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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
---- -----
COMMISSION FILE NUMBER 0-27288
-------
EAGLE USA AIRFREIGHT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 76-0094895
-------------------------------------------------------------- ---------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
15350 VICKERY DRIVE, HOUSTON, TEXAS 77032
(281) 618-3100
- --------------------------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices, Including Registrant's Zip Code, and Telephone Number, Including Area Code)
NONE
--------------------------------------------------------------------------------
Former Name, Former Address and former Fiscal Year, if Changed Since Last Report
</TABLE>
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 X No
--- ---
The number of shares of the registrant's common stock as of July 28, 1999:
19,049,007 shares (net of 548,000 treasury shares).
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EAGLE USA AIRFREIGHT, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of June 30, 1999 (unaudited)
and September 30, 1998 (audited)............................................................. 3
Condensed Consolidated Statement of Income and Comprehensive Income
for the Nine Months ended June 30, 1999 and 1998 (unaudited)................................. 4
Condensed Consolidated Statement of Income and Comprehensive Income
for the Three Months ended June 30, 1999 and 1998 (unaudited)................................ 5
Condensed Consolidated Statement of Cash Flows for the Nine Months
ended June 30, 1999 and 1998 (unaudited)..................................................... 6
Condensed Consolidated Statement of Shareholders' Equity for the Nine
Months ended June 30, 1999 (unaudited)....................................................... 7
Notes to Condensed Consolidated Financial Statements (unaudited)............................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 17
PART II. OTHER INFORMATION.................................................................... 17
SIGNATURES..................................................................................... 19
INDEX TO EXHIBITS.............................................................................. 20
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
(unaudited) (audited)
------------- --------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 47,403 $ 37,191
Short-term investments 12,010 12,487
Accounts receivable - trade, net 84,724 69,576
Prepaid expenses and other 5,848 3,905
----------- ------------
Total current assets 149,985 123,159
Property and equipment, net 26,543 21,963
Other assets 11,154 11,214
----------- ------------
$ 187,682 $ 156,336
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable - trade $ 10,187 $ 4,542
Accrued transportation costs 15,801 14,014
Accrued compensation and employee benefits 14,063 14,061
Other current liabilities 7,418 4,673
----------- ------------
Total current liabilities 47,469 37,290
----------- ------------
Long-term indebtedness
----------- ------------
Shareholders' equity:
Preferred Stock, $0.001 par value, 10,000 shares
authorized
Common Stock, $0.001 par value, 100,000 shares
authorized, 19,031 and 19,125 shares issued and outstanding 19 19
Additional paid-in capital 80,115 70,256
Retained earnings 69,707 49,131
Accumulated other comprehensive loss ( 426) (360)
Treasury stock at cost ( 9,202)
----------- ------------
140,213 119,046
----------- ------------
$ 187,682 $ 156,336
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ 428,424 $ 295,239
Cost of transportation 243,455 164,525
--------- ---------
184,969 130,714
--------- ---------
Operating expenses:
Personnel costs 93,955 69,071
Other selling, general and administrative expenses 59,411 37,758
--------- ---------
153,366 106,829
--------- ---------
Operating income 31,603 23,885
--------- ---------
Interest and other income 1,934 1,259
Interest expense
--------- ---------
Nonoperating income 1,934 1,259
--------- ---------
Income before provision for income taxes 33,537 25,144
Provision for income taxes 12,961 9,620
--------- ---------
Net income 20,576 15,524
Other comprehensive income:
Foreign currency translation (40)
--------- ---------
Comprehensive income $ 20,536 $ 15,524
========= =========
Basic weighted average common shares outstanding 18,812 18,617
========= =========
Diluted weighted average common and common equivalent
shares outstanding 19,283 19,322
========= =========
Basic earnings per share (Note 2) $ 1.09 $ 0.83
========= =========
Diluted earnings per share (Note 2) $ 1.07 $ 0.80
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ 149,826 $ 107,050
Cost of transportation 86,133 60,343
--------- ---------
63,693 46,707
--------- ---------
Operating expenses:
Personnel costs 32,012 24,135
Other selling, general and administrative expenses 20,609 14,100
--------- ---------
52,621 38,235
--------- ---------
Operating income 11,072 8,472
--------- ---------
Interest and other income 751 486
Interest expense
--------- ---------
Nonoperating income 751 486
--------- ---------
Income before provision for income taxes 11,823 8,958
Provision for income taxes 4,528 3,313
--------- ---------
Net income 7,295 5,645
Other comprehensive income:
Foreign currency translation (233)
--------- ---------
Comprehensive income $ 7,062 $ 5,645
========= =========
Basic weighted average common shares outstanding 18,934 19,008
========= =========
Diluted weighted average common and common equivalent
shares outstanding 19,723 19,674
========= =========
Basic earnings per share (Note 2) $ 0.39 $ 0.30
========= =========
Diluted earnings per share (Note 2) $ 0.37 $ 0.29
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities $ 23,873 $ 19,191
-------- --------
Cash flows from investing activities:
Purchase of investments (12,627) (13,897)
Maturity of investments 13,104 2,500
Acquisition of property and equipment, net (8,687) (8,081)
Payment of contingent consideration for acquisition (2,000)
Other (63) (2,988)
-------- --------
Net cash used by investing activities (10,273) (22,466)
-------- --------
Cash flows from financing activities:
Issuance of common stock, net of related costs 6,623
Proceeds from exercise of stock options 5,896 5,425
Purchase of treasury stock (9,218)
-------- --------
Net cash provided (used) by financing activities (3,322) 12,048
-------- --------
Effect of foreign currency translation on cash (66)
-------- --------
Net increase in cash and cash equivalents 10,212 8,773
Cash and cash equivalents, beginning of period 37,191 25,107
-------- --------
Cash and cash equivalents, end of period $ 47,403 $ 33,880
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
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EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
--------- --------- ----------- --------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 19,125 $ 19 $ 70,256 $ 49,131 $ (360) $ 119,046
Exercise of stock options 465 5,896 5,896
Issuance of shares under stock
purchase plan 4 (16) $ 64 48
Purchase of treasury stock (563) (9,266) (9,266)
Tax benefit from exercise of stock
options 3,979 3,979
Net income 20,576 20,576
Foreign currency translation
adjustments (66) (66)
--------- --------- ----------- --------- ---------- --------- --------
Balance at June 30, 1999 19,031 $ 19 $ 80,115 $ 69,707 $ (426) $ (9,202) $140,213
========= ========= =========== ========= ========== ========= ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
7
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EAGLE USA AIRFREIGHT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The accompanying unaudited condensed consolidated financial statements
have been prepared by Eagle USA Airfreight, Inc. (the Company) in accordance
with the rules and regulations of the Securities and Exchange Commission (the
SEC) for interim financial statements and accordingly do not include all
information and footnotes required under generally accepted accounting
principles for complete financial statements. The financial statements have been
prepared in conformity with the accounting principles and practices disclosed
in, and should be read in conjunction with, the annual financial statements of
the Company included in the Company's Annual Report on Form 10-K (File No.
0-27288). In the opinion of management, these interim financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial position at June
30, 1999 and the results of its operations for the nine and three months ended
June 30, 1999 and 1998. Results of operations for the nine and three months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 1999.
NOTE 1 - ORGANIZATION, OPERATIONS, AND SIGNIFICANT ACCOUNTING POLICIES:
Eagle USA Airfreight, Inc. (the Company) is a worldwide logistics
company. The Company maintains operating facilities throughout the United
States, Mexico, Canada, Hong Kong, the United Kingdom, Argentina, Brazil, and
Peru as well as a worldwide network of exclusive and nonexclusive agents. The
Company operates in one principal industry segment.
On July 26, 1999, the Board of Directors declared a three-for-two stock
split, effected in the form of a stock dividend, payable to shareholders of
record on August 23, 1999. As of June 30, 1999, the Company has 19,030,774
common shares outstanding (net of 558,558 treasury shares). After the split, the
number of shares outstanding will increase to approximately 28,546,161.
In September and October 1998, the Company's Board of Directors
authorized the repurchase of up to one million shares of the Company's common
stock in the open market. As of June 30, 1999, the Company had repurchased
563,200 shares of common stock (4,642 shares of which were subsequently resold
pursuant to the Company's employee stock purchase plan). Such shares are held in
treasury. The board authorization for share repurchases expired following these
repurchases.
NOTE 2 - EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting Standard No.
128 (SFAS 128), "Earnings Per Share". Adoption of SFAS 128 has resulted in the
retroactive restatement of earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share includes potential dilution that could occur if securities to
issue common stock were exercised.
8
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EAGLE USA AIRFREIGHT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The computation of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
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<S> <C> <C>
Net income $ 20,576 $ 15,524
========== =========
Shares used in basic calculation:
Weighted average shares outstanding 18,812 18,617
---------- ---------
Total basic shares 18,812 18,617
Additional shares for diluted computation:
Effect of stock options 471 705
---------- ---------
Total diluted shares 19,283 19,322
========== =========
Basic earnings per share $ 1.09 $ 0.83
========== =========
Diluted earnings per share $ 1.07 $ 0.80
========== =========
</TABLE>
For the nine months ended June 30, 1999, the effect of stock options
was calculated assuming exercise of options for 2,945,208 shares of common stock
at prices ranging from $1.25 to $37.28 per share and assumed repurchase of
shares at the average market price per share of $28.18 computed as of the
beginning of the period using the treasury stock method. For the nine months
ended June 30, 1998, the effect of stock options was calculated assuming
exercise of options for 3,019,153 shares of common stock at prices ranging from
$1.25 to $35.13 per share and assumed repurchase of shares at the average market
price per share of $30.28 computed as of the beginning of the period using the
treasury stock method. For the nine months ended June 30, 1999 and 1998,
1,731,075 and 175,000 options, respectively, were excluded from the diluted
earnings per share calculation because their effect was antidilutive.
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
---------- ---------
<S> <C> <C>
Net income $ 7,295 $ 5,645
========== =========
Shares used in basic calculation:
Weighted average shares outstanding 18,934 19,008
---------- ---------
Total basic shares 18,934 19,008
Additional shares for diluted computation:
Effect of stock options 789 666
---------- ---------
Total diluted shares 19,723 19,674
========== =========
Basic earnings per share $ 0.39 $ 0.30
========== =========
Diluted earnings per share $ 0.37 $ 0.29
========== =========
</TABLE>
9
<PAGE> 10
EAGLE USA AIRFREIGHT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
For the three months ended June 30, 1999, the effect of stock options
was calculated assuming exercise of options for 2,945,208 shares of common stock
at prices ranging from $1.25 to $37.28 per share and assumed repurchase of
shares at the average market price per share of $40.87 computed as of the
beginning of the period using the treasury stock method. For the three months
ended June 30, 1998, the effect of stock options was calculated assuming
exercise of options for 3,019,153 shares of common stock at prices ranging from
$1.25 to $35.13 per share and assume repurchase of shares at the average market
price per share of $31.74 computed as of the beginning of the period using the
treasury stock method. For the three months ended June 30, 1999 and 1998, 0 and
152,500 options, respectively, were excluded from the diluted earnings per share
calculation because their effect was antidilutive.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 is effective for transactions
entered into after January 1, 2000. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type of hedge transaction. The ineffective portion
of all hedges will be recognized in earnings. We are in the process of
determining the impact that the adoption of SFAS 133 will have on our results of
operations and financial position.
In October 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Under SFAS 130, companies are required
to report in the financial statements, in addition to net income, comprehensive
income including, as applicable, foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. The Company's only component of other comprehensive
income is foreign currency translation adjustments. The Company's cumulative
translation adjustments are now characterized as accumulated other comprehensive
income or loss.
SFAS 131 requires that companies report separately, in the financial
statements, financial and descriptive information about operating segments, if
applicable. During the nine and three months ended June 30, 1999, the Company's
geographic segments which are outside the United States did not
represent, in the aggregate, more than 10% of the revenues, net income, or
assets of the combined amounts for all geographic segments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected certain aspects of the Company's
financial position and operating results during the periods included in the
accompanying unaudited condensed consolidated financial statements. This
discussion should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the annual financial statements included in the Company's Annual Report on Form
10-K (File No. 0-27288) and the accompanying unaudited condensed consolidated
financial statements.
Overview
The Company's revenues have increased to $417.1 million in fiscal 1998
from $185.4 million in fiscal 1996, and its operating income has increased to
$32.2 million in fiscal 1998 from $17.8 million in fiscal 1996. The Company's
recent growth has been generated almost exclusively by increasing the number of
terminals operated by the Company and growth in revenue produced by existing
terminals. However, the opening of a new terminal generally has an initial
short-term negative impact on profitability due to operating losses of the new
terminal. The opening of a new terminal generally does not require significant
capital expenditures. Additionally, personnel costs are contained at the time of
the opening of a new terminal because commissions are generally not paid until
salesmen achieve minimum sales levels and until managers achieve terminal
profitability. Although future new terminals may be opened in cities smaller
than those in which the Company's more mature terminals are located, the Company
believes the results of new terminals should benefit from a ready base of
business provided by its existing customers. Historically, the Company's
operating results have been subject to a limited degree to seasonal trends when
measured on a quarterly basis. The second quarter has traditionally been the
weakest and the fourth quarter has traditionally been the strongest.
10
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EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company intends to continue to expand its international freight
forwarding business. International shipments typically generate higher gross
revenues per shipment than domestic shipments. The Company anticipates that the
cost of transportation as a percentage of revenues will be higher for
international freight than for domestic freight. However, the Company does not
expect its operating expenses to increase in proportion to such revenues. In
April 1998, the Company expanded its international operations through the
acquisition of the operations of Eagle Transfer, Inc. and of S. Boardman (Air
Services Limited). Additionally, in September 1998, the Company commenced
operations in Hong Kong. The Company also intends to continue the growth of its
local pick-up and delivery operations. By providing local pick-up and delivery
services for its freight forwarding shipments, the Company has been able to
increase its gross margin for these shipments because it captures margins that
were previously paid to third parties. However, the Company's local pick-up and
delivery services provided to other non-forwarding customers generate a lower
gross margin than the Company's domestic forwarding operations due to their
higher transportation costs as a percentage of revenues.
Nine Months Ended June 30, 1999 compared to Nine Months Ended June 30, 1998
Revenues increased 45.1% to $428.4 million in the first nine months of
fiscal 1999 from $295.2 million in the same period of fiscal 1998 primarily due
to increases in the number of shipments and the total weight of cargo shipped.
These increases resulted from an increase in the number of terminals open during
such period, an increase in penetration in existing airfreight and pickup and
delivery markets, the addition of significant national account customers and the
effect of two acquisitions.
Operating data for the period were as follows:
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Freight forwarding terminals at end of period 78 66
Local delivery locations at end of period 67 58
Freight forwarding shipments 1,006,094 747,811
Average weight (lbs.) per freight forwarding shipment 675 597
</TABLE>
For those freight forwarding terminals opened prior to the beginning of
fiscal 1998 (60 terminals), revenues increased 36.2% to $359.8 million for the
nine months ended June 30, 1999 from $264.2 million for the nine months ended
June 30, 1998.
Revenues for the nine months ended June 30, 1999 were comprised of
$391.3 million of forwarding revenues and $37.1 million of local pick-up and
delivery revenues, as compared to $272.3 million of forwarding revenues and
$23.0 million of local pickup and delivery revenues for the nine months ended
June 30, 1998.
The Company's total pick-up and delivery revenues for the first nine
months of fiscal 1999 were $112.7 million. This amount includes $75.6 million
of intercompany sales that were eliminated upon consolidation and $37.1 million
in services to third-party (non-forwarding) customers.
Cost of transportation increased during the first nine months of fiscal
1999 as a percentage of revenues to 56.8% from 55.7% in the comparable period in
fiscal 1998. The increase was primarily attributable to increased international
freight shipping volumes, which carry a higher cost of transportation per
shipment than domestic freight. Cost of transportation increased in absolute
terms by 48.0% to $243.4 million for the nine months ended June 30, 1999 from
$164.5 million in the same period in fiscal 1998 as a result of increases in air
freight shipped. Gross margin decreased to 43.2% in the first nine months of
fiscal 1999 from 44.3% in the same period in fiscal 1998. The primary reasons
for the margin decline were increased international freight shipping volumes,
which carry a higher cost of transportation per shipment than domestic freight.
Gross profit increased 41.5% to $185.0 million in first nine months of fiscal
1999 from $130.7 million in the same period in fiscal 1998.
11
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EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses decreased as a percentage of revenues to 35.8% in
the first nine months of fiscal 1999 from 36.2% for the same period in fiscal
1998. The $46.5 million increased costs in absolute terms were attributable
primarily to continued growth in the level of operations from additional
terminals and expansion of local delivery operations. Personnel costs decreased
as a percentage of revenues to 21.9% in the first nine months of fiscal 1999
from 23.4% in the same period in fiscal 1998 due primarily to controlled
headcount growth, and increased in absolute terms by 36.0% to $94.0 million.
This increase was due to increased staffing needs associated with the opening of
new terminals and local delivery locations, the effect of acquisitions, expanded
operations at existing terminals and increased commissions resulting from higher
revenues and expanded corporate infrastructure. Such personnel costs include all
compensation expenses, including those relating to sales commissions and
salaries and to headquarters employees and executive officers. The Company has
added personnel to build corporate infrastructure, to keep pace with its recent
significant growth, to deepen the staff at its terminals and to prepare for
expected growth during fiscal 1999. Other selling, general and administrative
expenses increased as a percentage of revenues to 13.9% in the first nine months
of fiscal 1999 from 12.8% for the same period of fiscal 1998, and increased in
absolute terms by 57.3% to $59.4 million in the fiscal 1999 period from $37.8
million in the fiscal 1998 period. In the first nine months of fiscal 1999,
selling expenses as a percentage of revenues decreased by 0.2% and other general
and administrative expenses as a percentage of revenues increased by 1.3%
compared to the same period of fiscal 1998. The absolute increases in selling,
general and administrative expenses were due to overall increases in the level
of the Company's activities in the fiscal 1999 period, increased expenses
attributable to the Company's acquisitions, the Company's new headquarters
facility and increased professional and technical fees.
Operating income increased 32.3% to $31.6 million in the first nine
months of fiscal 1999 from $23.9 million in the comparable period in fiscal
1998. Operating margin for the nine months ended June 30, 1999 was 7.4%, down
from 8.1% for the nine months ended June 30, 1998 primarily due to the increased
cost of transportation and the increases in other general and administrative
expenses described above. Interest and other income increased to $1.9 million
from $1.3 million as a result of increased levels of investments due to
increased cash balances from results of operations.
Income before provision for income taxes increased 33.4% to $33.5
million in the first nine months of fiscal 1999 from $25.1 million in the
comparable period of fiscal 1998. Provision for income taxes increased 34.7% to
$13.0 million for the nine months ended June 30, 1999 from $9.6 million for the
nine months ended June 30, 1998. Net income increased 32.5% to $20.5 million in
the first nine months of fiscal 1999 from net income of $15.5 million in the
same period in fiscal 1998. Diluted earnings per share increased 33.8% to $1.07
per share for the nine months ended June 30, 1999 from $0.80 in the same period
in fiscal 1998.
Three Months Ended June 30, 1999 compared to the Three Months Ended June 30,
1998
Revenues increased 40.0% to $149.8 million in the third quarter of
fiscal 1999 from $107.1 million in the same period of fiscal 1998 primarily due
to increases in the number of shipments and the total weight of cargo shipped.
These increases resulted from an increase in the number of terminals open during
such period, an increase in penetration in existing markets, the addition of
significant national account customers and the effect of two acquisitions.
Operating data for the period were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Freight forwarding terminals at end of period 78 66
Local delivery locations at end of period 67 58
Freight forwarding shipments 362,331 270,955
Average weight (lbs.) per freight forwarding shipment 689 634
</TABLE>
For those freight forwarding terminals opened prior to the beginning of
fiscal 1998 (60 terminals), revenues increased 30.9% to $123.8 million for the
three months ended June 30, 1999 from $94.6 million for the three months ended
June 30, 1998.
12
<PAGE> 13
EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Revenues for the three months ended June 30, 1999 were comprised of
$136.5 million of forwarding revenues and $13.3 million of local pick-up and
delivery revenues, as compared to $98.5 million and $8.6 million, respectively,
for the three months ended June 30, 1998.
The Company's total local pick-up and delivery revenues for the third
quarter of fiscal 1999 were $40.4 million. This amount includes $27.0 million of
intercompany sales that were eliminated upon consolidation and $13.4 million in
services to third-party (non-forwarding) customers.
Cost of transportation increased during the quarter as a percentage of
revenues to 57.5% from 56.4% in the comparable period in fiscal 1998. The
increase was primarily attributable to increased international freight shipping
volumes which carry a higher cost of transportation per shipment than domestic
freight. Cost of transportation increased in absolute terms by 42.7% to $86.1
million in the fiscal 1999 quarter from $60.3 million in the fiscal 1998 quarter
as a result of increases in freight shipped. Gross margin decreased to 42.5% in
the third quarter of fiscal 1999 from 43.6% in the same period in fiscal 1998.
The primary reasons for the margin decline were increased international freight
shipping volumes which carry a higher cost of transportation per shipment than
domestic freight. Gross profit increased 36.4% to $63.7 million in the third
quarter of fiscal 1999 from $46.7 million in the same period in fiscal 1998.
Operating expenses decreased as a percentage of revenues to 35.1% in
the third quarter of fiscal 1999 from 35.7% for the same period in fiscal 1998.
The $14.4 million increased costs in absolute terms was attributable primarily
to continued growth in the level of operations from additional terminals and
expansion of local delivery operations. Personnel costs decreased as a
percentage of revenues to 21.4% in the third quarter of fiscal 1999 from 22.5%
in the same period in fiscal 1998 due primarily to controlled headcount growth,
and increased in absolute terms by 32.6% to $32.0 million. This increase was due
to increased staffing needs associated with the opening of new terminals and
local delivery locations, the effect of acquisitions, expanded operations at
existing terminals and increased commissions resulting from higher revenues and
expanded corporate infrastructure. Such personnel costs include all compensation
expenses, including those relating to sales commissions and salaries and to
headquarters employees and executive officers. The Company has added personnel
to build corporate infrastructure, to keep pace with its recent significant
growth, to deepen the staff at its terminals and to prepare for expected growth
during fiscal 1999. Other selling, general and administrative expenses increased
as a percentage of revenues to 13.8% in the third quarter of fiscal 1999 from
13.2% in the third quarter of fiscal 1998, and increased in absolute terms by
46.2% to $20.6 million in the fiscal 1999 period from $14.1 million in the
fiscal 1998 period. In the third quarter of fiscal 1999, selling expenses as a
percentage of revenues decreased by 0.1% and other general and administrative
expenses as a percentage of revenues increased by 0.5% compared to the second
quarter of fiscal 1998. The absolute increases in selling, general and
administrative expenses were due to overall increases in the level of the
Company's activities in the fiscal 1999 period, increased expenses attributable
to the Company's acquisitions, the Company's new headquarters facility and
increased professional and technical fees.
Operating income increased 30.7% to $11.1 million in the third quarter
of fiscal 1999 from $8.5 million in the comparable period in fiscal 1998.
Operating margin for the quarter ended June 30, 1999 was 7.4%, down from 7.9%
for the quarter ended June 30, 1998 primarily due to the increased cost of
transportation and the increases in other general and administrative expenses
described above. Interest and other income increased to $751,000 from $486,000
as a result of increased levels of investments due to increased cash balances
from results of operations.
Income before provision for income taxes increased 32.0% to $11.8
million in the third quarter of fiscal 1999 from $9.0 million in the comparable
period of fiscal 1998. Provision for income taxes increased 36.7% to $4.5
million for the three months ended June 30, 1999 from $3.3 million for the three
months ended June 30, 1998. Net income increased 29.2% to $7.3 million in the
third quarter of fiscal 1999 from net income of $5.6 million in the same period
in fiscal 1998. Diluted earnings per share increased 27.6% to $0.37 per share
for the quarter ended June 30, 1999 from $0.29 in the same period in fiscal
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments increased $9.7 million to $59.4
million at June 30, 1999 from $49.7 million at September 30, 1998. At June 30,
1999, the Company had working capital of $102.5 million and a current ratio of
3.16 compared to working capital of $85.9 million and a current ratio of 3.30 at
September 30, 1998. The Company's
13
<PAGE> 14
EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
working capital has increased during this period primarily as a result of
profitable growth associated with the expansion of the Company's operations and
the resultant increase in accounts receivable and payable. Capital expenditures
for the nine months ended June 30, 1999 were approximately $8.7 million. The
Company believes that cash flow from operations and the remaining proceeds from
its public offerings will be adequate to support its normal working capital and
capital expenditures requirements for at least the next 12 months.
Other than its public offerings, the Company's cash generated from
operations has been its primary source of liquidity, although it has from time
to time made limited use of bank borrowing and lease or purchase arrangements.
The Company does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future.
During fiscal 1999, the Company repurchased 563,200 shares of its
common stock pursuant to board authorization, which has since expired.
Subsequently, 4,642 of the shares repurchased were resold pursuant to the
Company's employee stock purchase plan. The total cost of the share repurchases
as of June 30, 1999 was approximately $9.2 million.
Commitments and Contingencies
The Company's subsidiaries in the United Kingdom, Hong Kong and Mexico
maintain bank lines of credit for purposes of securing customs bonds and bank
letters of credit for purposes of guaranteeing some transportation expenses.
These credit lines and letters of credit are supported by standby letters of
credit issued by a United States bank or guarantees issued by the Company to the
foreign banks. At June 30, 1999, the Company was contingently liable for
approximately $2.5 million under outstanding letters of credit and guarantees
related to these obligations.
As of June 30, 1999, the Company had outstanding non-qualified stock
options to purchase an aggregate of 2,945,208 shares of common stock at exercise
prices ranging from $1.25 to $37.28, which equaled the fair market value of the
underlying common stock on the dates of grant. At the time a non-qualified stock
option is exercised, the Company will generally be entitled to a deduction for
federal and state income tax purposes equal to the difference between the fair
market value of the common stock on the date of exercise and the option price.
As a result of exercises for the nine months ended June 30, 1999 of
non-qualified stock options to purchase an aggregate of 464,827 shares of common
stock, the Company is entitled to a federal income tax deduction of
approximately $10.3 million. The Company realized a tax benefit of approximately
$4.0 million with respect to the nine months ended June 30, 1999. Accordingly,
the Company recorded an increase in additional paid-in capital and a reduction
to current taxes payable pursuant to the provisions of SFAS No. 109, "Accounting
for Income Taxes." Any exercises of non-qualified stock options in the future at
exercise prices below the then fair market value of the common stock may also
result in tax deductions equal to the difference between those amounts. There is
uncertainty as to whether or not the exercises will occur, the amount of any
deductions or the Company's ability to fully utilize any deductions.
On January 10, 1997, the Company entered into a five-year operating
lease agreement with two unrelated parties for financing the construction of its
Houston terminal, warehouse and headquarters facility. The cost of the Houston
facility was approximately $8.5 million. Under the terms of the lease agreement,
average monthly lease payments are approximately $59,000, which includes monthly
interest costs based upon LIBOR rate plus 145 basis points, beginning on July 1,
1998 through October 2, 2002. A balloon payment equal to the outstanding lease
balance, which was initially equal to the cost of the facility, is due on
October 2, 2002. As of June 30, 1999, the lease balance was approximately $8.3
million.
14
<PAGE> 15
EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On April 3, 1998, the Company entered into a five-year $20 million
master operating lease agreement with two unrelated parties for financing the
construction of terminal and warehouse facilities throughout the United States
designated by the Company. Under the terms of the master operating lease
agreement, average monthly lease payments, including monthly interest costs
based upon LIBOR rate plus 145 basis points, began upon the completion of the
construction of each financed facility. The monthly lease obligation will
continue for a term of 52 months. A balloon payment equal to the outstanding
lease balances, which was initially equal to the cost of the facility, is due at
the end of each lease term. The Company began construction during fiscal 1999 on
five financed facilities. As of June 30, 1999, the aggregate lease balance was
approximately $9.1 million under the master operating lease agreement.
The Company has an option, exercisable at anytime during the lease
term, and under particular circumstances, may be obligated to acquire the
Houston terminal and each of its other financed facilities for an amount equal
to the outstanding lease balance. If the Company does not exercise the purchase
option, and does not otherwise meet its obligations, it is subject to deficiency
payment computed as the amount equal to the outstanding lease balance minus the
then current fair market value of each financed facility within limits. The
Company expects that the amount of any such deficiency payment, if made, would
be expensed.
During fiscal 1998 and 1999, the Company entered into commitments of
approximately $6.0 million for the construction of additional terminal and
warehouse facilities located within the United States. Payments for construction
of these facilities are being made from cash balances. As of June 30, 1999, the
Company had paid approximately $3.5 million of the commitments. Construction of
these facilities is estimated to be completed during fiscal 1999 and fiscal
2000.
Year 2000 Issues
Historically, some computer programs used only the last two digits of a
year to refer to a date, causing them to not properly recognize a year that does
not begin with "19." This could result in major failures or miscalculations and
is generally referred to as the "Year 2000" or "Y2K" problem.
The Company relies principally on three internal systems to support its
freight forwarding, pick up and delivery, logistics management, accounting and
management reporting worldwide. The Company's assessment of these systems is as
follows:
(1) The primary domestic forwarding, logistics management,
accounting and management system has been independently tested
and the Company expects to receive a Year 2000 compliance
certificate in August 1999. The cost of this testing was not
significant and only minor remediation was requested.
(2) The primary international forwarding system has been developed
in-house, and remains under development. This system is being
developed using current technology and a platform that has
been certified as Y2K compliant.
(3) The Company plans to upgrade its pick up and delivery system
by September 1999 for a minimal cost.
The Company has not identified any internal non-information technology
systems that use embedded technology on which it relies and that it believes is
likely to have a Y2K problem. Except as noted above, the Company has completed
its review and remediation of its internal systems for potential Year 2000
problems it has identified. However, the Company plans to continue to monitor
these systems through the end of 1999.
The Company is also reliant upon systems capabilities of business
partners, trading partners, customers, suppliers, governmental agencies and
internet and telecommunications providers in many countries throughout the
world. Like every other business enterprise, the Company is also at risk from
Year 2000 failures in public and private infrastructure services, including
electricity, water, gas, transportation and communications. Other than
telecommunications services and electronic data interchange, the Company does
not directly rely on the systems capabilities of third parties for its
15
<PAGE> 16
EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
principal operations. Because of its extensive use of technology, the Company is
dependent upon data and voice communications to receive, process, track and bill
customer orders. The Company has completed tests of electronics data interchange
with several of its trading partners, and plans additional tests through the end
1999. The Company has also received representations as to Year 2000 compliance
from a majority of its major suppliers and plans to continue to monitor the
status of its suppliers' compliance efforts through the end of 1999. The Company
is also vulnerable to noncompliance of third party systems if they result in
business interruption of a customer. The Company plans to address readiness
issues with some of its major customers during calendar 1999.
Because of the number of external risks involved, the Company believes
there is likely to be some disruption in its business as a result of
noncompliance by third parties. Of all the external risks, the Company believes
that the most reasonably likely worst case scenario would be a business
disruption resulting from an extended communications failure and/or an extended
failure of the nations air traffic system. In addition, the global
transportation industry and regulatory authorities, including the United States
Department of Transportation and related agencies, could be affected in a way
that negatively affects the Company's operations. The Company's transportation
providers might be unable to provide those services because of these Year 2000
failures or Year 2000 problems of their own. If a Year 2000 failure causes
insufficient air lift to be available to the Company, the Company's air freight
forwarding operations would be curtailed and the Company might also be unable to
provide sufficient alternative services such as ground, rail, or ocean cargo
capacity to meet expected levels of operations. Furthermore, should the
Company's customers experience business interruption in the year 2000, the
Company's results of operation could be materially adversely affected. The
Company would also likely experience a deterioration in collections if the
Company's customers experience Year 2000 failures. Based on the Company's
information regarding the readiness of suppliers, including air carriers and
communication carriers, and customers, the Company expects that any Year 2000
disruption would be of short duration. However, the Company is unable to
determine the potential business interruption costs that might be incurred as a
result of Y2K disruptions.
The Company is currently exploring contingency plans in the event of
possible business interruptions. The Company intends to address emergency
instructions, including security, power outages and telecommunications failures,
and alternative means of transporting freight for each of its terminals. The
Company expects that its contingency planning will continue to the end of 1999
and the beginning of 2000.
To date the Company has incurred less than $100,000 of expense and does
not currently plan to expend any material amount of funds for Y2K remediation.
Despite the Company's assessment to date, there can be no assurance as to the
ultimate effect that the Y2K issues will have on the Company.
The Company's assessment of its Year 2000 issues involves many
assumptions. The Company's assumptions might prove to be inaccurate, and actual
results could differ significantly from the assumptions. In addition, third
party representations or certifications as to Year 2000 compliance might prove
to be inaccurate and Year 2000 compliance tests may not have been subjected to a
sufficient sample of conditions. The Company could be adversely affected by
business disruptions of a greater magnitude than anticipated or from a failure
of its contingency plans to adequately address problems.
Related Party Transactions
In May 1999 the Company began subleasing a portion of its warehouse
space to a customer pursuant to a five-year sublease. The customer is partially
owned by James R. Crane, the Company's Chairman and President. Rental income was
approximately $61,000 during the quarter ended June 30, 1999. In addition, the
Company billed the customer $134,000 for freight forwarding services during the
nine months ended June 30, 1999. The Company believes the rental rates set forth
in the sublease agreement approximate market rates.
16
<PAGE> 17
EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently does not have any outstanding short-term or
long-term debt instruments as of June 30, 1999. Accordingly, the Company does
not have market risk related to interest rates. However, the Company's lease
payments on certain financed facilities are tied to market interest rates. At
June 30, 1999, a 10% rise in the base rate for these financing arrangements
would not have a material impact on operating income for fiscal 1999.
The Company's earnings are affected by fluctuations in the value of the
U.S. dollar as it relates to the earnings of its United Kingdom, Canada, Mexico
and Hong Kong operations, as a result of transactions in foreign markets. At
June 30, 1999, the result of a uniform 10% strengthening in the value of the
dollar relative to the currencies in which these operations are denominated
would not have a material impact on operating income for fiscal 1999.
The Company has not purchased any futures contracts nor has it
purchased or held any derivative financial instruments for trading purposes
during the nine months ended June 30, 1999.
In the second quarter of fiscal 1999 the Company entered into contracts
for the purpose of hedging the cost of a portion of anticipated jet fuel
purchases for chartered aircraft during the following twelve months. Such
contracts are nominally insignificant. At June 30, 1999, a 10% change in the
price of jet fuel would not have a material impact on operating income for
fiscal 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS, NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES, NONE
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS, NONE
ITEM 5. OTHER INFORMATION
FORWARDING LOOKING STATEMENTS
The statements contained in all parts of this documents, including, but
not limited to, those relating to the Company's plans for international air
freight forwarding services; the future expansion and results of the Company's
terminal network; plans for local delivery services; expected growth, future
marketing; construction of new facilities; future operating expenses; any
seasonality of the Company's business; future margins; future dividend plans;
use of offering proceeds; fluctuations in currency valuations; fluctuations in
interest rates; future acquisitions and any effects, benefits, results, terms or
other aspects of such acquisitions; fluctuations in the price of jet fuel;
effects of the Year 2000 issue; ability to continue growth and implement growth
and business strategy; the ability of expected sources of liquidity to support
working capital and capital expenditure requirements; the tax benefit of any
stock option exercises; and any other statements regarding future growth, cash
needs, terminals, operations, business plans and financial results and any other
statements which are not historical facts are forward-looking statements. When
used in this document, the words "anticipate", "estimate", "expect", "may",
"plans", "project", and similar expressions are intended to be among the
statements that identify forward-looking statements. Such statements involve
risks and uncertainties, including, but not limited to, those relating to the
Company's dependence on its ability to attract and retain skilled managers and
other personnel; the intense competition within the freight industry; the
uncertainty of the Company's ability to manage and continue its growth and
implement its business strategy; the Company's dependence on the availability of
cargo space to serve its customers; the potential for liabilities if certain
independent owner/operators that serve the Company are determined to be
employees; effects of regulation; results of litigation; the Company's
vulnerability to general economic conditions and dependence on its principal
customers; the control by the Company's principal shareholder; the Company's
potential exposure to claims involving its local pick-up and delivery
operations; risk of international operations; risks relating to acquisition; the
Company's future financial and operating results, cash needs
17
<PAGE> 18
and demand for its services; and the Company's ability to maintain and comply
with permits and licenses; as well as other factors detailed in the Company's
filings with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated. The Company
undertakes no responsibility to update for changes related to these or any other
factors that may occur subsequent to this filing.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits.
*3(i) Second Amended and Restated Articles of Incorporation
of the Company, as amended (Exhibit 3(i) to the
Company's Form 10-Q for the fiscal quarter ended June
30, 1998).
*3(ii) Amended and Restated Bylaws of the Company, as
amended (Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-97606)).
27 Financial Data Schedule.
- ----------------------
* Incorporated by reference as indicated.
(B) No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
18
<PAGE> 19
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.
EAGLE USA AIRFREIGHT, INC.
---------------------------------------
(Registrant)
Date: July 30, 1999 BY: /s/ James R. Crane
----------------------------------
James R. Crane
President
Date: July 30, 1999 BY: /s/ Douglas A. Seckel
----------------------------------
Douglas A. Seckel
Chief Financial Officer
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
*3(i) Second Amended and Restated Articles of Incorporation of the
Company, as amended (Exhibit 3(i) to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1998).
*3(ii) Amended and Restated Bylaws of the Company, as amended (Exhibit 3.2
to the Company's Registration Statement on Form S-1 (Registration
No. 33-97606)).
27 Financial Data Schedule
</TABLE>
- ------------------------
*Incorporated by reference as indicated.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF EAGLE USA AIRFREIGHT, INC. FOR
THE NINE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS INCLUDED IN FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 47,403
<SECURITIES> 12,010
<RECEIVABLES> 86,149
<ALLOWANCES> 1,425
<INVENTORY> 0
<CURRENT-ASSETS> 149,985
<PP&E> 38,577
<DEPRECIATION> 12,034
<TOTAL-ASSETS> 187,682
<CURRENT-LIABILITIES> 47,469
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 140,194
<TOTAL-LIABILITY-AND-EQUITY> 187,682
<SALES> 428,424
<TOTAL-REVENUES> 428,424
<CGS> 0
<TOTAL-COSTS> 243,455
<OTHER-EXPENSES> 153,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,537
<INCOME-TAX> 12,961
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,576
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.07
</TABLE>
