<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File Number 0-23642
NORTHWEST AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4205287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 LONE OAK PARKWAY, EAGAN, MINNESOTA 55121
(Address of principal executive offices)
(Zip Code)
(612) 726-2111
(Registrant's telephone number, including area code)
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
----- -----
At June 30, 1997, there were 98,072,081 shares of the registrant's Class A
Common Stock and 4,227,018 shares of the registrant's Class B Common Stock
outstanding.
<PAGE>
NORTHWEST AIRLINES CORPORATION
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three
months and six months ended June 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets - June 30, 1997,
December 31, 1996 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows - Six months
ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
The Computations of Primary and Fully Diluted Earnings Per Common Share,
attached hereto and filed as Exhibits 11.1 and 11.2, and the Computations
of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed
Charges and Preferred Stock Requirements, attached hereto and filed as
Exhibits 12.1 and 12.2, are incorporated herein by reference.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits 13
SIGNATURE 14
EXHIBIT INDEX 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST AIRLINES CORPORATION
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
(UNAUDITED, IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Passenger $ 2,228.6 $ 2,228.4 $ 4,268.9 $ 4,163.9
Cargo 195.9 186.0 366.6 356.3
Other 133.1 126.0 297.6 285.0
---------- ---------- ---------- ----------
2,557.6 2,540.4 4,933.1 4,805.2
OPERATING EXPENSES
Salaries, wages and benefits 770.0 647.9 1,502.5 1,292.1
Stock-based employee compensation -- 65.0 -- 185.1
Aircraft fuel and taxes 339.1 330.5 710.6 636.1
Commissions 215.3 221.8 421.4 425.5
Aircraft maintenance materials and repairs 166.1 121.6 320.3 245.2
Other rentals and landing fees 118.2 112.0 223.7 220.7
Aircraft rentals 91.6 87.5 175.9 171.6
Depreciation and amortization 96.5 93.0 190.6 183.0
Other 469.7 486.4 962.0 936.8
---------- ---------- ---------- ----------
2,266.5 2,165.7 4,507.0 4,296.1
---------- ---------- ---------- ----------
OPERATING INCOME 291.1 374.7 426.1 509.1
OTHER INCOME (EXPENSE)
Interest expense, net (59.1) (65.6) (116.4) (134.2)
Interest of mandatorily redeemable preferred
security holder (5.9) (6.9) (12.0) (13.9)
Investment income 17.8 17.9 29.9 33.2
Foreign currency gain (loss) (27.7) 4.4 (14.9) 11.3
Other 6.2 6.7 14.3 13.4
---------- ---------- ---------- ----------
(68.7) (43.5) (99.1) (90.2)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 222.4 331.2 327.0 418.9
Income tax expense 86.2 128.4 126.2 162.7
---------- ---------- ---------- ----------
NET INCOME 136.2 202.8 200.8 256.2
Preferred stock requirements (5.1) (13.2) (10.1) (26.2)
---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 131.1 $ 189.6 $ 190.7 $ 230.0
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share:
PRIMARY $ 1.26 $ 1.90 $ 1.84 $ 2.32
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED $ 1.15 $ 1.72 $ 1.67 $ 2.10
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average shares used in computation:
PRIMARY 104,169,130 99,679,687 103,849,231 99,025,045
FULLY DILUTED 114,412,348 110,505,764 114,308,255 109,393,597
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
NORTHWEST AIRLINES CORPORATION
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31 June 30
(UNAUDITED, IN MILLIONS) 1997 1996 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 801.6 $ 559.4 $ 963.3
Short-term investments 231.0 253.1 366.6
Accounts receivable, net 770.7 656.1 735.0
Flight equipment spare parts, net 322.5 262.2 261.3
Prepaid expenses and other 301.9 359.1 270.5
-------- -------- --------
2,427.7 2,089.9 2,596.7
PROPERTY AND EQUIPMENT
Flight equipment, net 3,710.2 3,616.4 3,264.2
Other property and equipment, net 923.0 924.1 945.7
-------- -------- --------
4,633.2 4,540.5 4,209.9
FLIGHT EQUIPMENT UNDER CAPITAL LEASES, NET 653.8 671.5 691.3
OTHER ASSETS
International routes, net 739.5 751.4 763.5
Investments in affiliated companies and other 584.7 458.4 502.7
-------- -------- --------
1,324.2 1,209.8 1,266.2
-------- -------- --------
$9,038.9 $8,511.7 $8,764.1
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability $1,187.2 $1,010.7 $1,139.3
Accounts payable and other liabilities 1,680.1 1,666.4 1,503.0
Current maturities of long-term debt and
capital lease obligations 289.0 206.1 343.0
-------- -------- --------
3,156.3 2,883.2 2,985.3
LONG-TERM DEBT 2,026.1 1,916.0 1,980.8
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 682.6 710.5 746.4
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,008.5 947.2 793.6
Pension and postretirement benefits 381.0 461.2 791.2
Other 332.0 348.9 314.2
-------- -------- --------
1,721.5 1,757.3 1,899.0
MANDATORILY REDEEMABLE PREFERRED SECURITY OF
SUBSIDIARY WHICH HOLDS SOLELY NON-RECOURSE
OBLIGATION OF COMPANY 553.9 549.2 579.1
REDEEMABLE PREFERRED STOCK 588.8 602.6 1,027.6
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 1.0 1.0 1.0
Additional paid-in capital 1,177.1 1,151.1 1,102.7
Accumulated deficit (754.4) (945.2) (1,288.1)
Other (114.0) (114.0) (269.7)
-------- -------- --------
309.7 92.9 (454.1)
-------- -------- --------
$9,038.9 $8,511.7 $8,764.1
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
NORTHWEST AIRLINES CORPORATION
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended June 30
(UNAUDITED, IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 425.5 $ 713.5
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (294.4) (708.5)
Net decrease (increase) in short-term investments 40.2 (103.6)
Business acquired (31.3) --
Other, net (3.1) 4.2
------- -------
Net cash used in investing activities (288.6) (807.9)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 250.6 --
Proceeds from sale and leaseback transactions -- 350.0
Payments of long-term debt and capital lease obligations (130.8) (137.5)
Other, net (14.5) (5.7)
------- -------
Net cash provided by financing activities 105.3 206.8
INCREASE IN CASH AND CASH EQUIVALENTS 242.2 112.4
Cash and cash equivalents at beginning of period 559.4 850.9
------- -------
Cash and cash equivalents at end of period $ 801.6 $ 963.3
------- -------
------- -------
Cash and cash equivalents and unrestricted short-term
investments at end of period $ 959.7 $1,208.9
------- --------
------- --------
Available to be borrowed under credit facilities $ 727.3 $ 237.3
------- --------
------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
NORTHWEST AIRLINES CORPORATION
- -------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. The condensed consolidated financial statements of Northwest Airlines
Corporation ("NWAC" or the "Company") included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as permitted by
such rules and regulations. These financial statements and related notes
should be read in conjunction with the financial statements and notes thereto
included in the Company's audited consolidated financial statements for the
year ended December 31, 1996 contained in the Company's Annual Report on
Form 10-K for 1996 (the "Annual Report").
In the opinion of management, the interim financial statements reflect
adjustments, consisting of normal recurring accruals, which are necessary to
present fairly the Company's financial position, results of operations and
cash flows for the periods indicated.
2. The Company's accounting and reporting policies are summarized in Note A of
the Notes to Consolidated Financial Statements in the Annual Report.
3. The income tax expense is based on estimated annual effective tax rates which
differ from the federal statutory rate of 35% primarily due to state income
taxes and certain nondeductible expenses.
4. At June 30, 1997, the Company had no borrowings outstanding under its
revolving credit facility. In addition, the Company has the ability under
another facility to borrow up to $240 million using existing aircraft as
collateral. The $487.3 million available to be borrowed under the revolving
credit facility along with the $240 million facility and the $959.7 billion
of cash, cash equivalents and unrestricted short-term investments provided
the Company with $1.69 billion of available liquidity at June 30, 1997.
Scheduled maturities of long-term debt subsequent to June 30, 1997, excluding
short-term notes payable, are $109.8 million in 1997, $161.1 million in
1998, $184.0 million in 1999, $97.6 million in 2000 and $127.7 million in
2001.
5. The Company manages a portion of the price risk of fuel costs utilizing both
regulated exchange traded futures contracts and fuel swap agreements. The
changes in market value of such agreements have a high correlation to the
price changes of the fuel being hedged. Gains or losses on open and closed
hedge contracts are deferred and included in the condensed consolidated
balance sheets as accounts payable and other liabilities or prepaid expenses,
respectively, until the related fuel inventory is expensed, at which time
both the fuel cost and gain or loss on the hedge instrument are accounted for
as fuel expense.
6. Currently, earnings per share ("EPS") calculations are performed pursuant to
Accounting Principles Board Opinion No. 15. NWAC will be required to present
EPS data in accordance with Statement of Financial Accounting Standards No.
128 "Earnings per Share" commencing with the fourth quarter of 1997. While
early adoption of Statement No. 128 is not permitted, the following pro forma
supplemental data is presented:
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
---------------------------- -------------------------
1997 1996 1997 1996
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Earnings per common share using
Statement No. 128 approach:
Basic $ 1.29 $ 1.95 $ 1.88 $ 2.38
Diluted $ 1.15 $ 1.72 $ 1.67 $ 2.10
</TABLE>
6
<PAGE>
7. In accordance with Rule 1-02 (bb) of Regulation S-X, the following summary
data is presented for Northwest Airlines, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED, IN MILLIONS) Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 2,466.8 $ 2,488.6 $ 4,757.2 $ 4,666.7
Operating expenses 2,190.8 2,123.9 4,358.6 4,184.2
---------- ---------- ---------- ----------
Operating income 276.0 364.7 398.6 482.5
Other income (expense) (81.8) (41.6) (125.6) (89.1)
---------- ---------- ---------- ----------
Income before income taxes 194.2 323.1 273.0 393.4
Income tax expense 74.7 120.8 106.7 148.0
---------- ---------- ---------- ----------
Net income $ 119.5 $ 202.3 $ 166.3 $ 245.4
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
(UNAUDITED, IN MILLIONS) June 30 December 31 June 30
1997 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current assets $ 1,939.3 $ 1,626.8 $ 2,152.4
Noncurrent assets 5,977.7 5,818.3 5,563.2
Current liabilities 3,040.7 2,832.2 2,736.2
Long-term debt and obligations under capital leases 2,202.1 2,103.9 2,168.2
Deferred credits and other liabilities 829.7 935.7 1,237.7
Mandatorily redeemable preferred security of subsidiary 553.9 549.2 579.1
</TABLE>
See also Note P to Consolidated Financial Statements in the Annual Report.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Substantially all of the Company's results of operations are attributable to
Northwest Airlines, Inc. ("Northwest") and the following discussion pertains
primarily to Northwest. The Company acquired Express Airlines I, Inc.
("Express") on April 1, 1997 and the operating results of Express are included
in the consolidated financial statements commencing on that date. See also
"Other Information - EXPRESS AIRLINES." The Company's results of operations for
interim periods are not necessarily indicative of such results for an entire
year due to seasonal factors as well as competitive and general economic
conditions.
For the quarter ended June 30, 1997, the Company reported net income of $136.2
million and operating income of $291.1 million. Primary earnings per common
share were $1.26 ($1.15 fully diluted), a decrease of $.64 ($.57 fully
diluted).
Information with respect to the Company's operating statistics follows (1):
<TABLE>
<CAPTION>
THREE MONTHS ENDED % SIX MONTHS ENDED %
JUNE 30 CHG. JUNE 30 CHG.
----------------------- ----- ------------------ ----
----------------------- ----- ------------------ ----
Scheduled service: 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Available seat miles (ASM) (millions) 24,225.0 23,460.0 3.3 47,279.8 45,645.6 3.6
Revenue passenger miles (millions) 18,142.0 17,561.5 3.3 34,734.5 33,138.0 4.8
Passenger load factor (percent) 74.9 74.9 -- 73.5 72.6 0.9 pts.
Revenue passengers (thousands) 13,862 13,555 2.3 26,524 25,591 3.6
Revenue yield per passenger mile (cents) 12.08 12.69 (4.8) 12.18 12.57 (3.1)
Passenger revenue per scheduled ASM (cents) 9.05 9.50 (4.7) 8.95 9.12 (1.9)
Operating revenue per total ASM (cents) (2) 9.74 10.18 (4.3) 9.66 9.82 (1.6)
Operating expense per total ASM (cents) (2) 8.64 8.62 0.2 8.82 8.76 0.7
Cargo ton miles (millions) 553.6 555.1 (0.3) 1,046.4 1,042.3 0.4
Cargo revenue per ton mile (cents) 35.39 33.51 5.6 35.03 34.18 2.5
Fuel gallons consumed (millions) 494.7 485.8 1.8 966.2 943.8 2.4
Average fuel cost per gallon (cents) 63.46 63.33 0.2 68.60 62.62 9.5
Number of operating aircraft at end of period 399 397 0.5
Full-time equivalent employees at end of period 48,197 46,863 2.8
</TABLE>
(1) All statistics exclude Express Airlines I, Inc.
(2) Excludes the estimated revenues or expenses related to the operation of
Northwest's fleet of eight 747 freighter aircraft and MLT Inc.
RESULTS OF OPERATIONS--THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Operating income decreased $83.6 million to $291.1 million. This decrease was
primarily due to increases in salaries, wages and benefits of $122.1 million and
aircraft maintenance of $44.5 million offset by the impact of the conclusion of
stock-based employee compensation.
OPERATING REVENUES. Operating revenues were $2.56 billion, an improvement of
$17.2 million (.7%). Consolidated system passenger revenues (which represented
87.1% of total operating revenues) were basically unchanged. A 3.3% increase in
Northwest's scheduled service ASMs and the $36.9 million 1997 revenues of
Express were offset by a 4.7% decrease in Northwest's passenger revenue per
scheduled ASM ("RASM"). The decrease in RASM was due to a 4.8% decrease in
system yield.
8
<PAGE>
Northwest's domestic passenger revenue decreased $3.2 million (.2%) to $1.5
billion. A 1.6% increase in scheduled service ASMs was offset by a 1.8%
decrease in RASM due to a 3.5% decrease in yield. The decrease in yield was
primarily related to the reinstatement of ticket taxes. See also "Other
Information - U.S. TRANSPORTATION TAX." Pacific passenger revenue decreased
by $28.8 million (5.3%) to $520.8 million due to a 12.1% decrease in Pacific
RASM which was offset by a 7.8% increase in scheduled service ASMs related to
the initiation of Minneapolis/St. Paul-Osaka service and additional
trans-Pacific frequencies, mainly Minneapolis/St. Paul-Tokyo. The decrease
in Pacific RASM was due to an 8.8% decrease in yield and a 3.6% (2.9 pts.)
decrease in passenger load factor. A majority of the Pacific yield decrease
was attributable to a weaker Japanese yen. The average yen per U.S. dollar
exchange rate for the three months ended June 30, 1997 and 1996 was 122 and
107, respectively, a weakening of the yen of 14.0%. Atlantic passenger
revenue decreased $4.7 million (2.6%) to $175.9 million due to a 1.2%
decrease in RASM which was yield related.
OPERATING EXPENSES. Consolidated operating expenses increased $100.8 million
(4.7%). While operating capacity increased 3.4% to 24.3 billion total
service ASMs, operating expense per total service ASM increased .2%.
Salaries, wages and benefits expense increased $122.1 million (18.8%) due to
an increase in average full-time equivalent employees of 3.1%, the end of the
Wage Savings Period discussed under "Other Information - LABOR AGREEMENTS"
and the $11 million retroactive impact of wage snap-ups. The increase in
average full-time equivalent employees was attributable to increased flying
of 3.4% and increased traffic of 2.3%. Aircraft maintenance materials and
repairs increased $44.5 million (36.6%) due primarily to the increase in the
number of engine and airframe overhauls and mandated fleet campaigns.
OTHER INCOME AND EXPENSE. Interest expense-net decreased $6.5 million (9.9%)
primarily due to the retirement of debt prior to scheduled maturity and lower
interest rates on debt. The foreign currency loss for the three months ended
June 30, 1997 was attributable to charges related to Japanese yen forward
exchange and collar option contracts and balance sheet remeasurement of
foreign currency-denominated assets and liabilities. The foreign currency
gain for the three months ended June 30, 1996 was primarily attributable to
balance sheet remeasurement of foreign currency-denominated assets and
liabilities.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Operating income decreased $83.0 million (16.3%) to $426.1 million. The
favorable impacts of a $105.0 million increase in passenger revenues and the
conclusion of stock-based employee compensation were more than offset by
increases in salaries, wages and benefits of $210.4 million, aircraft
maintenance of $75.1 million and aircraft fuel of $74.5 million.
OPERATING REVENUES. Consolidated operating revenues were $4.93 billion, an
improvement of $127.9 million (2.7%). System passenger revenues (which
represented 86.5% of total operating revenues) increased $105.0 million
(2.5%). The increase was attributable to a 3.6% increase in Northwest's
scheduled service ASMs and the $36.9 million 1997 revenues of Express which
were somewhat offset by a 1.9% decrease in Northwest's RASM. The decrease in
RASM was attributable to a 3.1% decrease in system yield which was partially
offset by a 1.2% (0.9 pts.) increase in passenger load factor.
9
<PAGE>
Northwest's domestic passenger revenue increased $100.3 million (3.6%) to
$2.92 billion. A 3.0% increase in scheduled service ASMs and a .6 % increase
in RASM resulted in the improved performance. The increase in scheduled
service ASMs resulted primarily from the addition of DC9-30, DC10-30 and
Boeing 757 aircraft during the second and third quarters of 1996 and the
first and second quarters of 1997, which allowed the Company to increase
frequencies to 26 cities and enter ten new markets. The increase in RASM was
due to a 1.7% (1.2 pts.) increase in passenger load factor offset by a 1.2%
decrease in yield. See also "Other Information - U.S. TRANSPORTATION TAX."
Pacific passenger revenue decreased by $30.2 million (2.8%) to $1.03 billion
due to an 8.3% decrease in Pacific RASM which was somewhat offset by a 6.0%
increase in scheduled service ASMs related to initiation of Minneapolis/St.
Paul-Osaka service and additional trans-Pacific frequencies, mainly
Minneapolis/St. Paul-Tokyo. The decrease in Pacific RASM was primarily due
to an 8.1% decrease in yield. The Pacific yield decrease was largely
attributable to a weaker Japanese yen. The average yen per U.S. dollar
exchange rate for the six months ended June 30, 1997 and 1996 was 121 and
106, respectively, a weakening of the yen of 14.2%. Atlantic passenger
revenue decreased $2.0 million (.7%) to $286.1 million due to a 1.4% decrease
in scheduled service ASMs somewhat offset by a .6% increase in RASM which was
due to a 2.2% (1.8 pts.) increase in passenger load factor.
OPERATING EXPENSES. Consolidated operating expenses increased $210.9 million
(4.9%). While operating capacity increased 3.7% to 47.4 billion total
service ASMs, operating expense per total service ASM increased .7%.
Salaries, wages and benefits expense increased $210.4 million (16.3%) due to
an increase in average full-time equivalent employees of 3.7% and the end of
the Wage Savings Period discussed under "Other Information - LABOR
AGREEMENTS." The increase in average full-time equivalent employees was
attributable to increased flying of 3.7%. Aircraft fuel and taxes increased
$74.5 million (11.7%). A 9.5% increase in average fuel cost per gallon
caused $57.8 million of the increase with the balance attributable to
increased flying. Aircraft maintenance materials and repairs increased $75.1
million (30.6%) due primarily to increased flying, an increased number of
engine and airframe overhauls and mandated fleet campaigns.
OTHER INCOME AND EXPENSE. Interest expense-net decreased $17.8 million
(13.3%) primarily due to the retirement of debt prior to scheduled maturity
and lower interest rates on debt. The foreign currency loss for the six
months ended June 30, 1997 was attributable to charges related to Japanese
yen forward exchange and collar option contracts and to balance sheet
remeasurement of foreign currency-denominated assets and liabilities. The
foreign currency gain for the six months ended June 30, 1996 was primarily
attributable to balance sheet remeasurement of foreign currency-denominated
assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash and cash equivalents of $801.6
million, unrestricted short-term investments of $158.1 million, borrowing
capacity of $487.3 million under its revolving credit facility and the
ability under another facility to borrow up to $240 million using existing
aircraft as collateral, providing total available liquidity of $1.69 billion.
Net cash provided by operating activities for the six months ended June 30,
1997 was $425.5 million, a $288.0 million decrease compared with the six
months ended June 30, 1996 due to lower earnings, 1996 stock-based
compensation expense which was a non-cash operating expense and current
period pension plan contributions which exceeded prior period contributions
by $161.4 million. Investing activities in 1997 consisted primarily of costs
to commission aircraft that have not yet entered revenue service, engine
hushkitting, DC9-50 interior refurbishment, aircraft deposits, ground
equipment purchases and the acquisition of Express. Investing activities in
1996 pertained primarily to the acquisition of three DC-9 aircraft, and nine
Boeing 757 aircraft; the purchase off lease of 13 DC-9 aircraft and two 727
aircraft; and the modification of DC-9 aircraft. Financing activities for
the six months ended June 30, 1997 consisted primarily of the issuance of
$150 million of 8.375% notes due 2004 and $100 million of 8.70% notes due
2007 and the payment of debt and capital lease obligations. Financing
activities in 1996 pertain primarily to the sale and leaseback of seven of
the nine 757 aircraft and the payment of debt and capital lease
obligations.
Also, as discussed under "Other Information - KLM AGREEMENT," the Company has
entered into an agreement in principle with KLM Royal Dutch Airlines ("KLM")
to (a) acquire from KLM its NWAC common stock for approximately $1.1 billion
over three years and (b) acquire NWAC Series A and B Preferred Stock held by
KLM. The 1997 tranche is expected to include the repurchase of approximately
6.8 million common shares for approximately $272 million and the repurchase
of all outstanding Series A and B Preferred Stock held by KLM and others.
The Series A and B Preferred Stock has a financial statement carrying value of
approximately $250 million. The 1997 repurchase is expected to be funded
using existing cash resources. The funding of subsequent tranches will be
determined based on conditions at the time.
10
<PAGE>
OTHER INFORMATION
LABOR AGREEMENTS. The Company's labor agreements provided for wage and other
cost reductions which aggregated $897 million over 36 to 39 month periods
(depending on the labor group) (the "Wage Savings Period"). The Wage Savings
Period ended on July 31, 1996 for flight attendants, September 30, 1996 for
mechanics, ground personnel and management and October 30, 1996 for pilots.
The Company's agreements with the employee unions provided that wage scales
at the end of the Wage Savings Period snapback to August 1, 1993 levels and
snap-up pursuant to formulae based in part on wage rates and wage rate
increases at other large U.S. airlines. Consequently, at the end of the Wage
Savings Period, salaries and wages increased by approximately $340 million on
an annualized basis including $50 million for snap-ups. Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note B of the Notes to Consolidated Financial Statements in the Annual Report
contain additional discussion of the labor cost savings agreements, stock
issued to employees and the related accounting treatment.
FOREIGN CURRENCY. The Company's annual yen-denominated revenues exceed its
yen-denominated expenses by approximately 70 billion yen and its
yen-denominated liabilities exceed its yen-denominated assets. In general,
as the Japanese yen strengthens (weakens), the Company's operating income is
favorably (unfavorably) impacted and a nonoperating foreign currency loss
(gain) is recognized due to the remeasurement of net yen-denominated
liabilities. In recent periods, the yen has weakened as the yen to U.S.
dollar exchange rate has changed from 110 yen to $1 at June 30, 1996 to 116
yen to $1 at December 31, 1996 and 115 yen to $1 at June 30, 1997.
USE OF FINANCIAL INSTRUMENTS. In order to mitigate its exposure to foreign
exchange rate fluctuations, from time to time the Company enters into forward
exchange and collar option contracts to hedge its anticipated yen-denominated
net cash flows. At June 30, 1997, the Company had $329.1 million (39.6
billion yen) in forward exchange and collar option contracts outstanding to
hedge approximately 90% of its remaining 1997 anticipated yen-denominated net
cash flows. In the ordinary course of business, the Company manages the
price risk of fuel costs utilizing both regulated exchange traded futures
contracts and fuel swap agreements. Gains or losses on hedge contracts are
deferred until the related fuel inventory is expensed. As of June 30, 1997,
the Company had hedged approximately 58% of its remaining 1997 fuel
requirements.
U.S. TRANSPORTATION TAX. The United States 10% passenger ticket tax
applicable to domestic travel, the 6.25% domestic cargo waybill tax and the
$6 per passenger international departure tax expired on December 31, 1995.
Consequently, the Company ceased collecting these taxes on January 1, 1996.
These taxes were reinstated for tickets sold subsequent to August 27, 1996
for travel through December 31, 1996. These taxes lapsed again on January 1,
1997 and were reinstated for tickets sold from March 7, 1997 to September 30,
1997. The Company estimates that the reinstatement of the transportation
taxes had an $80 million adverse impact on passenger revenues for the quarter
ended June 30, 1997 and anticipates the third quarter of 1997 will be
similarly impacted.
Congress has enacted legislation which revises transportation taxes and
institutes new taxes for tickets for travel on October 1, 1997 to December
31, 2007. The legislation includes a reduction in the passenger ticket tax
to 7.5% over three years (the rate will be 9% beginning in October 1997) with
certain rural airports subject to a 7.5% tax throughout the life of the bill.
The $6 international departure tax will increase to $12 and a new $12
international arrival tax will be imposed (both beginning for tickets sold on
or after August 13, 1997 for travel commencing on or after October 1, 1997).
The departure tax on travel between the U.S. 48 states and Alaska or Hawaii
will remain at $6. A new segment fee applicable to domestic travel which
begins at $1 for the period from October 1, 1997 to September 30, 1998 and
gradually increases to $3 for the calendar year 2002 and thereafter is also
imposed. Rural airports are exempt from this segment fee, but travel between
the U.S. 48 states and Alaska or Hawaii will be subject to this new tax.
Both the international departure and arrival taxes and the segment fee will
be indexed each year to the consumer price index. In addition, a 7.5% tax on
the revenue generated from the sale of frequent flyer miles was included in
the legislation. The impact of the changes is expected to increase
annualized U.S. transportation taxes collected by Northwest from current
levels by approximately $50 million resulting in an undetermined dilution of
future passenger revenue.
EXPRESS AIRLINES. On April 1, 1997, NWA Inc., a wholly owned subsidiary of
the Company, purchased all of the outstanding stock of Express Airlines I,
Inc. and an affiliate. Express Airlines I, Inc. is a regional carrier that
provides passenger traffic to Northwest at Memphis.
11
<PAGE>
AIRBUS MEMORANDUM OF UNDERSTANDING. In June 1997, Northwest entered into a
memorandum of understanding with AVSA, S.A.R.L. for the purchase by Northwest
of 50 firm and up to 100 option Airbus Industrie A319 aircraft, with delivery
scheduled to commence in 1999. The memorandum of understanding is subject to
the satisfaction of certain conditions.
KLM AGREEMENT. In July 1997, the Company and KLM reached agreement in
principle on a long-term commercial and operational alliance. The agreement
in principle is subject to the execution of definitive documentation,
approval of the respective boards of the Company and KLM, the consent of the
Company's other Series B Preferred stockholder, the Company's and KLM's
conclusion that the U.S. Department of Transportation approval is not
necessary or, if such approval is required, the receipt of such approval, and
certain other conditions. The agreement in principle provides for a minimum
term of 10 years for the alliance and includes the acquisition by the Company
of all NWAC common and preferred stock currently held by KLM. The agreement
also presently provides for the acquisition by the Company of 3.29 million
shares of common stock which KLM has the option to acquire from other
stockholders. The financial accounting implications of the arrangement to
acquire common stock will be to reduce common stockholders' equity by
approximately $1.1 billion when the agreement is executed and to reduce the
average outstanding common shares used in the EPS denominator over time as
the common shares are actually acquired by the Company. In connection with
the KLM share repurchases, the Company also expects to repurchase all other
outstanding shares of Series B Preferred Stock.
The Company will repurchase the stock from KLM in four tranches, the first of
which will include 6.8 million NWAC common shares and the preferred shares
held by KLM. The purchase price for the first tranche of common stock is $40
per common share. The purchase price for the second, third and fourth
tranches, which will include 4.9 million, 3.22 million and 10.05 million
common shares, respectively, will accrete an amount presently set at
approximately seven percent per year from $40 per common share, subject to
adjustment for certain change in control or equity issuance transactions.
Concurrently with the purchase of the first tranche, all of KLM's existing
governance rights under various stockholder and other agreements will be
cancelled and the Company and KLM will enter into reciprocal standstill
agreements. As a result of these transactions, KLM's common stock voting
position in the Company will decrease from its current level of approximately
19 percent to 17 percent after the sale of the first tranche and then to 13
percent in 1998, 10 percent in 1999 and zero percent in 2000 with the sale of
the final tranche. The closing of the third and fourth tranches is subject
to the alliance obtaining certain antitrust immunity and if either tranche
does not close, KLM's remaining common shares will be converted to non-voting
Class B Common Stock and Northwest will have the right to terminate the
alliance.
Under the agreement in principle, the two airlines will expand their current
areas of cooperation to include services between Europe and Canada and
Mexico. In addition, the two companies plan to increase the level of
cooperation between their respective cargo divisions and will explore
extending their alliance to include additional partners and to further
develop strategies for joint marketing and product development. The
companies intend to finalize agreements within 60 days and KLM will then
withdraw its pending legal actions.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1.
Reference is made to Item 3, "Legal Proceedings" included in the Annual Report.
KLM ROYAL DUTCH AIRLINES V. A. CHECCHI, ET AL. (Delaware Court of Chancery,
New Castle County, Civil Action No. 14764). In July 1997, KLM and the
Company reached an agreement in principle on a long-term commercial and
operational alliance. In connection with the execution of definitive
documentation, KLM will dismiss this litigation. See Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Other Information -KLM AGREEMENT."
In the ordinary course of its business the Company is party to various legal
actions which the Company believes are incidental to the operation of its
business. The Company believes that the outcome of the proceedings to which
it is currently a party (including those described above and in the Annual
Report) will not have a material adverse effect on the Company's consolidated
financial statements taken as a whole.
ITEM 6. EXHIBITS
(a) EXHIBITS:
Exhibit 11.1 - Computation of Primary Earnings per Common Share.
Exhibit 11.2 - Computation of Fully Diluted Earnings per Common Share.
Exhibit 12.1 - Computation of Ratio of Earnings to Fixed Charges.
Exhibit 12.2 - Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Requirements.
Exhibit 27.1 - Financial Data Schedule.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northwest Airlines Corporation
Dated: August 14, 1997 By: /s/ Mark W. Osterberg
-------------------------
Mark W. Osterberg
Vice President and
Chief Accounting Officer
14
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit No. Description
---------- -------------
11.1 Computation of Primary Earnings Per Common Share.
11.2 Computation of Fully Diluted Earnings per Common Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Requirements.
27.1 Financial Data Schedule.
15
<PAGE>
EXHIBIT 11.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
1997 1996 1997 1996
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Reconciliation of net income applicable to common
stockholders:
Net income before preferred stock requirements $ 136.2 $ 202.8 $ 200.8 $ 256.2
Preferred stock requirements (5.1) (13.2) (10.1) (26.2)
----------- ---------- ----------- ----------
Net income applicable to common stockholders $ 131.1 $ 189.6 $ 190.7 $ 230.0
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Reconciliation of weighted average number of
shares outstanding to amount used in primary
earnings per share computation:
Weighted average number of common
shares outstanding 102,000,308 97,294,534(1) 101,673,339 96,494,730(1)
Stock options reduced by the number of shares
which could have been purchased with
the proceeds from exercise of such options 2,168,822 2,385,153 2,175,892 2,530,315
----------- ---------- ----------- ----------
Weighted average number of common shares
outstanding, as adjusted 104,169,130 99,679,687 103,849,231 99,025,045
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Earnings per common share $ 1.26 $ 1.90 $ 1.84 $ 2.32
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
(1) Includes the weighted average number of common shares earned by employees
since August 1, 1993 due to the February 1994 exercise of the Series C
Preferred Stock special conversion option.
<PAGE>
EXHIBIT 11.2
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Reconciliation of net income applicable to common
stockholders:
Net income before preferred stock requirements $ 136.2 $ 202.8 $ 200.8 $ 256.2
Preferred stock requirements (5.1) (13.2) (10.1) (26.2)
Addback: Series C Preferred Stock requirements 0.3 -- 0.6 --
----------- ----------- ----------- -----------
Net income applicable to common stockholders, as adjusted $ 131.4 $ 189.6 $ 191.3 $ 230.0
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Reconciliation of weighted average number of shares
outstanding to amount used in fully diluted
earnings per share computation:
Weighted average number of common
shares outstanding 102,000,308 97,294,534(1) 101,673,339 96,494,730(1)
Weighted average number of shares of Series C
Preferred Stock assumed to be converted to common
stock which were outstanding in 1997 and earned by
employees since August 1, 1993 in 1996 10,243,218 10,826,077 10,440,710 10,341,327
Stock options reduced by the number of shares
which could have been purchased with
the proceeds from exercise of such options 2,168,822 2,385,153 2,194,206 2,557,540
----------- ---------- ----------- -----------
Weighted average number of common shares
outstanding, as adjusted 114,412,348 110,505,764 114,308,255 109,393,597
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share assuming full dilution $ 1.15 $ 1.72 $ 1.67 $ 2.10
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(1) Includes the weighted average number of common shares earned by employees
since August 1, 1993 due to the February 1994 exercise of the Series C
Preferred Stock special conversion option.
<PAGE>
EXHIBIT 12.1
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -----------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS:
Income before income taxes $ 222.4 $ 331.2 $ 327.0 $ 418.9
Less: Income from less than 50%
owned investees 6.4 6.8 13.8 10.6
Add:
Rent expense representative of interest (1) 50.4 47.7 97.2 93.8
Interest expense net of capitalized interest 57.8 62.0 113.8 127.7
Interest of mandatorily redeemable
preferred security holder 5.9 6.9 12.0 13.9
Amortization of debt discount and expense 1.4 3.6 2.6 6.5
Amortization of interest capitalized 0.7 0.7 1.4 1.5
------- -------- -------- -------
ADJUSTED EARNINGS $ 332.2 $ 445.3 $ 540.2 $ 651.7
------- -------- -------- -------
------- -------- -------- -------
FIXED CHARGES:
Rent expense representative of interest (1) $ 50.4 $ 47.7 $ 97.2 $ 93.8
Interest expense net of capitalized interest 57.8 62.0 113.8 127.7
Interest of mandatorily redeemable
preferred security holder 5.9 6.9 12.0 13.9
Amortization of debt discount and expense 1.4 3.6 2.6 6.5
Capitalized interest 3.0 1.4 5.4 3.6
------- -------- -------- -------
FIXED CHARGES $ 118.5 $ 121.6 $ 231.0 $ 245.5
------- -------- -------- -------
------- -------- -------- -------
RATIO OF EARNINGS TO FIXED CHARGES 2.80 3.66 2.34 2.65
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
(1) Calculated as one-third of rentals, which is considered representative of
the interest factor.
<PAGE>
EXHIBIT 12.2
NORTHWEST AIRLINES CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK REQUIREMENTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -------- -------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
EARNINGS:
Income before income taxes $ 222.4 $ 331.2 $ 327.0 $ 418.9
Less: Income from less than 50%
owned investees 6.4 6.8 13.8 10.6
Add:
Rent expense representative of
interest (1) 50.4 47.7 97.2 93.8
Interest expense net of
capitalized interest 57.8 62.0 113.8 127.7
Interest of mandatorily redeemable
preferred security holder 5.9 6.9 12.0 13.9
Amortization of debt discount
and expense 1.4 3.6 2.6 6.5
Amortization of interest capitalized 0.7 0.7 1.4 1.5
-------- -------- -------- --------
ADJUSTED EARNINGS $ 332.2 $ 445.3 $ 540.2 $ 651.7
-------- -------- -------- --------
-------- -------- -------- --------
FIXED CHARGES AND PREFERRED
STOCK REQUIREMENTS:
Rent expense representative of
interest (1) $ 50.4 $ 47.7 $ 97.2 $ 93.8
Interest expense net of
capitalized interest 57.8 62.0 113.8 127.7
Interest of mandatorily redeemable
preferred security holder 5.9 6.9 12.0 13.9
Preferred stock requirements 8.3 21.6 16.4 42.8
Amortization of debt discount
and expense 1.4 3.6 2.6 6.5
Capitalized interest 3.0 1.4 5.4 3.6
-------- -------- -------- --------
FIXED CHARGES AND PREFERRED
STOCK REQUIREMENTS $ 126.8 $ 143.2 $ 247.4 $ 288.3
-------- -------- -------- --------
-------- -------- -------- --------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK REQUIREMENTS 2.62 3.11 2.18 2.26
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1) Calculated as one-third of rentals, which is considered representative of
the interest factor.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 802
<SECURITIES> 231
<RECEIVABLES> 771
<ALLOWANCES> 23
<INVENTORY> 323
<CURRENT-ASSETS> 2,428
<PP&E> 6,423
<DEPRECIATION> 1,790
<TOTAL-ASSETS> 9,039
<CURRENT-LIABILITIES> 3,156
<BONDS> 0
1
589
<COMMON> 0
<OTHER-SE> 309
<TOTAL-LIABILITY-AND-EQUITY> 9,039
<SALES> 2,558
<TOTAL-REVENUES> 2,558
<CGS> 0
<TOTAL-COSTS> 2,267
<OTHER-EXPENSES> 69
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> 222
<INCOME-TAX> 86
<INCOME-CONTINUING> 136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.15
</TABLE>
