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2006 Annual Report
ABX Air 2006 Annual Report
To Our Shareholders
I
n 2006, ABX Air made great strides toward its
operators, who support its U.S. ground operations. In
goal of becoming the best air cargo and
August, DHL released 21 of our DC-8 and DC-9 aircraft
package-handling company in the
industry, while also delivering
outstanding financial results.
Last year's earnings from
the services we provide to DHL, our
principal customer, were higher
than they were in 2005, thanks
primarily to our strong performance
against service
quality goals.
I continually
remind our
employees that
our relationship
with DHL is
structured to
motivate all of us
to do our jobs
better each year
than we did the year before. If
both companies improve each
year, then both get rewards.
Our 2006 results are proof
that the people of ABX are
dedicated to meeting
this challenge.
Still, the scope of that
from service under our
ACMI agreement,
completing a process it
first announced in 2004.
And, at the beginning of
2007, DHL opened a new
automated sorting facility
in Allentown, Pa.,
replacing a manual sort
facility nearby that we had
operated for them.
The line-haul
operations, in particular, were
a significant part of our hub
services business, and one that
we had performed well. Its
migration to DHL, while smooth
and efficient,
reduced our 2006
revenues and
earnings.
Fortunately,
however, our
performance in all
other phases of
our DHL business
was as good or
relationship changed last year. In May, DHL assumed
better in 2006 than in 2005, yielding a five percent
management of its independent line-haul trucking
increase in pre-tax earnings from our DHL contracts.
ABX Air 2006 Annual Report
T
hat percentage doesn't fully reflect the strength
As I said a year ago, we believed that we had a
of what we accomplished last year. Of our total
good opportunity to replace the line-haul business with
DHL pre-tax earnings of $22.5 million last year,
growing earnings and cash flow from our other
47 percent came from
performance-related cost and
service incentives, compared
with just 36 percent in 2005.
Our ACMI on-time performance
for DHL air network flights
finished the year in excess of
99 percent. And we beat our
own mid-year outlook
for service-quality
rewards in our hub
services operations
with a strong holiday-
season finish, earning
70 percent of the
allowable maximum in
that category.
At the same time, our
non-DHL businesses are
growing fast, but more
importantly, they are more
profitable. Due to strong air
cargo volume and our
expanding fleet of Boeing
767s, earnings from our
charter segment were up
businesses. We did just
that, and more, thanks to
solid performance in
both our DHL and
non-DHL businesses.
Our results have
reinforced our commitment
to our core strategy: finding
new ways to reduce
costs while
delivering ever-
improving service
across the board
for DHL, while
expanding our
higher-margin non-
DHL businesses,
especially our charter
business, as rapidly
as possible.
Our fundamental
strength is our ability to
connect companies with
their customers, and we
do that every day with
reliable air and package-
more than 200 percent, pre-tax. Margins in 2006 were
handling expertise that has earned us worldwide
significantly stronger than in 2005, and revenues rose
respect from freight forwarders, other cargo carriers,
76 percent in our charter operations alone.
and high-value shippers.
ABX Air 2006 Annual Report
O
ur work for the U.S. Postal Service (USPS) is a
six 767s we have in service as of March 2007 for
case in point. We took over management of two
customers other than DHL, I am looking forward to
regional sort centers
for the USPS last fall,
and supplemented
their holiday-season air
network with one of our
767s. Those two new
centers in Dallas and
Memphis, together with
our continuing
management of the
USPS center in
Indianapolis, will make a
positive contribution to our
non-DHL results this year.
Collectively, our non-
DHL businesses have
exceeded our projections
since we became an
independent public
company in 2003.
The thirteen 767s we
are adding to our fleet
– 12 from Delta Air
Lines and one
formerly operated by
American Airlines –
will make us a
stronger competitor
adding six more this year and
one more in early 2008.
Expanding our air cargo
segment into new markets will
require the commitment and
teamwork of the company's
employees. I am confident that
ABX Air's people are up for the
challenge. They understand
that our reputation for
reliability and cost
consciousness is
important to our
customers and our
prospects for growth
and diversity.
The 767 is
ideal for the markets we
intend to serve, with its
two-person crew, twin-engine
efficiency, and Category III
landing capability. That
capability, together with our
technical maintenance
expertise and the
sophisticated flight operations
center we operate in
Wilmington, lets us fly our
for air cargo business not just in the Americas, but in
767s under weather conditions that ground some other
growing international markets as well. In addition to the
freighters, keeping our on-time percentages very high.
ABX Air 2006 Annual Report
B
y this time next year, we will be the largest
In particular, we can demonstrate that the
operator of 767-200 freighters in the world,
thousands of ABX employees at the core of our sorting
including those in DHL service. Most importantly, we are
operations are more proficient, flexible, quality-focused
in the enviable position of having our 767s available
and cost-conscious than ever before.
today, when customers are eager for the advantages
Our focus as your management will continue to
they offer.
We will continue to
offer more air-related services,
including parts, maintenance and
repair services, through our FAA-
certified facilities and teams.
We will also continue to look
for appropriate ways to
acquire capacity and expertise
that complements our
existing operations.
We are equally
committed to DHL's
goal to develop a
strong presence in the
U.S. market, just as it
enjoys elsewhere
around the globe.
While the
components of our
be on executing the strategy we have
outlined before: providing excellent,
cost-effective service to our partner,
DHL, while seizing opportunities to
build our non-DHL business as we
find them. We believe we made
significant progress in that area last
year, as evidenced by the rollback of
our tax carryforward reserve. That
step, which provided a substantial
non-cash addition to our 2006
results, reflects our confidence
that we will be generating
substantial amounts of income
over the next several years.
You can be assured that
we will do everything we can to
see that the financial progress we
make is reflected in stronger
returns for our shareholders, not
relationship may change over time, we expect to remain
just in 2007, but in the years to come. Thanks again for
their strong U.S. partner, both in the air and on the
your continuing support of ABX Air.
ground, for years to come. Through continued emphasis
on exceptional service levels and cost controls, we are
convinced that we can help them win new U.S.
customers and build market share even in very
Joseph C. Hete
competitive market conditions.
President & Chief Executive Officer
ABX Air 2006 Annual Report
ABX Air Global Network 2006-2007
Yellow lines show flight routes operated on
behalf of DHL. Red lines represent flight routes
operated for customers other than DHL during
2006 and 2007.
ABX Air’s charter operations out of Los
Angeles and Miami allow us to cover Mexico, the
Caribbean, Central and South America with ease.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission file number 000-50368
ABX AIR, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
91-1091619
(I.R.S. Employer Identification No.)
145 Hunter Drive, Wilmington, OH 45177
(Address of principal executive offices)
937-382-5591
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 per share
(Title of class)
Name of each exchange on which registered: NASDAQ Stock Market, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of class: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES ‘ NO È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. YES ‘ NO È
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 È 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. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Accelerated filer È
Indicate by check mark whether the registrant
YES ‘ NO È
is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference
to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed
second fiscal quarter: $349,358,619.
As of March 16, 2007, 58,683,500 shares of the registrant’s common stock, par value $0.01, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders scheduled to be held May 9, 2007 are
incorporated by reference into Part III.
FORWARD LOOKING STATEMENTS
Statements contained in this annual report on Form 10-K, including “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” in Item 7, that are not historical facts are considered
forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995).
Words such as “projects,” “believes,” “anticipates,” “will,” “estimates,” “plans,” “expects,” “intends” and similar
words and expressions are intended to identify forward-looking statements. These forward-looking statements
are based on expectations, estimates and projections as of the date of this filing, and involve risks and
uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in
the forward-looking statements for any number of reasons, including those described in “Risk Factors” starting
on page 8 and “Outlook” starting on page 16.
Filings with the Securities and Exchange Commission
The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and
information statements and other information regarding ABX Air at www.sec.gov. Additionally, our filings with
the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, are available free of charge from our website at www.ABXAir.com as
soon as reasonably practicable after filing with the SEC.
ABX AIR, INC. AND SUBSIDIARIES
2006 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . .
Item 9.
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
1
9
13
13
13
15
16
18
19
35
36
64
64
66
67
68
68
69
69
69
72
ITEM 1. BUSINESS
Background
PART I
ABX Air, Inc. (“ABX” or “the Company”) is a cargo airline providing transportation through a fleet of
Boeing 767, McDonnell Douglas DC-9 (“DC-9”) and McDonnell Douglas DC-8 (“DC-8”) aircraft. We
complement our air transport capabilities with package handling and warehousing services. We employ
approximately 6,100 full-time employees and 3,600 part-time employees. We operate primarily in the United
States but have the authority to fly worldwide. Our headquarters, principal airline hub and largest package sorting
operations are located in Wilmington, Ohio.
ABX was formed as a Delaware corporation in 1980. Between 1980 and August 2003, ABX was an affiliate
of Airborne, Inc. (“Airborne”), a publicly traded, integrated delivery service provider. On August 15, 2003, ABX
was separated from Airborne in conjunction with a merger agreement between Airborne and DHL Holdings
(USA), Inc., (“DHL”) a wholly-owned subsidiary of DHL Worldwide Express, B.V. The merger agreement
required Airborne to separate its air operations from its ground operations with the air operations being retained
by ABX. ABX became an independent publicly traded company, and Airborne was subsequently merged into
DHL.
letters
to shipper-packaged pallets of electronic equipment,
DHL is our largest customer, constituting substantially all of our revenues in recent years. We manage a
network of eighteen hubs for DHL, providing package sorting and handling. We process shipments ranging from
individual
retail catalogs, movies and
pharmaceuticals. Using our aircraft, we assist DHL in providing domestic express delivery services for cargo
typically requiring next day delivery. We also offer ACMI (aircraft, crew, maintenance and insurance) and full
service charters to freight forwarders, airlines and other major shippers. Additionally, we operate three sorting
facilities for the United States Postal Service (“USPS”). We sell aircraft parts, provide maintenance and repair
services for airframes and aircraft components and conduct flight-training services for customers. We operate in
two reportable segments: DHL and Non-DHL ACMI/Charters. (Financial information about our reportable
segments is presented in Note N to the accompanying consolidated financial statements.)
Business with DHL
ABX and DHL operate under two commercial agreements. The aircraft, crew, maintenance and insurance
agreement (“ACMI agreement”) and a hub services agreement (“Hub Services agreement”) became effective
August 16, 2003, in conjunction with Airborne merging with DHL. Under these agreements, we provide services
to DHL on a cost-plus basis. We assist DHL in providing domestic express and deferred delivery services to its
customers. DHL’s express delivery services include its Next Day Service and DHL 2nd Day Service. Next Day
Service packages are primarily transported by our fleet of aircraft and sorted through our nightly hub operations.
2nd Day and DHL’s other deferred delivery services, which include DHL@Home and DHL Ground Service, are
primarily transported by contracted trucks and sorted through our Wilmington daytime sort and regional hub
operations.
We operate and maintain DHL’s primary U.S. hub facility located in Wilmington, Ohio. The Wilmington
facility handles approximately one million pieces during nightly sort operations each weekday. In addition to the
sort facility in Wilmington, we operate seventeen regional hubs on behalf of DHL. These regional hub facilities
primarily sort shipments originating and having a destination within approximately 250 miles. We also conduct
daytime sort operations in Wilmington that process deferred delivery shipments. The day sort generally receives
shipments through a combination of aircraft and trucks originating from regional hubs, DHL station facilities or
customer sites. The night sort and day sort operations at Wilmington handle approximately 50% of the total
system-wide shipment weight, while the regional hubs handle the remaining 50%.
1
The seventeen regional hubs are located near Atlanta, Georgia; Baton Rouge, Louisiana; Chehalis,
Washington; Kansas City, Missouri; Denver, Colorado; Erie, Pennsylvania; Fresno, California; Memphis,
Tennessee; Minneapolis, Minnesota; Orlando, Florida; Phoenix, Arizona; Providence, Rhode Island; Roanoke,
Virginia; Salt Lake City, Utah; Riverside, California; South Bend, Indiana; and Waco, Texas.
ACMI Agreement
Air cargo transportation services are provided to DHL under the ACMI agreement on a cost-plus pricing
structure. Costs incurred under the ACMI agreement are generally marked-up 1.75% and recorded in revenues.
Certain costs which are reimbursed by DHL, the most significant of which include fuel, rent, interest on a
promissory note to DHL, ramp fees and landing fees incurred under the ACMI agreement, are recorded in
revenues without mark-up. By achieving certain cost-related and service goals specified in the agreement, the
mark-up can increase from a base of 1.75% up to approximately 3.35%.
The initial term of the ACMI agreement expires August 15, 2010 and automatically renews for an additional
three years unless a one-year notice of non-renewal is given. DHL may terminate the ACMI agreement if, after a
cure period, ABX is not in compliance with applicable performance standards specified in the agreement. The
agreement allows DHL to reduce the air routes that we fly or to remove aircraft from service. For any aircraft
removed from service during the term of the ACMI agreement, the agreement allows us to put the aircraft to
DHL, requiring DHL to buy such aircraft from us at the lesser of book value or fair market value. If our
stockholders’ equity is less than or equal to $100 million at the time of sale, any amount by which the appraised
fair market value is less than net book value would be applied to a promissory note we owe to DHL. However, if
our stockholders’ equity is greater than $100 million, as it is at this time, any amount by which fair market value
is less than net book value would be recorded as an operating charge. For purposes of applying the $100 million
stockholders’ equity threshold, ABX’s stockholders’ equity will be calculated after including the effect of any
charges caused by the removal of aircraft.
Hub Services Agreement
Under the Hub Services agreement, we provide staff to conduct package sorting, warehousing, and logistics
services, as well as airport, facilities and equipment maintenance services for DHL. Costs incurred under the
agreements are generally marked-up 1.75% and included in revenues. By achieving certain cost and service goals
specified in the agreement, the mark-up can increase from a base of 1.75% up to approximately 3.85%.
The Hub Services agreement currently expires on August 15, 2007 and thereafter automatically renews for
periods of one year each unless a ninety-day notice of non-renewal is given. DHL may terminate the Hub
Services agreement if, after a cure period, ABX is not in compliance with applicable performance standards
specified in the agreement. DHL may also terminate the Hub Services agreement if the ACMI agreement has
been terminated. The agreement allows DHL to terminate specific services after giving at least sixty days of
advance notice.
DHL has reduced the scope of services provided by ABX in the last year. Since the second quarter of 2006,
DHL has directly managed the truck line-haul network previously managed by ABX. On January 1, 2007, the
Company transferred the operations of a regional hub in Allentown, Pennsylvania, from ABX’s management to
its own management. In February 2007, DHL notified us of its plan to take over management of the regional hub
operation in Riverside, California in June 2007.
ACMI and Charter Services for Customers other than DHL
We also have aircraft that are not under contract to DHL. We deploy these aircraft to provide ACMI
services and fly charters for customers other than DHL. A typical ACMI contract requires ABX to supply, at a
specific rate per block hour, the aircraft, crew, maintenance and insurance for specified cargo operations, while
2
the customer is responsible for substantially all other aircraft operating expenses, including fuel, landing fees,
parking fees and ground and cargo handling expenses. Charter agreements usually require ABX to provide full
service, including fuel and other operating expenses in addition to aircraft, crew, maintenance and insurance for a
fixed, all-inclusive price. Under our ACMI and charter arrangements, we have exclusive operating control of our
aircraft, and our customers must typically obtain any government authorizations and permits required to service
the designated routes.
Other Products and Services
U.S. Postal Service
During the third quarter of 2006, ABX was awarded contracts to manage USPS mail sort centers in Dallas,
Texas and Memphis, Tennessee. Each of these facilities began operations in September 2006. ABX was also
awarded a renewal of a USPS sort center in Indianapolis, Indiana that we have operated since 2004. Under each
of these contracts, we are compensated at a firm price for fixed costs and an additional amount based on the
volume of mail handled at each sort center. Each of the contracts has a four-year term with extensions at the
discretion of the USPS.
Airport-to-Airport Transportation of Freight on a Space-Available Basis
Our ACMI agreement with DHL allows us, subject to certain limitations described in the ACMI agreement,
to sell any aircraft space that DHL does not use to other customers. On the routes we operate for DHL, we sell
airport-to-airport transportation services to freight forwarders and to the USPS.
Aircraft Maintenance and Modification Services
We operate a Federal Aviation Administration (“FAA”) certified 145 repair station. We can leverage the
repair station facilities (including hangars and a component shop, which we lease) and our engineering
capabilities to perform airframe and component maintenance and repair services for other airlines and
maintenance repair organizations. We have developed technical expertise related to aircraft modifications as a
result of our long history in aviation. We own many Supplemental Type Certificates (“STCs”). An STC is
granted by the FAA and represents an ownership right, similar to an intellectual property right, which authorizes
the alteration of an airframe, engine or component. We market our capabilities by identifying aviation-related
maintenance and modification opportunities and attempting to match them to our capabilities.
Our marketable capabilities include the installation of terrain awareness warning systems (“TAWS”),
terminal collision avoidance systems (“TCAS”), reduced vertical separation minima (“RVSM”) and flat panel
displays for Boeing 757 and Boeing 767 cockpits. The flat panel display updates aircraft avionics equipment and
reduces maintenance costs by combining multiple display units into a single instrumentation panel. We perform
heavy maintenance and airframe overhauls on DC-9 and Boeing 767 aircraft and line maintenance on DC-8,
DC-9, Boeing 747 and Boeing 767 aircraft. We refurbish in-house approximately 60% of the airframe
components for DC-8 and DC-9 aircraft and the wheels and brakes for DC-8, DC-9 and Boeing 767 aircraft
types. We can also perform intermediate repairs on the engines for DC-8 aircraft and the engines and auxiliary
power units for DC-9 aircraft. Additionally, we update aircraft manuals for customers in conjunction with the
modification of aircraft from passenger to cargo configuration.
Aircraft Parts Sales and Brokerage
Our wholly-owned subsidiary, ABX Material Services, Inc., which holds a certificate relating to free trade
zone rights, is an ASA (Aviation Suppliers Association) 100 Certified reseller and broker of aircraft parts. We
carry an inventory of DC-8, DC-9 and Boeing 767 spare parts and also maintain inventory on consignment from
original equipment manufacturers, resellers, lessors and other airlines. Our customers include the commercial air
cargo industry, passenger airlines, aircraft manufacturers and contract maintenance companies serving the
commercial aviation industry, as well as other resellers.
3
Flight Crew Training
We are FAA-certificated to offer training to customers and rent usage of our flight simulators for outside
training programs. We train flight crewmembers in-house utilizing our own classroom instructors and facilities.
We own four flight simulators, including one Boeing 767, one DC-8 and two DC-9 flight simulators. Our Boeing
767 and one of our DC-9 flight simulators are level C certified, which allows us to qualify flight crewmembers
under FAA requirements without performing check flights in an aircraft. Our DC-8 and the other DC-9 flight
simulator are level B certified, which allows us to qualify flight crewmembers by performing a minimum number
of flights in an aircraft.
Airline Operations
Aircraft
We currently utilize pre-owned Boeing 767, McDonnell Douglas DC-8 and McDonnell Douglas DC-9
aircraft. Once acquired, aircraft are modified for use in our cargo operation. As of December 31, 2006, our
in-service fleet consisted of 99 aircraft, including 33 Boeing 767 aircraft, five DC-8 aircraft, and 61 DC-9
aircraft.
The majority of our aircraft are not equipped with standard cargo doors, but instead utilize the former
passenger doors for the loading and unloading of freight. This reduced the cost of modifying the aircraft from
passenger to cargo configuration but limits the size of the freight that can be carried onboard the aircraft and
necessitates the use of specialized containers and loading equipment. The absence of a cargo door may also
negatively impact the market value of the aircraft.
On December 31, 2006, we had nine Boeing 767 aircraft that were converted from passenger aircraft to a
standard cargo door configuration. We are currently committed to add eight more of these Boeing 767 freighters
to our fleet by the end of the first quarter of 2008. The timing of acquisitions and modification payments are
described on page 30 of this report. We also have four DC-8 aircraft that are equipped with an activated standard
cargo door.
Flight Operations and Control
Our flight operations, including aircraft dispatching, flight tracking and crew scheduling, are planned and
controlled by ABX personnel from the DHL Air Park in Wilmington, Ohio. We staff aircraft dispatching and
flight tracking 24 hours per day, 7 days per week. Our flight operations office at the DHL Air Park also
coordinates the technical support necessary for our flights to operate into other airports. Because our flight
operations can be hindered by inclement weather, we use sophisticated landing systems and other equipment that
is intended to minimize the effect that weather may have on our flight operations. All of our Boeing 767 aircraft
are equipped for Category III landings. This allows our crews to land under weather conditions with runway
visibility of only 600 feet at airports with Category III Instrument Landing Systems. All of our DC-8 and DC-9
aircraft are equipped for Category II landings which enable landing with runway visibility of only 1,200 feet.
Maintenance
Our operations are regulated by the FAA for aircraft safety and maintenance. We are certificated as an FAA
repair station to perform maintenance on DC-8, DC-9 and Boeing 767 aircraft and their related avionics and
accessories. Our maintenance and engineering personnel coordinate all routine and non-routine maintenance
requirements. Our maintenance programs include tracking the maintenance status of each aircraft, consulting
with manufacturers and suppliers about procedures to correct irregularities and training ABX maintenance
personnel on the requirements of our FAA-approved maintenance program. We conduct nearly all of our own
maintenance training. Performing a majority of the aircraft maintenance ourselves reduces costs, minimizes the
out-of-service time for aircraft and achieves a higher level of reliability.
4
We perform airframe heavy maintenance and modification on our DC-9 and Boeing 767 aircraft. We
perform routine inspections and airframe maintenance, including Airworthiness Directives and Service Bulletin
compliance on all of our aircraft. Additionally, we contract with a maintenance repair organization to perform the
passenger-to freighter cargo conversions on our Boeing 767 airframes. We contract with maintenance repair
organizations to perform heavy airframe maintenance on our DC-8 and Boeing 767 airframes. We also contract
with maintenance repair organizations for the performance of heavy maintenance on our aircraft engines. We
own a supply of spare aircraft engines, auxiliary power units, aircraft parts and consumable items. The number of
spare items we maintain is based on the size of the fleet of each aircraft and engine type we operate and the
reliability history of the item types.
Due to the nature of ABX’s business, our aircraft experience relatively low utilization. For this reason, we
have elected to schedule and perform heavy maintenance on our aircraft on a calendar basis as opposed to an
hourly use basis. This results in ABX’s aircraft undergoing inspections and maintenance on a more frequent
basis,
improving service to our
customers.
thereby improving mechanical reliability,
lowering costs and, ultimately,
Insurance
We are required by the Department of Transportation (“DOT”) to carry liability insurance on each of our
aircraft. Each of our aircraft leases, loans and the ACMI agreement also require us to carry such insurance. We
currently maintain public liability and property damage insurance, aircraft hull and liability insurance and war
risk insurance for each of the aircraft in our fleet in amounts consistent with industry standards.
Employees
As of December 31, 2006, there were approximately 9,700 ABX employees, including 6,100 full-time
employees and 3,600 part-time employees. We employ approximately 650 flight crewmembers, 1,350 aircraft
maintenance technicians and flight support personnel, 3,660 sort employees at the DHL Air Park, 2,450 sort
employees at the seventeen regional hubs and postal centers, 500 employees for airport and hub maintenance,
610 employees for warehousing and logistics and 470 employees for administrative functions. We also use
contracted labor during business peaks, particularly during the fourth calendar quarter.
We perform employee background checks for a five or ten-year period prior to employment, depending on
the job, and, in fact, conduct a more in-depth pre-employment screening than is mandated by FAA regulations. In
addition, management personnel who are directly involved in the supervision of flight operations, training,
maintenance and aircraft inspection must meet experience standards prescribed by FAA regulations. All of our
employees are subject to pre-employment drug and alcohol testing, and employees holding certain positions are
subject to subsequent random testing. Our flight crewmembers are our only group of unionized employees.
Labor Agreements
The International Brotherhood of Teamsters (“IBT”) is the duly designated and authorized representative of
ABX’s flight crewmembers under the Railway Labor Act (“RLA”), as amended. The flight crewmembers’
contract became amendable as of July 31, 2006 and is currently under negotiation. Under the RLA, labor
agreements do not expire, so the existing contract remains in effect throughout any negotiation process. If
required, mediation under the RLA is conducted by the National Mediation Board, which has the sole discretion
as to how long mediation can last and when it will end. In addition to direct negotiations and mediation, the RLA
includes a provision for potential arbitration of unresolved issues and a 30-day “cooling-off” period before either
party can resort to self-help.
Training
ABX flight crewmembers are required to be licensed in accordance with Federal Aviation Regulation
(“FAR”) Part 121, with specific ratings for the aircraft type to be flown, and to be medically certified as
5
physically fit to fly aircraft. Licenses and medical certifications are subject to recurrent requirements as set forth
in the FARs to include recurrent training and minimum amounts of recent flying experience.
The FAA mandates initial and recurrent training for most flight, maintenance and engineering personnel.
Mechanics and quality control inspectors must also be licensed and qualified for specific aircraft. We pay for all
of the recurrent training required for our flight crewmembers and provide training for our ground service and
maintenance personnel. Our training programs have received all required FAA approvals.
Industry
The scheduled delivery industry is dominated by integrated, door-to-door carriers including DHL, the
USPS, FedEx Corporation and United Parcel Service, Inc. Although the volume of our DHL business is being
impacted by competition among integrated carriers, we do not usually compete directly with these integrated
carriers; instead, we compete for domestic cargo volume principally with other cargo airlines and passenger
airlines which have substantial belly cargo capacity. Other cargo airlines include Astar Air Cargo, Inc. (“Astar”),
World Air Holdings, Inc., Atlas Air, Inc., Evergreen International, Inc. and Kitty Hawk, Inc. The industry is
highly competitive. At least two other cargo airlines have an ACMI agreement with DHL. The primary
competitive factors in our industry are price, geographic coverage, flight frequency, reliability and capacity.
Cargo volumes within the U.S. are highly dependent on the economic conditions and the level of
commercial activity. Generally, time-critical delivery needs, such as just-in-time inventory management, increase
the demand for air cargo delivery. Historically, ABX and the cargo industry have experienced higher volumes
during the fourth calendar quarter of each year.
Intellectual Property
We own a small number of U.S. patents that are important to our business operations and have nominal
commercial value. We also own approximately 160 STCs issued by the FAA. We use these STCs mainly in
support of our own fleet; however, we have marketed certain STCs to other airlines.
Information Systems
We have invested significant management and financial resources in the development of information
systems to facilitate cargo, flight and maintenance operations. We utilize our systems to maintain records about
the maintenance status and history of each major aircraft component, as required by FAA regulations. Using our
systems, we track and control inventories and costs associated with each maintenance task, including the
personnel performing those tasks. In addition, our flight operations system coordinates flight schedules and crew
schedules. We have developed and procured systems to track flight time, flight crewmember duty and flight
hours and crewmember training status.
Regulation
Our air carrier operations are generally regulated by the DOT and the FAA. Our operations must comply
with numerous security and environmental laws, ordinances and regulations. In addition, we must also comply
with various other federal, state, local and foreign authorities.
Environment
Under current federal, state and local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or clean-up of hazardous or toxic
substances on, under, or in such property. Such laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of
6
contamination from hazardous or toxic substances, or the failure to properly clean up such contaminated
property, may adversely affect the ability of the owner of the property to use such property as collateral for a loan
or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may
be used or transferred or in which businesses may be operated and may impose remediation or compliance costs.
Under the DHL sublease, ABX and DHL are required to defend, indemnify and hold each other harmless from
and against certain environmental claims associated with DHL Air Park.
We are subject to the regulations of the U.S. Environmental Protection Agency and state and local
governments regarding air quality and other matters. In part, because of the highly industrialized nature of many
of the locations at which we operate, there can be no assurance that we have discovered all environmental
contamination for which we may be responsible.
Our aircraft currently meet all known requirements for engine emission levels. However, under the Clean
individual states or the U.S. Environmental Protection Agency may adopt regulations requiring
Air Act,
reduction in emissions for one or more localities based on the measured air quality at such localities. Such
regulations may seek to limit or restrict emissions by 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 our financial condition or results of operations.
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 Airport Noise and Capacity Act of 1990 provides that, in the case of Stage 3 aircraft (all of our operating
aircraft satisfy Stage 3 noise compliance requirements), an airport operator must obtain the carriers’ consent to or
the government’s approval of the rule prior to its adoption. We believe the operation of our aircraft either
complies with or is exempt from compliance with currently applicable local airport rules. However, some airport
authorities are considering adopting local noise regulations, and, to the extent more stringent aircraft operating
regulations are adopted on a widespread basis, we may be required to spend substantial funds, make schedule
changes or take other actions to comply with such local rules.
The U.S. government, working through the International Civil Aviation Organization, has in the past
adopted more stringent aircraft engine emissions regulations with regard to newly certificated engines and
aircraft noise regulations applicable to newly certificated aircraft. Although these rules will not apply to any of
ABX’s existing aircraft, additional rules could be adopted in the future that would either apply these more
stringent noise and emissions standards to aircraft already in operation or require that some portion of the fleet be
converted over time to comply with these new standards.
Department of Transportation
the DOT continues to regulate many aspects of international aviation,
Although a majority of the economic regulation of domestic air transportation has been eliminated, the DOT
maintains authority over certain aspects of domestic air transportation, such as requiring a minimum level of
insurance and the requirement that a person be “fit” to hold a certificate to engage in air transportation. In
addition,
including the award of
international routes. The DOT has issued to ABX a Domestic All-Cargo Air Service Certificate for air cargo
transportation between all points within the U.S., the District of Columbia, Puerto Rico, and the U.S. Virgin
Islands, and a Certificate of Public Convenience and Necessity (Route 377) to engage in scheduled foreign air
cargo transportation between the U.S. and Canada. Prior to issuing such certificates, the DOT examines a
company’s managerial competence, financial resources and plans, compliance, disposition and citizenship in
order to determine whether the carrier is fit, willing and able to engage in the transportation services it has
proposed to undertake. By maintaining these certificates, ABX is vested with authority from the U.S. government
to conduct all-cargo charter operations worldwide.
The DOT has the authority to impose civil penalties, or to modify, suspend or revoke our certificates for
cause, including failure to comply with federal law or DOT regulations. A corporation holding either of such
certificates must qualify as a U.S. citizen, which requires that (1) it be organized under the laws of the U.S. or a
7
state, territory or possession thereof, (2) that its president and at least two-thirds of its Board of Directors and
other managing officers be U.S. citizens, (3) that not more than 25% of its voting interest be owned or controlled
by non-U.S. citizens, and (4) that it not otherwise be subject to foreign control. Neither certificate confers
proprietary rights on the holder, and the DOT may impose conditions or restrictions on such certificates. We
believe we possess all necessary DOT-issued certificates and authorities to conduct our current operations and
continue to qualify as a U.S. citizen.
Federal Aviation Administration
The FAA regulates aircraft safety and flight operations generally, including equipment, ground facilities,
maintenance, flight dispatch, training, communications, the carriage of hazardous materials and other matters
affecting air safety. The FAA issues operating certificates and operations specifications to carriers that possess
the FAA issues certificates of
the technical competence to conduct air carrier operations. In addition,
airworthiness to each aircraft that meets the requirements for aircraft design and maintenance. ABX believes it
holds all airworthiness and other FAA certificates and authorities required for the conduct of its business and the
operation of its aircraft, although the FAA has the power to suspend, modify or revoke such certificates for cause,
or to impose civil penalties for any failure to comply with federal law and FAA regulations.
The FAA has the authority to issue maintenance directives and other mandatory orders relating to, among
other things, the inspection and maintenance of aircraft and the replacement of aircraft structures, components
and parts, based on the age of the aircraft and other factors. For example, the FAA has required ABX to perform
inspections of its DC-9, DC-8 and Boeing 767 aircraft to determine if certain of the aircraft structures and
components meet all aircraft certification requirements. If the FAA were to determine that the aircraft structures
or components are not adequate, it could order operators to take certain actions, including but not limited to,
grounding aircraft, reducing cargo loads, strengthening any structure or component shown to be inadequate, or
making other modifications to the aircraft. New mandatory directives could also be issued requiring ABX to
inspect and replace aircraft components based on their age or condition. As a matter of routine, the FAA issues
airworthiness directives applicable to the aircraft operated by us, and ABX complies, sometimes at considerable
cost, as part of our aircraft maintenance program.
The FAA is proposing legislation that would permit the adoption of rules that would limit the number of daily
airline operations to control airport and air traffic control congestion. The FAA would seek to do so by
permitting airport rates and charges to be set at levels reflecting the scarcity of airspace and airside capacity.
With this new authority, the FAA or airport operators may in the future seek to impose limits on the number of
arrivals and departures and, were they to do so, ABX may incur higher airport fees and charges as a result.
Currently, ABX has all of the necessary airport operator permission to operate at each of the airports we serve.
Transportation Security Administration
The Transportation Security Administration (“TSA”), an administration within the Department of Homeland
Security, is responsible for the screening of passengers, baggage and cargo and the security of aircraft and
airports. ABX complies with all applicable aircraft and cargo security requirements. TSA is currently considering
the adoption of additional cargo security-related rules that, if adopted as proposed, could impose additional
burdens on ABX, which could have an impact on our ability to efficiently process cargo or otherwise increase
costs. In addition, we may be required to reimburse the TSA for the cost of security services it may provide to
ABX in the future.
Other Regulations
We believe our current operations are substantially in compliance with the numerous regulations to which
our business is subject; however, various regulatory authorities have jurisdiction over significant aspects of our
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 operations. In addition to the above, other laws
and regulations to which we are subject, and the agencies responsible for compliance with such laws and
regulations, include the following:
8
•
•
•
•
•
•
ABX’s labor relations are generally regulated under the Railway Labor Act, which vests in the
National Mediation Board certain regulatory powers with respect to disputes between airlines and labor
unions arising under collective bargaining agreements;
The Federal Communications Commission regulates ABX’s use of radio facilities pursuant to the
Federal Communications Act of 1934, as amended;
U.S. Customs and Border Protection inspects cargo imported from ABX’s international operations;
ABX must comply with U.S. Citizenship and Immigration Services regulations regarding the
citizenship of its employees;
U.S. Customs and Border Protection inspects animals, plants and produce imported from ABX’s
international destinations; and
ABX must comply with wage, work conditions and other regulations of the Department of Labor
regarding its employees.
Security and Safety
Security
We have instituted various security procedures to comply with FAA and TSA regulations and comply with
the directives outlined in the federal Domestic Security Integration Program. DHL customers are required to
inform us in writing of the nature and composition of any freight which is classified as “Dangerous Goods” by
the DOT. In addition, we conduct background checks of our employees, restrict access to our aircraft, inspect our
aircraft for suspicious persons or cargo, and inspect all dangerous goods. Notwithstanding these procedures,
ABX could unknowingly transport contraband or undeclared hazardous materials for customers, which could
result in fines and penalties and possible damage to our aircraft.
Safety and Inspections
Management is committed to the safe operation of our aircraft. In compliance with FAA regulations, our
aircraft are subject to various levels of scheduled maintenance or “checks” and periodically go through phased
overhauls. In addition, a comprehensive internal review and evaluation program is in place and active. Our aircraft
maintenance efforts are monitored closely by the FAA. We also conduct extensive safety checks on a regular basis.
ITEM 1A. RISK FACTORS
The risks described below could adversely affect our financial condition or results of operations. The risks
below are not the only risks that ABX faces. Additional risks that are currently unknown to us or that we
currently consider immaterial or unlikely could also adversely affect ABX.
We rely on DHL for substantially all of our revenue and the majority of our operating cash flows. DHL could
reduce the scope of service provided by ABX.
DHL has placed increasing pressure on its vendors and services providers, including ABX, to reduce costs,
improve productivity and stem its operating losses in the U.S. DHL competes in the U.S. against FedEx
Corporation and United Parcel Services, Inc., each of which has significant resources, market penetration and
brand recognition. ABX may experience declines in its revenues and operating cash flows if volume reductions
are experienced by DHL.
DHL can, after a contractual advance-notice period, reduce the scope of services that ABX provides under
the ACMI or Hub Services agreements. For example, DHL can reduce the number of aircraft or the number of
routes that we fly, or DHL can transfer the management of any or all of the hubs that we operate. Since 2003,
DHL has assumed administration of charters for tertiary markets that ABX previously contracted from other
airlines, transferred the international gateway operations from ABX, removed 28 ABX aircraft from service
transferred the management of the line-haul network and transferred the
under the ACMI agreement,
management of the Allentown, Pennsylvania regional hub from ABX. Additionally, in February 2007, DHL
notified ABX that it intends to assume management of the Riverside, California regional hub in June of 2007.
9
The term of the Hub Services agreement expires on August 15, 2007. The term will automatically renew for
an additional year unless either party gives notice of termination on or before May 17, 2007. Termination of the
Hub Services agreement would adversely impact our business, resulting in a significant decline in our revenues
and earnings. As a condition to renewal, DHL may seek to negotiate new terms, possibly creating greater risk/
reward opportunities related to the Company’s performance and cost controls or a reduction in the scope of
services ABX provides to DHL.
We have a credit facility and other debt agreements that subjects ABX to covenants and stipulates events of
default. The removal of services from the ACMI or Hub Services agreement could trigger a covenant violation or
result in a condition of default that could limit our use of the credit arrangements.
Certain terms of the ACMI agreement and Hub Services agreement with DHL may adversely affect ABX’s
operating results.
Under the ACMI agreement and Hub Services agreement, if we do not meet certain performance standards,
after a cure period, DHL may terminate the ACMI agreement and Hub Services agreement prior to the end of
their respective terms. A recurring work slowdown or strike by one or more groups of employees, such as our
mechanics, sorters or flight crews, could adversely impact our operating performance. These events could result
in reductions by DHL to the scope of services we provide under the DHL agreements, leading to the termination
of those agreements.
Although the ACMI agreement and Hub Services agreement with DHL are structured as cost-plus
arrangements, the costs for which we can be reimbursed are subject to certain limitations. For instance, labor rate
increases are capped at predetermined levels and certain other costs are non-reimbursable. DHL can dispute
whether expenses we have incurred are reimbursable under the agreements. The agreements give DHL the right
to audit our expenses. Further, the agreements stipulate dispute and arbitration procedures. If labor costs sharply
increase or we incur excessive non-reimbursable costs, there can be no assurance that the revenues from these
agreements will generate sufficient income to recover our costs.
For the purposes of internal reporting, ABX does not allocate overhead costs that are reimbursed by DHL to
its non-DHL activities. The provisions of the commercial agreements with DHL do not require an allocation of
overhead until such time as ABX derives more than 10% of its total revenue from non-DHL business activities.
The 10% threshold may be reached through a combination of decreased DHL revenues and increased non-DHL
revenues. After the 10% threshold is reached, a portion of our overhead expenses may be allocated to non-DHL
activities and not subject to reimbursement under the DHL agreements.
The ACMI agreement with DHL may limit our ability to provide services to third parties.
The ACMI agreement limits our ability to use the aircraft designated for use under the ACMI agreement to
perform services for parties other than DHL by permitting such use only if (1) it does not interfere in any
material respect with ABX’s performance of ACMI services for DHL, (2) ABX does not solicit DHL’s
customers in competition with DHL, (3) it does not involve ABX providing air cargo transportation services to
major integrated international air express delivery companies with annual revenues in excess of $5 billion (other
than the USPS or any affiliate of DHL) and (4) an ABX event of default shall not have occurred and be
continuing.
ABX is dependent upon the economic conditions in the U.S.
An economic downturn in the U.S. is likely to adversely affect demand for delivery services offered by
DHL, in particular expedited services shipped via aircraft. During an economic slowdown, customers generally
use ground-based delivery services instead of more expensive air delivery services. A prolonged economic
slowdown may increase the likelihood that DHL would reduce the scope of services we provide under the ACMI
10
agreement. Although the cost of jet fuel does not directly affect our net earnings, increased prices of jet fuel
could also reduce the demand for air delivery services from DHL or our other ACMI customers.
ABX has made a significant investment in Boeing 767 aircraft.
We are adding eight Boeing 767 aircraft to the ABX in-service fleet through 2008. This is in addition to four
Boeing 767 aircraft that we added to our non-DHL ACMI operations in 2006. Our future operating results and
financial condition will depend on our ability to successfully deploy these aircraft in operations that provide a
positive return on our investment. Our success will depend, in part, on our ability to obtain and operate additional
cargo volumes with customers other than DHL. To deploy our growing non-DHL fleet, we are pursuing
international opportunities, including flights in Asia. Deploying aircraft in new international markets may pose
additional risk, regulatory requirements and costs.
These eight aircraft will be converted from passenger configurations to standard freight configuration. We
plan to finance the purchase price and the cost of modifying the aircraft with existing cash and contractor-
provided financing during the modification period. Upon completion of the modification, we anticipate financing
some aircraft through a syndication process being arranged by our lead bank. Currently, only the financing for
one aircraft is committed, but we expect to finalize borrowing arrangements in 2007 and 2008 as needed. Our
future operating results will be affected by the interest rates, limits and other terms and conditions of the new
borrowings or leases. See page 30 for further discussion of these aircraft.
We may need to reduce the carrying value of our assets.
We own a significant amount of aircraft, aircraft parts and related equipment. Additionally, our balance
sheet reflects assets for income tax carryforwards and other deferred tax assets. The removal of aircraft from
service could require the Company to evaluate the recoverability of the carrying value of those aircraft in
accordance with Statements of Financial Accounting Standard (“SFAS”) No. 144 and result in an impairment
charge. At the Company’s current level of stockholders’ equity, the removal of additional aircraft from the DHL
ACMI agreement could result in impairment charges for aircraft if their fair market values are less than their
carrying values.
If we incur operating losses or our estimates of expected future earnings indicate a decline, it may be
necessary to reassess the need for a valuation allowance for some or all of the Company’s net deferred tax assets.
If insurance coverage becomes unavailable, it would adversely affect our ability to operate.
The U.S. government has been offering war risk insurance to U.S. airlines at rates below the commercial
insurance market. The U.S. government has committed to offer war risk insurance to airlines through August 31,
2007, after which it may be necessary to procure war risk insurance in the commercial market. The war risk
insurance available to airlines in the commercial market may be more limited in coverage and/or may not be
available on commercially reasonable terms.
Although we believe that our insurance coverage is adequate, there can be no assurance that the amount of
such coverage will not be changed upon renewal or that we will not be forced to bear substantial losses from
accidents. Substantial claims resulting from an accident could have a material adverse effect on our financial
condition and could affect our ability to obtain insurance in the future.
Penalties, fines, and sanctions levied by governmental agencies or the costs of complying with government
regulations could negatively affect our results of operations.
Our operations are subject to complex aviation, transportation, environmental, labor, employment and other
laws and regulations. These laws and regulations generally require us to maintain and comply with a wide variety
11
of certificates, permits, licenses and other approvals. Our inability to maintain required certificates, permits or
licenses, or to comply with applicable laws, ordinances or regulations could result in substantial fines or, in the
case of DOT and FAA requirements, possible suspension or revocation of our authority to conduct our
operations.
All aircraft in our in-service fleet of 99 aircraft were manufactured prior to 1990. The average ages of our
Boeing 767, DC-8 and DC-9 aircraft are approximately 23, 38 and 36 years, respectively. Manufacturer Service
Bulletins and the FAA Airworthiness Directives issued under its “Aging Aircraft” program cause aircraft
operators of such aged aircraft to be subject to extensive aircraft examinations and require such aircraft to
undergo structural inspections and modifications to address problems of corrosion and structural fatigue at
specified times. Airworthiness Directives have been issued that require inspections and both major and minor
modifications to such aircraft. It is possible that additional Service Bulletins or Airworthiness Directives
applicable to the types of aircraft or engines included in our fleet could be issued in the future. The cost of
compliance with Airworthiness Directives and of following Service Bulletins cannot currently be reasonably
estimated but could be substantial.
ABX and a few employees in our Human Resources Department are the targets of a criminal investigation
by the U.S. Department of Justice (“DOJ”) regarding whether we violated U.S. immigration laws in respect of
our use of contract employees being supplied to us by Garcia Labor Co., Inc., a temporary employment agency.
While ABX believes that it has not engaged in any wrongdoing, the investigation could result in proceedings
being initiated against the Company. In the event proceedings were initiated against ABX that resulted in an
adverse finding, ABX could be subjected to a financial penalty that is materially greater than the amount we have
accrued and restrictions on our ability to engage in business with agencies of the U.S. Government.
Our operations are geographically concentrated.
Our aircraft repair station, headquarters, and principal site of hub services are located in Wilmington, Ohio.
If these facilities were damaged or our access to these facilities was limited, for example, due to security
concerns, severe weather or natural disaster, our operations and financial conditions could be adversely affected.
Failure to maintain ABX’s operating certificates and authorities would adversely affect our business.
We have the necessary authority to conduct flight operations within the U.S. and maintain a Domestic
All-Cargo Air Service Certificate for our domestic services, a Certificate of Public Convenience and Necessity
for Route 377 for our Canada service, and an Air Carrier Operating Certificate issued to ABX by the FAA. The
continued effectiveness of such authority is subject to our compliance with applicable statutes and DOT, FAA
and TSA rules and regulations, including any new rules and regulations that may be adopted in the future.
Under U.S. laws and DOT precedents, non-U.S. citizens may not own more than 25% of, or have actual
control of, a U.S. certificated air carrier. The separation of ABX from Airborne required us to file a notice of a
substantial change with the DOT. In connection with the filing, the DOT will determine whether ABX continues
to be fit, willing and able to engage in air transportation of cargo and a U.S. citizen. The DOT may determine that
DHL actually controls ABX as a result of the commercial arrangements (in particular, the ACMI agreement and
the Hub Services agreement) between ABX and DHL. If the DOT determined that ABX was controlled by DHL,
the DOT could bring an enforcement action against ABX to revoke its certificates. The DOT could take action
requiring ABX to show cause that it is a U.S. citizen and that it is fit, willing and able to engage in air
transportation of cargo, or requiring amendments or modifications of the ACMI agreement, the Hub Services
agreement or the other transaction documents. If we were unable to modify such agreements to the satisfaction of
the DOT, the DOT may seek to suspend, modify or revoke our air carrier certificates and/or authorities.
The loss of our authorities, including in the situation described above, would materially and adversely affect
our operations and would effectively eliminate our ability to operate the air services.
12
Employees may decide to institute labor agreements.
We rely on a diverse group of employees, including sorters, mechanics and pilots. Today, only the pilots are
organized under a labor agreement, which became amendable July 31, 2006 and is currently under negotiation.
Operations could be interrupted and business could be adversely affected if no agreement is reached with the
pilots or if other employee groups choose to organize with a union.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We lease our corporate offices, 210,000 square feet of maintenance hangars and a 100,000-square-foot
component repair shop from DHL. These facilities are located at the DHL Air Park in Wilmington, Ohio. We
also have the non-exclusive right to use the airport which includes two runways, taxi ways, and ramp space
comprising approximately 300 paved acres. The term of the lease runs concurrently with the term of the ACMI
agreement with DHL. We believe our existing facilities are adequate to meet our current and reasonably
foreseeable future needs.
The following table contains detailed information about our in-service aircraft fleet.
Aircraft Type
DC-8-61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DC-8-63F (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DC-9-31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DC-9-32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DC-9-32F (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DC-9-33F (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DC-9-41 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
767-205 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
767-231 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
767-232SF (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
767-281 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
767-281SF (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Aircraft as of
Dec. 31, 2006
Year of
Manufacture
Gross Payload
(Lbs.)
Still Air Range
(Nautical Miles)
1969
1967-1972
1967-1971
1967-1972
1967-1968
1968-1970
1969-1978
1984
1983
1983
1983-1988
1985-1987
40,000-83,000
40,000-97,000
26,000-36,000
26,000-36,000
26,000-36,000
26,000-38,000
26,000-38,000
67,000-91,000
67,000-91,000
67,000-91,000
67,000-91,000
67,000-91,000
2,200-3,800
2,600-4,300
550-1,100
550-1,100
550-1,100
500-1,100
500-1,100
1,800-4,400
1,800-4,400
1,800-4,400
1,800-3,000
1,800-3,000
1
4
12
12
3
5
29
1
4
4
19
5
99
(1) These aircraft were manufactured with a cargo door for transporting freight. The cargo doors are currently
deactivated.
(2) These passenger aircraft are configured for standard cargo containers, including activated cargo doors.
ITEM 3. LEGAL PROCEEDINGS
Department of Transportation (“DOT”) Continuing Fitness Review
ABX filed a notice of substantial change with the DOT arising from its separation from Airborne, Inc. In
connection with the filing, which was initially made in mid-July of 2003 and updated in April of 2005, the DOT
will determine whether ABX continues to be fit, willing and able to engage in air transportation of cargo and a
U.S. citizen.
Under U.S. laws and DOT precedents, non-U.S. citizens may not own more than 25% of, or have actual
control of, a U.S. certificated air carrier. The DOT may determine that DHL actually controls ABX as a result of
13
its commercial arrangements (in particular, the ACMI agreement and Hub Services agreement) with DHL. If the
DOT determines that ABX is controlled by DHL, the DOT could require amendments or modifications of the
ACMI and/or other agreements between ABX and DHL. If ABX were unable to modify such agreements to the
satisfaction of the DOT, the DOT could seek to suspend, modify or revoke ABX’s air carrier certificates and/or
authorities, and this would materially and adversely affect the business.
The DOT has yet to specify the procedures it intends to use in processing ABX’s filing. We believe the
DOT should find that ABX is controlled by U.S. citizens and continues to be fit, willing and able to engage in air
transportation of cargo.
ALPA Lawsuit
On August 25, 2003, ABX intervened in a lawsuit filed in the U.S. District Court for the Southern District of
New York by DHL Holdings and DHL Worldwide Express, Inc. (“DHL Worldwide”) against the Air Line Pilots
Association (“ALPA”), seeking a declaratory judgment that neither DHL entity is required to arbitrate a
grievance filed by ALPA. ALPA represents the pilot group at Astar. The grievance seeks to require DHL
to cease
Holdings to direct
implementing its ACMI agreement with ABX on the grounds that DHL Worldwide is a legal successor to Astar.
ALPA similarly filed a counterclaim requesting injunctive relief that includes having DHL’s freight currently
being flown by ABX transferred to Astar.
its subsidiary, Airborne, Inc., now DHL Network Operations (USA), Inc.,
The proceedings were stayed on September 5, 2003, pending the National Labor Relations Board’s
(“NLRB”) processing of several unfair labor practice charges ABX filed against ALPA on the grounds that
ALPA’s grievance and counterclaim to compel arbitration violates the National Labor Relations Act. In March
2004, the NLRB prosecuted ALPA on the unfair labor practice charges. On July 2, 2004, an Administrative Law
Judge (“ALJ’) for the NLRB issued a decision finding that ALPA’s grievance and counterclaim violated the
secondary boycott provisions of the National Labor Relations Act, and recommended that the NLRB order ALPA
to withdraw both actions. ALPA appealed the ALJ’s finding to the full NLRB, which subsequently affirmed the
ALJ’s decision in its own decision and order dated August 27, 2005.
On September 14, 2005, ALPA filed a petition for review with the U.S. Court of Appeals for the Ninth
Circuit and that Court subsequently granted ABX’s motion to intervene in the case. The parties have filed briefs
in the matter, and we are currently waiting for the court to set a date for oral argument. We believe that the
NLRB’s decision will be sustained on appeal and that ALPA’s grievance and counterclaim will be denied.
Alleged Violations of Immigration Laws
ABX reported in January of 2005 that it was cooperating fully with an investigation by the U.S. Department
of Justice (“DOJ”) with respect to Garcia Labor Co., Inc., (“Garcia”) a temporary employment agency based in
Morristown, Tennessee, and ABX’s use of contract employees that were being supplied to it by Garcia. The
investigation concerns the immigration status of the Garcia employees assigned to ABX.
ABX terminated its contract with Garcia in February of 2005 and replaced the Garcia employees.
In October of 2005, the DOJ notified ABX that ABX and a few Company employees in its human resources
department, in addition to Garcia, were targets of a criminal investigation. ABX cooperated fully with the
investigation. In June of 2006, a non senior management employee of the Company entered a plea to a
misdemeanor related to this matter. In July of 2006, a federal grand jury indictment was unsealed charging two
Garcia companies, the president of Garcia and two of their corporate officers with numerous counts involving the
violation of federal immigration laws. The Garcia defendants subsequently entered guilty pleas in U.S. district
court and were sentenced in February and March of 2007. No proceedings have been initiated against ABX. See
Note I to the consolidated financial statements of this report for additional information.
14
Other
In addition to the foregoing matters, we are also currently a party to legal proceedings in various federal and
state jurisdictions arising out of the operation of our business. The amount of alleged liability, if any, from these
proceedings cannot be determined with certainty; however, we believe that our ultimate liability, if any, arising
from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which
are probable of assertion, taking into account established accruals for estimated liabilities, should not be material
to our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2006.
15
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our common stock became publicly traded on the OTC Bulletin Board under the symbol ABXA.OB on
August 15, 2003 and on the NASDAQ under the symbol ABXA on May 9, 2005. The following table shows the
range of high and low prices per share of our common stock for the periods indicated as quoted on the OTC
Bulletin Board and the NASDAQ. Over-the-counter market prices reflect inter-dealer prices without retail
mark-up, mark-down or commission.
2006 Quarter Ended:
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 Quarter Ended:
December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low
High
$5.12
$4.94
$5.73
$6.48
$6.94
$6.07
$7.11
$8.50
Low
High
$6.89
$7.84
$7.08
$6.90
$8.50
$9.19
$8.55
$8.90
On March 14, 2007, there were 2,156 stockholders of record of ABX common stock. The closing price of
ABX common stock was $7.12 on March 15, 2007.
16
Performance Graph
The graph below compares the cumulative total stockholder return on a $100 investment in the Company’s
common stock with the cumulative total return of a $100 investment in the NASDAQ Stock Market and the
cumulative total return of a $100 investment in the NASDAQ Transportation Index for the period beginning on
August 18, 2003,
the date on which the Company’s shares first began trading publicly, and ending on
December 31, 2006.
700
600
500
400
300
200
100
s
r
a
l
l
o
D
0
8/18/2003
12/31/2003
12/31/2004
12/31/2005
12/31/2006
ABX AIR, INC.
NASDAQ TRANSPORTATION INDEX
NASDAQ COMPOSITE INDEX
ABX Air, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Transportation Index . . . . . . . . . . . . . . . . . . .
NASDAQ Composite Index . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
277.42
104.11
110.63
573.55
133.24
119.93
506.45
137.77
122.57
447.10
154.32
135.15
8/18/2003
12/31/2003
12/31/2004
12/31/2005
12/31/2006
Dividends
We are restricted from paying dividends on our common stock in excess of $1.0 million during any calendar
year under the provisions of our promissory note due to DHL and our credit facility agreement. No cash
dividends have been paid or declared.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Comparability of financial data among years is affected by ABX’s separation from Airborne on August 15,
2003. The following selected consolidated financial data should be read in conjunction with the consolidated
financial statements and the notes thereto and the information contained in Item 7 of Part II, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
The selected consolidated financial data and the consolidated operations data below are derived from ABX’s
audited consolidated financial statements.
As of and for the Years Ended December 31,
2006
2005
2004
2003
2002
(In thousands, except per share data)
OPERATING RESULTS:
Revenues (1) . . . . . . . . . . . . . . . . . . . . .
Operating expenses (2) . . . . . . . . . . . . .
Net interest expense . . . . . . . . . . . . . . .
$1,260,361
1,217,576
6,772
$1,464,390
1,425,627
8,451
$1,202,509
1,157,511
8,025
$1,160,959
1,720,125
16,379
$1,173,735
1,125,200
25,866
Earnings (loss) before income taxes . . .
Income tax benefit (expense) (3) . . . . . .
36,013
54,041
30,312
—
36,973
—
(575,545)
128,644
22,669
(9,383)
Net earnings (loss) (2) . . . . . . . . . . . . . .
$
90,054
$
30,312
$
36,973
$ (446,901) $
13,286
EARNINGS (LOSS) PER SHARE
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.55
1.54
$
$
0.52
0.52
$
$
0.63
0.63
$
$
(8.52) $
(8.52) $
0.25
0.23
WEIGHTED AVERAGE SHARES:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . .
58,270
58,403
58,270
58,475
58,270
58,270
52,474
52,474
52,107
58,521
SELECTED CONSOLIDATED
FINANCIAL DATA:
Unrestricted and restricted cash . . . . . .
Deferred income taxes (3) . . . . . . . . . . .
Property and equipment, net . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . .
Advances from parent . . . . . . . . . . . . . .
Post-retirement liabilities (4) . . . . . . . . .
Capital lease obligations . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . .
$
63,219
101,715
458,638
679,798
—
224,376
73,551
125,126
$ 120,210
$
69,473
—
381,645
516,043
—
89,319
80,908
92,276
$ 113,079
$
$
38,749
—
351,646
472,923
—
79,770
88,861
92,949
87,949
$
$
65,741
—
312,803
413,106
—
66,825
96,193
92,949
58,666
$
33
—
1,089,485
1,174,008
474,608
67,858
37,825
76,318
$ 232,322
(1) Prior to August 16, 2003, revenues were calculated as pre-tax net expenses plus two percent. See revenue
recognition policy on page 26 of this report.
(2) Operating expenses for 2003 include an impairment charge of $600.9 million recorded in conjunction with
ABX’s separation from Airborne, Inc. A tax benefit of $134.8 million occurred primarily as a result of
recording the impairment charge.
In the fourth quarter of 2006, an income tax benefit was recognized to completely reverse the valuation
allowance on ABX’s deferred tax assets. See Note G to the accompanying consolidated financial statements.
(4) Post-retirement liabilities for 2006 reflect the adoption of SFAS No. 158. See Note J to the accompanying
(3)
consolidated financial statements.
18
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis has been prepared with reference to the historical
financial condition and results of operations of ABX Air, Inc. and its subsidiaries (“ABX”) and should be read in
conjunction with the “Risk Factors” on page 8 of this report, our historical financial statements, and the related
notes contained in this report.
INTRODUCTION
ABX operates an in-service fleet of 99 aircraft as of December 31, 2006 and employs approximately 6,100
full-time employees and 3,600 part-time employees. DHL is our largest customer, accounting for over 96% of
our revenues. We are DHL’s primary provider for air cargo transportation and for package handling and
warehousing services within the U.S. ABX provides staffing, management and maintenance services for DHL’s
primary hub in Wilmington, Ohio and seventeen regional hubs throughout the U.S. In addition to DHL, we
provide air cargo and aircraft maintenance related services to customers other than DHL. We currently operate
three sorting facilities for the U.S. Postal Service (“USPS”).
We assess our performance and operate in two reportable segments:
DHL: We have two commercial agreements with DHL: an aircraft, crew, maintenance and insurance
agreement (“ACMI agreement”) and a hub services agreement (“Hub Services agreement”). Under the
ACMI agreement, ABX provides air cargo transportation to DHL on a cost-plus pricing structure. Under the
Hub Services agreement, ABX provides staff to conduct package handling, package sorting, warehousing,
and facilities and equipment maintenance services for DHL, also on a cost-plus pricing structure. Costs
incurred under these agreements are generally marked-up by 1.75% and included in revenues. Both
agreements also allow ABX to earn incremental mark-up above the base 1.75% mark-up (up to an additional
1.60% under the ACMI agreement and an additional 2.10% under the Hub Services agreement) from the
achievement of certain cost-related and service goals specified in the two agreements. Fuel, rent, interest on
the promissory note to DHL, and ramp and landing fees incurred under the ACMI agreement are the most
significant cost items reimbursed without mark-up.
Unless we are notified of non-renewal, ACMI agreement automatically renews for a period of three years in
August 2010, and the Hub Services agreement automatically renews for additional one year periods
beginning in August 2007. However, DHL can terminate specific ACMI aircraft, delete or modify the air
routes we operate under the ACMI agreement and increase or reduce the scope of services we provide under
the Hub Services agreement before their respective renewal dates.
Non-DHL ACMI/Charters: We offer ACMI (aircraft, crew, maintenance and insurance) and full service
charters to freight forwarders, airlines and other shippers. We usually charge customers based on the
number of block hours flown, and typical agreements specify a minimum number of block hours to be
charged monthly.
Our other activities, which include contracts with the USPS and aircraft parts sales and maintenance
services, do not constitute reportable segments.
Summary of 2006 and Outlook
DHL Agreements
Our earnings from the DHL agreements were $22.5 million, up from $21.3 million in 2005, despite lower
DHL revenues. Our DHL revenues declined 15% in 2006 compared to 2005 due to reductions in the services we
provide to DHL. As a result, our earnings on base mark-ups declined. This decline, however, was more than
offset by improved incremental mark-ups for achieving annual service level targets. During 2006, DHL had
19
agreed to additional incentives for our 2006 performance, beyond the existing contractual incentives, in the event
we achieved very significant cost reductions under our commercial agreements. We did not achieve these
incentives.
We deployed two additional standard freighter Boeing 767 aircraft under the ACMI agreement in 2006.
These aircraft generate approximately $4.1 million in annual reimbursable depreciation expense under the
ACMI.
In 2004, DHL started to change its network plan to reduce overlapping flights among its airlift providers. To
complete its network plan, DHL released 21 specific aircraft (eleven DC-9s and ten DC-8s) from dedicated
service for DHL in August 2006. Several of these aircraft had previously been placed in back-up status since
September of 2005, when DHL consolidated its hub operations from Cincinnati into its main, ABX-managed hub
in Wilmington, Ohio, eliminating redundant air routes within the network. The August 2006 reduction of 21
aircraft brings the total number of aircraft released from service under the ACMI agreement since November
2004 to 28 (fourteen DC-8s and fourteen DC-9s). DHL will continue to fully fund depreciation for eight of the
DC-9s that were removed through their remaining depreciable lives in August 2010. The net book value of these
eight aircraft was approximately $4.1 million. We will use the engines on these eight DC-9 aircraft to support the
remaining 59 DC-9 aircraft that ABX has in service to DHL.
The removal of aircraft from service to DHL required us to evaluate the recoverability of the carrying value
of those aircraft removed from the ACMI agreement. In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We recorded
an impairment charge of $0.3 million in 2006 for the excess of the carrying value of the aircraft over their fair
value less cost to sell. The charge is reflected under the ACMI expenses but is not reimbursed by DHL.
Under the ACMI agreement with DHL, ABX had the option to put each of the other ten DC-8 and three
DC-9 aircraft released in 2006 to DHL at the lower of their fair value or net book value. After having the aircraft
appraised, management decided not to exercise the put provisions on these aircraft. Instead, ABX is marketing
the aircraft to part dealers and private operations, using the aircraft for spare parts or, in some cases, operating the
aircraft as back-ups or for other customers.
DHL has made reductions in the scope of hub services we provide. In May 2006, DHL took over
responsibility for the over-the-road truck line-haul network we previously managed for DHL. Effective April 1,
2006, ABX did not earn any mark-up on line-haul expenses during the second quarter 2006 transitional period,
and effective May 1, 2006, ABX no longer recorded revenues or expenses associated with over-the-road trucks.
As a result, line-haul services revenue declined approximately $214.5 million and earnings were reduced by
approximately $2.7 million during 2006 compared to 2005. Effective January 1, 2007, we no longer operate or
manage DHL’s Allentown hub facility. The Allentown hub comprised approximately $16.7 million of ABX’s
revenues and approximately $0.4 million of net earnings during 2006. We were notified in February 2007 that
DHL would take over the management of the Riverside, California operation effective June 2007. During 2006,
the Riverside hub contributed $11.7 million in revenues and approximately $0.3 million in pre-tax earnings, less
than 1% of the Company’s total revenue and pre-tax earnings.
Our level of business depends substantially on DHL’s ability to compete in the U.S. where FedEx
Corporation and United Parcel Service, Inc., have significant
resources, market penetration and brand
recognition. Our future operating results for this segment will depend, in part, on DHL’s sourcing preferences for
providing these services. Although we have not begun discussions with DHL, at this time we expect to renew the
Hub Services agreement under terms similar to the existing terms.
20
Non-DHL ACMI/Charters
During 2006, we deployed four Boeing 767 aircraft in our non-DHL ACMI/charter operations, replacing
two freighter aircraft that were subsequently redeployed into the DHL network. We achieved strong utilization
rates as we deployed two Boeing 767 aircraft during the fourth quarter peak cargo season. As a result, our charter
revenues increased 76% to $24.4 million, and pre-tax earnings increased to $3.7 million in 2006, compared to
pre-tax earnings of $1.1 million in 2005. These four aircraft are the first of twelve aircraft we committed ABX to
purchase from Delta Air Lines, Inc. (“Delta”).
Based on the most current projections, we are planning to deploy eight more former Delta aircraft through
2008. Our intention is to modify all of the aircraft to an industry standard freighter configuration and deploy
them in ACMI/charter operations. (The timing of acquisitions and modification payments are described on page
30 of this filing.) We contracted with an aircraft maintenance provider to modify these aircraft from passenger to
freighter configurations. We believe the fuel efficiency, cubic capacity, payload and operating cost of the Boeing
767 make it a desirable freighter aircraft in the domestic, Atlantic and other medium-range international air cargo
markets (less than 3,000 nautical miles). While some of these former Delta aircraft may be contracted to DHL
after the modifications are complete, interest from non-DHL customers is currently strong, particularly from
cargo markets outside of the U.S.
In addition to these Boeing 767 aircraft, we have one DC-8 aircraft in standard cargo configuration and two
DC-9 aircraft in non-standard cargo configuration that are available for service.
Our future results from the Charter segment will depend on several factors, including how quickly we can
place Boeing 767 aircraft into service after the modifications are completed, the level of aircraft utilization, and
the revenue rates we are able to negotiate in the cargo markets. We expect to have lower utilization in 2007
compared to the high utilization levels we achieved in the fourth quarter of 2006. Additionally, because our
policy is to expense maintenance costs as they are incurred, our results will fluctuate due to the timing of
scheduled heavy maintenance procedures.
Diversification
In recent years, we have attempted to diversify our customer base and service offerings. Our investment in
Boeing 767 aircraft is a key component of our strategy to diversify our sources of revenues and earnings. During
2006 and 2005, our non-DHL revenues, including non-DHL ACMI/charters, USPS contracts and aircraft
maintenance services,
increased approximately 42% and 27%, respectively, compared to the immediately
preceding year. Excluding interest income, pre-tax earnings from non-DHL sources were $8.4 million in 2006
compared to $6.5 million in 2005.
Our strategy also includes expanding the services we provide to the USPS. During the third quarter of 2006,
ABX was awarded contracts to manage USPS mail sort centers in Dallas, Texas and Memphis, Tennessee. Each
of these facilities began operations in September 2006. ABX was also awarded a renewal of a USPS sort center
in Indianapolis, Indiana that we have operated since 2004. Under each of these contracts, we are compensated at
a firm price for fixed costs and an additional amount based on the volume of mail handled at each sort center.
Each of the contracts has a four-year term with extensions at the discretion of the USPS. In December 2006, we
operated a temporary, seasonal flight for the USPS and a sorting facility. In addition to adding air cargo capacity
and USPS facilities, we have also marketed our technical expertise, aircraft maintenance services and training to
other airlines.
21
Our non-DHL business activities typically earn operating margins relative to revenues that are higher than
the margin on our DHL business. Our margin relative to revenues on the DHL agreements is predicated on large
business volumes and reflects long-term agreements backed by a financially strong international company. The
non-DHL opportunities typically involve single sales or short-term service arrangements across many different
customers. These opportunities have different economic and risk profiles that often dictate a higher sales price
and expected return than our DHL business. We expect that revenues and earnings from non-DHL business could
vary widely among quarters, due to the capacity of our facilities, availability of aircraft, and the timing of our
non-DHL customers’ demand for services. Our direct costs to develop, market and offer services to non-DHL
customers are not reimbursed by DHL.
RESULTS OF OPERATIONS
2006 compared to 2005
Net earnings increased $59.7 million to $90.1 million for 2006 compared to $30.3 million in 2005, including
a $54.0 million income tax benefit recorded in 2006. Pre-tax net earnings increased $5.7 million primarily due to
achieving a higher level of incremental mark-up under the DHL Hub Services agreement in 2006 compared to
20051 and an increase in non-DHL charter/ACMI earnings. Our incremental mark-up from hub services
increased $2.3 million, the incremental mark-up from the DHL ACMI agreement increased by $0.4 million, and
our earnings from non-DHL charter operations increased by $2.6 million. Base earnings2 from the DHL
agreements declined $1.5 million during 2006 compared to 2005 and our earnings from all other activities
declined $0.8 million. These declines were offset by an increase in net non-DHL interest income of $2.7 million.
DHL
While our revenues from DHL declined 15.3% during 2006, reflecting DHL’s decision to take over the
management of the line-haul trucking operation during the year, our 2006 earnings from the DHL segment
increased $1.1 million to $22.5 million. Earnings for achieving cost-related and service goals increased $2.7
million to $10.5 million for 2006.
The increase in our 2006 DHL earnings and in the annual cost-related and service mark-up is primarily due
to higher achievement of incentives within the Hub Services agreement. Mark-ups of $2.1 million from the
annual service-related goals under the Hub Services agreement were recognized for 2006 while none were
recognized in 2005. The improvement in incremental hub services revenues primarily reflects operational
issues we experienced in 2005 during the Wilmington hub consolidation, the relocation of two smaller hubs
and other changes that were made by DHL to their network in 2005. In an effort to share responsibility and
demonstrate our commitment to DHL, we agreed to forego approximately $0.9 million of 2005 annual
service incentive revenue that was otherwise earned under the agreement.
Our base earnings for 2006 declined $1.5 million to $12.0 million compared to $13.5 million for 2005. The
decline is principally because DHL assumed management of its line-haul trucking operations from ABX Air
in May 2006. Full-year results from those operations were $1.6 million in pre-tax earnings in 2006, and $4.3
million in pre-tax earnings in 2005, including fuel surcharge.
1
2
The two agreements with DHL allow ABX to earn additional incremental mark-up for meeting certain quarterly cost-related goals,
annual cost-related goals and annual service goals. The maximum incremental mark-up available from the quarterly cost goals is
approximately 0.54% of cost eligible for mark-up under each agreement, except during the last six months of 2005, when the incremental
mark-up under the Hub Services agreement for cost-related goals was approximately 1.04%. The maximum incremental mark-up
available from the annual service goals is 0.25% of costs subject to mark-up under the ACMI agreement and 0.75% of costs eligible for
mark-up under the Hub Services agreement. The maximum incremental mark-up available from the annual cost-related goals is
approximately 0.81% of costs subject to mark-up under the ACMI agreement and approximately 0.81% of costs eligible for mark-up
under the Hub Services agreement. Incremental mark-ups earned on the annual goals are only recognized in the fourth quarter.
Base earnings from DHL agreements are the segment’s pre-tax earnings excluding revenues from incremental mark-ups.
22
During the fourth quarters of 2006 and 2005, we recognized $4.1 million and $4.0 million, respectively, or
approximately 100%, of the maximum available incremental mark-up from the annual cost-related goal
under the ACMI agreement. Also, during the fourth quarter of 2006, we recognized revenue from the annual
service goal in the ACMI agreement of $1.2 million, or 100% of the maximum available. During the fourth
quarter of 2005, we recognized revenue from the annual service goal in the ACMI agreement of $0.7
million, or 60% of the maximum available.
Non-DHL ACMI/Charters
Our revenues from non-DHL ACMI/charter services were $24.4 million in 2006 compared to $13.9 million
in 2005. Contributing to the higher revenues in 2006 was high utilization of the Boeing 767 freighter aircraft
we operated for customers other than DHL. Early in 2005, we reached an agreement with DHL to
temporarily defer two Boeing 767 freighter aircraft from DHL service and instead deploy the aircraft in our
non-DHL charter operations for a twelve-month period. As a result, during the twelve months,
the
depreciation, maintenance and other operating costs associated with the aircraft were borne by ABX and not
reimbursed by DHL under the ACMI agreement. By mid-2006, we deployed two newly modified Boeing
767 cargo aircraft into our non-DHL charter business, allowing us to return the two 767s previously deferred
to service for DHL. By the end of 2006, we had deployed two additional newly modified Boeing 767
aircraft into service for our non-DHL charter operations, bringing the total to four. Our earnings from
non-DHL ACMI/charter were $3.7 million in 2006 compared to $1.1 million in 2005. Our non-DHL charter
earnings in the first half of 2005 were hampered by low utilization and higher fixed costs while we
transitioned the 767 freighters into non-DHL service.
Other Activities
Other, non-DHL revenues increased $3.9 million to $24.1 million in 2006 compared to $20.2 million for
2005, while earnings declined $0.8 million to $4.7 million. In September 2006, ABX began managing two
USPS sorting facilities in Dallas and Memphis to go along with a third USPS facility in Indianapolis that
ABX has operated since September 2004. Fourth quarter 2006 pre-tax earnings for ABX’s other non-DHL
operations were affected by start-up losses from the two added USPS sorting facilities.
23
A summary of our revenues, expenses and pre-tax earnings is shown below (in thousands):
Year Ended December 31,
2006
2005
2004
Revenues:
DHL Contracts
ACMI
Base mark-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incremental mark-up - cost goals . . . . . . . . . . . . . . . . . . .
Incremental mark-up - service goals . . . . . . . . . . . . . . . . .
$ 466,967
6,303
1,148
$ 480,322
6,319
708
$ 475,826
6,341
935
Total ACMI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
474,418
487,349
483,102
Hub Services
Base mark-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incremental mark-up - cost goals . . . . . . . . . . . . . . . . . . .
Incremental mark-up - service goals . . . . . . . . . . . . . . . . .
Total Hub Services . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Reimbursable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
400,336
951
2,064
403,351
334,101
605,094
753
—
605,847
337,151
440,602
3,917
3,248
447,767
244,935
Total DHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,211,870
24,440
24,051
1,430,347
13,864
20,179
1,175,804
16,673
10,032
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,260,361
$1,464,390
$1,202,509
Expenses:
DHL Contracts
ACMI
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hub Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Reimbursable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 459,926
395,391
334,101
$ 472,283
599,591
337,151
$ 467,642
433,024
244,935
Total DHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,189,418
20,736
19,356
1,409,025
12,726
14,786
1,145,601
14,147
5,788
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,229,510
$1,436,537
$1,165,536
Pre-tax earnings:
DHL Contracts
ACMI
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hub Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Reimbursable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total DHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
14,492
7,960
—
22,452
3,704
4,695
5,162
15,066
6,256
—
21,322
1,138
5,393
2,459
15,460
14,743
—
30,203
2,526
4,244
—
Total pre-tax earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
36,013
$
30,312
$
36,973
For the purposes of internal reporting, the Company does not allocate overhead costs that are reimbursed by
DHL to its non-DHL activities. The provisions of the commercial agreements with DHL do not require an
allocation of overhead until such time as ABX derives more than 10% of its total revenue from non-DHL
business activities.
24
Operating Expenses
Our expenses are driven by operational variables including the number of aircraft hours flown, the volume
and size of packages handled for DHL, the services that DHL requests (such as electronic package scanning) and
the number of instances in which a package is handled during the sort and transportation process. Pounds
processed reflects the weight of a package at multiple times as it moves through the network. The design of the
DHL air and ground network, which includes routing standards and transportation determinations, is generally
communicated to us by DHL.
Pounds processed for DHL (millions)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Labor hours (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft block hours flown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,817
21,976
107,396
2,834
20,702
121,508
2006
2005
Increase
(Decrease)
(1%)
6%
(12%)
Labor hours increased in 2006 compared to 2005 due primarily to higher levels of staffing to operate DHL’s
main hub in Wilmington, Oho and DHL’s network of regional hubs. Labor hours increased as a result of DHL’s
hub integration project in September 2005. At that time, DHL consolidated its Cincinnati, Ohio hub, which was
not operated by ABX, with its Wilmington hub, which we operate. Aircraft block hours flown for DHL declined
14% in 2006 compared to 2005, reflecting the lower level of flying since the September 2005 hub consolidation,
which eliminated redundant routes within the DHL air network. Aircraft block hours flown for non-DHL
customers increased 67% in 2006 compared to 2005 reflecting the deployment of two Boeing 767 aircraft in mid
2005 and two more Boeing 767 aircraft in 2006.
Salaries, wages and benefits expense increased 4.1% during 2006 compared to 2005 due to increased
staffing to operate the main hub in Wilmington, Ohio and additional resources to service the network of regional
hubs located outside of Ohio after DHL’s hub integration project in September 2005. The increase reflects higher
healthcare costs and increases in our defined benefit pension plan expense.
Purchased line-haul and yard management expenses decreased $224.1 million, or 71.7%, during 2006
compared to 2005. The decrease is primarily a result of DHL assuming management of its line-haul trucking
operations from ABX in May 2006. ABX Air’s expenses from those line-haul management operations were
approximately $81.5 million in 2006, compared with $293.3 million in 2005.
Fuel expense increased 2.0% in 2006 compared to 2005. The increases were driven by higher market prices
for aviation fuel. The average aviation fuel price was $2.14 and $1.85 per gallon in 2006 and 2005, respectively.
Our aviation fuel consumption declined to 130 million gallons in 2006 from 142 million gallons of aviation fuel
in 2005, due to the flight reductions made by DHL. We do not hedge fuel prices or purchase fuel derivatives. The
volatility of fuel prices are effectively assumed by DHL and other customers through ACMI agreements.
Maintenance, materials and repairs expense decreased 10.4% in 2006 compared to 2005. Our aircraft engine
maintenance expenses have declined in conjunction with the lower level of flight hours for DHL since the
September 2005 hub consolidation. Our policy is to expense these maintenance costs as they are incurred.
Accordingly, our aircraft maintenance expenses fluctuate from period to period due to the timing of scheduled
heavy maintenance work for aircraft. During 2006, we processed 54 heavy maintenance checks compared to 67
checks in 2005.
Depreciation and amortization expense increased $4.5 million in 2006 compared to 2005. The increase is
primarily a result of four additional Boeing 767 aircraft that we placed in service in 2006. Our depreciation
expense for 2007 will be impacted by the timing of the additional Boeing 767s that we anticipate placing into
service. At this time, we estimate that depreciation and amortization expense will approximate $49.7 million in
2007.
25
Landing and ramp expense decreased by 20.4% during 2006 compared to 2005. The reduction reflects lower
deicing costs due to a milder winter in 2006 and a lower level of landing fees as a result of scheduled flight
reductions in conjunction with the DHL hub consolidation in September 2005.
Rent expense increased $2.2 million during 2006 compared to 2005, due to equipment rentals in support of
the consolidated Wilmington hub and expanded regional hubs since September 2005 and additional building
rentals to support the United States Postal Service centers.
Other operating expenses include pilot travel, professional fees, insurance, utilities, and packaging supplies.
Other operating expenses decreased by $4.0 million in 2006 compared to 2005. During the third quarter of 2005,
our expenses included significant costs associated with DHL’s hub integration project and bad debt expenses
associated with airline bankruptcy filings.
Interest Income and Expense
Our interest expense increased by $0.7 million in 2006 compared to 2005. The increase in interest expense
in 2006 is a result of the Boeing 767 aircraft we financed in 2006. Interest income increased by $2.4 million in
2006 compared to 2005 due to holding a higher level of marketable securities, cash and cash equivalent balances
compared to 2005 and by achieving higher yields.
Income Tax
In the fourth quarter of 2006, we recorded an income tax benefit to completely reverse the remaining
valuation allowance on ABX’s deferred tax assets. The valuation allowance had originally been placed on
income tax carryforwards and other deferred tax assets since ABX’s separation from Airborne, Inc. in August
2003. The allowance was originally recorded due to a significant operating loss at that time and uncertainty in
ABX’s future earnings prospects. ABX’s former parent, Airborne, Inc., which had been our predominant source
of business for over twenty years, was acquired by DHL in 2003.
Since that time, ABX has generated annual pre-tax earnings in each of the last three years while diversifying
its business. ABX has diversified its revenues and earnings, growing non-Airborne/DHL revenues from $16.6
million in 2002 to $48.5 million for 2006. Our projections of taxable income and a successful implementation of
diversification strategies, combined with a three-year record of profitable results, indicate it is more likely than
not that all the deferred tax assets will be realized prior to their expiration. As a result, the asset valuation
allowance that had been placed on income tax carryforwards and other deferred tax assets was completely
reversed.
As of December 31, 2006, ABX had operating loss carryforwards for U.S. federal income tax purposes of
approximately $143.9 million, which will begin to expire in 2022. We expect to utilize the loss carryforwards to
offset federal income tax liabilities ABX will generate in the future. As a result, we do not expect to pay federal
income taxes for at least the next two years. ABX may, however, be required to pay alternative minimum taxes
and certain state and local income taxes before then. In 2007, we expect to record a deferred income tax expense
at an effective rate of approximately 38% of pre-tax earnings.
ABX did not record a tax expense in 2005 because deferred tax expense was offset by a reduction in the
valuation allowance for net deferred tax assets.
26
2005 compared to 2004
Net earnings declined $6.7 million to $30.3 million for 2005 compared to $37.0 million in 2004. The decline
in our net earnings was primarily due to achieving a lower level of incremental mark-up under the DHL Hub
Services agreement in 2005 compared to 20043. Our incremental mark-up from hub services declined $6.4
million and base earnings from the DHL agreements declined $2.2 million during 2005 compared to 2004.
Additionally, our incremental mark-up earnings from the DHL ACMI agreement declined by $0.3 million, and
our earnings from non-DHL charter operations declined by $1.4 million. These declines were partially offset by
non-DHL interest income of $2.4 million and improved earnings on all other activities of $1.2 million.
DHL
While our revenues from DHL increased 21.6% during 2005, reflecting increased activity to support the
growth of DHL’s ground delivery services and the expansion of DHL’s ground network compared to 2004,
our 2005 earnings from the DHL segment declined $8.9 million to $21.3 million. Earnings for achieving
cost-related and service goals declined $6.7 million to $7.8 for 2005. The decline in our 2005 DHL earnings
and in the annual cost-related and service mark-up was primarily due to lower achievement of incentives
within the Hub Services agreement. No mark-ups from the annual cost-related or service-related goals under
the Hub Services agreement were recognized for 2005 compared to $5.9 million that were recognized in
2004. The decline in incremental hub services revenues primarily reflected the operational issues we
experienced during the Wilmington hub consolidation, the relocation of two other hubs and other changes
that were made by DHL in 2005 to their network. In an effort to share responsibility and demonstrate our
commitment to DHL, we agreed to forego approximately $0.9 million of annual service incentive revenue
that was otherwise earned under the agreement.
Our base earnings4 for 2005 declined $2.2 million to $13.5 million compared to $15.7 million for 2004. Our
base earnings for 2005 were negatively impacted by $1.9 million of credits we granted to DHL stemming
from cost overruns incurred as a result of the hub consolidation in September 2005. We agreed to grant
these credits in recognition of the operational difficulties and higher than anticipated cost associated with
DHL’s hub network changes in 2005. The decline in base earnings also reflected the temporary reduction in
the base mark-up during the second half of 2005 and increases in operating expenses that were not
reimbursed by DHL. These include employee stock compensation and costs related to legal matters. (Legal
matters are discussed on page 13.)
During the fourth quarters of 2005 and 2004, we recognized $4.0 million, or approximately 100%, of the
maximum available incremental mark-up from the annual cost -related goal under the ACMI agreement.
Also, during the fourth quarter of 2005, we recognized revenue from the annual service goal in the ACMI
agreement of $0.7 million, or 60.0% of the maximum available. During the fourth quarter of 2004, we
recognized revenue from the annual service goal in the ACMI agreement of $0.9 million, or 80.0% of the
maximum available.
Non-DHL ACMI/Charters
Our revenues from non-DHL ACMI/charter services were $13.9 million in 2005 compared to $16.7 million
in 2004, which included $4.5 million of revenues related to the temporary network that was not contracted
3
4
The two agreements with DHL allow ABX to earn additional incremental mark-up for meeting certain quarterly cost-related goals,
annual cost-related goals and annual service goals. The maximum incremental mark-up available from the quarterly cost goals is
approximately 0.54% of cost eligible for mark-up under each agreement, except during the last six months of 2005, when the incremental
mark-up under the Hub Services agreement for cost-related goals was approximately 1.04%. The maximum incremental mark-up
available from the annual service goals is 0.25% of costs subject to mark-up under the ACMI agreement and 0.75% of costs eligible for
mark-up under the Hub Services agreement. The maximum incremental mark-up available from the annual cost-related goals is
approximately 0.81% of costs subject to mark-up under the ACMI agreement and approximately 0.81% of costs eligible for mark-up
under the Hub Services agreement. Incremental mark-ups earned on the annual goals are only recognized in the fourth quarter.
Base earnings from DHL agreements are the segment’s pre-tax earnings excluding revenues from incremental mark-ups.
27
by the USPS in 2005. Our earnings from non-DHL ACMI/charters were $1.1 million in 2005 compared to
$2.5 million in 2004. During 2005, we reached an agreement with DHL to temporarily defer two Boeing
767 freighter aircraft from DHL service and instead deploy the aircraft in our non-DHL charter operations
for a twelve-month period. As a result, during the twelve months, the depreciation, maintenance and other
operating costs associated with the aircraft were borne by ABX and not reimbursed by DHL under the
ACMI agreement. Earnings for 2005 declined due to the absence of the USPS air network and start-up costs
during mid-2005 to deploy the two Boeing 767 freighter aircraft.
Other Activities
Other, non-DHL revenues increased $10.2 million to $20.2 million in 2005 compared to $10.0 million for
2004, while earnings increased $1.2 million to $5.5 million. The revenue and earnings growth was driven by
aircraft part sales, maintenance services and sorting services for the USPS. Earnings on these business
activities were negatively impacted by bad debt provisions stemming from bankruptcy filings by customers.
Operating Expenses
Salaries, wages and benefits expense increased 21.7% during 2005 compared to 2004. Total paid hours
increased 38.1% in 2005 compared to 2004. The increases were primarily due to the higher levels of staffing and
contracted labor necessary to operate the consolidated hub and seven additional hubs and to process increased
piece counts compared to 2004.
Purchased line-haul expense increased $78.9 million or 33.8% during 2005 compared to 2004. The increase
reflected growth in DHL’s deferred delivery products that are generally transported via truck, as well as
additional line-haul to accommodate more inter-hub shipments for DHL’s ground network.
Fuel expense increased 30.2% in 2005 compared to 2004. The increases were driven by higher market
prices for aviation fuel. The average aviation fuel price was $1.85 and $1.32 per gallon in 2005 and 2004,
respectively. We consumed 142 million gallons and 148 million gallons of aviation fuel in 2005 and 2004,
respectively.
The level of maintenance, materials and repairs expense was unchanged in 2005 compared to 2004.
Expenses for aircraft maintenance declined $5.4 million, primarily due to fewer DC-8 aircraft undergoing heavy
maintenance in 2005 compared to 2004. Reductions in expenses for aircraft maintenance were offset by
increased expenses necessary to support DHL’s expanded hub network. These included additional expenses for
incremental building space, conveyors, scales, ground vehicles, loaders and other material handling equipment,
which we maintained for DHL under the Hub Services agreement.
Depreciation and amortization expense increased $4.3 million in 2005 compared to 2004. The increase was
primarily a result of five additional Boeing 767 aircraft that we placed in service since the second quarter of
2004.
Landing and ramp expense increased by 15.1% during 2005 compared to 2004. These expenses were higher
due to rate increases at the airports we utilized. Additionally, this category includes deicing costs, which were
higher in 2005 due to more severe winter weather in the first quarter of 2005 as compared to 2004.
Rent expense increased $0.5 million during 2005 compared to 2004, due to additional equipment rentals to
support the expanded DHL network.
Other operating expenses include pilot travel, professional fees, insurance, utilities, and packaging supplies.
Other operating expenses increased by $12.3 million in 2005 compared to 2004. The increases were primarily
due to bad debt reserves related to our non-DHL customer billings, as well as logistic services, utilities, travel,
recruiting, relocations, security and other costs necessary to support the hub consolidation project and other
changes in the DHL network.
28
Interest Income and Expense
Our interest expense increased by $1.8 million in 2005 compared to 2004 due primarily to a reduced amount
of interest capitalized during the cargo modification process of aircraft. Capitalized interest cost declined by $1.4
million in 2005 compared to 2004 because fewer aircraft were being modified during 2005. Interest income
increased by $1.4 million in 2005 compared to 2004 due to holding a higher level of cash and cash equivalent
balances compared to 2004 and by achieving higher yields. During 2004, interest earned on cash and cash
equivalents reduced interest expense when calculating revenue under the DHL agreements. Beginning in 2005,
interest earned on cash and cash equivalents was not included in the DHL revenue calculation.
Income Tax
ABX did not record a tax expense in 2005 or 2004 because deferred tax expense was offset by a reduction in
the valuation allowance for net deferred tax assets. During 2005, the State of Ohio enacted comprehensive tax
reform legislation. The Ohio corporate franchise tax will be phased out over five years and replaced with a
commercial activity tax on gross receipts. We wrote off the $6.3 million deferred tax asset and Ohio net
operating loss carryforward attributable to Ohio, since we did not believe any part of the asset would be realized
by 2009. The write-off of the Ohio deferred tax assets had no net provision effect since it was previously fully
reserved.
We continued to fully reserve the net deferred tax assets as of December 31, 2005. The realization of
deferred tax assets, including net operating loss carryforwards (“NOL CFs”), depended on the existence of
sufficient taxable income within the applicable carryback or carryforward periods. After considering both
positive and negative evidence of sources of future taxable income, ABX continued to maintain a full valuation
allowance against its deferred tax assets, including NOL CFs, due to the likelihood that the deferred tax assets
would not be realized. While ABX had positive pre-tax income since separation from Airborne, excluding the
2003 impairment charge, it also had accumulated significant taxable losses during the post-separation period,
primarily due to temporary differences in depreciating its aircraft fleet. These historical taxable losses and near-
term projected taxable losses weighed significantly in the overall assessment.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Operating cash flows were $54.4 million, $119.1 million and $57.2 million for 2006, 2005 and 2004,
respectively. Our operating cash flows are primarily a function of aircraft depreciation expense reimbursed by
DHL and the mark-up earned under our commercial agreements with DHL. Net operating cash flows declined
primarily to pay vendors for accrued charges from 2005. The decline in operating cash flows reflects the lower
level of line-haul and contracted labor expenses during 2006 compared to 2005. Additionally, during the first half
of 2005, ABX collected a large receivable from DHL associated with 2004 revenues.
Capital Expenditures
Total capital expenditures were $89.0 million in 2006 compared to $60.7 million and $73.7 million in 2005
and 2004, respectively. Our capital expenditures in 2006 included the acquisitions of eight Boeing 767 aircraft
from Delta and cargo modification costs for nine aircraft. In 2005, our capital expenditures were primarily for
two Boeing 767 aircraft that were undergoing freighter modification at that time. During 2005 and 2004, we
acquired one and two Boeing 767 aircraft, respectively, and modified the aircraft into cargo configurations.
During 2006 we completed four Boeing 767 cargo modifications, in 2005 we completed three, and in 2004 we
completed two.
Commitments
In September 2005, we reached an agreement with Delta committing ABX to purchase twelve Boeing 767
aircraft from Delta between 2005 and December 2008. We contracted with an aircraft maintenance provider to
29
modify these aircraft from passenger to freighter configurations. The estimated costs of the remaining aircraft
purchase commitments and the anticipated modification costs approximate $113.5 million in 2007 and
$22.7 million in 2008. We currently plan to complete six aircraft modifications in 2007 and two aircraft
modifications in 2008. If our aircraft modification provider has the required resources available, we may move
the two aircraft scheduled for completion in 2008 into 2007. The total level of capital spending for 2007 is
anticipated to be approximately $131.1 million, $17.6 million for other capital projects.
The table below summarizes our contractual obligations and commercial commitments (in thousands) as of
December 31, 2006. It does not include cash contributions for pension funding due to the absence of scheduled
maturities. The timing of pension and post-retirement healthcare payments cannot be reasonably determined,
except for $46.1 million estimated to be paid in 2007, which is discussed under “Cash Flows” in Note J to the
accompanying consolidated financial statements. The long-term debt bears interest at 5.00% to 7.07% per
annum.
Contractual Obligations
Long-term debt, including interest payments . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unconditional purchase obligations . . . . . . . . . . . . . . . . .
Payments Due By Period
Total
$242,945
99,815
19,408
136,210
Less Than
1 Year
2-3
Years
4-5
Years
After 5
Years
$
8,829
15,698
5,699
113,483
$17,658
31,109
9,392
22,727
$17,658
27,505
2,769
—
$198,800
25,503
1,548
—
Total contractual cash obligations . . . . . . . . . . . . . . . . . .
$498,378
$143,709
$80,886
$47,932
$225,851
The unconditional purchase obligations consist of commitments to acquire and modify aircraft to a standard
cargo configuration. We plan to finance the cost of modifying the aircraft with existing cash and contractor-
provided financing during the modification period. Upon completion of the modification, we anticipate six more
aircraft will be financed for approximately $89 million through a syndication process being arranged by our lead
bank. Our future operating results will be affected by the interest rates and other terms and conditions of the new
borrowings or leases.
Liquidity
At December 31, 2006, we had approximately $63.2 million of cash balances and $20.8 million of
marketable securities. ABX has a $45.0 million credit facility through a syndicated Credit Agreement that
expires in December 2008. Borrowings under the agreement are collateralized by substantially all of ABX’s
assets. The agreement contains an accordion feature to increase the borrowings to a total of $50.0 million if ABX
needs additional borrowing capacity. The agreement contains covenants restricting the level of annual capital
expenditures. The agreement was modified to exclude from the covenants capital expenditures for the twelve
aircraft modifications described above, which began in 2005. The agreement provides for the issuance of letters
of credit on ABX’s behalf. As of December 31, 2006, the unused credit facility totaled $35.1 million, net of
outstanding letters of credit of $9.9 million. We plan to renew these letters of credit through the credit facility
agreement when the letters expire.
We believe that our current cash balances and forecasted cash flows provided by commercial agreements
with DHL, combined with our credit facility and anticipated financing for aircraft acquisitions, will be sufficient
to fund our planned operations and capital expenditures for 2007. We project that our 2007 depreciation expense
subject to mark-up under the DHL agreements will be approximately $40.5 million in 2007.
The promissory note due to DHL limits cash dividends that we can pay to $1.0 million annually. We have
not declared any cash dividends and intend to retain earnings to finance future growth and operating
requirements.
30
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special
purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As of December 31, 2006, we are not involved
in any material unconsolidated SPE transactions.
Certain of our operating leases and agreements contain indemnification obligations to the lessor or one or
more other parties that are considered ordinary and customary (e.g. use, tax and environmental indemnifications),
the terms of which range in duration and are often limited. Such indemnification obligations may continue after
the expiration of the respective lease or agreement. No amounts have been recognized in our financial statements
for the underlying fair value of guarantees and indemnifications.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as
certain disclosures included elsewhere in this report, are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to select appropriate accounting policies and make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingencies. In certain cases, there are alternative policies or estimation techniques which could
be selected. On an on-going basis, we evaluate our selection of policies and the estimation techniques we use,
including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves,
accruals for labor contract settlements, valuation of spare parts inventory, useful lives, salvage values and
impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on
historical experience, current conditions and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our
accounting treatment with respect to commitments and contingencies. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following significant and critical accounting
policies involve the more significant judgments and estimates used in preparing the consolidated financial
statements.
Revenue Recognition
Revenues from DHL are recognized when the related services are performed. Prior to August 16, 2003,
revenues from Airborne were calculated as the sum of pretax net expenses incurred plus 2.0%. Prior to
August 16, 2003, net expenses included all operating and interest expenses, including allocated expenses from
Airborne, less revenues recorded from customers other than Airborne. Since August 16, 2003, revenues from
DHL are determined based on the expenses incurred during a reporting period for the ACMI and Hub Services
agreements. Expenses incurred under these agreements are generally subject to a base mark-up of 1.75%, which
is recognized in the period during which the expenses are incurred. Certain costs, the most significant of which
include fuel costs, interest on the promissory note to DHL, airport rent, ramp and landing fees incurred for
performance under the ACMI agreement, are reimbursed and included in revenues without mark-up.
In addition to a base mark-up of 1.75%, both the ACMI and Hub Services agreements provide for an
incremental mark-up potential above the base 1.75%, based on our achievement of specified cost-related and
service goals. The ACMI agreement provides for a maximum potential incremental mark-up of 1.60%, with
1.35% based on cost-related goals and 0.25% based on service performance. The Hub Services agreement
provides for a maximum potential incremental mark-up of 2.10%, with 1.35% based on cost-related goals and
0.75% based on service performance. Both contracts call for 40% of any incremental mark-up earned from cost-
related goals to be recognized based on quarterly results, with 60% measured against annual results. Accordingly,
31
a maximum incremental mark-up of approximately 0.54% may be achieved based on quarterly results and
recognized in our quarterly revenues. Up to a maximum incremental mark-up of approximately 0.81% based on
annual cost-related goals could be recognized during the fourth quarter, when full year results are known.
Incremental mark-up potential associated with the service goals (0.25% in the ACMI agreement and 0.75% in the
Hub Services agreement) is measured annually and any revenues earned from their attainment would be
recognized during the fourth quarter, when full year results are known. Management cannot predict to what
degree ABX will be successful in achieving incremental mark-up.
In August 2005, DHL and ABX agreed to amend the Hub Services agreement to extend the initial term of
the Hub Services agreement in exchange for temporarily placing more of ABX’s revenue potential under a cost-
related incentive. The amendment temporarily reduced the base mark-up under the Hub Services agreement from
1.75% to 1.25% during the last six months of 2005. The maximum incremental mark-up that ABX can earn
during the third and fourth quarters of 2005 from its quarterly cost-related incentives under the Hub Services
agreement was temporarily increased from approximately 0.54% to 1.04%. Additionally, the initial term of the
Hub Services agreement was extended for an additional year and will not be subject to annual renewals until
August 15, 2007. In 2006, the base mark-up reverted to the previous level of 1.75% and the maximum
incremental mark-up from the quarterly cost-related incentive reverted to the previous level of approximately
0.54%. The amendment did not change the annual cost and service-related incremental mark-up opportunities
under the Hub Services agreement. The Hub Services agreement, as amended, continued to allow DHL to
terminate specific services upon providing at least sixty-days notice. The amendment did not affect the mark-up
or the term of the ACMI agreement, incepted on August 15, 2003, which is for seven years and automatically
renews for an additional three years unless a one-year notice of non-renewal is given.
ABX derives a portion of its revenues from customers other than DHL. ACMI and charter service revenues
are recognized on scheduled and non-scheduled flights when the specific flight has been completed. Aircraft
parts and fuel sales are recognized when the parts and fuel are delivered. Revenues earned and expenses incurred
in providing aircraft-related maintenance repair services or technical maintenance services are recognized in the
period in which the services are completed and delivered to the customer.
Depreciation
Depreciation of property and equipment is provided on a straight-line basis over the lesser of the asset’s
useful life or lease term. We periodically evaluate the estimated service lives and residual values used to
depreciate our property and equipment. The acceleration of depreciation expense or the recording of significant
impairment losses could result from changes in the estimated useful lives of our assets. We may change the
estimated useful lives due to a number of reasons, such as the existence of excess capacity in our air system or
ground networks or changes in regulations grounding or limiting the use of aircraft.
Self-Insurance
We self-insure certain claims relating to workers compensation, aircraft, automobile, general liability and
employee healthcare. We record a liability for reported claims and an estimate for incurred claims that have not
yet been reported. Accruals for these claims are estimated utilizing historical paid claims data, recent claims
trends and, in the case of employee healthcare, an independent actuarial report. Changes in claim severity and
frequency could result in actual claims being materially different than the costs provided for in our annual results
of operations.
Contingencies
We are involved in legal matters that have a degree of uncertainty associated with them. We continually
assess the likely outcomes of these matters and the adequacy of amounts, if any, provided for these matters.
There can be no assurance that the ultimate outcome of these matters will not differ materially from our
assessment of them. There also can be no assurance that we know all matters that may be brought against us at
any point in time.
32
Income Taxes
We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes.” The
objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in the company’s financial statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in ABX’s financial statements or tax returns. Fluctuations in
the actual outcome of these future tax consequences could materially impact the company’s financial position or
its results of operations.
Post-retirement Obligations
In 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). SFAS
158 required ABX to recognize on its balance sheet the funded status (measured as the difference between the
fair value of plan assets and the projected benefit obligation) of pension and other post-retirement benefit plans.
SFAS 158 requires other disclosures; see Note J to the accompanying consolidated financial statements.
We sponsor qualified defined benefit plans for our pilots and other eligible employees. We also sponsor
unfunded post-retirement healthcare plans for our flight crewmembers and non-flight crewmember employees.
We also sponsor non-qualified, unfunded excess plans that provide benefits to executive management and pilots
that are in addition to amounts permitted to be paid through our qualified plans under provisions of the tax laws.
The accounting and valuation for these post-retirement obligations are determined by prescribed accounting
and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate
assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid.
The long-term nature of these benefit payouts increases the sensitivity of certain estimates on our post-retirement
costs. In actuarially valuing our pension obligations and determining related expense amounts, assumptions we
consider most sensitive are discount rates, expected long-term investment returns on plan assets and future salary
increases. Other assumptions concerning retirement ages, mortality and employee turnover also affect the
valuations. For our post-retirement healthcare plans, consideration of future medical cost trend rates is an
important assumption in valuing these obligations. Actual results and future changes in these assumptions could
result in future costs that are materially different than those recorded in our annual results of operations.
The plan assets related to our funded pension plans have experienced an actual investment return of
approximately 7.9% over the last ten years. Our actuarial valuation includes an assumed long-term rate of return
on plan assets of 8%. Our assumed rate of return is based on a targeted long-term investment allocation of 50%
equity securities, 45% fixed income securities and 5% real estate. The actual asset allocation at December 31,
2006 was 53% equities, 42% fixed income and 5% real estate.
In evaluating our assumption regarding expected long-term investment returns on plan assets, we consider a
number of factors including: our historical plan returns in connection with our asset allocation policies, assistance
from investment consultants hired to provide oversight over our actively managed investment portfolio and long-
term inflation assumptions. The selection of the expected return rate materially affects our pension costs. We
selected an expected rate of return of 8% in 2006 and continue to use this rate for valuation and determining
pension costs in 2007. We continue to believe that 8% is a reasonable long-term rate of return. If we were to
lower our long-term rate of return assumption by a hypothetical 100 basis points, expense in 2007 would be
increased by approximately $5.7 million. We use a market value of assets as of the measurement date for
determining pension expense.
In selecting the interest rate to discount estimated future benefit payments that have been earned to date to
their net present value (defined as the projected benefit obligation) we match the plan’s benefit payment streams
to high-quality bonds of similar maturities. The selection of the discount rate not only affects the reported funded
33
status information as of December 31 (as shown in Note J to the consolidated financial statements) but also
affects the succeeding year’s pension and post-retirement healthcare costs. The discount rate selected for
December 31, 2006, based on the method described above, was 5.90%. If we were to lower our discount rate by a
hypothetical 50 basis points, pension expense in 2007 would be increased by approximately $7.5 million.
The assumed future increase in salaries and wages is also a significant estimate in determining pension
costs. In selecting this assumption, we consider our historical wage and pensionable earnings increases, future
wage increase projections, our collective bargaining agreement with pilots, and inflation. We have used a 4%
salary increase assumption for non-pilots and a 4.5% salary increase for pilots in 2006 and will use the same
assumptions for 2007. In 2007, if we used a salary increase assumption which was 100 basis points higher than
that used, pension costs would have increased by approximately $7.1 million.
The following table illustrates the sensitivity of the aforementioned assumptions on our pension expense.
Change in assumption
100 basis point decrease in rate of return . . . . . . .
50 basis point decrease in discount rate . . . . . . . .
100 basis point increase in compensation rates . . .
Aggregate effect of all the above changes . . . . . .
Effect of change
(in thousands)
December 31, 2006
2007
Pension
expense
$ 5,693
7,456
7,111
21,168
Funded
status
$ (12,070)
(50,051)
(32,788)
(100,994)
Accumulated
other
comprehensive
income (pre-tax)
$ 12,070
50,051
32,788
100,994
We estimate that cash contributions to the defined benefit pension plans will approximate $45.0 million in
2007. We will periodically evaluate whether to make additional contributions during the year. Funding for the
contributions will be generated primarily from our operating agreements with DHL. Under our agreements with
DHL, the actuarial expense of our pension and post-retirement health care plans is reimbursed with mark-up.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax positions taken or expected to be
taken in a tax return. This Interpretation requires financial statement recognition of the impact of a tax position, if
that position is more likely than not of being sustained on audit, based on the technical merits of the position.
Additionally, FIN 48 provides guidance on accounting in interim periods and disclosure requirements for
uncertain tax positions. The accounting provisions of FIN 48 will be effective for ABX beginning January 1,
2007. ABX is currently evaluating the impact of FIN 48; at this time, management believes that its effect on the
consolidated financial position and results of operations will be less than $1.0 million. The cumulative effect of
applying the provisions of FIN 48, if any, will be reported as an adjustment to the opening balance of retained
earnings in the first quarter of 2007.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Accounting,” (“SFAS 157”) which defines
fair value, establishes a framework for measuring fair value and expands disclosure about fair value
measurements. SFAS 157 will be effective for ABX’s fiscal year beginning January 1, 2008.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our business, we are exposed to market risk for changes in the price of jet and
diesel fuel; however, this risk is largely mitigated by reimbursement through the ACMI agreement.
ABX also faces financial exposure to changes in interest rates. As of December 31, 2006, we have $156.4
million of fixed interest rate debt and $44.1 million of variable interest rate debt outstanding. We also have
forward treasury lock agreements (“treasury locks”) with notional amounts totaling $24.0 million as of
December 31, 2006.
Variable interest rate debt exposes us to differences in future cash flows resulting from changes in market
interest rates. This risk is largely mitigated, however, because, at this time, our interest expense for the debt with
variable rate risk is marked up and charged to DHL under our ACMI agreement. Variable interest rate risk can be
quantified by estimating the change in annual cash flows resulting from a hypothetical 20% increase in interest
rates. A hypothetical 20% increase in interest rates would have resulted in an increase in interest expense of
approximately $0.6 million for the year ended December 31, 2006.
The debt issued at fixed interest rates is exposed to fluctuations in fair value resulting from changes in
market interest rates. Fixed interest rate risk can be quantified by estimating the increase in fair value of our long-
term debt through a hypothetical 20% decrease in interest rates. As of December 31, 2006, a 20% decrease in
interest rates would have increased the fair value of our fixed interest rate debt by approximately $16.9 million.
To reduce our exposure to rising interest rates before aircraft financing transactions are executed, we entered
into forward treasury locks for five aircraft during the first quarter of 2006. Two remaining treasury locks will
expire in mid-2007, near the forecasted execution dates of the anticipated financing transactions. The financing
transactions are expected to be fixed interest rate aircraft loans based on the ten-year U.S. Treasury Notes. The
value of the treasury locks are also based on the ten-year U.S. Treasury rates, effectively countering the effect of
changing interest rates on the anticipated financing transactions. The treasury locks are with major U.S. financial
institutions and will settle in cash at the time each expires. See Note L for a table of treasury lock values and
discussion of our accounting treatment for these hedging transactions.
ABX has a portfolio of marketable securities consisting of U.S. government agency obligations and U.S.
corporate obligations. These securities are classified as available-for-sale and, consequently, are recorded at fair
market value with unrealized gains or losses reported as a separate component of stockholders’ equity. The
following table presents expected cash flows from market-risk sensitive financial instruments. These financial
instruments are denominated in U.S. dollars and are not held for the purpose of trading.
Fair
Value
Contractual
Maturities
2007
2008
Fixed Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Interest Rate . . . . . . . . . . . . . . . . . . . . .
$19,818
$14,405
$5,510
4.98%
4.17%
Variable Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Interest Rate . . . . . . . . . . . . . . . . . . . . .
$
998
$ 1,000
$ —
4.64%
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
37
38
39
40
41
42
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ABX Air, Inc.
Wilmington, Ohio
We have audited the accompanying consolidated balance sheets of ABX Air, Inc. and subsidiaries (the
“Company”) as of December 31, 2006 and 2005, and the related consolidated statements of earnings,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our
audits also included the financial statement schedules listed in the Index at Item 15a(2). These financial
statements and financial statement schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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.
As discussed in Note A to the consolidated financial statements, the Company’s principal customer accounts
for substantially all of the Company’s revenue. The Company’s financial security is dependent on its relationship
with their customer.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of ABX Air, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note J to the consolidated financial statements, the Company adopted the recognition and
disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106,
and 132(R)), effective December 31, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Company’s internal control over financial reporting as of December 31,
2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007 expressed an
unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over
financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
DELOITTE & TOUCHE, LLP
March 15, 2007
Dayton, Ohio
37
ABX AIR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities—available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance of $516 in 2006 and $872 in 2005 . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid supplies and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft and engines held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31
2006
2005
$ 63,219
15,374
10,365
13,907
6,395
14,691
2,219
126,170
7,966
87,024
458,638
$ 69,473
15,637
15,776
14,014
5,546
—
—
120,446
13,952
—
381,645
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 679,798
$ 516,043
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries, wages and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of post-retirement liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,313
51,384
10,298
1,789
11,413
4,081
$ 78,068
47,249
9,240
14,701
8,612
4,399
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144,278
162,269
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189,118
164,572
Post-retirement liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
222,587
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,605
74,618
1,505
Commitments and contingencies (Note I)
STOCKHOLDERS’ EQUITY
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior
Participating Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, par value $0.01 per share; 75,000,000 shares authorized;
58,539,300 and 58,385,100 shares issued and outstanding in 2006 and 2005,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock compensation awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
585
431,071
—
(207,836)
(103,610)
584
430,026
(688)
(297,890)
(18,953)
TOTAL STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120,210
113,079
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . . . . . . . . . . .
$ 679,798
$ 516,043
See notes to consolidated financial statements.
38
ABX AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OPERATING EXPENSES:
Year Ended December 31
2006
2005
2004
$1,260,361
$1,464,390
$1,202,509
Salaries, wages and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance, materials and repairs . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased line-haul and yard management . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Landing and ramp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
635,015
262,948
97,108
88,223
45,660
21,099
9,716
57,807
610,251
257,710
108,343
312,286
41,167
26,522
7,506
61,842
501,419
197,879
108,425
233,367
36,817
23,040
6,993
49,571
INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,217,576
(11,547)
4,775
1,425,627
(10,805)
2,354
1,157,511
(8,956)
931
EARNINGS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . .
INCOME TAX BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,013
54,041
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
90,054
EARNINGS PER SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.55
1.54
30,312
—
30,312
0.52
0.52
$
$
$
36,973
—
36,973
0.63
0.63
$
$
$
WEIGHTED AVERAGE SHARES:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,270
58,403
58,270
58,475
58,270
58,270
See notes to consolidated financial statements.
39
ABX AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31
2006
2005
2004
OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net earnings to net cash provided by operating
$ 90,054
$ 30,312
$ 36,973
activities:
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory and prepaid supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, salaries, wages, benefits and other liabilities . . . .
Post-retirement liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(54,041)
45,660
1,734
(1,491)
—
5,411
(2,636)
(46,284)
(318)
7,293
8,523
513
—
41,167
702
(55)
—
38,901
(3,929)
4,871
(3,166)
4,799
5,294
215
—
36,817
—
(26)
2,640
(49,195)
(899)
19,280
(4,736)
10,378
5,307
635
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . .
54,418
119,111
57,174
INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of property and equipment . . . . . . . . . . . . . . . . . . .
Proceeds from redemptions of marketable securities . . . . . . . . . . . . . . . . .
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(89,003)
3,095
17,151
(17,909)
(60,685)
466
4,250
(24,362)
(73,668)
—
—
—
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . .
(86,666)
(80,331)
(73,668)
FINANCING ACTIVITIES:
Principal payments on long-term obligations . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings on long-term obligations . . . . . . . . . . . . . . . . .
Financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,959)
35,000
(47)
(7,953)
—
(103)
(7,333)
—
(525)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,994
(8,056)
(7,858)
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . .
(6,254)
69,473
30,724
38,749
(24,352)
63,101
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . .
$ 63,219
$ 69,473
$ 38,749
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amount capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,904
$ 10,251
$ 9,440
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $ —
SUPPLEMENTAL NON-CASH INFORMATION:
Accrued aircraft modification expenditures . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,529
$ 10,562
—
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,306
$ — $ —
See notes to consolidated financial statements.
40
ABX AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Common Stock
Number
Amount
Add’l
Paid-in
Capital
Restricted
Stock
Retained
(Deficit)
Earnings
Accumulated
Other Comp.
Income
(Loss)
Total
BALANCE AT DECEMBER 31,
2003 . . . . . . . . . . . . . . . . . . . . . . . . . 58,270,400 $583 $428,637 $ — $(365,175) $
(5,379) $ 58,666
Comprehensive income
Net earnings . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss)
Minimum pension liabilities . . . . .
Total comprehensive income . . . . .
BALANCE AT DECEMBER 31,
36,973
36,973
(7,690)
(7,690)
$ 29,283
2004 . . . . . . . . . . . . . . . . . . . . . . . . . 58,270,400 $583 $428,637 $ — $(328,202) $ (13,069) $ 87,949
Stock-based compensation plans
Amortization of stock awards . . . . . .
Issuance of restricted stock . . . . . . .
Amortization of restricted stock . . . .
Comprehensive income
Net earnings . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss)
Minimum pension liabilities . . . . .
Unrealized loss on
available-for-sale securities . . .
Total comprehensive income . . . . .
BALANCE AT DECEMBER 31,
114,700
1
496
893
(894)
206
496
—
206
30,312
30,312
(5,829)
(5,829)
(55)
(55)
$ 24,428
2005 . . . . . . . . . . . . . . . . . . . . . . . . . 58,385,100 $584 $430,026 $(688) $(297,890) $ (18,953) $113,079
Stock-based compensation plans
Issuance of restricted stock . . . . . . .
Amortization of stock awards and
restricted stock . . . . . . . . . . . . . . .
Adjustment for FASB Statement
No. 123(R) . . . . . . . . . . . . . . . . . .
Comprehensive income
Net earnings . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of
tax
Minimum pension liabilities . . . . .
Unrealized gain on
available-for-sale securities . . .
Unrecognized net gain on
derivatives . . . . . . . . . . . . . . . .
Total comprehensive income . . . . .
Adjustment to initially apply
FASB Statement No. 158, net
of tax (Note J) . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31,
154,200
1
(1)
1,734
(688)
688
90,054
—
1,734
—
90,054
7,995
7,995
24
347
24
347
$ 98,420
(93,023)
(93,023)
2006 . . . . . . . . . . . . . . . . . . . . . . . . . 58,539,300 $585 $431,071 $ — $(207,836) $(103,610) $120,210
See notes to consolidated financial statements.
41
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three years ended December 31, 2006
NOTE A—BACKGROUND
Nature of Operations
ABX Air, Inc. (“ABX” or the “Company”) is a U.S.-certificated air carrier that provides air cargo
transportation services primarily within the U.S. The Company also provides package handling, warehousing,
and other air cargo transportation related services. DHL Express (USA), Inc., (“DHL”) and its affiliates provided
the Company with substantially all of its revenues in 2006, 2005 and 2004. The Company also offers ACMI
(aircraft, crew, maintenance and insurance) and charter services to other customers, including freight forwarders,
airlines and major shippers.
The Company provides air cargo transportation services through the operation of a fleet of 99 in-service
aircraft. At December 31, 2006, the fleet consisted of 33 Boeing 767, 61 McDonnell Douglas DC-9 (“DC-9”) and
five McDonnell Douglas DC-8 (“DC-8”) aircraft. The Company operates and maintains DHL’s main air hub and
package sorting center, located in Wilmington, Ohio. The Company provides staffing and management for
seventeen DHL regional sort facilities and three United States Postal Service (“USPS”) facilities in the
continental United States.
DHL Agreements
The Company has two commercial agreements with DHL including an aircraft, crew, maintenance and
insurance agreement (“ACMI agreement”) and a hub services agreement (“Hub Services agreement”). Under
these agreements, the Company provides DHL air cargo transportation, package handling, warehousing and
maintenance services, and receives compensation generally as determined by cost plus a base mark-up
percentage of 1.75%. Both agreements also allow the Company to earn incremental mark-up above the base
1.75% mark-up (up to 1.60% under the ACMI agreement and 2.10% under the Hub Services agreement) as
determined from achievement of cost and service goals outlined in the two commercial agreements. Certain costs
under the agreements are reimbursable only, without mark-up. These costs primarily include jet fuel expense,
landing and ramp rental charges, certain facility rent, and interest expense on the note payable to DHL. Income
tax expense incurred by the Company, as well as direct expenses incurred to secure revenue from customers
other than DHL, are not reimbursed under the terms of the two commercial agreements. The ACMI agreement
has an initial term of seven years, through August 15, 2010, with an automatic renewal for an additional three
years, unless an advance notice of one year is given, or if the Company is not in compliance with applicable
performance standards specified in the agreement. The Hub Services agreement expires August 15, 2007, with
one-year automatic renewals, unless ninety days advance notice is given.
The Company’s future operating results, cash flows and financial condition will continue to depend on the
amount of services it provides to DHL. Renewal of the Hub Services agreement, if it occurs, could result in
reductions to the scope of services the Company provides to DHL. DHL may seek to negotiate greater risk/
reward opportunities related to the Company’s performance and cost controls. The ACMI agreement allows DHL
to reduce the air routes that the Company flies or remove aircraft from service. DHL can also change the scope of
services under the Hub Services agreement by terminating specific services at one or more hub facilities after
giving at least sixty days notice to the Company. Since November 2004, DHL has released 28 aircraft from
service under the ACMI agreement and during 2006 assumed the management of the line-haul truck network
from the Company. Effective January 1, 2007, DHL transitioned the operation of its regional hub in Allentown,
Pennsylvania from the Company’s management. (The Company’s revenues and pre-tax earnings from the
Allentown operations were approximately $16.7 million and $0.4 million, respectively, during the year ended
December 31, 2006.) The Company was notified in February 2007 that DHL would take over the management of
the Riverside, California operation effective June 2007. (During 2006, the Riverside Hub contributed $11.7
million in revenues and approximately $0.3 million in pre-tax earnings.)
42
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
Pursuant to the terms of the ACMI agreement, the Company has certain rights to put to DHL any aircraft
that is removed from service. The Company can sell such aircraft to DHL at the lesser of fair market value or net
book value. The decision to put aircraft to DHL will depend on a number of factors, including the anticipated
number of aircraft to be removed, the type of aircraft removed, the demand for cargo airlift and the market value
for aircraft. Management assesses the number and type of aircraft that it may want to put to DHL as the aircraft
are removed from service. Provisions of the ACMI agreement stipulate that if the Company’s equity is less than
or equal to $100 million at the time of the put to DHL, any amount by which fair market value is less than net
book value would be applied to the promissory note owed to DHL. However, if equity is greater than $100
million, as it is at this time, any amount by which the fair market value is less than net book value would be
recorded as an impairment charge. At the Company’s current level of stockholders’ equity, the removal of
additional aircraft from the ACMI agreement could result in impairment charges for aircraft in which their fair
market values are less than their carrying value. For purposes of applying the $100 million stockholders’ equity
threshold, stockholders’ equity will be calculated after including the effect of any charges caused by the removal
of aircraft.
NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect amounts reported
in the consolidated financial statements. Estimates and assumptions are used to record allowances for
uncollectible amounts, self-insurance reserves, spare parts inventory, depreciation and impairments of property
and equipment,
income taxes, contingencies and
litigation. Changes in these estimates and assumptions may have a material impact on the consolidated financial
statements.
labor contract settlements, post-retirement obligations,
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. Intercompany balances and transactions are eliminated.
Cash and Cash Equivalents
The Company classifies short term, highly liquid investments with original maturities of three months or
less as cash and cash equivalents. These investments are recorded at cost, which approximate fair value.
Inventory
The Company’s inventory is comprised primarily of expendable spare parts and supplies used for internal
consumption. These items are generally charged to expense when issued for use. The Company values aircraft
spare parts inventory at weighted-average cost and maintains a related obsolescence reserve. The Company
records an obsolescence reserve on a base stock of inventory for each fleet type. Inventory amortization for the
obsolescence reserve corresponds to the expected life of each fleet type. Additionally, the Company monitors the
usage rates of inventory parts and segregates parts that are technologically outdated or no longer used in its fleet
types. Slow moving and segregated items are actively marketed and written down to their estimated net
realizable values based on market conditions.
Management analyzes the inventory reserve for reasonableness at the end of each calendar quarter. That
analysis includes consideration of the expected fleet life, amounts expected to be on hand at the end of a fleet
43
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
life, and recent events and conditions that may impact the usability or value of inventory. Events or conditions
that may impact the expected life, usability or net realizable value of inventory include additional aircraft
maintenance directives from the Federal Aviation Administration, changes in Department of Transportation
regulations, new environmental laws and technological advances.
Marketable Securities
Marketable securities classified as available-for-sale are recorded at their estimated fair market values and
any unrealized gains and losses are included in accumulated other comprehensive gain or loss within
stockholders’ equity, net of tax. Interest on marketable securities is included in interest income. Realized gains
and losses of any securities sold are based on the specific identification method.
Property and Equipment
Property and equipment are stated at cost, net of any impairment recorded, in accordance with Statements of
Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” The cost and accumulated depreciation of disposed property and equipment are removed from the
accounts with any related gain or loss reflected in earnings from operations.
Depreciation of property and equipment is provided on a straight-line basis over the lesser of the asset’s
useful life or lease term. Depreciable lives are as follows:
Aircraft and flight equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Package handling and ground support equipment
. . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles and other equipment
5 to 15 years
5 to 10 years
5 to 8 years
The Company periodically evaluates the useful lives, salvage values and fair values of property and
equipment. Acceleration of depreciation expense or the recording of significant impairment losses could result
from changes in the estimated useful lives of assets due to a number of reasons, such as an assessment done
quarterly to determine if excess capacity exists in the air or ground networks, or changes in regulations governing
the use of aircraft.
Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset
may not be recoverable. For assets that are to be held and used, impairment is recognized when the estimated
undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If
impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the
difference between the carrying value and fair value. Fair values are determined considering quoted market
values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are
carried at the lower of carrying value or fair value less the cost to sell.
The costs of major airframe and engine overhauls, as well as routine maintenance and repairs, are charged to
expense as incurred.
Capitalized Interest
Interest costs incurred while aircraft are being modified are capitalized as an additional cost of the aircraft
until the date the asset is placed in service. Capitalized interest was $1.1 million for 2006 and 2005 and $2.5
million for 2004.
44
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
Income Taxes
Income taxes have been computed using the asset and liability method, under which deferred income taxes
are provided for the temporary differences between the financial reporting basis and the tax basis of the
Company’s assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. A
valuation allowance against net deferred tax assets is recorded when it is more likely than not that such assets
will not be fully realized. Tax credits are accounted for as a reduction of income taxes in the year in which the
credit originates.
Comprehensive Income (Loss)
Comprehensive income includes net income and other comprehensive income or loss. Other comprehensive
income or loss results from changes in the Company’s pension liability, unrealized gains and losses on
available-for-sale marketable securities and gains and losses associated with interest rate hedging instruments.
Fair Value Information
The carrying amounts for accounts receivable and current liabilities approximate fair value. The fair value
of the promissory note due to DHL was approximately $90.1 million at December 31, 2006, about $2.1 million
less than the carrying value.
Revenue Recognition
Revenues from DHL are determined based on expenses incurred during a period and recognized when the
related services are performed. Revenues from DHL are determined based on the expenses incurred during a
reporting period under the two commercial agreements (see Note A). Expenses incurred under these agreements
are generally subject to a base mark-up of 1.75%, which is recognized in the period the expenses are incurred.
Certain costs, the most significant of which include fuel, interest on the promissory note due to DHL, rent and
ramp and landing fees incurred under the two commercial agreements are reimbursed and included in revenues
without mark-up.
Both agreements also allow the Company to earn incremental mark-up above the base 1.75% mark-up (up to
1.60% under the ACMI agreement, and 2.10% under the Hub Services agreement) as determined from the
achievement of certain cost-related and service goals outlined in the two commercial agreements. The
agreements stipulate the setting of quarterly and annual cost-related goals and annual service goals expressly
specified in each of the two agreements. At the end of each fiscal year, the Company measures the achievement
of annual goals and records any incremental revenues earned by achieving the annual goals. In a similar way, the
Company measures quarterly goals and records incremental revenues in the quarter in which earned.
In August 2005, DHL and the Company agreed to amend the Hub Services agreement to extend the initial
term of the Hub Services agreement in exchange for temporarily placing more of the Company’s revenue
potential under a cost-related incentive. The amendment temporarily reduced the base mark-up under the Hub
Services agreement from 1.75% to 1.25% during the last six months of 2005. The maximum incremental
mark-up that the Company could earn during the third and fourth quarters of 2005 from its quarterly cost-related
incentives under the Hub Services agreement was temporarily increased from approximately 0.54% to 1.04%.
Additionally, the initial term of the Hub Services agreement was extended for an additional year, expiring
August 15, 2007. In 2006, the base mark-up reverted to the previous level of 1.75% and the maximum
incremental mark-up from the quarterly cost-related incentive will revert to the previous level of approximately
45
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
0.54%. The amendment did not change the annual cost and service-related incremental mark-up opportunities
under the Hub Services agreement. The Hub Services agreement, as amended, continues to allow DHL to
terminate specific services upon providing at least sixty-days notice. The amendment did not affect the mark-up
or the term of the ACMI agreement, incepted on August 15, 2003, which is for seven years and automatically
renews for an additional three years unless a one-year notice of non-renewal is given.
The Company derives a portion of its revenues from customers other than DHL. ACMI and charter service
revenues are recognized on scheduled and non-scheduled flights when the specific flight has been completed.
Aircraft parts and fuel sales are recognized when the parts and fuel are delivered. Revenues earned and expenses
incurred in providing aircraft-related maintenance repair services or technical maintenance services are
recognized in the period in which the services are completed and delivered to the customer. Revenues derived
from transporting freight and sorting parcels are recognized upon delivery of shipments and completion of
service.
New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax positions taken or expected to be
taken in a tax return. This Interpretation requires financial statement recognition of the impact of a tax position, if
that position is more likely than not of being sustained on audit, based on the technical merits of the position.
Additionally, FIN 48 provides guidance on accounting in interim periods and disclosure requirements for
uncertain tax positions. The accounting provisions of FIN 48 will be effective for the Company beginning
January 1, 2007. The Company is currently evaluating the impact of FIN 48; at this time, management believes
that its effect on the Company’s consolidated financial position or results of operations will be less than $1.0
million. The cumulative effect of applying the provisions of FIN 48, if any, will be reported as an adjustment to
the opening balance of retained earnings in the first quarter of 2007.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Accounting,” (“SFAS 157”) which defines
fair value, establishes a framework for measuring fair value and expands disclosure about fair value
measurements. SFAS 157 will be effective for the Company’s fiscal year beginning January 1, 2008.
NOTE C—DHL TRANSACTIONS
The Company’s revenues, cash flows and liquidity resources are highly dependent on DHL. Substantially all
of the Company’s revenues are derived through contracted services provided to DHL. Revenues from contracted
services performed for DHL were $1.2 billion, $1.4 billion and $1.2 billion for 2006, 2005 and 2004,
respectively.
The Company’s balance sheet included the following balances related to revenue transactions with DHL (in
thousands):
Asset (Liabilities)
December 31
2006
2005
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,680
(392)
(2,607)
$10,574
(395)
(4,151)
Net asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (319)
$ 6,028
46
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
As specified in the two commercial agreements with DHL, the Company is advanced funds on the first
business day of each week for the costs budgeted to be incurred for the upcoming week. Unearned revenue
reflects the portion of a scheduled payment from DHL that relates to revenues earned in the next year. Accounts
receivable is primarily from the revenues earned under the commercial agreements. Accounts payable is interest
payable on the promissory note. The Company’s expenses during 2006 and 2005 included approximately $2.0
million of lease expense for facilities at the DHL Air Park.
NOTE D—COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per common share follows (in thousands, except per share
amounts):
December 31
2006
2005
2004
Net income applicable to common stockholders . . . . . . . . . . . . . . . .
$90,054
$30,312
$36,973
Weighted-average shares outstanding for basic earnings per
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,270
58,270
58,270
Common equivalent shares:
Effect of stock-based compensation awards . . . . . . . . . . . . . . .
133
205
—
Weighted-average shares outstanding assuming dilution . . . . . . . . .
58,403
58,475
58,270
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.55
1.54
$
$
0.52
0.52
$
$
0.63
0.63
Basic weighted average shares outstanding for purposes of basic earnings per share are less than the shares
outstanding due to 268,900 shares and 114,700 shares of restricted stock for 2006 and 2005, respectively, which
are accounted for as part of diluted weighted average shares outstanding in diluted earnings per share.
NOTE E—MARKETABLE SECURITIES
The marketable securities held by the Company consist of debt securities, which are classified as
available-for-sale. Marketable securities of approximately $5.4 million and $4.4 million at December 31, 2006
and 2005, respectively, contractually mature after one year and are included in other assets within the Company’s
consolidated balance sheets. Expected maturities may differ from contractual maturities because the issuers of
certain securities may have the right to prepay the obligations without prepayment penalties.
The following is a summary of the Company’s marketable securities (in thousands):
Estimated Fair
Market Value
December 31,
2006
2005
Obligations of U.S. Government Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of U.S. Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,480
11,336
$12,977
7,052
Total marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,816
$20,029
47
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
NOTE F—PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
2006
2005
Aircraft and flight equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance and support equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles and other equipment
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 685,652
48,602
1,725
849
$ 601,982
47,136
2,192
147
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
736,828
(278,190)
651,457
(269,812)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 458,638
$ 381,645
Property and equipment includes $36.9 million and $35.4 million of property held under capital leases at
December 31, 2006 and 2005, respectively, and accumulated depreciation and amortization includes $8.6 million
and $5.9 million for property held under capital leases as of December 31, 2006 and 2005, respectively.
In November 2004, DHL notified the Company of its plans to remove aircraft from service. In 2005, DHL
removed seven aircraft and in August 2006, DHL removed 21 more from service to complete its November 2004
plan. Several of these aircraft had previously been placed in back-up status since September of 2005, when DHL
consolidated its air hub operations from Cincinnati into its main, ABX-managed hub in Wilmington, Ohio,
eliminating redundant air routes. The August 2006 reduction of 21 aircraft brought to 28 (fourteen DC-8s and
fourteen DC-9s) the total number of aircraft released from service under the ACMI agreement since November
2004. DHL is continuing to fund depreciation for eight of the DC-9s that were removed through their remaining
depreciable lives in August 2010. The Company will use the engines on these eight DC-9 aircraft to support the
remaining 59 DC-9 aircraft that the Company has in service to DHL.
Under the ACMI agreement with DHL, the Company had the option to put each of the other aircraft to DHL
at the lower of their fair value or net book value. After having the aircraft appraised, management decided to
exercise the put provision on only one aircraft. Instead, the Company is marketing the remaining aircraft to part
dealers and private operators, using aircraft for spare parts or, in some cases, operating aircraft as service
back-ups or for other customers.
The removal of aircraft from service to DHL constituted an event requiring the Company to evaluate the
recoverability of the carrying value of those aircraft removed from the ACMI agreement. In accordance with
SFAS 144, ABX recorded an impairment charge of $0.3 million during the quarter ended September 30, 2006 for
the excess of the carrying value of the aircraft over their fair value less cost to sell. The charge is reflected in
other operating expenses on the statement of operations and is reflected in the DHL reportable segment.
NOTE G—INCOME TAXES
As of December 31, 2005, the Company had a valuation allowance against its net deferred tax assets of
$67.1 million. In the fourth quarter of 2006, the Company reached certain milestones and determined that it was
more likely than not that all the net deferred tax assets would be realized prior to their expiration. This
determination was based upon the Company’s projection of taxable income, as well as the Company’s earnings
history since 2003. Accordingly, the full valuation allowance was reversed during 2006, resulting in a net income
tax benefit for the year ended December 31, 2006.
48
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
At December 31, 2006, the Company had cumulative net operating loss carryforwards for federal income
tax purposes of approximately $143.9 million, which begin to expire in 2022. The deferred tax asset balance
includes $2.9 million related to state net operating loss carryforwards (“NOL CFs”), which have remaining lives
ranging from 4 to 20 years. These net operating loss carryforwards are attributable to excess tax deductions
related to the accelerated tax depreciation of fixed assets.
In June 2005, the State of Ohio enacted comprehensive tax reform. The Ohio Corporate Franchise tax will
be phased out over the next five years and replaced by a gross receipts tax. As a result, the Company reduced the
deferred tax assets, including the Ohio state franchise tax NOL CFs, of approximately $6.5 million in 2005, since
the Company concluded these assets would not be realized within the applicable phase-out period. These
deferred tax assets were already reserved by the valuation allowance. Therefore the reduction did not impact
2005 income from continuing operations.
The components of the deferred income tax assets and liabilities as of December 31, 2006 and 2005 are as
follows (in thousands):
Deferred income tax assets:
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital and operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-retirement employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits other than postretirement . . . . . . . . . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities:
December 31,
2006
2005
$ 52,774
25,304
73,908
8,472
—
3,612
164,070
—
164,070
$ 51,478
28,318
20,118
7,695
323
2,577
110,509
(67,062)
43,447
Accelerated depreciation and impairment charges . . . . . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(61,874)
(481)
(43,447)
—
Net deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$101,715
$ —
The following summarizes the components of the income tax provision (benefit) (in thousands):
Current taxes:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2006
2005
2004
$ —
—
—
$—
—
—
(52,022) —
(2,019) —
(54,041) —
$—
—
—
—
—
—
Total income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(54,041)
$—
$—
49
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
The total tax provision is different from the amount that would have been recorded by applying the U.S.
statutory federal income tax rate to income from continuing operations before taxes. Reconciliation of these
differences is as follows:
Statutory federal tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal tax benefit . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase/(decrease) in federal NOL CF . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elimination of Ohio state NOL CF and deferred tax assets . . . . . . . . . . . . .
Increase in state NOL CF and state deferred tax assets . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2006
2005
2004
(35.0)% (35.0)% (35.0)%
(1.4)% (1.6)% (3.9)%
(2.1)% (4.2)% (1.6)%
0.8% (0.6)% 24.9%
0.0% (13.9)% 0.0%
0.0% 17.9%
1.1%
0.0%
0.0%
0.7%
186.0% 55.3% (2.3)%
Effective income tax benefit rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150.1%
0.0%
0.0%
NOTE H—LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
Promissory note due to DHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 92,276
73,551
34,704
$ 92,276
80,908
—
Total long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,531
(11,413)
173,184
(8,612)
Total long-term obligations, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$189,118
$164,572
December 31,
2006
2005
The unsecured promissory note is due in 2028 and bears interest at 5.00% per annum payable semi-
annually. Interest on the promissory note is reimbursable under the ACMI agreement without mark-up. The
capital lease obligations are for five Boeing 767 aircraft, and consist of two different leases, both expiring in
2011 with an option to extend into 2017. The capital lease payments for three of the five aircraft include
quarterly principal and variable interest of LIBOR plus 2.50% (7.86% at December 31, 2006). The capital lease
for the other two Boeing 767 aircraft carries a fixed implicit interest rate of 8.55%. At the termination of the
leases, the Company is subject to normal aircraft return provisions for maintenance of the aircraft. The aircraft
loans are collateralized by the financed aircraft, are due in 2016 and bear interest at rates from 6.88% to
7.07% per annum payable monthly.
50
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
The scheduled annual principal payments on long-term debt as of December 31, 2006 for the next five years
are as follows (in thousands):
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal
Payments
$11,413
12,343
13,343
14,435
12,450
$63,984
The Company has a $45.0 million credit facility through a syndicated credit agreement that expires in
December 2008. Borrowings under the agreement are collateralized by substantially all of the Company’s assets,
and bear interest equal to the prime rate or a short term LIBOR (a one, two or three-month LIBOR, at the
Company’s discretion) plus 2.25%. The agreement contains an accordion feature to increase the borrowings to a
total of $50.0 million if the Company needs additional borrowing capacity. The agreement provides for the
issuance of letters of credit on the Company’s behalf. As of December 31, 2006, the unused credit facility totaled
$35.1 million, net of outstanding letters of credit of $9.9 million. There were no borrowings outstanding under
the credit agreement.
Under the credit agreement, the Company is subject to other expenses, covenants and warranties that are
usual and customary. The agreement stipulates events of default and contains covenants including, among other
things, limitations on certain additional indebtedness, guarantees of indebtedness, level of cash dividends, and
certain other transactions as defined in the agreement. The credit agreement contains covenants restricting the
level of annual capital expenditures. The agreement was amended to exclude from the covenants capital
expenditures for the twelve aircraft modifications described below, beginning in 2005. The unsecured promissory
note and the credit facility agreement restrict the Company from paying dividends on its common stock in excess
of $1.0 million annually.
NOTE I—COMMITMENTS AND CONTINGENCIES
Leases
The Company leases airport facilities and certain operating equipment under various long-term operating
lease agreements. The Company subleases portions of the DHL Air Park from DHL. The term of the lease
expires at the end of the transition period that follows termination of the ACMI agreement. The annual rent
payable by the Company under the lease is approximately $2.0 million and is reimbursed by DHL without
mark-up. Payments on operating leases, including rents payable to DHL, were $5.6 million, $4.4 million and $3.6
million for the years ended 2006, 2005 and 2004, respectively.
51
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
Lease commitments under long-term capital and operating leases at December 31, 2006, are as follows (in
thousands):
Capital
Leases
Operating
Leases
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 and beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,698
15,606
15,503
15,381
12,124
25,503
$ 5,699
5,423
3,969
2,234
535
1,548
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$99,815
$19,408
Less: interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,264
Principal obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$73,551
Commitments
In 2005, the Company reached an agreement with Delta Airlines, Inc. (“Delta”) committing the Company to
purchase twelve Boeing 767 aircraft from Delta through 2008. The Company has contracted with an aircraft
maintenance and modification provider to convert these aircraft from passenger to freighter configuration. As of
December 31, 2006, the Company has purchased nine of the twelve aircraft and has placed four into service. The
estimated costs of the remaining aircraft purchase commitments and the anticipated modification costs
approximate $136.2 million for the aircraft. All of these costs are expected to be incurred through the first quarter
of 2008.
During the modification process, financing for the aircraft and the modification costs will be provided
through the aircraft maintenance vendor and the Company’s existing cash. After the modification is complete,
the Company anticipates that it may execute aircraft loans for up to six of the aircraft. These aircraft loans are
expected to occur through a syndication process being arranged by the Company’s lead bank. One loan for
approximately $17.0 million was executed in February 2007. Under the anticipated financing transactions, the
Company would finance two more of the aircraft for approximately $17.0 million and three of the aircraft for
approximately $12.0 million.
Guarantees and Indemnifications
Certain operating leases and agreements of the Company contain indemnification obligations to the lessor,
or one or more other parties that are considered ordinary and customary (e.g. use, tax and environmental
indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations
may continue after expiration of the respective lease or agreement.
Department of Transportation (“DOT”) Continuing Fitness Review
The Company filed a notice of substantial change with the DOT arising from its separation from Airborne,
Inc., in August 2003. In connection with the filing, which was initially made in mid-July of 2003 and updated in
April of 2005, the DOT will determine whether the Company continues to be fit, willing and able to engage in air
transportation of cargo and a U.S. citizen.
52
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
Under U.S. laws and DOT precedents, non-U.S. citizens may not own more than 25% of, or have actual
control of, a U.S. certificated air carrier. The DOT may determine that DHL actually controls the Company as a
result of its commercial arrangements (in particular, the ACMI agreement and Hub Services agreement) with
DHL. If the DOT determines that the Company is controlled by DHL, the DOT could require amendments or
modifications of the ACMI and/or other agreements between the Company and DHL. If the Company were
unable to modify such agreements to the satisfaction of the DOT, the DOT could seek to suspend, modify or
revoke the Company’s air carrier certificates and/or authorities, and this would materially and adversely affect
the business.
The DOT has yet
intends to use in processing the Company’s filing.
Management believes the DOT should find that the Company is controlled by U.S. citizens and continues to be
fit, willing and able to engage in air transportation of cargo.
to specify the procedures it
ALPA Lawsuit
On August 25, 2003, the Company intervened in a lawsuit filed in the U.S. District Court for the Southern
District of New York by DHL Holdings and DHL Worldwide Express, Inc. (“DHL Worldwide”) against the Air
Line Pilots Association (“ALPA”), seeking a declaratory judgment that neither DHL entity is required to arbitrate
a grievance filed by ALPA. ALPA represents the pilot group at Astar. The grievance seeks to require DHL
Holdings to direct its subsidiary, Airborne, now DHL Network Operations (USA), Inc., to cease implementing its
ACMI agreement with ABX on the grounds that DHL Worldwide is a legal successor to Astar. ALPA similarly
filed a counterclaim requesting injunctive relief that includes having DHL’s freight currently being flown by
ABX transferred to Astar.
The proceedings were stayed on September 5, 2003, pending the National Labor Relations Board’s
(“NLRB”) processing of several unfair labor practice charges the Company filed against ALPA on the grounds
that ALPA’s grievance and counterclaim to compel arbitration violates the National Labor Relations Act. In
the NLRB prosecuted ALPA on the unfair labor practice charges. On July 2, 2004, an
March 2004,
Administrative Law Judge (“ALJ’) for the NLRB issued a decision finding that ALPA’s grievance and
counterclaim violated the secondary boycott provisions of the National Labor Relations Act, and recommended
that the NLRB order ALPA to withdraw both actions. ALPA appealed the ALJ’s finding to the full NLRB, which
subsequently affirmed the ALJ’s decision in its own decision and order dated August 27, 2005.
On September 14, 2005, ALPA filed a petition for review with the U.S. Court of Appeals for the Ninth
Circuit and that Court subsequently granted the Company’s motion to intervene in the case. The parties are
currently in the process of preparing and filing briefs in the matter. Management believes that the NLRB’s
decision will be sustained on appeal and that ALPA’s grievance and counterclaim will be denied.
Alleged Violations of Immigration Laws
The Company reported in January of 2005 that it was cooperating fully with an investigation by the U.S.
Department of Justice (“DOJ”) with respect to Garcia Labor Co., Inc. (“Garcia”), a temporary employment
agency based in Morristown, Tennessee, and ABX Air’s use of contract employees that were being supplied to it
by Garcia. The investigation concerns the immigration status of the Garcia employees assigned to the Company.
The Company terminated its contract with Garcia in February of 2005 and replaced the Garcia employees.
53
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
In October of 2005, the DOJ notified the Company that the Company and a few Company employees in its
human resources department, in addition to Garcia, were targets of a criminal investigation. The Company
cooperated fully with the investigation. In June of 2006, a non-senior management employee of the Company
entered a plea to a misdemeanor related to this matter. In July of 2006, a federal grand jury indictment was
unsealed, charging two Garcia companies, the president of Garcia and two of their corporate officers with
numerous counts involving the violation of federal immigration laws. The Garcia defendants subsequently
entered guilty pleas in U.S. district court in October of 2006 and were sentenced in February and March of 2007.
No proceedings have been initiated against the Company. The Company believes it has adequately reserved for
potential losses stemming from this matter. In the event proceedings were initiated against the Company that
resulted in an adverse finding, the Company could be subjected to a financial penalty that is materially greater
than the amount we have accrued and restrictions on our ability to engage in business with agencies of the U.S.
Government.
Other
In addition to the foregoing matters, the Company is also currently a party to legal proceedings in various
federal and state jurisdictions arising out of the operation of our business. The amount of alleged liability, if any,
from these proceedings cannot be determined with certainty; however, we believe that our ultimate liability, if
any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal
claims which are probable of assertion, taking into account established accruals for estimated liabilities, should
not be material to our financial condition or results of operations.
Employees Under Collective Bargaining Agreements
As of December 31, 2006, all of the Company’s flight crewmembers were covered under a collective
bargaining agreement that became amendable on July 31, 2006. The Company and representatives of the flight
crewmembers have been negotiating new terms for the collective bargaining agreement. Flight crewmembers
were 6.7% of the Company’s total full-time and part-time employees as of December 31, 2006.
NOTE J—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Defined Benefit and Post-retirement Healthcare Plans
The Company sponsors a qualified defined benefit plan for its pilots and a qualified defined benefit plan for
its other employees that meet minimum eligibility requirements. The Company also sponsors non-qualified
defined benefit pension plans for certain employees. These non-qualified plans are unfunded. The Company also
sponsors a post-retirement healthcare plan which is unfunded. On September 1, 2005, the Company closed its
qualified defined benefit plan to newly hired, non-flight crewmember employees. Instead, new non-flight
crewmember employees will receive an annual contribution based on a fixed percentage of eligible compensation
to a defined contribution plan.
The accounting and valuation for these post-retirement obligations are determined by prescribed accounting
and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate
assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid.
The long-term nature of these benefit payouts increases the sensitivity of certain estimates of our post-retirement
costs. The assumptions considered most sensitive in actuarially valuing the Company’s pension obligations and
determining related expense amounts are discount rates, expected long-term investment returns on plan assets
and future salary increases. Additionally, other assumptions concerning retirement ages, mortality and employee
54
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
turnover also affect the valuations. Consideration of future medical cost trend rates is a critical assumption in
valuing the Company’s post-retirement healthcare obligations. Actual results and future changes in these
assumptions could result in future costs significantly higher than those recorded in our results of operations.
In 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). SFAS
158 required the Company to:
•
•
recognize on its balance sheet the funded status (measured as the difference between the fair value of
plan assets and the projected benefit obligation) of pension and other post-retirement benefit plans; and
recognize, through comprehensive income, certain changes in the funded status of a defined benefit and
post-retirement plan in the year in which the changes occur.
SFAS 158 requires that the balance sheet liabilities for defined benefit plans reflect projected pension
benefit obligations, which include estimates of benefits from projected salary increases in future years. The
Company adopted SFAS 158 effective December 31, 2006 and the effects are shown below (in thousands).
Retrospective application was not permitted.
Before
Application of
Statement 158 Adjustments
After
Application of
Statement 158
Incremental Effect of FASB 158 on Statement of Financial
Position
Intangible pension asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability for pension and post-retirement health care benefits . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,951
80,294
48,705
415,506
(10,587)
213,233
$ (1,951)
144,082
53,010
144,082
(93,023)
(93,023)
$
—
224,376
101,715
559,588
(103,610)
120,210
55
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
The Company measures plan assets and benefit obligations as of December 31 of each year. Information
regarding the Company’s sponsored defined benefit pension plan, and post-retirement healthcare follow below
(in thousands). The accumulated benefit obligation reflects pension benefit obligations based on the actual
earnings and service to-date of current employees. The effect of the pension plan amendment below is a result of
the Pension Protection Act of 2006, which removed the sunset provisions for the Economic Growth and Tax
Relief Reconciliation Act, permanently extending benefit limits.
Accumulated benefit obligation . . . . . . . . . . . . .
$ 414,944
$ 367,076
$ 34,121
$ 34,171
Pension Plans
Post-retirement
Healthcare Plans
2006
2005
2006
2005
Change in benefit obligation
Obligation as of January 1 . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendment . . . . . . . . . . . . . . . . . . . . . . .
Plan transfers . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . .
Obligation as of December 31 . . . . . . . . . . . .
Change in plan assets
Fair value as of January 1 . . . . . . . . . . . . . . .
Actual gain on plan assets . . . . . . . . . . . . . . .
Plan transfers . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value as of December 31 . . . . . . . . . . . .
Funded status
Intangible asset
. . . . . . . . . . . . . . . . . . . . . . .
Pension liabilities . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss,
before income tax effect
. . . . . . . . . . . . . .
Net underfunded amount recognized on the
balance sheet
. . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial loss . . . . . . . . . . .
Unrecognized prior service cost
. . . . . . . . . .
Funded status of the plans—net
$ 533,694
38,160
30,023
6,416
1,278
(7,626)
(30,605)
$ 571,340
$ 297,653
35,573
1,278
54,207
(7,626)
$ 381,085
$ 403,234
29,820
23,405
—
588
(5,845)
82,492
$ 533,694
$ 241,538
19,067
588
42,306
(5,846)
$ 297,653
$ 34,171
2,407
1,920
—
—
(543)
(3,834)
$ 34,121
$ 27,418
1,993
1,581
—
—
(419)
3,598
$ 34,171
$ —
—
—
543
(543)
$ —
—
—
419
(419)
$ —
$ —
$
—
(190,255)
$
6,377
(70,151)
$ —
(34,121)
$ —
(19,267)
—
21,073
—
—
(190,255)
—
—
(42,701)
(171,820)
(21,520)
(34,121)
—
—
(19,267)
(14,904)
—
underfunded . . . . . . . . . . . . . . . . . . . . . . . .
$(190,255)
$(236,041)
$(34,121)
$(34,171)
The amounts in accumulated other comprehensive income that have not yet been recognized as components
of net periodic benefit expense at December 31, 2006, are as follows (in thousands):
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
Pension
Plans
$ 23,678
120,310
$143,988
Post-
Retirement
Healthcare
Plans
$ —
9,997
$9,997
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
Components of Net Periodic Benefit Cost
The Company’s net periodic benefit costs for its defined benefit pension plans and post-retirement
healthcare plans are as follows (in thousands):
Pension Plans
Postretirement Healthcare Plans
2006
2005
2004
2006
2005
2004
Service cost . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . .
Expected return on plan assets . .
Net amortization and deferral . . .
$ 38,160
30,023
(25,221)
14,811
$ 29,820
23,405
(20,482)
10,217
$ 26,225
19,755
(16,200)
7,302
$2,407
1,920
—
1,074
$1,993
1,581
—
1,019
$1,526
1,247
—
547
Net periodic benefit cost . . . . . . .
$ 57,773
$ 42,960
$ 37,082
$5,401
$4,593
$3,320
The following table sets forth the amounts of unrecognized prior service cost and net actuarial loss recorded
in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit
expense during 2007 (in thousands):
Amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost
Post-
Retirement
Healthcare
Plans
$633
—
Pension
Plans
$5,963
$4,818
Assumptions
Assumptions used in determining the Company’s pension obligations at December 31 were as follows:
Pension Plans
2006
2005
2004
Discount rate (for qualified and non-qualified plans) . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase (pilots)
Rate of compensation increase (non-pilots) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.90% 5.70% 5.85%
8.00% 8.00% 8.00%
4.50% 4.50% 4.50%
4.00% 4.00% 4.00%
The discount rate used to determine post-retirement healthcare obligations was 5.90%, 5.70% and 5.85% at
December 31, 2006, 2005 and 2004, respectively. Post-retirement healthcare plan obligations have not been
funded. The healthcare cost trend rate used in measuring post-retirement healthcare benefit costs was 11% for
2006, decreasing each year by 1% until it reaches a 5% annual growth rate in 2012. The effects of a 1% increase
and decrease in the healthcare cost trend rate on 2006 cost and the accumulated post-retirement benefit obligation
at December 31, 2006, are shown below (in thousands):
Effect on service and interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on accumulated post-retirement benefit obligation . . . . . . . . . . . . . .
$ 507
$3,724
$ (407)
$(3,028)
1% Increase
1% Decrease
57
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
Plan Assets
The weighted-average asset allocations by asset category:
Asset category
Composition of Plan Assets
on December 31,
2006
2005
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53%
42%
5%
61%
39%
0%
100%
100%
The Company uses an investment management firm to advise it in developing and executing an investment
policy. The portfolio is managed with consideration for diversification, quality and marketability. The targeted
asset allocation is 50% equity securities, 45% fixed income securities and 5% real estate. The investment policy
permits the following ranges of asset allocation: equities – 30.5% to 69.3%; fixed income securities – 38.0% to
52.0%; real estate – 3% to 7%. Except for U.S. Treasuries, no more than 10% of the fixed income portfolio and
no more than 5% of the equity portfolio can be invested in securities of any single issuer.
An actuarial firm advised the Company in developing the overall expected long-term rate of return on plan
assets. The overall expected long-term rate of return was developed using various market assumptions in
conjunction with the plans’ targeted asset allocation. The assumptions were based on historical market returns.
Cash Flows
In 2006, the Company made contributions to its defined benefit pension plans of $54.2 million and
contributions to its post-retirement healthcare plans of $0.5 million. The Company estimates that its contributions
in 2007 will be approximately $45.0 million for its defined benefit pension plans and $1.1 million for its post-
retirement healthcare plans.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid out of the respective plans as follows (in thousands):
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years 2012 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension
Benefits
$ 10,303
13,215
15,824
18,965
22,391
160,294
Post-retirement
Healthcare
Benefits
$ 1,135
1,422
1,659
1,898
2,036
11,884
Defined Contribution Plans
The Company sponsors defined contribution capital accumulation plans (401k) that are funded by both
voluntary employee salary deferrals of up to 75% of annual compensation and by employer matching
58
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
contributions on employee salary deferrals of up to 6% of annual compensation. The Company also sponsors a
defined contribution profit sharing plan, which is coordinated and used to offset obligations accrued under the
qualified defined benefit plans. Contributions to this plan, except contributions for the Company’s pilots, were
discontinued in 2000. Expenses for these plans are as follows (in thousands):
Capital accumulation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit sharing plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,145
1,062
$6,998
1,069
$6,563
1,038
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,207
$8,067
$7,601
Year Ended December 31
2006
2005
2004
NOTE K—STOCK-BASED COMPENSATION
The Company’s Board of Directors has granted stock incentive awards to certain employees and board
members pursuant to a long-term incentive plan which was approved by the Company’s stockholders in May
2005. Employees have been awarded non-vested stock units with performance conditions, non-vested stock units
with market conditions and non-vested restricted stock. The restrictions on the non-vested restricted stock awards
lapse at the end of a specified service period, which is approximately three years from the date of grant.
Restrictions could lapse sooner upon a business combination, death, disability or after an employee qualifies for
retirement. The non-vested stock units will be converted into a number of shares of Company stock depending on
performance and market conditions at the end of a specified service period, lasting approximately three years.
The performance condition awards will be converted into a number of shares of Company stock depending on the
Company’s average return on equity during the service period. Similarly, the market condition awards will be
converted into a number of shares depending on the appreciation of the Company’s stock compared to the
NASDAQ Transportation Index. Board members were granted time-based awards with approximately a one-year
vesting period, which will settle when the board member ceases to be a director of the Company. The Company
expects to settle all of the stock unit awards by issuing new shares of stock. The table below summarizes award
activity.
Twelve Months Ended
December 31, 2006
Twelve Months Ended
December 31, 2005
Outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Awards
264,600
332,400
—
—
Outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
597,000
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,600
Weighted
average
grant-date
fair value
$8.33
6.61
—
—
$7.37
$7.44
Number of
Awards
—
264,600
—
—
264,600
—
Weighted
average
grant-date
fair value
$ —
8.33
—
—
$8.33
—
The grant-date fair value of each performance condition award, non-vested restricted stock award and time-
based award granted by the Company was $6.63 and $7.79 for 2006 and 2005, respectively, the value of the
Company’s stock on the date of grant. The grant-date fair value of each market condition award granted was
59
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
$6.55 and $9.91 for 2006 and 2005, respectively. The market condition awards were valued using a Monte Carlo
simulation technique based on volatility over one year using daily stock prices and using the following variables:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.71% 3.68%
33.6% 45.2%
2006
2005
The Company accounts for the awards in accordance with SFAS No. 123 (revised 2004), “Share-Based
Payment.” The standard requires the Company to measure the cost of services received in exchange for stock-
based awards using the grant-date fair value of the award. For the years ended December 31, 2006 and 2005, the
Company recorded expense of $1.7 million and $0.7 million for stock incentive awards, respectively. The
Company has assumed no forfeitures. At December 31, 2006, there was $2.5 million of unrecognized expense
related to the stock incentive awards that is expected to be recognized over a weighted-average period of 1.4
years. As of December 31, 2006, 597,000 awards had been granted and were outstanding. None of the awards
were convertible, and none of the restricted stock had vested as of December 31, 2006. These awards could result
in a maximum number of 736,250 additional outstanding shares of the Company’s common stock depending on
service, performance and market results through December 31, 2008.
NOTE L—DERIVATIVE INSTRUMENTS
The Company anticipates that it may execute financing transactions for up to six of the eight aircraft it is
committed to purchase and modify through 2008. To reduce its exposure to rising interest rates before anticipated
aircraft financing transactions are executed,
the Company entered into forward treasury lock agreements
(“treasury locks”) during the first quarter of 2006. Under the anticipated financing transactions, the Company
would finance aircraft under fixed interest rate loans based on the interest rates of the ten-year U.S. Treasury
Notes. The value of the treasury locks are also based on the ten-year U.S. Treasury interest rates, effectively
offsetting the effect of changing interest rates on the anticipated loan transactions. The treasury locks are with
major U.S. financial institutions and will settle in cash upon expiration. The treasury locks are timed to expire in
mid-2007, near the forecasted execution dates of the anticipated financing transactions.
In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the
Company accounts for the treasury locks as cash flow hedges. The treasury locks were evaluated and deemed to
be highly effective as hedges at their inception and at December 31, 2006. The Company records unrealized
gains or losses resulting from the changes in fair value in the consolidated balance sheets under accumulated
other comprehensive income in stockholders’ equity. These gains and losses are recognized into earnings over
the terms of the forecasted loan transactions. At December 31, 2006, any amounts of hedge ineffectiveness were
not material.
The table below provides information about outstanding treasury lock instruments at December 31, 2006 (in
thousands):
Expire
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
Notional
Amount
$12,000
12,000
$24,000
Stated
interest
rate
Market
value
(liability)
4.750% $(48)
(49)
4.750%
$(97)
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
NOTE M—OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes the following transactions and tax effects for the years ended
December 31, 2006, 2005 and 2004, respectively (in thousands):
Before
Tax
Income Tax
(Expense)
or Benefit
Net of
Tax
2006
Minimum pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (loss) on marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (loss) on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Reclassification of hedging gain realized in net income . . . . . . . . . . . . . . .
$13,122
37
575
(33)
$(5,127)
(13)
(207)
12
$ 7,995
24
368
(21)
Other comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,701
$(5,335)
$ 8,366
2005
Minimum pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,829)
(55)
Unrealized loss on marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $(5,829)
(55)
—
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (5,884)
$ — $(5,884)
2004
Other comprehensive loss—minimum pension liabilities . . . . . . . . . . . . . . . . . . .
$ (7,690)
$ — $(7,690)
During the next twelve months, the Company estimates that net gains of $0.1 million from settled hedging
instruments will be reclassified to net income.
61
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
NOTE N—SEGMENT INFORMATION
The Company operates in two reportable segments. The air cargo transportation, and package handling
services provided to DHL under the ACMI and Hub Services agreements are aggregated below as “DHL” (see
Note A). The ACMI and charter services that the Company provides to customers other than DHL are referred to
as “Charters” below. The Company’s other activities, which include contracts with the U.S. Postal Service and
aircraft parts sales and maintenance services, do not constitute a reportable segment and are combined in “All
other” below. The Company’s segment information for 2006, 2005 and 2004 is presented below (in thousands):
Year Ended December 31
2006
2005
2004
Revenues:
DHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,211,870
24,440
24,051
$1,430,347
13,864
20,179
$1,175,804
16,673
10,032
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,260,361
$1,464,390
$1,202,509
Depreciation and amortization expense:
DHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-tax earnings:
DHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
41,655
3,596
409
45,660
22,452
3,704
9,857
$
$
$
37,776
3,243
148
41,167
21,322
1,138
7,852
$
$
$
36,797
13
7
36,817
30,203
2,525
4,245
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
36,013
$
30,312
$
36,973
December 31
2006
2005
Assets:
DHL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 358,211
126,682
194,905
$ 368,733
62,392
84,918
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 679,798
$ 516,043
During 2006, the Company had capital purchases of $12.1 million and $111.1 million for the DHL and
Charter segments, respectively. Interest income of $4.8 million and $2.4 million is included in All other pre-tax
earnings for 2006 and 2005, respectively. In 2004, interest earned on cash and cash equivalents reduced interest
expense when calculating revenue under the DHL agreements. Beginning in 2005, interest earned on cash and
cash equivalents is not included in the DHL revenue calculation. Interest expense of $7.3 million for 2006 and
2005 and $6.8 million for 2004 is reimbursed through the commercial agreements with DHL and included in the
DHL earnings above. All other interest is included in the All other category. Cash, cash equivalents, marketable
securities and deferred tax assets are reflected in Assets—All other.
62
ABX AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three years ended December 31, 2006
For the purposes of internal reporting, the Company does not allocate overhead costs that are reimbursed by
DHL to its non-DHL activities. The provisions of the commercial agreements with DHL do not require an
allocation of overhead until such time as ABX derives more than 10% of its total revenue from non-DHL
business activities. Beginning with the Company’s issuance of stock awards in the second quarter of 2005,
certain administration costs that are not reimbursed by DHL are allocated to the DHL segment based on segment
earnings.
The Company’s international revenues were approximately $17.2 million, $12.0 million and $9.9 million for
2006, 2005 and 2004, respectively, derived primarily from international flights. All revenues for the DHL
segment are attributed to U.S. operations.
NOTE O—QUARTERLY RESULTS (Unaudited)
The following is a summary of quarterly results of operations (in thousands except per share data):
2006
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares:
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
$369,165
8,093
$303,578
6,459
$281,348
6,574
$306,270
68,928
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,270
58,413
58,270
58,567
58,270
58,585
58,270
58,487
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.14
0.14
$
$
0.11
0.11
$
$
0.11
0.11
$
$
1.18
1.18
2005
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares:
$346,594
7,083
$351,237
6,755
$369,921
7,391
$396,638
9,083
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,270
58,270
58,270
58,454
58,270
58,322
58,270
58,449
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.12
0.12
$
$
0.12
0.12
$
$
0.13
0.13
$
$
0.16
0.16
In December 2006, the Company recorded an income tax benefit of $54.0 million to reverse the remaining
valuation allowance on deferred tax assets. During the fourth quarters of 2006 and 2005, the Company
recognized revenues of $7.3 million and $4.7 million, respectively, for achieving annual cost-related and service
goals under the ACMI and Hub Services commercial agreements with DHL. In addition, in the fourth quarter of
2005, the Company agreed to reduce revenues by $1.9 million for credits granted to DHL stemming from higher
than anticipated costs since the hub consolidation in September 2005.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2006, the Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Based upon the evaluation, the Company’s Chief Executive
Officer, and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures were
effective.
Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting during the fourth quarter
of 2006 that materially affected or are reasonably likely to materially affect the Company’s internal controls over
financial reporting.
Management’s Annual Report on Internal Controls over Financial Reporting
The management of ABX Air, Inc. and subsidiaries are responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal control system is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes, in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.
The Company’s management assessed the effectiveness of the company’s internal control over financial
reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
Based on management’s assessment of those criteria, management believes that, as of December 31, 2006,
the Company’s internal control over financial reporting was effective.
The Company’s registered public accounting firm has issued an attestation report on our assessment of the
Company’s internal control over financial reporting. That report follows.
March 15, 2007
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ABX Air, Inc.
Wilmington, Ohio
We have audited management’s assessment, included in the accompanying Management’s Annual Report on
Internal Controls Over Financial Reporting, that ABX Air, Inc. and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion
on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing
and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected by
the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal
Control—Integrated Framework
the Treadway
Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
issued by the Committee of Sponsoring Organizations of
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements and financial statement schedules as of and for the year ended
December 31, 2006 of the Company and our report dated March 15, 2007 expressed an unqualified opinion on those
financial statements and financial statement schedules and included an explanatory paragraph regarding the Company’s
adoption of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)).
DELOITTE & TOUCHE LLP
Dayton, Ohio
March 15, 2007
65
ITEM 9B. OTHER INFORMATION
On March 13, 2007, the Compensation Committee of the Board of Directors approved and authorized the
Company to amend the Retention Bonus Agreements, each dated August 15, 2003, between the Company and
each of the following named executive officers of the Company:
Position
President & Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chief Financial Officer
Senior Vice President, Maintenance & Engineering . . . . . . . . . . . . .
Senior Vice President, Flight Operations . . . . . . . . . . . . . . . . . . . . . .
Vice President, Materials Management . . . . . . . . . . . . . . . . . . . . . . .
Named Executive Officer
Joseph C. Hete
Quint O. Turner
Dennis A. Manibusan
Robert J. Morgenfeld
John A. Jessup
The executives identified above (the “Executives”) received Retention Bonus Agreements in connection
with the merger of DHL Worldwide Express, B.V. with Airborne, Inc. in 2003. The Company has paid to the
Executives all retention bonus amounts that were payable to them under their Retention Bonus Agreements.
The amendment to the Retention Bonus Agreements deletes in its entirety Section 7, which provided that in
the event any amounts became payable to the Executive by the Company or its subsidiaries pursuant to the terms
of any change in control, parachute or severance arrangement, or pursuant to the terms of any employment
agreement as a result of the Executive’s termination of employment, then any amounts paid or payable under the
Retention Bonus Agreement would reduce and off-set any amounts otherwise payable to the executive under that
change in control, parachute, severance or employment agreement or arrangement. Section 7 further provided
that, to the extent such amounts were actually paid under such other agreements contrary to the provisions of the
Retention Bonus Agreement, amounts paid or payable under such Retention Bonus Agreement would be subject
to reduction, set-off, counter-claim or recoupment by the Company. The amendment also obligates the Company
to defend, indemnify and hold the Executive harmless from any claims arising under or in connection with
Section 7 of the Retention Bonus Agreement for amounts paid or benefits received under such other agreements.
Each of the Executives is also a party to a change in control agreement with the Company, each dated
August 19, 2003. The Executives’ change in control agreements provide for severance payments and benefits to
the Executive in the event the Executive’s employment is terminated by the Company without cause or by the
Executive for “good reason” following, or in certain circumstances prior to, a change in control of the Company.
The Committee authorized the amendments to the Retention Bonus Agreements to ensure that the purpose for the
change in control agreements, to give the Executives a financial incentive to remain in the employ of the
Company should a change in control occur or be proposed, is not undermined by the Retention Bonus
Agreements now that all retention bonuses payable under these agreements have been made.
The Committee also authorized similar amendments to the Retention Bonus Agreements with three
additional officers who are not named executive officers.
The form of the amendment to the Retention Bonus Agreements is included herewith as Exhibit 10.15a. The
form of Retention Bonus Agreement and change of control agreement were filed as exhibits to the Company’s
Form 10-K for the year ending December 31, 2003. The Retention Bonus Agreement and Change in Control
Agreements are also described in the Company’s Definitive Proxy Statement Schedule 14A filed on April 10,
2006.
66
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The response to this Item is contained in part in the Proxy Statement for the 2007 Annual Meeting of
Stockholders under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” and “Corporate Governance and Board Matters.” The information contained therein is
incorporated herein by reference.
Executive Officers
The following table sets forth information about ABX’s executive officers. The executive officers serve at
the pleasure of ABX’s Board of Directors.
Name
Joseph C. Hete . . . . . . . . . . . . . . . . . . . . . .
Age
52
Dennis A. Manibusan . . . . . . . . . . . . . . . .
57
Information
President and Chief Executive Officer, since August 15, 2003.
Mr. Hete was President and Chief Operating Officer from
January 2000 to August 2003. From 1997 until January 2000,
Mr. Hete held the position of Senior Vice President and Chief
Operating Officer. Mr. Hete served as Senior Vice President,
Administration from 1991 to 1997 and Vice President,
Administration from 1986 to 1991. Mr. Hete joined ABX in
1980.
Senior Vice President, Maintenance and Engineering, since
May 1993.
Mr. Manibusan held positions as Assistant Vice President of
Engineering and Assistant Vice President of Maintenance at
Alaska Airlines, Senior Director of Maintenance and Director
of Line Maintenance at Continental Airlines, Director of
Engineering and Technical Services and Director of Line
Maintenance at Ozark Airlines before joining ABX.
Robert J. Morgenfeld . . . . . . . . . . . . . . . . .
58
Senior Vice President, Flight Operations, since April 1994.
In January of 1992 until 1994, Mr. Morgenfeld was Vice
President of Flight Operations. Prior to that he was Senior
Director of Operations/System Chief Pilot from 1990 to 1992,
Director of Operations/System Chief Pilot from 1989 to 1990,
System Chief Pilot from 1988 to 1990, Manager of DC-9
Flight Standards from September of 1987 to 1988, DC-9
Flight Standards Pilot from July of 1987 to September of
1987 and Assistant Chief Pilot from October of 1985 to 1987
Robert D. Gray . . . . . . . . . . . . . . . . . . . . . .
52 Vice President, Regulatory Compliance and Government
Affairs, since February 2006.
Mr. Gray was Senior Director of Regulatory Compliance and
Government Affairs from 2003 to February 2006 and Senior
Director of Operational Safety and Planning from 1997 to
2003. Prior
to 1997, he held positions of Director of
Operational Control and Manager of Crew Scheduling. He
joined ABX in 1979 as a Dispatcher in the Flight Department.
W. Joseph Payne . . . . . . . . . . . . . . . . . . . .
43 Vice President, General Counsel and Secretary, since January
2004.
Mr. Payne was Corporate Secretary/Counsel from January
1999 to January 2004, and Assistant Corporate Secretary from
July 1996 to January 1999. Mr. Payne joined ABX in April
1995.
67
Name
Thomas W. Poynter . . . . . . . . . . . . . . . . . .
Age
59
Information
Senior Vice President, Ground Operations, since May 1993.
Prior to May 1993, Mr. Poynter was Vice President of Ground
Operations from 1989 to May 1993, Senior Director of
Ground Operations from 1988 to 1989 and Director of
Ground Operations from 1987 to 1988. Mr. Poynter joined
ABX as Sort Manager in January 1985.
Edward P. Smethwick . . . . . . . . . . . . . . . .
62 Vice President, Air Park Services, since July 1989.
Quint O. Turner . . . . . . . . . . . . . . . . . . . . .
44 Chief Financial Officer, since December 2004.
Mr. Smethwick was Senior Director of Air Park Services
from 1986 to 1989 and Director of Product Support/
Equipment and Property Maintenance from 1985 to 1986. He
joined ABX in 1981 as Director of Product Support.
Mr. Turner was Vice President of Administration from
February 2002 to December 2004. Mr. Turner was Corporate
Director of Financial Planning and Accounting from 1997 to
2002. Prior to 1997, Mr. Turner held positions of Manager of
Planning and Director of Financial Planning. Mr. Turner
joined ABX in 1988 as a Staff Auditor.
The executive officers of the Company are appointed annually at the Board of Directors meeting held in
conjunction with the annual meeting of stockholders. There are no family relationships between any directors or
executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the Proxy Statement for the 2007 Annual Meeting of Stockholders
under the captions “Executive Compensation” and “Director Compensation,” and the information contained
therein is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Securities authorized for issuance under equity compensation plans as of December 31, 2006 are
summarized below:
Plan
2005 Long-Term Incentive Compensation
Maximum number
of common shares
contingently issuable
(a)
Weighted average
exercise prices of
outstanding options,
warrants, or rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column a)
(c)
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
736,250
N/A
2,263,750
The 2005 Long-Term Incentive Compensation Plan was approved by shareholders in May 2005.
Performance-Based Stock Units and Time-Based Restricted Stock have been awarded to employees and Time-
Based Restricted Stock Units have been awarded to non-employee directors under the Plan. The awards are
described in Note K of this report, Stock-Based Compensation. ABX does not have any equity compensation
plans that were not approved by its shareholders.
Other responses to this Item are contained in part in the Proxy Statement for the 2007 Annual Meeting of
Stockholders under the captions “Voting at the Meeting,” “Stock Ownership of Management,” and “Common
Stock Ownership of Certain Beneficial Owners,” and the information contained therein is incorporated herein by
reference.
68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The response to this Item is contained in part in the Proxy Statement for the 2007 Annual Meeting of
Stockholders under the captions “Related Person Transactions” and “Independence,” and the information
contained therein is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The response to this Item is contained in the Proxy Statement for the 2007 Annual Meeting of Stockholders
under the caption “Fees of the Independent Registered Public Accounting Firm,” and the information contained
therein is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of Documents filed as part of this report:
(1) Consolidated Financial Statements
The following are filed in Part II, item 8 of this Form 10-K Annual Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following consolidated financial statement schedules of the Company are included as follows:
Schedule II—Valuation and Qualifying Account
All other 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.
(3) Exhibits
The following exhibits are filed with or incorporated by reference into this report.
Exhibit No.
Description of Exhibit
2.1
3.1
3.2
4.1
4.2
Plan of acquisition, reorganization, arrangement, liquidation or succession.
Agreement and Plan of Merger, dated as of March 25, 2003, by and among Airborne, Inc., DHL
Worldwide Express B.V. and Atlantis Acquisition Corporation (included as Appendix A to the
proxy statement/prospectus which is a part of this registration statement). (1)
Articles of Incorporation
Amended and Restated Certificate of Incorporation of ABX Air, Inc. (14)
Amended and Restated Bylaws of ABX Air, Inc. (14)
Instruments defining the rights of security holders
Specimen of common stock of ABX Air, Inc. (3)
Form of Preferred Stock Rights Agreement dated the effective date of the merger, by and between
ABX Air, Inc. and a rights agent. (1)
69
Material Contracts
Form of Master Separation Agreement dated as of the effective date of the merger, by and among
Airborne, Inc., ABX Air, Inc. and Wilmington Air Park LLC. (included as Appendix B to the proxy
statement/prospectus which is a part of this registration statement) (1)
Form of ACMI Service Agreement, dated as of the effective date of the merger, by and between ABX
Air, Inc. and Airborne, Inc. (Certain portions have been omitted based upon a request for confidential
treatment. The nonpublic information has been filed with the Securities and Exchange
Commission.) (2)
Form of Hub and Line-Haul Services Agreement dated as of the effective date of the merger, by and
between ABX Air, Inc. and Airborne, Inc. (1)
Form of Performance Guaranty dated as of the effective date of the merger, by and between DHL
Holdings USA,
to the Hub and Line-Haul Services
Inc. with respect
Agreement. (1)
Inc. and Airborne,
Form of Performance Guaranty dated as of the effective date of the merger, by and between DHL
Holdings USA, Inc. and Airborne, Inc. with respect to the ACMI Service Agreement. (1)
First Non-Negotiable Promissory Note issued by ABX Air, Inc. in favor of Airborne Inc., (5)
Form of Second Non-Negotiable Promissory Note issued by ABX Air, Inc. in favor of DHL Holdings
(USA), Inc. (1)
Form of Transition Services Agreement, dated as of the effective date of the merger, by and between
ABX Air, Inc. and Airborne, Inc. (1)
Form of Wilmington Airpark Sublease, dated as of the effective date of the merger, by and between
ABX Air, Inc. and Airborne, Inc. (1)
Form of Employee Matters Agreement dated as of the effective date of the merger, by and between
Airborne, Inc. and ABX Air, Inc. (1)
Form of Tax Sharing Agreement dated as of the effective date of the merger, by and between
Airborne, Inc. and ABX Air, Inc. (1)
Participation Agreement dated as of August 16, 2001, among ABX Air, Inc., as lessee, Mitsui & Co.
Ltd., as finance lessor, Tomair LLC, as Owner Participant, and Wells Fargo Bank Northwest,
National Association, as Owner Trustee. (1)
Lease Agreement dated as of August 21, 2001, between Owner Trustee, as lessor, and ABX Air, Inc.,
as lessee. (1)
Form of change in control agreement with CEO and each of the next four highest paid officers. (4)
Form of Retention Bonus Agreement with CEO and each of the next four highest paid officers. (4)
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.15a
Form of Amendment to Retention Bonus Agreement, filed herewith.*
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Director compensation fee summary. (6)
Form of Executive Incentive Compensation Plan for CEO and the next four highest paid officers. (9)
Credit Agreement, dated as of March 31, 2004. (7)
Amendment No.1-dated June 18, 2004 to the Credit Agreement dated as of March 31, 2004. (8)
Form of Long-Term Incentive Compensation plan for officers, dated July 12, 2005. (10)
Amendment to the Hub and Line-Haul Services Agreement, dated August 9, 2005. (11)
Form of Long-Term Incentive Compensation Plan for directors, dated October 4, 2005. (12)
Aircraft modification agreement with Israel Aircraft Industries, Ltd. (13)
Consent to Assignment of ACMI Service Agreement and Hub & Line-Haul Services Agreement. (13)
70
10.25
10.26
10.27
10.28
Agreement with DHL, dated March 15, 2006. (13)
Letter from DHL dated July 19, 2006, notifying ABX Air, Inc. of a change to the scope of services
under the ACMI agreement. (14)
Aircraft Loan and Security Agreement and related promissory note, dated August 24, 2006, by and
among ABX Air, Inc. and Chase Equipment Leasing, Inc. (14)
Aircraft Loan and Security Agreement and related promissory note, dated October 10, 2006, by and
among ABX Air, Inc. and Chase Equipment Leasing, Inc., filed herewith.*
Code of Ethics
14.1
Code of Ethics—CEO and CFO. (6)
List of Subsidiaries
21.1
List of Subsidiaries of ABX Air, Inc. filed within.*
Consent of experts and counsel
23.1
Consent of independent registered public accounting firm, filed herewith.*
Certifications
31.1
31.2
32.1
32.2
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.*
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.*
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.*
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.*
Incorporated by reference to the Company’s Registration Statement Form S-4 filed on May 9, 2003 with the
Securities and Exchange Commission.
Incorporated by reference to the Company’s Registration Statement Form S-4/A filed on June 18, 2003 with
the Securities and Exchange Commission, as amended.
Incorporated by reference to the Company’s Registration Statement Form S-4/A filed on July 9, 2003 with
the Securities and Exchange Commission, 2003, as amended.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2003
with the Securities and Exchange Commission.
Incorporated by reference to the Company’s Annual Report of Form 10-K filed on March 25, 2004 with the
Securities and Exchange Commission.
Incorporated by reference to the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders.
Incorporated by reference to the Company’s 8-K filed on April 7, 2004.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2004 with
the Securities and Exchange Commission.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 14, 2004 with the
Securities and Exchange Commission.
(10) Incorporated by reference to the Company’s 8-K filed on July 12, 2005.
(11) Incorporated by reference to the Company’s 8-K filed on August 9, 2005.
(12) Incorporated by reference to the Company’s 8-K filed on October 4, 2005.
(13) Incorporated by reference to the Company’s Annual Report of Form 10-K filed on March 16, 2006 with the
Securities and Exchange Commission.
(14) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and
*
Exchange Commission on August 9, 2006.
Exhibits can be viewed by accessing ABX’s Form 10-K for 2006 at www.ABXAir.com/ir/index. html or at
www.sec.gov.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ABX Air, Inc.
Signature
Title
Date
/s/
JOSEPH C. HETE
Joseph C. Hete
President and Chief Executive Officer
March 16, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons in the capacities and on the date indicated:
Signature
Title
Date
/s/
JAMES H. CAREY
James H. Carey
/s/
JAMES E. BUSHMAN
James E. Bushman
/s/
/s/
JOHN D. GEARY
John D. Geary
JOSEPH C. HETE
Joseph C. Hete
Director and Chairman of the Board
March 16, 2007
Director
Director
Director, President and Chief
Executive Officer
March 16, 2007
March 16, 2007
March 16, 2007
/s/ RANDY D. RADEMACHER
Director
March 16, 2007
Randy D. Rademacher
/s/ FREDERICK R. REED
Director
March 16, 2007
Frederick R. Reed
/s/
JEFFREY J. VORHOLT
Jeffrey J. Vorholt
Director
March 16, 2007
/s/ QUINT O. TURNER
Chief Financial Officer
March 16, 2007
Quint O. Turner
72
ABX Air, Inc. and Subsidiaries
Schedule II—Valuation and Qualifying Account
Description
Accounts receivable reserve:
Year ended:
Balance at
beginning of
period
Additions
charged to
cost and
expenses
Deductions
Balance at
end of period
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$872,000
244,000
268,500
$ 27,961
692,349
8,827
$383,961
64,349
33,327
$516,000
872,000
244,000
ABX Air 2006 Annual Report
Investor Information
Stock Information
NASDAQ: ABXA
Company documents electronically
filed with the SEC also may be found
at www.abxair.com.
Independent Auditors
Deloitte & Touche LLP
Dayton, Ohio
Registrar and Transfer Agent
National City Bank
Shareholder Services
LOC#5352
4100 West 150th Street
Cleveland, Ohio 44135-1385
(800) 622-6757
Annual Meeting
The annual meeting of stockholders
will be May 9, 2007, at 11 a.m. EDT
at Roberts Convention Centre,
188 Roberts Road, Wilmington, Ohio.
Investor Relations
Telephone inquiries may be directed
to (937) 434-2700.
Board of Directors
James H. Carey, Executive Vice President (Retired)
of the Chase Manhattan Bank.
Joseph C. Hete, President and Chief Executive Officer of
ABX Air, Inc.
Mr. Carey has been the Chairman of the Board of the
Company since May 2004, and has been a Director
since August 2003. He is also the Chairman of the
Compensation Committee and is a member of the
Audit Committee.
James E. Bushman, Chairman and Chief Executive
Officer of Cast-Fab Technologies, Inc. and Chairman
and Chief Executive Officer of Security Systems
Equipment Corporation.
Mr. Bushman has been a Director of the Company
since May 2004, is the Chairman of the Nominating and
Governance Committee, and is a member of the Audit
Committee and Compensation Committee.
John D. Geary, President and Chief Executive Officer
(Retired) of Midland Enterprises, Inc., an inland marine
transportation company comprised of barge lines,
shipyards, and cargo loading terminals.
Mr. Geary has been a Director of the Company since
January 2004, and is a member of the Audit Committee
and the Compensation Committee.
Mr. Hete does not serve on any of the committees
of the Board.
Randy D. Rademacher, Chief Financial Officer for
The Armor Group, a privately owned manufacturer of
industrial and commercial products.
Mr. Rademacher has been a director of the Company
since December 2006, and is a member of the Audit
Committee and Compensation Committee.
Frederick R. Reed, Executive Vice President,
General Counsel and Consultant for Development
Specialists, Inc.
Mr. Reed has been a director of the Company
since August 2006, and is a member of the
Audit Committee and Nominating and
Governance Committee.
Jeffrey J. Vorholt, independent consultant and
private investor.
Mr. Vorholt has been a Director of the Company since
January 2004. He is the Chairman of the Audit
Committee and is a member of the Nominating and
Governance Committee.
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145 Hunter Drive
Wilmington, Ohio 45177
www.abxair.com