The Impact of Stock Option Accounting on the Air Freight Sectors

May 31, 2002 SUMMARY

* The treatment of stock options in company reporting has come under fire.

* In light of this, recent proposed legislation (i.e.Senate Bill S-1940) seeks to effectively lower reported earnings through the inclusion of stock options as an expense item on company income statements.

* We reviewed 10K filings of airfreight companies to determine the potential negative impact a change in the accounting for stock options might have.

We can see that if stock options were included on the income statement as normal practice, 2001 earnings would have been 12.5% lower for the major integrators (Airborne, FedEx, and UPS). Similarly, 2000 and 1999 earnings would have been lower by 7.9% and 3.5%, respectively. One can visibly see that in the case of Airborne, its declining earnings from 1999 to 2001 contributed disproportionately more to an increased percentage of dilution in reported earnings. The absolute dilutive impact to earnings remained relatively steady over the period, in the $0.11 range, while ABF earnings plummeted from $1.85 in 1999 to a loss of ($0.40) in 2001. Thus, in 2001, the impact of dilution for this company increased to 30.0% of reported earnings.

We conclude that the integrators are somewhat more leveraged to potential changes in the accounting for stock options than the broader Industrials sector of the S&P 100, but note that Airborne is the clear outlier in the group. Taking into account just FedEx and UPS, the three-year average drops substantially, from 8.0% to only 2.9%.