<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998
Commission File Number 1-6512
AIRBORNE FREIGHT CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
----------------------------------------
(State of incorporation or organization)
91-0837469
---------------------------------
(IRS Employer Identification No.)
3101 Western Avenue
P.O. Box 662
Seattle, Washington 98111-0662
------------------------------
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (206) 285-4600
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: XXX No:
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the close of the period covered by this report.
Common Stock, par value $1 per share
Outstanding (net of 497,078 treasury shares)
as of June 30, 1998 50,279,509 shares
-----------------
<PAGE>2
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in thousands except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Domestic $672,378 $611,999 $1,334,896 $1,174,110
International 91,759 100,785 179,434 194,196
-------- -------- ---------- ----------
764,137 712,784 1,514,330 1,368,306
OPERATING EXPENSES:
Transportation purchased 234,797 228,663 465,120 437,553
Station and ground operations 228,282 210,856 450,976 411,106
Flight operations and maintenance 117,480 100,913 234,883 204,696
General and administrative 61,940 57,271 121,890 109,100
Sales and marketing 17,569 17,901 34,968 34,079
Depreciation and amortization 45,182 42,210 90,070 84,481
-------- -------- ---------- ----------
705,250 657,814 1,397,907 1,281,015
-------- -------- ---------- ----------
EARNINGS FROM OPERATIONS 58,887 54,970 116,423 87,291
INTEREST, NET 2,960 8,049 6,876 16,496
-------- -------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 55,927 46,921 109,547 70,795
INCOME TAXES 22,100 18,634 43,360 28,134
-------- -------- ---------- ----------
NET EARNINGS $ 33,827 $ 28,287 $ 66,187 $ 42,661
======== ======== ========== ==========
NET EARNINGS PER SHARE:
Basic $ .67 $ .66 $ 1.32 $ 1.00
======== ======== ========== ==========
Diluted $ .66 $ .59 $ 1.29 $ .90
======== ======== ========== ==========
DIVIDENDS PER SHARE $ .040 $ .038 $ .078 $ .075
======== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>3
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
June 30 December 31
------- -----------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 16,922 $ 25,525
Trade accounts receivable,
less allowance of $10,290 and $10,290 310,698 322,549
Spare parts and fuel inventory 39,689 37,966
Deferred income tax assets 16,713 14,530
Prepaid expenses and other 27,872 25,982
---------- ----------
TOTAL CURRENT ASSETS 411,894 426,552
PROPERTY AND EQUIPMENT, NET 949,417 916,331
EQUIPMENT DEPOSITS and OTHER ASSETS 35,868 23,090
---------- ----------
TOTAL ASSETS $1,397,179 $1,365,973
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 144,478 $ 143,966
Salaries, wages and related taxes 70,710 80,154
Accrued expenses 72,043 100,126
Income taxes payable 4,704 5,440
Current portion of debt 393 381
---------- ----------
TOTAL CURRENT LIABILITIES 292,328 330,067
LONG-TERM DEBT 222,892 250,559
DEFERRED INCOME TAX LIABILITIES 78,154 65,322
OTHER LIABILITIES 63,713 49,110
SHAREHOLDERS' EQUITY:
Preferred Stock, without par value -
Authorized 5,200,000 shares,
no shares issued
Common stock, par value $1 per share -
Authorized 60,000,000 shares
Issued 50,776,587 and 50,428,548 shares 50,777 50,429
Additional paid-in capital 293,697 287,208
Retained earnings 396,384 334,083
---------- ----------
740,858 671,720
Treasury stock, 497,078 and 522,300 (766) (805)
shares, at cost ---------- ----------
740,092 670,915
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,397,179 $1,365,973
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>4
<TABLE>
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
----------------
June 30
----------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Earnings $ 66,187 $ 42,661
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 82,412 78,116
Provision for aircraft engine overhauls 7,658 6,365
Deferred income taxes 10,649 10,387
Other 14,695 229
-------- --------
CASH PROVIDED BY OPERATIONS 181,601 137,758
Change in:
Receivables 11,851 (19,238)
Inventories and prepaid expenses (3,613) (7,636)
Accounts payable 512 (660)
Accrued expenses, salaries & taxes payable (37,922) 22,405
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 152,429 132,629
INVESTING ACTIVITIES:
Additions to property and equipment (126,377) (78,716)
Dispositions of property and equipment 633 2,615
Expenditures for engine overhauls (8,471) (6,036)
Proceeds from insurance on aircraft accident -- 18,000
Other (1,811) 537
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (136,026) (63,600)
FINANCING ACTIVITIES:
Proceeds (payments) on bank notes, net (27,500) (89,000)
Principal payments on debt (155) (143)
Proceeds from common stock issuance 6,535 1,357
Dividends paid (3,886) (3,202)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (25,006) (90,988)
-------- --------
NET DECREASE IN CASH (8,603) (21,959)
CASH AT JANUARY 1 25,525 35,816
-------- --------
CASH AT JUNE 30 $ 16,922 $ 13,857
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>5
AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE A - SUMMARY OF FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements included herein are unaudited but
include all adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position and results of operations
and cash flows for the interim periods reported.
Certain amounts for prior periods have been reclassified to conform to the
1998 presentation.
NOTE B - LONG-TERM DEBT:
<TABLE>
Long-term debt consists of the following:
<CAPTION>
June 30 December 31
------- -----------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Senior debt:
Notes payable 2,500 30,000
Senior notes 200,000 200,000
Revenue bonds 13,200 13,200
Other debt 7,585 7,740
-------- --------
223,285 250,940
Less current portion 393 381
-------- --------
$222,892 $250,559
======== ========
</TABLE>
NOTE C - EARNINGS PER SHARE:
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the interim period. Diluted earnings per
share are based upon the weighted average number of common shares
outstanding during the interim period plus dilutive common equivalent
shares applicable to the assumed exercise of outstanding stock options.
Diluted earnings per share for the three months and six months ended
June 30, 1997, assumes conversion of the Company's convertible subordinated
debentures as well as the dilutive common equivalent shares applicable to
the assumed exercise of stock options. Net earnings as adjusted for the
elimination of interest expense, net of applicable taxes was $29,352,000
for the three month period and $44,791,000 for the six month period.
<PAGE>6
Weighted average shares outstanding used in earnings per share computations
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 50,220,364 42,776,526 50,123,331 42,706,891
Diluted 51,288,921 50,134,061 51,235,062 49,833,611
</TABLE>
NOTE D - ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which will be effective for fiscal year
2000. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value.
The Company has entered into certain derivative contracts with financial
institutions to limit its exposure to volatility in jet fuel prices. Under
terms of the contracts, the Company either makes or receives payments if
the market price of heating oil, as determined by an index of monthly NYMEX
Heating Oil futures contracts, is lower or exceeds certain prices agreed to
between the Company and the financial institutions. The contracts, which
have no cost basis, are accounted for as hedges since there has
historically existed a high correlation between the changes in the NYMEX
index and the price of jet fuel. Settlements are made in cash and are
recorded in the earnings statement in the period of settlement as either an
increase or decrease to fuel expense.
Under the cash flow hedge provisions of SFAS No. 133, the Company will be
required to record the contracts at fair value, with corresponding changes
in fair value recorded as a component of other comprehensive income. The
Company has not adopted the provisions of SFAS No. 133 as of June 30, 1998.
However, if the provisions of the statement had been adopted, a cumulative
charge of $2,300,000, net of tax, would have been recorded to shareholders'
equity and charges to comprehensive income of approximately $400,000 and
$1,600,000 would have been reported for the three and six month periods
ended June 30, 1998, respectively.
<PAGE>7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
The Company's operating performance in the second quarter and the first six
months of 1998 resulted in operating income and net earnings significantly
higher than the comparable periods of 1997. The Company is pleased with
this strong operating performance which was achieved in spite of what
appears to be a slowing economy in the second quarter. The overall growth
in shipments and revenue was positive, and an operating margin of 7.7% was
achieved in the second quarter of 1998, the same as experienced in the
second quarter of 1997 and the first quarter of 1998, when growth rates
were higher.
Net earnings for the second quarter of 1998 were $33.8 million, or $.66 per
share on a diluted basis, on revenues of $764 million, compared to
$28.3 million, or $.59 per share on revenues of $713 million, for the
second quarter of 1997. Net earnings for the first six months of 1998 were
$66.2 million, or $1.29 per share on revenues of $1.51 billion, compared to
$42.7 million, or $.90 per share on revenues of $1.37 billion for the
corresponding period in 1997.
<PAGE>8
<TABLE>
The following table sets forth selected shipment and revenue data for the
periods indicated:
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- % ------- %
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Shipments (in thousands):
Domestic
Overnight 46,632 42,287 10.3% 92,391 81,926 12.8%
Next Afternoon Service 14,718 13,717 7.3% 29,101 25,881 12.4%
Second Day Service 17,673 16,657 6.1% 35,684 32,466 9.9%
100 Lbs. and Over 87 80 8.8% 178 154 15.6%
------ ------ ------- -------
Total Domestic 79,110 72,741 8.8% 157,354 140,427 12.1%
------ ------ ------- -------
International
Express 1,507 1,271 18.6% 2,896 2,452 18.1%
Freight 113 122 (7.4%) 223 238 (6.3%)
------ ------ ------- -------
Total International 1,620 1,393 16.3% 3,119 2,690 15.9%
------ ------ ------- -------
Total Shipments 80,730 74,134 8.9% 160,473 143,117 12.1%
====== ====== ======= =======
Average Pounds per Shipment:
Domestic 4.22 4.31 (2.1%) 4.29 4.31 (0.5%)
International 41.62 53.65 (22.4%) 42.85 51.88 (17.4%)
Average Revenue per Pound:
Domestic $1.98 $1.94 2.1% $1.95 $1.93 1.0%
International $1.34 $1.32 1.5% $1.33 $1.37 (2.9%)
Average Revenue per Shipment:
Domestic $8.49 $8.40 1.1% $8.48 $8.35 1.6%
International $56.64 $72.35 (21.7%) $57.53 $72.19 (20.3%)
</TABLE>
<PAGE>9
Domestic shipments increased 8.8% and 12.1% in the second quarter and first
half of 1998, respectively, compared to the same periods in 1997. Domestic
revenues increased 9.9% in the second quarter of 1998 and 13.7% for the
first half of 1998 compared to 1997.
The growth rate in the higher yielding overnight segment increased 10.3% in
the second quarter of 1998, a higher growth rate than the other domestic
segments. This helped the domestic revenue per shipment improve to $8.49 per
shipment, compared to $8.40 for the second quarter of 1997. Overnight
shipments accounted for approximately 59.0% of total domestic shipments in
the second quarter of 1998 compared to 58.1% in the comparable period of
1997.
Domestic revenues for 1997 included $15.5 million of fuel surcharge revenue
in the first half of the year, of which $10.6 million was realized in the
second quarter of 1997. This fuel surcharge revenue added approximately
$.16 per share in the first half of 1997, of which $.11 per share related
to the second quarter of 1997.
International revenues decreased 9.0% and 7.6% in the second quarter and
first six months of 1998, respectively, primarily the result of economic
troubles in parts of Asia. Shipments in the heavier weight, higher revenue
per shipment freight segment decreased 7.4% in the second quarter and 6.3%
in the first half of the year. Mitigating some of the weakness in freight
volumes, the Company experienced strong growth in its international express
segment. International express shipments increased 18.6% and 18.1% in the
second quarter and first six months of 1998, respectively, compared to the
corresponding periods of 1997.
Operating expenses as a percentage of revenues were 92.3% for the first six
months of 1998 compared to 93.6% in the first six months of 1997 and 92.3%
for all of 1997. Operating cost per shipment handled decreased 2.7% to
$8.71 for the first six months 1998 compared to the first six months of
1997. The operating cost per shipment for the second quarter of 1998
decreased 1.5% to $8.74, compared to the second quarter of 1997 while
operating expense as a percentage of revenues was 92.3%. Most of the
decrease in operating cost per shipment was attributable to lower costs
related to lower international freight volumes. The operating margin of
7.7% in the second quarter of 1998 was the same as that experienced in the
first quarter of this year, and in the second quarter of 1997.
The Company experienced a 1.5% improvement in productivity for the second
quarter of 1998, compared to the second quarter of 1997, as measured by
shipments handled per paid employee hour. This productivity improvement,
while lower than previous periods, was meaningful given the slower shipment
growth. Productivity improvement and continued emphasis on cost control
were factors having a positive impact on 1998 operating results.
Comparisons of certain operating expense components are discussed below.
Transportation purchased decreased as a percentage of revenues to 30.7% in
the first six months of 1998 compared to 32.0% in the comparable period of
1997. This decrease was primarily due to commercial airline costs which,
although higher in total, were lower as a percentage of total revenues in
the first half of 1998 due to the lower volumes of international freight
shipments discussed above. The suspension of the Federal Aviation Excise
Tax reduced costs in the first quarter of 1997 by $4.3 million. The
Aviation Excise Tax moratorium was effective through March 6, 1997,
subsequent to which the tax became effective once again; therefore, no cost
reduction was realized in 1998.
<PAGE>10
Flight operations and maintenance expense as a percentage of revenues
during the first half of 1998 was 15.5%, compared to 15.0% in the first six
months of 1997, and was 15.4% in the second quarter of 1998 compared to
14.2% in 1997. During the second quarter of 1997, costs associated with
periodic aircraft maintenance were lower as a percentage of revenues,
compared to both quarters of 1998 or first quarter of 1997, due to fewer
maintenance checks performed. The average aviation fuel price for the
second quarter and first six months of 1998 was $.57 per gallon and $.60
per gallon, respectively, compared to $.70 per gallon and $.76 per gallon
for the comparable periods of 1997. Aviation fuel consumption increased to
89.8 million gallons in the first half of 1998, a 10.4% increase over the
first half of 1997. As a result of fuel hedging contracts, the Company
incurred $2.0 million of expense in the second quarter of 1998, compared to
$1.0 million of expense in the first quarter of 1998, and $1.7 million
benefit in the first quarter of 1997.
The station and ground expense, general and administrative expense, and
sales and marketing expense categories as a percentage of revenues were
very comparable in the second quarter and first half of 1998 compared to
the same periods in 1997.
The increase in depreciation and amortization expense in the first half of
1998 is due in large part to the increased number of aircraft in service
since the first half of 1997.
Interest expense in the first six months of 1998 was significantly lower
than the same period of 1997. This is attributable to the significant
reduction in average outstanding borrowings during the first half of 1998
compared to the corresponding period of 1997.
The Company's effective tax rate was 39.6% for the first six months of 1998
compared to 39.7% in the first half of 1997 and 39.2% for all of 1997.
YEAR 2000 ISSUE:
The Company has implemented a compliance program to address the challenges
the Year 2000 may present to its products, systems and applications. 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 which contain date sensitive
technology critical to its operation.
Management anticipates modifications to its own systems, conversions to new
software and related testing will be substantially complete by the end of
1998. As part of the compliance program, the Company has also initiated
communications with third parties (primarily customers, vendors, airport
authorities, and other governmental agencies, including the Federal
Aviation Administration) whose failure to timely convert their systems
could have an impact on the Company's operations. Although the Company
does not believe the Year 2000 issue will have a material impact on the
Company's operations, there can be no guarantee that the Company's or any
third party Year 2000 remediation efforts will be fully compliant. If
non-compliance is extensive, this could have a material effect on the
Company's business, financial condition and results of operation. In an
attempt to mitigate this risk, the Company is in the process of developing
contingency plans regarding critical systems should they fail to become
Year 2000 compliant.
Management does not consider the incurred or estimated costs of its
compliance program to be material. Total costs are not expected to differ
from the normal recurring costs that are incurred for systems development,
in part, due to the reallocation of internal resources and the deferral of
other projects. This assessment could differ materially if either the
scope or schedule progress with its compliance program is significantly
altered.
<PAGE>11
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operations net of change in working capital increased for
the first six months of 1998 to $152 million, compared to $133 million in
the first half of 1997. This increased liquidity is primarily the result
of the increase in profitability in 1998.
Capital expenditures continue to be a primary factor affecting the
financial condition of the Company. The Company anticipates total capital
expenditures to approximate $274 million in 1998. During the first six
months of 1998, total capital expenditures net of dispositions were $126
million. Cash provided by operations was the primary source for funding
capital expenditures.
The Company's strong operating cash flow has become the major source of
liquidity, whereas, the Company's $250 million unsecured revolving bank
credit agreement had traditionally been used as the major source of
liquidity for periods between other financing transactions. The Company
also has available $65 million under unsecured uncommitted money market
lines of credit with several banks, used in conjunction with the revolving
credit agreement to facilitate settlement and accommodate short-term
borrowing fluctuations. Reliance on the bank facilities has decreased
commensurately, with a total of $2.5 million outstanding at June 30, 1998
under the revolving bank credit and money market credit lines, compared to
$30.0 million outstanding at December 31, 1997 and $99.5 million
outstanding at June 30, 1997.
In management's opinion, the available capacity under the bank credit
agreements coupled with internally generated cash flow from remaining 1998
operations should provide adequate flexibility to finance anticipated
capital expenditures for the balance of 1998.
<PAGE>12
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports or Form 8-K.
(a) Exhibits -
Exhibit No. 27 - Financial Data Schedule
<PAGE>13
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized:
AIRBORNE FREIGHT CORPORATION
----------------------------
(Registrant)
<TABLE>
<CAPTION>
<S> <C> <C>
Date: 8/13/98 /s/Roy C. Liljebeck
------- -------------------------
Roy C. Liljebeck
Executive Vice President,
Chief Financial Officer
Date: 8/13/98 /s/Lanny H. Michael
------- -------------------------
Lanny H. Michael
Senior Vice President,
Treasurer and Controller
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,922
<SECURITIES> 0
<RECEIVABLES> 320,988
<ALLOWANCES> 10,290
<INVENTORY> 39,689
<CURRENT-ASSETS> 411,894
<PP&E> 1,941,264
<DEPRECIATION> 991,847
<TOTAL-ASSETS> 1,397,179
<CURRENT-LIABILITIES> 292,328
<BONDS> 222,892
0
0
<COMMON> 50,777
<OTHER-SE> 689,315
<TOTAL-LIABILITY-AND-EQUITY> 1,397,179
<SALES> 0
<TOTAL-REVENUES> 1,514,330
<CGS> 0
<TOTAL-COSTS> 1,397,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,876
<INCOME-PRETAX> 109,547
<INCOME-TAX> 43,360
<INCOME-CONTINUING> 66,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,187
<EPS-PRIMARY> 1.32<F1>
<EPS-DILUTED> 1.29<F2>
<FN>
<F1>EARNINGS PER SHARE - BASIC (IN COMPLIANCE WITH SFAS 128)
<F2>EARNINGS PER SHARE - DILUTED (IN COMPLIANCE WITH SFAS 128)
</FN>
</TABLE>
