-----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, VbNcqHJX3kk0FNX9ewBXhhllAVavGCkSf2k3AC1kFTm2VAgPfRfpbkdCGaUJoiUV /7ylN6plQfJ0NhjBfE/VoA== 0000023675-98-000012.txt : 19981113 0000023675-98-000012.hdr.sgml : 19981113 ACCESSION NUMBER: 0000023675-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98744479 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, 1998 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 (650) 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, 1998: 47,795,725 PAGE 2 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended September 30, 1998 ____________________________________________________________________________ ____________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 3 Statements of Consolidated Income - Three and Nine Months Ended September 30, 1998 and 1997 5 Statements of Consolidated Cash Flows - Nine Months Ended September 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 18 PAGE 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) September 30, December 31, 1998 1997 ASSETS CURRENT ASSETS Cash and cash equivalents $ 108,015 $ 97,617 Trade accounts receivable, net of allowances 768,291 703,785 Other accounts receivable 22,829 32,067 Operating supplies, at lower of average cost or market 40,266 36,580 Prepaid expenses 38,315 35,682 Deferred income taxes 112,954 103,656 Total Current Assets 1,090,670 1,009,387 PROPERTY, PLANT AND EQUIPMENT, NET Land 108,033 109,768 Buildings and improvements 332,842 301,245 Revenue equipment 713,888 685,618 Other equipment and leasehold improvements 512,361 400,065 1,667,124 1,496,696 Accumulated depreciation and amortization (708,106) (616,854) 959,018 879,842 OTHER ASSETS Restricted funds 2,628 10,601 Deferred charges and other assets 171,000 120,872 Unamortized aircraft maintenance, net 130,346 123,352 Costs in excess of net assets of businesses acquired, net of accumulated amortization 270,607 277,442 574,581 532,267 TOTAL ASSETS $2,624,269 $2,421,496 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, 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 255,964 $ 268,064 Accrued liabilities 480,431 423,237 Accrued claims costs 105,384 99,848 Current maturities of long-term debt and capital leases 5,262 4,875 Federal and other income taxes 51,009 10,114 Total Current Liabilities 898,050 806,138 LONG-TERM LIABILITIES Long-term debt and guarantees (Note 2) 356,905 362,671 Long-term obligations under capital leases (Note 2) 110,753 110,817 Accrued claims costs 58,328 55,030 Employee benefits 165,055 141,351 Other liabilities and deferred credits 55,616 72,428 Deferred income taxes 101,857 89,958 Total Liabilities 1,746,564 1,638,393 COMMITMENTS AND CONTINGENCIES (Note 6) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES OF THE COMPANY (Note 5) 125,000 125,000 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 856,503 and 865,602 shares, respectively 9 9 Additional paid-in capital, preferred stock 130,265 131,649 Deferred TASP compensation (96,840) (101,819) Total Preferred Shareholders' Equity 33,434 29,839 Common stock, $.625 par value; authorized 100,000,000 shares; issued 54,677,191 and 54,370,182 shares, respectively 34,173 33,981 Additional paid-in capital, common stock 309,341 302,256 Deferred compensation, restricted stock (3,812) (2,528) Cumulative translation adjustment (Note 3) (6,587) (6,647) Retained earnings 557,133 473,250 Cost of repurchased common stock (6,934,434 and 6,977,848 shares, respectively) (170,977) (172,048) Total Common Shareholders' Equity 719,271 628,264 Total Shareholders' Equity 752,705 658,103 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,624,269 $2,421,496 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, 1998 1997 1998 1997 REVENUES Con-Way Transportation Services $ 438,595 $ 387,975 $ 1,256,818 $ 1,087,838 Emery Worldwide 556,176 599,830 1,604,535 1,627,332 Other 287,739 139,557 710,677 357,383 1,282,510 1,127,362 3,572,030 3,072,553 COSTS AND EXPENSES Con-Way Transportation Services Operating Expenses 310,148 275,631 880,056 786,849 Selling and Administrative Expenses 57,877 54,347 163,774 143,946 Depreciation 19,904 16,838 57,831 47,326 387,929 346,816 1,101,661 978,121 Emery Worldwide Operating Expenses 438,743 462,476 1,277,374 1,280,757 Selling and Administrative Expenses 83,695 90,938 240,828 241,111 Depreciation 12,139 10,197 35,008 28,637 534,577 563,611 1,553,210 1,550,505 Other Operating Expenses 241,787 125,873 623,209 318,545 Selling and Administrative Expenses 23,366 7,622 62,339 22,020 Depreciation 5,808 1,593 13,760 4,281 270,961 135,088 699,308 344,846 1,193,467 1,045,515 3,354,179 2,873,472 OPERATING INCOME Con-Way Transportation Services 50,666 41,159 155,157 109,717 Emery Worldwide 21,599 36,219 51,325 76,827 Other 16,778 4,469 11,369 12,537 89,043 81,847 217,851 199,081 OTHER INCOME (EXPENSE) Investment Income 20 516 111 640 Interest Expense (8,154) (8,815) (25,135) (29,882) Dividend Requirement on Preferred Securities of Subsidiary Trust (Note 5) (1,563) (1,561) (4,689) (1,908) Miscellaneous, Net (119) 756 (301) 11 (9,816) (9,104) (30,014) (31,139) Income before Income Taxes 79,227 72,743 187,837 167,942 Income Taxes 35,257 33,098 83,588 76,364 Net Income 43,970 39,645 104,249 91,578 Preferred Dividends 2,031 1,951 6,078 5,861 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 41,939 $ 37,694 $ 98,171 $ 85,717 Weighted-Average Shares 47,698,568 46,630,121 47,607,124 45,956,459 EARNINGS PER SHARE (Note 4) Basic $ 0.88 $ 0.81 $ 2.06 $ 1.87 Diluted $ 0.78 $ 0.70 $ 1.83 $ 1.67 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, 1998 1997 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 97,617 $ 82,094 CASH FLOWS FROM OPERATING ACTIVITIES Net income 104,249 91,578 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 119,515 88,748 Amortization of deferred compensation 6,465 5,717 Increase in deferred income taxes 2,601 10,155 Gains from property disposals, net (1,544) (456) Changes in assets and liabilities: Receivables (55,268) (87,704) Prepaid expenses (2,633) (9,317) Accounts payable (9,262) 49,095 Accrued liabilities 47,757 47,257 Accrued incentive compensation 9,437 32,289 Accrued claims costs 8,834 8,880 Federal and other income taxes 40,895 22,994 Employee benefits 23,704 18,712 Deferred charges and credits (56,627) (29,296) Other (14,431) (4,970) Net Cash Provided by Operating Activities 223,692 243,682 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (199,437) (136,183) Proceeds from sales of property 12,925 3,372 Net Cash Used by Investing Activities (186,512) (132,811) CASH FLOWS FROM FINANCING ACTIVITIES Net payments of long-term debt and capital lease obligations (5,443) (1,983) Net payments under revolving lines of credit - (155,000) Net proceeds from issuance of subsidiary preferred stock - 121,431 Proceeds from exercises of stock options 4,161 32,025 Payments of common dividends (14,288) (13,777) Payments of preferred dividends (11,212) (11,776) Net Cash Used by Financing Activities (26,782) (29,080) Increase in Cash and Cash Equivalents 10,398 81,791 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 108,015 $ 163,885 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 1997 Annual Report to Shareholders. There were no significant changes in the Company's commitments and contingencies as previously described in the 1997 Annual Report to Shareholders and related annual report to the Securities and Exchange Commission Form 10-K. 2. Long-term Debt and Long-term Obligations under Capital Leases The aggregate principal amount of the Company's unsecured 9 1/8% notes is repayable on August 15, 1999. The Company has the ability to refinance the outstanding principal on a long-term basis and it is therefore included in Long-term Debt and Guarantees in the Consolidated Balance Sheet as of September 30, 1998. On October 1, 1998, the Company redeemed $46 million of Series A revenue bonds used as partial financing of a sorting facility in Dayton, Ohio. These redeemed bonds, with an effective interest rate of 8% and due in October 2009, were replaced with $46 million of Series A refinancing bonds due in February 2018 with an interest rate of 5.625%. The restructured and non-restructured notes issued by the Company's Thrift and Stock Plan (the "TASP") are guaranteed by the Company. Holders of both the restructured and non-restructured notes have the right to require the Company to purchase the notes, in whole or in part, on July 1, 1999. The Company has the ability to refinance the outstanding principal on a long-term basis and it is therefore included in Long-term Debt and Guarantees in the Consolidated Balance Sheet as of September 30, 1998. 3. Non-Owner Changes in Equity In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income", which requires companies to report a measure of all changes in equity except those resulting from investments by owners and distributions to owners. Total non-owner changes in equity were as follows: Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, 1998 1997 1998 1997 Net Income $43,970 $39,645 $104,249 $91,578 Foreign currency translation adjustment 1,403 (6,287) 60 (8,083) $45,373 $33,358 $104,309 $83,495 PAGE 8 4. Earnings Per Share Effective December 31, 1997, the Company adopted SFAS 128, "Earnings Per Share". SFAS 128 prescribes new Basic and Diluted Earnings Per Share (EPS) calculations that replace the former calculations for Primary and Fully Diluted EPS. Prior years have been restated to conform to the requirements of SFAS 128. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average shares outstanding. Diluted earnings per share was calculated as follows: Three Months Ended Nine Months Ended (Dollars in thousands except September 30, September 30, per share data) 1998 1997 1998 1997 Earnings: Net Income Available to Common Shareholders $ 41,939 $ 37,694 $ 98,171 $ 85,717 Add-backs: Dividends on Series B preferred stock, net of replacement funding 316 281 979 888 Dividends on preferred securities of subsidiary trust, net of tax 954 954 2,862 1,165 $ 43,209 $ 38,929 $ 102,012 $ 87,770 Shares: Basic shares (weighted- average shares outstanding) 47,698,568 46,630,121 47,607,124 45,956,459 Stock option and restricted stock dilution 667,151 1,468,319 774,227 1,212,769 Series B preferred stock 4,146,066 4,080,249 4,146,066 4,080,249 Subsidiary trust preferred securities 3,125,000 3,125,000 3,125,000 1,273,148 55,636,785 55,303,689 55,652,417 52,522,625 Diluted Earnings Per Share $ 0.78 $ 0.70 $ 1.83 $ 1.67 5. Preferred Securities of Subsidiary Trust On June 11, 1997, CNF Trust I (the Trust), a Delaware business trust wholly owned by the Company, 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. PAGE 9 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. 6. Contingencies In connection with the spin-off of Consolidated Freightways Corporation (CFC) on December 2, 1996, the Company agreed to indemnify certain states, insurance companies and sureties against the failure of CFC to pay certain worker's compensation, tax and public liability claims that were pending as of September 30, 1996. In some cases, these indemnities are supported by letters of credit under which the Company is liable to the issuing bank and by bonds issued by surety companies. In order to secure CFC's obligation to reimburse and indemnify the Company against liability with respect to these claims, CFC has provided the Company with approximately $13.5 million of letters of credit and $22.0 million of real property collateral. The Company has entered into a Transition Services Agreement to provide CFC with certain information systems, data processing and other administrative services and administers CFC's retirement and benefits plans. The agreement expires on December 2, 1999, although CFC may terminate any or all services with six months notice. The Company also may terminate all services other than the telecommunications and data processing services at any time with six months notice. Services performed by the Company under the agreement are paid by CFC on an arm's-length negotiated basis. The Internal Revenue Service (the "IRS") has proposed adjustments that would require Emery Worldwide pay substantial additional aviation excise taxes for the period from January 1, 1990 through September 30, 1995. The Company has filed 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 Emery Worldwide for periods subsequent to September 30, 1995. As a result, there can be no assurance that this matter will not have a material adverse effect on the Company. PAGE 10 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 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. There can be no assurance, however, that this matter will not have a material adverse effect on the Company. The Company has received notices from the Environmental Protection Agency 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 several hazardous waste sites. Under CERCLA, PRPs are jointly and severally liable for all site remediation and expenses. After investigating the Company's involvement at such sites, based upon cost studies performed by independent third parties, the Company believes its obligations with respect to such sites would not have a material adverse effect on the Company's financial position or results of operations. In addition to the matters discussed above, the Company and its subsidiaries are defendants 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 impact on the Company's financial position or results of operations. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total Company revenues for the third quarter and first nine months of 1998 were at record levels and up 13.8% and 16.3% over the respective periods last year. Despite signs of a slowing economy in 1998, revenue increases were posted by Con-Way Transportation Services (Con-Way) and Menlo Logistics (Menlo). Operations under the Priority Mail contract with the U.S. Postal Service also contributed to higher revenues. Partially offsetting these increases was lower revenue at Emery Worldwide (Emery). Operating income, also a record for the third quarter and first nine months of 1998, increased 8.8% and 9.4%, respectively, over the comparable periods in 1997. The Company's higher operating income in the third quarter of 1998 was primarily the result of higher operating income at Con- Way and Menlo and operating profit from Priority Mail operations offset by lower operating income from Emery. In the first nine months of 1998, higher operating income from Con-Way and Menlo more than offset lower operating income from Emery and year-to-date operating losses incurred during completion of the start-up phase of the Priority Mail contract. Effective January 1, 1998, the Company adopted AICPA SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal-Use". For the third quarter and first nine months of 1998, the Company capitalized $8.1 million and $24.0 million, respectively, of internally developed internal-use software. Internally developed software costs, as well as costs of externally purchased software, are amortized over 3 to 5 years. In prior years, purchased software was capitalized and the costs of internally developed software were recorded as operating expenses. In the third quarter and first nine months of 1998, the Company expensed approximately $6 million and $13 million, respectively, for the costs of replacing or modifying certain information systems to address year 2000 issues. PAGE 11 Net income available to common shareholders in the 1998 third quarter increased 11.3% compared to last year's third quarter due primarily to higher total operating income and a decrease in the effective tax rate from 45.5% in 1997 to 44.5% in 1998. For the first nine months of 1998, net income available to common shareholders increased 14.5% due primarily to higher total operating income, a lower effective tax rate, and lower interest expense on short-term borrowings. Compared to the nine-month period last year, lower interest expense for the first nine months of 1998 was partially offset by dividend requirements on preferred securities of a subsidiary trust issued in June 1997. Compared to the same periods last year, the lower effective tax rate in the third quarter and first nine months of 1998 was due primarily to lower estimated non-deductible expenses. Con-Way Transportation Services Third-quarter revenues for Con-Way Transportation Services (Con-Way) were 13.0% higher than the third quarter of last year and nine-month revenues were 15.5% higher than the first nine months of last year. Record revenues for both the quarter and year-to-date periods were primarily due to tonnage growth and higher yields. Tonnage for the regional carriers for the third quarter and first nine months of 1998 increased 5.2% and 7.3%, respectively, when compared to the same periods in 1997. Third quarter and year-to-date revenue per hundredweight in 1998 increased 9.7% and 9.5%, respectively, over the comparable periods last year. The higher tonnage and improved pricing was primarily attributable to increased demand for Con- Way's core regional carrier services as well as inter-regional joint services. New inter-regional joint service between Con-Way's western and central carriers contributed to the 1998 third-quarter operating results, while new joint service between Con-Way's western and southern carriers benefited the entire first nine months of 1998. A portion of the tonnage increase in the first nine months of 1998 was attributable to shippers who redirected freight to Con-Way from unionized motor carriers due to concerns with uncertainty over the National Master Freight Agreement, a labor agreement applicable to several unionized carriers, that was ultimately signed in February 1998. Con-Way's operating income for the third quarter and first nine months of 1998 increased 23.1% and 41.4%, respectively, over the same periods last year. Improved operating results for both the quarter and year-to-date periods were primarily due to higher revenues, improved freight system utilization, expanded inter-regional joint services, and lower fuel costs. The third quarter and first nine months of last year benefited from a small amount of incremental income attributed to the two-week United Parcel Service (UPS) strike in August 1997. Emery Worldwide Revenues for Emery Worldwide (Emery) in the third quarter and first nine months of 1998 decreased 7.3% and 1.4%, respectively, when compared to the same periods last year. International revenues in the third quarter of 1998 were down 4.0% compared to the third quarter last year and nine-month international revenues were essentially flat compared to the same period in 1997. North American third-quarter and year-to-date revenues in 1998 were down 9.7% and 2.8%, respectively. PAGE 12 International revenues in the third quarter and first nine months of 1998 were adversely impacted by lower revenue in Asia due to the economic crisis in that region. Total international tonnage in the third quarter of 1998 decreased 3.6% from the same period last year. Total international tonnage in the first nine months of 1998 increased 2.5% over the first nine months of 1997. With business in Asia providing higher-than-average yields, lower tonnage in this region contributed disproportionately to lower total international revenues in both the third quarter and first nine months of 1998 when compared to the respective periods last year. Lower North American revenue in the third quarter and first nine months of 1998 was partially due to incremental revenue attributed to the two-week UPS strike in August 1997, which benefited both the third quarter and first nine months of last year. North American tonnage declines of 13.8% in the third quarter of 1998 and 6.8% in the first nine months of 1998 were also in part due to strikes in the automotive industry, slow- downs in the automotive and technology industries, general softening of the domestic economy, and implementation of Emery's yield management program designed to reprice or eliminate certain low margin business. Emery's operating income for the third quarter and first nine months of 1998 decreased 40.4% and 33.2% from the respective periods of 1997. Emery's operating income in the third quarter and first nine months of last year include the benefit of incremental income attributed to the UPS strike in August 1997. Lower operating income in the third quarter of 1998 was due primarily to lower revenue combined with costs of maintaining air fleet capacity, handling operations, and information technology. Maintaining this cost structure despite lower revenues in the third quarter of 1998 reflects management's initiative to improve the quality of service both in the 1998 third quarter and through the 1998 fourth quarter seasonal peak. Nine-month operating income in 1998 was also adversely affected by lower income in the first quarter of 1998 due to a sudden and larger-than- expected decline in revenues. Emery's management strategies include efforts that are intended, in the long-term, to improve operating margins by increasing the proportion of business requiring premium levels of service, which generally generates higher operating margins. If slower future economic growth results in lower airfreight revenues, management intends to reduce costs commensurately but will also seek to regulate such cost reductions in an effort to ensure premium service. Other Operations The Other segment is comprised of Menlo Logistics (Menlo), operations under the Priority Mail contract with the U.S. Postal Service, Road Systems, and VantageParts. For the third quarter and first nine months of 1998, revenues from the Other segment increased 106.2% and 98.9%, respectively, over the same periods last year. Higher revenues for both the third quarter and first nine months of 1998 were due primarily to Priority Mail revenues and increases at Menlo. Operating income increased $12.3 million from $4.5 million in the 1997 third quarter to $16.8 million in the third quarter of 1998 due primarily to Priority Mail quarterly operating income and higher quarterly operating income at Menlo. For the first nine months of 1998, operating income from the Other segment declined 9.3% from the same period last year due primarily to the Priority Mail operation's year-to-date operating loss partially offset by higher operating income at Menlo. PAGE 13 Menlo's revenues for the third quarter and first nine months of 1998 increased 23.9% and 30.4%, respectively, over the comparable periods in 1997. New business with several large customers positively affected revenues in the 1998 third quarter and, to a lesser extent, the first nine months of 1998. Operating income for the third quarter and first nine months of 1998 increased 17.0% and 15.2%, respectively, over the same periods of last year due primarily to higher revenues. Priority Mail revenues in the third quarter and first nine months of 1998 were $110.9 million and $241.4 million, respectively. Third quarter operating income in 1998 was $10.5 million and the year-to-date operating loss was $5.0 million. Operations under the Priority Mail contract, which was signed in April 1997, were minimal during the third quarter and first nine months of last year. The third quarter of 1998 was the first quarter in which the full system of 10 Priority Mail Processing Centers was complete and operational. Operating losses from Priority Mail operations for the nine months ended September 30, 1998 reflected losses during the completion of the contract's start-up phases (primarily during the first half of the year), which more than offset operating profit under the Priority Mail contract for the three months ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES In the first nine months of 1998, the Company's cash and cash equivalents increased $10.4 million from $97.6 million at December 31, 1997 to $108.0 million at September 30, 1998. Cash flow from operations of $223.7 million in the first nine months of 1998 provided the primary funding for $199.4 million used for capital expenditures and $25.5 million of dividend payments. Cash flows from operating activities in the first three quarters of 1998 were $20.0 million lower than the first three quarters of 1997, primarily due to asset and liability changes, which used $7.6 million in the first nine months of 1998 but provided $47.9 million in the same period of 1997. Net income and adjustments to income, which were $35.5 million higher in the first nine months of 1998 compared to the first nine months of 1997, partially offset the greater cash requirements related to changes in assets and liabilities. Adjustments to income include depreciation, amortization, deferred taxes, and gains from property disposals. Capital expenditures for the first nine months of 1998 were $63.3 million higher than the same period last year due primarily to expenditures of $40.1 million related to the Priority Mail contract. Proceeds from sales of certain equipment and idle properties generated an additional $9.6 million of cash in the first nine months of 1998 compared to the first nine months of 1997. In the first nine months of 1998, proceeds from the exercise of stock options decreased $27.9 million from the same period last year and common and preferred stock dividend payments of $25.5 million were essentially the same as the first nine months of last year. As was the case at December 31, 1997, there were no short-term borrowings outstanding at September 30, 1998. In the first nine months of last year, a $155.0 million net payment of short-term borrowings was largely facilitated by $121.4 million in net proceeds from the issuance of preferred stock of a subsidiary trust in June 1997. Other net debt repayments used $5.4 million in the first nine months of 1998 compared to $2.0 million in the same period last year. PAGE 14 The Company's ratio of total debt to capital decreased to 35.0% at September 30, 1998 from 37.9% at December 31, 1997 due primarily to higher shareholders' equity from net income. At September 30, 1998, the Company had available for borrowings $276.5 million under its $350 million unsecured credit facility and another $95.0 million under uncommitted lines of credit. The $350 million facility is also available for issuance of letters of credit. Under that facility, outstanding letters of credit totaled $73.5 million at September 30, 1998. Under several other unsecured facilities, $55.1 million of letters of credit were outstanding at that date. The Company filed a shelf registration statement with the Securities and Exchange Commission in June 1998 that covers $250 million of debt and equity securities for future issuance with terms to be decided at the time of and if issued. CYCLICALITY AND SEASONALITY The Company operates in industries that are affected directly by general economic conditions and seasonal fluctuations, both of which affect demand for transportation services. In the trucking and air freight industries, the months of September and October of each year usually have the highest business levels while the months of January and February of each year usually have the lowest business levels. Operations under the Priority Mail contract are expected to peak in December due primarily to higher shipping demand related to the holiday season. ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the income statement. SFAS 133 is effective for fiscal years beginning after June 15, 1999. Management is assessing the impact of adopting SFAS 133 on the Company's financial statements and has not determined the timing of adoption. YEAR 2000 Like many other companies, an issue affecting the Company is the inability of many computer systems and software to process the year 2000 (Y2K or Year 2000). To ensure that the Company's systems are Year 2000 compliant, a team of Information Technology professionals began preparing for the Y2K issue in 1996. In 1997, the Company formed a Steering Committee comprised of senior executives to address compliance issues. The Y2K team developed, and the Steering Committee approved, a Company-wide initiative to address issues associated with the Year 2000. Company management has designated the Y2K project as the highest priority of the Company's Information Technology Department. The Company's Y2K compliance efforts are focused on business-critical items. Systems and software are considered "business-critical" if a failure would either have a material adverse impact on the Company's business, financial condition or results of operations or involve a safety exposure to employees or customers. PAGE 15 State of Readiness The Company has identified distinct categories for its Y2K compliance efforts: (1) information technology ("IT") systems, (2) non-IT systems, and (3) IT and non-IT systems of third parties with which the Company has major relationships. The Company intends to fix or replace non-compliant software and systems through a process that involves taking inventory of its systems, assessing risks and impact, renovating non-compliant systems through remediation or replacement, and validating compliance through testing. The Company intends to commit the resources necessary to bring the project to scheduled completion. IT Systems IT systems include mainframes, mid-range computers and servers, networks and workstations, related operating systems and application software. The Company has inventoried and assessed all business- critical IT systems. Renovation efforts are in progress or are substantially complete, depending on the system or software. Mainframe computers have been fully renovated and certain peripheral mainframe hardware is approximately 80% renovated. Mainframe operating systems and mainframe applications software are approximately 70% and 25% renovated, respectively. Mid-range computers and servers are estimated to be 30% renovated while approximately 10% of related operating systems and application software programs have been renovated. Network hardware (excluding servers) and computer workstations are approximately 50% renovated while an estimated 30% of the related operating systems and application software programs have been renovated. Renovation of all business-critical IT systems is scheduled to be substantially complete by the end of the first quarter of 1999. Validation, which is currently in process for many systems and software applications, is scheduled for completion by the end of the third quarter of 1999. Non-IT Systems Non-IT systems include operating equipment, security systems, and other equipment that may contain microcontrollers with embedded technology. Certain IT systems may also include embedded technology. The Company has contacted all business-critical operating and support facilities to identify the extent of its embedded technology and has received responses from approximately 70% of those surveyed locations. The Company is assessing these results and, when embedded technology is determined to exist, the Company is surveying the vendor or manufacturer of the embedded technology or the affected equipment or system to identify risks related to the Year 2000. Approximately 30% of the embedded technology the Company is aware of has been confirmed as Y2K compliant. The Company's remaining systems are being assessed and, if necessary, will be replaced if determined to be non-compliant. These systems are expected to be Y2K compliant by the end of the first quarter of 1999 and to be validated by the end of the third quarter of 1999. Third Party Systems In addition to its own IT and non-IT systems, the Company is also reliant upon system capabilities of third parties (including, among others, customers, vendors, domestic and international government agencies, and U.S. and international airports). The Company believes these third party risks are inherent in the industry and not specific to the Company. PAGE 16 The Company has initiated communications with third parties with whom the Company has material business relationships to determine the extent to which the Company's systems are vulnerable to those third parties' failure to make necessary changes related to Y2K issues. The intent of these inquiries through questionnaires and interviews is to ascertain the level of readiness of the identified third parties. Essentially all of the Company's critical vendors have been contacted and approximately 65% have responded to the surveys. By the end of 1998, the Company expects to have received responses from substantially all of its critical vendors. If a vendor is determined to be non-compliant, the Company is working to identify a Y2K- compliant vendor as a replacement. In an effort to mitigate risks related to the system capabilities of certain customers, the Company plans to provide Y2K-compliant software upgrades to its tracking and tracing software and other proprietary software utilized by its customers. The International Air Transport Association and the Air Transport Association of America are involved in global and industry-wide studies aimed at assessing the Y2K compliance status of airports and other U.S. and international government agencies. As a member of these associations, Emery Worldwide expects to receive and to analyze the results of these studies. Costs to Address Y2K Compliance Since 1996, the Company has expensed approximately $16 million on Y2K compliance and expects that approximately $18 million of additional Y2K compliance costs will be expensed through December 31, 1999. All Y2K costs have been and are expected to be funded from operations. In the third quarter and first nine months of 1998, the Company capitalized $11.1 million and $35.4 million, respectively, of purchased and internally developed software costs. A portion of the capitalized software costs was for new financial and administrative systems that are Y2K compliant. These systems have replaced or are expected to replace certain non-compliant systems. Risks While the Company believes its efforts to address the Year 2000 issue will be successful in avoiding any material adverse effect on the Company's operations or financial condition, it recognizes that failing to resolve Year 2000 issues on a timely basis would, in a most reasonably likely worst case scenario, significantly limit its ability to provide its services for a period of time, especially if such failure is coupled with a third party failure. As a result, there can be no assurance that this matter will not have a material adverse effect on the Company. Contingency Plans The Company is establishing a Y2K contingency plan to evaluate business disruption scenarios, coordinate the establishment of Y2K contingency plans, and identify and implement preemptive strategies. Detailed contingency plans for critical business processes are scheduled to be formulated by the end of the second quarter of 1999 and, if necessary, would undergo modification should there be any changes in the status of the Company's Y2K renovation efforts. PAGE 17 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," "approximately," "intends," "plans," "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 the matters discussed below and elsewhere in this document and in documents incorporated or deemed to be 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; uncertainty regarding the Company's Priority Mail contract with the United States Postal Service; labor matters, including changes in labor costs, renegotiations 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 tax matters discussed herein; and matters relating to the spin-off of 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, tax and environmental matters. Although CFC is, in general, either the primary or secondary obligor or jointly and severally liable with the Company with respect to these matters, a failure 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 6 in the Notes to Consolidated Financial Statements in Part I of this form. PAGE 18 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges were 3.6x and 3.3x for the nine months ended September 30, 1998 and 1997, 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 3.4x and 3.2x for the nine months ended September 30, 1998 and 1997, respectively. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1998. 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, 1998 /s/Chutta Ratnathicam Chutta Ratnathicam Senior Vice President and Chief Financial Officer EX-27 2
5 1000 9-MOS DEC-31-1998 SEP-30-1998 108,015 0 789,034 (20,743) 40,266 1,090,670 1,667,124 (708,106) 2,624,269 898,050 467,658 125,000 130,274 343,514 278,917 2,624,269 0 3,572,030 0 3,354,179 30,014 0 25,135 187,837 83,588 104,249 0 0 0 98,171 2.06 1.83
EX-99 3 Exhibit 99(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Nine Months Ended September 30 1998 1997 Fixed Charges: Interest Expense $ 25,135 $ 29,882 Capitalized Interest 1,585 1,786 Dividend Requirement on Series B Preferred Stock [1] 11,212 11,776 Interest Component of Rental Expense [2] 28,977 24,755 $ 66,909 $ 68,199 Earnings: Income before Taxes $ 187,837 $ 167,942 Fixed Charges 66,909 68,199 Capitalized Interest (1,585) (1,786) Preferred Dividend Requirements [3] (11,212) (11,776) $ 241,949 $ 222,579 Ratio of Earnings to Fixed Charges: 3.6 x 3.3 x [1] Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt service on notes issued by the Company's Thrift and Stock Plan. [2] Estimate of the interest portion of lease payments. The nine month period ended September 30, 1997 was restated for a change in the estimation method. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. EX-99 4 Exhibit 99(b) 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 1998 1997 Combined Fixed Charges and Preferred Stock Dividends: Interest Expense $ 25,135 $ 29,882 Capitalized Interest 1,585 1,786 Dividend Requirement on Series B Preferred Stock [1] 11,212 11,776 Dividend Requirement on Preferred Securities of Subsidiary Trust 4,689 1,908 Interest Component of Rental Expense [2] 28,977 24,755 $ 71,598 $ 70,107 Earnings: Income before Taxes $ 187,837 $ 167,942 Fixed Charges 71,598 70,107 Capitalized Interest (1,585) (1,786) Preferred Dividend Requirements [3] (11,212) (11,776) $ 246,638 $ 224,487 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: 3.4 x 3.2 x [1] Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt service on notes issued by the Company's Thrift and Stock Plan. [2] Estimate of the interest portion of lease payments. The nine month period ended September 30, 1997 was restated for a change in the estimation method. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. -----END PRIVACY-ENHANCED MESSAGE-----