-----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, QggCe78vCZOZzzchY2QJLwcJ6B+HVjXavwvTBxEjYk6A8A1omnjsNPVIbn1Wq5cQ qFDPe31G3BvoTLDynCOmTQ== 0000023675-99-000004.txt : 19990513 0000023675-99-000004.hdr.sgml : 19990513 ACCESSION NUMBER: 0000023675-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: 99618913 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 March 31, 1999 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 April 30, 1999: 48,122,833 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended March 31, 1999 ____________________________________________________________________________ ____________________________________________________________________________ PAGE 2 INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 3 Statements of Consolidated Income - Three Months Ended March 31, 1999 and 1998 5 Statements of Consolidated Cash Flows - Three Months Ended March 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 PAGE 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 79,531 $ 73,897 Trade accounts receivable, net of allowances 776,567 810,550 Other accounts receivable 29,099 51,865 Operating supplies, at lower of average cost or market 41,215 41,764 Prepaid expenses 54,648 32,741 Deferred income taxes 90,740 89,544 Total Current Assets 1,071,800 1,100,361 PROPERTY, PLANT AND EQUIPMENT, NET Land 113,198 114,146 Buildings and leasehold improvements 490,157 468,123 Revenue equipment 727,461 714,195 Other equipment 434,828 425,476 1,765,644 1,721,940 Accumulated depreciation and amortization (766,719) (737,464) 998,925 984,476 OTHER ASSETS Deferred charges and other assets 120,773 128,627 Capitalized software, net 73,219 64,285 Unamortized aircraft maintenance, net 156,156 143,349 Goodwill, net 275,036 268,314 625,184 604,575 TOTAL ASSETS $2,695,909 $2,689,412 The accompanying notes are an integral part of these statements. PAGE 4 CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1999 1998 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 264,715 $ 285,832 Accrued liabilities 421,116 446,171 Accrued claims costs 114,266 108,028 Current maturities of long-term debt and capital leases 6,460 5,259 Short-term borrowings 29,000 43,000 Federal and other income taxes 35,182 12,340 Total Current Liabilities 870,739 900,630 LONG-TERM LIABILITIES Long-term debt and guarantees (Note 2) 350,505 356,905 Long-term obligations under capital leases 110,706 110,730 Accrued claims costs 58,238 58,388 Employee benefits 198,260 190,268 Other liabilities and deferred credits 47,153 55,268 Deferred income taxes 117,454 115,868 Total Liabilities 1,753,055 1,788,057 COMMITMENTS AND CONTINGENCIES (Note 7) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES OF THE COMPANY (Note 6) 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 849,232 and 854,191 shares, respectively 8 9 Additional paid-in capital, preferred stock 129,160 129,914 Deferred compensation (93,027) (94,836) Total Preferred Shareholders' Equity 36,141 35,087 Common stock, $.625 par value; authorized 100,000,000 shares; issued 55,014,444 and 54,797,707 shares, respectively 34,384 34,249 Additional paid-in capital, common stock 318,123 314,440 Retained earnings 620,453 584,991 Deferred compensation, restricted stock (3,850) (4,599) Cost of repurchased common stock (6,898,938 and 6,922,285 shares, respectively) (170,102) (170,678) 799,008 758,403 Accumulated foreign currency translation adjustments (9,300) (9,140) Minimum pension liability adjustment (7,995) (7,995) Accumulated Other Comprehensive Loss (17,295) (17,135) Total Common Shareholders' Equity 781,713 741,268 Total Shareholders' Equity 817,854 776,355 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,695,909 $2,689,412 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 March 31, 1999 1998 REVENUES $1,255,323 $1,089,866 Costs and Expenses Operating expenses 1,029,150 901,326 General and administrative 121,082 110,860 Depreciation 38,962 32,875 Net gain on legal settlement (16,466) - 1,172,728 1,045,061 OPERATING INCOME 82,595 44,805 Other Income (Expense) Interest expense (7,126) (8,532) Dividend requirement on preferred securities (1,563) (1,563) of subsidiary trust (Note 6) Miscellaneous, net 955 (633) (7,734) (10,728) Income before Income Taxes 74,861 34,077 Income Taxes 32,565 15,164 Net Income 42,296 18,913 Preferred Stock Dividends 2,027 2,007 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 40,269 $ 16,906 Weighted-Average Common Shares Outstanding (Note 5) Basic 47,925,476 47,509,416 Diluted 55,814,095 55,476,583 Earnings per Common Share (Note 5) Basic $ 0.84 $ 0.36 Diluted $ 0.74 $ 0.33 The accompanying notes are an integral part of these statements. PAGE 6 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands) Three Months Ended March 31, 1999 1998 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 73,897 $ 97,617 OPERATING ACTIVITIES Net income 42,296 18,913 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 44,528 37,019 Increase in deferred income taxes 390 766 Amortization of deferred compensation 2,707 1,885 Provision for doubtful accounts 2,711 2,703 Gains from sales of property, net (417) (1,465) Changes in assets and liabilities: Receivables 54,038 11,256 Prepaid expenses (21,907) (24,443) Accounts payable (18,322) (23,485) Accrued liabilities (7,498) 31,322 Accrued incentive compensation (17,557) (26,989) Accrued claims costs 6,088 403 Income taxes 22,842 13,725 Employee benefits 7,992 7,550 Deferred charges and credits (13,722) (38,089) Other (7,796) 4,292 Net Cash Provided by Operating Activities 96,373 15,363 INVESTING ACTIVITIES Capital expenditures (55,799) (69,663) Software expenditures (11,381) (12,081) Proceeds from sales of property 2,540 6,364 Net Cash Used in Investing Activities (64,640) (75,380) FINANCING ACTIVITIES Repayment of long-term debt and capital lease obligations (5,223) (5,399) Proceeds from (repayment of) net short-term borrowings (14,000) 71,000 Proceeds from exercise of stock options 3,488 2,473 Payments of common dividends (4,808) (4,757) Payments of preferred dividends (5,556) (5,616) Net Cash Provided by (Used in) Financing Activities (26,099) 57,701 Increase (decrease) in Cash and Cash Equivalents 5,634 (2,316) CASH AND CASH EQUIVALENTS, END OF YEAR $ 79,531 $ 95,301 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 1998 Annual Report to Shareholders. Certain amounts in prior year financial statements have been reclassified to conform to current year presentation. 2. Long-term Debt and Guarantees The aggregate principal amount of the Company's unsecured 9 1/8% notes is repayable on August 15, 1999. The Company has the ability and intent to refinance the outstanding principal of $117.7 million on a long-term basis and the notes are therefore included in Long-term Debt and Guarantees in the Consolidated Balance Sheet as of March 31, 1999. The Company guarantees the restructured and non-restructured notes issued by the Company's Thrift and Stock Plan. Holders of the Series A 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 and intent to refinance the outstanding principal of $72.4 million on a long-term basis and the notes are therefore included in Long-term Debt and Guarantees in the Consolidated Balance Sheet as of March 31, 1999. 3. Comprehensive Income The Company's comprehensive income was $42.1 million and $18.2 million for the three-month periods ended March 31, 1999 and 1998, respectively. The only adjustment made to net income in the periods was for foreign currency translation losses of $0.2 million and $0.7 million for the three months ended March 31, 1999 and 1998, respectively. PAGE 8 4. Business Segments SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" established standards for reporting information about operating segments in annual financial statements and requires selected information in interim financial statements. Selected financial information is reported below for the three-month periods ended March 31, 1999 and 1998: (Thousands) Con-Way Emery Menlo Other Total ---------- ---------- ---------- ---------- ---------- 1999 Revenues $ 438,511 $ 532,827 $ 162,987 $ 144,128 $1,278,453 Inter-company Eliminations (5,132) (3,406) (2,428) (12,164) (23,130) ---------- ---------- ---------- ---------- ---------- Net Revenues 433,379 529,421 160,559 131,964 1,255,323 ---------- ---------- ---------- ---------- ---------- Operating Income 53,947 3,551 4,556 20,541 82,595 1998 Revenues 395,512 528,517 122,957 65,559 1,112,545 Inter-company Eliminations (1,907) (6,884) (2,882) (11,006) (22,679) ---------- ---------- ---------- ---------- ---------- Net Revenues 393,605 521,633 120,075 54,553 1,089,866 ---------- ---------- ---------- ---------- ---------- Operating Income (Loss) 50,501 7,513 3,812 (17,021) 44,805 PAGE 9 5. Earnings Per Share Basic earnings per share was computed by dividing net income available to common shareholders by the weighted-average common shares outstanding. Diluted earnings per share was calculated as follows: Three Months Ended (Dollars in thousands except March 31, per share data) 1999 1998 ---------------------- Earnings: Net Income Available to Common Shareholders $ 40,269 $ 16,906 Add-backs: Dividends on Series B preferred stock, net of replacement funding 332 326 Dividends on preferred securities of subsidiary trust, net of tax 954 954 ---------- ---------- $ 41,555 $ 18,186 ---------- ---------- Shares: Basic shares (weighted-average common shares outstanding) 47,925,476 47,509,416 Stock option and restricted stock dilution 765,435 780,797 Series B preferred stock 3,998,184 4,061,370 Preferred securities of subsidiary trust 3,125,000 3,125,000 ---------- ---------- 55,814,095 55,476,583 ---------- ---------- Diluted Earnings Per Share $ 0.74 $ 0.33 ========== ========== 6. 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 10 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. 7. 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 has a three-year term, which expires on December 2, 1999, although CFC may terminate any or all services with six months notice. The Company 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 Company is currently under examination by the Internal Revenue Service (IRS) for tax years 1987 through 1996 on various issues. In connection with those examinations, the IRS is seeking additional taxes, plus interest, for certain matters relating to CFC for periods prior to its spin-off from the Company in 1996. Although the Company is currently contesting these additional taxes proposed by the IRS, the Company may elect to pay a substantial portion of these taxes in 1999. As the former parent of CFC, the Company is liable to the IRS for CFC's tax liability relating to such periods. However, as part of the spin- off, the Company and CFC entered into a tax sharing agreement that provides a mechanism for the allocation of any additional tax liability and related interest that arise due to adjustments by the IRS for years prior to the spin-off. The Company believes it is entitled to and will pursue reimbursement from CFC under the tax sharing agreement for any payments that the Company makes to the IRS with respect to these additional taxes. 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. PAGE 11 The Company has filed a protest concerning the proposed adjustment for tax years 1987 through 1990 and is engaged in discussions with the Appeals Office of the IRS. The Company is unable to predict whether or not it will be able to resolve this issue with the Appeals Office. The Company expects that, if it is unable to resolve this issue with the Appeals Office, it will receive a statutory notice of assessment from the IRS before the end of 1999. If this occurs, the Company intends to contest the assessment by appropriate legal proceedings. The Company believes that its practice of expensing these types of aircraft maintenance costs is consistent with industry practice and intends to continue to vigorously contest the proposed adjustment. However, if this matter is determined adversely to the Company, there can be no assurance that the Company will not be liable for substantial additional taxes, plus accrued interest. As a result, the Company is unable to predict the ultimate outcome of this matter and there can be no assurance that this matter will not have a material adverse effect on the Company. The IRS has proposed adjustments that would require Emery Worldwide to 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 Appeals Office of the IRS. However, the Company believes it is unlikely that the issue will be resolved with the Appeals Office and expects to receive a statutory notice of assessment from the IRS before the end of 2000. Upon receipt of the notice, the Company will be required to pay all or a portion of the adjustment with accrued interest before seeking a refund of that payment through appropriate legal proceedings. 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 be liable for a substantial amount of additional aviation excise taxes for the 1990 through 1995 tax period, plus interest. 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. 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. PAGE 12 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total Company net income available to common shareholders for the first quarter of 1999 increased 138.2% to $40.3 million from $16.9 million in the first quarter of 1998. Earnings per share for the first quarter of 1999 were $0.84 basic and $0.74 diluted compared to $0.36 basic and $0.33 diluted for the same period in 1998. Net income in the first quarter of 1999 included a net gain from the settlement of a lawsuit of $0.19 per basic share and $0.16 per diluted share. Excluding the non-recurring net gain, net income available to common shareholders would have increased 83.2% over the prior year quarter with diluted earnings per share of $0.58. Revenues for the first quarter of 1999 increased at all four of the Company's operating segments with the largest increase coming from the Priority Mail operations, which was in the start-up phase during the first quarter of last year and is included in the operating results of the Other segment. Emery's revenue increased in the 1999 first quarter compared to the same quarter last year following two quarters of year-over-year revenue declines. First quarter operating income in 1999 increased over the prior-year first quarter at three of the four operating segments. The Other segment consists primarily of the Priority Mail operations, but in the 1999 first quarter also included a $16.5 million non-recurring net gain from the settlement of a lawsuit. In addition, the Priority Mail operations reported operating income in the first quarter of 1999 in contrast to start-up losses in the first quarter of last year. Higher operating income at Con- Way and Menlo was partially offset by lower operating income at Emery. Other net expense for the first quarter was down 27.9% due primarily to lower interest expense and gains on the sale of properties. Lower interest expense was primarily the result of lower average short-term borrowings and the refinancing of a capital lease obligation at a lower interest rate in October 1998. The first quarter of the prior year also included a loss on the sale of property. The effective tax rate for the first quarter of 1999 was 43.5% compared to 44.5% in 1998. The reduction was primarily the result of higher income in the 1999 first quarter. PAGE 13 Con-Way Transportation Services Con-Way's revenue in the first quarter of 1999 increased 10.1% over the prior year first quarter primarily as a result of increased freight volume and revenue per hundredweight. In the first quarter of 1999, total and less-than-truckload (LTL) weight increased 3.5% and 4.2%, respectively, over the same quarter of last year. Total and LTL shipments increased 5.2% and 5.3%, respectively. The higher weight and shipment volumes reflect growth in core regional service and interregional joint services. Net revenue per hundredweight in the first quarter of 1999 increased 7.5% over the first quarter of last year due primarily to higher rates obtained for Con-Way's core premium service and a larger percentage of interregional joint services, which yield higher rates on longer lengths of haul. The prior year first quarter included benefits received from freight diverted by shippers concerned about a possible strike at unionized national carriers. Con-Way's first quarter operating income in 1999 was 6.8% above operating income in the first quarter of 1998 primarily as a result of higher revenue, which was partially offset by higher costs associated with severe winter storms. Other factors contributing to improved operating income in the first quarter of 1999 were increased emphasis on operating efficiencies, better cost control, and lower fuel costs, which were partially offset by start-up costs associated with Con-Way's new multi- client warehousing and logistics business. The first quarter of last year experienced lower weather related costs due to an unusually mild winter and benefited from the strike concerns of shippers mentioned above. Emery Worldwide Emery's 1999 first-quarter revenue increased 1.5% from the 1998 first quarter. Higher revenue from the Express Mail contract with the U.S. Postal Service and Emery Global Logistics was partially offset by lower airfreight revenue. North American airfreight revenue in the 1999 first quarter decreased 6.6% from the same quarter of last year due primarily to a 10.0% decline in freight volume partially offset by a yield increase of 4.2%. Lower freight volume was partially attributable to decreased demand from certain industries serviced by Emery and an increase in competitive ground-based transportation. Emery's yield management program, which was designed to reprice or eliminate certain low margin business, also contributed to lower volume but was also a factor in achieving higher revenue per pound. Improved revenue per pound in the first quarter of 1999 was also partially due to a new higher yielding guaranteed service introduced in January 1999. International airfreight revenue in the 1999 first quarter decreased 3.3% due primarily to a 4.4% decline in freight volume partially offset by a 1.1% increase in yield. International freight volume in the 1999 first quarter was lower than the same quarter last year due primarily to continued adverse economic conditions in the international markets served by Emery. Emery's 1999 first quarter operating income decline of 52.7% from the same quarter last year was primarily the result of lower airfreight revenue and higher airfreight costs in part related to the repositioning of Emery as a premium service carrier. Better service in the 1999 first quarter was attained in part by maintaining its infrastructure and incurring quality- related costs of improving aircraft dependability and modifying freight handling processes. Lower fuel costs in the 1999 first quarter partially offset the higher costs of the service initiatives. PAGE 14 Management will continue to focus on positioning Emery as a premium service provider. In North America, management intends to maintain an infrastructure capable of servicing a higher volume of premium and guaranteed services and to reduce the costs associated with its infrastructure by replacing older and less reliable aircraft with newer aircraft having lower maintenance costs and greater freight capacity, including wide-body aircraft. Internationally, Emery's management will focus on expanding its variable-cost-based operations. In an effort to increase the international revenue as a percentage of total revenue, management will continue its marketing efforts and convert more agent locations to owned locations. Menlo Logistics Menlo's revenue in the first quarter of 1999 was 33.7% above the same quarter of 1998. The 1999 first quarter results included revenue generated from logistics contracts secured after the first quarter of 1998 and higher revenue from existing contracts. Operating income for Menlo in the 1999 first quarter was up 19.5% over the first quarter of 1998. Higher operating income was primarily attributable to increased revenue, the addition of higher-margin contracts and moderation of operating costs. However, higher business development and information system costs in the 1999 first quarter contributed to lower operating income as a percentage of revenue than in the 1998 first quarter. Other Segment First quarter revenues for the Other segment increased 141.9% over the same quarter last year. The Other segment consists primarily of the operations under a Priority Mail contract with the U.S. Postal Service, and includes Road Systems and VantageParts. Priority Mail revenue of $118.2 million increased 175.4% over the first quarter of last year due primarily to the contract still being in the start-up phase in the first quarter of 1998. Operating income for the Other segment increased by $37.6 million in the first quarter of 1999 from a $17.0 million operating loss in the first quarter of 1998. The increase was primarily the result of a $16.5 million net gain from the settlement of a lawsuit in the first quarter of 1999 and improved operating results from the Priority Mail operations. Priority Mail operating income was $3.5 million in the first quarter of 1999 compared to a $17.6 million operating loss in the same quarter of last year. First quarter results for the Priority Mail operations reflect pricing that may be subject to retroactive adjustment at a later date. The Company has proposed to the Postal Service increased pricing that the Company feels is well founded and justifiable based upon its experience of operating the Priority Mail contract in 1998. The Postal Service is reviewing the Company's proposal. Consequently, the Company has recognized contract revenues in the 1999 first quarter based upon the pricing actually paid by the Postal Service. Any adjustments to contract revenue for prior periods affected by the conclusion of the price re-determination will be recognized in the then current fiscal quarter. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 1999, the Company's cash and cash equivalents increased by $5.6 million to $79.5 million. Cash from operations of $96.4 million provided substantially all of the funding for $67.2 million of capital and software expenditures, $19.2 million of debt reduction and $10.4 million of dividend payments. Cash flow from operations in the first quarter of 1999 increased $81.0 million over the same quarter last year primarily due to higher net income, depreciation and amortization, and changes in receivables, accrued liabilities and deferred charges. Capital expenditures of $55.8 million in the first quarter of 1999 decreased $13.9 million from the same quarter last year due primarily to the inclusion in the 1998 first quarter of capital expenditures related to the start-up phase of the Priority Mail contract. Proceeds from sales of property were $3.8 million lower in the 1999 first quarter compared to the same quarter of last year. PAGE 15 During the first quarter of 1999, the Company repaid $14.0 million of net short-term debt compared to the borrowing of $71.0 million of net short- term debt during the first quarter of 1998. At March 31, 1999, the Company had no borrowings under its $350 million unsecured credit facility and $29.0 million outstanding under $95.0 million of 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 $69.1 million at March 31, 1999, which left available capacity of $280.9 million. In addition, the Company had available capacity of $66.0 million under other uncommitted lines of credit. Under several other unsecured facilities, $51.5 million of letters of credit were outstanding at March 31, 1999. The aggregate principal amount of the Company's unsecured 9 1/8% Notes is repayable on August 15, 1999. In addition, holders of the Series A restructured and non-structured Thrift and Stock Plan (TASP) notes have the right to require the Company to repurchase the notes, in whole or in part, on July 1, 1999. The Company has the ability and intent to refinance the outstanding principal on both the 9 1/8% Notes and the TASP notes on a long- term basis. Refer to Note 2 of the Notes to Consolidated Financial Statements. 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 when and if issued. The Company's ratio of total debt to capital decreased to 34.5% at March 31, 1999, from 36.4% at December 31, 1998, primarily due to lower short-term borrowings and higher shareholders' equity from net income. Market Risk There have been no material changes in the Company's market risk sensitive instruments and positions since its disclosure in its Annual Report on Form 10-K for the year ended December 31, 1998. 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 airfreight 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 peak in December due primarily to higher shipping demand related to the holiday season. PAGE 16 Year 2000 Renovation of all business-critical Information Technology (IT) Systems is scheduled to be substantially complete by the end of the second quarter of 1999. Validation, which is currently in process for the Company's systems and software applications, is scheduled for completion by the end of the third quarter of 1999. Like many other companies, an issue affecting the Company is the ability of its 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 IT professionals began preparing for the Y2K issue in 1996. In 1997, the Company formed a Steering Committee composed 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. State of Readiness The Company has identified distinct categories for its Y2K compliance efforts: (1) IT Systems, (2) Non-IT Systems, and (3) 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, correcting non- compliant systems through renovation 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. The following percentages of system and software renovations were achieved as of March 31, 1999. Mainframe hardware has been fully renovated. Certain peripheral mainframe hardware is approximately 95% renovated. Mainframe operating systems and mainframe applications software are approximately 90% and 70% renovated, respectively. Mid-range computers and servers are estimated to be 55% renovated while approximately 50% of related operating systems and application software programs have been renovated. Network hardware (excluding servers) and computer workstations are approximately 95% renovated and an estimated 20% of the related operating systems and application software programs have been renovated. 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 essentially all 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 60% 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 second quarter of 1999 and to be validated by the end of the third quarter of 1999. PAGE 17 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. The Company has communicated with third parties with which 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. Essentially all of the Company's critical vendors have been contacted and approximately 95% have responded to the surveys. 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 developed 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 is analyzing the results of these studies as they become available. Costs to Address Y2K Compliance Since 1996, the Company has expensed approximately $29 million on Y2K compliance and expects that approximately $11 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 first quarter of 1999, the Company capitalized $1.8 million of purchased software costs and $9.6 million of 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. At March 31, 1999, draft contingency plans have been completed by most of the Company's operating and support facilities. PAGE 18 Forward-Looking Statements Certain statements included 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 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, 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, including the tax matters described herein. 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. PAGE 19 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 costs 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 material adverse effect on the Company. Certain legal matters are discussed in Note 7 in the Notes to Consolidated Financial Statements in Part I of this form. ITEM 4. Submission of Matters to a Vote of Security Holders At the Annual Shareholders Meeting held May 3, 1999, the following proposals were presented with the indicated voting results: For the purpose of electing members of the Board of Directors, the votes representing shares of Common and Preferred stock were cast as follows: Nominee For Against Donald E. Moffitt 47,092,789 468,496 Michael J. Murray 47,122,179 439,106 Robert D. Rogers 47,120,248 441,037 William J. Schroeder 47,122,021 439,264 The following directors did not stand for election and continued in office as directors after the Annual Shareholders Meeting: Robert Alpert, Richard A. Clarke, Margaret G. Gill, Robert Jaunich II, W. Keith Kennedy, Jr., Richard B. Madden, Gregory L. Quesnel, and Robert P. Wayman. Earl Cheit, a member of the Board of Directors since 1976, retired from office as director effective May 3, 1999. The appointment of Arthur Andersen LLP as independent public accountants for the year 1999 was approved by the following vote: For 47,069,178; Against 285,279; Abstain 206,828. 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 3.9x and 2.4x for the three months ended March 31, 1999 and 1998, 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 3.8x and 2.3x for the three months ended March 31, 1999 and 1998, respectively. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1999. PAGE 20 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) May 12, 1999 /s/Chutta Ratnathicam Chutta Ratnathicam Senior Vice President and Chief Financial Officer EX-27 2
5 1000 3-MOS DEC-31-1999 MAR-31-1999 79,531 0 799,099 (22,532) 41,215 1,071,800 1,765,644 (766,719) 2,695,909 870,739 461,211 125,000 129,168 352,507 336,179 2,695,909 0 1,255,323 0 1,172,728 7,734 0 7,126 74,861 32,565 42,296 0 0 0 40,269 0.84 0.74
EX-99 3 Exhibit 99(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Three Months Ended March 31, 1999 1998 Fixed Charges: Interest Expense $ 7,126 $ 8,532 Capitalized Interest 1,129 490 Dividend Requirement on Series B Preferred Stock [1] 3,063 3,003 Interest Component of Rental Expense [2] 12,684 9,863 $ 24,002 $ 21,888 Earnings: Income before Taxes $ 74,861 $ 34,077 Fixed Charges 24,002 21,888 Capitalized Interest (1,129) (490) Preferred Dividend Requirements [3] (3,063) (3,003) $ 94,671 $ 52,472 Ratio of Earnings to Fixed Charges: 3.9x 2.4x [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. [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) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands) Three Months Ended March 31, 1999 1998 Combined Fixed Charges and Preferred Stock Dividends: Interest Expense $ 7,126 $ 8,532 Capitalized Interest 1,129 490 Dividend Requirement on Series B Preferred Stock [1] 3,063 3,003 Dividend Requirement on Preferred Securities of Subsidiary Trust 1,563 1,563 Interest Component of Rental Expense [2] 12,684 9,863 $ 25,565 $ 23,451 Earnings: Income before Taxes $ 74,861 $ 34,077 Fixed Charges 25,565 23,451 Capitalized Interest (1,129) (490) Preferred Dividend Requirements [3] (3,063) (3,003) $ 96,234 $ 54,035 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: 3.8x 2.3x [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. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. -----END PRIVACY-ENHANCED MESSAGE-----