 483,611 470,070331,846 373,549
PROPERTY AND EQUIPMENT, NET 1,295,004 1,115,7121,298,977 1,324,345
EQUIPMENT DEPOSITS and OTHER ASSETS 52,993 57,46845,051 48,025
---------- ----------
TOTAL ASSETS $1,831,608 $1,643,250$1,675,874 $1,745,919
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 155,296156,046 $ 142,087180,623
Salaries, wages and related taxes 76,721 65,27680,289 71,179
Accrued expenses 80,666 78,755
Income taxes payable - 3,28290,513 83,518
Current portion of debt 459 442485 477
---------- ----------
TOTAL CURRENT LIABILITIES 313,142 289,842327,333 335,797
LONG-TERM DEBT 429,361 314,707279,105 322,230
DEFERRED INCOME TAX LIABILITIES 119,701 99,169126,201 125,444
POST RETIREMENT LIABILITIES 56,038 62,360
OTHER LIABILITIES 91,570 81,32542,721 37,233
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
Issued 51,345,071 and 51,279,651 and 51,176,018 shares 51,345 51,280 51,176
Additional paid-in capital 304,597 303,885 298,742
Retained earnings 581,484 546,962548,781 567,700
Accumulated other comprehensive income 1,059 918(379) (136)
---------- ----------
937,708 897,798904,344 922,729
Treasury stock, 3,244,5263,240,526 and 2,491,0783,244,526
shares, at cost (59,868) (59,874) (39,591)
---------- ----------
877,834 858,207844,476 862,855
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,831,608 $1,643,250$1,675,874 $1,745,919
========== ==========
See notes to consolidated financial statements.
3
AIRBORNE, FREIGHT CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NineThree Months Ended
September 30
------------March 31
--------
2001 2000 1999
---- ----
OPERATING ACTIVITIES:
Net Earnings (Loss) $(16,995) $ 40,354 $ 73,87032,105
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Cumulative effect of change in accounting - (14,206) -
Depreciation and amortization 152,768 139,30052,638 49,569
Deferred income taxes 17,135 5,952
Provision for aircraft engine overhauls - 15,145806 4,307
Postretirement obligations (6,323) 1,768
Other 15,485 8,5265,836 6,367
-------- --------
CASH PROVIDED BY OPERATIONS 211,536 242,79335,962 79,910
Change in:
Proceeds from receivable securitization
facility 50,000 -
Receivables (14,337) (2,124)20,123 (9,706)
Inventories and prepaid expenses (6,625) (8,409)(2,837) 2,311
Refundable income taxes 867 -
Accounts payable 13,209 (18,912)(24,577) (7,875)
Accrued expenses, salaries &and taxes payable 10,074 (19,581)16,105 19,267
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 213,857 193,76795,643 83,907
INVESTING ACTIVITIES:
Additions to property and equipment (302,390) (226,429)
Dispositions(26,578) (129,395)
Disposition of property and equipment 4,037 1,855
Expenditures for engine overhauls - (13,054)253 1,138
Other (7,051) (3,296)1,439 (1,864)
-------- --------
NET CASH USED BYIN INVESTING ACTIVITIES (305,404) (240,924)(24,886) (130,121)
FINANCING ACTIVITIES:
Proceeds from(Payments) proceeds on bank notes, net 115,000 50,000(43,000) 42,000
Principal payments on debt (329) (270)
Repurchase of common stock (20,662) -(116) (107)
Proceeds from common stock issuance 1,259 5,230783 912
Dividends paid (5,832) (5,832)(1,924) (1,950)
-------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 89,436 49,128
-------- --------(44,257) 40,855
NET INCREASE (DECREASE) INCREASE IN CASH (2,111) 1,97126,500 (5,359)
CASH AT JANUARY 1 40,390 28,678 18,679
-------- --------
CASH AT SEPTEMBER 30MARCH 31 $ 26,56766,890 $ 20,65023,319
======== ========
See notes to consolidated financial statements.
4
AIRBORNE, FREIGHT CORPORATIONINC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2000March 31, 2001 (Unaudited)
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 20002001 presentation.
NOTE B-LONG-TERM DEBT:
Long-term debt consists of the following:
September 30March 31 December 31
2001 2000 1999
---- ----
(In thousands)
Senior debt:
Revolving bank credit $ 190,00060,000 $ 95,00075,000
Notes payable 20,000 - 28,000
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 6,620 6,949
--------- ---------
429,820 315,1496,390 6,507
---------- ----------
279,590 322,707
Less current portion 459 442
--------- ---------485 477
---------- ----------
$ 429,361279,105 $ 314,707
========= =========322,230
========== ==========
The Company's revolving bank credit agreement provides for a total commitment of $275 million subject to certain financial covenants. In April 2001, an amendment to the agreement was completed that amended the fixed charge covenant and provided for borrowing availability to be allocated for issued letters of credit. The Company was in compliance with all financial covenants as amended for the first quarter. The Company is currently in the process of further restructuring the agreement. The restructured agreement will include provisions requiring the Company to provide collateral sufficient to secure the commitment. As of March 31, 2001, $60 million was outstanding under the facility and issued letter of credit commitments totaled $96.8 million. The Company expects the restructuring to be completed during the second quarter and accordingly has, continued to classify outstanding borrowings as long term on the consolidated balance sheet.
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 Ended
Nine Months Ended
September 30 September 30
------------ ------------March 31
--------
2001 2000 1999 2000 1999
---- ----
---- ----
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 48,034,899 48,642,297 48,516,263 48,579,33348,079,634 48,785,792
Diluted 48,185,156 49,222,452 48,850,931 49,303,004
548,080,472 49,206,767
NOTE D-SEGMENT 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 Ended
Nine Months Ended
September 30 September 30
------------ ------------March 31
--------
2001 2000 1999 2000 1999
---- ----
---- ----
SEGMENT REVENUES:
Domestic $705,977 $696,116 $2,147,530 $2,063,772$730,099 $725,252
International 98,552 89,192 280,490 269,88493,422 87,212
-------- --------
---------- ----------
$804,529 $785,308 $2,428,020 $2,333,656$823,521 $812,464
======== ======== ========== ==========
SEGMENT EARNINGS (LOSS) FROM OPERATIONS:
Domestic $(16,528) $ 55 $39,488 $61,786 $129,77935,575
International (3,081) (677) (6,044) 1,693
------- ------- -------(1,757) (2,150)
-------- $(3,026) $38,811 $55,742 $131,472
======= ======= =======--------
$(18,285) $ 33,425
======== ========
NOTE E-OTHER COMPREHENSIVE Other comprehensive income includes the following transactions and tax effects for the three and nine month periods ended September 30,March 31, 2001 and 2000, respectively (in thousands):
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
Income IncomeTax
Before Tax Net of Before Tax(Expense) Net of
Tax (Expense) Tax Tax (Expense) Tax
or or Benefit Benefit
------ ------- ------ ------ ------- ------Tax
2001 --- ---------- ---
- ----
Unrealized securities gainslosses arising
during the period $(145) $ 59356 $ (228) $ 365 $1,043 $ (401) $ 642(89)
Less: Reclassification adjustment for
gains realized in net income (67) 26 (41) (588) 227 (361)
------ ------ ------(32) 12 (20)
----- ----- -----
Net unrealized securities losses (177) 68 (109)
Foreign currency translation adjustments (201) 67 (134)
----- ----- -----
Other comprehensive income $(378) $ 135 $(243)
===== ===== =====
Income Tax
Before (Expense) Net of
Tax or Benefit Tax
2000 --- ---------- ---
- ----
Unrealized securities gains arising
during the period $1,572 $ (605) $ 967
Less: Reclassification adjustment for
gains realized in net income (305) 117 (188)
------ ------ ------
Net unrealized securities gains 526 (202) 324 455 (174) 2811,267 (488) 779
Foreign currency translation adjustments (16) 6 (10) (227) 87 (140)
------ ------ ------(249) 96 (153)
------ ------ ------
Other comprehensive income $1,018 $ 510(392) $ (196) $ 314 $ 228 $ (87) $ 141626
====== ====== ====== ====== ====== ======
6
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 first nine months ofquarter ending March 31, 2000. Excluding the cumulative effect, this change increased net earnings for the thirdfirst quarter and first nine months of 2000 by approximately $1.4$1.2 million, net of tax or $.03$.02 per share, and $4.2 million, net of tax or $.09 per share, respectively. If the accounting change for engine overhaul costs had been retroactively applied, earnings from continuing operations for the three and nine month periods ended September 30, 1999 would have been as follows:
Three Months Ended Nine Months Ended September 30, September 30, 1999 1999 ---- ---- As Reported: Earnings from continuing operations $38,811 $131,472 Diluted earnings per share $ 0.44 $ 1.50 Proforma continuing operations: Earnings from continuing operations $40,109 $134,311 Diluted earnings per share $ 0.47 $ 1.56
ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS 133 to clarify areas causing difficulties in implementation.
The Company has appointed 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 the corresponding amendments under SFAS 138 on January 1, 2001. SFAS 133, as amended by SFAS 138, is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.
7share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company reported net earnings for the first nine months of 2000 below that of the comparable period in 1999, and experienced a net loss for the thirdfirst quarter of this year. The weaker operating results are primarily caused by the lack2001 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.
The net loss for the third quarter of 2000 was $5.5$17.0 million, or $.11$.35 per diluted share. This compares to net earnings before a change in accounting of $21.6$17.9 million, or $.44 per share reported in the third quarter of 1999.
Net earnings for the first nine months of 2000 were $40.4 million, or $.83 per share, compared to $73.9 million, or $1.50$.36 per share for the corresponding period in 1999. Earningsfirst quarter of 2000. Net earnings reported for 2000 include a non-recurring gain from the sale of securities of $1.9 million, or $.02 per share recorded in the second quarter. Effective at the beginningfirst quarter 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 inincluding a non-cash credit of $14.2 million, net of taxes, or $.29 per share being recordedcredit for a change in accounting, were $32.1 million or $.65 per share.
Operating results were negatively affected by the slowing economy, the lack of growth in core domestic product and a shift in mix of shipment volumes. Also, with the slow growth in shipment volumes, productivity gains were difficult to achieve and not sufficient to offset increases in operating costs. The first quarter of 2001 had one less operating day than the comparable quarter last year, hindering volume and included in net earnings for the first nine months of 2000.
Operating costs for the first nine 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 $19.5 million and $51.9 million of surcharge revenues were recorded during the third quarter and first nine months of 2000, respectively. Jet fuel costs increased approximately $15.5 million, or $.35 per gallon in the third quarter of 2000 and $48.5 million, or $.36 per gallon for the first nine 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 third quarter of 2000, it has not fully offset the impact of all fuel-related increases incurred in the first nine 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.margin performance comparisons.
The following table sets forth selected shipment and revenue data for the periods indicated:
Three Months
Ended
Nine Months Ended
September 30 September 30
------------ ------------March 31
--------
2001 2000 1999 Change 2000 1999 Change
---- ---- ------
---- ---- ------
Shipments (in thousands):
Domestic
Overnight 45,540 46,496 (2.1%) 139,694 139,239 0.3%45,618 47,979 -4.9%
Next Afternoon Service 13,430 13,722 (2.1%) 41,044 42,538 (3.5%)13,428 13,934 -3.6%
Second Day Service 19,466 18,733 3.9% 58,398 54,444 7.3%24,215 19,771 22.5%
100 Lbs. and Over 72 69 4.3% 214 217 (1.4%)60 67 -10.4%
------ ------
------- -------
Total Domestic 78,508 79,020 (0.6%) 239,350 236,438 1.2%83,321 81,751 1.9%
International
Express 1,506 1,699 (11.4%) 4,584 4,912 (6.7%)1,600 1,529 4.6%
Freight 102 96 6.3% 297 296 0.3%94 8.5%
------ ------
------- -------
Total International 1,608 1,795 (10.4%) 4,881 5,208 (6.3%)
81,702 1,623 4.9%
------ ------
Total Shipments 80,116 80,815 (0.9%) 244,231 241,646 1.1%85,023 83,374 2.0%
====== ====== ======= =======
Average Pounds per Shipment:
Domestic 4.27 4.24 0.7% 4.274.14 4.21 1.4%-1.7%
International 55.69 43.44 28.2% 51.01 43.75 16.6%51.92 47.87 8.5%
Average Revenue per Pound:
Domestic $2.07 $2.04 1.5% $2.07 $2.04 1.5%-
International $1.09 $1.14 (4.4%)$1.04 $1.11 $1.17 (5.1%)-6.3%
Average Revenue per Shipment:
Domestic $8.91 $8.81 1.1% $8.93 $8.73 2.3%$8.72 $8.87 -1.7%
International $61.29 $49.69 23.3% $57.47 $51.82 10.9%$54.89 $53.74 1.6%
Total revenues increased 2.4% and 4.0%1.4% in the thirdfirst quarter and first nine months of 2000, respectively,2001 compared to the same periods in 1999.period of 2000. Domestic revenues increased 1.5%.7% in the thirdfirst quarter and 4.1% for the first nine months of 2000. The fuel surcharge accounted for 2.5% of the year to date growthon one less operating day in domestic revenue. The average revenue per domestic shipment increased 1.1% in the third quarter of 2000 and 2.3% for the first nine months of 2000 compared to2001 than the comparable periods of 1999. The Company remains encouraged by the stabilityperiod in domestic2000. Average revenue per shipment yields.declined 1.7% to $8.72 due to a decline in higher yielding overnight express shipments coupled with lower average weights per shipment in all shipment categories. Domestic revenues have been aided by a fuel surcharge on revenue of 3% that was originally implemented in February 2000 and was raised to a 4% beginning October 2000. In the first quarter of 2001, $24.6 million of surcharge revenue was recognized compared to $12.5 million in the same period last year. In January 2001, the Company announced a new pricing structure for its domestic services that included a rate increase, a shift to zone-based pricing and a non-scheduled pickup fee. Implementation of certain pricing actions were ongoing during the quarter with further actions being taken into the second quarter as customer contracts are renewed. Once fully implemented, the average rate increase is targeted to be about 5% with some variance keyed to shipping volume.
Domestic shipments decreased .6% in the third quarter and increased 1.2%1.9% in the first nine months of 2000quarter in comparison to the same periodsperiod in 1999.2000. The thirdfirst quarter of 20002001 had one less operating day than the comparable period in 1999.2000. On a per day basis, domestic shipments increased .9%3.5% to 1,246,0001.3 million shipments per day. The first nine months of 2000 had one additional operating day thangrowth in 1999. Overnight shipments accounted for 58.0% of total domestic shipmentswas due to volume increases in the third quarter compared to 58.8% in the third quarter of 1999. The higher yielding overnight shipments decreased 2.1% in the third quarter, compared to a decline of .6% experienced in the same period of 1999. The Company's Next Afternoon Service shipments decreased 2.1% compared to a decrease of 6.3% in the third quarter of 1999. Second Day Service shipments increased 3.9% in the third quarter compared to a 7.1% growth rate experienced in the same period of 1999. The Second Day Service category includes shipments associated with the Company's newairborne@home product, airborne@home, which was introduced in late 1999 to service expandingthe e-commerce and business to residential delivery markets. airborne@home shipment volumes were 1,758,000These shipments, included in the third quarter and 3,500,000Second Day Service category for reporting purposes, totaled 5.3 million in the first nine monthsquarter of 2001 compared to 554,000 in the first quarter of 2000. However, growth in airborne@home was offset by declining volumes in the Company's core products. The Company's core products include its Overnight service, Next Afternoon Service (NAS) and Second Day Service (SDS). Higher yielding Overnight shipments decreased 4.9% with NAS and SDS shipments decreasing 3.6% and 1.4%, respectively in the first quarter. The Company continuesattributes these declines to slowing economic conditions.
In April 2001 the Company expanded its service portfolio by introducing a new product, Ground Delivery Service (GDS). With the addition of GDS, the Company can provide customers with ground services as well as air services. The new product will leverage the Company's sort and linehaul infrastructure and will be encouragedmarketed to a target customer base initially. Shipment volumes are targeted to reach 15,000 shipments per day by the business opportunitiesend of thisthe second quarter with incremental growth targeted as new product which offers shipperscustomers are added. The Company also began offering in April 2001 a competitive combinationnew 10:30am delivery option to selected zip codes. This option allows customers to choose an earlier 10:30am delivery for a surcharge fee of up to $5. Shippers indicate their choice of the 10:30 am delivery or the next morning by noon delivery by using a specially bar-coded label. This new service and pricing, while providingoption is not expected to require significant costs since it will leverage the Company an efficient way to accomplish residential deliveries through an arrangement with the U.S. Postal Service.existing performance structure.
International revenues increased 10.5% and 3.9% in the third quarter and first nine months of 2000, respectively, compared to a decrease of 1.1% in the third quarter of 1999 and an increase of .3%7.1% in the first nine monthsquarter of 1999. Total international shipments decreased 10.4% in the third quarter and 6.3% in the first nine months of 20002001 compared to the same periods in 1999. International expressperiod a year ago with shipments decreased 11.4% in the third quarter and 6.7% for the first nine months of 2000 due primarily to the loss of a major customer early in 2000. Internationalincreasing 4.9%. Higher yielding freight shipments increased 6.3% and .3%8.5% while the lower yielding express product grew 4.6%. While growth in the third quarter and first nine months of 2000, respectively, compared to the corresponding periods in 1999. The Company is encouraged by the recent strength ininternational freight shipmentssegment was encouraging in the second half of 2000 and third quartersthrough the first quarter of 2000. Although international revenues showed strength in the third quarter, the2001, a shift in the mix towardtowards lower margin import business andcontinues to hinder margins. Likewise, growth during the overall costfirst quarter of international express shipments was due to 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 higherlower margin than imports.import business. The international segment contribution to earnings from operations was a loss of $3.0 million
9
and $6.0$1.8 million for the thirdfirst quarter and first nine months of 2000, respectively,2001 compared to a loss of $.7 million for the third quarter of 1999 and operating earnings of $1.7$2.1 million in the first nine monthssimilar period of 1999.2000.
Operating expenses exceededwere 104.8% of revenues in the thirdfirst quarter and were 97.7%of 2001 as compared to 95.9% of revenues for the first nine monthsquarter 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 increased 9.1% in the third quarter of 20006.0% to $10.08 compared to $9.24 in the third quarter of 1999. The operating cost per shipment for the first nine months of 2000 increased 6.6% to $9.71 compared to the same period in 1999. The significantly higher cost of jet fuel is a major factor impacting operating costs$9.90 in the first nine monthsquarter of 2001 compared to a year ago, although decreased 2.6% from $10.16 per shipment incurred in the fourth quarter 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,The Company experienced a .1% improvement in productivity, as measured by shipments handled per paid employee hour, experiencedover the same period in 2000 and a decline4.2% improvement over levels incurred in the fourth quarter of 2.6% and 1.2% for the third quarter and first nine months of 2000, respectively.2000. 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.customer service.
Transportation purchased increased as a percentage of revenues to 31.5%32.4% in the first nine monthsquarter of 20002001 compared to 30.5%30.6% in the comparable period of 1999.2000. This increase was primarily due to increases in farmed out pickup and delivery, international airline and surface linehaul rates as well as fuel surcharges on these services.and delivery costs paid to the U.S. Postal Service for delivery of airborne@home shipments.
Station and ground expense increased to 32.0%33.7% of revenues for the first quarter of 2001 compared to 31.4% in the first nine monthsquarter of 2000 compared to 30.9% in the first nine months of 1999. The decline in2000. Flat 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 nine monthsquarter of 20002001 was 17.5%18.4% of revenues compared to 16.1%17.6% in the first nine monthssame period of 1999. Aviation fuel consumption decreased to 44.6 million gallons in the third quarter, a 1.3% decrease over the third quarter of 1999. For the first nine months of 2000, aviation fuel consumption of 135.8 million gallons increased 1.2% from the first nine months of 1999.2000. The average aviation fuel price for the thirdfirst quarter and first nine months of 20002001 was $1.03 and $.96$1.00 per gallon respectively, compared to $.68 and $.58$.94 per gallon respectively,a year ago. Aviation fuel consumption decreased 3.9% to 43.9 million gallons in the comparable periodsfirst quarter of 1999. As2001. The decrease in consumption is a result of fuel hedging contracts, the Company incurred $2.4 million of expense, equal to approximately $.02 per gallon,placing an additional seven 767 aircraft in service since the first nine monthsquarter of 1999, with no hedging settlements occurring2000 thereby allowing less fuel-efficient DC-8 aircraft to be moved to shorter lane segments, backup status or charter operations or removed from service. Maintenance expenses increased due to additional 767 aircraft placed in service as compared to the same period of last year. The Company had 121 aircraft in service (17 Boeing 767s, 30 DC-8s and 74 DC-9s) at the end of the first nine monthsquarter of 2000.
Effective January 1, 2000,2001 compared to 114 aircraft at 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 advanceend of the next scheduled overhaul and charged to the depreciation and amortization category.first quarter of 2000.
General and administrative expense was 7.9%8.3% of revenues in the first nine monthsquarter of 2000,2001 compared to 7.7%7.8% in 1999. This categorythe same period of cost has increased as a percentage of revenues2000. The increase in 2001 was primarily due to wage and compensation cost pressures.
Sales and marketing costs were 2.9% of revenues in the first quarter of 2001 compared to 2.5% in the first quarter of 2000. Increased sales personnel and compensation costs as well as expanded marketing efforts to attract new business have resulted in higher levels of expenditures in this category.
Depreciation and amortization expense decreased to 6.3%constituted 6.4% of revenues for the first nine months of 2000 compared to 6.6% in 1999. Depreciation expense in the first nine monthsquarter of 2000 increased2001 compared to 6.1% in the comparable period in 1999first quarter of 2000. The increase is due to the increased number ofplacing additional 767 aircraft placed in service since the thirdfirst quarter of 1999. This increase was offset by the effect of the change in accounting for engine overhaul costs discussed above.
102000.
Interest expense in the first nine monthsquarter of 2001 was lower than the first quarter of 2000 was higher than in the first nine months of 1999 due to lower average borrowings outstanding offset somewhat by higher levels of average outstanding borrowings. Effectiveeffective interest rates for the first nine months of 2000 was comparable to the same period in 1999.rates. Capitalized interest was $5.0$1.1 million for the first nine months of 2000 compared to $3.1$1.5 million in the first nine monthsquarter of 1999.2001 versus 2000, respectively. The lower level of average borrowings was a result of the off balance sheet refinancing of $200 million of long-term debt under a new accounts receivable securitization facility that was implemented in December 2000.
Other income includes a nonrecurring gainexpense primarily represents discounts associated with the sales of $1.9 million recordedreceivables under the new accounts receivable securitization facility. Discounts related to recording the obligation to fund the purchaser's costs were $3.8 in the secondfirst quarter onof 2001. The Company considers this expense to be an interest type of cost. Because of the saleoff balance sheet nature of securities received in connection withthis financing, the demutualization of Metropolitan Life.cost is recorded separately from interest expense.
The Company's effective tax benefit rate was 38.1%35.3% in the first nine monthsquarter of 20002001 compared to 38.4%an effective tax expense rate 38.3% recorded in the first nine monthsquarter of 19992000. The lower tax benefit rate recorded in the first quarter of 2001 as compared to the tax expense rate incurred in 2000 is a function of the provision impact of non-deductible expenses and 38.1% for all of 1999.state taxes.
The strength of the U.S. and global economies will have an impact on the results of operations for the balance of 2001 and beyond. 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 offeringpreviously was optimistic that there may be an improvement in the marketplace.U.S. economic environment during the second half of 2001. However, the current near-term lack of visibility regarding economic growth has caused the Company to expect slow shipment and revenue growth through the remainder of the year. While the Company is continuing to pursue cost reductions, it expects it will be difficult to return to positive operating income levels during the remaining quarters of 2001. The Company has however targeted to show sequential improvement in quarterly operating income.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of the change in working capital for the first ninethree months of 20002001 was $211.5$95.6 million, compared to $227.6$83.9 million in the first nine monthsquarter of 1999.2000. Inclusive in first quarter of 2001 operating cash flow is $50 million in proceeds from the sale of accounts receivable.
Capital expenditures continue to be a primary factor affecting the financial condition of the Company. The Company anticipates total capital expenditures to approximate $370 million in 2000. During the first nine monthsquarter of 2000,2001, total capital expenditures net of dispositions were $298.3$26.3 million compared to $224.6$128.3 million during the first nine monthsquarter of 1999. Cash provided by operations2000. Due to the low level of operating performance and bank borrowings were the primary sourcesshipment volume growth, capital spending plans have been revised for funding2001. The Company currently anticipates 2001 capital expenditures in the first nine monthsto be approximately $200 million, a reduction of 2000.
The Company completed a share repurchase$60 million from previously planned levels. Capital expenditures during 2001 are lower than 2000 primarily due to fewer acquisitions and deployments of 1 million shares of common stock in June 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.767 aircraft.
The Company's operating cash flow is a major source of liquidity. Also,Additional liquidity of $50 million was provided in the Company's unsecuredfirst quarter of 2001 under a $200 million receivable securitization facility implemented in December 2000. This facility was fully utilized as of March 31, 2001. The Company also has a $275 million revolving bank credit agreement, which is subject to certain financial covenants, that historically has traditionally been used as a major source of liquidity.liquidity for periods between other financing transactions. In July 2000,April 2001, an amendment to the agreement was completed that amended the fixed charge coverage covenant and provided for borrowing availability to be allocated for issued letters of credit. The Company was in compliance with all financial covenants as amended for the first quarter of 2001. The Company is currently in process of further restructuring the agreement. The restructured agreement will include provisions requiring the Company replaced its revolving bank credit facilityto provide collateral sufficient to secure the commitment. As of March 31, 2001, $60 million of borrowings were outstanding under a newthe 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 linesand issued letters 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 the first nine months of 2000, compared to 1999 and prior levels, and the decreased operating cash flows, reliance on the bank facilities has increased. A total of $210 million was outstanding at September 30, 2000 under the revolving bank credit and money market credit lines, compared to $95 million outstanding at December 31, 1999 and $79 million outstanding at September 30, 1999.
11totaled $96.8 million.
The Company's ratio of long-term debt to total capitalization was 30.1%22.3% at September 30, 2000,March 31, 2001 compared to 24.1% at September 30, 1999 and 24.7%24.6% at December 31, 1999.2000 and 26.2% at March 31, 2000.
In management's opinion, the available capacityinternally generated cashflows from operations coupled with anticipated availability under the bankrevolving credit agreements coupled with internally generated cash flow from remaining 2000 operationsagreement should provide adequate flexibility to finance anticipated capital expenditures for the balanceremainder 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.
2001. The Company does not intendis also evaluating other financing sources to publicly revise or update any of its forward-looking statements.ensure adequate liquidity.
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 itsthe Annual Report on Form 10-K for the year ended December 31, 1999.2000.
12FORWARD LOOKING STATEMENTS:
Statements contained herein and in other parts of this report which are not historical facts are considered forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Such statements relating to future events involve risks and uncertainties which are inherently difficult to predict, including statements regarding future shipment growth and product acceptance, capacity requirements, capital expenditure levels and the adequacy of available financing capacity. Actual results, however, may vary because of competitor pricing initiatives, customer demand for time-definite and deferred services, the ability of management to successfully implement growth and profitability initiatives, economic and regulatory conditions, secure financing, fuel price volatility and labor disputes.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of Airborne, Inc. was held at The Westin Hotel, 1900
Fifth Avenue, Seattle, Washington 98101 on April 24, 2001. A total of
43,021,535 shares were represented at the meeting comprising 89% of the
outstanding shares of the Company entitled to vote at the meeting on the
record date (February 20, 2001).
The following directors were duly elected for terms ending in 2004:
Number of Shares
Voted For
---------
Carl D. Donaway 31,905,773
Harold M. Messmer, Jr. 31,918,761
Mary Agnes Wilderotter 30,420,872
Rosalie J. Wolf 30,401,810
The following are continuing directors with terms expiring as indicated:
Terms Expiring in 2002 Terms Expiring in 2003
---------------------- ----------------------
Robert G. Brazier Robert S. Cline
James H. Carey Richard M. Rosenberg
Andrew B. Kim William Swindells
The shareholders, by an affirmative vote of approximately 99% of the shares
represented at the meeting and entitled to vote, approved the selection of
Deloitte & Touche LLP as independent auditors for the coming year.
The shareholders, by an affirmative vote of 25,148,842 votes representing
75% of the shares represented at the meeting and entitled to vote on this
proposal, 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 22,883,889 votes representing
68% of the shares represented at the meeting and entitled to vote on this
proposal, approved the proposal to recommend that the Board of Directors
adopt a bylaw or policy requiring confidentiality for all proxies, ballots
and voting tabulations that identify how shareholders vote and that
inspectors of election be independent and not employees of the Company.
The shareholders, by an affirmative vote of 23,742,344 votes representing
71% of the shares represented at the meeting and entitled to vote on this
proposal, approved the proposal to recommend that a shareholder vote be
required to maintain Airborne's poison pill and the Company is to redeem or
terminate any such plan or agreement.
The Board of Directors, on the same date of April 24, 2001, reelected all
existing executive officers, including Robert S. Cline as Chairman and
Chief Executive Officer, and Robert G. Brazier as Vice Chairman.
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 22, 2001 to
shareholders of record on May 8, 2001.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
EXHIBIT NO. 27 Financial Data Schedule
1310 Material Contracts
10 First Amendment to Credit Agreement.
SIGNATURES
----------
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 CORPORATIONINC.
----------------------------
(Registrant)
Date: 11/14/005/15/01 /s/Lanny H. Michael
------- ---------------------------------------------
Lanny H. Michael
Senior Vice President,
Chief Financial Officer
Date: 5/15/01 /s/Robert T. Christensen
-------------------------------- -------------------
Robert T. Christensen
Vice President,
Corporate Controller
14