10-Q 1 finalq101form10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A Commission File Number 1-12149 CONSOLIDATED FREIGHTWAYS CORPORATION Incorporated in the State of Delaware I.R.S. Employer Identification No. 77-0425334 16400 S.E. CF Way, Vancouver, WA 98683 Telephone Number (360) 448-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 X No Number of shares of Common Stock, $.01 par value, outstanding as of April 30, 2001: 21,835,288 CONSOLIDATED FREIGHTWAYS CORPORATION FORM 10-Q Quarter Ended March 31, 2001 ____________________________________________________________________________ ____________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 3 Statements of Consolidated Operations - Three Months Ended March 31, 2001 and 2000 5 Statements of Consolidated Cash Flows - Three Months Ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, December 31, 2001 2000 (Dollars in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 38,197 $ 46,523 Trade accounts receivable, net of allowances 324,964 327,919 Other receivables 50,594 14,978 Operating supplies, at lower of average cost or market 7,966 8,419 Prepaid expenses 50,092 41,286 Deferred income taxes 79,876 70,610 Total Current Assets 551,689 509,735 PROPERTY, PLANT AND EQUIPMENT, at cost Land 90,041 81,697 Buildings and improvements 356,319 350,137 Revenue equipment 515,412 518,086 Other equipment and leasehold improvements 153,286 149,123 1,115,058 1,099,043 Accumulated depreciation and amortization (749,150) (750,249) 365,908 348,794 OTHER ASSETS Deposits and other assets 74,681 68,153 74,681 68,153 TOTAL ASSETS $ 992,278 $ 926,682 The accompanying notes are an integral part of these statements. CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, December 31, 2001 2000 (Dollars in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 93,946 $ 97,741 Accrued liabilities 229,167 211,043 Accrued claims costs 84,952 86,674 Short-term borrowings 28,000 -- Total Current Liabilities 436,065 395,458 LONG-TERM LIABILITIES Long-term debt 15,100 15,100 Accrued claims costs 99,097 99,074 Employee benefits 120,234 120,317 Deferred income taxes 24,429 6,282 Other liabilities 48,659 38,267 Total Liabilities 743,584 674,498 SHAREHOLDERS' EQUITY Preferred stock, $.01 par value; authorized 5,000,000 shares; issued none -- -- Common stock, $.01 par value; authorized 50,000,000 shares; issued 23,133,848 shares 231 231 Additional paid-in capital 75,206 75,767 Accumulated other comprehensive loss (13,603) (11,293) Retained earnings 198,240 200,067 Treasury stock, at cost (1,298,812 and 1,436,712 shares, respectively) (11,380) (12,588) Total Shareholders' Equity 248,694 252,184 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 992,278 $ 926,682 The accompanying notes are an integral part of these statements. CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS (Dollars in thousands except per share amounts) Three Months Ended March 31, 2001 2000 REVENUES $ 574,578 $ 593,629 COSTS AND EXPENSES Salaries, wages and benefits 373,758 379,660 Operating expenses 103,133 115,815 Purchased transportation 52,988 49,125 Operating taxes and licenses 16,383 18,468 Claims and insurance 15,161 18,059 Depreciation 12,925 13,741 574,348 594,868 OPERATING INCOME (LOSS) 230 (1,239) OTHER INCOME (EXPENSE) Investment income 224 353 Interest expense (1,856) (1,087) Miscellaneous, net (649) (4,106) (2,281) (4,840) Loss before income tax benefits (2,051) (6,079) Income tax benefits (224) (3,100) NET LOSS $(1,827) $ (2,979) Basic average shares outstanding 21,818,691 21,350,812 Diluted average shares outstanding 21,818,691 (a) 21,350,812 Basic Loss per Share: $ (0.08) $ (0.14) Diluted Loss per Share: $ (0.08) $ (0.14) (a) Does not include 305,624 potentially dilutive securities because to do so would be anti-dilutive. The accompanying notes are an integral part of these statements. CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS Three Months Ended March 31, 2001 2000 (Dollars in thousands) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 46,523 $ 49,050 CASH FLOWS FROM OPERATING ACTIVITIES Net loss (1,827) (2,979) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 15,633 15,255 Increase (decrease) in deferred income taxes 8,881 (1,461) Gains from property disposals, net (19,475) (297) Issuance of common stock under stock and benefit plans 647 735 Changes in assets and liabilities: Receivables (11,661) 17,471 Prepaid expenses (8,806) (9,933) Accounts payable (3,795) (12,333) Accrued liabilities 18,124 18,202 Accrued claims costs (1,699) 878 Income taxes -- (3,481) Employee benefits (83) 1,080 Other 410 2,829 Net Cash Provided (Used) by Operating Activities (3,651) 25,966 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (34,183) (5,436) Software expenditures (585) (2,879) Proceeds from sales of property 2,093 981 Net Cash Used by Investing Activities (32,675) (7,334) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings 28,000 20,000 Net Cash Provided by Financing Activities 28,000 20,000 Increase (decrease) in Cash and Cash Equivalents (8,326) 38,632 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,197 $ 87,682 The accompanying notes are an integral part of these statements. CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying consolidated financial statements of Consolidated Freightways Corporation and subsidiaries (the Company) have been prepared by the Company, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements included in the Company's 2000 Annual Report to Shareholders. There were no significant changes in the Company's commitments and contingencies as previously described in the 2000 Annual Report to Shareholders and related annual report to the Securities and Exchange Commission on Form 10-K. 2. Segment and Geographic Information The Company primarily provides less-than-truckload transportation, air freight forwarding and supply chain management services throughout the United States and Canada, as well as in Mexico through a joint venture, and international freight services between the United States and more than 80 countries. The Company does not present segment disclosures because the air freight forwarding, supply chain management and international service offerings do not meet the quantitative thresholds of Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information." The following information sets forth revenues and property, plant and equipment by geographic location. Revenues are attributed to geographic location based upon the location of the customer. No one customer provides 10% or more of total revenues. Geographic Information (Dollars in thousands) Three Months Ended March 31, 2001 2000 Revenues United States $538,430 $557,903 Canada 36,148 35,726 Total $574,578 $593,629 Property, Plant and Equipment United States $331,064 $323,826 Canada 34,844 36,604 Total $365,908 $360,430 4. Comprehensive Loss Comprehensive loss for the three months ended March 31, 2001 and 2000 is as follows: (Dollars in thousands) Three Months Ended March 31, 2001 2000 Net Loss $(1,827) $(2,979) Other Comprehensive Loss: Foreign currency translation adjustments (2,310) (7) Comprehensive Loss $(4,137) $(2,986) 5. Credit Facility As of March 31, 2001, the Company had $28 million of short-term borrowings and $78 million of letters of credit outstanding under its existing $155 million credit facility. The Company was in compliance with all covenants of this facility as of March 31st. On April 27, 2001, the Company entered into a five-year, $200 million credit facility, securitized by accounts receivable, with a new lender. The new facility provides for working capital and letter of credit needs and is a replacement for the existing facility. Letters of credit are limited to $100 million. Borrowings will bear interest at either the commercial paper rate plus 75 basis points or LIBOR plus 75 basis points. Approximately $125 million will be used to repay borrowings and support letters of credit under the existing facility as well as to purchase 2,700 trucks and tractors under lease with the existing lender. The continued availability of funds under the new facility will require that the Company comply with certain financial convenants, the most restrictive of which requires the Company to maintain a minimum EBITDAL (earnings before interest, taxes, depreciation, amortization and lease expense). The Company expects to be in compliance with these covenants during 2001. 6.Recently Adopted Accounting Standards The Company adopted the provisions of Statement of Financial Accounting Standards No. 133 (SFAS 133). "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. SFAS 133 requires that an organization recognize all derivatives as either assets or liabilities on the balance sheet at fair value and establishes the timing of recognition of the gain/loss based upon the derivative's intended use. Adoption of this standard did not have an impact on the Company's financial position or results of operations. 7. Contingencies The Company and its subsidiaries are involved in various lawsuits incidental to their businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material adverse effect on the Company's financial position or results of operations. CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues for the quarter ended March 31, 2001 decreased 3.2% on a 5.1% decrease in tonnage levels. Tonnage decreased due to a continued general economic slowdown and severe winter weather conditions. Shipments decreased 4.8% and the weight per shipment decreased 0.3%. The tonnage decrease was partially offset by a 2.1% increase in revenue per hundredweight due to a rate increase and a fuel surcharge. Salaries, wages and benefits decreased 1.6% from the prior year due primarily to lower tonnage levels and management's efforts to reduce costs. However, the Company was impacted by contractual wage and benefit increases as well as decreases in pick-up and delivery and dock efficiencies, due in part to the severe winter weather. The prior year includes $4.3 million of severance pay due to an administrative reorganization. Operating expenses decreased 11% from the prior year due to $19.5 million of gains on sales of facilities. Excluding the gains, operating expenses increased 5.9%, despite lower tonnage levels. The increase was due to a 5.6% increase in the average fuel cost per gallon, increased lease expense on revenue equipment, increased repair and maintenance expense, and costs associated with the severe winter weather. The costs were partially offset by increased use of rail services. Purchased transportation increased 7.9% due to increased use of rail services. Rail miles as a percentage of inter-city miles increased to 26.3% from 22.8% in the prior year. Operating taxes and licenses decreased 11.3% due to lower tonnage levels and increased use of rail services. Claims and insurance decreased 16.0% due to improved claims experience and lower tonnage levels. The Company benefited from new process improvement programs directed at reducing freight damage and increasing vehicular safety. Depreciation decreased 5.9% due to a higher proportion of the fleet becoming fully depreciated. Operating income improved $1.5 million from the prior year with the operating ratio improving to 99.9% from 100.2%. Excluding the gains on sales of facilities, the operating loss was $19.3 million and the operating ratio was 103.4%. The Canadian operations contributed $2.8 million of operating income in both the current and prior year periods. Other expense, net, decreased $2.6 million to $2.3 million. The decrease is due to the fact that the prior year included a $4.0 million charge for settlement of a tax sharing liability with the former parent. The decrease was partially offset by increased interest expense due to higher average short-term borrowings and interest expense on a tax obligation payable to the former parent. The Company's effective income tax rates differ from the statutory federal rate due primarily to foreign and state taxes and non-deductible items. The Company began to see the benefits of its systematic process improvement programs during the quarter. These programs are aimed at increasing pick-up and delivery and dock efficiencies, increasing load factor and reducing claims expense. The Company experienced significantly fewer claims compared with the prior year and month over month improvement in load factor during the quarter. Additionally, despite a year over year decrease in pick-up and delivery and dock efficiencies, the Company experienced month over month improvement during the quarter. The Company will continue to aggressively pursue further cost efficiencies in these areas as well as in the general and administrative areas to improve margins. The Company expects to return to profitability in the second half of 2001, subject to any further declining general economic trends. As discussed in the Company's Annual Report on Form 10-K, the Company has various stock incentive plans under which restricted stock has been granted. There are approximately 950,000 restricted shares that had not achieved the pre-determined increases in stock price required for vesting as of March 31st. Compensation expense will be recognized for those shares once the stock price meets the required levels. Of the 950,000 shares, 843,000 will be forfeited if the stock price does not meet the required levels by December 2, 2001. The remaining shares must meet the required stock prices by May 12, 2002. The Company continues to experience increased fuel costs per gallon. The Company's rules tariff implements a fuel surcharge when the average cost per gallon of on-highway diesel fuel exceeds $1.10, as determined from the Energy Information Administration of the Department of Energy's publication of weekly retail on-highway diesel prices. The Company currently has a fuel surcharge in effect. However, there can be no assurance that the Company will be able maintain this surcharge or successfully implement such surcharges in response to increased fuel costs in the future. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, the Company had $38.2 million in cash and cash equivalents. Net cash used by operating activities of $3.7 million compares with $26.0 million provided by operating activities for the same period last year. The decrease was due primarily to increased operating losses. Management expects that existing cash balances, cash flow from operations and available borrowings under the Company's new credit facility will be sufficient for working capital requirements in 2001. Net cash used by investing activities of $32.7 million compares with $7.3 million in the same period last year. The increase reflects the purchases of strategic terminal properties in Brooklyn, NY, Laredo, TX, and Phoenix, AZ. Management expects capital and software expenditures to be approximately $93 million for the remainder of the year, primarily for upgrades to terminal properties, the purchase of the Company's new headquarters and administrative facility, the purchase of revenue equipment and technology enhancements. It is anticipated that those expenditures will be funded with existing cash balances, cash flow from operations and financing arrangements. The Company sold its administrative facility in Portland, OR during the quarter. Consideration received was in the form of a $21 million note receivable, bearing interest at 6.45% per annum, due on or before September 25, 2001. The proceeds from the note will be used to purchase the Company's new Vancouver, WA headquarters and administrative facility. Net cash provided by financing activities of $28 million reflects net short-term borrowings under the Company's credit facility. This compares with $20 million in the same period last year. The Company anticipates settling a $20 million tax obligation payable to its former parent, originally due in May 2004, in the second quarter, using its new credit facility. As discussed in Footnote 5 above, the Company had $28 million of short-term borrowings and $78 million of letters of credit outstanding under its existing $155 million credit facility as of March 31st. The Company was in compliance with all covenants of this facility as of March 31st. On April 27, 2001, the Company entered into a five-year, $200 million credit facility, securitized by accounts receivable, with a new lender. The new facility provides for working capital and letter of credit needs and is a replacement for the existing facility. Letters of credit are limited to $100 million. Borrowings will bear interest at either the commercial paper rate plus 75 basis points or LIBOR plus 75 basis points. Approximately $125 million will be used to repay borrowings and support letters of credit under the existing facility as well as to purchase 2,700 trucks and tractors under lease with the existing lender. The continued availability of funds under the new facility will require that the Company comply with certain financial convenants, the most restrictive of which requires the Company to maintain a minimum EBITDAL (earnings before interest, taxes, depreciation, amortization and lease expense). The Company expects to be in compliance with these covenants during 2001. OTHER Certain statements included or incorporated by reference herein constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties. Any such forward-looking statements included or incorporated by reference herein should not be relied upon as predictions of future events. Certain such forward- looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates," or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. In that regard, the following factors, among others, and in addition to matters discussed elsewhere herein and in documents incorporated by reference herein, could cause actual results and other matters to differ materially from those in such forward-looking statements: general economic conditions; general business conditions of customers served and other shifts in market demand; increases in domestic and international competition; pricing pressures, rate levels and capacity in the motor-freight industry; future operating costs such as employee wages and benefits, fuel prices and workers compensation and self-insurance claims; shortages of drivers; weather; environmental and tax matters; changes in governmental regulation; technology costs; legal claims; timing and amount of capital expenditures; and successful execution of operating plans, customer service initiatives, marketing plans, process and operational improvements and cost reduction efforts. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risks related to changes in interest rates and foreign currency exchange rates, primarily the Canadian dollar and Mexican peso. Management believes that the impact on the Company's financial position, results of operations and cash flows from fluctuations in interest rates and foreign currency exchange rates would not be material. Consequently, management does not currently use derivative instruments to manage these risks; however, it may do so in the future. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings As previously disclosed, the Company has received notices from the Environmental Protection Agency (EPA) and others that it has been identified as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) or other Federal and state environmental statutes at various Superfund sites. Under CERCLA, PRP's are jointly and severally liable for all site remediation and expenses. Based upon the advice of local environmental attorneys and cost studies performed by environmental engineers hired by the EPA (or other Federal or state agencies), the Company believes its obligations with respect to such sites would not have a material adverse effect on its financial position or results of operations. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended March 31, 2001 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company (Registrant) has duly caused this Form 10-Q Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. Consolidated Freightways Corporation (Registrant) May 14, 2001 /s/Robert E. Wrightson Robert E. Wrightson Executive Vice President and Chief Financial Officer May 14, 2001 /s/James R. Tener James R. Tener Vice President and Controller