UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2002

 

Commission file number 0-23642

 

NORTHWEST AIRLINES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

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  ý    No o

 

As of September 30, 2002, there were 85,783,403 shares of the registrant’s Common Stock outstanding.

 

 

Northwest Airlines Corporation

 

PART I.  FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Operations - Three months and nine months ended September 30, 2002 and 2001.
		Condensed Consolidated Balance Sheets - September 30, 2002 and December 31, 2001.
		Condensed Consolidated Statements of Cash Flows - nine months ended September 30, 2002 and 2001.
		Notes to Condensed Consolidated Financial Statements
	The Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Requirements are attached hereto and filed as Exhibits 12.1 and 12.2.
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 6.	Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
EXHIBIT INDEX

 

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PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Northwest Airlines Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three Months Ended September 30						Nine Months Ended September 30
(Unaudited, in millions except per share amounts)		2002			2001			2002			2001
Operating Revenues
Passenger		$	2,227		$	2,243		$	6,097		$	6,782
Cargo		180			177			504			544
Other		157			174			549			594
Total operating revenues		2,564			2,594			7,150			7,920
Operating Expenses
Salaries, wages and benefits		977			1,024			2,837			3,046
Aircraft fuel and taxes		395			454			1,046			1,410
Selling and marketing		211			260			629			825
Aircraft maintenance materials and repairs		139			156			435			536
Depreciation and amortization		133			172			399			430
Other rentals and landing fees		162			136			426			400
Aircraft rentals		116			113			345			333
Other		423			434			1,267			1,367
Total operating expenses		2,556			2,749			7,384			8,347
Operating Income (Loss)		8			(155		)	(234		)	(427		)
Other Income (Expense)
Airline Stabilization Act funds		—			249			—			249
Interest expense, net		(99		)	(89		)	(293		)	(246		)
Interest of mandatorily redeemable preferred security holder		(7		)	(6		)	(19		)	(19		)
Investment income		12			15			35			52
Foreign currency gain (loss)		1			(6		)	(10		)	(6		)
Other		12			17			46			57
Total other income (expense)		(81		)	180			(241		)	87
Income (Loss) Before Income Taxes		(73		)	25			(475		)	(340		)
Income tax expense (benefit)		(27		)	6			(165		)	(133		)
Net Income (Loss)		$	(46	)	$	19		$	(310	)	$	(207	)
Earnings (loss) per common share:
Basic		$	(.55	)	$	.22		$	(3.63	)	$	(2.47	)
Diluted		$	(.55	)	$	.20		$	(3.63	)	$	(2.47	)
Average shares used in computation:
Basic		86			85			86			84
Diluted		86			92			86			84

 

See accompanying notes.

 

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Northwest Airlines Corporation

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Unaudited in million)		September 30 2002			December 31 2001
Assets
Current Assets
Cash and cash equivalents		$	2,426		$	2,512
Restricted short-term investments		116			100
Accounts receivable, net		470			512
Flight equipment spare parts, net		259			273
Prepaid expenses and other		426			393
Total current assets		3,697			3,790
Property and Equipment, net
Flight equipment, net		5,806			5,034
Other property and equipment, net		1,050			1,032
Total property and equipment, net		6,856			6,066
Flight Equipment Under Capital Leases, net		451			543
Other Assets
Intangible pension asset		943			943
International routes, net		634			634
Investments in affiliated companies		250			213
Other		762			766
Total other assets		2,589			2,556
Total Assets		$	13,593		$	12,955
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities
Air traffic liability		$	1,387		$	1,275
Accounts payable and other liabilities		2,467			2,455
Current maturities of long-term debt and capital lease obligations		369			416
Total current liabilities		4,223			4,146
Long-Term Debt		5,901			4,828
Long-Term Obligations Under Capital Leases		407			393
Deferred Credits and Other Liabilities
Pension and postretirement benefits		1,635			1,749
Deferred income taxes		852			1,005
Other		558			546
Total deferred credits and other liabilities		3,045			3,300
Mandatorily Redeemable Preferred Security of Subsidiary Which Holds Solely Non-Recourse Obligation of Company		529			492
Redeemable Preferred Stock		226			227
Common Stockholders’ Equity (Deficit)
Common stock		1			1
Additional paid-in capital		1,455			1,451
Accumulated deficit		(829		)	(518		)
Accumulated other comprehensive income (loss)		(310		)	(305		)
Treasury stock		(1,055		)	(1,060		)
Total common stockholders’ equity (deficit)		(738		)	(431		)
Total Liabilities and Stockholders’ Equity (Deficit)		$	13,593		$	12,955

 

See accompanying notes.

 

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Northwest Airlines Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Nine Months Ended September 30
(Unaudited, in millions)		2002			2001
Net Cash (Used in) Provided by Operating Activities		$	(39	)	$	657
Cash Flows From Investing Activities
Capital expenditures		(1,185		)	(1,014		)
Net (increase) decrease in short-term investments		23			(56		)
Proceeds from sale of investment in Continental Airlines, Inc.		—			582
Other, net		(22		)	9
Net cash used in investing activities		(1,184		)	(479		)
Cash Flows From Financing Activities
Proceeds from issuance of short-term borrowings and long-term debt		1,289			3,160
Proceeds from sale and leaseback transactions		136			84
Payments of long-term debt and capital lease obligations		(245		)	(159		)
Payment of short-term borrowings		(1		)	(1,107		)
Other, net		(42		)	(35		)
Net cash provided by financing activities		1,137			1,943
Increase (Decrease) in Cash and Cash Equivalents		(86		)	2,121
Cash and cash equivalents at beginning of period		2,512			693
Cash and cash equivalents at end of period		$	2,426		$	2,814
Available to be borrowed under credit facilities		$	1		$	2
Supplemental Cash Flow Information:
Interest paid		$	273		$	197
Income taxes (refunded) paid		(123		)	30
Investing and Financing Activities Not Affecting Cash:
Manufacturer financing of aircraft predelivery deposits		$	(14	)	$	(15	)

 

See accompanying notes.

 

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Northwest Airlines Corporation

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                           The condensed consolidated financial statements of Northwest Airlines Corporation (“NWA Corp.”), a holding company whose principal indirect operating subsidiary is Northwest Airlines, Inc. (“Northwest”), include the accounts of NWA Corp. and all consolidated subsidiaries (collectively, the “Company”).  The condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations.  These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended December 31, 2001 contained in the Company’s Annual Report on Form 10-K for 2001.  The Company’s accounting and reporting policies are summarized in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

 

The Company maintains a Web site at http://www.nwa.com.  Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports, and other information about the Company are available free of charge through this Web site at http://ir.nwa.com as soon as reasonably practicable after those reports are electronically filed with or furnished to the SEC.

 

In the opinion of management, the interim financial statements reflect adjustments, consisting of normal recurring accruals, which are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated.

 

2.                           The income tax expense (benefit) is based on estimated annual effective tax rates, which differ from the federal statutory rate of 35% primarily due to state income taxes and nondeductible expenses.

 

On March 9, 2002, Congress passed, and the President signed into law, the Job Creation and Worker Assistance Act of 2002 (“the Act”) which provides, in part, an extension of the period for the carryback of net operating losses (“NOLs”) arising in 2001 and 2002 from two years to five years.  The Act also allows the full amount of alternative minimum tax NOLs arising in, or carried forward to, 2001 and 2002 to be used to reduce the taxpayer’s alternative minimum taxable income.  These changes will allow the Company to claim a federal income tax refund of approximately $217 million related to the carryback of its 2002 NOL.

 

The extended NOL carryback period will result in the displacement of $13 million of foreign tax credits taken in prior years.  Some of these credits are now expected to expire before being utilized by the Company.

 

3.                           As of September 30, 2002, maturities of long-term debt through December 31, 2006 are as follows (in millions):

 

 

The amount due in 2005 includes $962 million of principal outstanding on the Company’s credit facilities.

 

As of September 30, 2002, the Company’s secured credit facilities consisted of a $725 million revolving credit facility, ($12 million of which has been utilized to establish letters of credit) available until October 2005, and a $250 million 364-day revolving credit facility which was renewed in October 2002 and is renewable annually at the option of the lenders; however, to the extent any portion of the $250 million facility is not renewed for an additional 364-day period, the Company may borrow up to the entire non-renewed portion of the facility and such borrowings would then mature in October 2005.  This credit agreement is secured by the Company’s Pacific route system and certain aircraft.  On June 28, 2002, Standard & Poor’s downgraded the rating on the Company’s secured credit facilities to BB- from BB.  With the change in credit rating, borrowings under these secured credit facilities increased 0.5% and currently bear

 

6

 

interest at a variable rate equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 2.5% (4.3% at September 30, 2002).

 

4.                           The Company is managed as one cohesive business unit, from which revenues are derived primarily from the commercial transportation of passengers and cargo.  Operating revenues from flight segments serving foreign destinations are classified into the Pacific or Atlantic regions, as appropriate.  The following table shows the operating revenues for each region (in millions):

 

 

5.                           Northwest operated a fleet of 435 aircraft at September 30, 2002, consisting of 367 narrow-body and 68 wide-body aircraft.  The composition of the fleet accommodates both the Company’s domestic hub-and-spoke system and its international routes.  As of September 30, 2002, the Company operated the following aircraft:

 

 

(1)               The Company has the right to defer the scheduled delivery of certain aircraft listed above.

(2)               The Company has the right to cancel eight of the Airbus A330 aircraft orders.

 

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As of September 30, 2002, the following aircraft were operated by Northwest Airlink carriers:

 

 

(1)

These aircraft will be leased or subleased to and operated by Northwest Airlink carriers, and the Company has the option to finance these aircraft through long-term operating leases from the manufacturer.  The Company has the right to defer the scheduled delivery of certain of these aircraft.

 

Committed expenditures for the aircraft on firm order listed above, including CRJ aircraft, and related equipment, including estimated amounts for contractual price escalations and predelivery deposits, will be approximately $635 million for the remainder of 2002, $1.83 billion in 2003, $1.67 billion in 2004, $1.43 billion in 2005, $209 million in 2006 and $33 million in 2007.  Consistent with prior practice, the Company intends to finance its aircraft deliveries through a combination of internally generated funds, debt and leveraged lease financing.  Financing commitments available for use by the Company are in place for all of the aircraft on firm order.

 

The Company is in the process of replacing its DC10-40 aircraft with Boeing 757-200/300 aircraft purchased or on order.  The Company also plans to replace existing Boeing 727 aircraft in service with Airbus A319/A320 aircraft purchased or on order, with all Boeing 727 aircraft to be removed from regularly scheduled service by the end of January 2003.  As of September 30, 2002, 13 Boeing 727 aircraft and one DC10-40 aircraft remained in service.  The Company continues to evaluate long-lived assets for potential impairment in compliance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and has previously made the necessary changes to the lives and asset values of the DC10-40 and Boeing 727 aircraft to be retired.

 

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6.                           The following table sets forth the computation of basic and diluted earnings per common share:

 

		Three months ended September 30						Nine months ended September 30
		2002			2001			2002			2001
Numerator:
Net income (loss) (in millions)		$	(46	)	$	19		$	(310	)	$	(207	)
Denominator:
Weighted-average shares outstanding for basic earnings per share		85,713,993			84,503,281			85,613,322			84,112,042
Effect of dilutive securities:
Series C Preferred Stock		—			6,644,434			—			—
Shares held in non-qualified rabbi trusts		—			769,178			—			—
Employee stock options and unvested restricted shares		—			265,726			—			—
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		85,713,993			92,182,619			85,613,322			84,112,042
Shares related to dilutive securities excluded because inclusion would be anti-dilutive		6,658,388			—			7,058,507			8,081,052

 

7.                           Comprehensive loss was $29 million and $30 million for the three months ended September 30, 2002 and 2001, respectively, and $315 million and $264 million for the nine months ended September 30, 2002 and 2001, respectively.  Comprehensive income (loss) consists of net income (loss) plus other comprehensive income (loss).

 

8.                           During June 2002, a Receivables Purchase Agreement (the “Agreement”) was executed by Northwest, NWA Funding II, LLC (“NWA Funding”), a wholly-owned, non-consolidated subsidiary of the Company, and a third party purchaser (the “Purchaser”).  The agreement is a one-year, $100 million revolving receivables purchase facility, renewable annually for five years at the option of the Purchaser, that allows Northwest to sell additional receivables to NWA Funding and NWA Funding to sell variable undivided interests in these receivables to the Purchaser.  NWA Funding pays a yield to the Purchaser equal to the rate on A1/F1 commercial paper plus a program fee.

 

In the second quarter of 2002, NWA Funding sold an initial undivided interest in such receivables to the Purchaser for $65 million, subject to specified collateral requirements.  The amount of loss recognized related to receivables securitized was not material.  In the third quarter of 2002, NWA Funding sold an additional $7 million of its undivided interest in the receivables, bringing the total amount to $72 million at September 30, 2002.  NWA Funding maintains a variable undivided interest in these receivables and is subject to losses on its share of the receivables and, accordingly, maintains an allowance for doubtful accounts.

 

The Agreement provides for early termination upon the occurrence of certain events including, among others, a strike event causing a significant schedule reduction for seven consecutive days, falling below a minimum liquidity requirement of $1.10 billion as of the last day of any fiscal quarter, or the Company not meeting minimum credit ratings (defined as any two of the following three events occurring: (i) S&P’s “Long Term Local Issuer Credit” rating below a B credit rating, (ii) Moody’s “Senior Implied” rating below a B2 credit rating, or (iii) Fitch’s “Senior Unsecured Debt” rating below a B credit rating).

 

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9.                           As of  September 30, 2002, the Company had a $51 million receivable from the U.S. Government related to a grant under the Air Transportation Safety and System Stabilization Act (“Airline Stabilization Act”).  The Company has filed its final application and is in discussions with representatives of the Department of Transportation (“DOT”).

 

10.                     In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS 142 requires that companies test goodwill and indefinite lived intangible assets for impairment on an annual basis rather than amortize such assets.  The Company adopted SFAS 142 on January 1, 2002, and as a result no longer amortizes its indefinite lived intangible assets and goodwill.  During the first quarter of 2002, the Company performed the required transitional impairment tests of goodwill and indefinite lived intangible assets and found the fair value to be in excess of the carrying value of these assets.

 

The following table presents net income (loss) and earnings (loss) per share for comparable periods in 2001 adjusted for amortization of goodwill and indefinite lived intangible assets, which are not tax effected since these expenses were not deductible for tax purposes (in millions except per share amounts):

 

 

(1)               Goodwill amortization was $182,391 and $547,174 for the three and nine months ended September 30, 2001.

(2)               For the nine months ended September 30, 2001, no incremental shares related to dilutive securities were used to calculate diluted earnings per share because of the anti-dilutive impact caused by inclusion of these securities.

 

 

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11.                     The following tables present condensed consolidating financial information for: (i) Northwest, (ii) on a combined basis, NWA Corp. and all other subsidiaries of NWA Corp., and (iii) NWA Corp. on a consolidated basis.  The principal consolidating adjustment entries eliminate investments in subsidiaries and inter–company balances and transactions.

 

Condensed Consolidating Statements of Operations for the three months ended September 30, 2002 (in millions):

 

		Northwest			Other Subsidiaries			Consolidating Adjustments			NWA Corp. Consolidated
Operating revenues		$	2,463		$	147		$	(46	)	$	2,564
Operating expenses		2,461			137			(42		)	2,556
Operating income (loss)		2			10			(4		)	8
Other income (expense)		(95		)	(129		)	143			(81		)
Income (loss) before income taxes		(93		)	(119		)	139			(73		)
Income tax expense (benefit)		(32		)	5			—			(27		)
Net income (loss)		$	(61	)	$	(124	)	$	139		$	(46	)

 

Condensed Consolidating Statements of Operations for the nine months ended September 30, 2002 (in millions):