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 March 31,June 30, 2001
Commission File Number 1-6512
AIRBORNE INC.FREIGHT CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) | 91-2065027 (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 3,240,526 treasury shares) as of |
AIRBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS (Dollars
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended March 31
--------Six Months Ended
June 30 June 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES:
Domestic $730,099 $725,252$720,235 $716,301 $1,450,334 $1,441,553
International 93,422 87,21291,990 94,726 185,412 181,938
-------- --------
823,521 812,464--------- ---------- ----------
812,225 811,027 1,635,746 1,623,491
OPERATING EXPENSES:
Transportation purchased 267,039 248,354266,085 254,273 533,124 502,627
Station and ground operations 277,932 254,937262,450 257,682 540,382 512,619
Flight operations and
maintenance 151,686 142,963143,686 139,101 295,372 282,064
General and administrative 68,509 63,19769,151 63,800 137,660 126,997
Sales and marketing 24,002 20,01923,329 20,521 47,331 40,540
Depreciation and amortization 52,638 49,56952,684 50,307 105,322 99,876
-------- --------- ---------- ----------
817,385 785,684 1,659,191 1,564,723
-------- 841,806 779,039
-------- --------
EARNINGS (LOSS) --------- ---------- ----------
EARNINGS(Loss)FROM OPERATIONS (18,285) 33,425(5,160) 25,343 (23,445) 58,768
OTHER INCOME (EXPENSE):
Interest, net (4,497) (4,914)(4,454) (5,177) (8,951) (10,091)
Other (3,485) 50375 2,202 (3,410) 2,705
-------- --------
EARNINGS (LOSS) --------- ---------- ----------
EARNINGS(Loss)BEFORE INCOME
TAXES (26,267) 29,014(9,539) 22,368 (35,806) 51,382
INCOME TAX EXPENSE (BENEFIT) (9,272) 11,115BENEFIT(Expense) 3,178 (8,610) 12,450 (19,725)
-------- ----------------- ---------- ----------
NET EARNINGS (LOSS) EARNINGS(Loss)BEFORE
CHANGE IN (16,995) 17,899
ACCOUNTING (6,361) 13,758 (23,356) 31,657
-------- --------- ---------- ----------
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING, NET OF TAX - - - 14,206
-------- ----------------- ---------- ----------
NET(Loss)EARNINGS ($ 6,361) $ 13,758 ($ 23,356) $ 45,863
======== ========= ========== ==========
NET EARNINGS (LOSS) $(16,995) $32,105
======== ========
NET EARNINGS (LOSS) EARNINGS(Loss)PER SHARE:
BASIC
Before change in
accounting ($ 0.13) $ (0.35)0.28 ($ 0.48) $ 0.370.65
Cumulative effect of
change in accounting - - - 0.29
-------- ----------------- ---------- ----------
Net earnings (loss)Earnings(Loss) ($ 0.13) $ (0.35)0.28 ($ 0.48) $ 0.660.94
======== ================= ========== ==========
DILUTED
Before change in
accounting ($ 0.13) $ (0.35)0.28 ($ 0.48) $ 0.360.64
Cumulative effect of
change in accounting - - - 0.29
-------- ----------------- ---------- ----------
Net earnings (loss)Earnings(Loss) ($ 0.13) $ (0.35)0.28 ($ 0.48) $ 0.650.93
======== ================= ========== ==========
DIVIDENDS PER SHARE $ 0.04 $ 0.04 $ 0.08 $ 0.08
======== ================= ========== ==========
See notes to consolidated financial statements.
2
AIRBORNE,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31June 30 December 31 2001 2000---- ----(Unaudited) ASSETS------CURRENT ASSETS: Cash $66,89026,514 $ 40,390 Trade accounts receivable, less allowance of$10,638$11,295 and $10,290148,562143,921 218,685 Spare parts and fuel inventory43,59143,677 43,231 Refundable incometax 20,728taxes 25,264 21,595 Deferred income tax assets28,78928,967 28,839 Prepaid expenses and other23,28625,690 20,809 ---------- ---------- TOTAL CURRENT ASSETS331,846294,033 373,549 PROPERTY AND EQUIPMENT, NET1,298,9771,294,508 1,324,345 EQUIPMENT DEPOSITS and OTHER ASSETS45,05145,693 48,025 ---------- ---------- TOTAL ASSETS$1,675,874$1,634,234 $1,745,919 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY------------------------------------CURRENT LIABILITIES: Accounts payable $156,046150,460 $ 180,623 Salaries, wages and related taxes80,28971,455 71,179 Accrued expenses90,513100,646 83,518 Current portion of debt485495 477 ---------- ---------- TOTAL CURRENT LIABILITIES327,333323,056 335,797 LONG-TERM DEBT279,105236,978 322,230 DEFERRED INCOME TAX LIABILITIES126,201135,195 125,444 POST RETIREMENT LIABILITIES56,03865,787 62,360 OTHER LIABILITIES42,72136,915 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 Issued51,345,07151,344,071 and 51,279,651 shares51,34551,344 51,280 Additional paid-in capital 304,597 303,885 Retained earnings548,781540,496 567,700 Accumulated other comprehensive income(379)(266) (136) ---------- ----------904,344896,171 922,729 Treasury stock, 3,240,526 and 3,244,526 shares, at cost (59,868) (59,874) ---------- ----------844,476836,303 862,855 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,675,874$1,634,234 $1,745,919 ========== ========== See notes to consolidated financial statements. 3
AIRBORNE,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
ThreeSix Months Ended
March 31
--------June 30
------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net Earnings (Loss) $(16,995)Earnings(Loss) ($ 23,356) $ 32,10545,863
Adjustments to reconcile net earningsearnings(Loss) to
net cash provided by operating activities:
Cumulative effect of change in accounting - (14,206)
Depreciation and amortization 52,638 49,569105,322 99,876
Deferred income taxes 806 4,3079,623 9,106
Postretirement obligations (6,323) 1,7683,427 12,087
Other 5,836 6,367(228) (2,488)
-------- --------
CASH PROVIDED BY OPERATIONS 35,962 79,91094,788 150,238
Change in:
Proceeds from receivable securitization
facility 50,000 -
Receivables 20,123 (9,706)24,764 (4,359)
Inventories and prepaid expenses (2,837) 2,311(5,327) 4,064
Refundable income taxes 867(3,669) -
Accounts payable (24,577) (7,875)(30,163) 8,844
Accrued expenses, salaries and& taxes payable 16,105 19,26717,405 6,209
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 95,643 83,907147,798 164,996
INVESTING ACTIVITIES:
Additions to property and equipment (26,578) (129,395)
Disposition(73,848) (222,691)
Dispositions of property and equipment 253 1,138459 1,660
Other 1,439 (1,864)15 (3,069)
-------- --------
NET CASH USED INBY INVESTING ACTIVITIES (24,886) (130,121)(73,374) (224,100)
FINANCING ACTIVITIES:
(Payments) proceeds onProceeds(repayments)from bank notes, net (43,000) 42,000(85,000) 85,000
Principal payments on debt (116) (107)(234) (217)
Repurchase of common stock - (20,662)
Proceeds from common stock issuance 783 912782 1,253
Dividends paid (1,924) (1,950)(3,848) (3,911)
-------- --------
NET CASH (USED) CASH(USED)PROVIDED BY FINANCING ACTIVITIES (44,257) 40,855
NET (88,300) 61,463
-------- --------
NET(DECREASE)INCREASE (DECREASE) IN CASH 26,500 (5,359)(13,876) 2,359
CASH AT JANUARY 1 40,390 28,678
-------- --------
CASH AT MARCH 31JUNE 30 $ 66,89026,514 $ 23,31931,037
======== ========
See notes to consolidated financial statements.
4
AIRBORNE,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31,June 30, 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 2001 presentation.
NOTE B-LONG-TERM DEBT:
Long-term debt consists of the following:
March 31June 30 December 31
2001 2000
---- ----
(In thousands)
Senior debt:
Revolving bank credit $ 60,00018,000 $ 75,000
Notes payable - 28,000
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 6,3906,273 6,507
---------- ----------
279,590-------- --------
237,473 322,707
Less current portion 485495 477
---------- ----------
$ 279,105 $ 322,230
========== ==========
-------- --------
$236,978 $322,230
======== ========
The Company'sCompany has a revolving bank credit agreement providesproviding for a total
commitment of $275 million subject to certain financial covenants.million. In AprilJune 2001, an amendment to the agreement was completed that amended to,
among other requirements, provide certain assets as collateral to secure
the fixed charge covenantcommitment, reduce available borrowing capacity by the amount of
outstanding letters of credit, establish revised covenants and provided foramend the
expiration date to June 2004. Capacity under the facility is dependent on
a borrowing availability to be allocatedbase determined by the amount of collateral pledged, with a
maximum commitment of $275 million. At June 30, 2001 the capacity of the
facility was $220 million of which $18 million was outstanding and $98
million was reserved for issued letters of credit. The Company wasIn June 2001, the
outstanding senior notes of $200 million were secured in complianceconnection with
all financial covenants asthe amended for the first quarter. The Company is currently in the process of further restructuring therevolving credit 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-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 EndedNOTE D-SEGMENT INFORMATIONMarch 31 --------Six Months Ended June 30 June 30 2001 2000---- ----2001 2000 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic48,079,634 48,785,79248,103,545 48,728,096 48,091,590 48,756,944 Diluted48,080,472 49,206,76748,103,545 49,160,869 48,092,008 49,183,818The 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 EndedNOTE E-OTHER COMPREHENSIVEMarch 31 --------Six Months Ended June 30 June 30 2001 2000---- ----2001 2000 SEGMENT REVENUES: Domestic$730,099 $725,252$ 720,235 $ 716,301 $1,450,334 $1,441,553 International93,422 87,212 -------- -------- $823,521 $812,464 ======== ========91,990 94,726 185,412 181,938 ---------- ---------- ---------- ---------- $ 812,225 $ 811,027 $1,635,746 $1,623,491 ========== ========== ========== ========== SEGMENTEARNINGS (LOSS)EARNINGS(Loss)FROM OPERATIONS: Domestic$(16,528)($ 4,622) $35,57526,151 ($ 21,150) $ 61,726 International(1,757) (2,150) -------- -------- $(18,285)(538) (808) (2,295) (2,958) ---------- ---------- ---------- ---------- ($ 5,160) $33,425 ======== ========25,343 ($ 23,445) $ 58,768 ========== ========== ========== ==========INCOMEINCOME:Other comprehensive income includes the following transactions and tax effects for the three and six monthperiodsperiod endedMarch 31,June 30, 2001and 2000, respectively(in thousands):Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 Income Income Before Tax Net of BeforeNOTE(Expense)Tax Net of Tax (Expense) Tax Tax (Expense) Tax or or BenefitTax 2001 --- ---------- --- - ----Benefit ------ ------- ------ ------ ------- ------ Unrealized securities losses arising during the period$(145)$56312 $(89)(120) $ 192 $ 168 $ (65) $ 103 Less: Reclassification adjustment for gains realized in net income - - - (32) 12 (20)----- ----- ----------- ------- ------ ------ ------- ------ Net unrealized securities losses(177) 68 (109)312 (120) 192 136 (53) 83 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)(109) 30 (79) (310) 97 (213) ------ ------- ------ ------------ Net unrealized securities gains 1,267 (488) 779 Foreign currency translation adjustments (249) 96 (153) ------ ------------- ------ Other comprehensive income$1,018(Loss) $(392)203 $626(90) $ 113 $ (174) $ 44 $ 130 ====== ======= ====== ====== ======= ======F-CHANGEF-OTHER INCOME:Other income includes the following transactions for the three and six month period ended June 30, 2001 (in thousands): Three Months Ended Six Months Ended June 30 June 30 2001 2000 2001 2000 OTHER INCOME(EXPENSE): Discount on sale of receivables, net $ (2,229) $ - $ (5,987) $ - Gain on sales of radio frequencies 2,071 - 2,071 - Gain on sale of securities - 1,913 - 1,913 Other 233 289 (506) 792 -------- -------- ---------- ---------- $ 75 $ 2,202 $ (3,410) $ 2,705 ======== ======== ========== ==========NOTE G-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.NOTE H-NEW ACCOUNTING PRONOUNCEMENTSThe 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, 2000. Excluding the cumulative effect, this change increased net earnings for the second quarter and first
share, and $2.8 million, net of tax or $.06 per share, respectively.quartersix months of 2000 by approximately$1.2$1.4 million, net of tax or$.02$.03 pershare.In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Conbinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations, initiated after July 1, 2001, be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill and some intangible assets charged to expense by testing and measuring these items for impairment as compared to periodic amortization over the estimated useful life of the assets. SFAS No. 141 and No. 142 are not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:The Company reported a net loss for theLIQUIDITY AND CAPITAL RESOURCES:firstsecond quarter of 2001 of $6.4 million, or $.13 per diluted share. This compares to net earnings of $13.8 million or $.28 per share for the second quarter of 2000 and a net loss of $17.0 million or $.35 perdiluted share. This comparesshare reported in the first quarter of 2001. For the first six months of 2001, the net loss was $23.4 million or $.48 per share compared to net earnings before a change in accounting of$17.9$31.7 million or$.36$.64 per share for thefirst quarter ofsame period in 2000. Net earnings reported for the firstquarterhalf of 2000, including a $.29 per share credit for a change in accounting, were$32.1$45.9 million or$.65$.93 per share.The second quarter of 2001 included a severance and restructuring charge of $1.9 million after tax or $.04 per share. Additionally, the Company realized a gain from a sale of radio frequencies of $1.4 million after tax or $.03 per share. One time after tax gains from the sale of certain securities in the second quarter of 2000 totaled $.02 per share. Operating results
werecontinue to be negatively affected by theslowing economy, thelack of adequate revenue growth due to the slow economy and the resulting lack of shipment growth incorethe Company's higher yielding domesticproduct andproducts. Additionally, a shift in volume mixof shipment volumes. Also, withtowards lighter weight and lower yielding deferred products also has hampered revenue growth. Despite the slow revenue growth,in shipment volumes, productivity gains were difficultthe net loss for the second quarter was reduced $10.6 million compared toachieve and not sufficient to offset increases in operating costs. Thethe first quarter of2001 had one less2001. This improvement was due primarily to cost reduction actions the Company has implemented. The Company has reduced labor hours, reduced and combined flight segments and cut discretionary expenses. The combined effect of management's efforts are targeted to save $60-$70 million in annual operatingday than the comparable quarter last year, hindering volume and margin performance comparisons.expenses. 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 2001 2000 Change---- ---- ------2001 2000 Change Shipments (in thousands): Domestic Overnight45,618 47,979 -4.9%44,141 46,175 (4.4%) 89,759 94,154 (4.7%) Next Afternoon Service13,428 13,934 -3.6%13,208 13,680 (3.5%) 26,636 27,614 (3.5%) Second Day Service24,215 19,771 22.5%24,326 19,161 27.0% 48,541 38,932 24.7% Ground Delivery Service 331 - N/A 331 - N/A 100 Lbs.andAnd Over6067-10.4%75 (10.7%) 127 142 10.6% ------ ------ ----- ------- ------- ----- Total Domestic83,321 81,751 1.9%82,073 79,091 3.8% 165,394 160,842 2.8% International Express1,600 1,529 4.6%1,549 1,549 -% 3,149 3,078 2.3% Freight 10294 8.5%101 (1.0%) 204 195 4.6% ------ ------ ----- ------- ------- ----- Total International1,702 1,623 4.9%1,651 1,650 (1.0%) 3,353 3,273 2.4% ------ ------ ----- ------- ------- ----- Total Shipments85,023 83,374 2.0%83,724 80,741 3.7% 168,747 164,115 2.8% ====== ====== ===== ======= ======= ===== Average Pounds per Shipment: Domestic 4.144.21 -1.7%4.32 (4.2%) 4.14 4.27 (3.0%) International51.92 47.87 8.5%53.32 49.52 7.7% 52.61 48.70 (8.0%) Average Revenue per Pound: Domestic$2.07 $2.07 -$ 2.07 $ 2.07 -% $ 2.07 $ 2.07 -% International$1.04 $1.11 -6.3%$ 1.03 $ 1.13 (8.8%) $ 1.04 $ 1.12 (7.1%) Average Revenue per Shipment: Domestic$8.72 $8.87 -1.7%$ 8.69 $ 9.02 (3.7%) $ 8.71 $ 8.94 (2.5%) International$54.89 $53.74 1.6%$55.72 $57.41 (2.9%) $55.30 $55.59 0.5% Total revenues
increased 1.4%were relatively flat in the second quarter and firstquarterhalf of 2001comparedin comparison to the sameperiod of 2000. Domestic revenues increased .7% in the first quarter on one less operating day in 2001 than the comparable periodperiods in 2000. Average revenue per shipment declined1.7%3.7% to$8.72$8.69 in the second quarter and 2.5% to $8.71 for the first six months of 2001. The yield decreases were due toa declinedeclines 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 toa4% beginning October 2000. In the second quarter and for the firstquartersix months of 2001$24.6fuel surcharge revenues were $23.8 million and $48.4 million, respectively. This compares to fuel surcharge revenues ofsurcharge revenue was$19.9 million and $32.5 million recognizedcompared to $12.5 millionin thesame period last year.second quarter and first six months of 2000, respectively. 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 pricingThese actions wereongoing duringtargeted to improve yields; however, thequarter with further actions being taken intolack of shipment growth and the shift by customers to lower yielding deferred services has diluted the impact. Domestic shipments increased 3.8% in the second quarteras 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 increased 1.9%and 2.8% in the firstquarter in comparisonhalf of 2001 compared to the sameperiod inperiods of 2000. The firstquarterhalf of 2001 had one less operating day thanthe comparable period in2000.On a per day basis,Higher yielding overnight shipments accounted for 53.8% of total domestic shipmentsincreased 3.5%in the second quarter compared to1.3 million58.4% in the second quarter of 2000. Overnight shipmentsper day.declined 4.4% in the second quarter and 4.7% for the first six months of 2001. The growth in shipments for the quarter and year to date periods was due primarily to the volumeincreasesincrease in the Company's airborne@home product which was introduced in late 1999 to service thee-commercee- commerce and business to residential consumer markets. These shipments, included in the Second Day Service category for reporting purposes, totaled5.35.6 million in the second quarter and 10.8 million in the firstquarterhalf of 2001 compared to554,000shipments of 1.2 million and 1.7 million in thefirst quarter ofcomparable periods in 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 attributes these declines to slowing economic conditions.In April 2001, the Company expanded its service portfolio by introducing a new product, Ground Delivery Service (GDS).
WithThe Company intends to leverage theadditionmarketing of GDSthe Company can provideto customerswith ground services as well aswho also have airservices.express shipments. The new productwill leverageleverages the Company's sort and linehaul infrastructure andwill beis being marketed initially to a target customerbase initially. Shipment volumes arebase. The Company believes the introduction of GDS is an important initiative that is targeted toreachestablish growth not only from the deferred ground segment where it has not previously participated, but from the ability to leverage that with the cross marketing of higher yielding air express shipments. Ground shipments totaled 331,000 shipments in the second quarter and achieved the Company's target of 15,000 average shipments per day shortly after the end of the second quarter. The Company has targeted GDS shipments to average 25,000 to 35,000 shipments per day by the end of thesecondthird quarterwith incremental growth targeted as new customers are added.of 2001. The Company also began offering, in April 2001, a new 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.$5.00. Shippers indicate their choice ofthea 10:30 am30am delivery or the next morning by noon delivery by using a specially bar-coded label. Thisnewservice optionisdoes notexpectedrequire the Company torequireincur significantcostscost increases since it will leverage the existingperformance structure.delivery infrastructure. International revenues
increased 7.1%decreased 2.9% in the second quarter and increased 1.9% for the first half of 2001 compared to a year ago. Total international shipments were almost the same in the second quarter of 2001 compared tothe same period a year ago with shipments increasing 4.9%. Higher yielding freight shipments increased 8.5% while the lower yielding express product grew 4.6%. While growth2000 and 2.4% higher in theinternational freight segment was encouraging in the second half of 2000 and through thefirstquartersix months of 2001a shift in mix towards lower margin import business continuescompared tohinder margins. Likewise, growth during the first quarter of international express shipments was due to increases in lower margin import business.2000. The international segment contribution to earningsfrom operationsfor the second quarter was a loss of$1.8 million for the first quarter$145,000 before a severance and restructuring charge of2001$393,000 compared to a loss of$2.1$808,000 in 2000. The segment loss was $2.3 million in thesimilarfirst half of 2001 compared to $3.0 million in the comparable period of 2000.Operating expenses were
104.8%100.6% and 101.4% of revenues in the second quarter and firstquartersix months of 2001,asrespectively, compared to95.9% of revenues96.9% and 96.4% for thefirst quarter ofcorresponding periods in 2000. Operating cost per shipment increased6.0%.3% to $9.76 in the second quarter compared to $9.73 in the second quarter of 2000. The operating cost per shipment in the second quarter of $9.76 was significantly lower than the $9.90 per shipment cost incurred in the first quarter of 2001. Operating cost per shipment for the first six months of 2001 increased 3.1% to $9.83 compared toa year ago, although decreased 2.6% from $10.16 per shipment incurredthe same period inthe fourth quarter of2000. The Companyexperiencedhas been aggressively managing costs through a.1%number of cost cutting measures to assist in improving operating results. Specifically, labor hours have been reduced which resulted in a 5.5% improvement in productivity during the second quarter, as measured by shipments handled per paid employee hour, over levels incurred during the same period of 2000. This has been achieved through diligent control of labor scheduling throughout the period, and through the reduction in2000 and a 4.2%force implemented June 1, 2001. Productivity for the first six months of 2001 showed an improvementover levels incurred inof 2.7% compared to thefourth quarterfirst half of 2000. The Company continues to manage productivity at levels sufficient to maintain a high level of overall customer service.Transportation purchased increased as a percentage of revenues to
32.4%32.8% in thefirstsecond quarter of 2001 compared to30.6%31.4% a year ago. This category comprised 32.6% of costs for the first six months of 2001 compared to 31.0% inthe comparable period of2000.This increase wasThe increases were primarily due to increases in farmed out pickup and delivery,international andsurface linehaul costs and delivery costs paid to the U.S. Postal Service for delivery of airborne@home shipments.Station and ground expense increased to
33.7%32.3% as a percentage of revenuesforin thefirstsecond quarterof 2001compared to31.4%31.8% a year ago and 33.7% in the first quarter of2000. Flat productivity combined with wage related cost increases had a negative effect on2001. Station and ground expense was 33.0% of revenues in the first half of 2001 versus 31.6%. Total costs in this category decreased $15.5 million from those incurred in the first quarter ofexpense.2001. Productivity achieved for pickup and delivery, sort and other field operations improved performance in this expense category in comparison to the first quarter of 2001. Flight operations and maintenance expense as a percentage of revenues during the second quarter of 2001 were 17.7% as compared to 17.2% in the same period of 2000 and 18.4% in the first quarter of 2001. Year to date 2001
was 18.4% of revenuesflight operations costs were 18.1% compared to17.6%17.4% in thesamecomparable period of 2000. The average aviation fuel price for the second quarter and first half of 2001 was $.95 and $.98 per gallon, respectively, compared to $.91 and $.93 per gallon, respectively in the comparable periods in 2000. Aviation fuel consumption in the second quarter decreased 10.7% to 40.6 million gallons compared to 45.5 million gallons in the second quarter of 2000. Consumption in the first quarter of 2001 was$1.00 per gallon compared to $.94 per gallon a year ago. Aviation43.9 million gallons. For the first six months of 2001, aviation fuel consumptiondecreased 3.9% to 43.9of 84.5 million gallons was 7.4% less than consumption for the comparable period inthe first quarter of 2001.2000. The decrease in consumptionis a resultwas due, in part, to management efforts to reduce and combine certain flight segments to control costs beginning in the second quarter ofplacing2001. Additionally, the Company has placed an additional seven 767 aircraft in service since thefirstsecond quarter of 2000 thereby allowing less fuel-efficient DC-8 aircraft to be moved to shorter lane segments, backup status or charter operations or removed from service. Maintenanceexpensescosts increased during the second quarter and the first half of 2001 due to the additional 767 aircraft being placed in service as compared to the sameperiodperiods of last year. The Company had121120 aircraft in service (17 Boeing 767s,3029 DC-8s and 74 DC-9s) at the end of thefirstsecond quarterof2001 compared to 114 aircraft at the end of thefirstsecond quarter of 2000.General and administrative expense was
8.3%8.5% and 8.4% of revenues for the second quarter and first half of 2001, respectively. This compares to 7.9% and 7.8% of revenues for the second quarter and first half of 2000 respectively. Included in this expense category was a one-time charge of $2.9 million for severance and restructuring costs recorded in thefirstsecond quarter of2001 compared to 7.8% in the same period of 2000.2001. The increase in costs in 2001, exclusive of the one-time charge, wasprimarilydue to wage and compensation cost pressures.Sales and marketing costs were 2.9% of revenues in the second quarter and first
quarterhalf of 2001 compared to 2.5% in thefirst quartercomparable periods 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 constituted
6.4%6.5% of revenues in thefirstsecond quarterof 2001 compared to 6.1%and 6.4% in the first six months of 2001. This compares to 6.2% of revenues for the second quarter and first half of 2000. The increaseiswas due toplacingthe additional 767 aircraft placed in service since thefirstsecond quarter of2000.last year. Interest expense in the first
quarterhalf of 2001 was lower thanthe first quarter ofin 2000 due, in part, to lower average borrowings outstanding offsetsomewhatslightly by higher effective interest rates.CapitalizedAdditionally, interest capitalized was$1.1$1.6 million compared to$1.5$3.4 million in the firstquarterhalf of 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 undera newan accounts receivable securitization facility that was implemented in December 2000.
OtherIncluded in other expenseprimarily representsare discounts associated with the sales of receivables under thenewaccounts receivable securitization facility. Discounts related to recording the obligation to fund the purchaser's costs were$3.8$2.2 million in the second quarter of 2001 and $6.0 for the firstquarterhalf of 2001. The Company considers this expense to be an interest type of financing cost. Because this type of financing required theoff balance sheet natureaccounting recognition as a sale ofthis financing,asset, the cost is recordedseparatelyseparatly from interest expense.Also included in this category and realized in the second quarter of 2001 were $2.1 million in gains from the sales of radio frequencies. In the second quarter of 2000, a $1.9 million gain was recorded on the sale of securities the Company received as a policyholder in connection with the demutualization of Metropolitan Life. The Company's effective tax benefit rate was
35.3% in34.8% for the firstquartersix months of 2001 compared to an effective tax expense rate38.3%of 38.4% recorded in the firstquarterhalf of 2000. 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 state taxes.The effective tax rate for the balance of 2001 is difficult to determine due to the provision impact and levels of nondeductible expenses and state taxes in relation to low levels of earnings. 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 previously was optimistic
thattheremaywould be an improvement in the 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 theyear.year and into 2002. While the Company is continuing to aggressively pursue cost reductions, it expects it will be difficult to return to positiveoperating income levelsnet earnings during the remaining quarters of 2001.The Company has however targeted to show sequential improvement in quarterly operating income.Cash provided by operations net of the change in working capital for the firstQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:threesix months of 2001 was$95.6$97.8 millioncompared to $83.9 million in the first quarter(exclusive of2000. Inclusive in first quarter of 2001 operating cash flow is$50 million in proceeds from thesalereceivable securitization facility). This compares to $165.0 million recorded in the first half ofaccounts receivable.2000. Capital expenditures continue to be a primary factor affecting the financial condition of the Company. During the first
quarterhalf of 2001, total capital expenditures net of dispositions were$26.3$73.4 million compared to$128.3$221.0 million during thefirst quartercorresponding period of 2000. Due to the low level of operating performance and shipment volume growth,capital spendingcapital-spending planshavehad beenrevised for 2001.reduced earlier in the year to $200 million. The Companycurrently anticipates 2001has made further adjustments to reduce its planned capital expenditures for 2001 tobeapproximately$200$170 million primarily by deferring the acquisition of one 767 aircraft into areduction of $60 million from previously planned levels. Capital expenditures during 2001 are lower than 2000 primarily due to fewer acquisitions and deployments of 767 aircraft.future period. The Company's operating cash flow is a major source of liquidity. Additional liquidity of
$50$150 million was provided in December 2000 and an additional $50 million in the firstquarterhalf of 2001underfrom a $200 million receivable securitization facility implemented in December 2000.ThisIn July 2001, this facility wasfully utilizedexpanded from $200 million to provide for a maximum of $250 million of proceeds from the sale of eligible receivables as well as extending the term ofMarch 31, 2001.the liquidity facility for a three-year period expiring June 2004 as compared to the 364-day term of the previous agreement. The Company alsohascompleted a renegotiation of its $275 million revolvingbankcredit agreement in June 2001. The renegotiated facility, which expires in June 2004, issubject tocollateralized by certainfinancial covenants, that historically has been used as a sourceassets, reduces borrowing capacity by the amount ofliquidity for periods between other financing transactions. In 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 issuedoutstanding letters ofcredit.credit and established revised covenants. The Companywascurrently has pledged collateral to support approximately $220 million of the $275 million commitment and is considering pledging additional collateral later incompliance with all financial covenants as amended forthefirst quarter of 2001. The Company is currently in process of further restructuring the agreement. The restructured agreement will include provisions requiring the Company to provide collateral sufficient to secure the commitment.current fiscal year. As ofMarch 31,June 30, 2001,$60$18 millionof borrowings werewas outstanding under the agreement,and issued lettersletter of credittotaled $96.8commitments were $98 million and available capacity was $104 million.In July 2001, the Company arranged a TRAC (Terminal Rental Adjustment Clause) Lease facility for prospective vehicle acquisitions of up to $20 million in 2001. Historically, the Company has purchased its vehicles. With the TRAC Lease, the Company has the option to purchase the delivery vehicles at the end of the lease term. In August 2001, the Company completed sale/leaseback transactions on two Boeing 767-200 aircraft and received proceeds of $40.8 million. The Company is continuing to pursue sale/leaseback transactions and anticipates completing transactions covering five additional 767 aircraft by the end of the third quarter. The Company's ratio of long-term debt to total capitalization (exclusive of the receivable securitization) was
22.3%19.6% atMarch 31,June 30, 2001 compared to 24.6% at December 31, 2000 and26.2%28.6% atMarch 31,June 30, 2000.In management's opinion, internally generated
cashflowscash flows from operations coupled withanticipated availabilityresources provided under the accounts receivable securitization facility and revolving credit agreement and cash anticipated from leasing transactions should provide adequate flexibility to finance capital expenditures and meet other liquidity requirements for theremainderbalance of 2001.The Company is also evaluating other financing sources to ensure adequate liquidity.There have been no material changes in the Company's market risk sensitive instruments and positions since its disclosure in the Annual Report on Form 10-K for the year ended December 31, 2000.FORWARD 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
Item4. Submission of Matters5. The Company has amended its By-Laws toa Vote of Security Holders. Thechange the date for the annual meeting ofAirborne, Inc. was held atshareholders to the fifth Tuesday in April or, in the absence of such date, the first Tuesday in May, among other things. TheWestin 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%date of theoutstanding sharesCompany's 2002 annual meeting of shareholders has changed from April 23, 2002, as stated in the Company's 2001 proxy statement, to April 30, 2002. The amended By-Laws also change the date for a shareholder to give notice of a proposal to be brought before, or a nomination for director at, an annual meeting to 45 days prior to the anniversary of the date the Companyentitled 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 auditorsmailed its proxy materials for thecoming year.prior year's annual meeting. Theshareholders, by an affirmative vote of 25,148,842 votes representing 75% of the shares represented at the meetingnotice date for such proposals andentitled 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 Boardnominations for thepurpose of director elections. The shareholders, by an affirmative vote of 22,883,889 votes representing 68% of the shares represented at the2002 annual meetingand 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 electionwill beindependent 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.January 25, 2002. Item 6. Exhibits and Reportsonor Form 8-K. (a) Exhibits - EXHIBIT NO. 3 Articles of Incorporation and By-Laws 3(a) Amended and Restated By-Laws of Airborne, Inc. EXHIBIT NO. 4 Instruments Defining the Rights of Security Holders Including Indentures 4(a) First Supplemental Indenture dated as of September 15, 1995 between Airborne Express, Inc., ABX Air, Inc., Airborne Forwarding Corporation, Wilmington Air Park, Inc., and Airborne FTZ, Inc., and the Bank of New York, as trustee, relating to the Company's 7.35% notes due 2005. 4(b) Third Supplemental Indenture dated June 29, 2001 between Airborne Express, Inc., ABX Air, Inc., SKY Courier, Inc., Wilmington Air Park, Inc., Airborne FTZ, Inc., and the Bank of New York, as trustee, relating to the Company's 7.35% notes due 2005 (see Exhibits 10(b) through 10(g) for the collateral documents executed in connection with the Third Supplental Indenture). EXHIBIT NO. 10 Material Contracts10 First Amendment to10(a) $275,000,000 Amended and Restated CreditAgreement.Agreement dated as of June 29, 2001 among Airborne, Inc. as parent, Airborne Express, Inc. and ABX Air, Inc., as borrower, and Wachovia Bank, N.A., as administrative and collateral agent, with U.S. Bank, as documentation agent, Bank of America, N.A., as syndication agent, and Wachovia Securities, Inc., as lead arranger, and lenders party thereto (see Exhibits 10(b) through 10(g) for the collateral documents executed in connection with the Amended and Restated Credit Agreement). 10(b) Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents dated June 29, 2001 by ABX Air, Inc. and Wachovia Bank, N.A. 10(c) Stock Pledge Agreement dated June 29, 2001 between Airborne, Inc. and Wachovia Bank, N.A. 10(d) Open-End Mortgage, Assignment of Leases and Rents and Fixture Filing dated June 29, 2001 by ABX Air, Inc., Wilmington Air Park, Inc., Aviation Fuel, Inc., and Wachovia Bank, N.A. 10(e) Security Agreement dated June 29, 2001 between Airborne Express, Inc., ABX Air, Inc., Airborne, Inc., Wilmington Air Park, Inc., Sky Courier, Inc., Aviation Fuel, Inc., Sound Suppression, Inc., Airborne FTZ, Inc., and Wachovia Bank, N.A. 10(f) Trademark Security Agreement dated June 29, 2001 between Airborne Express, Inc. and Wachovia Bank, N.A. 10(g) Assignments of Leases and Rents dated June 29, 2001 between ABX Air, Inc., Wilmington Air Park, Inc., Aviation Fuel, Inc. and Wachovia Bank, N.A. 10(h) Amended and Restated Receivables Purchase Agreement dated August 8, 2001 between Airborne Credit, Inc. as seller; Airborne Express, Inc. as servicer; Blue Ridge Asset Funding Corporation and certain committed investors as named therein; as purchaser, and Wachovia Bank, N.A. as administrative agent. 10(i) Employment Agreement dated April 24, 2001 between the Company and Mr. Robert T. Christensen. A substantial identical agreement exists between the Company and most of its officers. 10(j) Employment Agreement dated April 24, 2001 between the Company and Mr. Lanny H. Michael, Senior Vice President, Chief Financial Officer. A substantial identical agreement exists between the Company and eight of its executive officers. 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,INC. ---------------------------- (Registrant) Date:5/15/8/14/01 /s/Lanny H. Michael ---------------------------------------------------- Lanny H. Michael Senior Vice President & Chief Financial Officer Date:5/15/8/14/01 /s/Robert T. Christensen -------------------------- Robert T. Christensen Vice President, Corporate Controller------------------------- Chief Accounting Officer