ABF 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1999March 31, 2000Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)91-0837469
(I.R.S. Employer
Identification No.)3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662
(Address of principal executive offices)Registrant's telephone number, including area code: (206) 285-4600
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report.
Class Outstanding Common Stock, $1.00 par value 48,641,60649,013,505
(net of 2,491,0782,244,526 treasury shares)
as ofSeptember 30, 1999March 31, 2000
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended
March 31
------------------
2000 1999
---- ----
REVENUES:
Domestic $725,252 $681,261
International 87,212 88,087
-------- --------
812,464 769,348
OPERATING EXPENSES:
Transportation purchased 248,354 233,975
Station and ground operations 254,937 241,317
Flight operations and maintenance 142,963 122,183
General and administrative 63,197 59,084
Sales and marketing 20,019 18,348
Depreciation and amortization 49,569 49,613
-------- --------
779,039 724,520
-------- --------
EARNINGS FROM OPERATIONS 33,425 44,828
OTHER INCOME (EXPENSE):
Interest, net (4,914) (3,632)
Other 503 148
-------- --------
EARNINGS BEFORE INCOME TAXES 29,014 41,344
INCOME TAXES 11,115 16,100
-------- --------
NET EARNINGS BEFORE CHANGE IN ACCTG 17,899 25,244
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
(NET OF TAX) 14,206 -
-------- --------
NET EARNINGS $ 32,105 $ 25,244
======== ========
NET EARNINGS PER SHARE:
BASIC
Before change in accounting $ 0.37 $ 0.52
Cumulative effect of change in
accounting $ 0.29 $ -
-------- --------
Net earnings $ 0.66 $ 0.52
======== ========
DILUTED
Before change in accounting $ 0.36 $ 0.51
Cumulative effect of change in
accounting $ 0.29 $ -
-------- --------
Net earnings $ 0.65 $ 0.51
======== ========
DIVIDENDS PER SHARE $ 0.04 $ 0.04
======== ========
See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31 December 31
2000 1999
---------- -----------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 23,319 $ 28,678
Trade accounts receivable,
less allowance of $9,187 and $9,640 348,750 339,044
Spare parts and fuel inventory 45,905 44,263
Deferred income tax assets 27,422 31,950
Prepaid expenses and other 22,182 26,135
---------- -----------
TOTAL CURRENT ASSETS 467,578 470,070
PROPERTY AND EQUIPMENT, NET 1,223,433 1,115,712
EQUIPMENT DEPOSITS and OTHER ASSETS 53,792 57,468
---------- -----------
TOTAL ASSETS $1,744,803 $1,643,250
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 134,212 $ 142,087
Salaries, wages and related taxes 75,326 65,276
Accrued expenses 84,027 78,755
Income taxes payable 7,227 3,282
Current portion of debt 451 442
---------- -----------
TOTAL CURRENT LIABILITIES 301,243 289,842
LONG-TERM DEBT 356,591 314,707
DEFERRED INCOME TAX LIABILITIES 107,655 99,169
OTHER LIABILITIES 85,047 81,325
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 51,258,031 and 51,176,018 shares 51,258 51,176
Additional paid-in capital 303,560 298,742
Retained earnings 577,117 546,962
Accumulated other comprehensive income 1,544 918
---------- -----------
933,479 897,798
Treasury stock, 2,244,526 and 2,491,078
shares, at cost (39,212) (39,591)
---------- -----------
894,267 858,207
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,744,803 $1,643,250
========== ===========
See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31
------------------
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net Earnings $ 32,105 $ 25,244
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Cumulative effect of change in accounting (14,206) -
Depreciation and amortization 49,569 44,745
Deferred income taxes 4,307 792
Provision for aircraft engine overhauls - 4,868
Other 8,135 6,407
-------- --------
CASH PROVIDED BY OPERATIONS 79,910 82,056
Change in:
Receivables (9,706) (4,753)
Inventories and prepaid expenses 2,311 (2,102)
Accounts payable (7,875) (17,212)
Accrued expenses, salaries and taxes payable 19,267 (8,675)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 83,907 49,314
INVESTING ACTIVITIES:
Additions to property and equipment (129,395) (80,327)
Disposition of property and equipment 1,138 29
Expenditures for engine overhauls - (4,918)
Other (1,864) (1,130)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (130,121) (86,346)
FINANCING ACTIVITIES:
Proceeds on bank notes, net 42,000 33,000
Principal payments on debt (107) (66)
Proceeds from common stock issuance 912 4,802
Dividends paid (1,950) (1,941)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 40,855 35,795
-------- --------
NET DECREASE IN CASH (5,359) (1,237)
CASH AT JANUARY 1 28,678 18,679
-------- --------
CASH AT MARCH 31 $ 23,319 $ 17,442
======== ========
See notes to consolidated financial statements.
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999March 31, 2000 (Unaudited)
(unaudited)
The consolidated financial statements included herein are unaudited but include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods reported.
Certain amounts for prior periods have been reclassified to conform to the
19992000 presentation.
NOTE B - LONG-TERMB-LONG-TERM DEBT:
Long-term debt consists of the following:
September 30March 31 December 31
------------ -----------2000 1999 1998
---- ----
(In thousands)
Senior debt:
Revolving bank credit $65,000 $ -125,000 $ 95,000
Notes payable 14,000 29,00012,000 -
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 7,089 7,359
-------- --------
299,289 249,5596,842 6,949
---------- ----------
357,042 315,149
Less current portion 431 410
-------- --------
$298,858 $249,149
======== ========451 442
---------- ----------
$ 356,591 $ 314,707
========== ==========
NOTE Basic earnings per share are based upon the weighted average number of common shares outstanding during the interim period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the interim period plus dilutive common equivalent shares applicable to the assumed exercise of outstanding stock options.
Weighted average shares outstanding used in earnings per share computations were as follows:
Three Months EndedNOTE D-SEGMENTNine Months EndedMarch 31 ---------------------------------- September 30 September 30 ------------ ------------2000 19991998 1999 1998 ---- ---- ---- --------------- ---------- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic48,642 49,921 48,579 50,05648,785,792 48,479,073 Diluted49,222 50,682 49,303 51,05149,206,767 49,352,658INFORMATION:INFORMATIONThe Company has organized its business into two reportable operating segments. The domestic segment derives its revenues from the door-to-door delivery of small packages and documents throughout the United States, Canada, and Puerto Rico. Domestic operations are supported principally by Company operated aircraft and facilities. The international segment derives its revenues from express door-to-door delivery and a variety of freight services. International revenues are recognized on shipments where the origin and/or destination is outside of locations supported by the domestic segment. The Company uses a variable cost approach to delivering international services through use of existing commercial airline capacity in connection with its domestic network and independent express and freight agents in locations not currently served by Company-owned foreign operations.
The following is a summary of key segment information (in thousands): Three Months EndedNOTE E-OTHER COMPREHENSIVENine Months EndedMarch 31 ---------------------------------- September 30 September 30 ------------ ------------2000 19991998 1999 1998 ---- -------- ---- SEGMENT REVENUES: Domestic$696,116 $678,650 $2,063,772 $2,013,546$725,252 $681,261 International89,482 90,432 270,565 269,866 --------- --------- ---------- ---------- $785,598 $769,082 $2,334,337 $2,283,412 ========= ========= ========== ==========87,212 88,087 -------- -------- $812,464 $769,348 ======== ======== SEGMENT EARNINGS FROM OPERATIONS: Domestic$39,850 $54,481 $134,097 $172,992$ 35,575 $ 44,200 International(667) 604 (1,719) (1,484) --------- --------- --------- --------- $39,183 $55,085 $132,378 $171,508 ========= ========= ========== ==========(2,150) 628 -------- -------- $ 33,425 $ 44,828 ======== ========INCOME:INCOMEOther comprehensive income includes the following transactions and tax effects for the three month periods ended March 31, 2000 and
nine month period ended September 30,1999, respectively (in thousands):Three Months Ended Nine Months Ended September 30, 1999 September 30, 1999 ------------------------------- ------------------------------ IncomeIncome TaxNOTETaxBefore (Expense)(Expense) Before or Net of Before orNet of Tax or Benefit TaxTax Benefit Tax------- ---------- --------------- ------ ------ --------- ------2000 - ---- Unrealized securities gains(losses)arising during the period$(303) $117 $(186) $(452) $174 $(278)$1,572 $ (605) $ 967 Less: Reclassification adjustment for gains realized in net income(81) 31 (50) (223) 86 (137) ---- ---- ---- ---- ---- ----(305) 117 (188) ------ ------ ------ Net unrealized securities gains(losses) (384) 148 (236) (675) 260 (415)1,267 (488) 779 Foreign currency translation adjustments202 (64) 138 216 (83) 133 ----- ----- ----- ----- ----- -----(249) 96 (153) ------ ------ ------ Other comprehensive income$(182)$1,018 $84(392) $(98) $(459) $177 $(282) ===== ===== ===== ===== ===== =====626 ====== ====== ====== Income Tax Before (Expense) Net of Tax or Benefit Tax ------- ---------- ------ 1999 - ---- 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) ====== ====== ======F-NEWF-CHANGE IN ACCOUNTING:Effective January 1, 2000, the Company changed its method of accounting for major engine overhaul costs on DC-9 aircraft from the accrual method to the direct expense method where costs are expensed as incurred. Previously, these costs were accrued in advance of the next scheduled overhaul based upon engine usage and estimates of overhaul costs. The Company believes that this new method is preferable because it is more consistent with industry practice and appropriate given the relatively large size of its DC- 9 fleet.
The cumulative effect of this change in accounting resulted in a non-cash credit of $14,206,000, net of taxes, or $.29 per share on a diluted basis being recognized in the quarter ending March 31, 2000. Excluding the cumulative effect, this change increased net earnings for the first quarter of 2000 by approximately $1.2 million, net of tax or $.02 per share. If the accounting change for engine overhaul costs had been retroactively applied, earnings from continuing operations for the three months ended March 31, 1999 would have been as follows:
Three months ended March 31 1999 ---- As Reported: Earnings from continuing operations $ 44,828 Diluted earnings per share $ 0.51 Proforma continuing operations: Earnings from continuing operations $ 45,181 Diluted earnings per share $ 0.52NOTE G-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"
.As amended by SFAS No. 137, this statement will be effective for fiscal year 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 had no outstanding fuel contracts at March 31, 2000. The Company has,
entered into certain derivativein the past, utilized 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
related disclosures.theoutstanding fuel contracts at fair value, with corresponding changes in fair value recorded as a component of other comprehensiveincome.income if the hedges are determined to be effective. The Company has not adopted the provisions of SFAS No. 133 as ofSeptember 30, 1999. However, ifMarch 31, 2000 and is currently evaluating theprovisionsfuture impact of this pronouncement on thestatement had been adopted, a cumulative charge of $405,000, net of tax, would have been recorded to shareholders' equityfinancial statements anda credit to comprehensive income of approximately $269,000 and $2,969,000 would have been reported for the three and nine month periods ended September 30, 1999, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONRESULTS OF OPERATIONS:
The Company's
operating performance in the third quarter and the first nine months of 1999 resulted in operating income andnetearnings below that of the comparable periods of 1998. The lack of growth in domestic shipments experienced in the first half of 1999 continued through the third quarter. Without domestic shipment growth the Company did not experience any productivity gains to offset cost increases. 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, in part because the cost of jet fuel has increased significantly compared to both the second quarter of 1999 and the third quarter of 1998. These combined factors had a negative impact on operating performance in the third quarter and in the first nine months of 1999.
Netearnings for thethirdfirst quarter of19992000 were$21.6$32.1 million, or$.44$.65 per share on a diluted basis,on revenues of $786 million, comparedwhich includes a credit due to$32.8a change in accounting for certain engine overhaul costs. Net earnings before this nonrecurring credit were $17.9 million, or$.65$.36 pershare on revenuesshare. This compares to net earnings of$769$25.2 million,for the third quarter of 1998. Net earningsor $.51 per share for the firstnine monthsquarter of 1999.Effective at the beginning of 2000, the Company changed from the accrual method of accounting for DC-9 engine overhaul costs to the direct expense method where costs are expensed as incurred. The cumulative effect of this change in accounting resulted in a non-cash credit of $14.2 million, net of taxes, or $.29 per share.
Operating results were negatively impacted by the continued escalating cost of jet fuel during the first quarter of 2000. The net cost increase for jet fuel in the first quarter of 2000 verses 1999
were $73.9was $18.0 million,or $1.50equal to a net increase of approximately $.395 pershare on revenuesgallon. To help offset this cost increase in jet fuel the Company implemented a 3% fuel surcharge beginning February 7, 2000, which resulted in $12.5 million being billed for the surcharge in the first quarter of$2.33 billion,2000.The Company experienced total shipment growth in the first quarter of 2000 of 3.5% compared to
$99.0 million, or $1.94the first quarter of 1999. On a pershare on revenuesday basis, total shipment growth was approximately 0.5% in the first quarter of$2.28 billion for2000 compared to 1999 first quarter, as there were two additional operating days in this years first quarter. Although thecorresponding periodgrowth achieved is modest, this was the first quarter in1998.the last four quarters that some shipment growth was experienced. The Company is encouraged by this positive trend and hopes it is a sustainable trend that can be built upon.The following table sets forth selected shipment and revenue data for the periods indicated:
Three Months EndedNine Months Ended ------------------ ---------------- September 30 September 30 ------------ % ------------ %March 31 --------------------------- 2000 19991998 Change 1999 1998 Change---- ---------- ---- ---- ------Shipments (in thousands): Domestic Overnight46,496 46,792 (0.6%) 139,239 139,183 0.0%47,979 46,321 Next Afternoon Service13,722 14,640 (6.3%) 42,538 43,741 (2.8%)13,934 14,684 Second Day Service18,733 17,497 7.1% 54,444 53,181 2.4%19,771 17,814 100 Lbs. and Over69 91 (24.2%) 217 269 (19.3%) ------- ------- ----- ------- ------- -----67 75 ------ ------ Total Domestic79,020 79,020 0.0% 236,438 236,374 0.0%81,751 78,894 International Express1,699 1,522 11.6% 4,912 4,418 11.2%1,529 1,577 Freight96 105 (8.6%) 296 328 (9.8%) ------- ------- ----- ------- ------- -----94 99 ------ ------ Total International1,795 1,627 10.3% 5,208 4,746 9.7% ------- ------- ----- ------- ------- -----1,623 1,676 ------ ------ Total Shipments80,815 80,647 0.2% 241,646 241,120 0.2%83,374 80,570 ====== ============= =======Average Pounds per Shipment: Domestic4.24 4.26 (0.5%)4.214.28 (1.6%)4.21 International43.44 41.06 5.8% 43.75 42.23 3.6%47.87 43.12 Average Revenue per Pound: Domestic$2.04 $1.98 3.0% $2.04 $1.96 4.1%$ 2.07 $ 2.02 International$1.14 $1.34 (14.9%) $1.17 $1.33 (12.0%)$ 1.11 $ 1.20 Average Revenue per Shipment: Domestic$8.81 $8.59 2.6% $8.73 $8.51 2.6%$ 8.87 $ 8.64 International$49.85 $55.58 (10.3%) $51.95 $56.86 (8.6%)$53.74 $52.55Total revenues increased
2.1% and 2.2%5.6% in thethirdfirst quarterand first nine monthsof1999, respectively. This compares2000 compared toa decrease of 2.5%2.6% in thethirdfirst quarter of1998 and an increase of 5.9% for the first nine months of 1998 compared to the same periods of 1997. Total shipment growth was .2% for the third quarter of 1999 compared to the third quarter of 1998 and also for the first nine months of 1999 over the first nine months of 1998. This compares to total shipment growth of 7.7% for the first nine months of 1998 over 1997, and a decrease of .1% for the third quarter of 1998 compared to the third quarter of 1997. Domestic shipment and revenue comparisons for 1998 over 1997 are less meaningful due to a UPS strike in the third quarter of 1997 which increased the Company's business during that period.1999.
Domestic revenue growth for the third quarter and the first nine months of 1999 was impacted by the flat growth in total domestic shipments.1999. Domestic revenues increased2.6% and 2.5%6.5% in thethirdfirst quarterand first nine monthsof1999, respectively,2000 compared toa decrease of 1.3%2.8% in thethirdcomparable period of 1999. During the first quarter of19982000 fuel surcharge revenue of $12.5 million accounted for 1.9% of the domestic revenue growth. The Company is encouraged by the increased revenue growth andto an increase of 8.2% forby thefirst nine months of 1998. Thefact thatthe growth rate in domestic revenueit exceeded the growth rate in shipments,for the first nine months of 1999the yearwhich continuesto bea positivetrend.trend related to the Company's continuing focus on yield enhancements. The average revenue per domestic shipment increased2.6%2.8% to$8.81$8.87 in thethirdfirst quarter of19992000 compared to thethirdfirst quarter of1998.Domestic shipments increased 3.6% in the first quarter of 2000 compared to 0.8% in the first quarter of 1999. Overnight shipments accounted for
58.8%58.7% of total domestic shipments in thethirdfirst quarter of1999, compared2000, comparable to59.2%the overnight shipment percentage achieved in thethirdfirst quarter of1998.1999. The higher yielding overnight shipmentsdecreased 0.6%increased 3.6% in thethirdfirst quarter of1999,2000, compared toa 2.4% increase1.2% in the corresponding19981999 period. The Company's Next Afternoon Service shipments decreased6.3% and5.1% in the first quarter of 2000 compared to an increase of 2.1% in 1999. The Second Day Service shipments increased7.1%11.0% inthe third quarter of 19992000 compared toan increase of 4.3% anda decrease of10.2%, respectively,1.1% in thethirdfirst quarter of1998.1999. The Second Day Service category includes 554,000 shipments in the first quarter of 2000 associated with the Company's new residential delivery product, airborne@home. This product, which was introduced in late 1999, targets new business from internet retailers and catalog fulfillment providers. The Company
began a pilot program in mid-July, 1999 to test a new service foris encouraged by the businessto residential delivery. This service, referred to as Airborne@Home, will target shipments from internet, catalog, and mail order businesses which are primarily destined for residential addresses. Deliveryopportunities of this new productwill be accomplishedwhich offers shippers a competitive combination of service and pricing, while providing the Company an efficient way to accomplish residential deliveries through an arrangement with the U.S. Postal Service.The pilot program for Airborne@Home will continue to be evaluated on an ongoing basis to determine longer-term application.International revenues decreased
1.1% in the third quarter, and increased .3%1.0% in the firstnine monthsquarter of1999, respectively,2000 compared to an increase of 0.5% in the comparable period of 1999. Total international shipments decreased 3.2% in the first quarter of 2000 compared to an increase of 11.8% in the comparable period of 1999. International express shipments posted a decline of 3.0% in the first quarter of 2000, primarily due to the loss of a major customer. This compares to an increase of 13.6% for express shipments in the first quarter of 1999. Heavier weight international shipments also declined in the first quarter of 2000. The international segment contribution to earnings from operations was negative $2.1 million for the first quarter of 2000 compared to adecreasecontribution of10.5% and 8.6%$.6 million in thecomparable periods of 1998. The Company experienced strong growth in its international express segment, with shipments increasing 11.6% in the third quarter and 11.2% for the first nine monthssimilar period of 1999.The Company continued to experience a decline in shipments in the heavier weight, higher revenue per shipment freight segment, which decreased 8.6% in the third quarter and 9.8% in the first nine months of 1999.Operating expenses as a percentage of revenues were
95.0% and 94.3%95.9% for thethirdfirst quarterand first nine monthsof 2000 compared to 94.2% in the corresponding period of 1999respectively, compared to 92.8% in the third quarterand92.5% in the first nine months of 1998, and 92.5%94.9% for all of1998. Operating cost per shipment handled increased 4.0% to $9.111999. The Company experienced a 1.0% improvement in productivity for the firstnine monthsquarter of19992000, compared to the firstnine months of 1998. The operating cost per shipment for the thirdquarter of 1999,increased 4.3% to $9.24, compared to the third quarter of 1998. Flat shipment growth had a negative impact on productivity. The Company experienced a decline of 2.2% and 2.6% in productivity for the third quarter and first nine months of 1999, respectively, compared to the same periods of 1998,as measured by shipments handled per paid employee hour.The decline in yearOperating cost per shipment handled increased 3.9% todate productivity, additional$9.34 for the first quarter1999 weather related costs, andof 2000 compared to the first quarter of 1999. The significantly higher cost of jet fuel was a major factor negatively impacting operating costsparticularlyso far inthe third quarter, were significant factors having a negative impact on year to date 1999 operating results.2000. Comparisons of certain operating expense components are discussed below.Transportation purchased
surface line haul costs.decreasedincreased as a percentage of revenues to30.5%30.6% in the firstnine monthsquarter of19992000 compared to30.8%30.4% in the comparable period of1998.1999. Thisdecreaseincrease was primarily due tocommercial airline costs which were lowerthe increase intotalfarmed out cartage andas a percentage of total revenues in the first nine months of 1999 due to the decline in international freight shipments.Station and ground expense
increased to 30.9%of 31.4% of revenues in the firstnine monthsquarter of1999 compared2000 was comparable to29.8% in the first nine months of 1998. The decline in productivity and the weather related costs incurred inthe first quarterhad a negative impact onof 1999. Increased productivity helped to offset cost increases in this category of expense.Flight operations and maintenance expense as a percentage of revenues during the first
2000.nine monthsquarter of19992000 was16.1%17.6%, compared to15.6%15.9% in the firstnine months of 1998. Aviation fuel consumption decreased to 45.2 million gallons in the thirdquarter of1999, a 2.3% decrease over the third quarter of 1998. For the first nine months of 1999, aviation fuel consumption of 134.2 million gallons decreased 1.3% from the first nine months of 1998.1999. The average aviation fuel price for thethirdfirst quarter of19992000 was$.68$.94 per galloncompared to $.58which is 91% higher than the $.49 per gallon experienced in thesecondfirst quarter of1999 and $.55 per gallon1999. Aviation fuel consumption increased to 45.7 million gallons in thethirdfirst quarter of1998.2000, a 2.5% increase over the similar period of 1999. As a result of fuel hedging contracts, the Company incurred $2.4 million of expense, equal to approximately $.05 per gallon, in the firstnine monthsquarter of 1999,compared to $5.9 millionwith no comparable cost incurred in the firstnine monthsquarter of1998.Effective January 1, 2000, the Company began to expense DC-9 engine overhaul costs directly to maintenance expense as costs are incurred. Beginning in 2000, these overhaul costs are expensed to the flight operations and maintenance category. Prior to 2000, the Company used the accrual method with estimated engine overhaul costs provided in advance of the next scheduled overhaul. In 1999 and prior, engine overhaul cost provisions were included in the depreciation and amortization expense category.
General and administrative expense was
7.7%7.8% of revenues in the firstnine monthsquarter of19992000 compared to8.1%7.7% in the comparable period of1998.1999. This category of costdecreased in total andstayed relatively constant as a percentage of revenues primarily due tolower profit sharingthe continued strong cost controls over labor andmanagement incentive compensationdiscretionary costs.These lower costs are a result of reduced levels of operating earnings in comparison to the first nine months of 1998.
SalesDepreciation andMarketingamortization expense was2.5%6.1% of revenues in the firstnine monthsquarter of19992000 compared to2.3% for6.4% in the firstnine monthsquarter of1998. This increase is due in part to1999. Although there was highersales incentive compensation.the expense due to the change in accounting for engine reserves discussed above.
The increase indepreciationand amortizationexpense in the firstnine monthsquarter of1999 is2000 duein large partto the increased number ofBoeing767 aircraft placed in serviceduringsince the firstnine monthsquarter of 1999,versusthis was offset by thecomparable periodelimination of1998.Interest expense in the first
in the first quarter of 2000 compared to the first quarter of 1999. Capitalized interest was $1.5 million compared to $1.3 million in the first quarter of 2000 versus 1999, respectively.nine monthsquarter of19992000 was higher than the firstnine monthsquarter of1998, primarily1999 as theresultimpact of higher levels of average outstanding borrowingswhichoffset thebenefiteffect of lower average effective interest ratesrealized.The Company's effective tax rate was
38.4%38.3% in the firstnine monthsquarter of19992000 compared to38.7%38.9% in the firstnine monthsquarter of19981999 and38.0%38.1% for all of1998. The effective tax rate for the third quarter of 1999 was 37.3%, which was impacted by lower state tax accruals than in the previous year. The Company anticipates the effective tax rate for all of 1999 will be in a range comparable to the first nine months of1999.
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 has also been substantially completed.
As part of the compliance program, the Company has also had 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 has tested interfaces of shipment information with curtain customers as this data is critical to providing timely 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. The 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 has developed contingency plans, and continues to refine these plans, regarding critical systems should they fail to become Year 2000 compliant. These plans focus on the Company's own critical operational and financial systems as well as customer interfaces of shipment information. The contingency plans include, among other things, the development of systems rollover check plans and manual procedures to be performed by field and headquarters personnel in the event of communications systems failures.
Management estimates the total cost of the Year 2000 compliance program to be approximately $3.8 million, of which $3.6 million has been incurred through September 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. 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
1999.nine monthsquarter of19992000 was$194$83.9 million, compared to$237$49.3 million in the firstnine monthsquarter of1998.Capital expenditures continue to be a primary factor affecting the financial condition of the Company. The Company anticipates total capital expenditures to approximate
2000.$350$380 million in1999.2000. During the firstnine monthsquarter of1999,2000, total capital expenditures net of dispositions were$225 million.$128.3 million compared to $80.3 million during the first quarter of 1999. Cash provided by operations and bank borrowings were the primary sources for funding capital expenditures in the firstthree quartersquarter of1999.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
March 31, 1999.liquidity for periods between other financing transactions.liquidity. The Company also has available$65$40 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 and the first quarter of 2000, compared to 1998 and prior levels, reliance on the bank facilities hasincreased, with aincreased. A total of$79.0$137 million was outstanding atSeptember 30, 1999March 31, 2000 under the revolving bank credit and money market credit lines, compared to$29.0$95 million outstanding at December 31,19981999 and$30.0$62 million outstanding atSeptember 30, 1998.The Company's ratio of long-term debt to total capitalization was 26.25% at March 31, 2000, compared to 24.1% at March 31, 1999 and 24.7% at December 31, 1999.
2000.In management's opinion, the available capacity under the bank credit agreements coupled with internally generated cash flow from remaining
19992000 operations should provide adequate flexibility to finance anticipated capital expenditures for the balance of1999.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,
1998.1999. 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 25, 2000. A total of 44,496,445 shares were represented at the meeting comprising 91% of the outstanding shares of the Company entitled to vote at the meeting on the record date (February 21, 2000).
The following directors were duly elected for terms ending in 2003, in each case by an affirmative vote in excess of 96% of the shares represented at the meeting:
Number of Shares Voted For ---------------- Robert S. Cline 43,535,682 Richard M. Rosenberg 43,494,739 William Swindells 43,065,478The following are continuing directors with terms expiring as indicated:Terms Expiring in 2001 Terms Expiring in 2002 --------------------- ---------------------- Rosalie J. Wolf Robert G. Brazier Harold M. Messmer James H. Carey Mary Agnes Wilderotter Andrew B. KimThe shareholders, by an affirmative vote in excess of 95% of the shares represented at the meeting and entitled to vote, approved the material terms of the 2000-2004 Executive Incentive Compensation Plan ("EICP"). The EICP provides for annual cash bonuses to certain executives of the Company and its subsidiaries for each of calendar years 2000 through 2004.The shareholders, by an affirmative vote of 66% of the shares represented at the meeting and entitled to vote, approved the Airborne Freight Corporation 2000 Director Stock Option Plan ("Plan"). The Plan provides automatic annual grants of stock options to non-employee directors of the Company.
The shareholders, by an affirmative vote of 73% of the shares represented at the meeting and entitled to vote, approved the proposal to urge the Board of Directors to take all necessary steps, in compliance with state law, to declassify the Board for the purpose of director elections.
The shareholders, by an affirmative vote of approximately 18% of the shares represented at the meeting and entitled to vote, rejected a proposal to recommend that the Company adopt all necessary governing documents for the policy that the Board must have at least one independent director with five years of significant airline flight-operations management experience.
The Airborne Board of Directors on the same date, April 25, 2000, 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 23, 2000 to shareholders of record on May 9, 2000.
Item 6. Exhibits and Reportsoron Form 8-K. (a) Exhibits -Exhibit No.EXHIBIT NO. 10 Material Contracts - --------------------------------- Executive Compensation Plans and Agreements ------------------------------------------- 10(a) Executive Group Incentive Compensation Plan 10(b) Executive Incentive Compensation Plan EXHIBIT NO. 18 Letter Re: Change in Accounting Principles - ----------------------------------------------------------- 18 Letter Re: Change in Accounting Principles EXHIBIT NO. 27-Financial Data Schedule- ---------------------------------------- 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule SIGNATURES
---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
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