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 March 31,June 30, 1999
Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
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(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
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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 March 31,June 30, 1999 48,606,59548,635,206 shares
-----------------
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended March 31Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Domestic $681,261 $662,518$686,395 $672,378 $1,367,656 $1,334,896
International 88,170 87,67592,913 91,759 181,083 179,434
-------- -------- 769,431 750,193---------- ----------
779,308 764,137 1,548,739 1,514,330
OPERATING EXPENSES:
Transportation purchased 233,975 230,323238,197 234,797 472,172 465,120
Station and ground operations 241,317 222,694238,517 228,282 479,834 450,976
Flight operations and maintenance 122,183 117,403123,620 117,480 245,803 234,883
General and administrative 59,019 59,95061,172 61,940 120,191 121,890
Sales and marketing 18,348 17,39918,603 17,569 36,951 34,968
Depreciation and amortization 49,613 44,88850,980 45,182 100,593 90,070
-------- -------- 724,455 692,657---------- ----------
731,089 705,250 1,455,544 1,397,907
-------- -------- ---------- ----------
EARNINGS FROM OPERATIONS 44,976 57,53648,219 58,887 93,195 116,423
INTEREST, NET 3,632 3,9164,047 2,960 7,679 6,876
-------- -------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 41,344 53,62044,172 55,927 85,516 109,547
INCOME TAXES 16,100 21,26017,150 22,100 33,250 43,360
-------- -------- ---------- ----------
NET EARNINGS 25,244 32,360$ 27,022 $ 33,827 $ 52,266 $ 66,187
======== ======== ========== ==========
NET EARNINGS PER SHARE:
BASICBasic $ .52.56 $ .65.67 $ 1.08 $ 1.32
======== ======== DILUTED========== ==========
Diluted $ .51.55 $ .63.66 $ 1.06 $ 1.29
======== ======== ========== ==========
DIVIDENDS PER SHARE $ .040 $ .038.040 $ .080 $ .078
======== ======== ========== ==========
See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31June 30 December 31
------------ ------------------- -----------
1999 1998
---- ----
(Unaudited)
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 17,44219,294 $ 18,679
Trade accounts receivable,
less allowance of $9,640$9,840 and $10,140 327,931320,617 323,178
Spare parts and fuel inventory 42,95543,160 39,726
Deferred income tax assets 29,62130,773 28,508
Prepaid expenses and other 24,57027,424 25,697
---------- ----------
TOTAL CURRENT ASSETS 442,519441,268 435,788
PROPERTY AND EQUIPMENT, NET 1,057,9721,075,786 1,021,885
EQUIPMENT DEPOSITS and OTHER ASSETS 44,23847,445 43,904
---------- ----------
TOTAL ASSETS $1,544,729$1,564,499 $1,501,577
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 135,776134,997 $ 153,000
Salaries, wages and related taxes 72,03481,383 77,030
Accrued expenses 80,60379,834 93,997
Income taxes payable 18,53512,246 8,820
Current portion of debt 416423 410
---------- ----------
TOTAL CURRENT LIABILITIES 307,364308,883 333,257
LONG-TERM DEBT 282,077268,969 249,149
DEFERRED INCOME TAX LIABILITIES 90,75491,873 88,838
OTHER LIABILITIES 67,54272,278 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 51,103,67351,132,284 and 50,818,493 shares 51,10451,132 50,819
Additional paid-in capital 298,146298,464 293,629
Retained earnings 486,842511,919 463,539
Accumulated other comprehensive income 501582 766
---------- ----------
836,593862,097 808,753
Treasury stock, 2,497,078 and 2,497,078 (39,601) (39,601)
shares, at cost ---------- ----------
796,992822,496 769,152
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,544,729$1,564,499 $1,501,577
========== ==========
See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
ThreeSix Months Ended
March 31
----------------------------------
June 30
----------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net Earnings $ 25,24452,266 $ 32,36066,187
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 44,745 41,30290,632 82,412
Provision for aircraft engine overhauls 4,868 3,5869,961 7,658
Deferred income taxes 792 6,442770 10,649
Other 6,407 (1,076)11,190 14,695
-------- --------
CASH PROVIDED BY OPERATIONS 82,056 82,614164,819 181,601
Change in:
Receivables (4,753) 2,4282,561 11,851
Inventories and prepaid expenses (2,102) 885(5,161) (3,613)
Accounts payable (17,212) (7,382)(18,003) 512
Accrued expenses, salaries and& taxes payable (8,675) (28,005)(6,384) (37,922)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,314 50,540137,832 152,429
INVESTING ACTIVITIES:
Additions to property and equipment (80,327) (47,949)
Disposition(147,748) (126,377)
Dispositions of property and equipment 29 136390 633
Expenditures for engine overhauls (4,918) (4,238)(8,620) (8,471)
Other (1,130) (2,088)(2,334) (1,811)
-------- --------
NET CASH USED INBY INVESTING ACTIVITIES (86,346) (54,139)(158,312) (136,026)
FINANCING ACTIVITIES:
Proceeds (payments) on bank notes, net 33,000 (1,500)20,000 (27,500)
Principal payments on debt (66) (62)(167) (155)
Proceeds from common stock issuance 4,802 3,6785,148 6,535
Dividends paid (1,941) (1,876)(3,886) (3,886)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING 21,095 (25,006)
ACTIVITIES 35,795 240
-------- --------
NET DECREASEINCREASE (DECREASE) IN CASH (1,237) (3,359)615 (8,603)
CASH AT JANUARY 1 18,679 25,525
-------- --------
CASH AT MARCH 31JUNE 30 $ 17,44219,294 $ 22,16616,922
======== ========
See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,June 30, 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
1999 presentation.
NOTE B--LONG-TERMB - LONG-TERM DEBT:
Long-term debt consists of the following:
MarchJune 30 December 31
December 31------- -----------
1999 1998
---- ----
(In thousands)
Senior debt:
Revolving bank credit $ 45,00040,000 $ -
Notes payable 17,0009,000 29,000
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 7,2937,192 7,359
-------- --------
282,493269,392 249,559
Less current portion 416423 410
-------- --------
$282,077$268,969 $249,149
======== ========
NOTE C--EARNINGSC - EARNINGS PER SHARE:
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the interim period. Diluted earnings per
share are based upon the weighted average number of common shares
outstanding during the interim period plus dilutive common equivalent
shares applicable to the assumed exercise of outstanding stock options.
Weighted average shares outstanding used in earnings per share computations
were as follows:
Three Months Ended Six Months Ended
------------------ March 31----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 48,479,073 50,026,29848,616,630 50,220,364 48,547,851 50,123,331
Diluted 49,352,658 51,181,20349,333,901 51,288,921 49,343,279 51,235,062
NOTE D-SEGMENT INFORMATION
The Company has organized its business into two reportable operating
segments. The domestic segment derives its revenues from the door-to-door
delivery of small packages and documents throughout the United States,
Canada, and Puerto Rico. Domestic operations are supported principally by
Company operated aircraft and facilities. The international segment
derives its revenues from express door-to-door delivery and a variety of
freight services. International revenues are recognized on shipments where
the origin and/or destination is outside of locations supported by the
domestic segment. The Company uses a variable cost approach to delivering
international services through use of existing commercial airline capacity
in connection with its domestic network and independent express and freight
agents in locations not currently served by Company-owned foreign
operations.
The following is a summary of key segment information (in thousands):
Three Months Ended Six Months Ended
------------------ March 31----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
SEGMENT REVENUES:
Domestic $681,261 $662,518$686,395 $672,378 $1,367,656 $1,334,896
International 88,170 87,67592,913 91,759 181,083 179,434
---------- ---------- $769,431 $750,193---------- ----------
$779,308 $764,137 $1,548,739 $1,514,330
========== ========== ========== ==========
SEGMENT EARNINGS
FROM OPERATIONS:
Domestic $44,348 $58,347$46,442 $57,192 $90,788 $115,541
International 628 (811)1,777 1,695 2,407 882
---------- ---------- $44,976 $57,536---------- ----------
$48,219 $58,887 $93,195 $116,423
========== ========== ========== ==========
NOTE E-OTHER COMPREHENSIVE INCOME
Other comprehensive income includes the following transactions and tax effects
for the three and six month period ended March 31,June 30, 1999 (in thousands):
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
-------------------------------- ------------------------------
Income Tax Income Tax
Before (Expense) Net of Before (Expense) Net of
Tax or Benefit Tax Tax or Benefit Tax
------ ---------- ------ ------ ---------- ------
Unrealized securities lossesgains
(losses) arising during the period $ (361)212 $(82) $ 139130 $(148) $ (222)57 $ (91)
Less: Reclassification adjustment
for gains realized in net income (65) 25 (40)
------- ------- -------(77) 30 (47) (142) 55 (87)
------ ------ ------ ------ ------ ------
Net unrealized securities losses (426) 164 (262)gains
(losses) 135 (52) 83 (290) 112 (178)
Foreign currency translation
adjustments 20 (22) (2) 14 (20) (6)
3 (3)
------- ------- ------------- ------ ------ ------ ------ ------
Other comprehensive income $ (432)155 $(74) $ 16781 $(276) $ (265)
======= ======= =======92 $(184)
====== ====== ====== ====== ====== ======
NOTE F-NEW ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which. As amended by SFAS No. 137, this
statement will be effective for fiscal year 2000.2001. 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 March 31,June 30, 1999.
However, if the provisions of the statement had been adopted, a cumulative
charge of $74,000,$136,000, net of tax, would have been recorded to shareholder'sshareholders'
equity and a credit to comprehensive income of approximately $2,490,000$210,000 and
$2,700,000 would have been reported for the three and six month periodperiods
ended March
31, 1999.June 30, 1999, respectively.
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 quartersix
months of 1999 wasresulted in operating income and net earnings below management's expectations. Athat of
the comparable periods of 1998. The lack of 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 first quarter of 1999 continued through the second
quarter. While the yield on domestic shipments continued to improve, the
average operating cost per shipment increased at a faster rate than the
average revenue per shipment. These factors combined with a decline in
productivity had a negative impact on operating performance in the first
six months of 1999.
Net earnings for the second quarter of 1999 were $25.2$27.0 million, or $.51$.55 per
share on a diluted basis, on revenues of $779 million, compared to
net earnings of $32.4$33.8 million, or $.63$.66 per share on revenues of $764 million, for the
comparable periodsecond quarter of 1998. The Company estimates
that weather related costs in excessNet earnings for the first six months of normal expenditures reduced
earnings by at least $.061999 were
$52.3 million, or $1.06 per share on revenues of $1.55 billion, compared to
$66.2 million, or $1.29 per share on revenues of $1.51 billion for the
corresponding period in the first quarter of 1999.1998.
The following table sets forth selected shipment and revenue data for the
periods indicated:
Three Months Ended March 31
---------------------------Six Months Ended
------------------ ----------------
June 30 June 30
-------- % ------- %
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
Shipments (in thousands):
Domestic
Overnight 46,321 45,75946,422 46,632 (0.5%) 92,743 92,391 0.4%
Next Afternoon Service 14,684 14,38314,132 14,718 (4.0%) 28,816 29,101 (1.0%)
Second Day Service 17,814 18,01117,897 17,673 1.3% 35,711 35,684 0.1%
100 Lbs. and Over 75 9173 87 (16.1%) 148 178 (16.9%)
------ ------ ------- -------
Total Domestic 78,894 78,24478,524 79,110 (0.7%) 157,418 157,354 0.0%
------ ------ ------- -------
International
Express 1,577 1,3891,636 1,507 8.6% 3,213 2,896 10.9%
Freight 99 110101 113 (10.6%) 200 223 (10.3%)
------ ------ ------- -------
Total International 1,676 1,4991,737 1,620 7.2% 3,413 3,119 9.4%
------ ------ ------- -------
Total Shipments 80,570 79,74380,261 80,730 (0.6%) 160,831 160,473 0.2%
====== ====== ======= =======
Average Pounds per Shipment:
Domestic 4.21 4.364.18 4.22 (0.9%) 4.19 4.29 (2.3%)
International 43.12 44.1544.68 41.62 7.4% 43.92 42.85 2.5%
Average Revenue per Pound:
Domestic $ 2.02 $ 1.92$2.06 $1.98 4.0% $2.04 $1.95 4.6%
International $ 1.20 $ 1.31$1.18 $1.34 (11.9%) $1.19 $1.33 (10.5%)
Average Revenue per Shipment:
Domestic $ 8.64 $ 8.46$8.74 $8.49 2.9% $8.69 $8.48 2.5%
International $52.60 $58.49$53.49 $56.64 (5.6%) $53.06 $57.53 (7.8%)
Total shipmentsrevenues increased 1.0%2.0% and 2.3% in the second quarter and first half
of 1999, respectively, compared to the same periods of 1998. Total
shipment growth was flat for the first half of 1999 over the first half of
1998, and decreased 0.6% in the second quarter of 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 firstsecond quarter of 1998.
Domestic revenue growth for the second quarter and the first quarterhalf of 1999
was impacted by the relatively flat growth in all categories of domestic
shipments. Domestic revenues increased 2.8%2.1% and 2.5% in the second quarter
and first quarterhalf of 1999, respectively, compared to 17.9%9.9% and 13.7% in the
comparable periodperiods 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 quarterfirst half of the year continues a positive trend related to the
Company's continuing focus on yield enhancements.trend. The
average revenue per domestic shipment increased 2.1%2.9% to $8.64$8.74 in the firstsecond
quarter of 1999 compared to the firstsecond quarter of 1998.
Overnight shipments accounted for 58.7%59.1% of total domestic shipments in the
firstsecond quarter of 1999, comparable to the overnight shipment percentage
achieved in the firstsecond quarter of 1998. The higher yielding overnight
shipments increased 1.2%decreased 0.5% in the firstsecond quarter of 1999, compared to 15.4%a 10.3%
increase in the corresponding 1998 period. The Company's Next Afternoon
Service shipments increased 2.1%decreased 4.0% and the Second Day Service shipments
decreased
1.1%increased 1.3% in 19981999 compared to growth of 18.2%7.3% and 13.9%6.1%, respectively,
in the firstsecond quarter of 1998.
The Company began a pilot program in mid-July, 1999 to test a new service
for business to residential delivery. This service, referred to as
Airborne@Home, will target shipments from Internet, catalog, and mail order
businesses which are primarily directed to residential delivery. Delivery
of this product will be accomplished through an arrangement with the U.S.
Postal Service. The pilot program for Airborne@Home will be evaluated on
an ongoing basis to determine longer-term application.
International revenues increased 0.6%1.3% and .9% in the second quarter and
first quartersix months of 1999, respectively, compared to a decrease of 6.1%9.0% and
7.6% in the comparable periodperiods of 1998. Shipments in the heavier weight,
higher revenue per shipment freight segment decreased 10.2%10.6% in the firstsecond
quarter of 1999. Mitigating some of the weakness in freight volumes, the
Company experienced strong growth in its international express segment.
International express shipments increased 13.6%8.6% in the firstsecond quarter of
1999 compared to 17.6% in the corresponding period of 1998.1999. International segment contribution to earnings from operations was
$.6$1.8 million and $2.4 million for the second quarter and first quarterhalf of
1999, respectively, compared to a loss of $.8$1.7 million and $.9 million in the
comparable periodperiods of 1998.
Operating expenses as a percentage of revenues were 94.2%93.8% and 94.0% for the
second quarter and first quartersix months of 1999, respectively, compared to
92.3% in both the corresponding periodsecond quarter and first six months of 1998, and 92.4%
for all of 1998. The Company experienced a 3.0% decline in
productivityOperating cost per shipment handled increased 3.9% to
$9.05 for the first quartersix months of 1999 compared to the first six months of
1998. The operating cost per shipment for the second quarter of 1999
increased 4.3% to $9.11, compared to the second quarter of 1998.
Relatively flat shipment growth had a negative impact on productivity. The
Company experienced a decline of 2.7% and 2.8% in productivity for the
second quarter and first half of 1999, respectively, compared to the same
periods of 1998, as measured by shipments handled per paid employee hour.
Additional operating costs related to severe weather, primarily in station
and ground and flight operations costs, and theThe decline in year to date productivity and additional first quarter 1999
weather related costs were significant factors having a negative impact on
1999 operating results. Operating cost per shipment handled increased 3.5% to $8.99 for
the first quarter of 1999 compared to the first quarter of 1998. Comparisons of certain operating expense
components are discussed below.
Transportation purchased decreased as a percentage of revenues to 30.4%30.5% in
the first quartersix months of 1999 compared to 30.7% in the comparable period of
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 quartersix
months of 1999 due to the decline in international freight shipments.
Station and ground expense increased to 31.4%31.0% of revenues in the first quartersix
months of 1999 compared to 29.7%29.8% in the first quartersix months of 1998. The
decline in productivity and the weather related costs incurred in the first
quarter had a negative impact on this category of expense.
Flight operations and maintenance expense as a percentage of revenues
during the first quarterhalf of 1999 was 15.9%, compared to 15.6%15.5% in the first six
months of 1998. Aviation fuel consumption decreased to 44.4 million
gallons in the second quarter of 1999, a 2.6% decrease over the second
quarter of 1998. For the first six months of 1999, aviation fuel
consumption of 89.1 million gallons decreased .8% from the first six months
of 1998. The average aviation fuel price for the second quarter and first
quartersix months of 1999 was $.49$.58 and $.54 per gallon, respectively, compared to
$.62$.57 and $.60 per gallon, respectively, in the first quarter
of 1998. Aviation fuel consumption increased to 44.6 million gallons in
the first quarter of 1999, a 1.1% increase over the first quartercomparable periods of 1998.
As a result of fuel hedging contracts, the Company incurred $2.4 million of
expense in the first quartersix months of 1999 compared to $1.0 million in the
first quartersix months of 1998. Offsetting the lower fuel costs were higher costs
associated with periodic aircraft maintenance checks and weather related
expenses.
General and administrative expense was 7.7%7.8% of revenues in the first quartersix
months of 1999 compared to 8.0% in the comparable period of 1998. This
category of cost decreased in total and as a percentage of revenues
primarily due to lower profit sharing and management incentive compensation
costs. These lower costs are a result of reduced levels of operating
earnings in comparison to the continued strong cost controls over labor and
discretionary costs.first six months of 1998.
The increase in depreciation and amortization expense in the first quartersix
months of 1999 is due in large part to the increased number of aircraft in
service since the first quarterhalf of 1998.
Interest expense in the first quartersix months of 1999 was lowerhigher than the first
quartersix months of 1998, due toprimarily as the result of higher levellevels of capitalized interest expense in
the first quarter of 1999. Also,average
outstanding borrowings which offset the benefit of lower average effective
interest rates was offset by the impact of modestly higher levels of
average outstanding borrowings in the first quarter of 1999 compared to the
similar period of 1998.realized.
The Company's effective tax rate was 38.9% in the first quartersix months of 1999
compared to 39.7%39.6% in the first quartersix months of 1998 and 38.0% for all of
1998. The Company anticipates the effective tax rate for all of 1999 will
be in a range comparable to the first six months of 1999.
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.
Modifications to the Company's critical operational and financial systems
and conversions to new software were substantially complete at the end of
1998. Testing of these critical systems and software as well as remediation
efforts and related testing on less critical applications are scheduled to
be completed before July 1999.have been
substantially completed.
As part of the compliance program, the Company has also initiated
communications with third parties - primarily customers, vendors, airport
authorities, and other governmental agencies (domestic and foreign),
including the Federal Aviation 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.
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 or any third party's Year 2000 remediation efforts will be fully
compliant. If noncompliance 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 operations. In an attempt to mitigateThe Company believes however, the most likely worst case
scenario would include pickup or delivery delays in a particular geographic
location or locations.
To assist in mitigating the risk of noncompliance, the Company is in the
process of developinghas and
continues to develop 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. ContingencyThe contingency plans
coveringinclude, among other things, the failuredevelopment of material third party systems will alsorollover check
plans and manual procedures to be developed as their
statusperformed by field and headquarters
personnel in the event of readiness becomes fully known.communications systems failures.
Management estimates the total cost of the Year 2000 compliance program to
be approximately $4.0 million, of which $2.0$3.3 million has been incurred
through March 31,June 30, 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 if either the
scope or schedule of the compliance program is altered. Funding of the compliance program is from
internal cash flows.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of change in working capital for the first
quartersix months of 1999 was $49$138 million, compared to $51$152 million in the first
quartersix months of 1998.
Capital expenditures continue to be a primary factor affecting the
financial condition of the Company. The Company anticipates total capital
expenditures to approximate $350 million in 1999. During the first quarterhalf of
1999, total capital expenditures net of dispositions were $80$147 million.
Cash provided by operations and bank borrowings were the primary sources
for funding capital expenditures in the first quarterhalf of 1999.
The Company's strong operating cash flow is a major source of liquidity.
Also, the Company's $250 million unsecured revolving bank credit agreement
has traditionally been used as a 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.
With the higher level of capital expenditures in 1999 compared to 1998,
reliance on the bank facilities has increased, with a total of $62.0$49.0
million outstanding at March 31,June 30, 1999 under the revolving bank credit and
money market credit lines, compared to $29.0 million outstanding at
December 31, 1998 and $28.5$2.5 million outstanding at March 31,June 30, 1998.
In management's opinion, the available capacity under the bank credit
agreements coupled with internally generated cash flow from remaining 1999
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. See Note F of the Notes to
Consolidated Financial Statements to this Form 10-Q for further discussion
regarding the Company's fuel hedging activities.
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 onor Form 8-K.
(a) Exhibits -
EXHIBIT NO.Exhibit No. 27 - Financial Data Schedule
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: 5/13/8/12/99 /s/Roy C. Liljebeck
------- ---------------------------------------------
Roy C. Liljebeck
Executive Vice President,
Chief Financial Officer
Date: 5/13/8/12/99 /s/Lanny H. Michael
------- --------------------------------------------
Lanny H. Michael
Senior Vice President,
Treasurer and Controller