1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended JuneSeptember 30, 1998
Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
----------------------------------------
(State of incorporation or organization)
91-0837469
---------------------------------
(IRS Employer Identification No.)
3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662
------------------------------
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (206) 285-4600
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (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: XXX 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.
Common Stock, par value $1 per share
Outstanding (net of 497,0782,497,078 treasury shares)
as of JuneSeptember 30, 1998 50,279,50948,286,791 shares
-----------------
2
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended SixNine Months Ended
------------------ ----------------
June-----------------
September 30 JuneSeptember 30
------- ------------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES:
Domestic $672,378 $611,999 $1,334,896 $1,174,110$678,650 $687,549 $2,013,546 $1,861,659
International 91,759 100,785 179,434 194,19690,432 101,049 269,866 295,245
-------- -------- ---------- ----------
764,137 712,784 1,514,330 1,368,306769,082 788,598 2,283,412 2,156,904
OPERATING EXPENSES:
Transportation purchased 234,797 228,663 465,120 437,553237,503 242,521 702,623 680,074
Station and ground operations 228,282 210,856 450,976 411,106228,339 224,945 679,315 636,051
Flight operations and maintenance 117,480 100,913 234,883 204,696121,102 110,949 355,985 315,645
General and administrative 61,940 57,271 121,890 109,10062,811 64,842 184,701 173,942
Sales and marketing 17,569 17,901 34,968 34,07918,288 19,742 53,256 53,821
Depreciation and amortization 45,182 42,210 90,070 84,48145,954 41,688 136,024 126,169
-------- -------- ---------- ----------
705,250 657,814 1,397,907 1,281,015713,997 704,687 2,111,904 1,985,702
-------- -------- ---------- ----------
EARNINGS FROM OPERATIONS 58,887 54,970 116,423 87,29155,085 83,911 171,508 171,202
INTEREST, NET 2,960 8,049 6,876 16,4963,005 7,026 9,881 23,522
-------- -------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 55,927 46,921 109,547 70,79552,080 76,885 161,627 147,680
INCOME TAXES 22,100 18,634 43,360 28,13419,267 30,266 62,627 58,400
-------- -------- ---------- ----------
NET EARNINGS $ 33,827 $ 28,287 $ 66,187 $ 42,66132,813 46,619 99,000 89,280
======== ======== ========== ==========
NET EARNINGS PER SHARE:SHARE
Basic $ .67 $ .66 $ 1.321.05 $ 1.001.98 $ 2.06
======== ======== ========== ==========
Diluted $ .66.65 $ .59.94 $ 1.291.94 $ .901.84
======== ======== ========== ==========
DIVIDENDS PER SHARE $ .040 $ .038 $ .078.118 $ .075.113
======== ======== ========== ==========
See notes to consolidated financial statements.
3
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
JuneSeptember 30 December 31
------------------- -----------
ASSETS 1998 1997
------ ---- ----
(Unaudited) (Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 16,92214,088 $ 25,525
Trade accounts receivable, less
allowance of $10,290$9,990 and $10,290 310,698316,589 322,549
Spare parts and fuel inventory 39,68938,960 37,966
Deferred income tax assets 16,71316,407 14,530
Prepaid expenses and other 27,87226,329 25,982
---------- ----------
TOTAL CURRENT ASSETS 411,894412,373 426,552
PROPERTY AND EQUIPMENT, NET 949,417976,107 916,331
EQUIPMENT DEPOSITS and OTHER ASSETS 35,86836,585 23,090
---------- ----------
TOTAL ASSETS $1,397,179$1,425,065 $1,365,973
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 144,478142,366 $ 143,966
Salaries, wages and related taxes 70,71067,099 80,154
Accrued expenses 72,04390,974 100,126
Income taxes payable 4,7043,130 5,440
Current portion of debt 393400 381
---------- ----------
TOTAL CURRENT LIABILITIES 292,328303,969 330,067
LONG-TERM DEBT 222,892250,289 250,559
DEFERRED INCOME TAX LIABILITIES 78,15481,383 65,322
OTHER LIABILITIES 63,71357,506 49,110
SHAREHOLDERS' EQUITY:
Preferred Stock, without par value -
Authorized 5,200,000 shares,
no shares issued
Common stock, par value $1 per share -
Authorized 60,000,000120,000,000 shares
Issued 50,776,58750,783,869 and 50,428,548 shares 50,77750,784 50,429
Additional paid-in capital 293,697293,549 287,208
Retained earnings 396,384427,186 334,083
---------- ----------
740,858771,519 671,720
Treasury stock, 497,0782,497,078 and 522,300 (766) (805)
shares, at cost (39,601) (805)
---------- ----------
740,092731,918 670,915
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,397,179$1,425,065 $1,365,973
========== ==========
See notes to consolidated financial statements.
4
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SixNine Months Ended
----------------
June-----------------
September 30
---------------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net Earnings $ 66,18799,000 $ 42,66189,280
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 82,412 78,116124,002 116,303
Provision for aircraft engine overhauls 7,658 6,36512,022 9,866
Deferred income taxes 10,649 10,38714,184 17,903
Other 14,695 2298,535 2,411
-------- --------
CASH PROVIDED BY OPERATIONS 181,601 137,758257,743 235,763
Change in:
Receivables 11,851 (19,238)5,960 (57,859)
Inventories and prepaid expenses (3,613) (7,636)(1,341) (2,760)
Accounts payable 512 (660)(1,600) (1,063)
Accrued expenses, salaries &and taxes payable (37,922) 22,405(24,176) 49,788
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 152,429 132,629236,586 223,869
INVESTING ACTIVITIES:
Additions to property and equipment (126,377) (78,716)
Dispositions(193,497) (135,433)
Disposition of property and equipment 633 2,615951 4,425
Expenditures for engine overhauls (8,471) (6,036)(15,521) (8,821)
Proceeds from insurance on aircraft accident -- 18,000
Other (1,811) 537(1,367) 214
-------- --------
NET CASH USED BYIN INVESTING ACTIVITIES (136,026) (63,600)(209,434) (121,615)
FINANCING ACTIVITIES:
Proceeds (payments)Payments on bank notes, net (27,500) (89,000)-- (117,300)
Principal payments on debt (155) (143)(251) (316)
Repurchase of common stock (38,835) --
Proceeds from common stock issuance 6,535 1,3576,394 6,596
Dividends paid (3,886) (3,202)(5,897) (4,894)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (25,006) (90,988)(38,589) (115,914)
-------- --------
NET DECREASE IN CASH (8,603) (21,959)(11,437) (13,660)
CASH AT JANUARY 1 25,525 35,816
-------- --------
CASH AT JUNESEPTEMBER 30 $ 16,92214,088 $ 13,85722,156
======== ========
See notes to consolidated financial statements.
5
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 30, 1998
(Unaudited)
NOTE A - SUMMARY OF FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements included herein are unaudited but
include all adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position and results of operations
and cash flows for the interim periods reported.
Certain amounts for prior periods have been reclassified to conform to the
1998 presentation.
NOTE B - LONG-TERM DEBT:
Long-term debt consists of the following:
JuneSeptember 30 December 31
------- ----------------------- ------------
1998 1997
---- ----
(In thousands)
Senior debt:
Notes payable 2,50030,000 30,000
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 7,5857,489 7,740
-------- --------
223,285--------- ---------
250,689 250,940
Less current portion 393400 381
-------- --------
$222,892 $250,559
======== ========--------- ---------
$ 250,289 $ 250,559
========= =========
NOTE C - SHARE REPURCHASE:
In August 1998, the Company's Board of Directors authorized the repurchase
of up to 2 million shares of its common stock. The repurchase of 2 million
shares was completed by the end of September for a total purchase price of
$38.8 million. The repurchased shares were not retired or canceled but
rather held as treasury stock.
NOTE D - 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.
Diluted earnings per share for the three months and sixnine months ended JuneSeptember
30, 1997 assumes conversion of the Company's convertible subordinated
debentures as of the beginning of the period as well as the dilutive common
equivalent shares applicable to the assumed exercise of stock options. Net
earnings as adjusted for the elimination of interest expense, net of
6
applicable taxes, relative to the assumed conversion was $29,352,000$47,459,000 for
the three month period and $44,791,000$92,249,000 for the sixnine month period.
6
Weighted average shares outstanding used in earnings per share computations
were as follows:
Three Months Ended SixNine Months Ended
------------------ ----------------
June-----------------
September 30 JuneSeptember 30
------- ------------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 50,220,364 42,776,526 50,123,331 42,706,89149,921 44,325 50,056 43,246
Diluted 51,288,921 50,134,061 51,235,062 49,833,61150,682 50,631 51,051 50,099
NOTE DE - NEW ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which will be effective for fiscal year
2000. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value.
The Company has entered into certain derivative contracts with financial
institutions to limit its exposure to volatility in jet fuel prices. Under
terms of the contracts, the Company either makes or receives payments if
the market price of heating oil, as determined by an index of monthly NYMEX
Heating Oil futures contracts, is lower or exceeds certain prices agreed to
between the Company and the financial institutions. The contracts, which
have no cost basis, are accounted for as hedges since there has
historically existed a high correlation between the changes in the NYMEX
index and the price of jet fuel. Settlements are made in cash and are
recorded in the earnings statement in the period of settlement as either an
increase or decrease to fuel expense.
Under the cash flow hedge provisions of SFAS No. 133, the Company will be
required to record the contracts at fair value, with corresponding changes
in fair value recorded as a component of other comprehensive income. The
Company has not adopted the provisions of SFAS No. 133 as of JuneSeptember 30,
1998. However, if the provisions of the statement had been adopted, a
cumulative charge of $2,300,000,$1,000,000, net of tax, would have been recorded to
shareholders' equity and chargesa credit to comprehensive income of approximately
$400,000 and
$1,600,000$1,300,000 would have been reported for the three month period ended
September 30, 1998. A charge to comprehensive income of approximately
$400,000, would have been reported for the nine month period ended
September 30, 1998.
7
OTHER PRONOUNCEMENTS:
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and six month periods
ended June 30, 1998, respectively.Related Information" which establishes standards for
reporting information about operating segments and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
which revises disclosures requirements for pension and other postretirement
benefit plans. Both of these pronouncements govern only financial
statement disclosures and will be incorporated into the Company's financial
statements for the year ending December 31, 1998. Implementation of the
pronouncements are not expected to have a material impact on the Company's
financial position or results of operations.
78
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company's operating performance in the second quarter and the first six
months of 1998 resulted in operating income and net earnings significantly
higher than the comparable periods of 1997. The Company is pleased with
this strong operating performance which was achieved in spite of what
appears to be a slowing economy in the second quarter. The overall growth
in shipments and revenue was positive, and an operating margin of 7.7% was
achieved in the second quarter of 1998, the same as experienced in the
second quarter of 1997 and the first quarter of 1998, when growth rates
were higher.
Net earnings for the secondthird quarter of 1998 were $33.8$32.8 million, or $.66$.65 per
share on a diluted basis, on revenues of $764$769 million. Current period
results are not directly comparable with the prior year in certain
respects, as the Company benefited in the third quarter of 1997 from a
strike at United Parcel Service which added $50 - $55 million comparedin
incremental domestic revenues and increased earnings per share results by
$.28 to $28.3$.30. Total net earnings for the third quarter of 1997 were $46.6
million or $.59$.94 per diluted share on revenues of $713 million,$789 million.
Because of weaker economic conditions, the Company experienced basically
stagnant third quarter 1998 total shipment and revenue growth on a
sequential basis over second quarter. However, the Company is pleased with
the operating performance achieved for the third quarter as signified by
the 7.2% operating margin, despite the slower growth. This strong
performance was primarily due to the improvement in the domestic yield, as
measured by revenue per shipment, which was $8.59 in the third quarter
compared to $8.49 in the second quarter of 1997.1998.
Net earnings for the first sixnine months of 1998 increased 10.9% to
$99.0 million, or $1.94 per diluted share compared to $89.3 million, or
$1.84 per share for the first nine months of 1997. Total revenues for the
first nine months of 1998 were $66.2 million, or $1.29$2.283 billion, a 5.9% increase over the
comparable period of 1997. This 1998 year-to-date performance represents
approximately a 25% increase in earnings per share over 1997, on revenues of $1.51 billion, compared to
$42.7 million, or $.90 per share on revenues of $1.37 billion fora
comparative basis when the corresponding period in 1997.
8benefit realized from the 1997 UPS strike is
eliminated, a significant improvement considering the prevailing weak
economic conditions.
The following table sets forth selected shipment and revenue data for the
periods indicated:
Three Months Ended SixNine Months Ended
------------------ ----------------
June-----------------
September 30 JuneSeptember 30
------------------- % ------------------ %
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
Shipments (in thousands):
Domestic
Overnight 46,632 42,287 10.3% 92,391 81,926 12.8%46,792 45,675 2.4% 139,183 127,601 9.1%
Next Afternoon Service 14,718 13,717 7.3% 29,101 25,881 12.4%14,640 14,026 4.4% 43,741 39,907 9.6%
Second Day Service 17,673 16,657 6.1% 35,684 32,466 9.9%17,497 19,482 -10.2% 53,181 51,948 2.4%
100 Lbs. and& Over 87 80 8.8% 178 154 15.6%91 96 -5.2% 269 250 7.6%
------ ------ ------- -------
Total Domestic 79,110 72,741 8.8% 157,354 140,427 12.1%79,020 79,279 -0.3% 236,374 219,706 7.6%
------ ------ ------- -------
International
Express 1,507 1,271 18.6% 2,896 2,452 18.1%1,522 1,351 12.7% 4,418 3,803 16.2%
Freight 113 122 (7.4%) 223 238 (6.3%)105 118 -11.0% 328 356 -7.9%
------ ------ ------- -------
Total International 1,620 1,393 16.3% 3,119 2,690 15.9%1,627 1,469 10.8% 4,746 4,159 14.1%
------ ------ ------- -------
Total Shipments 80,730 74,134 8.9% 160,473 143,117 12.1%80,647 80,748 -0.1% 241,120 223,865 7.7%
====== ====== ======= =======
Average Pounds per Shipment:
Domestic 4.22 4.31 (2.1%) 4.29 4.31 (0.5%)4.26 4.71 -9.6% 4.28 4.45 -3.8%
International 41.62 53.65 (22.4%) 42.85 51.88 (17.4%)41.06 50.32 -18.4% 42.23 51.33 -17.7%
Average Revenue per Pound:
Domestic $1.98 $1.94 2.1% $1.95 $1.93 1.0%$1.82 8.8% $1.96 $1.89 3.7%
International $1.34 $1.32 1.5%$1.34 -- $1.33 $1.37 (2.9%)$1.36 -2.2%
Average Revenue per Shipment:
Domestic $8.49 $8.40 1.1% $8.48 $8.35 1.6%$8.59 $8.67 -0.9% $8.51 $8.46 0.6%
International $56.64 $72.35 (21.7%) $57.53 $72.19 (20.3%)$55.58 $68.79 -19.2% $56.86 $70.99 -19.9%
9
Domestic shipments increased 8.8% and 12.1%decreased .3% in the secondthird quarter and first
half of 1998, respectively,but
increased 7.6% in the first nine months of 1998, compared to the same
periods in 1997. Domestic revenues increased 9.9%shipment comparisons for 1998 over 1997 are less
meaningful due to the effect of the UPS strike in the secondthird quarter of 1998 and 13.7% for the
first half of 1998 compared1997
referred to 1997.above.
The growth rate in the higher yielding domestic overnight segment increased
10.3%2.4% in the secondthird quarter of 1998, and 9.1% in the first nine months of
1998, a higher growth rate than the otheroverall domestic segments.shipment growth. This
helped the domestic revenue per shipment improve to $8.49$8.59 per shipment for
the third quarter of 1998, compared to $8.40 for the second quarter of 1997.1998, and to
$8.51 per shipment for the first nine months of 1998. Overnight shipments
accounted for approximately 59.0%59.2% of total domestic shipments in the secondthird
quarter of 1998 compared to 58.1%57.6% in the comparable period of 1997.
Domestic revenues for 1997 included $15.5 million of fuel surcharge revenue
in the first half of the year, of which $10.6 million was realized in the second quarterfirst two quarters of 1997. This fuel surcharge
revenue added approximately $.16$.15 per share in the first half ofto 1997 of which $.11 per share related
to the second quarter of 1997.operating results.
International revenues decreased 9.0%10.5% and 7.6%8.6% in the secondthird quarter and
first sixnine months of 1998, respectively, versus comparable periods in 1997,
primarily the result of slower global economic troublesconditions prevailing,
especially in parts of Asia. Shipments in the heavier weight, higher
revenue per shipment freight segment decreased 7.4% in the second quartercontinued to decline as measured both
year to year and 6.3%
in the first half of the year.sequentially over prior quarter. Mitigating some of the
weakness in freight volumes, the Company experienced strong growth in its
international express segment.segment, resulting in gross margins on overall
international business remaining relatively stable. International express
shipments increased 18.6%12.7% and 18.1%16.2% in the secondthird quarter and first sixnine
months of 1998, respectively, compared to the corresponding periods of
1997.
Operating expenses as a percentage of revenues were 92.3%92.5% for the first
sixnine months of 1998 compared to 93.6%92.1% in the first sixnine months of 1997 and
92.3% for all of 1997. Operating cost per shipment handled decreased 2.7%1.3%
to $8.71$8.76 for the first sixnine months of 1998 compared to the first sixnine
months of 1997. The operating cost per shipment for the secondthird quarter of
1998 decreased 1.5%increased 1.4% to $8.74,$8.85, compared to the secondthird quarter of 1997 while
operating expense as a percentage of revenues was 92.3%92.8%. Most of the
decrease in year-to-date operating cost per shipment was attributable to
lower costs related to lower international freight volumes.
The operating margin of
7.7% in the second quarter of 1998 was the same as that experienced in the
first quarter of this year, and in the second quarter of 1997.
The Company experienced a 1.5% improvement2.1% decline in productivity for the secondthird
quarter of 1998, compared to the secondthird quarter of 1997, as measured by
shipments handled per paid employee hour. ThisIt was difficult to achieve
productivity improvement while lower than previous periods, was meaningful given the sloweroverall stagnant shipment growth. Productivitygrowth
experienced during the third quarter of 1998, however, the Company achieved
a 1.9% productivity improvement and continuedfor the first nine months of 1998.
Continued emphasis on cost control and productivity improvement were
factors having a positive impact on 1998 operating results. Comparisons of
certain operating expense components are discussed below.
Transportation purchased decreased as a percentage of revenues to 30.7%30.8% in
the first sixnine months of 1998 compared to 32.0%31.5% in the comparable period of
1997. This decrease was primarily due to commercial airline costs which
although higherwere lower in total were lowerand as a percentage of total revenues in the first halfnine
months of 1998 due to the lower volumes of international freight shipments
discussed above. The suspension of the Federal Aviation Excise Tax reduced
costs in the first quarter of 1997 by $4.3 million. The Aviation Excise
Tax moratorium was effective through March 6, 1997, subsequent to which the
tax became effective once again; therefore, no cost reduction was realized
in 1998.
Station and ground expense increased as a percentage of revenues to 29.7%
for the first nine months of 1998 compared to 29.5% in the same period of
1997, primarily the result of lower productivity.
10
Flight operations and maintenance expense as a percentage of revenues
during the first halfnine months of 1998 was 15.5%15.6%, compared to 15.0%14.6% in the
first sixnine months of 1997, and was 15.4%15.7% in the secondthird quarter of 1998
compared to 14.2%14.1% in 1997. During the second quarterand third quarters of 1997,
costs associated with periodic aircraft maintenance were lower as a
percentage of revenues compared to bothversus the comparable quarters of 1998, or first quarter of 1997, due to fewer
maintenance checks performed. The average aviation fuel price for the
secondthird quarter and first sixnine months of 1998 was $.57$.55 per gallon and $.60$.58
per gallon, respectively, compared to $.70 per gallon and $.76$.74 per gallon
for the comparable periods of 1997. Aviation fuel consumption increased to
89.8136.0 million gallons in the first halfnine months of 1998, a 10.4%8.7% increase
over the first halfcomparable period of 1997. As a result of fuel hedging contracts,
the Company incurred $2.0 million ofsettlement expense equivalent to approximately $.06
per gallon in the secondthird quarter of 1998, and $.04 per gallon in the first
nine months of 1998 compared to $1.0 million of expense$.01 per gallon benefit realized in the
first quarter of 1998, and $1.7 million
benefit in the first quarternine months of 1997.
The station and ground expense, generalGeneral and administrative expense and
sales and marketing expense categories as a percentage of revenues were
very comparable in the secondfirst
nine months of 1998 was 8.1% which was comparable to the same period of
1997. This category of expense decreased as a percentage of revenues as
well as in total cost in the third quarter of 1998 versus the third quarter
of 1997, primarily the result of higher incremental accrued profit sharing
costs in 1997.
Sales and marketing expense decreased both in total cost and as a
percentage of revenues to 2.3% in the first halfnine months of 1998 compared to
2.5% in the same periods infirst nine months of 1997. This decline is primarily due to
lower sales incentive compensation associated with slower shipment and
revenue growth.
The increase in depreciation and amortization expense in the first halfnine
months of 1998 is due in large part to the increased number of aircraft in
service since the first halfthird quarter of 1997.
Interest expense in the first sixnine months of 1998 was significantly lower
than the same period of 1997. This is primarily attributable to the
significant reduction in average outstanding borrowings during the first
halfnine months of 1998 compared to the corresponding period of 1997.
The Company's effective tax rate was 39.6% for38.7% in the first sixnine months of 1998
compared to 39.7%39.5% in the first halfnine months of 1997 and 39.2% for all of
1997. The Company anticipates the effective tax rate for the 1998 annual
period will approximate 38.5%.
YEAR 2000 ISSUE:
The Company has implemented a compliance program to address the challenges
the Year 2000 issues may present to its products, systems and applications.business. This program includes
computer systems and applications operated by the Company, computer systems
of third parties upon whose data or functionality the Company relies, and
certain other fixed assets, including aircraft, which contain date
sensitive technology critical to itstheir operation.
Management anticipates modifications to its owncritical operational and
financial systems, conversions to new software, and related testing will be
substantially complete by the end of 1998. Remediation efforts and related
testing on less critical applications are scheduled to be completed by
early 1999.
As part of the compliance program, the Company has also initiated
communications with third parties (primarily customers, vendors, airport
authorities, and other governmental agencies, including the Federal
Aviation Administration) whose failure to timely convert theirhave Year 2000 compliant systems
could have an adverse impact on the Company's operations. The Company is
scheduling testing of customer interfaces of shipment information as this
data is critical to providing services and billing.
11
Although the Company does not believe the Year 2000 issue will have a
material impact on the
Company'sits operations, there can be no guarantee that the
Company's ornor any third partyparty's Year 2000 remediation efforts will be fully
compliant. If non-compliance is extensive and involves some form of
temporary suspension of operations, this could have a material adverse
effect on the Company's business, financial condition and results of
operation.
In an attempt to mitigate thisthe risk of noncompliance, the Company is in the
process of developing contingency plans regarding critical systems should
they fail to become Year 2000 compliant. These plans are focusing on the
Company's own critical operational and financial systems as well as
customer interfaces of shipment information. Contingency plans covering
the failure of material third party systems will also be developed as the
status readiness becomes fully known.
Management does not considerestimates the incurred or estimated coststotal cost of its Year 2000 compliance program to
be material.approximately $2.5 million, of which $1 million has cumulatively been
incurred through September 30, 1998. Total information technology costs
are not expected to differ from the normal recurring costs that are
incurred for systems development, in part due to the reallocation of
internal resources and the deferral of other projects. This assessmentThese costs could
differ materially if either the scope or schedule progress withof its compliance program
is significantly altered.11
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of changechanges in working capital increased for
the first sixnine months of 1998 to $152$237 million, compared to $133$224 million in
the first halfnine months of 1997. This increased liquidity is primarily the
result of the increase in profitability in 1998.
Capital expenditures continue to be a primary factor affecting the
financial condition of the Company. The Company anticipates total capital
expenditures to approximate $274$250 million in 1998.1998, down from the original
estimate of $274 million. During the first sixnine months of 1998, total
capital expenditures net of dispositions were $126$193 million. Cash provided
by operations was the primary source for funding capital expenditures.
In August 1998, the Board of Directors authorized a stock repurchase
program for up to 2 million shares of the Company's common stock. The
Company accomplished the repurchase of 2 million shares by the end of
September for approximately $38.8 million. These shares were added to the
Company's treasury stock.
In November 1998, the Board of Directors authorized a second stock
repurchase program for up to 4 million shares of the Company's common
stock. All shares may be acquired, at management's discretion, over time on
the open market. Shares repurchased will not be retired or canceled, but
will be held as treasury stock.
The Company's strong operating cash flowcashflow has become the major source of
liquidity, whereas, the Company's $250 million unsecured revolving bank
credit agreement hadhas traditionally been used as the major source of
liquidity for periods between other financing transactions. The Company
also has available $65 million under unsecured uncommitted money market
lines of credit with several banks, used in conjunction with the revolving
credit agreement to facilitate settlement and accommodate short-term
borrowing fluctuations. Reliance on the bank facilities has decreased
commensurately, with aA total of $2.5$30.0 million was outstanding at
JuneSeptember 30, 1998 under the revolving bank credit and money market credit
lines, compared to $30.0 million outstanding at December 31, 1997, and
$99.5$71.2 million outstanding at JuneSeptember 30, 1997.
In management's opinion, the available capacity under the bank credit
agreements coupled with internally generated cash flow from remaining 1998
operations should provide adequate flexibility to finance anticipated
capital expenditures for the balance of 1998.
12
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports oron Form 8-K.
(a) Exhibits -
Exhibit No. 27 - Financial Data Schedule
13
SIGNATURES
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Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized:
AIRBORNE FREIGHT CORPORATION
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(Registrant)
Date: 8/11/13/98 /s/Roy C. Liljebeck
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Roy C. Liljebeck
Executive Vice President,
Chief Financial Officer
Date: 8/11/13/98 /s/Lanny H. Michael
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Lanny H. Michael
Senior Vice President,
Treasurer and Controller