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, 2004

 

Commission File Number: 0-23642

 

NORTHWEST AIRLINES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(612) 726-2111

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes  ý    No  o

 

As of September 30, 2004, there were 86,533,358 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, 2004 and 2003
		Condensed Consolidated Balance Sheets - September 30, 2004 and December 31, 2003
		Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2004 and 2003
		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
EXHIBIT INDEX

 

2

 

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)		2004			2003			2004			2003
Operating Revenues
Passenger		$	2,297		$	2,103		$	6,440		$	5,720
Regional carrier revenues		304			235			795			622
Cargo		211			196			587			544
Other		240			157			704			603
Total operating revenues		3,052			2,691			8,526			7,489
Operating Expenses
Salaries, wages and benefits		952			955			2,853			2,944
Aircraft fuel and taxes		605			386			1,554			1,172
Selling and marketing		209			187			588			533
Other rentals and landing fees		154			141			449			422
Depreciation and amortization		126			144			504			448
Aircraft maintenance materials and repairs		121			114			341			342
Aircraft rentals		109			117			338			355
Regional carrier expenses		322			135			866			386
Other		375			366			1,114			1,140
Total operating expenses		2,973			2,545			8,607			7,742
Operating Income (Loss)		79			146			(81		)	(253		)
Other Income (Expense)
U. S. Government Appropriations		—			—			—			209
Interest expense, net		(133		)	(117		)	(390		)	(341		)
Interest of mandatorily redeemable security holder		—			(7		)	—			(19		)
Investment income		14			9			40			29
Gain (loss), other		2			16			(5		)	223
Total other income (expense)		(117		)	(99		)	(355		)	101
Income (Loss) Before Income Taxes		(38		)	47			(436		)	(152		)
Income tax benefit		—			—			—			(30		)
Net Income (Loss)		(38		)	47			(436		)	(122		)
Preferred stock requirements		(8		)	(5		)	(22		)	(5		)
Net Income (Loss) Applicable to Common Stockholders		$	(46	)	$	42		$	(458	)	$	(127	)
Earnings (loss) per common share:
Basic and Diluted		$	(0.54	)	$	0.49		$	(5.31	)	$	(1.48	)
Average shares used in computation:
Basic		87			86			86			86
Diluted		87			86			86			86

 

See accompanying notes.

 

3

 

Northwest Airlines Corporation

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30			December 31
(Unaudited, in millions)		2004			2003
Assets
Current Assets
Cash and cash equivalents		$	1,395		$	1,608
Unrestricted short-term investments		1,146			1,149
Restricted short-term investments		136			126
Accounts receivable, net		524			478
Flight equipment spare parts, net		129			174
Prepaid expenses and other		582			447
Total current assets		3,912			3,982
Property and Equipment
Flight equipment, net		7,311			6,698
Other property and equipment, net		747			725
Total property and equipment		8,058			7,423
Flight Equipment Under Capital Leases, net		145			250
Other Assets
Intangible pension asset		750			750
International routes		634			634
Investments in affiliated companies		73			67
Other		878			1,048
Total other assets		2,335			2,499
Total Assets		$	14,450		$	14,154
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities
Air traffic liability		$	1,512		$	1,272
Accounts payable and other liabilities		2,237			2,274
Current maturities of long-term debt and capital lease obligations		594			733
Total current liabilities		4,343			4,279
Long-Term Debt		7,634			7,198
Long-Term Obligations Under Capital Leases		310			354
Deferred Credits and Other Liabilities
Pension and postretirement benefits		3,432			3,228
Deferred income taxes		149			146
Other		748			724
Total deferred credits and other liabilities		4,329			4,098
Preferred Redeemable Stock		256			236
Common Stockholders’ Equity (Deficit)
Common stock		1			1
Additional paid-in capital		1,464			1,460
Accumulated deficit		(1,549		)	(1,083		)
Accumulated other comprehensive income (loss)		(1,308		)	(1,340		)
Treasury stock		(1,030		)	(1,049		)
Total common stockholders’ equity (deficit)		(2,422		)	(2,011		)
Total Liabilities and Stockholders’ Equity (Deficit)		$	14,450		$	14,154

 

See accompanying notes.

 

4

 

Northwest Airlines Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Nine Months Ended September 30
(Unaudited, in millions)		2004			2003
Cash Flows from Operating Activities
Net loss		$	(436	)	$	(122	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gain on sale of investment in Worldspan L.P.		—			(199		)
Depreciation and amortization		504			448
Income tax expense (benefit)		—			(30		)
Net receipts (payments) of income taxes		(5		)	215
Pension and other postretirement benefit contributions less than expense		164			331
Changes in certain assets and liabilities		160			29
Other, net		26			3
Net cash provided by (used in) operating activities		413			675
Cash Flows from Investment Activities
Capital expenditures		(434		)	(831		)
Net increase (decrease) in short-term investments		8			(618		)
Proceeds from sale of investment in Worldspan L.P.		—			278
Other, net		11			36
Net cash provided by (used in) investing activities		(415		)	(1,135		)
Cash Flows from Financing Activities
Proceeds from long-term debt		462			885
Payments of long-term debt and capital lease obligations		(664		)	(246		)
Other, net		(9		)	(64		)
Net cash provided by (used in) financing activities		(211		)	575
Increase (Decrease) in Cash and Cash Equivalents		(213		)	115
Cash and cash equivalents at beginning of period		1,608			2,097
Cash and cash equivalents at end of period		$	1,395		$	2,212
Cash and cash equivalents and unrestricted short-term investments at end of period		$	2,541		$	2,804
Supplemental Cash Flow Information:
Interest paid		$	364		$	305
Investing and Financing Activities Not Affecting Cash:
Manufacturer financing of aircraft, aircraft predelivery deposits and other non-cash transactions		$	458		$	230

 

See accompanying notes.

 

5

 

Northwest Airlines Corporation

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Basis of Presentation

 

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 U.S. Generally Accepted Accounting Principles (“GAAP”) 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 included in the Company’s audited consolidated financial statements, which are provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.  The Company’s accounting and reporting policies are summarized in “Note 1 – Summary of Significant Accounting Policies” in the Annual Report on Form 10-K for 2003.

 

The Company maintains a Web site at http://www.nwa.com.  Information contained on the Company’s website is not incorporated into this Quarterly Report on Form 10-Q.  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 Securities and Exchange Commission.

 

In the opinion of management, the interim financial statements reflect adjustments, consisting of normal recurring accruals, unless otherwise noted, which are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated.  As noted in the Company’s Form 8-K filed with the SEC on January 28, 2004, regional carrier revenues and related Airline Service Agreement (“ASA”) payments previously reported as a net amount in passenger revenues are now reported separately in revenues and expenses for all periods presented.

 

The Company’s results of operations for interim periods are not necessarily indicative of the results for an entire year due to seasonal factors as well as competitive and general economic conditions.  The Company’s second and third quarter operating results have historically been more favorable due to increased leisure travel on domestic and international routes during the spring and summer months.

 

Note 2 – Recent Accounting Pronouncements

 

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was passed by Congress and signed into law on December 8, 2003.  The Act establishes a voluntary prescription drug benefit for eligible participants beginning January 1, 2006, at which time the U.S. Government will also begin to pay a special subsidy equal to 28% of a retiree’s covered prescription drug expenses between $250 and $5,000 (adjusted annually for changes in Medicare per capita prescription drug costs) to employers who sponsor equivalent plans.  In accordance with Financial Accounting Standards Board (“FASB”) Staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which is effective for interim periods beginning after June 15, 2004, the Company will not include the effects of the Act in any measures of liabilities and expenses reflected in the Consolidated Financial Statements and accompanying notes until year end 2004.  The Company estimates that the Act will not have a significant impact on postretirement liabilities and benefit costs.

 

In December 2003, the FASB revised Statement of Financial Accounting Standards (“SFAS”) No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits.  This revision requires the disclosure in interim reports of the amount of net periodic benefit cost recognized and the total amount of contributions paid and expected to be paid during the current fiscal year if significantly different from amounts previously disclosed.  The Company adopted the provisions of this revised statement as of December 31, 2003, and has included the required disclosures in “Note 11 – Pension and Other Postretirement Benefits”.

 

6

 

During the September 2004 meeting of the Emerging Issues Task Force (“EITF”), a consensus was reached on EITF Issue 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share.  EITF 04-8 requires companies to include certain convertible debt and equity instruments that were previously excluded into their calculations of diluted earnings per share.  The EITF concluded that Issue 04-8 will be effective for periods ending after December 15, 2004, and must be applied by restating all periods during which time the applicable convertible instruments were outstanding.  As further discussed in “Note 4 – Earnings (Loss) Per Share Data”, shares issuable upon conversion of the Company’s 6.625% and 7.625% senior convertible notes issued in 2003 will be included in the Company’s diluted earnings per share calculation in periods where the Company reported net income applicable to common shareholders.

 

Note 3 – Segment Information

 

The Company is managed as one cohesive business unit, for 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):

 

 

7

 

Note 4 – Earnings (Loss) Per Share Data

 

The following table sets forth the computation of basic and diluted earnings (loss) per common share:

 

		Three months ended September 30						Nine months ended September 30
		2004			2003			2004			2003
Numerator:
Net income (loss) (in millions)		$	(38	)	$	47		$	(436	)	$	(122	)
Preferred stock requirements (in millions)		(8		)	(5		)	(22		)	(5		)
Net income (loss) applicable to common shareholders (in millions)		$	(46	)	$	42		$	(458	)	$	(127	)
Denominator:
Weighted-average shares outstanding for basic earnings (loss) per share		86,523,146			85,842,569			86,327,275			85,834,496
Effect of dilutive securities:
Series C Preferred Stock		—			—			—			—
Shares held in non-qualified rabbi trusts		—			2,772			—			—
Employee stock options and restricted shares		—			439,835			—			—
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings (loss) per share		86,523,146			86,285,176			86,327,275			85,834,496
Basic and diluted earnings (loss) per common share:
Net income (loss) before preferred stock requirements		$	(0.45	)	$	0.54		$	(5.06	)	$	(1.43	)
Preferred stock requirements		(0.09		)	(0.05		)	(0.25		)	(0.05		)
Net income (loss) applicable to common shareholders		$	(0.54	)	$	0.49		$	(5.31	)	$	(1.48	)

 

For the three and nine months ended September 30, 2004, incremental shares related to dilutive securities of 440,840 and 610,002, respectively, and for the nine months ended September 30, 2003, incremental shares related to dilutive securities of 266,819, were not included in the diluted earnings per share calculation because the Company reported a net loss for those periods.  Incremental shares related to dilutive securities have an anti-dilutive impact on earnings per share when a net loss is reported and therefore are not included in the calculation.

 

Because of the Company’s election to settle the Series C Preferred Stock with cash rather than by the Company issuing additional common stock, 6,484,065 and 6,497,719 shares of Series C Preferred Stock are excluded from the effect of dilutive securities for the three and nine months ended September 30, 2004, respectively, and 6,549,328 and 6,555,677 shares of Series C Preferred Stock are excluded from the effect of dilutive securities for the three and nine months ended September 30, 2003, respectively.  See “Note 6-Redeemable Preferred and Common Stock”, in the Company’s December 31, 2003 Annual Report on Form 10-K for additional information regarding this security.

 

The dilutive securities described above do not include 1,574,850 employee stock options and restricted shares for the three months ended as of September 30, 2003, because the exercise prices of these options were greater than the average market price of the common stock for the period and the amount of assumed proceeds for these restricted shares did not result in incremental dilutive shares under the treasury method.  Total employee stock options and restricted shares outstanding of 6,465,001 as of September 30, 2004 and 6,878,833 as of September 30, 2003, respectively, were not included in diluted securities because the Company reported a net loss for the three and nine months ended September 30, 2004, and for the nine months ended September 30, 2003.  Additionally, 9.3 million shares issuable upon conversion of the Company’s 6.625% senior convertible notes issued in May 2003 were excluded from dilutive securities for the three and nine months ended September 30, 2004 and 2003, and 9.8 million shares issuable upon conversion of the Company’s 7.625% senior convertible notes issued in November 2003 were excluded from dilutive securities for the three and nine months ended September 30, 2004 because the contingent conversion features of the notes had not been met and because the Company presently intends to use cash for any redemptions of notes at the repurchase dates.  See “Note 3-Long-Term Debt and Short-Term Borrowings” in the Company’s December 31, 2003 Annual Report on Form 10-K for additional information regarding these securities.  Additionally, refer to “Note 2 – Recent Accounting Pronouncements” for further information regarding the consensus reached on EITF Issue 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share.

 

8

 

Note 5 – Comprehensive Income (Loss)

 

Comprehensive income (loss) consisted of the following (in millions):

 

		Three months ended September 30						Nine months ended September 30
		2004			2003			2004			2003
Net income (loss)		$	(38	)	$	47		$	(436	)	$	(122	)
Minimum pension liability adjustments		—			—			—			(156		)
Change in unrealized gain/loss on available-for-sale securities		2			1			(5		)	1
Change in deferred gain/loss from hedging activities		41			(26		)	38			(13		)
Foreign currency translation adjustments		—			(5		)	(1		)	(4		)
Comprehensive income (loss)		$	5		$	17		$	(404	)	$	(294	)

 

Note 6 – Stock-based Compensation

 

Effective January 1, 2003, the Company adopted the fair value method of recording stock-based employee compensation prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, and accounts for this change in accounting principle using the “prospective method” as described by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.

 

For the three and nine months ended September 30, 2004 and 2003, the pro forma results and per share amounts assuming the fair value based method had been applied to all outstanding option awards are materially the same as the reported amounts because a minimal number of outstanding options were granted prior to January 1, 2003.

 

Note 7 – Income Taxes

 

Under the provisions of SFAS No. 109, Accounting for Income Taxes, the realization of future tax benefits of a net deferred tax asset is dependent on future taxable income against which such tax benefits can be applied.  SFAS No. 109 requires that all available evidence be considered in the determination of whether sufficient future taxable income will exist.  Such evidence includes, but is not limited to, a company’s financial performance for the current and prior two years, the market environment in which a company operates, the utilization of past tax credits, and the length of relevant carryback and carryforward periods.  As a result of the Company’s cumulative losses over the past three fiscal years and the full utilization of its loss carryback potential, future pre-tax losses are not expected to be reduced by the recognition of associated tax benefits at least until a net deferred tax liability is generated or the Company achieves substantial profitability.

 

Note 8 – Long-term Debt

 

At September 30, 2004, maturities of long-term debt, excluding capital lease obligations, through December 31, 2008 are as follows (in millions):

 

 

(1)          These amounts include $79 million and $364 million of aircraft related loan obligations maturing in 2006 and 2007, respectively, that may be extended for an additional nine years from their respective maturity dates, at the Company’s election.

 

9

 

The amount shown in 2005 includes $962 million of principal outstanding under the Company’s secured credit facilities due on October 24, 2005.  As of October 24, 2004, the loan will mature within one year and as such, this amount will be recorded as a current liability in financial statements going forward.  These facilities currently bear interest at a variable rate equal to the one-month London Interbank Offered Rate (“ LIBOR”) plus 3.25% (5.16% as of October 20, 2004).  The credit agreement includes a covenant that requires the Company, beginning in the June quarter of this year, to maintain at least a one-to-one ratio of earnings (defined as operating income adjusted to exclude the effects of depreciation, amortization and aircraft rents and to include the effects of interest income) to fixed charges (comprising interest expense and aircraft rents).  If the Company fails to meet this fixed charges coverage ratio, repayment of borrowings under the credit facilities could be accelerated by the participant banks.  The Company met this requirement for the six months ending September 30, 2004.  The Company is currently in discussions with the banks to restructure the facilities well in advance of the maturity date.  Prior to a restructuring of the agreement, in view of fuel prices at historical highs and other factors, the banks have agreed to reset the fixed charges covenant to 0.8 for the nine and twelve months ending December 31, 2004 and March 31, 2005, respectively, and to waive the covenant entirely on those dates so long as the Company’s unrestricted cash remains above $1.7 billion.  As of September 30, 2004, the Company held unrestricted cash totaling $2.54 billion.

 

On January 26, 2004, Northwest completed an offering of $300 million of unsecured notes due 2009.  The notes have a coupon rate of 10%, payable semi-annually in cash on February 1 and August 1 of each year, beginning on August 1, 2004, and are not redeemable prior to maturity.  Each note was issued at a price of $962 per $1,000 principal amount, resulting in a yield to maturity of 11.0%.  Proceeds from the notes are used for working capital and general corporate purposes.  The notes are guaranteed by NWA Corp.

 

In March and April 2004, the Company repaid the remaining $333 million outstanding under two issues of unsecured notes, as scheduled, with a combined original face amount of $350 million.  On March 15, $138 million of 8.375% senior unsecured notes were repaid, net of $12 million previously exchanged for newly issued pass-through certificates in conjunction with an exchange offer in December 2003.  The 8.375% unsecured notes were originally issued in 1997.  Additionally, the Company repaid $195 million of 8.52% senior unsecured notes that matured on April 7, net of $5 million previously exchanged for newly issued pass-through certificates in conjunction with the same December 2003 exchange offer.  The 8.52% unsecured notes were originally issued in 1998.

 

10

 

Note 9 – Fleet Information and Commitments

 

The following table presents the number of aircraft in service and on firm order as of September 30, 2004:

 

Aircraft Type		Seating Capacity		Owned		Capital Lease		Operating Lease		Temporarily Not in Service		Total Aircraft in Service		Aircraft on Firm Order
Passenger Aircraft
Airbus:
A319		124		58		—		12		—		70		11
A320		148		43		4		31		—		78		2
A330-200		243		4		—		—		(1	)	3		8
A330-300		298		8		—		—		—		8		4
Boeing:
757-200		180-184		32		5		19		(5	)	51		—
757-300		224		16		—		—		—		16		—
747-200		353-430		2		—		5		(1	)	6		—
747-400		403		4		—		12		—		16		—
DC9		78-125		158		—		5		(9	)	154		—
DC10		273		14		—		8		—		22		—
				339		9		92		(16	)	424		25
Freighter Aircraft
Boeing 747-200F				7		—		5		—		12		—
Total Northwest Operated Aircraft				346		9		97		(16	)	436		25
Regional Aircraft
BAE AVRO RJ85		69		10		—		25		—		35		—
Bombardier CRJ-200/440		44-50		—		—		109		(2	)	107		20
SAAB 340		30-34		—		—		49		—		49		—
Total Airlink Operated Aircraft				10		—		183		(2	)	191		20
Total Aircraft				356		9		280		(18	)	627		45

 

Committed expenditures for the 45 aircraft and related equipment on firm order, including estimated amounts for contractual price escalations and predelivery deposits, will be approximately $352 million for the remainder of 2004, $740 million in 2005, $511 million in 2006, $205 million in 2007 and $189 million in 2008.  Consistent with prior practice, the Company intends to finance its aircraft deliveries through a combination of internally generated funds, debt and long-term lease financing.  Financing commitments available for use by the Company are in place for all of the aircraft on firm order and range from 80% - 100% of each aircraft’s purchase price.  The Company intends to finance all of the CRJ-200/440 aircraft on order through long-term operating lease financing commitments from the manufacturer.  These aircraft will, in turn, be subleased to and operated by Pinnacle Airlines, Inc. (“Pinnacle Airlines”).  The manufacturer has the right not to provide financing for future regional aircraft deliveries in the event the Company’s credit ratings fall below certain levels; however, if the manufacturer does not provide financing, the Company is not obligated to take delivery.  On July 28, 2004, Standard & Poor’s (“S&P”) downgraded the corporate credit rating of the Company from B+ to B, which triggered the manufacturer’s right not to provide financing for subsequent aircraft deliveries.  Since the downgrade, the manufacturer has continued to provide financing.

 

During the nine months ended September 30, 2004, the Company took delivery of seven Airbus aircraft and 33 Bombardier CRJ regional jet aircraft.  The Company subleased all of the Bombardier CRJ aircraft to Pinnacle Airlines pursuant to the Company’s Airline Services Agreement with Pinnacle Airlines.  In connection with the acquisition of these 40 aircraft, the Company entered into long-term debt arrangements and operating leases with various lenders and lessors.  The aggregate amount of debt incurred and minimum lease payments under such arrangements totaled $1.2 billion.

 

11

 

Note 10 – Aircraft Impairments

 

In June 2004, as part of a revised fleet plan, the Company determined that it does not currently intend to return to service 10 Boeing 747-200 passenger aircraft that had been temporarily removed from operations.  As a result, the Company recorded, as additional depreciation expense, impairment charges of $104 million associated with these aircraft and related inventory in the second quarter of 2004.

 

Note 11 – Pension and Other Postretirement Benefits

 

The Company has several noncontributory pension plans covering substantially all of its employees.  The benefits for these plans are based primarily on years of service and, in some cases, employee compensation.

 

The components of net periodic cost of defined benefit plans included the following (in millions):

 

 

 

On December 23, 2003, the Company applied to the Internal Revenue Service (“IRS”) to reschedule some of its plan year 2004 pension contributions, which included amounts due in both 2004 and 2005, for the contract and salaried employees’ pension plans.  Subsequently, on April 10, 2004, the President signed into law the Pension Funding Equity Act (the “Pension Act”), which temporarily reduces the Company’s required contributions through two mechanisms: (1) certain companies were permitted to elect partial relief from the deficit reduction contribution requirements that otherwise would have applied in 2004 and 2005, an election the Company made; and (2) the applicable discount rate used to determine funding was increased to reflect yields on indices of high quality corporate bonds instead of 30-year U.S. Treasury rates.  Following enactment of the Pension Act, the Company withdrew its request to the IRS to reschedule its plan year 2004 pension contributions.

 

Including the effect of the Pension Act, the Company’s 2004 calendar year cash contributions to qualified pension plans approximate $253 million.  On both April and July 15, 2004, the Company contributed $84 million to these plans.  Subsequently, on October 15, 2004, the Company contributed an additional $85 million, completing its funding obligations for the year.

 

12