Management’s Discussion and Analysis

Results of Operations

BAX Global

Executive Overview

BAX Global helps its customers move heavy weight freight and provides supply chain management services. BAX Global’s business model is different in the U.S. than in the other countries in which it operates.

In the U.S., BAX Global operates as both an integrator and a freight forwarder/supply chain management (“SCM”) provider. As an integrator, BAX Global operates its own network of planes and trucks with a freight sorting hub. This network permits the Company to offer to its customers a full range of reliable services ranging from expedited to deferred deliveries. Accordingly, management focuses on the resources needed to ensure that the BAX Global network maintains reliable service levels. The hub and planes commit BAX Global to a higher level of fixed costs and capital than freight forwarders, making volume throughput and pricing important to financial performance.

Freight forwarders and supply chain management companies arrange to use the assets of others while providing services similar to those provided by integrators. As a result, their level of fixed costs and capital employed are usually lower than for integrators. However, since they do not control the resources used, it is more difficult for freight forwarders to meet all customers’ needs with the same reliability as an integrator.

Since 1999, BAX Global has significantly reduced the resources employed in the U.S. as an integrator by focusing only on areas where it expects to match customer needs. At the same time, it has expanded its offering of less capital intensive freight forwarding and SCM. Because this should make financial performance in the U.S. less subject to fluctuation solely on the basis of volume throughput, management expects to continue to expand its freight forwarding and SCM operations.

In its non-U.S. operations, BAX Global functions as a SCM/freight forwarder. Management believes its operations in Asia perform well and are well positioned for growth there. In particular, BAX Global is focused on expanding its already significant presence in China. Operations in Europe have not performed as well so management is focused on growing revenue with acceptable margins and reducing resources where they may not match up with customers’ needs.

Performance at BAX Global has been and will continue to be affected by the economy. Absent changes in market share, BAX Global will perform better in a growing economy. In addition, the velocity of shipments and manufacturing will affect the ability of shippers to choose deferred versus expedited freight. The higher the velocity of an economy, usually the more expedited, higher-margined freight is used. BAX Global’s performance will also be affected by the relative performance of the customers and industries it focuses its resources upon.

There is also a seasonal factor in BAX Global’s performance. In a normal year, demand for BAX Global’s services is highest in the third and fourth quarters of the year and weakest in the first and second quarters. Of course, trends in the economy can impact normal seasonality.

               
  Years Ended December 31,   % change
(In millions)   2004 2003 2002   2004 2003
Revenues
Americas (a) $ 1,161.8 976.0 989.9   19 (1)
International (b)   1,366.6 1,098.3 951.7   24 15
Eliminations   (87.8) (75.1) (70.1)   (17) (7)
  $ 2,440.6 1,999.2 1,871.5   22 7
Operating Profit (Loss)
Americas (a) $ 22.6 (30.9) (15.1)   NM (105)
International (b)   49.5 41.2 43.8   20 (6)
Corporate and other   (15.9) (7.3) (11.1)   (118) 34
  $ 56.2 3.0 17.6   200+ (83)
Cash Flow Information
Depreciation and amortization $ 41.8 47.0 44.4   (11) 6
Capital expenditures   25.4 23.6 27.1   8 (13)
Operating Statistics
Intra-America revenue $ 554.5 464.6 468.6   19 (1)
Worldwide expedited freight services:
Revenues $ 1,847.4 1,501.0 1,452.4   23 3
Weight in pounds   1,805.3 1,568.0 1,530.3   15 2
(a)
U.S., Mexico, Latin America and Canada.
(b)
Europe-Middle East-Africa (“EMEA”) and Asia-Pacific.

Profits are shared among the origin and destination subsidiaries on most export volumes. Performance in BAX Global’s U.S. business, the region with the largest domestic and export volume, significantly affects the results of worldwide expedited freight services. Eliminations revenues primarily reflect intercompany revenue eliminations on shared services.

BAX Global’s revenues and operating profits are affected by the seasonal nature of customers’ businesses. BAX Global generally recognizes more revenue and operating profit in the last half of the year compared to the first half. The relative strength of the worldwide economies may have a larger effect on BAX Global’s results as compared to seasonal forces.

BAX Global operates throughout most of the world. Revenues in all regions include both expedited and nonexpedited freight services.

BAX Global’s Products

     
Region offered
Heavy Freight Services:
Expedited
Overnight delivery   Worldwide
Second-day delivery   Worldwide
Wholesale freight forwarding   Americas
Air import and export delivery   Worldwide
Nonexpedited
BAXSaver Suite of deferred delivery products (various deferred delivery terms)   Americas
Customs brokerage services   Worldwide
Aircraft charter services   Worldwide
Ocean delivery   Worldwide
Supply Chain Management Services   Worldwide

 

2004

Overview

Operating profit in 2004 was $53.2 million above last year on a 22% increase in revenues (19% increase in revenues on a constant currency basis). Revenue was significantly higher in the Americas, higher in Asia, and higher in Europe, where it would have been slightly lower except for the effect of currency changes. Operating profit increased as a result of higher volumes in the Intra-America network. Volumes and revenue were higher in the Intra-America network because of the effects of a strengthening U.S. economy and increased air export volumes. Freight forwarding and supply chain management activity grew in Asia-Pacific due to the strong economy there.

Americas

Americas revenues increased 19% in 2004 as compared to 2003 as the strengthening economy led to higher volumes across the board. Revenues in the United States were up about 19% due to the higher volume of both domestic and export freight. The rest of the Americas benefited similarly. In addition, flying under contract for the U.S. government and other charter activity for both the government and commercial customers grew at a similar pace.

Operating profit in the Americas was over $53 million higher in 2004 as compared to 2003. Performance was up largely as the result of the impact on resource utilization and yields of the increase in volume. Operating profit in the Americas for 2004 includes a $5.0 million impairment charge to cover the abandonment of capitalized transportation logistics software.

The impact of higher market fuel costs in 2004 was not significant to the performance of BAX Global primarily as a result of the Company’s ability to pass through a portion of higher fuel costs to customers through fuel surcharge adjustments to billings. The fuel surcharge represents approximately 6.5% of revenues in the Americas region for 2004. The Company is relying less on financial derivatives to hedge fuel costs because fuel surcharges are widely accepted within the industry and are reasonably effective at hedging increases in fuel prices.

International

In 2004, International revenues increased 24% and operating profit increased 20% as compared to 2003. On a constant currency basis, revenues were 19% higher than 2003, with a 30% increase in Asia-Pacific and a 1% decrease in Europe, Middle East and Africa (“EMEA”). The increase in Asia-Pacific was primarily due to improved economic conditions and new business in several Asia-Pacific countries, primarily associated with the high technology industry. In the EMEA region, the increase in operating profit for 2004 as compared to 2003 was the result of improved air exports volumes.

BAX Global Corporate and Other

The increase in BAX Global’s corporate and other expense in 2004 as compared to 2003 was primarily due to higher incentive-based compensation expense and foreign currency translation losses.

2003

Overview

Operating profit in 2003 was $14.6 million below 2002 despite a 7% increase in revenues (3% increase in revenues on a constant currency basis). Revenue was lower in the Americas, higher in Asia, and higher in Europe, where it would have been lower except for the effect of currency changes. Operating profit was lower as a result of lower volumes in the Intra-America network. Volumes and revenue were lower in the Intra-America network because of the effects of a weak U.S. economy and a shift from expedited to deferred products. Partially offsetting this were the effects on revenue and earnings of increased air export volumes and supply chain management activity in Asia-Pacific.

Americas

BAX Global’s 2003 operating loss in the Americas region was $15.8 million higher than 2002 on a 1% decrease in revenues. A decrease in operating profit due to lower Intra-America volumes of higher-yielding overnight and second-day products, more than offset an increase in operating profit due to higher volumes for deferred products and volumes related to BAX Global’s new wholesale freight forwarding product. Although volumes, in total, were lower in 2003 compared to 2002, volumes in the fourth quarter of 2003 were above the prior-year quarter.

U.S. air export revenues reflect the benefit of being able to pass through to customers a portion of the surcharges charged by airlines for high fuel costs, security and other reasons. U.S. air export volumes were slightly higher in 2003 over 2002, while revenue per pound, excluding surcharges, declined in 2003 as compared to 2002. Growth in the U.S. supply chain management business increased revenues by $14.4 million in 2003 as compared to 2002 due to the addition of new customers as well as increased activity with existing customers. Revenues and operating results in 2003 were adversely affected by lower third-party aircraft charter activity compared to the prior year period.

The 2003 operating loss in the Americas includes higher expense from the Company’s primary U.S. pension plan as well as higher health care costs in the 2003 periods. Heavy maintenance expense was $9.3 million lower in 2003 compared to 2002 primarily due to a reduction in flight hours as a result of a decrease in third-party aircraft charter activity. Adjustments made in the first half of 2003 in conjunction with the renegotiation of certain return provisions of its aircraft lease agreements and the completion of a study of the lease agreements also reduced heavy maintenance expense.

International

International operating profits decreased 6% in 2003 compared to 2002 on a 15% increase in revenues (7% increase in revenues on a constant currency basis). A decrease in operating profits in the EMEA region was partially offset by improved profits in Asia-Pacific. Reduced demand and competitive market pressures in the EMEA region continued due to the combined effect of the strengthening currencies and the weak European economy resulting in lower export volumes and flat import volumes compared with 2002. Revenues and operating profit for 2003 benefited from an increase in air export volumes within the Asia-Pacific region and from Asia-Pacific to the U.S. In addition, Asia-Pacific’s results benefited from growth in supply chain management operations, including the effects of an expansion of operations in China during 2003, as well as increased activity from existing customers.

BAX Global Corporate and Other

BAX Global’s corporate and other expense decreased $3.8 million in 2003 versus the prior-year period due to foreign currency exchange transaction gains and lower administrative costs.