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 September 30, 1998March 31, 1999
Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
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(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 2,497,078 treasury shares)
as of September 30, 1998 48,286,791March 31, 1999 48,606,595 shares
-----------------2
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended
Nine Months EndedMarch 31
------------------
-----------------
September 30 September 30
------------ ------------1999 1998 1997 1998 1997
---- ----
---- ----
REVENUES:
Domestic $678,650 $687,549 $2,013,546 $1,861,659$681,261 $662,518
International 90,432 101,049 269,866 295,24588,170 87,675
-------- --------
---------- ----------
769,082 788,598 2,283,412 2,156,904769,431 750,193
OPERATING EXPENSES:
Transportation purchased 237,503 242,521 702,623 680,074233,975 230,323
Station and ground operations 228,339 224,945 679,315 636,051241,317 222,694
Flight operations and maintenance 121,102 110,949 355,985 315,645122,183 117,403
General and administrative 62,811 64,842 184,701 173,94259,019 59,950
Sales and marketing 18,288 19,742 53,256 53,82118,348 17,399
Depreciation and amortization 45,954 41,688 136,024 126,16949,613 44,888
-------- --------
---------- ----------
713,997 704,687 2,111,904 1,985,702724,455 692,657
-------- -------- ---------- ----------
EARNINGS FROM OPERATIONS 55,085 83,911 171,508 171,20244,976 57,536
INTEREST, NET 3,005 7,026 9,881 23,5223,632 3,916
-------- -------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 52,080 76,885 161,627 147,68041,344 53,620
INCOME TAXES 19,267 30,266 62,627 58,40016,100 21,260
-------- --------
---------- ----------
NET EARNINGS 32,813 46,619 99,000 89,28025,244 32,360
======== ======== ========== ==========
NET EARNINGS PER SHARE
BasicSHARE:
BASIC $ .66.52 $ 1.05 $ 1.98 $ 2.06.65
======== ========
========== ==========
DilutedDILUTED $ .65.51 $ .94 $ 1.94 $ 1.84.63
======== ======== ========== ==========
DIVIDENDS PER SHARE $ .040 $ .038
$ .118 $ .113
======== ======== ========== ==================
See notes to consolidated financial statements.3
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30March 31 December 31
------------ -----------
ASSETS------------
1999 1998 1997
------
---- ----
(Unaudited) (Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 14,08817,442 $ 25,52518,679
Trade accounts receivable,
less allowance of $9,990$9,640 and $10,290 316,589 322,549$10,140 327,931 323,178
Spare parts and fuel inventory 38,960 37,96642,955 39,726
Deferred income tax assets 16,407 14,53029,621 28,508
Prepaid expenses and other 26,329 25,98224,570 25,697
---------- ----------
TOTAL CURRENT ASSETS 412,373 426,552442,519 435,788
PROPERTY AND EQUIPMENT, NET 976,107 916,3311,057,972 1,021,885
EQUIPMENT DEPOSITS and OTHER ASSETS 36,585 23,09044,238 43,904
---------- ----------
TOTAL ASSETS $1,425,065 $1,365,973$1,544,729 $1,501,577
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 142,366135,776 $ 143,966153,000
Salaries, wages and related taxes 67,099 80,15472,034 77,030
Accrued expenses 90,974 100,12680,603 93,997
Income taxes payable 3,130 5,44018,535 8,820
Current portion of debt 400 381416 410
---------- ----------
TOTAL CURRENT LIABILITIES 303,969 330,067307,364 333,257
LONG-TERM DEBT 250,289 250,559282,077 249,149
DEFERRED INCOME TAX LIABILITIES 81,383 65,32290,754 88,838
OTHER LIABILITIES 57,506 49,11067,542 61,181
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 50,783,86951,103,673 and 50,428,54850,818,493 shares 50,784 50,42951,104 50,819
Additional paid-in capital 293,549 287,208298,146 293,629
Retained earnings 427,186 334,083486,842 463,539
Accumulated other comprehensive income 501 766
---------- ----------
771,519 671,720836,593 808,753
Treasury stock, 2,497,078 and 522,3002,497,078 (39,601) (39,601)
shares, at cost (39,601) (805)
---------- ----------
731,918 670,915796,992 769,152
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,425,065 $1,365,973$1,544,729 $1,501,577
========== ==========
See notes to consolidated financial statements.4
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NineThree Months Ended
-----------------
September 30
-----------------March 31
------------------
1999 1998 1997
---- ----
OPERATING ACTIVITIES:
Net Earnings $ 99,00025,244 $ 89,28032,360
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 124,002 116,30344,745 41,302
Provision for aircraft engine overhauls 12,022 9,8664,868 3,586
Deferred income taxes 14,184 17,903792 6,442
Other 8,535 2,4116,407 (1,076)
-------- --------
CASH PROVIDED BY OPERATIONS 257,743 235,76382,056 82,614
Change in:
Receivables 5,960 (57,859)(4,753) 2,428
Inventories and prepaid expenses (1,341) (2,760)(2,102) 885
Accounts payable (1,600) (1,063)(17,212) (7,382)
Accrued expenses, salaries and taxes payable (24,176) 49,788(8,675) (28,005)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 236,586 223,86949,314 50,540
INVESTING ACTIVITIES:
Additions to property and equipment (193,497) (135,433)(80,327) (47,949)
Disposition of property and equipment 951 4,42529 136
Expenditures for engine overhauls (15,521) (8,821)
Proceeds from insurance on aircraft accident -- 18,000(4,918) (4,238)
Other (1,367) 214(1,130) (2,088)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (209,434) (121,615)(86,346) (54,139)
FINANCING ACTIVITIES:
PaymentsProceeds (payments) on bank notes, net -- (117,300)33,000 (1,500)
Principal payments on debt (251) (316)
Repurchase of common stock (38,835) --(66) (62)
Proceeds from common stock issuance 6,394 6,5964,802 3,678
Dividends paid (5,897) (4,894)(1,941) (1,876)
-------- --------
NET CASH USEDPROVIDED BY FINANCING ACTIVITIES (38,589) (115,914)35,795 240
-------- --------
NET DECREASE IN CASH (11,437) (13,660)(1,237) (3,359)
CASH AT JANUARY 1 18,679 25,525 35,816
-------- --------
CASH AT SEPTEMBER 30MARCH 31 $ 14,08817,442 $ 22,15622,166
======== ========
See notes to consolidated financial statements.5
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998March 31, 1999 (Unaudited)
NOTE A - SUMMARYA--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
19981999 presentation.
NOTE B - LONG-TERMB--LONG-TERM DEBT:
Long-term debt consists of the following:
September 30March 31 December 31
------------ ------------1999 1998 1997
---- ----
(In thousands)
Senior debt:
Revolving bank credit $ 45,000 $ -
Notes payable 30,000 30,00017,000 29,000
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 7,489 7,740
--------- ---------
250,689 250,9407,293 7,359
-------- --------
282,493 249,559
Less current portion 400 381
--------- ---------
$ 250,289 $ 250,559
========= =========416 410
-------- --------
$282,077 $249,149
======== ========
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 - 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.
Diluted earnings per share for the three and nine months ended September
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 $47,459,000 for
the three month period and $92,249,000 for the nine month period.
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
-------
1999 1998 1997 1998 1997
---- ----
---- ----
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 49,921 44,325 50,056 43,24648,479,073 50,026,298
Diluted 50,682 50,631 51,051 50,09949,352,658 51,181,203
NOTE E - NEWD-SEGMENT INFORMATION
The Company has organized its business into two reportable operating
segments. The domestic segment derives its revenues from the door-to-door
delivery of small packages and documents throughout the United States,
Canada, and Puerto Rico. Domestic operations are supported principally by
Company operated aircraft and facilities. The international segment
derives its revenues from express door-to-door delivery and a variety of
freight services. International revenues are recognized on shipments where
the origin and/or destination is outside of locations supported by the
domestic segment. The Company uses a variable cost approach to delivering
international services through use of existing commercial airline capacity
in connection with its domestic network and independent express and freight
agents in locations not currently served by Company-owned foreign
operations.
The following is a summary of key segment information (in thousands):
Three Months Ended
------------------
March 31
-------
1999 1998
---- ----
SEGMENT REVENUES:
Domestic $681,261 $662,518
International 88,170 87,675
---------- ----------
$769,431 $750,193
========== ==========
SEGMENT EARNINGS FROM OPERATIONS:
Domestic $44,348 $58,347
International 628 (811)
---------- ----------
$44,976 $57,536
========== ==========
NOTE E-OTHER COMPREHENSIVE INCOME
Other comprehensive income includes the following transactions and tax
effects for the three month period ended March 31, 1999 (in thousands):
Income Tax
Before (Expense) Net of
Tax or Benefit Tax
------ ---------- ------
Unrealized securities losses arising
during the period $ (361) $ 139 $ (222)
Less: Reclassification adjustment for
gains realized in net income (65) 25 (40)
------- ------- -------
Net unrealized securities losses (426) 164 (262)
Foreign currency translation adjustments (6) 3 (3)
------- ------- -------
Other comprehensive income $ (432) $ 167 $ (265)
======= ======= =======
NOTE F-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 September 30,
1998.March 31,
1999. However, if the provisions of the statement had been adopted, a
cumulative charge of $1,000,000,$74,000, net of tax, would have been recorded to
shareholders'shareholder's equity and a credit to comprehensive income of approximately
$1,300,000$2,490,000 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 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 DecemberMarch
31, 1998. Implementation of the
pronouncements are not expected to have a material impact on the Company's
financial position or results of operations.
81999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company's operating performance in the first quarter of 1999 was below
management's expectations. A growth rate of less than 1% in domestic
shipments, and additional operating expenses related to a couple of periods
of severe weather were factors impacting operating results. Also, from a
comparative standpoint, the first quarter of 1998 is a difficult comparison
as domestic volume was very strong and winter weather was probably as mild
as ever experienced in a first quarter.
Net earnings for the thirdfirst quarter of 19981999 were $32.8$25.2 million, or $.65$.51 per
share on a diluted basis, on revenues of $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 in
incremental domestic revenues and increased earnings per share results by
$.28compared to $.30. Total net earnings for the third quarter of 1997 were $46.6$32.4 million, or
$.94 per diluted share on revenues of $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 1998.
Net earnings for the first nine months of 1998 increased 10.9% to
$99.0 million, or $1.94 per diluted share compared to $89.3 million, or
$1.84$.63 per share for the first nine months of 1997. Total revenues for the
first nine months of 1998 were $2.283 billion, a 5.9% increase over the
comparable period of 1997. This 1998 year-to-date performance represents
approximately a 25% increase1998. The Company estimates
that weather related costs in excess of normal expenditures reduced
earnings by at least $.06 per share over 1997, on a
comparative basis whenin the benefit realized from the 1997 UPS strike is
eliminated, a significant improvement considering the prevailing weak
economic conditions.first quarter of 1999.
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
---------------------------
1999 1998 1997 Change 1998 1997 Change
---- ----
------ ---- ---- ------
Shipments (in thousands):
Domestic
Overnight 46,792 45,675 2.4% 139,183 127,601 9.1%46,321 45,759
Next Afternoon Service 14,640 14,026 4.4% 43,741 39,907 9.6%14,684 14,383
Second Day Service 17,497 19,482 -10.2% 53,181 51,948 2.4%17,814 18,011
100 Lbs. &and Over 75 91 96 -5.2% 269 250 7.6%
------ ------
------- -------
Total Domestic 79,020 79,279 -0.3% 236,374 219,706 7.6%78,894 78,244
------ ------
------- -------
International
Express 1,522 1,351 12.7% 4,418 3,803 16.2%1,577 1,389
Freight 105 118 -11.0% 328 356 -7.9%99 110
------ ------
------- -------
Total International 1,627 1,469 10.8% 4,746 4,159 14.1%1,676 1,499
------ ------
------- -------
Total Shipments 80,647 80,748 -0.1% 241,120 223,865 7.7%80,570 79,743
====== ====== ======= =======
Average Pounds per Shipment:
Domestic 4.26 4.71 -9.6% 4.28 4.45 -3.8%4.21 4.36
International 41.06 50.32 -18.4% 42.23 51.33 -17.7%43.12 44.15
Average Revenue per Pound:
Domestic $1.98 $1.82 8.8% $1.96 $1.89 3.7%$ 2.02 $ 1.92
International $1.34 $1.34 -- $1.33 $1.36 -2.2%$ 1.20 $ 1.31
Average Revenue per Shipment:
Domestic $8.59 $8.67 -0.9% $8.51 $8.46 0.6%$ 8.64 $ 8.46
International $55.58 $68.79 -19.2% $56.86 $70.99 -19.9%$52.60 $58.49
9
DomesticTotal shipments decreased .3% in the third quarter of 1998, but
increased 7.6%1.0% in the first nine monthsquarter of 1998,1999 compared to
15.6% in the first quarter of 1998. Total revenues increased 2.6% in the
first quarter of 1999 compared to 14.4% in the first quarter of 1998.
Domestic revenue growth for the first quarter of 1999 was impacted by the
relatively flat growth in all categories of domestic shipments. Domestic
revenues increased 2.8% in the first quarter of 1999 compared to 17.9% in
the comparable period of 1998. Although the growth rate in domestic
revenue was much lower than last year, the fact that it exceeded the growth
rate in shipments for the quarter continues a positive trend related to the
Company's continuing focus on yield enhancements. The average revenue per
domestic shipment increased 2.1% to $8.64 in the first quarter of 1999
compared to the same
periods in 1997. Domestic shipment comparisons for 1998 over 1997 are less
meaningful due to the effect of the UPS strike in the thirdfirst quarter of 1997
referred to above.
The growth rate in the higher yielding domestic overnight segment increased
2.4% in the third quarter of 1998, and 9.1% in the first nine months of
1998, a higher growth rate than overall domestic shipment growth. This
helped the domestic revenue per shipment improve to $8.59 per shipment for
the third quarter of 1998, compared to the second quarter of 1998, and to
$8.51 per shipment for the first nine months of 1998.
Overnight shipments accounted for approximately 59.2%58.7% of total domestic shipments in the
thirdfirst quarter of 1999, comparable to the overnight shipment percentage
achieved in the first quarter of 1998. The higher yielding overnight
shipments increased 1.2% in the first quarter of 1999, compared to 15.4% in
the corresponding 1998 period. The Company's Next Afternoon Service
shipments increased 2.1% and the Second Day Service shipments decreased
1.1% in 1998 compared to 57.6%growth of 18.2% and 13.9%, respectively, in the
first quarter of 1998.
International revenues increased 0.6% in the first quarter of 1999 compared
to a decrease of 6.1% in the comparable period of 1997.
Domestic revenues for 1997 included $15.5 million of fuel surcharge revenue
which was realized in the first two quarters of 1997. This fuel surcharge
revenue added approximately $.15 per share to 1997 operating results.
International revenues decreased 10.5% and 8.6% in the third quarter and
first nine months of 1998, respectively, versus comparable periods in 1997,
primarily the result of slower global economic conditions prevailing,
especially in parts of Asia.1998. Shipments in the
heavier weight, higher revenue per shipment freight segment continued to decline as measured both
year to year and sequentially over prior quarter.decreased 10.2%
in the first quarter of 1999. Mitigating some of the weakness in freight
volumes, the Company experienced strong growth in its international express
segment, resulting in gross margins on overall
international business remaining relatively stable.segment. International express shipments increased 12.7% and 16.2%13.6% in the thirdfirst
quarter and first nine
months of 1998, respectively,1999 compared to 17.6% in the corresponding periodsperiod of 1997.1998.
International segment contribution to earnings from operations was
$.6 million for the first quarter of 1999 compared to a loss of $.8 million
in the comparable period of 1998.
Operating expenses as a percentage of revenues were 92.5%94.2% for the first
nine monthsquarter of 1999 compared to 92.3% in the corresponding period of 1998 compared to 92.1% in the first nine months of 1997 and
92.3%92.4% for all of 1997. Operating cost per shipment handled decreased 1.3%
to $8.76 for the first nine months of 1998 compared to the first nine
months of 1997. The operating cost per shipment for the third quarter of
1998 increased 1.4% to $8.85, compared to the third quarter of 1997 while
operating expense as a percentage of revenues was 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.1998. The Company experienced a 2.1%3.0% decline in
productivity for the thirdfirst quarter of 1998,1999, compared to the thirdfirst quarter
of 1997,1998, as measured by shipments handled per paid employee hour.
It was difficultAdditional operating costs related to achievesevere weather, primarily in station
and ground and flight operations costs, and the decline in productivity
improvement given the overall stagnantwere significant factors having a negative impact on 1999 operating
results. Operating cost per shipment growth
experienced during the third quarter of 1998, however, the Company achieved
a 1.9% productivity improvementhandled increased 3.5% to $8.99 for
the first nine monthsquarter of 1999 compared to the first quarter 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 30.8%30.4% in
the first nine monthsquarter of 19981999 compared to 31.5%30.7% in the comparable period of
1997.1998. This decrease was primarily due to commercial airline costs which
were lower in total and as a percentage of total revenues in the first
nine
monthsquarter of 19981999 due to the lower volumes ofdecline in international freight shipments
discussed above. The suspensionshipments.
Station and ground expense increased to 31.4% of the Federal Aviation Excise Tax reduced
costsrevenues 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 revenues1999 compared to 29.7% forin the first nine monthsquarter of 1998 compared to 29.5%1998. The
decline in productivity and the weather related costs incurred in the
same periodquarter had a negative impact on this category of 1997, primarily the result of lower productivity.
10expense.
Flight operations and maintenance expense as a percentage of revenues
during the first nine monthsquarter of 19981999 was 15.6%15.9%, compared to 14.6%15.6% in the first
nine months of 1997, and was 15.7% in the third quarter of 1998
compared to 14.1% in 1997. During the second and third quarters of 1997,
costs associated with periodic aircraft maintenance were lower as a
percentage of revenues versus the comparable quarters of 1998, due to fewer
maintenance checks performed.1998. The average aviation fuel price for the thirdfirst quarter and first nine months of
19981999 was $.55$.49 per gallon and $.58compared to $.62 per gallon respectively, compared to $.70 per gallon and $.74 per gallon
forin the comparable periodsfirst quarter
of 1997.1998. Aviation fuel consumption increased to 136.044.6 million gallons in
the first nine monthsquarter of 1998,1999, a 8.7%1.1% increase over the comparable periodfirst quarter of 1997.1998.
As a result of fuel hedging contracts, the Company incurred settlement$2.4 million of
expense equivalent to approximately $.06
per gallon in the third quarter of 1998, and $.04 per gallon in the first nine monthsquarter of 19981999 compared to $.01 per gallon benefit realized$1.0 million in the first
nine monthsquarter of 1997.1998. Offsetting the lower fuel costs were higher costs
associated with periodic aircraft maintenance checks and weather related
expenses.
General and administrative expense as a percentagewas 7.7% of revenues in the first
nine monthsquarter of 1998 was 8.1% which was1999 compared to 8.0% in the comparable to the same period of 1997.1998. This
category of expensecost 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 nine months of 1998 compared to
2.5% in the first nine months of 1997. This decline is primarily due to lower sales incentive compensation associated with slower shipmentthe continued strong cost controls over labor and
revenue growth.discretionary costs.
The increase in depreciation and amortization expense in the first nine
monthsquarter
of 19981999 is due in large part to the increased number of aircraft in service
since the thirdfirst quarter of 1997.1998.
Interest expense in the first nine monthsquarter of 19981999 was significantly lower than the same periodfirst
quarter of 1997. This is primarily attributable1998 due to the significant reductionhigher level of capitalized interest expense in
the first quarter of 1999. Also, the benefit of lower average effective
interest rates was offset by the impact of modestly higher levels of
average outstanding borrowings duringin the first nine monthsquarter of 19981999 compared to the
correspondingsimilar period of 1997.1998.
The Company's effective tax rate was 38.7%38.9% in the first nine monthsquarter of 19981999
compared to 39.5%39.7% in the first nine monthsquarter of 19971998 and 39.2%38.0% for all of 1997. The Company anticipates the effective tax rate for the 1998 annual
period will approximate 38.5%.1998.
YEAR 2000 ISSUE:
The Company has implemented a compliance program to address the challenges
Year 2000 issues may present to its 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 their operation.
Management anticipates modificationsModifications to itsthe Company's critical operational and financial systems
and conversions to new software and related testing will bewere substantially complete byat the end of
1998. RemediationTesting of these critical systems and software as well as remediation
efforts and related testing on less critical applications are scheduled to
be completed by
earlybefore July 1999.
As part of the compliance program, the Company has also initiated
communications with third parties (primarily- primarily customers, vendors, airport
authorities, and other governmental agencies (domestic and foreign),
including the Federal Aviation Administration)Administration - whose failure to have 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 its operations, there can be no guarantee that the
Company's noror any third party's Year 2000 remediation efforts will be fully
compliant. If non-compliancenoncompliance is extensive and, in the worse case, 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.operations.
In an attempt to mitigate the 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 thetheir
status of readiness becomes fully known.
Management estimates the total cost of itsthe Year 2000 compliance program to
be approximately $2.5$4.0 million, of which $1$2.0 million has cumulatively been incurred
through September 30, 1998.March 31, 1999. 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. These costs could differ materially if either the
scope or schedule of itsthe compliance program is significantly altered. Funding of the
compliance program is from internal cash flows.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of changeschange in working capital increased for the first
nine monthsquarter of 1998 to $2371999 was $49 million, compared to $224$51 million in the first
nine monthsquarter 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 $250$350 million in 1998, down from the original
estimate of $274 million.1999. During the first nine monthsquarter
of 1998,1999, total capital expenditures net of dispositions were $193$80 million.
Cash provided by operations wasand bank borrowings were the primary sourcesources
for funding capital expenditures.
In August 1998,expenditures in the Boardfirst quarter 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.1999.
The Company's strong operating cashflow has become thecash flow is a major source of liquidity, whereas,liquidity.
Also, the Company's $250 million unsecured revolving bank credit agreement
has traditionally been used as thea 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.
AWith the higher level of capital expenditures in 1999 compared to 1998,
reliance on the bank facilities has increased, with a total of $30.0$62.0
million was outstanding at September 30, 1998March 31, 1999 under the revolving bank credit and
money market credit lines, compared to $30.0$29.0 million outstanding at
December 31, 1997,1998 and $71.2$28.5 million outstanding at September 30, 1997.March 31, 1998.
In management's opinion, the available capacity under the bank credit
agreements coupled with internally generated cash flow from remaining 19981999
operations should provide adequate flexibility to finance anticipated
capital expenditures for the balance of 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
There have been no material changes in the Company's market risk sensitive
instruments and positions since its disclosure in its Annual Report on Form
10-K for the year ended December 31, 1998. 12See Note F of the Notes to
Consolidated Financial Statements to this Form 10-Q for further discussion
regarding the Company's fuel hedging activities.
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of Airborne Freight Corporation was held at The Westin
Hotel, 1900 Fifth Avenue, Seattle, Washington 98101 on April 27, 1999. A
total of 44,662,944 shares were represented at the meeting comprising 92.0%
of the outstanding shares of the Company entitled to vote at the meeting on
the record date (February 22, 1999).
The following directors were duly elected for terms ending in 2002, in each
case by an affirmative vote in excess of 99.7% of the shares represented at
the meeting:
Number of Shares
Voted For
---------
Robert G. Brazier 44,551,577
James H. Carey 44,541,915
Andrew B. Kim 44,551,173
The following are continuing directors with terms expiring as indicated:
Terms Expiring in 2000 Terms Expiring in 2001
---------------------- ----------------------
Robert S. Cline Andrew F. Brimmer
Richard M. Rosenberg Harold M. Messmer
William Swindells Mary Agnes Wilderotter
Additionally, Andrew F. Brimmer retired from the Board of Directors
following the annual meeting because he had reached the age of 72.
Rosalie J. Wolf, Treasurer and Chief Investment Officer of The Rockefeller
Foundation, was appointed to the Board replacing Mr. Brimmer.
The shareholders, by an affirmative vote in excess of 66.0% of the votes
cast at the meeting, approved a non-binding request that the Board of
Directors take all necessary steps to elect the entire Board of Directors
each year as set forth in the proxy statement.
The Airborne Board of Directors on the same date, April 27, 1999, reelected
all existing executive officers, including Robert S. Cline as Chairman and
Chief Executive Officer, and Robert G. Brazier as President and Chief
Operating Officer.
The Board of Directors also declared a quarterly cash dividend of $0.04 per
share on the Common Stock of the Company payable on May 25, 1999 to
shareholders of record on May 11, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Exhibit No.-
EXHIBIT NO. 27 - Financial Data Schedule13
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 CORPORATION
----------------------------
(Registrant)
Date: 11/5/13/9899 /s/Roy C. Liljebeck
-------- -------------------------- --------------------
Roy C. Liljebeck
Executive Vice President,
Chief Financial Officer
Date: 11/5/13/9899 /s/Lanny H. Michael
--------------- -------------------
Lanny H. Michael
Senior Vice President,
Treasurer and Controller