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ABX Air, Inc., Reports Second Quarter Revenues and Earnings; Announces Contract for Memphis Postal Center

Posted on: Wednesday, 9 August 2006, 18:00 CDT

ABX Air, Inc., (NASDAQ:ABXA) today reported revenues of $303.6 million and net earnings of $6.5 million, or $0.11 per share, for the second quarter of 2006.

For the quarter, ABX Air's revenues declined $47.7 million and net earnings declined $0.3 million, or $0.01 per share, compared with the second quarter of 2005. Earnings during the second quarter of 2006 were negatively impacted by the reduction in truck line-haul management services provided to DHL, ABX's largest customer.

As previously reported, ABX Air transitioned the management of the line-haul network to DHL in the second quarter of 2006. ABX Air received revenues equal to its line-haul expenses of $17.5 million through the transition of the line-haul network to DHL on May 1, 2006. During the second quarter of 2005, the line-haul operations contributed $54.7 million in revenues, including mark-ups, and approximately $1.2 million to ABX Air's earnings.

Offsetting the decline in services provided to DHL were improved results from ABX Air's non-DHL charter operations and increased interest income. Revenues from non-DHL charter operations increased 69% to $5.4 million, while earnings increased by $0.7 million.

For the first six months of 2006, ABX Air's net earnings were $14.6 million, or $0.25 per share, on revenues of $672.7 million. Net earnings improved from the first six months of 2005, when ABX Air earned $13.8 million, or $0.24 per share, on revenues of $697.8 million. ABX Air's net earnings during the first six months of 2006 include $8.9 million from its two commercial agreements with DHL and $5.7 million from other, non-DHL business activities and interest income. ABX Air's net earnings of $13.8 million in the first six months of 2005 included $10.2 million from the two DHL agreements and $3.6 million from non-DHL business activities and interest income.

"We continue to focus on improving the cost efficiency of the services we provide to our largest customer," said President and CEO Joe Hete. "We have particularly been encouraged by the productivity improvements in our hub services group, where we are maintaining high service levels while reducing our costs through the first six months of 2006. Meanwhile, our non-DHL charter operations continue to expand, and market demand for our Boeing 767 freighters remains very strong. We also were pleased to receive two contract awards from the U.S. Postal Service ("USPS") to manage surface transfer centers in Dallas, Texas and Memphis, Tennessee. These are the second and third such facilities we will operate for the USPS. Both facilities are targeted to begin in September, 2006. We estimate that these two four-year postal contracts should provide additional annualized revenues of approximately $5.0 million each," stated Hete.

Results Associated with the DHL Agreements

ABX Air has two commercial agreements with DHL: the aircraft, crew, maintenance and insurance agreement ("ACMI agreement"), and a hub and line-haul services agreement ("Hub Services agreement"). Under each agreement, ABX Air earns a base mark-up of 1.75% on eligible costs and can earn incremental mark-ups for meeting certain quarterly cost-related goals.

ABX Air's net earnings from its two commercial agreements with DHL were $3.6 million during the second quarter of 2006, down from $5.1 million in the second quarter of 2005. The 2006 results included $2.9 million in earnings from the base mark-up and $0.7 million from incremental mark-ups, representing approximately 66% of the maximum, cost-related incremental mark-up possible under the two agreements.

Incremental mark-up of $0.7 million (the maximum available) was received from the ACMI agreement, and no incremental mark-up was received from the Hub Services agreement in the second quarter of 2006. During the second quarter of 2005, ABX Air's net earnings included $0.5 million from incremental mark-up under the two agreements ($0.4 million from the ACMI agreement and $0.1 million from the Hub Services agreement), representing 39% of the maximum, cost-related incremental mark-up possible.

"During 2006 we have been able to keep our ACMI expenses within budgeted ranges while performing a higher number of air operations than planned for DHL. As a result, we improved our incremental earnings under the ACMI agreement," noted Hete. "Although no incremental mark-up was earned under the Hub Services agreement in the second quarter of 2006, we did operate at budgeted expense levels under that agreement, and continue to improve labor productivity; however, shipment volumes handled during the quarter were below anticipated levels."

Results from Non-DHL Operations

Charter revenues grew to $5.4 million for the second quarter of 2006 compared with $3.2 million in the second quarter of 2005. ABX Air operates two Boeing 767 freighter aircraft that are dedicated to non-DHL customers. Charter earnings of $0.7 million for the second quarter of 2006 increased from $5.0 thousand during the second quarter of 2005 due to higher revenues and improved aircraft utilization.

"Our non-DHL charter business is gaining momentum. The second quarter was our best yet since deploying the Boeing 767 freighters in the second quarter of 2005," stated Hete. Charter aircraft block hours flown during the second quarter of 2006 grew by 69% as compared to the second quarter of 2005, and increased by 42% as compared to the first quarter of 2006. Based on the most current delivery projections, the Company expects to deploy two more 767 freighters in the fourth quarter of 2006 and eight additional aircraft during the next two years. While some of these additional aircraft may be contracted to DHL, interest from non-DHL customers is currently strong.

Other, non-DHL revenues decreased $0.5 million to $3.3 million in the second quarter of 2006 compared to the second quarter of 2005. Earnings from other non-DHL activities declined $0.2 million during the second quarter of 2006 compared to 2005. Declines in non-DHL revenues reflect the volatility associated with aircraft modification and heavy maintenance orders.

Outlook/Other Items

Hub Services Reductions

The Company reported in March 2006 that DHL intends to reduce the level of services provided by ABX Air at DHL's regional hub facility in Allentown, Pa. The Company projects that the Allentown operation will be transitioned in the first quarter of 2007, concurrent with the opening of a new automated facility at that location. ABX Air's net income during the second quarter of 2006 derived from the Allentown operations was less than $0.1 million

Aircraft Fleet Consolidation

ABX Air had reported in November 2004 that DHL intended to remove 26 aircraft that ABX Air operates on its behalf. Since November of 2004, seven aircraft have been removed from active service under the ACMI agreement by DHL. In July 2006, DHL gave ABX notice to remove 21 specific aircraft from the ACMI agreement effective in August 2006. This removal of aircraft was not unexpected. As a result of consolidating DHL's air hub operations from Cincinnati into its main, ABX-managed hub in Wilmington, Ohio last September, redundant air routes were eliminated and several aircraft had been placed in back-up status.

After these aircraft removals occur, ABX Air will continue to operate 91 aircraft dedicated to DHL service and will remain by far the largest provider of ACMI services to DHL. DHL will continue to fund depreciation for eight of the DC-9s that are being removed through their remaining depreciable life in August 2010. ABX will use the engines on these eight DC-9 aircraft to support the remaining 59 DC-9 aircraft in the DHL network. Under the ACMI agreement, the company has the option to retain the other thirteen aircraft or sell individual aircraft to DHL for the lower of net book value or appraised fair market value. ABX is assessing the fair value of the 13 aircraft being removed and whether it will exercise its put option to sell the aircraft to DHL. The net book value of these aircraft is approximately $4.8 million. There may be an impairment charge recorded in the third quarter of 2006 associated with the appraised values of these aircraft.

Mark-up Potential Under the DHL Agreements

The two commercial agreements with DHL specify that ABX Air can earn both quarterly cost-related mark-ups and additional, annual cost-related and service-related mark-up revenues based on its performance against specific goals. No incremental mark-up from the annual cost and service goals was included in our revenue for the first half of 2006. These annual mark-ups, to the extent earned, are recorded in the fourth quarter of the year.

In March 2006, ABX Air and DHL agreed to additional performance incentives for 2006 beyond the existing contractual incentives in the event ABX Air can achieve very significant cost reductions under the commercial agreements. Achievement of these additional incentives will be very difficult.

Conference Call

ABX Air will host a conference call to review its financial results for the second quarter of 2006 on August 10 at 10 AM Eastern Daylight Time. Participants should dial (866) 362-5158 and international participants should dial (617) 597-5397 ten minutes before the scheduled start of the call and ask for conference ID #69114162. The call will also be webcast live (listen-only mode) via either www.abxair.com or www.earnings.com for individual investors and www.streetevents.com for institutional investors. A replay of the conference call will be available an hour after the conclusion of the call. It will be available by phone through August 16, 2006 at (888) 286-8010 (international callers (617) 801-6888); use pass code ID #98949472. The webcast replay will remain available via www.abxair.com or www.earnings.com for 30 days.

Except for historical information contained herein, the matters discussed in this release contain forward-looking statements that involve risks and uncertainties. ABX Air, Inc.'s actual results may differ materially from the results discussed in the forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, reductions in the scope of services under the commercial agreements with DHL, maintaining cost and service level performance, the ability to generate revenues from sources other than DHL and other factors that are contained from time to time in ABX Air's filings with the U.S. Securities and Exchange Commission, including ABX's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Readers should carefully review this release and should not place undue reliance on the Company's forward-looking statements. These forward-looking statements were based on information, plans and estimates as of the date of this release. ABX undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

ABX AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share data) Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------ 2006 2005 2006 2005 -------- -------- -------- -------- REVENUES $303,578 $351,237 $672,743 $697,831 OPERATING EXPENSES: Salaries, wages and benefits 152,592 143,746 317,357 286,206 Purchased line-haul 18,955 77,273 84,449 151,108 Fuel 69,714 63,549 131,052 122,266 Maintenance, materials and repairs 23,211 26,243 55,849 54,016 Depreciation and amortization 11,350 10,252 22,353 19,884 Landing and ramp 4,516 4,490 12,122 14,256 Rent 2,280 1,865 4,710 3,964 Other operating expenses 12,910 14,748 27,019 27,885 -------- -------- -------- -------- 295,528 342,166 654,911 679,585 -------- -------- -------- -------- 8,050 9,071 17,832 18,246 INTEREST EXPENSE, NET OF INTEREST INCOME (1,591) (2,316) (3,280) (4,408) -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 6,459 6,755 14,552 13,838 INCOME TAXES - - - - -------- -------- -------- -------- NET EARNINGS $ 6,459 $ 6,755 $ 14,552 $ 13,838 ======== ======== ======== ======== EARNINGS PER SHARE: Basic earnings per share $ 0.11 $ 0.12 $ 0.25 $ 0.24 ======== ======== ======== ======== Diluted earnings per share $ 0.11 $ 0.12 $ 0.25 $ 0.24 ======== ======== ======== ======== WEIGHTED AVERAGE SHARES: Basic 58,270 58,270 58,270 58,270 ======== ======== ======== ======== Diluted 58,567 58,454 58,481 58,454 ======== ======== ======== ======== ABX AIR, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) June 30, 2006 December 31, (Unaudited) 2005 -------------- -------------- ASSETS: Cash $ 58,234 $ 69,473 Accounts receivable, net 5,400 15,776 Other current assets 35,459 35,197 -------------- ------------- Total Current Assets 99,093 120,446 Property and equipment, net 413,673 381,645 Other assets 14,736 13,952 -------------- ------------- Total Assets $ 527,502 $ 516,043 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities $ 146,571 $ 162,269 Long-term Obligations 250,509 240,695 Stockholders' Equity 130,422 113,079 -------------- ------------- Total Liabilities and Stockholders' Equity $ 527,502 $ 516,043 ============== ============= ABX AIR, INC. EARNINGS SUMMARY (UNAUDITED) (In thousands) Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2006 2005 2006 2005 -------- -------- -------- -------- REVENUES DHL Contracts ACMI Base mark-up $114,938 $121,495 $243,083 $244,193 Incremental mark-up 683 435 1,431 996 -------- -------- -------- -------- Total ACMI 115,621 121,930 244,514 245,189 Hub Services Base mark-up 81,081 142,238 229,564 279,118 Incremental mark-up - 116 792 196 -------- -------- -------- -------- Total Hub Services 81,081 142,354 230,356 279,314 Other Reimbursable 98,147 79,933 180,791 159,888 -------- -------- -------- -------- Total DHL 294,849 344,217 655,661 684,391 Charter 5,401 3,191 9,251 5,354 All other 3,328 3,829 7,831 8,086 -------- -------- -------- -------- Total Revenues $303,578 $351,237 $672,743 $697,831 -------- -------- -------- -------- EXPENSES DHL Contracts ACMI $113,163 $119,428 $239,217 $240,016 Hub services 79,898 139,807 226,761 274,333 Other Reimbursable 98,147 79,933 180,791 159,888 -------- -------- -------- -------- Total DHL 291,208 339,168 646,769 674,237 Charter 4,697 3,186 8,305 5,211 All other 2,356 2,656 5,403 5,400 -------- -------- -------- -------- Total Expenses $298,261 $345,010 $660,477 $684,848 -------- -------- -------- -------- EARNINGS DHL Contracts $ 3,641 $ 5,049 $ 8,892 $ 10,154 Charter 704 5 946 143 All other 972 1,173 2,428 2,686 Interest Income 1,142 528 2,286 855 -------- -------- -------- -------- Total Earnings $ 6,459 $ 6,755 $ 14,552 $ 13,838 ======== ======== ======== ======== Note: The results above for customers other than DHL do not reflect an allocation of overhead costs that are reimbursed by DHL. The provisions of the commercial agreements with DHL do not require an allocation of reimbursed overhead until such time as ABX derives more than 10% of its total revenue from non-DHL sources.

Source: Business Wire

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