-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AsyqEYur7o/8RiZtBcVOLnyfl1/Rkrpr0+gPJmbLufE9y1GZlfX8RfFZ/m02++lC i0U8GuLV5dUU9G3L4qvzqQ== 0000023675-97-000022.txt : 19971114 0000023675-97-000022.hdr.sgml : 19971114 ACCESSION NUMBER: 0000023675-97-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF TRANSPORTATION INC CENTRAL INDEX KEY: 0000023675 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 941444798 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05046 FILM NUMBER: 97713414 BUSINESS ADDRESS: STREET 1: 3240 HILLVIEW AVE CITY: PALO A LTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154942900 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED FREIGHTWAYS INC DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q PAGE 1 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 September 30, 1997 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 1-5046 CNF TRANSPORTATION INC. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 3240 Hillview Avenue, Palo Alto, California 94304 Telephone Number (415) 494-2900 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 and (2) has been subject to such filing requirements for the past 90 days. Yes xx No Number of shares of Common Stock, $.625 par value, outstanding as of October 31, 1997: 46,823,451 PAGE 2 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended September 30, 1997 ___________________________________________________________________________ ___________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 3 Statements of Consolidated Income - Three and Nine Months Ended September 30, 1997 and 1996 5 Statements of Consolidated Cash Flows - Nine Months Ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 PAGE 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) September 30, December 31, 1997 1996 ASSETS CURRENT ASSETS Cash and cash equivalents $ 163,885 $ 82,094 Trade accounts receivable, net of allowances 653,181 542,381 Other accounts receivable 26,182 49,278 Operating supplies, at lower of average cost or market 36,462 32,916 Prepaid expenses 40,566 31,249 Deferred income taxes 80,480 77,977 Total Current Assets 1,000,756 815,895 PROPERTY, PLANT AND EQUIPMENT, net Land 107,848 104,314 Buildings and improvements 287,305 265,655 Revenue equipment 648,263 586,720 Other equipment and leasehold improvements 353,495 302,679 1,396,911 1,259,368 Accumulated depreciation and amortization (587,891) (506,719) 809,020 752,649 OTHER ASSETS Restricted funds 13,444 12,685 Deposits and other assets 109,658 95,144 Unamortized aircraft maintenance, net 123,289 119,927 Costs in excess of net assets of businesses acquired, net of accumulated amortization 278,807 285,566 525,198 513,322 TOTAL ASSETS $2,334,974 $2,081,866 The accompanying notes are an integral part of these statements. PAGE 4 CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) September 30, December 31, 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 259,997 $ 210,902 Accrued liabilities 429,043 349,497 Accrued claims costs 98,533 87,340 Current maturities of long-term debt and capital leases 4,895 3,185 Short-term borrowings - 155,000 Federal and other income taxes 32,156 9,162 Total Current Liabilities 824,624 815,086 LONG-TERM LIABILITIES Long-term debt and guarantees 362,670 366,305 Long-term obligations under capital leases 110,838 110,896 Accrued claims costs 55,599 57,912 Employee benefits 134,182 115,470 Other liabilities and deferred credits 67,569 75,479 Deferred income taxes 45,097 32,439 Total Liabilities 1,600,579 1,573,587 Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary, CNF Trust I,Holding Solely Convertible Debentures of CNF Transportation Inc. (Note 3) 125,000 - SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized 5,000,000 shares: Series B, 8.5% cumulative, convertible, $.01 stated value; designated 1,100,000 shares;issued 867,041 and 875,191 shares, respectively 9 9 Additional paid-in capital, preferred stock 131,868 133,108 Deferred TASP compensation (103,478) (108,655) Total Preferred Shareholders' Equity 28,399 24,462 Common stock, $.625 par value; authorized 100,000,000 shares; issued 53,742,691 and 51,595,827 shares, respectively 33,589 32,247 Additional paid-in capital, common stock 276,591 242,879 Cumulative translation adjustment (4,804) 3,279 Retained earnings 450,676 378,744 Cost of repurchased common stock (6,984,622 and 7,029,917 shares, respectively) (172,215) (173,332) Deferred compensation (2,841) - Total Common Shareholders' Equity 580,996 483,817 Total Shareholders' Equity 609,395 508,279 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,334,974 $2,081,866 The accompanying notes are an integral part of these statements. PAGE 5 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED INCOME (Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 REVENUES Con-Way Transportation Services $ 387,975 $ 331,090 $ 1,087,838 $ 949,584 Emery Worldwide 599,830 497,860 1,627,332 1,420,788 Other 139,557 106,840 357,383 307,627 1,127,362 935,790 3,072,553 2,677,999 COSTS AND EXPENSES Con-Way Transportation Services Operating Expenses 275,631 245,261 786,849 708,746 Selling and Administrative Expenses 54,347 43,056 143,946 123,775 Depreciation 16,838 13,588 47,326 37,489 346,816 301,905 978,121 870,010 Emery Worldwide Operating Expenses 462,476 399,529 1,280,757 1,148,930 Selling and Administrative Expenses 90,938 68,788 241,111 196,810 Depreciation 10,197 8,013 28,637 23,368 563,611 476,330 1,550,505 1,369,108 Other Operating Expenses 125,873 95,336 318,545 275,323 Selling and Administrative Expenses 7,622 7,236 22,020 19,535 Depreciation 1,593 567 4,281 1,736 135,088 103,139 344,846 296,594 1,045,515 881,374 2,873,472 2,535,712 OPERATING INCOME Con-Way Transportation Services 41,159 29,185 109,717 79,574 Emery Worldwide 36,219 21,530 76,827 51,680 Other 4,469 3,701 12,537 11,033 81,847 54,416 199,081 142,287 OTHER INCOME (EXPENSE) Investment Income 516 - 640 52 Interest Expense (8,815) (9,943) (29,882) (29,498) Dividend requirement on preferred securities of subsidiary trust (Note 3) (1,561) - (1,908) - Miscellaneous, net 756 (2,408) 11 (3,770) (9,104) (12,351) (31,139) (33,216) Income from Continuing Operations before Income Taxes 72,743 42,065 167,942 109,071 Income Taxes 33,098 18,766 76,364 48,391 NET INCOME FROM CONTINUING OPERATIONS 39,645 23,299 91,578 60,680 Loss from Discontinued Operations net of Income Tax Benefits - (3,445) - (26,890) Net Income 39,645 19,854 91,578 33,790 Preferred Dividends 1,951 2,141 5,861 6,458 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 37,694 $ 17,713 $ 85,717 $ 27,332 Primary Average Shares Outstanding (Note 2) 51,208,607 44,659,341 48,442,376 44,846,589 Earnings (Loss) Per Share (Note 2) Primary Continuing Operations $ 0.75 $ 0.47 $ 1.79 $ 1.21 Discontinued Operations - (0.07) - (0.60) $ 0.75 $ 0.40 $ 1.79 $ 0.61 Fully Diluted Continuing Operations $ 0.70 $ 0.44 $ 1.65 $ 1.13 Discontinued Operations - (0.07) - (0.54) $ 0.70 $ 0.37 $ 1.65 $ 0.59 The accompanying notes are an integral part of these statements.
PAGE 6 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands) Nine Months Ended September 30, 1997 1996 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 82,094 $ 59,787 CASH FLOWS FROM OPERATING ACTIVITIES Net income 91,578 33,790 Adjustments to reconcile income to net cash provided by operating activities: Loss from discontinued operations - 26,890 Depreciation and amortization 88,748 69,188 Increase (decrease) in deferred income taxes 10,155 (3,110) Gains from property disposals, net (456) (1,296) Changes in assets and liabilities: Receivables (87,704) (17,180) Prepaid expenses (9,317) (2,734) Accounts payable 49,095 22,201 Accrued liabilities 79,546 33,258 Accrued claims costs 8,880 5,095 Federal and other income taxes 22,994 371 Employee benefits 18,712 (8,341) Deferred charges and credits and other (31,859) (22,564) Net Cash Provided by Operating Activities 240,372 135,568 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (136,183) (142,145) Proceeds from sales of property 3,372 5,110 Net Cash Used by Investing Activities (132,811) (137,035) CASH FLOWS FROM FINANCING ACTIVITIES Net payments of long-term debt and capital lease obligations (1,983) (2,376) Net borrowings (payments) under revolving lines of credit (155,000) 100,000 Proceeds from issuance of subsidiary preferred securities 125,000 - Costs of issuance of subsidiary preferred securities (3,569) - Proceeds from exercises of stock options 32,025 948 Payments of common dividends (13,777) (13,199) Payments of preferred dividends (8,466) (9,229) Net Cash Provided (Used) by Financing Activities (25,770) 76,144 Net Cash Provided by Continuing Operations 81,791 74,677 Net Cash Used by Discontinued Operations - (52,880) Increase in Cash and Cash Equivalents 81,791 21,797 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 163,885 $ 81,584 The accompanying notes are an integral part of these statements. PAGE 7 CNF TRANSPORTATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying consolidated financial statements of CNF Transportation Inc. 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 generally accepted accounting principles 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 1996 Annual Report to Shareholders. There have been no significant changes in the accounting policies of the Company. There were no significant changes in the Company's commitments and contingencies as previously described in the 1996 Annual Report to Shareholders and related annual report to the Securities and Exchange Commission Form 10-K except as indicated in Note 4. Operating results for 1996 have been restated to exclude the results of Consolidated Freightways Corporation, the Company's former long-haul, less-than-truckload carrier which was spun-off to shareholders on December 2, 1996, and is reported as discontinued operations in the prior year. 2. Earnings Per Share Primary earnings per share (EPS) is based upon the weighted average number of common shares outstanding during each period after consideration of the dilutive effect of common stock equivalents. For all periods presented, common stock equivalents include stock options. For the three and nine months ended September 30, 1997, Primary EPS also includes the dilutive effect of restricted stock issued to officers and directors and convertible preferred securities of a subsidiary trust (TECONS) issued in June 1997. See Note 3 "Term Convertible Securities (TECONS)". Fully diluted EPS is similarly computed, but includes the dilutive effect of the Company's Thrift and Stock Plan (TASP) shares. See Exhibit 11 "Computation of Per Share Earnings". In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). The statement replaces Primary EPS with Basic EPS. Basic EPS is computed by dividing reported earnings available to common shareholders by the weighted average shares outstanding; no dilution for any potentially dilutive securities is included. In addition, Diluted EPS under the new statement is calculated differently than the Fully Diluted EPS calculation under existing authoritative guidance. When applying the treasury stock method for Diluted EPS to compute dilution for options, SFAS 128 requires use of the average share price for the period, rather than the greater of the average share price or end-of-period share price required by APB Opinion 15. Adoption of SFAS 128 is required in financial statements issued after December 15, 1997. Although early application is prohibited, prior periods will be restated. PAGE 8 Had this statement been adopted January 1, 1997, Basic EPS and Diluted EPS from continuing operations for the three and nine-month periods ended September 30, 1997 and September 30, 1996 would have been as follows: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Basic EPS $0.81 $0.48 $1.87 $1.23 Diluted EPS 0.70 0.44 1.67 1.13 3. Term Convertible Securities (TECONS) On June 11, 1997, CNF Trust I, a Delaware business trust wholly owned by the Company (the Trust), issued 2,500,000 of its $2.50 Term Convertible Securities, Series A (TECONS) to the public for gross proceeds of $125 million. The combined proceeds from the issuance of the TECONS and the issuance to the Company of the common securities of the Trust were invested by the Trust in $128.9 million aggregate principal amount of 5% convertible subordinated debentures due June 1, 2012 (the Debentures) issued by the Company. The Debentures are the sole assets of the Trust. Holders of the TECONS are entitled to receive cumulative cash distributions at an annual rate of $2.50 per TECONS (equivalent to a rate of 5% per annum of the stated liquidation amount of $50 per TECONS). The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TECONS, to the extent the Trust has funds available therefor and subject to certain other limitations (the "Guarantee"). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Declaration of Trust of the Trust (including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust (other than with respect to the TECONS and the common securities of the Trust)), provide a full and unconditional guarantee of amounts due on the TECONS. The Debentures are redeemable for cash, at the option of the Company, in whole or in part, on or after June 1, 2000 at a price equal to 103.125% of the principal amount, declining annually to par if redeemed on or after June 1, 2005, plus accrued and unpaid interest. In certain circumstances relating to federal income tax matters, the Debentures may be redeemed by the Company at 100% of the principal plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of TECONS will be redeemed. The TECONS do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 1, 2012, or upon earlier redemption. Each TECONS is convertible at any time prior to the close of business on June 1, 2012 at the option of the holder into shares of the Company's common stock at a conversion rate of 1.25 shares of the Company's common stock for each TECONS, subject to adjustment in certain circumstances. 4. Contingencies The Internal Revenue Service (IRS) has proposed adjustments that would require that Emery Air Freight Corporation (EAFC), a subsidiary of the Company, pay substantial additional aviation excise taxes for the period from January 1, 1990 through September 30, 1995. The Company has filed PAGE 9 protests contesting these proposed adjustments and is engaged in discussions with the administrative conference division (Appeals Office) of the IRS. The Company believes that there is legal authority to support the manner in which it has calculated and paid the aviation excise taxes and, accordingly, the Company intends to continue to vigorously challenge the proposed adjustments. Nevertheless, the Company is unable to predict the ultimate outcome of this matter. As a result, there can be no assurance that the Company will not have to pay a substantial amount of additional aviation excise taxes for the 1990 through 1995 tax period. In addition, it is possible that the IRS may seek to increase the amount of the aviation excise tax payable by EAFC for periods subsequent to September 30, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Statements". The IRS has also proposed a substantial adjustment for tax years 1987 through 1990 based on the IRS' position that certain aircraft maintenance costs should have been capitalized rather than expensed for federal income tax purposes. In addition, the Company believes it is likely that the IRS will propose an additional adjustment, based on the same IRS position with respect to aircraft maintenance costs, for subsequent tax years. The Company believes that its practice of expensing these types of maintenance costs is consistent with industry practice. However, if this issue is determined adversely to the Company, there can be no assurance that the Company will not have to pay substantial additional tax. The Company is unable to predict the ultimate outcome of this matter and intends to vigorously contest the proposed adjustment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward- Looking Statements". The Company and its subsidiaries are defendants in various other lawsuits incidental to their businesses. It is the opinion of management that the ultimate outcome of these incidental lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating results for 1996 have been restated to exclude the results of Consolidated Freightways Corporation, the Company's former long-haul, less-than-truckload carrier which was spun-off to shareholders on December 2, 1996, and is reported as discontinued operations in the prior year. GENERAL The Company's total revenues increased 20.5% for the third quarter of 1997 and 14.7% for the first nine months of 1997 compared to the third quarter and first nine months of the prior year. Total revenues for both periods were record levels driven by significant revenue increases at all three reported segments. Factors contributing to the improved revenues included strong economic conditions, reduced capacity and more stable pricing within the industry, continued success of marketing strategies, and additional revenues from the two-week work stoppage at United Parcel Service of America (UPS) in August 1997. Operating income, also a record for both the third quarter and first nine months of 1997, increased 50.4% and 39.9%, respectively, over the third quarter and first nine months of the prior year. The record revenues contributed to operating income improvements at all three segments for both PAGE 10 the quarterly and year-to-date periods. Operating income improvements were also attributable to a more stable pricing environment, efforts to improve profitability of the service mix within the reported segments and incentive programs rewarding profitability. In the first nine months of the prior year, operating results for Con-Way Transportation Service (CTS) and Emery Worldwide (Emery) included the adverse effects of severe winter storms in the first quarter of 1996 and higher unrecovered fuel costs. Other expense for the third quarter decreased 26.3% compared with the same quarter of last year while other expense for the first nine months of 1997 decreased 6.3% from the same period last year. The net decrease in other expense for the quarter was primarily due to lower interest expense on short-term borrowings, which were fully repaid in the third quarter of 1997. This repayment resulted primarily from the application of a portion of the net proceeds from the offering of 2,500,000, $2.50 Term Convertible Securities, Series A (TECONS) issued by a subsidiary trust in June 1997 to temporarily reduce borrowings under the Company's revolving credit facility, pending application of such net proceeds to pay costs associated with the USPS contract discussed below. Partially offsetting the lower interest expense were dividend payments on the TECONS. The decrease in other expense for the third quarter and first nine months of 1997 was due in part to lower net miscellaneous expense, which includes bank fees and losses on sales of non-operating assets. The effective income tax rate was 45.5% for both the third quarter of 1997 and the first nine months of 1997. The increase from 44.6% in the prior year's third quarter and 44.4% in the first nine months of the prior year was partially due to higher tax rates on increased foreign source income. Net income available to common shareholders for the third quarter of 1997 was 112.8% above the third quarter of 1996 and, for the first nine months of 1997, increased 213.6% from the first nine months of 1996. When compared to the same periods of the prior year, the increased income in 1997 was the result of higher operating income, lower other expense and the absence of losses from discontinued operations. Con-Way Transportation Services Con-Way Transportation Services' (CTS) 1997 third quarter revenues, a record for any quarter, were 17.2% above the third quarter of 1996 and nine- month revenues increased 14.6% from the same period last year. The increase in revenues was attributed primarily to higher tonnage levels and increased revenue per hundred-weight. Tonnage for the regional carriers in the third quarter and first nine months of 1997 increased 8.5% and 8.4%, respectively, when compared to the same periods in 1996. Less-than- truckload (LTL) tonnage increased 9.2% from the third quarter of 1996 to the third quarter of 1997 and 9.1% from the first nine months of 1996 to the first nine months of 1997. The tonnage increases were primarily the result of a strong economy, increased business from expanded markets, and a small level of incremental revenues attributed to the UPS strike. Successful marketing of premium services also contributed to higher revenue per hundred-weight. CTS's operating income for the third quarter of 1997 increased 41.0% to a record $41.2 million compared with the third quarter of 1996. Operating income for the first nine months of 1997 increased 37.9% from the first nine months of 1996. Operating margins improved for both the quarter and the nine months ended September 30, 1997. The operating income improvements were achieved primarily from revenue increases, higher revenue per hundred-weight, efforts to improve profitability of the service mix, greater operating efficiencies from increased utilization of PAGE 11 infrastructure, and a small amount of incremental income attributed to the UPS strike. Changes in the service mix and increased revenue per hundred- weight, both factors contributing to higher operating margins, were most affected by a higher proportion of LTL tonnage and efforts to market premium services. Operating income in the first nine months of the prior year was adversely affected by severe winter weather, in the first quarter of 1996, and by higher unrecovered fuel costs. CTS's management will continue with strategies intended to nurture the business with a focus toward operating margin improvement. Emphasis will be placed on optimizing the mix of premium transportation services, replacing or repricing low margin business, increasing the utilization of existing freight infrastructure, and maintaining stringent cost controls. Emery Worldwide Emery's revenues for the third quarter and first nine months of 1997 were 20.5% and 14.5% higher, respectively, than the third quarter and first nine months of 1996. The increased revenues were due primarily to both international and domestic tonnage increases, some rate improvements and incremental revenues attributed to the UPS work stoppage. Compared to the third quarter of 1996, domestic and international tonnage from commercial business in the third quarter of 1997 increased 13.7% and 19.2%, respectively. For the first nine months of 1997, domestic and international tonnage from commercial business increased 9.9% and 11.6%, respectively, compared to the first nine months of 1996. Emery's third quarter 1997 operating income was 68.2% above the third quarter of 1996 and nine-month 1997 operating income increased 48.7% compared to the same period in 1996. Operating income for the third quarter of 1997 was positively affected by increased revenues, an increase in the proportion of higher margin services, greater use of zone-based pricing, and incremental income attributed to the UPS strike. Partially offsetting the improvements in the first nine months of 1997 were the strikes in the automotive industry and a U.S. air cargo excise tax that was absent most of 1996. Operating income in the first nine months of the prior year was adversely affected by severe winter weather, in the first quarter of 1996, and by higher unrecovered fuel costs. Emery's management strategies continue to be directed toward the improvement of operating margins. Among the strategies to improve margins are increased use of zone-based pricing, enhancement of the service mix, technology enhancements, increased use of owned and dedicated international agent locations and continued emphasis on operating efficiencies to reduce costs. Efforts to improve operating efficiency and capacity include a redesign and upgrade of the freight sortation center located at the Dayton International Airport in Ohio (the Hub), which is estimated to be completed in the year 2000 at a cost of approximately $56 million. This redesign and upgrade, when completed, is expected to increase sortation capacity at the Hub by more than 30%. In addition, the Company is seeking to improve operating efficiency and capacity with the recent openings of new international distribution centers in Miami and Singapore. The Miami center will house Emery's Latin American headquarters and will function as a regional distribution center for Central and South America. The regional distribution center in Singapore will serve the Asia-Pacific region. On July 2, 1997, Emery's pilots at the Hub voted to approve representation by the Airline Pilots Association. Contract negotiations are expected to begin prior to July 1998. The Company is unable to predict the outcome of these contract negotiations or their effect on its results of operations. PAGE 12 On April 23, 1997, Emery Worldwide Airlines (EWA), a subsidiary of the Company, was awarded a new contract with the U.S. Postal Service (USPS) to provide Priority Mail sortation and transportation. The USPS has indicated that the Company could receive revenues of approximately $1.7 billion over the initial 58 month term of the contract. However, the foregoing amount is subject to a number of uncertainties and assumptions (including assumptions regarding Priority Mail volumes to be handled under the contract and a projected growth rate for that volume over the life of the contract, and further assumes that the Company meets the performance standards established by the contract), and there can be no assurance that the revenues realized by the Company will not be less than this amount. In that regard, the contract does not specifically set forth a minimum volume of Priority Mail to be handled by the Company. The initial term of the contract ends in February 2002, although the contract may be renewed by the USPS for two successive three-year terms. The USPS contract establishes fixed prices per piece, subject to adjustments based on volume and percentage of on-time and accurate handling and for increases in certain wage costs, and provides for EWA to be reimbursed for fuel costs. In addition, the contract contains a number of specific service standards that the Company is required to meet (including a benchmark of 96.5% on-time and accurate handling by the Company) and provides for financial disincentives, which could be substantial, if the Company fails to meet those standards. As a result, the effect of the contract on the Company's results of operations will depend largely on its ability to control costs of performance under the contract and to meet the performance standards under the contract. The USPS contract calls for the Company to obtain, equip and fully staff ten Priority Mail processing centers in major metropolitan areas along the eastern seaboard. The contract calls for five of the processing centers to be fully operational by November 15, 1997, and for the remaining five to be fully operational by late February 1998. The Company has established the first five processing centers within the prescribed time frame. The contract also provides for the Company to pay liquidated damages if the remaining centers are not operational on time. The Company has budgeted approximately $102 million for capital expenditures associated with the new contract plus approximately $17 million for other associated costs. The contract may be terminated by the USPS for failure by the Company to perform its obligations thereunder and, as is common in government contracts, may be terminated by the USPS "for convenience" (i.e., without fault on the part of EWA), although the USPS would be required, following termination for convenience, to reimburse the Company for certain expenditures associated with the contract. Other Operations The Other segment, consisting primarily of Menlo Logistics' (Menlo) operating results, also includes the operating results of Road Systems and VantageParts. The segment reported a revenue increase of 30.6% for the third quarter of 1997 over the third quarter of 1996. Nine-month revenues were 16.2% above the same period last year. Menlo's revenues for the third quarter of 1997 increased approximately 35% over the third quarter of the prior year and Menlo's nine-month revenues increased 20.8% over the same period in 1996. The higher revenues for Menlo were again partially offset by lower revenues from Road Systems due to lower trailer sales. A majority of revenues for Road Systems and a portion of revenues for VantageParts are generated by intercompany sales and are therefore eliminated in consolidation. The segment's operating income for the third quarter and first nine months of 1997 increased 20.8% and 13.6%, respectively, over the same PAGE 13 periods of 1996. Increased operating income from Menlo was partially offset by lower income from Road Systems. Menlo's operating income for the third quarter and first nine months of 1997 increased approximately 50% and 30% over the respective periods in 1996 as its service mix continued to shift to higher margin dedicated logistics management services from the lower margin, but higher revenue generating, transportation management services. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1997, the Company's cash and cash equivalents increased $81.8 million to $163.9 million. Cash was provided primarily by cash flow from operations of $240.4 million, net proceeds of $121.4 million from issuance of the TECONS and $32 million from the proceeds of exercised stock options. Cash provided by these activities was offset primarily by capital expenditures of $136.2 million and net debt repayments of $157.0 million. Cash flow from operations of $240.4 million for the first nine months of 1997 increased $104.8 million over the first nine months of 1996. The increase was primarily due to higher net income and depreciation and amortization in the current year. Increases in receivables, accounts payable and accrued liabilities for the nine months ended September 30, 1997 were consistent with the increase in 1997 business volumes. The combined change in these working capital accounts provided operating cash flow of $40.9 million for the first nine months of 1997 and was consistent with the $38.3 million provided by the net change in these accounts in the prior year. Compared to 1996, increases in deferred and accrued income taxes and employee benefits in 1997 also contributed to cash flow provided by operations. Capital expenditures of $136.2 million for the first nine months of 1997 decreased $6.0 million compared to the same period in 1996. Of the capital expenditures in the first nine months of 1997, $18 million related to the new USPS contract. The Company expects capital expenditures of approximately $115 million in the fourth quarter including approximately $70 million related to the new USPS contract. The remaining capital expenditures of the original $102 million estimated capital expenditures for the USPS contract are expected to occur in the first quarter of 1998. The Company intends to fund the capital expenditure requirements for the remainder of 1997 with available cash, cash from operations, and borrowings under unsecured credit facilities. Proceeds from the exercise of stock options in the first nine months of 1997 provided $32.0 million compared with less than $1 million in the first nine months of 1996. Payments of preferred and common dividends were $22.2 million and $22.4 million for the nine months ended September 30, 1997 and 1996, respectively. During the first nine months of 1997, the Company reduced debt by $157.0 million including full repayment of $155.0 million borrowed under unsecured lines of credit. In the first nine months of the prior year, borrowings under the unsecured lines of credit increased $100 million. The net debt repayments in the first nine months of 1997 were funded primarily from operating cash flow and net proceeds of $121.4 million from the issuance of the TECONS, which were applied to temporarily reduce debt pending application of such proceeds to pay costs associated with the USPS contract. The Company's debt-to-total capitalization ratio decreased to 39.4% at September 30, 1997 from 55.6% at December 31, 1996. The improvement resulted primarily from the issuance of the TECONS, the related interim repayment of short-term borrowings, and exercises of stock options. Cash PAGE 14 flow from operations, which partially funded debt repayments during the first nine months of 1997, also contributed to the improvement of the debt- to-total capitalization ratio. At September 30, 1997, letters of credit of $104.8 million were outstanding under the Company's $350 million unsecured credit facility, leaving $245.2 million available for additional short-term borrowings and letters of credit under this facility. Under several other unsecured letter of credit facilities, the Company had outstanding letters of credit of $72.7 million at September 30, 1997, leaving $12.3 million available for additional letters of credit. Further, the Company had available $95.0 million of capacity under other short-term uncommitted borrowing lines, none of which was drawn. Other Items The Company is currently replacing or modifying certain information systems in order to address year 2000 issues. The Company is unable to predict with certainty the total costs of addressing year 2000 issues, however the Company estimates that total expenditures for year 2000 compliance, based on current evaluations, will total approximately $20 million through 1999, although there can be no assurance that actual costs will not exceed this amount. These costs represent expenditures in addition to normal systems replacement and maintenance. The effect of year 2000 expenditures on the Company's results of operations and financial condition will in part depend on whether the Company replaces or modifies the systems affected by the year 2000 issue. Forward-Looking Statements Certain statements included or incorporated by reference herein constitute "forward-looking statements" within the meaning of 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 contained 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" 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 the matters discussed elsewhere herein and in any documents incorporated by reference herein, could cause actual results and other matters to differ materially from those in such forward-looking statements: changes in general business and economic conditions; increasing domestic and international competition and pricing pressure; changes in fuel prices; uncertainties regarding the Company's contract with the USPS; labor matters, including changes in labor costs, negotiation and renegotiation of labor contracts and the risk of work stoppages or strikes; changes in governmental regulation; environmental and tax matters, including the aviation excise tax and aircraft maintenance cost matters discussed above; and matters relating to the recently completed spin-off of Consolidated Freightways Corporation (CFC). In that regard, the Company is or may be subject to substantial liabilities with respect to certain matters relating to CFC's business and operations, including, without limitation, guarantees of certain indebtedness of CFC and liabilities for employment-related and environmental matters. Although CFC is, in general,either the primary obligor or jointly and severally liable with the Company with respect to these matters, a failure PAGE 15 to pay or other default by CFC with respect to the obligations as to which the Company is or may be, or may be perceived to be, liable, whether because of CFC's bankruptcy or insolvency or otherwise, could lead to substantial claims against the Company. As a result of the foregoing, no assurance can be given as to future results of operations or financial condition. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings As previously reported, the Company has been designated a Potentially Responsible Party (PRP) by the EPA with respect to the disposal of hazardous substances at various sites. The Company expects its share of the clean-up cost will not have a material adverse effect on the Company's financial position or results of operations. The Company expects the costs of complying with existing and future federal, state and local environmental regulations to continue to increase. On the other hand, it does not anticipate that such cost increases will have a materially adverse effect on the Company. Certain legal matters are discussed in Note 4 in the Notes to Consolidated Financial Statements in Part I of this form. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Computation of Per Share Earnings 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges were 3.0 and 2.3 for the nine months ended September 30, 1997 and 1996,respectively. (b) Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends -- the ratios of earnings to combined fixed charges and preferred stock dividends were 2.9 and 2.3 for the nine months ended September 30, 1997 and 1996, respectively. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1997. PAGE 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. CNF Transportation Inc. (Registrant) November 12, 1997 /s/Chutta Ratnathicam Chutta Ratnathicam Senior Vice President and Chief Financial Officer November 12, 1997 /s/Gary D. Taliaferro Gary D. Taliaferro Vice President and Controller EX-11 2 Exhibit 11 CNF TRANSPORTATION INC. COMPUTATION OF PER SHARE EARNINGS
The following is the computation of fully-diluted earnings per share: Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 (Dollars in thousands except per share data) Net income available to common shareholders $ 37,694 $ 17,713 $ 85,717 $ 27,332 Non-discretionary adjustments under the if-converted method: Addback: Dividends on Series B preferred stock, net of tax benefits 1,951 2,141 5,861 6,458 Addback: Dividends on preferred stock of subsidiary trust, net of tax benefits 953 - 1,165 - Less: Replacement funding adustment on Series B preferred stock, net of tax benefits (1) (1,669) (1,721) (4,973) (5,022) Net income available to common shareholders $ 38,929 $ 18,133 $ 87,770 $ 28,768 WEIGHTED AVERAGE SHARES OUTSTANDING: Common shares 46,630,121 44,023,076 45,956,459 43,992,127 Equivalents: stock options 1,802,255 953,101 1,802,255 953,101 If converted: Series B preferred stock 4,080,249 4,259,321 4,080,249 4,259,321 If converted: Preferred stock of subsidiary trust 3,125,000 - 1,273,148 - Adjustments for restricted stock (65,223) - (37,888) - 55,572,402 49,235,498 53,074,223 49,204,549 FULLY DILUTED EARNINGS PER SHARE $ 0.70 $ 0.37 $ 1.65 $ 0.59 (1) Additional payment to the Company's Thrift and Stock Plan to replace the funding lost under the if-converted method.
EX-27 3
5 1000 9-MOS DEC-31-1997 SEP-30-1997 163885 0 674350 (21169) 36462 1000756 1396911 (587891) 2334974 824624 473508 125000 131877 310180 167338 2334974 0 3072553 0 2873472 31139 0 29882 167942 76364 91578 0 0 0 85717 1.79 1.65
EX-99 4 Exhibit 99(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Nine Months Ended September 30, 1997 1996 Fixed Charges: Interest Expense $ 29,882 $ 29,498 Capitalized Interest 1,786 1,627 Preferred Dividends 8,466 9,481 Total Interest 40,134 40,606 Interest Component of Rental Expense 40,562 34,121 Fixed Charges 80,696 74,727 Less: Capitalized Interest 1,786 1,627 Preferred Dividends 8,466 9,481 Net Fixed Charges $ 70,444 $ 63,619 Earnings: Income from Continuing Operations before Income Taxes $ 167,942 $ 109,071 Add: Net Fixed Charges 70,444 63,619 Total Earnings Before Fixed Charges $ 238,386 $ 172,690 Ratio of Earnings to Fixed Charges: Total Earnings $ 238,386 $ 172,690 Fixed Charges (1) 80,696 74,727 Ratio 3.0 x 2.3 x (1) Fixed charges represent interest on capital leases and short-term and long-term debt, capitalized interest, dividends on shares of the Series B cumulative convertible preferred stock used to pay debt service on notes issued by the Company's Thrift and Stock Plan (the TASP), and the applicable portion of the consolidated rent expense which approximates the interest of lease payments. EX-99 5 Exhibit 99(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands) Nine Months Ended September 30, 1997 1996 Fixed Charges: Interest Expense $ 29,882 $ 29,498 Capitalized Interest 1,786 1,627 Preferred Dividends (1) 10,374 9,481 Total Interest 42,042 40,606 Interest Component of Rental Expense 40,562 34,121 Fixed Charges 82,604 74,727 Less: Capitalized Interest 1,786 1,627 Preferred Dividends 8,466 9,481 Net Fixed Charges $ 72,352 $ 63,619 Earnings: Income from Continuing Operations before Income Taxes $167,942 $ 109,071 Add: Net Fixed Charges 72,352 63,619 Total Earnings Before Fixed Charges $240,294 $ 172,690 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: Total Earnings $240,294 $ 172,690 Combined Fixed Charges and Preferred Stock Dividends (2) 82,604 74,727 Ratio 2.9 x 2.3 x (1) For the nine months ended September 30, 1997, dividends of $1,908,000 on the preferred securities of a subsidiary trust issued in June 1997 are included as an expense in the Statements of Consolidated Income; these dividends are shown as fixed charges in the Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (2) Fixed charges represent interest on capital leases and short-term and long-term debt, capitalized interest, dividends on shares of the Series B cumulative convertible preferred stock used to pay debt service on notes issued by the Company's Thrift and Stock Plan (the TASP), dividends on the preferred securities of a subsidiary trust, and the applicable portion of the consolidated rent expense which approximates the interest of lease payments. -----END PRIVACY-ENHANCED MESSAGE-----