-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QCimu97PlTWD+h3cn5kBdzXUo3NB9499+uRxkVhju320SqoF8wu4Q3Xjazp+sum9 6hA7Krk1Oak5qfVxVxoOcA== 0000003000-99-000004.txt : 19990330 0000003000-99-000004.hdr.sgml : 19990330 ACCESSION NUMBER: 0000003000-99-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRBORNE FREIGHT CORP /DE/ CENTRAL INDEX KEY: 0000003000 STANDARD INDUSTRIAL CLASSIFICATION: AIR COURIER SERVICES [4513] IRS NUMBER: 910837469 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06512 FILM NUMBER: 99576155 BUSINESS ADDRESS: STREET 1: P O BOX 662 CITY: SEATTLE STATE: WA ZIP: 98111 BUSINESS PHONE: 2062854600 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended Commission file number December 31, 1998 1-6512
---------------------------------- AIRBORNE FREIGHT CORPORATION (Exact name of registrant as specified in its charter) Delaware 91-0837469 (State of Incorporation) (I.R.S. Employer Identification No.)
Airborne Freight Corporation 3101 Western Avenue P.O. Box 662 Seattle, WA 98111 (Address of principal executive offices) Registrant's telephone number, including area code: 206-285-4600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, Par Value New York Stock Exchange $1.00 per share Pacific Stock Exchange Rights to Purchase Series A New York Stock Exchange Participating Cumulative Pacific Stock Exchange Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: NONE 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.( ) As of February 22, 1999, 48,534,065 shares (net of 2,497,078 treasury shares) of the registrant's Common Stock were outstanding and the aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing price on that date on the New York Stock Exchange) was approximately $1,966,311,000.(1) Documents Incorporated by Reference Portions of the 1998 Annual Report to Shareholders are incorporated by reference into Part I and Part II. Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders to be held April 27, 1999 are incorporated by reference into Part III. (1) Excludes value of shares of Common Stock held of record by non- employee directors and executive officers at February 22, 1999. Includes shares held by certain depository organizations. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or is under common control with the registrant. AIRBORNE FREIGHT CORPORATION 1998 FORM 10-K ANNUAL REPORT Table of Contents
Page ---- Part I Item 1. Business 1 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 4a. Executive Officers of the Registrant 11 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 12 Item 8. Financial Statements and Supplementary Data 13 Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure 13 Part III Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
1 PART I ITEM 1. BUSINESS - ------------------ a) General Development of Business ------------------------------- Airborne Freight Corporation (herein referred to as "Airborne Express" or the "Company", which reference shall include its subsidiaries and their assets and operations, unless the context clearly indicates otherwise) was incorporated in Delaware on May 10, 1968. The Company is an air express company and air freight forwarder that expedites shipments of all sizes to destinations throughout the United States and most foreign countries. The Company was formed in 1968 through the merger of two established freight forwarders, Airborne Freight Corporation and Pacific Air Freight. The Company holds a certificate of registration issued by the United States Patent and Trademark Office for the service mark AIRBORNE EXPRESS. Most public presentation of the Company carries this name. The purpose of using this trade name is to more clearly communicate to the market place the primary nature of the business of the Company. ABX Air, Inc., the Company's principal wholly-owned subsidiary (herein referred to as "ABX"), was incorporated in Delaware on January 22, 1980. ABX provides domestic express cargo service and cargo service to Canada. The Company is the sole customer of ABX for this service. ABX also offers limited charter service. b) Financial Information about Industry Segments --------------------------------------------- Response to this Item is contained in Note K of the Notes to Consolidated Financial Statements (contained in the 1998 Annual Report to Shareholders and incorporated by reference herein). c) Narrative Description of Business --------------------------------- Airborne Express provides door-to-door express delivery of small packages and documents throughout the United States and to and from most foreign countries. The Company also acts as an international and domestic freight forwarder for shipments of any size. The Company's strategy is to be the low cost provider of express services for high volume corporate customers. Domestic Operations - ------------------- The Company's domestic operations, supported by approximately 290 facilities, primarily involve express door-to-door delivery of shipments weighing less than 100 pounds. Shipments consist primarily of business documents and other printed matter, electronic and computer parts, software, machine parts, health care items, films and videotapes, and other items for which speed and reliability of delivery are important. The Company's primary service is its Overnight Express product. This product, which comprised approximately 59% of the Company's domestic shipments during 1998, generally provides for before noon delivery on the next business day to most metropolitan cities in the United States. The Company also provides Saturday and holiday pickup and delivery service for most cities. 1 The Company also offers two deferred service products, Next Afternoon Service (NAS) and Second Day Service (SDS). NAS is available for shipments weighing five pounds or less and SDS is offered for shipments of all weights. Deferred service shipments, which comprised approximately 41% of domestic shipments during 1998, are lower priced than the Overnight Express product reflecting the less time sensitive nature of the shipments. NAS rates are generally higher than SDS rates. While the Company's domestic airline system is designed primarily to handle express shipments, any available capacity is also utilized to carry shipments which the Company would normally move on other carriers in its role as an air freight forwarder. Communications System - --------------------- FOCUS (Freight On-line Control and Update System) is a proprietary communications system which provides real time information for purposes of tracking and providing the status of customer shipments as well as monitoring the performance of the Company's operational systems. The Company's facilities and international agents are linked to FOCUS and provide information on the status and location of customer shipments 24 hours a day. Some information is provided to FOCUS through the use of hand- held scanners which read bar-codes on the shipping documents. FOCUS allows customers access to shipment information through either direct dial-in capabilities or through the Company's website on the Internet. FOCUS provides the Company's personnel with important information for use in coordinating its operational activities. Information regarding Company-operated aircraft arrivals and departures, weather, and documentation requirements for shipments destined to foreign locations are several examples of the information maintained and provided by FOCUS. Pickup and Delivery - ------------------- The Company accomplishes its door-to-door pickup and delivery service using approximately 14,800 radio-dispatched delivery vans and trucks, of which approximately 5,900 are owned by the Company. Independent contractors under contract with the Company provide the balance of the pickup and delivery services. Because convenience is an important factor in attracting business from less frequent shippers, the Company has an ongoing program to place drop boxes in convenient locations. The Company has approximately 14,000 boxes in service. Sort Facilities - --------------- The Company's main sort center is located in Wilmington, Ohio. As express delivery volume has increased, the main sort center has been expanded. The sort center currently has the capacity to handle approximately 1.2 million pieces during the primary 3-1/4 hour nightly sort operation. On average, approximately 1.0 million pieces were sorted each weekday night at the sort center during the fourth quarter of 1998. In addition to the main sort facility at Wilmington, nine regional hub facilities have been established primarily to sort shipments originating and having a destination within approximately a 300 mile radius of a regional hub. The Company also conducts a day sort operation at Wilmington which services SDS shipments. The day sort generally receives SDS shipments through a combination of flights and trucks originating from either regional hub or station facilities. 2 The operation of the Wilmington facility is critical to the Company's business. The inability to use the Wilmington airport, because of bad weather or other factors, would have a serious adverse effect on the Company's service. The Company has invested in sophisticated instrument landing and radar systems and other equipment which is intended to limit the effect bad weather may have on the Wilmington airport. In the fourth quarter of 1998, approximately 50% and 24% of total shipment weight was handled through the night sort and day sort operations at Wilmington, respectively, with the remaining 26% being handled exclusively by the regional hubs. Shipment Routing - ---------------- The logistics of moving a shipment from its origin to destination is determined by several factors. Shipments are routed differently depending on shipment product type, weight, geographic distances between origin and destination, and locations of Company stations relative to the locations of sort facilities. Shipments generally are moved between stations and sort facilities on either Company aircraft or contracted trucks. A limited number of shipments are transported airport-to-airport on commercial air carriers. Overnight Express shipments and NAS shipments are picked up by local stations and generally consolidated with other stations' shipments at Company airport facilities. Shipments that are not serviced through regional hubs are loaded on Company aircraft departing each weekday evening from various points within the United States and Canada. These aircraft may stop at other airports to permit additional locations and feeder aircraft to consolidate their cargo onto the larger aircraft before completing the flight to the Wilmington hub. The aircraft are scheduled to arrive at Wilmington between approximately 11:30 p.m. and 3:00 a.m. at which time the shipments are sorted and reloaded. The aircraft are scheduled to depart before 6:00 a.m. and return to their applicable destinations in time to complete scheduled next business morning or deferred service commitments. The Wilmington hub also receives shipments via truck from selected stations in the vicinity of the Wilmington hub for integration with the nightly sort process. The day sort operation for SDS shipments is supported by 15 aircraft that return to Wilmington from overnight service destinations on Tuesday through Thursday. These aircraft, and trucks from five regional hubs, arrive at Wilmington between 10:00 a.m. and 1:30 pm, at which time shipments are sorted and reloaded on the aircraft or trucks by 3:30 p.m. for departure and return to their respective destinations. The Company also performs weekend sort operations at Wilmington to accommodate Saturday pickups and Monday deliveries of both Overnight Express and deferred service shipments. This sort is supported by 18 Company aircraft and by trucks. Aircraft - -------- The Company currently utilizes pre-owned McDonnell Douglas DC-8 and DC-9 aircraft and Boeing 767 aircraft. Upon acquisition, the aircraft are modified by the Company. At the end of 1998, the Company's in-service fleet consisted of a total of 110 aircraft, including 36 McDonnell Douglas DC-8s (consisting of 13 series 61, 6 series 62 and 17 series 63), 71 DC-9s (consisting of 2 series 10, 43 series 30 and 26 series 40), and 3 Boeing 767-200s. The Company owns the majority of the aircraft it operates, but leases three DC-8 and seven DC-9 aircraft. The Company also owns three 767 and one DC-9 aircraft which are currently undergoing modifications and will be placed in service in 1999. In addition, approximately 71 smaller aircraft are chartered nightly to connect small cities with Company aircraft that then operate to and from Wilmington. 3 In 1998, the Company introduced the Boeing 767-200 aircraft to its operating fleet. During the year, 3 used 767-200's were placed in service. The Company has commitments to acquire a total of 23 767-200 aircraft by 2003. This newer generation of aircraft should increase operating efficiency and allow the Company to meet anticipated demand for additional lift capacity. There are no plans to retire any aircraft as a result of these acquisitions, although retirement is an option if shipment growth does not require the added capacity. During 1998, the nightly lift capacity of the system was increased by approximately 117,000 pounds, reaching 3.9 million pounds at December 31, 1998. During 1998, the Company's average utilization of available lift capacity approximated 75%. In response to increased public awareness regarding the operation of older aircraft, the Federal Aviation Administration ("FAA") periodically mandates additional maintenance requirements for certain aircraft, including the type operated by the Company. In recent years, the Company has completed, and continues to perform, a number of inspection and maintenance programs pertaining to various Airworthiness Directives issued by the FAA. The FAA could, in the future, impose additional maintenance requirements for aircraft and engines of the type operated by the Company or interpret existing rules in a manner which could have a material effect on the Company's operations and financial position. In accordance with federal law and FAA regulations, only subsonic turbojet aircraft classified as Stage 2 or 3 by the FAA may be operated in the United States. Generally, Stage 3 aircraft produce less noise than comparable Stage 2 aircraft. In 1990, Congress passed the Airport Noise and Capacity Act of 1990 (the "Noise Act"). Among other things, the Noise Act generally requires turbojet aircraft weighing in excess of 75,000 pounds and operating in the United States (the type of 767, DC-8 and DC-9 aircraft operated by the Company) to comply with Stage 3 noise emission standards on or before December 31, 1999 although the FAA may waive the final compliance deadline for up to 15% of carriers fleet under certain circumstances. In accordance with the Noise Act, the FAA has issued regulations establishing interim compliance deadlines. These rules require air carriers to reduce the base level of Stage 2 aircraft they operate 75% by December 31, 1998. As of December 31, 1998, the Company has complied with interim compliance deadlines. As of December 31, 1998, 83% of the Company's turbojet aircraft in service were Stage 3, the balance being Stage 2. In addition to FAA regulation, certain local airports also regulate noise compliance. See "Business - Regulation". The 767 aircraft meet Stage 3 requirements and do not require any noise-related modifications under the Noise Act. By the end of 1999, the Company expects to convert to Stage 3 its remaining 11 DC-9 aircraft and at least three of eight remaining Stage 2 DC-8-61 series aircraft. Total capital costs expected to be expended in 1999 for these conversions is approximately $27 million. Stage 3 compliance requirements have been met on all DC-8-62 and DC-8-63 series aircraft. The Company has requested the FAA to temporarily waive the application of the Noise Act with respect to five DC-8-61 series aircraft. The Company cannot predict whether its waiver application will be granted. If it is not granted, the Company would evaluate other lift and replacement opportunities in conjunction with its scheduled fleet expansion program. International Operations - ------------------------ The Company provides international express door-to-door delivery and a variety of freight services. These services are provided in most foreign countries on an inbound and outbound basis through a network of Airborne offices and independent agents. Most international deliveries are accomplished within 24 to 96 hours of pickup. 4 The Company's domestic stations are staffed and equipped to handle international shipments to or from almost anywhere in the world. In addition to its extensive domestic network, the Company operates its own offices in the Far East, Australia, New Zealand, Netherlands, and the United Kingdom. The Company's freight and express agents worldwide are connected to FOCUS, Airborne's on-line communication network, through which the Company can provide its customers with immediate access to the status of shipments almost anywhere in the world. The Company's international air express service is intended for the movement of non dutiable and certain dutiable shipments weighing less than 99 pounds. The Company's international air freight service handles heavier weight shipments on either an airport-to-airport, door-to-airport or door- to-door basis. The Company also offers ocean service capabilities for customers who want a lower cost shipping option. The Company's strategy is to use a variable-cost approach in delivering and expanding international services to its customers. This strategy uses existing commercial airline lift capacity in connection with the Company's domestic network to move shipments to and from overseas destinations and origins. Additionally, service arrangements with independent freight and express agents have been entered into to accommodate shipments in locations not currently served by Company-owned operations. The Company currently believes there are no significant service advantages which would justify the operation of its own aircraft on international routes, or making significant investment in additional offshore facilities or ground operations. In order to expand its business at a reasonable cost, the Company continues to explore possible joint venture agreements which combine the Company's management expertise, domestic express system and information systems with local business knowledge and market reputation of suitable partners. Joint venture operations currently exist in Japan, Thailand, Malaysia, and South Africa. Customers and Marketing - ----------------------- The Company's primary domestic strategy focuses on express services for high volume corporate customers. Most high volume customers have entered into service agreements providing for specified rates or rate schedules for express deliveries. As of December 31, 1998, the Company serviced approximately 572,000 active customer shipping locations. The Company determines prices for any particular domestic express customer based on competitive factors, anticipated costs, shipment volume and weight, and other considerations. The Company believes that it generally offers prices that are competitive with, or lower than, prices quoted by its principal competitors for comparable services. Internationally, the Company's marketing strategy is to target the outbound express and freight shipments of U.S. corporate customers, and to sell the inbound service of the Company's distribution capabilities in the United States. Both in the international and domestic markets, the Company believes that its customers are most effectively reached by a direct sales force and does not currently engage in mass media advertising. Domestic sales representatives are responsible for selling both domestic and international express shipments. In addition, the International Division has its own dedicated direct sales organization for selling international freight service. The Company's sales force currently consists of approximately 395 domestic representatives and approximately 90 international specialists. The Company's sales efforts are supported by the Marketing and International Divisions, based at the Company headquarters. Senior management is also active in marketing the Company's services to major accounts. 5 Value-added services continue to be important factors in attracting and retaining customers. Accordingly, the Company is automating more of its operations to make the service easier for customers to use and to provide them with valuable management information. The Company believes that it is generally competitive with other express carriers in terms of reliability, value-added services and convenience. For many of its high volume customers, the Company offers a metering device, called LIBRA (SM), which is installed at the customer's place of business. With minimum data entry, the metering device weighs the package, calculates the shipping charges, generates the shipping labels, provides custom shipping reports, and enables the customer to track the exact status of shipments in Airborne's FOCUS shipping and tracking system. At year end 1998, the system was in use at approximately 10,200 domestic customer locations and 500 international customer locations. Use of LIBRA not only benefits the customer, but also lowers the Company's operating costs, since LIBRA shipment data is transferred into the Airborne FOCUS system automatically, thus avoiding duplicate data entry. "Customer Linkage", an electronic data interchange ("EDI") program developed for Airborne's highest volume shippers, allows customers, with their computers, to create shipping documentation at the same time they are entering orders for their goods. At the end of each day, shipping activities are transmitted electronically to the Airborne FOCUS system where information is captured for shipment tracking and billing purposes. Customer Linkage benefits the customer by eliminating repetitive data entry and paperwork and also lowers the Company's operating costs by eliminating manual data entry. EDI also includes electronic invoicing and payment remittance processing. The Company also has available a software program known as QUICKLINK, which significantly reduces programming time required by customers to take advantage of linkage benefits. The Company offers customers PC-based software designed to improve their productivity and provide convenient access to the Company's various services. LIGHTSHIP(R) Shipping and Tracking Software for Windows(R) allows customers, working from their PCs, to obtain estimated shipping rates and delivery times, prepare and print shipping labels, schedule pickups, and track the status of their shipments. The Company's WORLD DIRECTORY software provides a comprehensive catalog of worldwide shipping information including customs requirements and delivery times among other useful features. The Company maintains an Internet website, www.airborne.com, which provides customers a global connection to Airborne's services. The website allows customers to track the status of their shipments, locate drop boxes, obtain information regarding the Company's service offerings and documentation requirements, in addition to providing other useful information about the Company. Future website developments will allow customers to schedule pickups and create shipping labels online. The Company offers a number of special logistics programs to customers through Airborne Logistics Services ("ALS"), a division of ABX. ALS operates the Company's Stock Exchange and Hub Warehousing and other logistics programs. These programs provide customers the ability to maintain centralized inventories which can be managed either by Company or customer personnel. Items inventoried at Wilmington can be delivered utilizing either the Company's airline system or, if required, commercial airlines on a next-flight-out basis. ALS' Central Print program allows information to be sent electronically to customer computers located at Wilmington where Company personnel monitor printed output and ship the material according to customer instructions. ALS also provides international inventory and distribution logistic services through a logistics partner with bases in the Netherlands, Belgium, Germany, and England. 6 In addition, the Company's Sky Courier operation provides expedited next-flight-out service at premium prices. Sky Courier also offers a Field Stock Exchange program where customer inventories are managed at over 100 locations around the United States and Canada. Competition - ----------- The market for the Company's services has been and is expected to remain highly competitive. The principal competitive factors in both domestic and international markets are price, the ability to provide reliable pickup and delivery, and value-added services. Federal Express continues to be the dominant competitor in the domestic air express business, followed by United Parcel Service. Airborne Express ranks third in shipment volume behind these two companies in the domestic express business. Other domestic air express competitors include the U.S. Postal Service's Express and Priority Mail Services and several other transportation companies offering next morning or next-plane-out delivery service. The Company also competes to some extent with companies offering ground transportation services and with facsimile and other forms of electronic transmission. The Company believes it is important to maintain an active capital expansion program to increase capacity, improve service and increase productivity as its volume of shipments increases. However, the Company has significantly less capital resources than its two primary competitors. In the international markets, in addition to Federal Express and United Parcel Service, the Company competes with DHL, TNT, and air freight forwarders and carriers, and most commercial airlines. Employees - --------- As of December 31, 1998, the Company and its subsidiaries had approximately 14,300 full-time employees and 8,700 part-time and casual employees. Approximately 6,800 full-time employees (including the Company's 800 pilots) and 3,800 part-time and casual employees are employed under union contracts, primarily with locals of the International Brotherhood of Teamsters and Warehousemen. Labor Agreements - ---------------- Labor agreements covering approximately 52% of the Company's union ground personnel were renegotiated in 1998 for a term expiring in 2003. Agreements covering most of the Company's remaining ground personnel either expire in 1999 or are currently being renegotiated. The Company's pilots are covered by a contract which becomes amendable on July 31, 2001. Although the Company has not experienced any significant disruption from labor disputes in the past, there can be no assurance that the labor agreements currently being negotiated will be renewed without disruption or on favorable terms. Subsidiaries - ------------ The Company has the following wholly-owned subsidiaries: 1. ABX Air, Inc., a Delaware corporation, is a certificated air carrier which owns and operates the Company's domestic express cargo service. Its wholly-owned subsidiaries with operating activities are as follows: 7 a) Wilmington Air Park, Inc., an Ohio corporation, is the owner of the Wilmington airport property (Airborne Air Park). b) Airborne FTZ, Inc., an Ohio corporation, is the holder of a foreign trade zone certificate at the Wilmington airport property and owns and manages the Company's expendable aircraft parts inventory. c) Aviation Fuel, Inc., an Ohio corporation, purchases and sells aviation and other fuels. 2. Airborne Forwarding Corporation, a Delaware corporation doing business as Sky Courier, provides expedited courier service. 3. Airborne Freight Limited, a New Zealand corporation, provides air express and air freight services. Regulation - ---------- The Company's operations are regulated by the United States Department of Transportation ("DOT"), the FAA, and various other federal, state, local and foreign authorities. The DOT, under federal transportation statutes, grants air carriers the right to engage in domestic and international air transportation. The DOT issues certificates to engage in air transportation and has the authority to modify, suspend or revoke such certificates for cause, including failure to comply with federal law or the DOT regulations. The Company believes it possesses all necessary DOT-issued certificates to conduct its operations. The FAA regulates aircraft safety and flight operations generally, including equipment, ground facilities, maintenance, flight dispatch, security procedures, training, communications, and other matters affecting air safety. The FAA issues operating certificates and operations specifications to carriers who possess the technical competence to conduct air carrier operations. In addition, the FAA issues certificates of airworthiness to each aircraft which meets the requirements for aircraft design and maintenance. The Company believes it holds all airworthiness and other FAA certificates required for the conduct of its business and operation of its aircraft, although the FAA has the power to suspend or revoke such certificates for cause, including failure to comply with federal law. The FAA has authority to issue maintenance directives and other mandatory orders relating to, among other things, inspection of aircraft and replacement of parts that have failed or may fail in the future. For example, the FAA has commenced an inspection of DC-8 aircraft of the type operated by the Company to determine if certain of the aircraft structures which were originally designed for passenger carriage are adequate for the carriage of cargo. The DC-9 may in the future also be subject to FAA inspection. If the FAA were to determine the aircraft structures are not adequate it could order operators to either reduce cargo loads or otherwise strengthen any structure shown to be inadequate. In addition to the issuance of mandatory directives, the FAA from time to time may amend its regulations thereby increasing regulatory burdens on air carriers. For example, the FAA can order the installation or enhancement of safety related aircraft equipment. Depending on the scope of the FAA's orders or amended regulations, these requirements may cause the Company to incur substantial, unanticipated expenses. 8 The federal government generally regulates aircraft engine noise at its source. However, local airport operators may, under certain circumstances, regulate airport operations based on aircraft noise considerations. The Noise Act provides that in the case of Stage 2 aircraft restrictions, the airport operator must notify air carriers of its intention to propose rules and satisfy the requirements of federal statutes before implementation of the rules. In the case of Stage 3 aircraft, the airport operator must obtain the carriers' or the government's approval of the rule prior to its adoption. The Company believes the operation of its aircraft either complies with or is exempt from compliance with currently applicable local airport rules. However, if more stringent aircraft operating regulations were adopted on a widespread basis, the Company might be required to expend substantial sums, make schedule changes or take other actions. The Company's aircraft currently meet all known requirements for emission levels. However, under the Clean Air Act, individual states or the Federal Environmental Protection Agency (the "EPA") may adopt regulations requiring reduction in emissions for one or more localities based on the measured air quality at such localities. The EPA has in the past proposed but not adopted regulations for portions of California calling for emission reductions through restricting the use of emission producing ground service equipment or aircraft auxiliary power units. There can be no assurance that if such regulations are adopted in the future or changes in existing laws or regulations are promulgated, such laws or rules would not have a material adverse effect on the Company. Under currently applicable federal aviation law, the Company's airline subsidiary could cease to be eligible to operate as an all-cargo carrier if more than 25% of the voting stock of the Company were owned or controlled by non-U.S. citizens or the airline were not effectively controlled by U.S. citizens. Moreover, in order to hold an all-cargo air carrier certificate, the president and at least two-thirds of the directors and officers of an air carrier must be U.S. citizens. To the best of the Company's knowledge, foreign stockholders do not control more than 25% of the outstanding voting stock. Two of the Company's 48 officers are not U.S. citizens. The Company believes that its current operations are substantially in compliance with the numerous regulations to which its business is subject; however, various regulatory authorities have jurisdiction over significant aspects of the Company's business, and it is possible that new laws or regulations or changes in existing laws or regulations or the interpretations thereof could have a material adverse effect on the Company's operations. Financial Information Regarding International and Domestic Operations - --------------------------------------------------------------------- Financial information relating to foreign and domestic operations for each of the three years in the period ended December 31, 1998 is presented in Note K (Segment Information) of the Notes to Consolidated Financial Statements appearing in the 1998 Annual Report to Shareholders and is incorporated herein by reference. ITEM 2. PROPERTIES - -------------------- The Company leases general and administrative office facilities located in Seattle, Washington. At year end the Company maintained approximately 290 domestic and 45 foreign stations, most of which are leased. The majority of the facilities are located at or near airports. 9 The Company owns the airport at the Airborne Air Park, in Wilmington, Ohio. The airport currently consists of two runways, taxi-ways, aprons, buildings serving as aircraft and equipment maintenance facilities, sort facilities, storage facilities, a training center, and operations and administrative offices. The Company believes its existing facilities are adequate to meet current needs. Information regarding collateralization of certain property and lease commitments of the Company is set forth in Notes F and G of the Notes to Consolidated Financial Statements appearing in the 1998 Annual Report to Shareholders and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS - --------------------------- None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------- None 10 ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------
Positions and Offices Presently Name Age Held and Business Experience - ---- --- ---------------------------- Robert S. Cline 61 Chairman and Chief Executive Officer (1984 to date); Vice Chairman and Chief Financial Officer (1978 to 1984); Executive Vice President and Chief Financial Officer (1973 to 1978); Senior Vice President, Finance (1970 to 1973); Vice President, Finance (1968 to 1970); Vice President, Finance, Pacific Air Freight, Inc. (1966 to 1968) Robert G. Brazier 61 President and Chief Operating Officer (1978 to date); Executive Vice President and Chief Operating Officer (1973 to 1978); Senior Vice President, Operations (1970 to 1973); Vice President, Operations (1968 to 1970); Vice President, Sales and Operations, Pacific Air Freight, Inc. (1964 to 1968) Roy C. Liljebeck 61 Chief Financial Officer (1984 to date); Executive Vice President, Finance Division (1979 to date); Senior Vice President (1973 to 1979); Treasurer (1968 to 1988) Kent W. Freudenberger 58 Executive Vice President, Marketing Division (1980 to date); Senior Vice President (1978 to 1980); Vice President (1973 to 1978) Raymond T. Van Bruwaene 60 Executive Vice President, Field Services Division (1980 to date); Senior Vice President (1978 to 1980); Vice President (1973 to 1978) John J. Cella 58 Executive Vice President, International Division (1985 to date); Senior Vice President, International Division (1982 to 1985); Vice President, International Divi sion (1981 to 1982); Vice President, Far East (1971 to 1981) Carl D. Donaway 47 President and Chief Executive Officer, ABX Air, Inc. (1992 to date); offices held in the Company: Vice President, Business Analysis (1992); Vice President, Customer Support (1990 to 1992)
11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED - --------------------------------------------------------------- STOCKHOLDERS MATTERS - -------------------- The response to this Item is contained in the 1998 Annual Report to Shareholders and the information contained therein is incorporated herein by reference. On February 22, 1999 there were 1,306 shareholders of record of the Common Stock of the Company based on information provided by the Company's transfer agent. ITEM 6. SELECTED FINANCIAL DATA - --------------------------------- The response to this Item is contained in the 1998 Annual Report to Shareholders and the information contained therein is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- The response to this Item is contained in the 1998 Annual Report to Shareholders and the information contained therein is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- The Company is exposed to market risks in the ordinary course of its business. These risks include interest rate risk, fuel price risk and foreign exchange risk. The following is a description of these risks and a discussion of the Company's exposure to changes in market rates and prices and related effects on fair values, earnings and cashflows. Interest Rate Risk - ------------------ Indebtedness of the Company under its various borrowing arrangements creates interest rate risk. The Company has outstanding long-term debt of $249 million as of December 31, 1998. The Company does not have significant exposure to changes in interest rates as the majority of its long-term debt ($207 million) carries interest rates which are fixed. Remaining long-term debt ($42 million) carries variable interest rates which reprice frequently. Management does not consider this repricing risk to be significant. The Company does not currently use derivative financial instruments to manage its interest rate risk. The Company's sensitivity to interest rate risk can be quantified by estimating the decrease in fair value of its long-term debt through a hypothetical 10% increase in interest rates. As of December 31, 1998, a 10% increase in interest rates would have decreased fair value of the Company's long-term debt by approximately $6 million. The underlying fair value before performing the hypothetical calculation was estimated principally from quoted market prices for the same securities. Foreign Currency Risk - --------------------- The Company's earnings are exposed to changes in the value of the U.S. dollar relative to other foreign currencies due to the fact that the Company's services are provided in a number of foreign markets. Currency exposure may arise through the collection of revenues and payment of expenses in these foreign markets. The Company currently does not use derivative financial instruments to manage foreign currency risks. 12 Foreign currency rate sensitivity can be quantified by estimating the decrease in earnings as a result of a hypothetical, uniform, 10% strengthening in the value of the U.S. dollar relative to the currencies in which the revenues and expenses are denominated. This calculation, while ignoring the potential effect on revenue and expense levels resulting from a significant change in foreign currency exchange rates, would result in an approximately $5 million dollar increase in pretax earnings from operations for the year ended December 31, 1998. Jet Fuel Price Risk - ------------------- The Company is inherently dependent on jet fuel to operate its fleet of aircraft and accordingly earnings are impacted by changes in jet fuel prices. For the year ended December 31, 1998 the Company consumed 182.5 million gallons of jet fuel at an average price of $.57 per gallon. Notes A, B and G of the Notes to Consolidated Financial Statements (contained in the 1998 Annual Report to Shareholders and incorporated by reference herein) describe the accounting policy, fair value and additional information regarding the Company's use of financial instruments to manage jet fuel price risk. Jet fuel price sensitivity can be quantified by estimating the decrease in earnings as a result of a uniform increase in average jet fuel prices applied against consumption. If jet fuel prices were to increase 10%, earnings would have decreased approximately $5 million, net of hedging settlements. The Company does not use derivative financial instruments for trading purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------- The response to this Item is contained in the 1998 Annual Report to Shareholders and the information contained therein is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- None 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The response to this Item is contained in part in the Proxy Statement for the 1999 Annual Meeting of Shareholders under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" and the information contained therein is incorporated herein by reference. The executive officers of the Company are elected annually at the Board of Directors meeting held in conjunction with the annual meeting of shareholders. There are no family relationships between any directors or executive officers of the Company. Additional information regarding executive officers is set forth in Part I, Item 4a. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The response to this Item is contained in the Proxy Statement for the 1999 Annual Meeting of Shareholders under the caption "Executive Compensation" and the information contained therein is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The response to this Item is contained in the Proxy Statement for the 1999 Annual Meeting of Shareholders under the captions "Voting at the Meeting" and "Stock Ownership of Management" and the information contained therein is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- None 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- (a)1. Financial Statements -------------------- The following consolidated financial statements of Airborne Freight Corporation and its subsidiaries as contained in its 1998 Annual Report to Shareholders are incorporated by reference in Part II, Item 8: Consolidated Statements of Net Earnings Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Shareholders' Equity Notes to Consolidated Financial Statements Independent Auditors' Report All schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto. (a)3. Exhibits --------------- The following exhibits are filed with this report: EXHIBIT NO. 3 Articles of Incorporation and Bylaws - --------------------------------------------------- 3(a) The Restated Certificate of Incorporation of the Company, dated as of April 28, 1998 (incorporated by reference from Exhibit 3 to the Company's Form 10-Q for the quarter ended March 31, 1998). 3(b) The Bylaws of the Company as amended to February 4, 1997 (incorporated by reference from Exhibit 3(b) to the Company's Form 10-K for the year ended December 31, 1996). EXHIBIT NO. 4 Instruments Defining the Rights of Security Holders - ------------------------------------------------------------------ Including Indentures - -------------------- 4(a) Indenture dated as of December 3, 1992, between the Company and The Bank of New York, as trustee, relating to the Company's 8-7/8% Notes due 2002 (incorporated by reference from Exhibit 4(a) to Amendment No. 1 to the Company's Registration Statement on Form S-3, No. 33-54560 filed with the Securities and Exchange Commission on December 4, 1992). 4(b) First Supplemental Indenture dated as of September 15, 1995, between the Company and The Bank of New York, as trustee, relating to the Company's 7.35% Notes due 2005 (incorporated by reference from Exhibit 4(b) to Amendment No. 1 to the Company's Registration Statement on Form S-3, No. 33- 61329, filed with the Securities and Exchange Commission on September 5, 1995). 15 4(c) Second Supplemental Indenture dated as of February 12, 1997 between the Company and The Bank of New York, as trustee, relating to the Company's 8-7/8% Notes due 2002 (incorporated by reference from Exhibit 4(e) to the Company's Form 10-K for the year ended December 31, 1996). 4(d) Rights Agreement, dated as of February 14, 1997 between the Company and The Bank of New York, as Rights Agent (incorporated by reference from Exhibit 1 to the Company's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on February 12, 1997). 4(e) Certificate of the Voting Powers, Designations, Preferences and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations or Restrictions of Series A Participating Cumulative Preferred Stock of Airborne Freight Corporation (incorporated by reference from Exhibits 1 and 2 to the Company's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on February 12, 1997.) 4(f) Certificate of Adjustment relating to the Rights Agreement (see 4(d) above, incorporated by reference to Exhibit 4 to Amendment 1 to the Company's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on June 1, 1998). 4(g) Form of Right Certificate relating to the Rights Agreement (see 4(d) above, incorporated by reference from Exhibits 2 and 3 to the Company's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on February 12, 1997.) EXHIBIT NO. 10 Material Contracts - --------------------------------- Executive Compensation Plans and Agreements - ------------------------------------------- 10(a) 1983 Airborne Freight Corporation Key Employee Stock Option and Stock Appreciation Rights Plan, as amended through February 2, 1987 (incorporated by reference from Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1986). 10(b) 1989 Airborne Freight Corporation Key Employee Stock Option and Stock Appreciation Rights Plan (incorporated by reference from Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1989). 10(c) 1994 Airborne Freight Corporation Key Employee Stock Option and Stock Appreciation Rights Plan (incorporated by reference from the Addendum to the Company's Proxy Statement for the 1994 Annual Meeting of Shareholders). 10(d) Airborne Freight Corporation 1998 Key Employee Stock Option Plan (incorporated by reference from the Addendum to the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders). 10(e) Airborne Freight Corporation Directors Stock Option Plan (incorporated by reference from the Addendum to the Company's Proxy Statement for the 1991 Annual Meeting of Shareholders). 10(f) Airborne Freight Corporation Director Stock Bonus Plan dated April 23, 1996 (incorporated by reference from Exhibit 10(a) to the Company's Form 10-Q for the quarter ended June 30, 1996). 16 10(g) First Amendment to Airborne Freight Corporation Director Stock Bonus Plan dated as of February 3, 1998. 10(h) Second Amendment to Airborne Freight Corporation Director Stock Bonus Plan dated as of February 3, 1998. 10(i) Airborne Express Executive Deferral Plan dated January 1, 1992 (incorporated by reference from Exhibit 10(b) to the Company's Form 10-K for the year ended December 31, 1991). 10(j) Airborne Express Supplemental Executive Retirement Plan dated January 1, 1992 (incorporated by reference from Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1991). 10(k) Airborne Express 1995-1999 Executive Incentive Compensation Plan, amended as of January 1, 1997 (incorporated by reference from Exhibit 10(h) to the Company's Form 10-K for the year ended December 31, 1996). 10(l) Airborne Express 1997-1999 Executive Group Incentive Compensation Plan as of January 1, 1997 (incorporated by reference from Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1996). 10(m) Employment Agreement dated December 15, 1983, as amended November 20, 1986, between the Company and Mr. Robert G. Brazier, President and Chief Operating Officer (incorporated by reference from Exhibit 10(a) to the Company's Form 10-K for the year ended December 31, 1986). Substantially identical agreements exist between the Company and the other six executive officers. 10(n) Employment Agreement dated November 20, 1986 between the Company and Mr. Lanny H. Michael, then Vice President, Treasurer and Controller (incorporated by reference from Exhibit 10(b) to the Company's Form 10-K for the year ended December 31, 1986). The Company and its principal subsidiary, ABX Air, Inc., have entered into substantially identical agreements with most of their officers. Other Material Contracts ------------------------ 10(o) $240,000,000 Revolving Loan Facility dated as of November 19, 1993 among the Company, as borrower, and Wachovia Bank of Georgia, N.A., as agent, and Wachovia Bank of Georgia, N.A., ABN AMRO Bank N.V., United States National Bank of Oregon, Seattle-First National Bank, CIBC, Inc., Continental Bank N.A., Bank of America National Trust and Savings Association, The Bank of New York and NBD Bank, N.A., as banks (incorporated by reference from Exhibit 10(k) to the Company's Form 10-K for the year ended December 31, 1993). 10(p) First Amendment to Revolving Loan Facility dated as of March 31, 1995 among the Company, as borrower, and Wachovia Bank of Georgia, N.A., as Agent, and Wachovia Bank of Georgia, N.A., ABN AMRO Bank N.V., United States National Bank of Oregon, Seattle-First National Bank, CIBC, Inc., National City Bank, Columbus, Bank of America National Trust and Savings Association, The Bank of New York, and NBD Bank, N.A., as banks (incorporated by reference from Exhibit 10(a) to the Company's Form 10-Q for the quarter ended March 31, 1995). 17 10(q) Second Amendment to Credit Agreement dated May 1, 1996 among the Company, as borrower, and Wachovia Bank of Georgia, N.A., as Agent, and Wachovia Bank of Georgia, N.A., ABN AMRO Bank N.V., United States National Bank of Oregon, Bank of America NW, N.A., CIBC, Inc., National City Bank, Columbus, as assignee of Continental Bank N.A., Bank of America National Trust and Savings Association, The Bank of New York and NBD Bank, N.A., as banks (incorporated by reference from Exhibit 10(b) to the Company's Form 10-Q for the quarter ended June 30, 1996). 10(r) Used Aircraft Sales Agreement entered into as of December 22, 1995 between ABX Air, Inc. and KC-One, Inc; KC- Two, Inc.; and KC-Three, Inc. (incorporated by reference from Exhibit 10(n) to the Company's Form 10-K for the year ended December 31, 1996). Confidential treatment has been granted for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. EXHIBIT NO. 12 Statements Re Computation of Ratios - -------------------------------------------------- 12 Statement re computation of ratio of total long-term debt to total capitalization EXHIBIT NO. 13 Annual Report to Security Holders - ------------------------------------------------ 13 Portions of the 1998 Annual Report to Shareholders of Airborne Freight Corporation EXHIBIT NO. 21 Subsidiaries of the Registrant - --------------------------------------------- 21 The subsidiaries of the Company are listed in Part I of this report on Form 10-K for the year ended December 31, 1998. EXHIBIT NO. 23 Consents of Experts and Counsel - ---------------------------------------------- 23 Independent Auditors' Consent EXHIBIT NO. 27 Financial Data Schedule - -------------------------------------- 27 Financial Data Schedule All other exhibits are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K ------------------- None 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AIRBORNE FREIGHT CORPORATION By /s/ Robert S. Cline -------------------------- Robert S. Cline Chief Executive Officer By /s/ Robert G. Brazier -------------------------- Robert G. Brazier Chief Operating Officer By /s/ Roy C. Liljebeck -------------------------- Roy C. Liljebeck Chief Financial Officer By /s/ Lanny H. Michael -------------------------- Lanny H. Michael Treasurer and Controller Date: March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ Robert G. Brazier /s/ Richard M. Rosenberg - ----------------------------- ----------------------------- Robert G. Brazier (Director) Richard M. Rosenberg (Director) /s/ Robert S. Cline /s/ William Swindells - ----------------------------- ----------------------------- Robert S. Cline (Director) William Swindells (Director) /s/ Mary A. Wilderotter - ----------------------------- Mary A. Wilderotter (Director) 19 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- EXHIBIT NO. 10 Material Contracts - ----------------------------------
10(g) First Amendment to Airborne Freight Corporation Director Stock Bonus Plan dated as of February 3, 1998. 10(h) Second Amendment to Airborne Freight Corporation Director Stock Bonus Plan dated as of February 3, 1998.
EXHIBIT NO. 12 Statements Re Computation of Ratios - --------------------------------------------------- 12 Statement re computation of ratio of total long-term debt to total capitalization
EXHIBIT NO. 13 Annual Report to Security Holders - ------------------------------------------------- 13 Portions of the 1998 Annual Report to Shareholders of Airborne Freight Corporation
EXHIBIT NO. 23 Consents of Experts and Counsel - ----------------------------------------------- 23 Independent Auditors' Consent
EXHIBIT NO. 27 Financial Data Schedule - --------------------------------------- 27 Financial Data Schedule
EX-10 2 EXHIBIT 10G EXHIBIT 10(G) FIRST AMENDMENT TO AIRBORNE FREIGHT CORPORATION DIRECTOR STOCK BONUS PLAN Airborne Freight Corporation, a Delaware corporation, hereby amends the terms of the Airborne Freight Corporation Director Stock Bonus Plan (the "Plan") as follows: Share Awards. Section 4 of the Plan is hereby amended by deleting "$3,000" after "(a)" in line 7 and substituting therefor "$6,000". Except as otherwise set forth herein, all terms of the Plan shall remain in full force and effect. This first amendment shall be effective this 3rd day of February, 1998. AIRBORNE FREIGHT CORPORATION By /s/ Robert S. Cline ---------------------- Robert S. Cline Chairman and Chief Executive Officer EX-10 3 EXHIBIT 10H EXHIBIT 10(H) SECOND AMENDMENT TO AIRBORNE FREIGHT CORPORATION DIRECTOR STOCK BONUS PLAN Airborne Freight Corporation, a Delaware corporation, hereby amends the terms of the Airborne Freight Corporation Director Stock Bonus Plan (the "Plan") as follows: Shares Available for the Plan. Section 10 of the Plan is hereby amended by deleting "twenty thousand (20,000)" in line 2 and substituting therefor "forty thousand (40,000)" . Except as otherwise set forth herein, all terms of the Plan shall remain in full force and effect. This first amendment shall be effective this 3rd day of February, 1998. AIRBORNE FREIGHT CORPORATION By /s/ Robert S. Cline ---------------------- Robert S. Cline Chairman and Chief Executive Officer EX-12 4 STATEMENT RE COMPUTATION RATIOS EXHIBIT 12 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES RATIO OF TOTAL LONG-TERM DEBT TO TOTAL CAPITALIZATION
DECEMBER 31, 1998 ----------------- (Dollars in thousands) LONG-TERM DEBT: Revolving Credit Agreement $ -- Money Market Lines of Credit 29,000 Senior Notes 200,000 Refunding Revenue Bonds 13,200 Other 7,359 -------- 250,559 Less Current Portion 410 -------- Total Long-term Debt $ 249,149 ======== TOTAL CAPITALIZATION: Long-term Debt $ 249,149 Deferred Income Taxes 88,838 Shareholders Equity, Net 769,152 -------- Total Capitalization $1,107,139 ======== RATIO OF TOTAL LONG-TERM DEBT TO TOTAL CAPITALIZATION 22.5% ========
EX-13 5 ANNUAL REPORT 1 EXHIBIT 13 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES COMMON STOCK AND DIVIDEND INFORMATION The Company's common stock is traded on the New York Stock Exchange and the Pacific Stock Exchange under the symbol ABF. The following is a summary of the cash dividends paid and the quarterly trading price ranges of Airborne common stock on the New York Stock Exchange for 1998 and 1997:
Quarter High Low Dividend - ------- ---- --- -------- 1998: Fourth $35.781 $14.750 $ .0400 Third 35.625 17.438 .0400 Second 42.375 32.094 .0400 First 42.156 30.688 .0375 1997: Fourth $37.219 $25.875 $ .0375 Third 31.219 20.781 .0375 Second 20.938 14.938 .0375 First 15.625 11.375 .0375
1 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands except per share data) OPERATING RESULTS: Revenues Domestic $2,712,344 $2,514,737 $2,108,670 $1,871,163 $1,660,003 International 362,181 397,672 375,636 368,188 310,756 ---------- ---------- ---------- ---------- ---------- Total 3,074,525 2,912,409 2,484,306 2,239,351 1,970,759 Operating Expenses 2,840,058 2,687,154 2,405,125 2,170,370 1,881,821 ---------- ---------- ---------- ---------- ---------- Earnings From Operations 234,467 225,255 79,181 68,981 88,938 Interest, Net 12,882 27,790 33,236 29,347 24,663 ---------- ---------- ---------- ---------- ---------- Earnings Before Income Taxes 221,585 197,465 45,945 39,634 64,275 Income Taxes 84,300 77,393 18,500 15,814 25,440 ---------- ---------- ---------- ---------- ---------- Net Earnings 137,285 120,072 27,445 23,820 38,835 ---------- ---------- ---------- ---------- ---------- Preferred Stock Dividends -- -- 271 276 894 ---------- ---------- ---------- ---------- ---------- Net Earnings Available $ 137,285 $ 120,072 $ 27,174 $ 23,544 $ 37,941 to Common Shareholders ========== ========== ========== ========== ========== Net Earnings Per Common Share Basic $ 2.77 $ 2.68 $ .64 $ .56 $ .92 ========== ========== ========== ========== ========== Diluted $ 2.72 $ 2.44 $ .64 $ .55 $ .87 ========== ========== ========== ========== ========== Dividends Per Common Share $ .16 $ .15 $ .15 $ .15 $ .15 ========== ========== ========== ========== ========== Weighted Average 49,620 44,883 42,266 42,100 41,289 Shares Outstanding ========== ========== ========== ========== ========== FINANCIAL STRUCTURE: Working Capital $ 102,531 $ 96,485 $ 141,457 $ 91,599 $ 66,871 Property and Equipment 1,021,885 916,331 866,627 842,703 766,346 Total Assets 1,501,577 1,365,973 1,307,422 1,217,384 1,078,506 Long-term Debt 249,149 250,559 409,440 364,621 279,422 Subordinated Debt -- -- 115,000 115,000 118,580 Redeemable Preferred Stock -- -- -- 3,948 5,000 Shareholders' Equity 769,152 670,915 431,830 406,315 387,398 NUMBER OF SHIPMENTS: Domestic 316,590 297,032 254,234 225,553 187,460 International 6,451 5,699 5,036 4,592 3,954 ---------- ---------- ---------- ---------- ---------- Total 323,041 302,731 259,270 230,145 191,414 ========== ========== ========== ========== ==========
2 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS: The Company achieved another record year for 1998 as revenues, operating income, and net earnings all attained record levels. Shipment growth was not as strong as the Company would have liked, due in part to a less robust domestic economy. The shipment spike caused by the United Parcel Service strike in 1997 also made the comparisons to last year difficult. The Company is pleased with the strong financial performance achieved despite the slower volume growth. Net earnings available to common shareholders in 1998 increased to $137.3 million, or $2.72 per share on a diluted basis, compared to $120.1 million, or $2.44 per share in 1997. The United Parcel Service strike is estimated to have added $50 - $55 million in incremental domestic revenues in 1997 and increased diluted earnings per share by $.28 - $.30. The following table is an overview of the Company's shipments, revenue and weight trends for the last three years:
1998 1997 1996 ---- ---- ---- Number of Shipments (in thousands): Domestic Overnight 186,321 172,782 146,458 Next Afternoon Service 58,186 53,773 27,937 Second Day Service 71,724 70,138 79,541 100 lbs. and Over 359 339 298 ------- ------- ------- Total Domestic 316,590 297,032 254,234 ------- ------- ------- International Express 6,017 5,223 4,500 Freight 434 476 536 ------- ------- ------- Total International 6,451 5,699 5,036 ------- ------- ------- Total Shipments 323,041 302,731 259,270 ======= ======= ======= Average Pounds Per Shipment: Domestic 4.3 4.5 4.5 International 42.6 51.2 54.6 Average Revenue Per Pound: Domestic $ 1.96 $ 1.89 $ 1.83 International $ 1.31 $ 1.35 $ 1.34 Average Revenue Per Shipment: Domestic $ 8.56 $ 8.45 $ 8.25 International $ 56.14 $ 69.78 $ 74.59
3 Total revenues increased 5.6% in 1998, 17.2% in 1997, and 10.9% in 1996. Shipment volume grew to 323 million units in 1998, increasing 6.7% compared to an increase of 16.8% in 1997 and 12.7% in 1996. Domestic revenue increased 7.9% in 1998 on shipment growth of 6.6%, compared to revenue growth of 19.3% in 1997 and 12.7% in 1996, and shipment growth of 16.8% and 12.7% in 1997 and 1996, respectively. Domestic revenue growth for 1998, although not as strong as 1997, continued to be positively impacted by strong growth in higher yielding lower weight overnight shipments, the continued focus on yield enhancement, and a stable pricing environment. As a result, the percentage growth in domestic revenues exceeded the percentage growth in domestic shipments. The average revenue per domestic shipment increased to $8.56 for 1998 compared to $8.45 for 1997 and $8.25 for 1996. During 1998, each sequential quarter experienced an increase in the average revenue per domestic shipment. Domestic revenues for 1997 included $15.5 million of fuel surcharge revenue which was realized in the first half of the year. This fuel surcharge revenue added approximately $.15 per share to 1997 operating results. Overnight shipments accounted for over 58.9% of total domestic shipments in 1998 compared to 58.2% in 1997 and 57.6% in 1996. The higher yielding overnight shipments increased 7.8% in 1998 compared to 18.0% in 1997. Next Afternoon Service (NAS) shipments increased 8.2% while Second Day Service (SDS) shipments increased 2.3% in 1998 compared to last year. On a combined basis the NAS and SDS products increased 4.8% in 1998 compared to 15.3% in 1997. Beginning in 1995 and continuing into 1996, the Company redefined its deferred service product through the creation of the two distinct levels of service, NAS and SDS, replacing the Select Delivery Service category. This redefinition was not completed until late 1996, which makes comparison of separate NAS and SDS results for 1997 to 1996 not meaningful. 4 International revenue decreased 8.9% in 1998 on shipment growth of 13.2% compared to revenue growth of 5.9% and 2.0% and shipment growth of 13.2% and 9.7% in 1997 and 1996, respectively. International revenue per shipment and weight per shipment decreased in 1998 compared to last year as a result of the continued decrease in higher yielding freight shipments. This product has been negatively impacted over the past two years primarily from slower global economic conditions prevailing, especially in parts of Asia. Mitigating some of the weakness in freight volumes, the Company experienced strong growth in its international express product, causing gross margins on overall international business to remain relatively stable. International express shipments increased 15.2% in 1998 compared to 16.1% in 1997 and 11.5% in 1996. The international segment contribution to earnings from operations was $1.5 million in 1998 compared to $3.8 million in 1997 and $6.9 million in 1996. OPERATING EXPENSES are affected by shipment volume, productivity improvements, costs incurred to increase capacity and expand service, fuel price volatility and discretionary items such as the level of marketing expenditures. Operating expenses as a percentage of revenues were 92.4% in 1998 compared to 92.3% in 1997 and 96.8% in 1996. Measuring cost performance on a per shipment basis, total operating expenses per shipment declined 1.0% in 1998 to $8.79, compared to $8.88 in 1997 and $9.28 in 1996. The Company achieved a 1.4% improvement in productivity in 1998, as measured by shipments handled per paid employee hour, compared to 10.2% improvement in 1997 and 1.9% in 1996. With slower volume growth in 1998, productivity gains achieved were not as strong as experienced in 1997. A strong focus on cost control, continuation of quality improvement programs, along with a favorable price environment for aviation fuel, were significant factors having an impact on 1998 operating costs. Transportation purchased decreased as a percentage of revenues to 30.7% in 1998 compared to 31.7% in 1997 and 33.3% in 1996. This expense category consists primarily of commercial airline costs, cartage costs related to contracted pick-up and delivery, and trucking costs. The decrease in 1998 was primarily due to commercial airline costs which were lower in total and as a percentage of total revenues due to the decline in international freight shipments. Also, the suspension in early 1996 and eventual reinstatement in 1997 of the Federal Aviation Excise Tax resulted in the avoidance of cost associated with the tax of $14.7 million dollars during the first eight months of 1996 and $4.3 million during the first three months of 1997, with no comparable cost reduction realized in 1998. Station and ground expense as a percentage of revenues was 29.8% in 1998 compared to 29.5% in 1997 and 31.5% in 1996. The slight increase in this category as a percentage of revenues in 1998 compared to 1997 was primarily the result of lower productivity improvements in 1998. However, overall productivity gains in pick-up and delivery, customer service and terminal operations over the past three years have been instrumental in partially offsetting the effect of increased wages and costs incurred to accommodate the growth in shipments and expand service while maintaining service integrity. 5 Flight operations and maintenance expense as a percentage of revenues was 15.5% in 1998 compared to 14.8% in 1997 and 15.6% in 1996. The impact of lower aviation fuel prices was offset by higher aircraft maintenance and flight crew costs in 1998 compared to 1997. Costs associated with periodic aircraft maintenance as a percentage of revenues were lower in 1997 versus 1998, due to fewer maintenance checks performed. The average aviation fuel price, exclusive of fuel hedge settlements, was $.57 per gallon in 1998, compared to $.73 per gallon in 1997, and $.75 per gallon in 1996. Aviation fuel consumption increased 7.5% to 182.5 million gallons in 1998 compared to a 5.7% increase in consumption in 1997 over 1996. The increased consumption year over year is a result of additional Company operated aircraft placed in service during each year to accommodate the growth in business. As a result of fuel hedging contracts, the Company incurred settlement expense equivalent to approximately $.04 per gallon in 1998 compared to settlement benefits realized of approximately $.01 per gallon in 1997 and $.02 per gallon in 1996. General and administrative expense as a percentage of revenues was 8.0% in 1998 and 1997 and 7.3% in 1996. The increase as a percentage of revenues in this category in 1997 compared to 1996 was primarily due to incremental profit sharing and management incentive compensation costs resulting from the significant improvement in operating results over 1996. Sales and marketing costs were 2.3% of revenues in 1998 compared to 2.4% in 1997 and 1996. Productivity gains and controls on discretionary spending in General and Administrative and Sales and Marketing expense categories have been instrumental in offsetting most of the effect of increased costs incurred to accommodate shipment growth and expand service. Depreciation and amortization expense as a percentage of revenues increased to 6.0% in 1998 compared to 5.8% in 1997 and 6.6% in 1996. Total depreciation and amortization has continued to increase over the last three years as a result of capital expenditures incurred primarily to expand the airline operations. Operating expense in 1996 included a nonrecurring charge of $3.7 million related to the loss of a DC-8-63 aircraft destroyed in an accident in December 1996. INTEREST EXPENSE decreased 53.6% in 1998 compared to 1997, primarily as the result of the significantly lower level of average outstanding borrowings during 1998 and to the higher level of capitalized interest. Interest capitalized in 1998 of $5.9 million was primarily related to the acquisition and modification of several 767-200 aircraft and compares to capitalized interest of $1.9 million in 1997 and $1.7 million in 1996. The Company anticipates the level of capitalized interest in 1999 to be comparable to the 1998 amount. INCOME TAXES for 1998 resulted in an effective tax rate of 38.0% compared to 39.2% in 1997 and 40.3% in 1996. The comparatively lower tax rate in 1998 was primarily due to a lower effective state tax rate. The Company anticipates that the tax rate for 1999 will be in the 38.5% to 39.0% range. 6 Looking ahead, it is difficult at this point to project a trend for all of 1999 regarding volume growth, but we are anticipating the continuation of modest shipment growth. The Company's focus will continue to be on managing yields and lowering cost per shipment to improve margins. The strength of the U.S. and global economies will have an impact on the results of operations in 1999 and beyond. YEAR 2000 ISSUE: The Company has implemented a compliance program to address the challenges Year 2000 issues may present to its business. This program includes computer systems and applications operated by the Company, computer systems of third parties upon whose data or functionality the Company relies, and certain other fixed assets, including aircraft, which contain date sensitive technology critical to their operation. Modifications to the Company's critical operational and financial systems and conversions to new software were substantially complete at the end of 1998. Testing of these critical systems and software as well as remediation efforts and related testing on less critical applications are scheduled to be completed before July 1999. As part of the compliance program, the Company has also initiated communications with third parties - primarily customers, vendors, airport authorities, and other governmental agencies (domestic and foreign), including the Federal Aviation Administration - whose failure to have Year 2000 compliant systems could have an adverse impact on the Company's operations. The Company is scheduling testing of customer interfaces of shipment information as this data is critical to providing services and billing. Although the Company does not believe the Year 2000 issue will have a material impact on its operations, there can be no guarantee that the Company's or any third party's Year 2000 remediation efforts will be fully compliant. If noncompliance is extensive and involves some form of temporary suspension of operations, this could have a material adverse effect on the Company's business, financial condition and results of operations. In an attempt to mitigate the risk of noncompliance, the Company is in the process of developing contingency plans regarding critical systems should they fail to become Year 2000 compliant. These plans are focusing on the Company's own critical operational and financial systems as well as customer interfaces of shipment information. Contingency plans covering the failure of material third party systems will also be developed as their status of readiness becomes fully known. 7 Management estimates the total cost of the Year 2000 compliance program to be approximately $3.2 million, of which $1.2 million has been incurred through December 31, 1998. Total information technology costs are not expected to differ from the normal recurring costs that are incurred for systems development, in part due to the reallocation of internal resources and the deferral of other projects. These costs could differ if either the scope or schedule of the compliance program is altered. FINANCIAL CONDITION: CAPITAL EXPENDITURES and financing associated with those expenditures have been primary factors affecting the financial condition of the Company over the last three years. Total capital expenditures net of dispositions were $283 million in 1998 compared to $207 million in 1997 and $193 million in 1996. A significant portion of these expenditures has been related to the acquisition and modification of aircraft and related flight equipment. The Company acquired four used Boeing 767-200 aircraft and one McDonnell Douglas DC-9 aircraft in 1998. A total of five Company-owned aircraft were placed into service during the year, made up of three 767's and two DC-9's. At the end of 1998, there were 110 aircraft in service, consisting of three 767's, 36 DC-8's, and 71 DC-9's. In addition, there were four aircraft in modification status including three recently acquired 767 aircraft. Other capital expenditures in 1998 included vehicles for expansion and replacement, facilities and package handling equipment related to servicing the increased shipment volume, leasehold improvements for new or expanded facilities, and computer equipment. Capital expenditures will continue to be a significant factor affecting financial condition in 1999. The Company anticipates 1999 capital expenditures of approximately $365 million. A significant portion of the 1999 capital investment is for the acquisition of six additional 767 aircraft, the modification of aircraft to be placed in service, the retrofitting of aircraft with Stage III hush kits, and the continued expansion of the central airport and sort facilities. A total of eight aircraft, five 767's and three DC-9's, are expected to be placed in service in 1999. During 1998, the Company committed to acquire 11 additional 767-200 aircraft, bringing the totals of future commitments to 17 aircraft, including the six aircraft which will be delivered in 1999. The remaining 767 aircraft are to be delivered between the years 2000 and 2003. The Company is also pursuing additional commitments for at least seven used 767's for delivery within this same time range. LIQUIDITY AND CAPITAL RESOURCES: Liquidity for financing capital expenditures in 1998 came primarily from internally generated cash provided by operations. Cash provided by operations net of changes in working capital was approximately $345 million in 1998 and in 1997 compared to $196 million in 1996. Additional liquidity during the year was provided by the revolving bank credit agreement. 8 For the past two years, the Company's strong operating cash flow became 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 $55 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 decreased significantly during 1998 and 1997. At December 31, 1998, a total of $29.0 million was owing under the revolving bank credit and money market agreements compared to $30.0 million outstanding at December 31, 1997, and $188.5 million outstanding at December 31, 1996. In August 1998, the Board of Directors authorized a stock repurchase program for up to 2 million shares of the Company's common stock. The Company accomplished the repurchase of 2 million shares by the end of September for approximately $38.8 million. These shares were added to the Company's treasury stock. In November 1998, the Board of Directors authorized a second stock repurchase program for up to 4 million shares of the Company's common stock. All shares may be acquired, at management's discretion, over time on the open market. Shares repurchased will not be retired or canceled, but will be held as treasury stock. The Company's ratio of total long-term debt to total capitalization was 22.5% at December 31, 1998, compared to 25.4% at December 31, 1997. The debt-to-capitalization ratio is not expected to change significantly during 1999 as anticipated cash flow from operations should provide the majority of the liquidity for projected 1999 capital expenditures. In management's opinion, the available capacity under the bank credit agreements coupled with anticipated internally generated cash flow from 1999 operations should provide adequate flexibility for financing future growth. INFLATION: The rate of inflation has been relatively constant over the past several years, and so has the impact of inflation on the Company's results of operations and financial condition. The effects of inflation have been considered in management's discussion where considered pertinent. 9 INDEPENDENT AUDITORS' REPORT Board of Directors Airborne Freight Corporation Seattle, Washington We have audited the accompanying consolidated balance sheets of Airborne Freight Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of net earnings, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. - ------------------------- DELOITTE & TOUCHE LLP February 12, 1999 Seattle, Washington 10 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET EARNINGS
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- (In thousands except per share data) REVENUES: Domestic $2,712,344 $2,514,737 $2,108,670 International 362,181 397,672 375,636 ---------- ---------- ---------- 3,074,525 2,912,409 2,484,306 OPERATING EXPENSES: Transportation purchased 944,357 922,885 827,997 Station and ground operations 914,919 858,238 781,867 Flight operations and maintenance 477,799 431,474 386,961 General and administrative 247,103 234,366 181,353 Sales and marketing 71,354 70,346 59,565 Depreciation and amortization 184,526 169,845 163,645 Loss related to aircraft accident -- -- 3,737 ---------- ---------- ---------- 2,840,058 2,687,154 2,405,125 ---------- ---------- ---------- EARNINGS FROM OPERATIONS 234,467 225,255 79,181 INTEREST, NET 12,882 27,790 33,236 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 221,585 197,465 45,945 INCOME TAXES 84,300 77,393 18,500 ---------- ---------- ---------- NET EARNINGS 137,285 120,072 27,445 PREFERRED STOCK DIVIDENDS -- -- 271 ---------- ---------- ---------- NET EARNINGS AVAILABLE $ 137,285 $ 120,072 $ 27,174 TO COMMON SHAREHOLDERS ========== ========== ========== NET EARNINGS PER COMMON SHARE: Basic $ 2.77 $ 2.68 $ .64 ========== ========== ========== Diluted $ 2.72 $ 2.44 $ .64 ========== ========== ========== DIVIDENDS PER COMMON SHARE $ .16 $ .15 $ .15 ========== ========== ==========
See notes to consolidated financial statements. 11 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 1998 1997 - ----------- ---- ---- (In thousands) ASSETS - ------ CURRENT ASSETS: Cash $ 18,679 $ 25,525 Trade accounts receivable, less allowance of $10,140,000 and $10,290,000 323,178 322,549 Spare parts and fuel inventory 39,726 37,966 Deferred income tax assets 28,508 14,530 Prepaid expenses and other 25,697 25,982 ---------- ---------- TOTAL CURRENT ASSETS 435,788 426,552 PROPERTY AND EQUIPMENT, NET 1,021,885 916,331 EQUIPMENT DEPOSITS AND OTHER ASSETS 43,904 23,090 ---------- ---------- TOTAL ASSETS $1,501,577 $1,365,973 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 153,000 $ 143,966 Salaries, wages and related taxes 77,030 80,154 Accrued expenses 93,997 100,126 Income taxes payable 8,820 5,440 Current portion of debt 410 381 ---------- ---------- TOTAL CURRENT LIABILITIES 333,257 330,067 LONG-TERM DEBT 249,149 250,559 DEFERRED INCOME TAX LIABILITIES 88,838 65,322 OTHER LIABILITIES 61,181 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 120,000,000 shares Issued 50,818,493 and 50,428,548 50,819 50,428 Additional paid-in capital 293,629 287,209 Retained earnings 463,539 334,083 Accumulated other comprehensive income 766 -- ---------- ---------- 808,753 671,720 Treasury stock, 2,497,078 and 522,300 shares, at cost (39,601) (805) ---------- ---------- 769,152 670,915 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,501,577 $1,365,973 ========== ==========
See notes to consolidated financial statements. 12 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- (In thousands) OPERATING ACTIVITIES: Net earnings $137,285 $120,072 $ 27,445 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 168,029 156,233 151,538 Provision for aircraft engine overhauls 16,497 13,612 12,107 Deferred income taxes 9,538 24,988 3,697 Loss related to aircraft accident -- -- 3,737 Other 12,256 13,076 8,027 -------- -------- -------- CASH PROVIDED BY OPERATIONS 343,605 327,981 206,551 Change in: Receivables (629) (35,034) (28,107) Inventories and prepaid expenses (1,475) (5,069) (200) Accounts payable 9,034 4,930 2,049 Accrued expenses, salaries and taxes payable (5,532) 52,444 16,118 NET CASH PROVIDED BY -------- -------- -------- OPERATING ACTIVITIES 345,003 345,252 196,411 INVESTING ACTIVITIES: Additions to property and equipment (285,481) (211,758) (173,157) Disposition of property and equipment 2,598 4,451 694 Expenditures for engine overhauls (22,846) (10,614) (15,000) Proceeds from insurance on aircraft accident -- 18,000 -- Investment in aircraft destroyed in accident -- -- (21,232) Other (4,584) (27) (3,309) -------- -------- -------- NET CASH USED BY INVESTING ACTIVITIES (310,313) (199,948) (212,004) FINANCING ACTIVITIES: Proceeds (payments) on bank notes, net (1,000) (158,500) 45,200 Principal payments on debt (381) (436) (5,818) Repurchase of common stock (38,835) -- -- Proceeds from common stock issuance 6,509 10,104 734 Dividends paid (7,829) (6,763) (6,613) -------- -------- -------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (41,536) (155,595) 33,503 -------- -------- -------- NET (DECREASE) INCREASE IN CASH (6,846) (10,291) 17,910 CASH AT BEGINNING OF YEAR 25,525 35,816 17,906 -------- -------- -------- CASH AT END OF YEAR $ 18,679 $ 25,525 $ 35,816 ======== ======== ========
13
SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year - Interest, net of amount capitalized $13,227 $ 32,768 $ 33,234 Income taxes 68,301 46,641 16,674 Noncash financing activities - Contribution of treasury stock to profit sharing plans 341 1,100 -- Conversion of subordinated debentures -- 114,572 -- Conversion of redeemable preferred stock -- -- 3,948
See notes to consolidated financial statements. 14 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Additional Other Common Paid-In Retained Comprehensive Treasury Stock Capital Earnings Income Stock Total ------ ------- -------- ------------- -------- ----- (In thousands) BALANCE at JANUARY 1, 1996 $42,796 $164,549 $199,941 $ -- $ (971) $406,315 Net earnings available to common shareholders 27,174 27,174 Conversion of redeemable preferred stock 337 3,610 3,947 Common stock dividends paid (6,341) (6,341) Exercise of stock options 110 625 735 ------- -------- -------- ---- -------- -------- BALANCE at DECEMBER 31, 1996 $43,243 $168,784 $220,774 $ -- $ (971) $431,830 Net earnings available to common shareholders 120,072 120,072 Conversion of subordinated debt 6,474 108,099 114,573 Common stock dividends paid (6,763) (6,763) Exercise of stock options 711 9,349 43 10,103 Contribution of treasury stock to profit sharing plans 977 123 1,100 ------- -------- -------- ---- -------- -------- BALANCE at DECEMBER 31, 1997 $50,428 $287,209 $334,083 $ -- $ (805) $670,915 Comprehensive income: Net earnings available to common shareholders 137,285 137,285 Other comprehensive income, net of tax - Unrealized securities gains 947 947 Foreign currency translation adjustments (181) (181) ------- -------- -------- ---- -------- -------- Total comprehensive income -- -- 137,285 766 -- 138,051 Common stock dividends paid (7,829) (7,829) Repurchase of common stock (38,835) (38,835) Exercise of stock options 391 6,093 25 6,509 Contribution of treasury stock to profit sharing plans 327 14 341 ------- -------- -------- ---- -------- -------- BALANCE at DECEMBER 31, 1998 $50,819 $293,629 $463,539 $766 $(39,601) $769,152 ======= ======== ======== ==== ======== ========
See notes to consolidated financial statements. 15 AIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Years Ended December 31, 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company's revenues are derived from domestic and international transportation of shipments. The Company provides door-to-door express delivery of small packages and documents throughout the United States and to most foreign countries. The Company also acts as an international and domestic freight forwarder for shipments of any size. Most domestic shipments are transported on the Company's own airline and a fleet of ground transportation vehicles through its Company-owned airport and central sorting facilities, or one of nine regional hubs. International shipments are transported utilizing a combination of the Company's domestic network, commercial airline lift capacity, and through a network of offshore Company offices and independent agents. The Company is subject to certain business risks which could affect future operations and financial performance. These risks include weather and natural disaster related disruptions, collective bargaining labor disputes, fuel price volatility, regulatory compliance concerning the operation or maintenance of aircraft, and aggressive competitor pricing. As of December 31, 1998, the Company had approximately 10,600 employees (46% of total employees), including approximately 800 pilots, employed under collective bargaining agreements with various locals of the International Brotherhood of Teamsters and Warehousemen. The pilots are covered by an agreement which becomes amendable on July 31, 2001. Labor agreements covering approximately 52% of the Company's ground personnel were renegotiated in 1998 for a term expiring in 2003. Agreements covering most of the Company's remaining ground personnel either expire in 1999 or are currently being renegotiated. The Company has not experienced any significant disruptions from labor disputes in the past. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions may have a material impact on the financial statements. 16 CASH The Company has a cash management system under which a cash overdraft exists for uncleared checks in the Company's primary disbursement accounts. The cash amount in the accompanying financial statements represents balances in other accounts prior to being transferred to the primary disbursement accounts. Uncleared checks of $47,063,000 and $29,311,000 are included in accounts payable at December 31, 1998 and 1997, respectively. SPARE PARTS AND FUEL INVENTORY Spare parts are stated at average cost and fuel inventory is stated at cost on a first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment, including rotable aircraft parts, are stated at cost. The cost and accumulated depreciation of property and equipment disposed of are removed from the accounts with any related gain or loss reflected in earnings from operations. For financial reporting purposes, depreciation of property and equipment is provided on a straight-line basis over the asset's useful life or lease term as follows:
Flight equipment 7 to 18 years Buildings, runways, and leasehold improvements 5 to 30 years Package handling and ground support equipment 3 to 8 years Vehicles and other equipment 3 to 8 years
DC-8 and DC-9 aircraft generally carry residual values of 10% and 15% of asset cost, respectively. Beginning in 1999, once an aircraft has been depreciated to its residual value, the residual value will be depreciated over 7 years for DC-8 aircraft and 10 years for DC-9 aircraft. All other property and equipment have no assigned residual values. Major engine overhauls for DC-9 aircraft are accrued in advance of the next scheduled overhaul based upon engine usage and estimates of overhaul costs. Provision for engine overhauls is included in depreciation and amortization expense. Major engine overhauls as well as ordinary engine maintenance and repairs for DC-8 and 767 aircraft are performed by third- party service providers under long-term contracts. Service costs under the contracts are based upon hourly rates for engine usage and are charged to expense in the period utilization occurs. 17 CAPITALIZED INTEREST Interest incurred during the construction period of certain facilities and on aircraft purchase and modification costs are capitalized as an additional cost of the asset until the date the asset is placed in service. Capitalized interest was $5,850,000, $1,869,000, and $1,728,000 for 1998, 1997 and 1996, respectively. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are provided for temporary differences between the timing of reporting certain revenues and expenses for financial versus tax purposes. Deferred taxes are measured using provisions of currently enacted tax laws. Tax credits are accounted for as a reduction of income taxes in the year in which the credit originates. FUEL CONTRACTS The Company has entered into 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 the monthly NYMEX Heating Oil futures contracts, is lower than 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 period of settlement as either an increase or decrease to fuel expense. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (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. Under the cash flow hedge provisions of SFAS No. 133, the Company will be required to record its fuel 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 December 31, 1998. However, if the provisions of the statement had been adopted, a cumulative charge of $2,564,000, net of tax, would have been recorded to Accumulated Other Comprehensive Income and a charge to Other Comprehensive Income of approximately $1,912,000 would have been reported for the year ended December 31, 1998. 18 COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) effective January 1, 1998. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in financial statements. Comprehensive income includes net income and "other comprehensive income" which includes changes in equity arising during the period from holding investments in marketable securities and foreign joint ventures. Prior to adoption of the SFAS No. 130, management did not consider comprehensive income items to be material to shareholders' equity, and accordingly, no amounts have been recorded previously. REVENUE RECOGNITION Domestic revenues and most domestic operating expenses are recognized when shipments are picked up from the customer. International revenues and direct air carrier expenses are recognized in the period when shipments are tendered to a carrier for transport to a foreign destination. Domestic and international delivery costs are recognized in the period incurred. The net revenue resulting from existing recognition policies does not materially differ from that which would be recognized on a delivery date basis. RECLASSIFICATIONS Certain amounts for prior years have been reclassified in the consolidated financial statements to conform to the classification used in 1998. 19 NOTE B - FAIR VALUE INFORMATION The carrying amounts and related fair values of the Company's financial instruments are as follows (in thousands):
December 31 1998 1997 - ----------- ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Marketable securities $ 16,087 $ 16,087 $ -- $ -- Long-term debt 249,149 260,707 250,559 262,233 Off-balance sheet-derivative: Fuel contracts -- (4,169) -- (1,060)
Marketable securities are considered available-for-sale securities for financial reporting purposes and are classified with Equipment Deposits and Other Assets on the Consolidated Balance Sheets. Fair value for these investments is based on quoted market prices for the same securities. Unrealized holding gains on these securities, which are included in Other Comprehensive Income, were $1,540,000 as of December 31, 1998. Realized gains recognized in 1998 were $1,531,000. Discussion regarding the fair value of the Company's long-term debt and fuel contracts is disclosed in the respective notes to the consolidated financial statements. Carrying amounts for cash, trade accounts receivable, and current liabilities approximate fair value. 20 NOTE C - PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
December 31 1998 1997 - ----------- ---- ---- Flight equipment $1,430,880 $1,230,232 Land, buildings and leasehold improvements 232,669 226,628 Package handling and ground support equipment 153,921 133,624 Vehicles and other equipment 256,930 240,309 ---------- ---------- 2,074,400 1,830,793 Accumulated depreciation and amortization (1,052,515) (914,462) ---------- ---------- $1,021,885 $ 916,331 ========== ==========
NOTE D - ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
December 31 1998 1997 - ----------- ---- ---- Insurance accruals $ 27,289 $ 20,713 Profit sharing retirement plan 20,407 26,613 Unearned revenues 15,514 13,024 Property and other taxes 8,978 9,971 Aircraft lease payments 7,780 10,557 Other retirement plans 4,302 10,492 Interest 2,508 2,572 Other 7,219 6,184 ------- ------- $ 93,997 $ 100,126 ======= =======
21 NOTE E - INCOME TAXES Deferred income tax assets and liabilities consist of the following (in thousands):
December 31 1998 1997 - ----------- ---- ---- Employee benefits $ 14,586 $ 10,798 Insurance accruals 9,299 6,450 Bad debts, sales reserves and other 4,623 5,507 Union pension benefits -- (8,225) -------- -------- Current net deferred income tax assets 28,508 14,530 -------- -------- Depreciation and amortization 98,421 90,931 Capitalized aircraft expenses 10,708 6,773 Insurance accruals (10,161) (10,832) Aircraft engine overhaul accrual (6,566) (8,746) Alternative Minimum Tax credit -- (11,761) Employee benefits and other (3,564) (1,043) -------- -------- Noncurrent net deferred income tax liabilities 88,838 65,322 -------- -------- Net deferred income tax liabilities $ 60,330 $ 50,792 ======== ========
22 Income taxes consist of the following (in thousands):
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Current: Federal $66,372 $41,463 $12,361 State 7,800 10,443 1,900 Foreign 590 499 542 ------- ------- ------- 74,762 52,405 14,803 Deferred: Alternative Minimum Tax credit 11,761 21,417 (4,830) Depreciation and amortization 7,490 6,701 9,955 Aircraft engine overhaul accrual 2,180 (1,634) 1,027 Union pension benefits (8,225) 1,990 1,648 Employee benefits (6,240) (2,449) (2,515) Insurance accruals (2,178) (3,342) (2,811) Other 4,750 2,305 1,223 ------- ------- ------- 9,538 24,988 3,697 ------- ------- ------- $84,300 $77,393 $18,500 ======= ======= =======
The following table summarizes the major differences between the actual income tax provision and taxes computed at the Federal statutory rate (in thousands):
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Taxes computed at statutory rate of 35% $77,555 $69,113 $16,081 State and foreign income taxes, net of Federal benefit 5,070 6,788 1,288 Tax effect of nondeductible expenses 1,647 1,549 1,185 Other 28 (57) (54) ------- ------- ------- $84,300 $77,393 $18,500 ======= ======= =======
23 NOTE F - LONG-TERM DEBT Long-term debt consists of the following:
December 31 1998 1997 - ----------- ---- ---- (In thousands) Money market lines of credit, effective rate of 5.9% on December 31, 1998 $ 29,000 $ 30,000 Senior notes, 8.875%, due December, 2002 100,000 100,000 Senior notes, 7.35%, due September, 2005 100,000 100,000 Refunding revenue bonds, effective rate of 4.1% on December 31, 1998, due June 2011 13,200 13,200 Other 7,359 7,740 -------- -------- 249,559 250,940 Less current portion 410 381 -------- -------- $249,149 $250,559 ======== ========
The Company has a revolving bank credit agreement providing for a total commitment of $250,000,000. Interest rates for borrowings outstanding are generally determined by maturities selected and prevailing market conditions. The agreement expires May 31, 2001. The Company was in compliance with covenants of the revolving credit agreement during 1998, 1997, and 1996, including net worth restrictions which limit the payment of dividends ($396,378,000 of retained earnings was not restricted at December 31, 1998). The Company has available $55,000,000 of financing under uncommitted money market lines of credit with several banks. These facilities bear interest at rates that vary with the banks' cost of funds and are typically less than the prevailing bank prime rate. The average interest rate on these borrowings was 5.7% for 1998. These credit lines are used in conjunction with the revolving credit agreement to facilitate settlement and accommodate short-term borrowing fluctuations. The Company has classified the borrowings outstanding under the money market lines of credit as long-term. These amounts will be refinanced under the revolving credit agreement. 24 The Company's tax-exempt airport facilities refunding bonds carry no sinking fund requirements and bear interest at weekly adjustable rates. The average interest rate on these borrowings was 3.5% during 1998. Payment of principal and interest is secured by an irrevocable bank letter of credit that is collateralized by a mortgage on certain airport properties which have a net carrying value of $52,243,000 at December 31, 1998. In August 1997, the Company called for the redemption of its 6.75% convertible subordinated debentures due in 2001. This transaction resulted in the issuance of approximately 6,474,000 shares of common stock as substantially all debenture holders elected conversion rather than redemption. The scheduled annual principal payments on long-term debt for the next five years are $410,000, $442,000, $29,476,000, $100,513,000 and $553,000 for 1999 through 2003, respectively. The fair value information shown in Note B reflects values for the Company's senior notes based on quoted market prices for the same issues. The carrying value of the Company's remaining long-term financial debt instruments approximate fair value primarily because of the repricing frequency of the instruments. NOTE G - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company is obligated under various long-term operating lease agreements for certain equipment and for a substantial portion of its facilities. These leases expire at various dates through 2016. Rental expense for 1998, 1997, and 1996 was $117,862,000, $115,350,000, and $105,331,000, respectively. Rental commitments under long-term operating leases at December 31, 1998 total $422,678,000 and are payable as follows (in thousands):
Facilities Equipment ---------- --------- 1999 $ 70,449 $19,678 2000 66,447 9,399 2001 56,869 2,970 2002 48,328 1,027 2003 38,989 582 2004 and beyond 107,872 68
25 COMMITMENTS The Company has entered into firm agreements to purchase 17 used Boeing 767s, related 767 freighter conversion kits and two McDonnell Douglas DC-9 aircraft at various dates through 2003. Additionally, the Company has exercised options to purchase in 1999 four leased DC-9 aircraft it currently operates. The Company also has commitments in 1999 to purchase 14 Stage III hush kits for its DC-8 and DC-9 aircraft. At December 31, 1998, cash deposits of $10,686,000 had been made toward these purchases. Additional deposits and payments for these acquisitions will approximate $130,132,000, $80,766,000, $86,304,000, $57,000,000, and $39,400,000 for 1999 through 2003, respectively. The Company has outstanding fuel contracts, some extending through November 1999, covering a monthly notional sum of between 5.0 million to 7.5 million gallons, which represents between 33% and 50% of prospective average monthly consumption of jet fuel. Settlement payments related to these contracts of $7,915,000 were made during 1998, and settlement payments of $1,682,000 and $3,016,000 were received during 1997 and 1996, respectively. The fair market value of these contracts, as computed by the counterparties, was a liability of approximately $4,169,000 and $1,060,000 at December 31, 1998 and 1997, respectively. CONTINGENCIES In the normal course of business, the Company has various legal claims and other contingent matters outstanding. Management believes that any ultimate liability arising from these actions would not have a material adverse effect on the Company's financial condition or results of operations as of and for the year ended December 31, 1998. NOTE H - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits". SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. The Company sponsors defined benefit and defined contribution pension plans and postretirement healthcare plans. These plans are generally provided to employees who are not covered by multi-employer plans to which the Company contributes under terms of various collective bargaining agreements. 26 Information regarding the Company's qualified and nonqualified defined benefit pension plans and postretirement healthcare plans is as follows (in thousands):
Postretirement Pension Plans Healthcare Plans ------------- ---------------- Year Ended December 31 1998 1997 1998 1997 - ---------------------- ---- ---- ---- ---- Reconciliation of benefit obligation: Obligation as of January 1 $108,062 $ 71,280 $ 7,189 $ 5,039 Service cost 11,625 10,838 954 751 Interest cost 7,333 6,243 529 373 Benefits paid (892) (603) (199) (125) Plan amendments -- 4,149 -- -- Actuarial loss 1,849 15,907 761 1,151 Plan transfers 178 248 -- -- -------- -------- ------- ------- Obligation as of December 31 $128,155 $108,062 $ 9,234 $ 7,189 ======== ======== ======= ======= Reconciliation of fair value of plan assets: Plan assets as of January 1 $ 60,889 $ 42,640 $ -- $ -- Actual return on plan assets 8,810 8,882 -- -- Employer contributions 9,252 9,722 199 125 Benefits paid (892) (603) (199) (125) Plan transfers 178 248 -- -- -------- -------- ------- ------- Plan assets as of December 31 $ 78,237 $ 60,889 $ -- $ -- ======== ======== ======= ======= Funded status: Funded status as of December 31 $(49,918) $(47,172) $(9,234) $(7,189) Unrecognized prior service cost (1,027) (871) -- -- Unrecognized net actuarial loss 23,368 26,744 1,377 644 Unrecognized transition amount 59 89 -- -- -------- -------- ------- ------- Accrued benefit liabilities $(27,518) $(21,210) $(7,857) $(6,545) ======== ======== ======= =======
27 Accrued Liabilities on the Consolidated Balance Sheets include accrued pension benefit liabilities of $4,303,000 and $10,482,000 as of December 31, 1998 and 1997, respectively. Other Liabilities include postretirement healthcare and remaining pension liabilities of $31,072,000 and $17,273,000 as of December 31, 1998 and 1997, respectively, which do not require funding in the next year. The Company's nonqualified pension plans and one qualified plan have accumulated benefit obligations in excess of plan assets. The Company has invested in certain commingled investment funds which may be used for funding nonqualified pension plan obligations. Postretirement healthcare plan obligations also have not been funded. The following table provides aggregate information for pension plans with accumulated benefit obligations in excess of plan assets (in thousands):
Year Ended December 31 1998 1997 - ---------------------- ---- ---- Aggregate accumulated benefit obligation - qualified plan $35,750 $31,767 Aggregate accumulated benefit obligation - nonqualified plans 10,971 6,885 Aggregate fair value of plan assets - qualified plan 34,816 24,432
Net periodic benefit cost consists of the following components (in thousands):
Postretirement Pension Plans Healthcare Plans ------------- ---------------- Year Ended December 31 1998 1997 1996 1998 1997 1996 - ---------------------- ---- ---- ---- ---- ---- ---- Service cost $11,625 $10,838 $ 8,295 $ 954 $ 751 $ 695 Interest cost 7,333 6,243 4,525 529 373 345 Expected return on plan assets (5,363) (3,851) (2,700) -- -- -- Net amortization and deferral 1,964 1,821 1,802 29 (44) 26 ------- ------- ------- ------- ------- ------- Net periodic benefit cost $15,559 $15,051 $11,922 $ 1,512 $ 1,080 $ 1,066 ======= ======= ======= ======= ======= =======
28 Assumptions used in determining pension and postretirement healthcare obligations were as follows:
Postretirement Pension Plans Healthcare Plans ------------- ---------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Discount rate 6.75% 7.00% 7.50% 6.75% 7.00% 7.50% Expected return on plan assets 8.00% 8.00% 8.00% -- -- -- Rate of compensation increase (pilots) 6.50% 6.50% 6.50% -- -- -- Rate of compensation increase (nonpilots) 5.00% 5.00% 5.00% -- -- --
The assumed healthcare cost trend rate used in measuring postretirement healthcare benefit costs was 7% for 1998, decreasing each year to a 5% annual growth rate in 2000 and thereafter. A 1% increase or decrease in the assumed health care cost trend rate for each year would not have a material effect on the accumulated postretirement benefit obligation or cost as of or for the year ended December 31, 1998. 29 The Company maintains defined contribution capital accumulation and profit sharing plans. Capital accumulation plans (401K) are funded by both voluntary employee salary deferrals of up to 16% of annual compensation and by employer matching contributions on employee salary deferrals up to 6% of annual compensation. Contributions to the profit sharing plans are made at the discretion of the Board of Directors. However, a basic formula has been followed for contributions of 7% of earnings before taxes up to a specific profit level plus 14% of earnings in excess of that level. The profit sharing plans hold 977,569 shares of the Company's common stock at December 31, 1998, representing 2% of outstanding shares. Expense for these plans is as follows (in thousands):
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Capital accumulation plans $ 7,375 $ 5,499 $ 4,987 Profit sharing plans 20,407 26,613 3,459 ------- ------- ------- Defined contribution plans $27,782 $32,112 $ 8,446 ======= ======= =======
The Company contributes to multi-employer defined benefit pension plans and health and welfare plans for substantially all employees covered under collective bargaining agreements. Expense for these plans is as follows (in thousands):
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Multi-employer defined benefit pension plans $37,309 $34,106 $28,773 Multi-employer health and welfare plans 41,473 38,499 34,474 ------- ------- ------- Multi-employer plans $78,782 $72,605 $63,247 ======= ======= =======
30 NOTE I - STOCK OPTIONS The Company has four shareholder approved stock option plans. Three of these plans, approved by the shareholders in 1989, 1994 and 1998 (the "1989 Plan", "1994 Plan" and "1998 Plan"), reserve shares of the Company's common stock for issuance to officers and key employees. Options granted under the 1989 Plan and 1994 Plan vest over a three year period. Options granted under the 1998 Plan include 484,280 options which vest over a four year period and 268,000 performance options issued to the Company's executive officers. The performance options vest in four installments contingent upon attainment of specified market price targets of the Company's common stock. A specific plan for the Company's nonemployee directors provides for annual grants of 2,000 shares which vest six months from the date of grant. Options granted under these four plans are issued at the fair market value of the Company's stock on the date of grant. A total of 9,507,250 shares may be granted under these plans of which 5,402,360 are available for future grants at December 31, 1998. A summary of the Company's stock option activity and related information is as follows:
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Outstanding at beginning of year 2,189,014 2,555,186 2,269,360 Granted 766,280 442,580 436,920 Exercised (423,697) (797,578) (127,318) Canceled (15,180) (11,174) (23,776) --------- --------- --------- Outstanding at end of year 2,516,417 2,189,014 2,555,186 ========= ========= ========= Exercisable at end of year 1,297,300 1,178,058 1,656,744 ========= ========= =========
31 Weighted average option price information is as follows:
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Outstanding at beginning of year $12.22 $11.61 $11.06 Granted 34.90 13.63 13.00 Exercised 10.44 11.04 6.31 Canceled 20.07 12.94 13.34 Outstanding at end of year 19.38 12.22 11.61 Exercisable at end of year 14.54 11.53 10.73
Information related to the number of options outstanding, weighted average price per share and remaining life of significant option groups outstanding at December 31, 1998 is as follows:
Outstanding Exercisable ---------------------------- ---------------------------- Life Life Price Range Number Price in Years Number Price in Years ----------- ------ ----- -------- ------ ----- -------- $ 6.38-$11.56 702,223 $10.40 3.5 702,223 $10.40 3.5 $13.00-$18.88 1,052,214 14.13 6.7 441,277 15.12 5.3 $31.06-$36.97 761,980 34.89 9.0 153,800 31.82 9.0
The Company has elected to follow APB Opinion No. 25 in accounting for its stock option plans. Compensation expense of $1,198,000 was recognized in 1998 upon attainment of market price targets as specified under the grant of the performance options. No compensation expense was recorded in 1997 or 1996. Had expense been measured under the fair value provisions of SFAS No. 123, the Company's Net Earnings Available to Common Shareholders and Earnings Per Share for 1998, 1997, and 1996 would have been reduced to the pro forma amounts shown below. In accordance with SFAS No. 123, pro forma information does not include compensation expense attributable to options granted prior to 1995. 32
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Net Income Available to Common Shareholders (in thousands): As reported $137,285 $120,072 $ 27,174 Pro forma 134,230 118,084 26,086 Diluted Net Earnings Per Common Share: As reported $2.72 $2.44 $ .64 Pro forma 2.65 2.40 .61
The weighted average fair value for options granted in 1998, 1997, and 1996, computed utilizing the Black-Scholes option-pricing model, was $16.83, $5.90, and $4.67, respectively. Significant assumptions used in the estimation of fair value and compensation expense are as follows:
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Weighted expected life (years) 7.4 6.7 6.6 Weighted risk-free interest rate 5.5% 6.3% 5.3% Weighted volatility 38.8% 36.6% 36.9% Dividend yield 0.5% 1.1% 1.2%
33 NOTE J - EARNINGS PER SHARE Net earnings and average shares used in basic and diluted earnings per share calculations were as follows:
Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- (In thousands except per share data) NET EARNINGS: Net Earnings $137,285 $120,072 $ 27,445 Less preferred stock dividends -- -- 271 -------- -------- -------- Basic net earnings available to common shareholders 137,285 120,072 27,174 Convertible subordinated debenture interest, net of tax -- 2,969 -- -------- -------- -------- Diluted net earnings available to common shareholders including assumed conversions $137,285 $123,041 $ 27,174 ======== ======== ======== SHARES: Basic weighted average shares outstanding 49,620 44,883 42,266 Stock options 941 939 307 Convertible subordinated debentures -- 4,517 -- -------- -------- -------- Diluted weighted average shares outstanding 50,561 50,339 42,573 ======== ======== ======== NET EARNINGS PER SHARE: Basic $2.77 $2.68 $ .64 Diluted $2.72 $2.44 $ .64 ======== ======== ========
The above calculations of diluted earnings per share excludes certain common shares issuable under stock option plans because the options' exercise price was greater than the average market price of the common shares. Also excluded are common shares issuable under convertible securities arrangements since assuming conversion would be antidilutive and would have the effect of increasing earnings per share. 34 The following is a summary of these excluded common shares (in thousands):
Year Ended December 31 1998 1997 1996 ---- ---- ---- Stock options 528 -- 910 Convertible securities - Subordinated debentures -- -- 6,479 Redeemable preferred stock -- -- 328 ------ ------ ------ Excluded common shares 528 -- 7,717 ====== ====== ======
NOTE K - SEGMENT INFORMATION The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for reporting information about operating segments. The Company has organized its business into two reportable operating segments. The domestic segment derives its revenues from the door-to-door delivery of small packages and documents throughout the United States, Canada, and Puerto Rico. Domestic operations are supported principally by Company operated aircraft and facilities. The international segment derives its revenues from express door-to-door delivery and a variety of freight services. International revenues are recognized on shipments where the origin and/or destination is outside of locations supported by the domestic segment. The Company uses a variable cost approach to delivering international services through use of existing commercial airline capacity in connection with its domestic network and independent express and freight agents in locations not currently served by Company-owned foreign operations. 35 The following is a summary of key segment information (in thousands):
Domestic International Total -------- ------------- ----- 1998 - ---- Revenues $2,712,344 $ 362,181 $3,074,525 Depreciation and amortization 183,147 1,379 184,526 Segment earnings from operations 232,966 1,501 234,467 Segment assets 1,428,956 72,621 1,501,577 Expenditures for property and equipment 281,571 3,910 285,481 1997 - ---- Revenues $2,514,737 $ 397,672 $2,912,409 Depreciation and amortization 168,646 1,199 169,845 Segment earnings from operations 221,473 3,782 225,255 Segment assets 1,288,180 77,793 1,365,973 Expenditures for property and equipment 209,745 2,013 211,758 1996 - ---- Revenues $2,108,670 $ 375,636 $2,484,306 Depreciation and amortization 162,442 1,203 163,645 Loss related to aircraft accident 3,737 -- 3,737 Segment earnings from operations 72,283 6,898 79,181 Segment assets 1,229,011 78,411 1,307,422 Expenditures for property and equipment 171,193 1,964 173,157
International operations are supported in the United States by pickup and delivery, customer service and airline capabilities provided by the domestic segment. Management allocates these costs, generally on a per shipment basis, to the international segment. The Company changed its cost allocation method in 1998, and accordingly, segment earnings from operations for 1997 and 1996 differ from amounts previously reported. Management considers interest expense and income taxes as corporate expenses and, accordingly, does not allocate these costs to the operating segments. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. 36 A substantial portion of international revenue is associated with shipments originating within the United States ($256,259,000 in 1998, $279,532,000 in 1997, and $273,586,000 in 1996). Long lived assets located within the United States and associated with the international segment were $6,274,000, $4,694,000, and $5,113,000 as of December 31, 1998, 1997, and 1996, respectively. NOTE L - LOSS RELATED TO AIRCRAFT ACCIDENT In 1996, the Company suffered the loss of a DC-8-63 aircraft during a routine maintenance check flight. Costs associated with the accident were approximately $3,737,000 and include certain amounts for self insured retention of workers' compensation, loss on the retirement of the aircraft (net of insurance recoveries), and other costs specific to the accident. NOTE M - OTHER COMPREHENSIVE INCOME Other comprehensive income includes the following transactions and tax effects for the year ended December 31, 1998 (in thousands):
Income Tax Before (Expense) Net of Tax or Benefit Tax ------ ---------- ------ Unrealized securities gains arising during the period $ 3,071 $ (1,182) $ 1,889 Less: Reclassification adjustment for gains realized in net income (1,531) 589 (942) ------- ------- ------- Net unrealized securities gains 1,540 (593) 947 Foreign currency translation adjustments (295) 114 (181) ------- ------- ------- Other comprehensive income $ 1,245 $ (479) $ 766 ======= ======= =======
37 NOTE N - SUPPLEMENTAL GUARANTOR INFORMATION In connection with the issuance of $200,000,000 of Senior Notes (Notes) certain of the Company's subsidiaries (collectively, "Guarantors") have fully and unconditionally guaranteed, on a joint and several basis, the Company's obligations to pay principal, premium, if any, and interest with respect to the Notes. The Guarantors are ABX Air, Inc. (ABX) and Airborne Forwarding Corporation (AFC), which are wholly-owned by the Company, and Airborne FTZ, Inc. (FTZ) and Wilmington Air Park, Inc. (WAP), which are wholly-owned subsidiaries of ABX. Non-guarantor subsidiaries' assets, liabilities, revenues and net earnings are inconsequential both individually and on a combined basis in comparison to the Company's consolidated financial statement totals. Management does not consider disclosure of separate subsidiary financial statements for each Guarantor to be material. Summarized financial information of the Guarantors on a combined basis is as follows (in thousands):
Balance Sheet Information: December 31 1998 1997 - ----------- ---- ---- Current assets $ 66,572 $ 45,103 Property and equipment, net 886,801 784,555 Other noncurrent assets 22,623 7,487 Current liabilities 100,302 98,791 Long-term debt 20,149 20,559 Other noncurrent liabilities 105,926 94,424 Intercompany payable 426,590 377,019
Earnings Statement Information: Year Ended December 31 1998 1997 1996 - ---------------------- ---- ---- ---- Revenues - intercompany $980,322 $900,428 $767,972 Revenues - third-party 77,923 72,763 72,702 Operating expenses 938,925 873,213 778,392 Earnings from operations 119,320 99,978 62,282 Net earnings 76,678 64,239 27,229
38 ABX is a certificated air carrier which owns and operates the domestic express cargo services for which the Company is the sole customer. ABX also offers air charter services on a limited basis to third-party customers. FTZ owns certain aircraft parts inventory which it sells primarily to ABX, with limited sales to third-party customers. FTZ is also the holder of a foreign trade zone certificate at Wilmington airport property. WAP is the owner of the Wilmington airport property which includes the Company's main sort facility, aircraft maintenance facilities, runways and related airport facilities and airline administrative and training facilities. ABX is the only occupant and customer of WAP. AFC, which conducts business as Sky Courier, provides expedited courier services and regional logistics warehousing primarily to third-party customers. Investment balances and revenues between Guarantors have been eliminated for purposes of presenting the above summarized financial information. Intercompany revenues and net earnings recorded by ABX, FTZ, and WAP are controlled by the Company and are based on various discretionary factors. Intercompany payable amounts represent net amounts due the Company by its Guarantors. The Company provides the Guarantors with a majority of the cash necessary to fund operating and capital expenditure requirements. 39 NOTE O - QUARTERLY RESULTS (Unaudited) The following is a summary of quarterly results of operations (in thousands except per share data):
1st 2nd 3rd 4th 1998 Quarter Quarter Quarter Quarter - ---- ------- ------- ------- ------- Revenues $750,193 $764,137 $769,082 $791,113 Earnings from Operations 57,536 58,887 55,085 62,959 Net Earnings Available to Common Shareholders 32,360 33,827 32,813 38,285 Net Earnings per Common Share Basic $ .65 $ .67 $ .66 $ .79 Diluted $ .63 $ .66 $ .65 $ .78 1997 - ---- Revenues $655,522 $712,784 $788,598 $755,505 Earnings from Operations 32,321 54,970 83,911 54,053 Net Earnings Available to Common Shareholders 14,374 28,287 46,619 30,792 Net Earnings per Common Share Basic $ .34 $ .66 $ 1.05 $ .62 Diluted $ .31 $ .59 $ .94 $ .60
40 EX-23 6 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Board of Directors Airborne Freight Corporation Seattle, Washington We consent to the incorporation by reference in Registration Statement Nos. 33-3713, 33-39720, 33-51651, 33-58905 and 333-55687 of Airborne Freight Corporation and subsidiaries on Form S-8 of our report dated February 12, 1999, incorporated by reference in this Annual Report on Form 10-K of Airborne Freight Corporation and subsidiaries for the year ended December 31, 1998. /s/ Deloitte & Touche LLP - ------------------------- DELOITTE & TOUCHE LLP Seattle, Washington March 26, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 18,679 0 333,318 10,140 39,726 435,788 2,074,400 1,052,515 1,501,577 333,257 249,149 0 0 50,819 718,333 1,501,577 0 3,074,525 0 2,840,058 0 0 12,882 221,585 84,300 0 0 0 0 137,285 2.77 2.72 EARNINGS PER SHARE - BASIC EARNINGS PER SHARE - DILUTED
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