10-Q 1 jun0710q.txt 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 June 30, 2007 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 Con-way Inc. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 2855 Campus Drive, Suite 300, San Mateo, California 94403 Telephone Number (650) 378-5200 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 X No --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer X Accelerated filer Non-accelerated filer --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Number of shares of Common Stock, $.625 par value, outstanding as of July 31, 2007: 45,113,411 CON-WAY INC. FORM 10-Q Quarter Ended June 30, 2007 _______________________________________________________________________________ _______________________________________________________________________________ INDEX PART I.FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2007 and December 31, 2006 3 Statements of Consolidated Income - Three and Six Months Ended June 30, 2007 and 2006 5 Statements of Consolidated Cash Flows - Six Months Ended June 30, 2007 and 2006 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 30 Item 4. Controls and Procedures 31 PART II. OTHER INFORMATION Item 1. Legal Proceedings 32 Item 1A. Risk Fctors 32 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34 Item 6. Exhibits 34 Signatures 35 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CON-WAY INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) June 30, December 31, ASSETS 2007 2006 ------------ ------------ Current Assets Cash and cash equivalents $ 345,373 $ 260,039 Marketable securities 197,550 184,525 Trade accounts receivable, net 467,064 439,727 Other accounts receivable 22,339 107,520 Operating supplies, at lower of average cost or market 24,849 19,223 Prepaid expenses 35,270 34,445 Deferred income taxes 42,926 43,107 Assets of discontinued operations 2,057 1,898 ------------ ------------ Total Current Assets 1,137,428 1,090,484 ------------ ------------ Property, Plant and Equipment, at cost Land 159,308 159,506 Buildings and leasehold improvements 708,230 688,644 Revenue equipment 947,698 970,290 Other equipment 249,071 239,244 ------------ ------------ 2,064,307 2,057,684 Accumulated depreciation and amortization (970,498) (939,709) ------------ ------------ 1,093,809 1,117,975 ------------ ------------ Other Assets Deferred charges and other assets 27,932 26,621 Capitalized software, net 32,517 34,831 Deferred income taxes 22,601 31,978 ------------ ------------ 83,050 93,430 ------------ ------------ Total Assets $ 2,314,287 $ 2,301,889 ============ ============ The accompanying notes are an integral part of these statements. CON-WAY INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts) June 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2007 2006 ------------ ------------ Current Liabilities Accounts payable $ 255,956 $ 240,870 Accrued liabilities 248,214 202,923 Income taxes payable 6,839 -- Self-insurance accruals 98,079 92,372 Current maturities of long-term debt 22,722 18,635 Liabilities of discontinued operations 3,957 5,002 ------------ ------------ Total Current Liabilities 635,767 559,802 Long-Term Liabilities Long-term debt and guarantees 532,357 557,723 Self-insurance accruals 114,235 114,431 Employee benefits 264,183 314,559 Other liabilities and deferred credits 21,034 14,595 ------------ ------------ Total Liabilities 1,567,576 1,561,110 ------------ ------------ Commitments and Contingencies (Notes 2 and 11) 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 579,659 and 603,816 shares, respectively 6 6 Additional paid-in capital, preferred stock 88,160 91,834 Deferred compensation, defined contribution plan (26,404) (31,491) ------------ ------------ Total Preferred Shareholders' Equity 61,762 60,349 ------------ ------------ Common stock, $.625 par value; authorized 100,000,000 shares; issued 61,878,378 and 61,616,649 shares, respectively 38,586 38,434 Additional paid-in capital, common stock 561,640 549,267 Retained earnings 909,106 847,068 Cost of repurchased common stock (16,786,703 and 15,168,447 shares, respectively) (724,341) (638,929) ------------ ------------ Total Common Shareholders' Equity 784,991 795,840 ------------ ------------ Accumulated Other Comprehensive Loss (100,042) (115,410) ------------ ------------ Total Shareholders' Equity 746,711 740,779 ------------ ------------ Total Liabilities and Shareholders' Equity $ 2,314,287 $ 2,301,889 ============ ============ The accompanying notes are an integral part of these statements. CON-WAY INC. STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (Dollars in thousands except per share amounts) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenues $1,073,717 $1,100,052 $2,075,908 $2,146,044 Costs and Expenses Salaries, wages and other employee benefits 461,202 440,032 901,204 870,794 Purchased transportation 269,531 301,867 526,390 604,983 Depreciation and amortization 37,067 35,235 74,130 70,627 Maintenance 28,545 27,226 53,805 53,129 Rents and leases 18,699 19,538 36,933 39,242 Purchased labor 14,652 16,724 29,811 31,569 Other operating expenses 166,400 152,262 317,642 294,818 Loss (Income) from equity investment -- (4,665) 2,699 (8,859) ----------- ----------- ----------- ----------- 996,096 988,219 1,942,614 1,956,303 ----------- ----------- ----------- ----------- Operating Income 77,621 111,833 133,294 189,741 ----------- ----------- ----------- ----------- Other Income (Expense) Investment income 5,854 6,680 11,302 13,622 Interest expense (8,773) (8,317) (17,324) (16,465) Miscellaneous, net 418 174 193 656 ----------- ----------- ----------- ----------- (2,501) (1,463) (5,829) (2,187) ----------- ----------- ----------- ----------- Income from Continuing Operations before Income Tax Provision 75,120 110,370 127,465 187,554 Income Tax Provision 25,670 34,418 47,296 63,609 ----------- ----------- ----------- ----------- Income from Continuing Operations 49,450 75,952 80,169 123,945 ----------- ----------- ----------- ----------- Discontinued Operations, net of tax Loss from Discontinued Operations -- (1,176) -- (1,929) Gain (Loss) from Disposal (1,310) (4,044) 1,609 (4,850) ----------- ----------- ----------- ----------- (1,310) (5,220) 1,609 (6,779) Net Income 48,140 70,732 81,778 117,166 Preferred Stock Dividends 1,765 1,808 3,479 3,571 ----------- ----------- ----------- ----------- Net Income Available to Common Shareholders $ 46,375 $ 68,924 $ 78,299 $ 113,595 =========== =========== =========== =========== Net Income From Continuing Operations Available to Common Shareholders $ 47,685 $ 74,144 $ 76,690 $ 120,374 =========== =========== =========== =========== Weighted-Average Common Shares Outstanding Basic 45,286,315 49,676,912 45,636,617 50,793,078 Diluted 48,415,928 53,104,005 48,757,823 54,228,769 Earnings (Loss) per Common Share Basic Net Income from Continuing Operations $ 1.05 $ 1.49 $ 1.68 $ 2.37 Loss from Discontinued Operations -- (0.02) -- (0.04) Gain (Loss) from Disposal (0.03) (0.08) 0.04 (0.09) ----------- ----------- ----------- ----------- Net Income Available to Common Shareholders $ 1.02 $ 1.39 $ 1.72 $ 2.24 =========== =========== =========== =========== Diluted Net Income from Continuing Operations $ 0.99 $ 1.40 $ 1.58 $ 2.23 Loss from Discontinued Operations -- (0.02) -- (0.04) Gain (Loss) from Disposal (0.03) (0.08) 0.04 (0.09) ---------- ------------ ----------- ----------- Net Income Available to Common Shareholders $ 0.96 $ 1.30 $ 1.62 $ 2.10 =========== =========== =========== =========== The accompanying notes are an integral part of these statements. CON-WAY INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Dollars in thousands) Six Months Ended June 30, ----------------------- 2007 2006 ----------- ----------- Cash and Cash Equivalents, Beginning of Period $ 260,039 $ 514,275 ----------- ----------- Operating Activities Net income 81,778 117,166 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operations, net of tax (1,609) 6,779 Depreciation and amortization, net of accretion 71,741 68,404 Increase in deferred income taxes 8,933 5,991 Amortization of deferred compensation 5,087 4,569 Share-based compensation 5,350 3,485 Provision for uncollectible accounts 1,455 1,251 Loss (Income) from equity investment 2,699 (8,859) Gain from sales of property and equipment, net (1,136) (1,197) Changes in assets and liabilities: Receivables (29,961) 18,122 Prepaid expenses (825) (2,629) Accounts payable 10,698 9,389 Accrued incentive compensation 750 944 Accrued liabilities, excluding accrued incentive compensation and employee benefits 22,076 19,894 Self-insurance accruals 5,511 2,828 Income taxes 37,604 23,276 Employee benefits (8,717) (5,667) Deferred charges and credits 2,016 13,938 Other (5,400) (8,489) ----------- ----------- Net Cash Provided by Operating Activities 208,050 269,195 ----------- ----------- Investing Activities Capital expenditures (57,407) (164,215) Software expenditures (4,217) (6,252) Proceeds from sales of property and equipment, net 10,223 4,050 Proceeds from sale of equity investment 51,900 -- Net increase in marketable securities (13,025) (13,124) ----------- ----------- Net Cash Used in Investing Activities (12,526) (179,541) ----------- ----------- Financing Activities Repayment of long-term debt and guarantees (18,617) (15,016) Proceeds from exercise of stock options 6,868 11,749 Excess tax benefit from stock option exercises 567 2,229 Payments of common dividends (9,164) (10,223) Payments of preferred dividends (4,027) (4,311) Repurchases of common stock (89,865) (261,783) ----------- ----------- Net Cash Used in Financing Activities (114,238) (277,355) ----------- ----------- Net Cash Provided by (Used in) Continuing Operations 81,286 (187,701) ----------- ----------- Discontinued Operations Net Cash Provided by (Used in) Operating Activities 4,048 (12,492) Net Cash Used in Investing Activities -- (178) ----------- ----------- Net Cash Provided by (Used in) Discontinued Operations 4,048 (12,670) ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents 85,334 (200,371) ----------- ----------- Cash and Cash Equivalents, End of Period $ 345,373 $ 313,904 =========== =========== Supplemental Disclosure Cash paid for income taxes, net of refunds $ 488 $ 30,188 =========== =========== Cash paid for interest, net of amounts capitalized $ 19,740 $ 20,597 =========== =========== The accompanying notes are an integral part of these statements. CON-WAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Principal Accounting Policies Organization The term "Con-way" or "Company" refers to Con-way Inc. and its subsidiaries. Con-way provides transportation and logistics services for a wide range of manufacturing, industrial, and retail customers. For financial reporting purposes, Con-way is divided into four reporting segments: Con-way Freight and Transportation, Menlo Logistics, Vector and Con-way Other. Con-way Freight and Transportation primarily provides regional next-day, second-day, and transcontinental less-than-truckload freight transportation throughout the U.S., and in Canada, Puerto Rico and Mexico, as well as asset-based regional and transcontinental full-truckload services. Menlo Logistics develops contract logistics solutions, including the management of complex distribution networks and supply-chain engineering and consulting, and also provides domestic brokerage services. Vector served as the lead logistics manager for General Motors ("GM") prior to GM's exercise of its call right to purchase Con-way's membership interest in Vector on June 23, 2006, as more fully discussed in Note 3, "Sale of Unconsolidated Joint Venture." Certain corporate activities are reported in the Con-way Other reporting segment. Basis of Presentation Pursuant to the rules and regulations of the Securities and Exchange Commission, the accompanying consolidated financial statements of Con-way Inc. and its wholly owned subsidiaries have been prepared by Con-way, without audit by an independent registered public accounting firm. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") 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 Con-way's 2006 Annual Report on Form 10-K. Results for the periods presented are not necessarily indicative of annual results. Earnings per Share ("EPS") Basic EPS is computed by dividing reported earnings (loss) by the weighted- average common shares outstanding. Diluted EPS is calculated as follows: (Dollars in thousands Three Months Ended Six Months Ended except per share data) June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Numerator: Continuing operations (after preferred stock dividends), as reported $ 47,685 $ 74,144 $ 76,690 $ 120,374 Add-backs: Dividends on Series B preferred stock, net of replacement funding 284 290 533 545 ----------- ----------- ----------- ----------- Continuing operations 47,969 74,434 77,223 120,919 ----------- ----------- ----------- ----------- Discontinued operations (1,310) (5,220) 1,609 (6,779) ----------- ----------- ----------- ----------- Available to common shareholders $ 46,659 $ 69,214 $ 78,832 $ 114,140 =========== =========== =========== =========== Denominator: Weighted-average common shares outstanding 45,286,315 49,676,912 45,636,617 50,793,078 Stock options and nonvested stock 400,583 494,347 392,176 502,945 Series B preferred stock 2,729,030 2,932,746 2,729,030 2,932,746 ----------- ----------- ----------- ----------- 48,415,928 53,104,005 48,757,823 54,228,769 =========== =========== =========== =========== Anti-dilutive stock options not included in denominator 851,899 321,700 878,399 325,700 =========== =========== =========== =========== Earnings (Loss) per Diluted Share: Continuing operations $ 0.99 $ 1.40 $ 1.58 $ 2.23 Discontinued operations (0.03) (0.10) 0.04 (0.13) ----------- ----------- ----------- ----------- Available to common shareholders $ 0.96 $ 1.30 $ 1.62 $ 2.10 =========== =========== =========== =========== New Accounting Standards In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair-value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair-value measurements and does not require any new fair-value measurements. The effective date of SFAS 157 is the first fiscal year beginning after November 15, 2007, and interim periods within those years, which for Con-way is the first quarter of 2008. Con-way does not expect the adoption of SFAS 157 to have a material effect on its financial statements. In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair-value option has been elected will be reported in earnings. The effective date for SFAS 159 is the first fiscal year beginning after November 15, 2007, which for Con-way is the first quarter of 2008. Con-way is currently evaluating the elective option under SFAS 159, but does not expect that adoption will have a material effect on its financial statements. Reclassification Certain amounts in the prior-period financial statements have been reclassified to conform to the current-period presentation. 2. Discontinued Operations Discontinued operations in the periods presented relate to (1) the closure of Con-way Forwarding in June 2006, (2) the sale of Menlo Worldwide Forwarding, Inc. and its subsidiaries and Menlo Worldwide Expedite!, Inc. (collectively "MWF") in December 2004, (3) the shut-down of Emery Worldwide Airlines, Inc. ("EWA") in December 2001, and (4) the spin-off of Consolidated Freightways Corporation ("CFC") in December 1996. The results of operations, net liabilities, and cash flows of discontinued operations have been segregated from continuing operations, except where otherwise noted. Results of discontinued operations are summarized below: Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- (Dollars in thousands) 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenues Con-way Forwarding $ -- $ 9,544 $ -- $ 21,699 Loss from Discontinued Operations Con-way Forwarding Loss before income tax benefit -- (1,493) -- (2,963) Income tax benefit -- 317 -- 1,034 ----------- ----------- ----------- ----------- $ -- $ (1,176) $ -- $ (1,929) =========== =========== =========== =========== Gain (Loss) from Disposal, net of tax Con-way Forwarding $ 156 $ (5,128) $ 156 $ (5,128) MWF (60) 1,025 (33) 644 EWA (186) 225 2,706 (200) CFC (1,220) (166) (1,220) (166) ----------- ----------- ----------- ----------- $ (1,310) $ (4,044) $ 1,609 $ (4,850) =========== =========== =========== =========== The assets and liabilities of discontinued operations are presented in the consolidated balance sheets under the assets (or liabilities) of discontinued operations. At June 30, 2007 and December 31, 2006, assets of discontinued operations were $2.1 million and $1.9 million, respectively, and liabilities of discontinued operations were $4.0 million and $5.0 million, respectively. Con-way Forwarding In June 2006, Con-way closed the operations of its domestic air freight forwarding business known as Con-way Forwarding. The decision to close the operating unit was made following management's detailed review of the unit's competitive position and its prospects in relation to Con-way's long-term strategies. As a result of the closure, Con-way in 2006 recognized net losses of $4.2 million (net of $3.0 million of tax benefits), consisting primarily of a $5.1 million second-quarter loss (net of a $2.8 million tax benefit) for the write-off of non-transferable capitalized software and other assets, a loss related to non-cancelable operating leases, and other costs. MWF In October 2004, Con-way and Menlo Worldwide, LLC ("MW") entered into a stock purchase agreement with United Parcel Service, Inc. ("UPS") to sell all of the issued and outstanding capital stock of MWF. Con-way completed the sale in December 2004. The stock purchase agreement excludes the assets and liabilities related to EWA, and the obligation related to former MWF employees covered under Con-way's domestic pension, postretirement medical and long-term disability plans. Under the stock purchase agreement, Con-way has agreed to a three-year non-compete covenant that, subject to certain exceptions, will limit Con-way's annual air freight and ocean forwarding and/or customs brokerage revenues to $175 million through December 19, 2007. Con-way has also agreed to indemnify UPS against certain losses that UPS may incur after the closing of the sale with certain limitations. Any losses related to these indemnification obligations or any other costs, including any future cash expenditures, related to the sale that have not been estimated and recognized will be recognized in future periods as an additional loss from disposal when and if incurred. See Note 2, "Discontinued Operations," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K for a complete description of the disposition of MWF, including a discussion of losses from impairment and disposal of MWF and of cash payments received from UPS in connection with the sale of MWF. As more fully discussed in Note 9, "Income Taxes," Con-way's disposal of MWF generated a capital loss for tax purposes. EWA The results of EWA relate to the cessation of its air-carrier operations in 2001. In the periods presented, results from EWA relate to adjustments of loss estimates, except for a first-quarter net gain in 2007 of $2.9 million (net of tax of $1.7 million) that relates to a recovery of prior losses. EWA's estimated loss reserves declined to $3.4 million at June 30, 2007, from $4.0 million at December 31, 2006, due primarily to the cash payment of liabilities. EWA's remaining loss reserves at June 30, 2007 were reported in liabilities of discontinued operations and consisted of Con-way's estimated remaining exposure related to the labor matters described below. In connection with the cessation of its air-carrier operations in 2001, EWA terminated the employment of all of its pilots and flight crewmembers. Those pilots and crewmembers were represented by the Air Line Pilots Association ("ALPA") under a collective bargaining agreement. Subsequently, ALPA filed grievances on behalf of the pilots and flight crewmembers protesting the cessation of EWA's air-carrier operations and MWF's use of other air carriers. These matters have been the subject of litigation in U.S. District Court and state court in California, including litigation brought by ALPA and by former EWA pilots and crewmembers no longer represented by ALPA. On June 30, 2006, EWA, for itself and for Con-way Inc. and Menlo Worldwide Forwarding, Inc. ("MWF, Inc."), concluded a final settlement of the California state court litigation. Under the terms of the settlement, plaintiffs received a cash payment of $9.2 million from EWA, and the lawsuit was dismissed with prejudice. The cash settlement reduced by an equal amount EWA's estimated loss reserve applicable to the grievances filed by ALPA. On August 8, 2006, EWA paid $10.9 million to settle the litigation brought by ALPA that finally concluded litigation with former EWA pilots and flight crewmembers still represented by ALPA as of that date. The remaining matters are also the subject of a claim by former EWA pilots and flight crewmembers no longer represented by ALPA that has been ordered by the court to binding arbitration. Other former pilots have also initiated litigation in federal court. Based on management's current evaluation, Con-way believes that it has provided for its estimated remaining exposure related to these matters. However, there can be no assurance in this regard as Con-way cannot predict with certainty the ultimate outcome of these matters. CFC The results of CFC relate to Con-way's spin-off of CFC to Con-way's shareholders on December 2, 1996. In connection with the spin-off of CFC, Con-way agreed to indemnify certain states, insurance companies and sureties against the failure of CFC to pay certain workers' compensation, tax and public liability claims that were pending as of September 30, 1996. In the periods presented, Con-way's losses related to CFC were due to revisions of estimated losses related to indemnified workers' compensation liabilities. 3. Sale of Unconsolidated Joint Venture Vector SCM, LLC ("Vector") was a joint venture formed with GM in December 2000 for the purpose of providing logistics management services on a global basis for GM, and for customers in addition to GM. GM Exercise of Call Right On June 23, 2006, GM exercised its right to purchase Con-way's membership interest in Vector. On December 11, 2006, an independent financial advisor established a fair value for Vector that was agreed upon by Con-way and GM. The advisor established a fair value of $96.4 million for the membership interests of both joint-venture partners, including a fair value of $84.8 million that was attributable to Con-way's membership interest in Vector. As a result of the agreed-upon valuation, Con-way in December 2006 recognized a receivable from GM of $51.9 million (an amount equal to the $84.8 million fair value of Con-way's membership interest reduced by Con-way's $32.9 million payable to Vector) and also recognized a $41.0 million gain (an amount equal to the $51.9 million receivable reduced by Con-way's $9.0 million net investment in Vector and $1.9 million of sale-related costs). In January 2007, Con-way received a $51.9 million payment from GM. Operating Results from Vector Although Con-way owned a majority interest in Vector, Con-way's portion of Vector's operating results were reported as an equity-method investment based on GM's ability to control certain operating decisions. Prior to the sale of Vector, Con-way's proportionate share of the net income from Vector is reported in Con-way's statements of consolidated income as a reduction of operating expenses. Except for the sale-related gain described above, Vector's segment results subsequent to June 30, 2006 included only profit or loss associated with the settlement of business-case activity related to the periods prior to June 30, 2006. In connection with these business cases, Con-way at December 31, 2006 reported a $2.7 million receivable from GM. Following negotiation with GM in the first quarter of 2007, the business-case receivable due from GM could not be collected, and accordingly, a $2.7 million charge was recognized in the Vector reporting segment to write off the outstanding receivable from GM. Transition and Related Services Pursuant to a closing agreement, GM and Con-way specified the transition services, primarily accounting assistance, and the compensation amounts for such services, to be provided to GM through the transition period ended March 23, 2007. In addition, GM and Con-way entered into an agreement for Con-way to provide certain information-technology support services at an agreed-upon compensation through at least March 31, 2008. Under these agreements, Menlo Logistics reported revenue of $2.8 million in the second quarter and $5.6 million in the first half of 2007, primarily for information-technology services provided to GM. See Note 3, "Investment in Unconsolidated Joint Venture," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K for a complete description of Vector, including a discussion of Con-way's net investment in Vector and other sale-related amounts. 4. Segment Reporting Con-way discloses segment information in the manner in which the components are organized for making operating decisions, assessing performance and allocating resources. Management evaluates segment performance primarily based on revenue and operating income (loss). Accordingly, interest expense, investment income and other non-operating items are not reported in segment results. Corporate expenses are generally allocated based on measurable services provided to each segment, or for general corporate expenses, based on segment revenue and capital employed. Inter-segment revenue and related operating income have been eliminated to reconcile to consolidated revenue and operating income. For financial reporting purposes, Con-way is divided into four reporting segments: Con-way Freight and Transportation, Menlo Logistics, Vector and Con-way Other. Vector served as the lead logistics manager for GM prior to GM's exercise of its call right to purchase Con-way's membership interest in Vector on June 23, 2006. In December 2006, Con-way recognized the sale to GM of Con-way's membership interest in Vector. The sale of Vector did not qualify as a discontinued operation due to its classification as an equity- method investment, and accordingly, Vector's income or losses are reported in net income from continuing operations. Effective January 1, 2007, the operating results of Vector are reported separately as a single reporting segment and are excluded from the results of the Menlo Logistics reporting segment. Segment reporting disclosures have been reclassified for all periods presented. (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenues from External Customers Con-way Freight and Transportation $ 749,808 $ 754,353 $1,431,518 $1,450,483 Menlo Logistics 323,909 345,699 644,390 695,561 ----------- ----------- ----------- ----------- $1,073,717 $1,100,052 $2,075,908 $2,146,044 =========== =========== =========== =========== Inter-segment Revenues Con-way Freight $ 11,738 $ 22,420 $ 25,540 $ 45,629 and Transportation Menlo Logistics 123 226 240 226 ----------- ----------- ----------- ----------- $ 11,861 $ 22,646 $ 25,780 $ 45,855 =========== =========== =========== =========== Revenues before Inter- segment Eliminations Con-way Freight and Transportation $ 761,546 $ 776,773 $1,457,058 $1,496,112 Menlo Logistics 324,032 345,925 644,630 695,787 Inter-segment Revenue Eliminations (11,861) (22,646) (25,780) (45,855) ----------- ----------- ----------- ----------- $1,073,717 $1,100,052 $2,075,908 $2,146,044 =========== =========== =========== =========== Operating Income (Loss) Con-way Freight $ and Transportation $ 70,328 $ 102,276 $ 124,203 $ 169,079 Menlo Logistics 6,935 6,093 13,471 12,278 Vector -- 4,665 (2,699) 8,859 Con-way Other 358 (1,201) (1,681) (475) ----------- ----------- ----------- ----------- $ 77,621 $ 111,833 $ 133,294 $ 189,741 =========== =========== =========== =========== 5. Employee Benefit Plans In the periods presented, employees of Con-way and its subsidiaries in the U.S. were covered under several retirement benefit plans, including defined benefit pension plans, a defined contribution retirement plan, and a postretirement medical plan. Con-way's defined benefit pension plans include "qualified" plans that are eligible for certain beneficial treatment under the Internal Revenue Code ("IRC"), as well as "non-qualified" plans that do not meet IRC criteria. In October 2006, Con-way's Board of Directors approved changes to Con-way's retirement benefit plans that are intended to preserve the retirement benefits earned by existing employees under Con-way's primary qualified defined benefit pension plan (the "Primary DB Plan") and its primary non- qualified supplemental defined benefit pension plan (the "Supplemental DB Plan") while expanding benefits earned under its defined contribution plan (the "Primary DC Plan") and its new supplemental defined contribution plan (the "Supplemental DC Plan"). The major provisions were effective January 1, 2007, and are more fully discussed in Note 9, "Employee Benefit Plans," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K. Defined Benefit Pension Plans Con-way's qualified defined benefit pension plans (collectively, the "Qualified Pension Plans") consist mostly of the Primary DB Plan, which covers the non-contractual employees and former employees of Con-way's continuing operations as well as former employees of its discontinued operations. Con-way's other qualified defined benefit pension plans cover only the former employees of discontinued operations. Con-way also sponsors the Supplemental DB Plan and several other unfunded non-qualified defined benefit plans (collectively, the "Non-Qualified Pension Plans"). The Supplemental DB Plan provides additional benefits for certain employees who are affected by IRC limitations on compensation eligible for benefits available under the qualified Primary DB Plan. Adoption of SFAS 158 - Measurement-Date Provision Effective January 1, 2007, Con-way adopted the measurement-date provisions of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of SFAS 87, 88, 106, and 132R," which require employers to measure plan assets and obligations as of the end of the fiscal year. Accordingly, Con-way changed its measurement date to December 31 from November 30 for all of its defined benefit pension plans. Under the transition provisions of SFAS 158, Con-way recognized a $21.3 million decrease in plan-related employee benefit liabilities, an $8.3 million decline in related deferred tax assets, and a $13.0 million increase in shareholders' equity. The beginning-of-period increase to shareholders' equity consisted of a $2.6 million decline in retained earnings to recognize pension cost for December 2006 and a $15.6 million decline in accumulated other comprehensive loss primarily to recognize the effect of an increase in the plan-related discount rate to 5.95% at December 31, 2006 from 5.85% at November 30, 2006. Net Periodic Pension Expense (Income) The following tables summarize the components of net periodic benefit expense (income) for Con-way's defined benefit pension plans: Qualified Pension Plans ------------------------------------------------ Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- (Dollars in thousands) 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Service cost - benefits earned during the period $ 15 $ 13,685 $ 55 $ 27,095 Interest cost on benefit obligation 17,143 14,453 34,192 28,614 Expected return on plan assets (25,205) (17,695) (48,472) (35,033) Net amortization and deferral (1,280) 2,019 (1,614) 3,997 ----------- ----------- ----------- ----------- Net periodic benefit expense (income) $ (9,327) $ 12,462 $ (15,839) $ 24,673 =========== =========== =========== =========== Non-Qualified Pension Plans ------------------------------------------------ Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- (Dollars in thousands) 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Service cost - benefits earned during the period $ -- $ 201 $ -- $ 411 Interest cost on benefit obligation 1,111 1,068 2,310 2,188 Net amortization and deferral 517 566 1,095 1,159 ----------- ----------- ----------- ----------- Net periodic benefit expense $ 1,628 $ 1,835 $ 3,405 $ 3,758 =========== =========== =========== =========== In April 2007, Con-way contributed $12.7 million to the Qualified Pension Plans. Con-way does not currently anticipate making any further contributions to the plans in 2007. Defined Contribution Retirement Plan Effective January 1, 2007, amendments to Con-way's Primary DC Plan increased the contributions made by Con-way to its employees' 401(k) accounts. Con-way doubled its discretionary matching contributions under the Primary DC Plan to 50% of the first 6 percent of employees' eligible compensation (from 50% of the first 3 percent of eligible compensation) and now makes additional contributions to employees' 401(k) accounts based on years of service. As a result, Con-way's expense related to its contributions under the Primary DC Plan was $23.0 million and $44.1 million in the second quarter and first half of 2007, respectively, compared to $3.6 million and $7.4 million in the same periods of 2006. At June 30, 2007 and December 31, 2006, Con-way had recognized accrued liabilities of $20.0 million and $1.4 million, respectively, for its contributions related to the Primary DC Plan. Postretirement Medical Plan The following table summarizes the components of net periodic benefit expense for the postretirement medical plan: Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- (Dollars in thousands) 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Service cost - benefits earned during the period $ 829 $ 540 $ 1,410 $ 1,068 Interest cost on benefit obligation 1,743 1,752 3,538 3,301 Net amortization and deferral 741 620 1,241 1,136 ----------- ----------- ----------- ----------- Net periodic benefit expense $ 3,313 $ 2,912 $ 6,189 $ 5,505 =========== =========== =========== =========== 6. Comprehensive Income Comprehensive income, which is a measure of all changes in equity except those resulting from investments by owners and distributions to owners, was as follows: (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Net income $ 48,140 $ 70,732 $ 81,778 $ 117,166 Other comprehensive income (loss): Foreign currency translation adjustment (261) (5) (235) 501 ----------- ----------- ----------- ----------- Comprehensive income $ 47,879 $ 70,727 $ 81,543 $ 117,667 =========== =========== =========== =========== 7. Common Stock Repurchase Program In April 2006, the Board of Directors authorized the repurchase of up to $400 million in Con-way's common stock through open-market transactions and privately negotiated transactions from time to time in such amounts as management deemed appropriate through June 30, 2007. Under the program, which concluded on June 29, 2007, Con-way repurchased common stock of $399.5 million. 8. Share-Based Compensation Under terms of the share-based compensation plans, Con-way grants various types of share-based compensation awards to employees and directors. The plan provides for awards in the form of stock options, nonvested stock (also known as restricted stock), and performance-share plan units. Stock options are granted at prices equal to the market value of the common stock on the date of grant and expire 10 years from the date of grant. Generally, stock options are granted with three- or four-year graded-vesting terms, under which one-third or one-fourth of the award vests each year, respectively. Stock options granted in and after December 2004 generally have three-year graded-vesting terms, while stock options issued before that date generally have four-year graded-vesting terms. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the stock option plans). Effective September 26, 2006, Con-way established vesting provisions for new option awards that generally provide for immediate vesting of unvested shares upon retirement. Stock options issued before that date generally provide for continued vesting subsequent to the employee's retirement. Shares of nonvested stock are valued at the market price of Con-way's common stock at the date of award and are generally granted with three-year graded- vesting terms. In the first quarter of 2007, Con-way awarded performance-share plan units ("PSPUs") to its officer-level employees. These shares are valued at the market price of Con-way's common stock at the date of award and vest three years from the grant date if certain performance criteria are achieved. PSPUs are subject to forfeiture if an award recipient leaves Con-way during the three-year period. If the maximum performance criteria are attained, award recipients may collectively earn up to 312,936 shares. The PSPUs were awarded with a weighted-average grant-date value of $47. The amount of expense recorded each period is based on Con-way's current estimate of the number of shares that will ultimately vest. The following expense was recognized for share-based compensation: (Dollars in Three Months Ended Three Months Ended thousands) June 30, 2007 June 30, 2006 ----------------------------- ----------------------------- Stock Nonvested Stock Nonvested Options Stock and Total Options Stock and Total PSPUs PSPUs --------- --------- --------- --------- --------- --------- Salaries, wages and other employee benefits $ 1,847 $ 1,122 $ 2,969 $ 1,491 $ 506 $ 1,997 Deferred income tax benefit (706) (438) (1,144) (572) (198) (770) --------- --------- --------- --------- --------- --------- Net share-based compensation expense $ 1,141 $ 684 $ 1,825 $ 919 $ 308 $ 1,227 ========= ========= ========= ========= ========= ========= (Dollars in Six Months Ended Six Months Ended thousands) June 30, 2007 June 30, 2006 ----------------------------- ---------------------------- Stock Nonvested Stock Nonvested Options Stock and Total Options Stock and Total PSPUs PSPUs --------- --------- --------- --------- --------- --------- Salaries, wages and other employee benefits $ 3,356 $ 1,994 $ 5,350 $ 2,842 $ 643 $ 3,485 Deferred income tax benefit (1,283) (778) (2,061) (1,091) (251) (1,342) --------- --------- --------- --------- --------- --------- Net share-based compensation expense $ 2,073 $ 1,216 $ 3,289 $ 1,751 $ 392 $ 2,143 ========= ========= ========= ========= ========= ========= 9. Income Taxes Con-way's effective tax rate was 34.2% and 37.1% in the second quarter and first half of 2007, respectively, and was 31.2% and 33.9% in the same respective periods of last year. Excluding the effect of various discrete tax adjustments, Con-way's second-quarter and first-half effective tax rate in 2007 was 37.5% and 37.6%, respectively, and in 2006, was 37.6% and 37.8%, respectively. The beneficial effect of discrete tax adjustments in all periods presented primarily reflect the settlement of issues following completion of an Internal Revenue Service ("IRS") audit. At December 31, 2006, Con-way reported an income tax receivable of $31.5 million in other accounts receivable in the consolidated balance sheets. In the first quarter of 2007, Con-way received federal income tax refunds of $34.5 million, and at June 30, 2007, reported an accrued income tax liability of $6.8 million. Disposal-Related Capital Loss Con-way's disposal of MWF in December 2004, as more fully discussed in Note 2, "Discontinued Operations," generated a capital loss for tax purposes. Under current tax law, capital losses can only be used to offset capital gains. Since Con-way did not forecast any significant taxable capital gains in the five-year tax carry-forward period, the cumulative disposal-related tax benefit was fully offset by a valuation allowance of an equal amount. The remaining disposal-related tax benefit and the associated valuation allowance increased to $30.4 million at June 30, 2007 from $11.8 million at December 31, 2006, due primarily to a second-quarter revision to MWF's tax basis, which Con-way initially estimated at the time of MWF's disposal. Uncertain Tax Positions In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of SFAS 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. FIN 48 is a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Tax positions shall be recognized in the financial statements only when it is more likely than not that the position will be sustained upon examination by a taxing authority. If the position meets the more-likely-than-not criteria, it should be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. It requires previously recognized tax positions that no longer meet the more- likely-than-not recognition threshold to be derecognized in the first subsequent financial reporting period in which the threshold is no longer met. Con-way adopted the provisions of FIN 48 on January 1, 2007. As of the adoption date, Con-way reported gross tax-affected unrecognized tax benefits of $7.6 million, including $1.2 million of accrued interest and penalties related to the unrecognized tax benefits. Con-way classifies interest and penalties expense related to income taxes as a component of income tax expense. As of the adoption date, Con-way estimated that $5.4 million of the unrecognized tax benefits, if recognized, would affect the effective tax rate. At June 30, 2007, Con-way's estimate of gross tax-affected unrecognized tax benefits declined to $7.0 million primarily due to settlements following completion of an IRS audit. In the next 12 months, Con-way does not expect a significant increase or decrease to its estimates of unrecognized tax benefits. In the normal course of business, Con-way is subject to examination by taxing authorities throughout the world. With few exceptions, Con-way is no longer subject to U.S. federal examinations for years before 2003, and is no longer subject to state, local, and foreign income-tax examinations for years before 1999. However, certain years remain subject to examination in the relevant jurisdictions, including the years from 2003 to 2006 for U.S. federal income taxes and the years from 1999 to 2006 for state, local and foreign income taxes. 10. Acquisitions Contract Freighters, Inc. On July 13, 2007, Con-way Inc. entered into an agreement to acquire the common stock of Transportation Resources, Inc. ("TRI") for an aggregate purchase price of $750 million, subject to adjustment. TRI is the privately held holding company for Contract Freighters, Inc. and other affiliated companies (collectively, "CFI"). CFI is a North American truckload carrier headquartered in Joplin, Missouri, and provides truckload services for customers throughout the U.S., Canada and Mexico. CFI reported annual revenue of $427 million in 2006 and currently operates over 2,600 tractors and more than 7,000 trailers, with more than 3,000 employees, including approximately 2,500 drivers. The acquisition of TRI is subject to customary review by regulatory authorities and fulfillment or waiver of closing conditions. The boards of directors of both companies have approved the transaction, which is expected to conclude during the 2007 third quarter. Con-way intends to fund the acquisition with existing cash resources together with proceeds from debt financing, either through the sale of debt securities in the public markets or through bridge financing. Con-way has obtained a commitment to provide bridge financing of up to $500 million, which is subject to certain conditions, including satisfactory completion of the lender's due diligence review of CFI. Cougar Express Logistics On June 7, 2007, Menlo Worldwide, LLC ("MW") entered into an agreement to acquire the common stock of Cougar Holdings Pte Ltd., and its primary subsidiary, Cougar Express Logistics ("Cougar"), for an aggregate purchase price of $33.9 million, subject to adjustment. The purchase price includes a $28.2 million cash payment and the assumption of $5.7 million in debt. Cougar is a publicly traded freight forwarding, warehousing, logistics and distribution-management company headquartered in Singapore. Cougar provides its services to a client base of nearly 200 Asia-based and global businesses with personnel, facilities and operations in 12 locations in Singapore, Malaysia and Thailand. In its most recent fiscal year, Cougar reported annual revenue of $23 million. The acquisition of Cougar is subject to customary review by regulatory authorities and fulfillment or waiver of closing conditions, and the transaction is expected to conclude in the third quarter of 2007. Con-way and MW intend to fund the acquisition with Con-way's existing cash resources. 11. Commitments and Contingencies Spin-Off of CFC On December 2, 1996, Con-way completed the spin-off of Consolidated Freightways Corporation ("CFC") to Con-way's shareholders. CFC was, at the time of the spin-off, a party to certain multiemployer pension plans covering some of its current and former employees. The cessation of its U.S. operations in 2002 resulted in CFC's "complete withdrawal" (within the meaning of applicable federal law) from these multiemployer plans, at which point it became obligated, under federal law, to pay its share of any unfunded vested benefits under those plans. It is possible that the trustees of CFC's multiemployer pension plans may assert claims that Con-way is liable for amounts owing to the plans as a result of CFC's withdrawal from those plans and, if so, there can be no assurance that those claims would not be material. Con-way has received requests for information regarding the spin-off of CFC from representatives from some of the pension funds, and, in accordance with federal law, Con-way has responded to those requests. Con-way believes that it would ultimately prevail if any such claims were made, although there can be no assurance in this regard due to various unknowns, including possible adverse judicial decisions in other cases. Con- way believes that the amount of those claims, if asserted, could be material, and a judgment against Con-way for all or a significant part of these claims could have a material adverse effect on Con-way's financial condition, results of operations and cash flows. Prior to the enactment in April 2004 of the Pension Funding Equity Act of 2004, if the multiemployer funds had asserted such claims against Con-way, Con-way would have had a statutory obligation to make cash payments to the funds prior to any arbitral or judicial decisions on the funds' determinations. Under the facts related to the CFC withdrawals and the law in effect after enactment of the Pension Funding Equity Act of 2004, Con-way would no longer be required to make such payments to the multiemployer funds unless and until final decisions in arbitration proceedings, or in court, upheld the funds' determinations. As a result of the matters discussed above, Con-way can provide no assurance that matters relating to the spin-off of CFC will not have a material adverse effect on Con-way's financial condition, results of operations or cash flows. Other In February 2002, a lawsuit was filed against EWA in the District Court for the Southern District of Ohio, alleging violations of the Worker Adjustment and Retraining Notification Act (the "WARN Act") in connection with employee layoffs and ultimate terminations due to the August 2001 grounding of EWA's airline operations and the shutdown of the airline operations in December 2001. The court subsequently certified the lawsuit as a class action on behalf of affected employees laid off between August 11 and August 15, 2001. The WARN Act generally requires employers to give 60-days notice, or 60-days pay and benefits in lieu of notice, of any shutdown of operations or mass layoff at a site of employment. The estimated range for potential loss on this matter is zero to approximately $9 million, including interest. Con-way intends to continue to vigorously defend the lawsuit. Con-way is a defendant in various other lawsuits incidental to its businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material effect on Con-way's financial condition, results of operations or cash flows. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction ------------ Management's Discussion and Analysis of Financial Condition and Results of Operations (referred to as "Management's Discussion and Analysis") is intended to assist in a historical and prospective understanding of Con-way's financial condition, results of operations, and cash flows, including a discussion and analysis of the following: * Overview of Business * Results of Operations * Liquidity and Capital Resources * Critical Accounting Policies and Estimates * Forward-Looking Statements Overview of Business -------------------- The Company provides transportation and logistics services for a wide range of manufacturing, industrial and retail customers. For financial reporting purposes, Con-way is divided into four reporting segments: [1] Con-way Freight and Transportation, which primarily provides freight services through Con-way Freight, a provider of regional less-than-truckload ("LTL") freight services, and Con-way Transportation, which consists of both Con-way Truckload, a provider of full-truckload freight services, and Road Systems, a trailer manufacturer; [2] Menlo Logistics, which provides integrated contract logistics solutions; [3] Vector, which served as the former lead logistics manager for GM prior to GM's exercise of its call right to purchase Con-way's membership interest in Vector on June 23, 2006; and [4] Con-way Other, which includes certain corporate activities. Con-way's operating-unit results generally depend on the number, weight and distance of shipments transported, the prices received on those shipments or services, and the mix of services provided to customers, as well as the fixed and variable costs incurred by Con-way in providing the services and the ability to manage those costs under changing circumstances. Con-way Freight and Transportation primarily transports shipments through a freight service center network while Menlo Logistics manages the logistics functions of its customers and primarily utilizes third-party transportation providers for the movement of customer shipments. Results of Operations --------------------- The following table compares Con-way's consolidated operating results for continuing and discontinued operations: (Dollars in thousands Three Months Ended Six Months Ended except per share amounts) June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Net Income (Loss) Continuing Operations 1 $ 47,685 $ 74,144 $ 76,690 $ 120,374 Discontinued Operations (1,310) (5,220) 1,609 (6,779) ----------- ----------- ----------- ----------- Available to Common Shareholders $ 46,375 $ 68,924 $ 78,299 $ 113,595 =========== =========== =========== =========== Diluted Earnings (Loss) per Share Continuing Operations $ 0.99 $ 1.40 $ 1.58 $ 2.23 Discontinued Operations (0.03) (0.10) 0.04 (0.13) ----------- ----------- ----------- ----------- Available to Common Shareholders $ 0.96 $ 1.30 $ 1.62 $ 2.10 =========== =========== =========== =========== 1 After preferred stock dividends Con-way's second-quarter net income from continuing operations available to common shareholders decreased 35.7% to $47.7 million in 2007, and in the first six months, decreased 36.3% to $76.7 million due primarily to lower operating income from Con-way Freight and Transportation and to the loss of income from Vector following its sale to GM. Con-way's diluted earnings per share from continuing operations in 2007 decreased 29.3% to $0.99 in the second quarter, and in the first six months, decreased 29.1% to $1.58 due primarily to a decline in net income that was partially offset by the accretive effect of Con-way's share repurchase program, which concluded on June 29, 2007. Primarily as the result of share repurchases, Con-way's average diluted shares outstanding declined to 48.4 million shares in the second quarter of 2007 from 53.1 million shares in the same period of 2006, and in the first six months, declined to 48.8 million shares in 2007 from 54.2 million shares in 2006. Net income available to common shareholders in the periods presented include the results of discontinued operations, which relate to the closure of Con- way Forwarding, the sale of MWF, the shut-down of EWA, and the spin-off of CFC, as more fully discussed in Note 2, "Discontinued Operations," of Item 1, "Financial Statements." The resulting net income available to common shareholders decreased to $46.4 million ($0.96 per diluted share) in the second quarter of 2007 from $68.9 million ($1.30 per diluted share) in the second quarter of 2006, and in the first six months, decreased to $78.3 million ($1.62 per diluted share) in 2007 from $113.6 million ($2.10 per diluted share). The overview below provides a high-level summary of Con-way's results from continuing operations for the periods presented and is intended to provide context for the remainder of the discussion on reporting segments. Refer to "Reporting Segment Review" below for more complete and detailed discussion and analysis. Continuing Operations (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenues Con-way Freight and Transportation $ 749,808 $ 754,353 $1,431,518 $1,450,483 Menlo Logistics 323,909 345,699 644,390 695,561 ----------- ----------- ----------- ----------- $1,073,717 $1,100,052 $2,075,908 $2,146,044 =========== =========== =========== =========== Operating Income (Loss) Con-way Freight and Transportation $ 70,328 $ 102,276 $ 124,203 $ 169,079 Menlo Logistics 6,935 6,093 13,471 12,278 Vector -- 4,665 (2,699) 8,859 Con-way Other 358 (1,201) (1,681) (475) ----------- ----------- ----------- ----------- $ 77,621 $ 111,833 $ 133,294 $ 189,741 =========== =========== =========== =========== Con-way's consolidated revenue for the second quarter and first half of 2007 decreased 2.4% and 3.3%, respectively, from the same periods last year, due to decreases at both revenue-generating segments. Menlo Logistics' revenue for the second quarter and first half of 2007 decreased 6.3% and 7.4%, respectively, due principally to declines in carrier-management services, partially offset by increases in warehouse-management services. Con-way Freight and Transportation's revenue for the second quarter and first half of 2007 declined 0.6% and 1.3%, respectively, due primarily to a decline in revenue from Con-way Transportation following the sale of the expedited- shipping portion of the former Con-way Expedite and Brokerage business in July 2006. In the second quarter and first half of 2007, consolidated operating income decreased 30.6% and 29.7%, respectively, from the same periods last year due largely to lower operating income from Con-way Freight and Transportation and from Vector. Con-way Freight and Transportation's operating income in the second quarter and first half of 2007 decreased 31.2% and 26.5%, respectively, due primarily to a higher-volume, lower-yield mix of revenue at Con-way Freight and to higher employee costs. Lower operating income from Vector reflects its sale, which was recognized in December 2006, as more fully discussed in Note 3, "Sale of Unconsolidated Joint Venture," of Item 1, "Financial Statements." In the first half of 2007, operating income included a $2.7 million first-quarter loss for the write-off of a receivable related to the Vector sale, while the second quarter and first half of 2006 included income from Vector of $4.7 million and $8.9 million, respectively. Under Con-way's re-branding initiative announced in April 2006, Con-way has recognized expense of $7.3 million, including $2.9 million and $5.7 million in the second quarter and first half of 2007, respectively, primarily for the conversion of trailers to the new Con-way graphic identity and for new uniforms. Under current estimates, Con-way expects to recognize approximately $8 million of additional re-branding expenses in the remainder of 2007 and another $8 million of re-branding expenses in 2008. Total estimated expenses of $23 million for the re-branding initiative consist primarily of the costs to re-brand tractors and trailers. Other net expense increased $1.0 million in the second quarter of 2007 and $3.6 million in the first half of 2007 due primarily to a decline in investment income, which decreased $0.8 million and $2.3 million in the second quarter and first half of 2007, respectively, due to a decrease in the average balances of interest-bearing financial instruments resulting primarily from common stock repurchases that were funded with cash and the conversion of marketable securities. Other net expense was also affected by an increase in interest expense of $0.5 million in the second quarter and $0.9 million in the first half of 2007. Con-way's effective tax rate was 34.2% and 37.1% in the second quarter and first half of 2007, respectively, and was 31.2% and 33.9% in the same respective periods of last year. Excluding the effect of various discrete tax adjustments, Con-way's second-quarter and first-half effective tax rate in 2007 was 37.5% and 37.6%, respectively, and in 2006, was 37.6% and 37.8%, respectively. The beneficial effect of discrete tax adjustments in all periods presented primarily reflect the settlement of issues following completion of an IRS audit. Reporting Segment Review Con-way Freight and Transportation The following table compares operating results, operating margins, and the percentage change in selected operating statistics of the Con-way Freight and Transportation reporting segment: (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Summary of Segment Operating Results Revenues $ 749,808 $ 754,353 $1,431,518 $1,450,483 Operating Income 70,328 102,276 124,203 169,079 Operating Margin 9.4% 13.6% 8.7% 11.7% 2007 vs. 2006 2007 vs. 2006 ------------- ------------- Selected Con-way Freight Operating Statistics Revenue per day +0.8% -0.2% Weight per day +4.4 +1.1 Revenue per hundredweight ("yield") -3.5 -1.2 Weight per shipment -0.4 -0.9 Con-way Freight and Transportation's revenue in the second quarter and first half of 2007 declined 0.6% and 1.3%, respectively, from the same periods in 2006 due primarily to a decline in revenue from Con-way Transportation following the sale of the expedited-shipping portion of the former Con-way Expedite and Brokerage business in July 2006. Revenues in 2007 were also affected by increases in weight per day and lower yields at Con-way Freight. Weight per day in the second quarter and first half of 2007 increased 4.4% and 1.1%, respectively, from the same periods in 2006. The amount of weight transported increased, despite an increasingly price-sensitive and competitive freight market, due to targeted sales initiatives that were implemented to increase freight transported. Yields declined 3.5% and 1.2% in the second quarter and first half of 2007, respectively, due primarily to lower yields associated with new business generated under Con-way's sales initiatives, to an increasingly price- sensitive and competitive freight market that required defensive pricing for certain customer relationships, and to an increase in freight shipped under Con-way's spot-quote program. In the second quarter and first half of 2007, Con-way's recent sales initiatives contributed to increased business levels from large customers who typically command lower rates on a higher quantity of freight. Also, in the current competitive freight market, Con-way lowered rates when management considered it appropriate and necessary to retain certain valued and profitable customer relationships. For the periods presented, lower yields were due in part to Con-way's spot-quote program, which places lower-yielding large shipments into empty linehaul segments, making use of lower-cost under-utilized capacity. Like other LTL carriers, Con-way Freight assesses many of its customers with a fuel surcharge. Fuel surcharges are only one part of Con-way Freight's overall rate structure, and the total price that Con-way Freight receives from customers for its services is governed by market forces, as more fully discussed below in Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Fuel." Although fuel surcharges increase the revenue per hundredweight billed to customers, fuel surcharges did not have a significant effect on second-quarter and first-half yield comparisons as yields excluding fuel surcharges decreased 3.4% and 1.2% in the second quarter and first half of 2007, respectively. Con-way Freight and Transportation's operating income in the second quarter and first half of 2007 decreased 31.2% and 26.5%, respectively, due primarily to a higher-volume, lower-yield mix of revenue at Con-way Freight and to higher employee costs. Employee costs in the second quarter and first half of 2007 increased 4.7% and 3.1%, respectively, from the same periods in 2006 due largely to increases in base compensation and employee benefits. Base compensation in the second quarter and first half of 2007 rose 6.6% and 4.1%, respectively, reflecting wage and salary rate increases and increased costs associated with driver recruitment and training, as driver count increased during the period in response to increases in actual and anticipated freight volumes. Employee benefits expense increased 2.1% and 3.4% in the second quarter and first half of 2007, respectively, due largely to higher self- insurance expense for health-care benefits and to increases in the costs for paid time off and post-employment benefits, partially offset by lower costs associated with workers' compensation claims. Operating income was also negatively affected by increases in vehicular self- insurance expense and costs incurred under Con-way's re-branding initiative. Vehicular self-insurance expense increased 87.1% and 67.0% in the second quarter and first half of 2007, respectively, due primarily to an $8.0 million loss related to a significant claim in the second quarter of 2007, partially offset by improved overall vehicular-claim experience. Under Con- way's re-branding initiative announced in April 2006, Con-way Freight incurred $2.9 million and $5.7 million of costs in the second quarter and first half of 2007, respectively, compared to $0.3 million in the second quarter and first half of 2006. The re-branding costs were for expenses related primarily to the conversion of trailers to the new Con-way graphic identity and to new uniforms. In the second quarter and first half of 2007, purchased transportation expense decreased 15.9% and 19.4%, respectively, due primarily to a decline in transportation requirements following the sale of the expedited-shipping portion of the former Con-way Expedite and Brokerage business in July 2006, partially offset by increases at Con-way Freight. Rent expense in the second quarter and first half of 2007 decreased 14.2% and 18.6%, respectively, due to a decreased demand for temporary rentals following tractor and trailer acquisitions in 2006 and the expiration of a long-term lease for trailers. Menlo Logistics The table below compares operating results and operating margins of the Menlo Logistics ("Logistics") reporting segment. The table summarizes Logistics' gross revenues as well as net revenues (revenues less transportation expenses). Carrier-management revenue is attributable to contracts for which Logistics manages the transportation of freight but subcontracts the actual transportation and delivery of products to third parties, which Logistics refers to as purchased transportation. Logistics' management places emphasis on net revenues as a meaningful measure of the relative importance of its principal services since gross revenues earned on most carrier-management services include the third-party carriers' charges to Logistics for transporting the shipments. (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Summary of Segment Operating Results Revenues $ 323,909 $ 345,699 $ 644,390 $ 695,561 Purchased Transportation (217,998) (249,125) (434,356) (504,590) ----------- ----------- ----------- ----------- Net Revenues 105,911 96,574 210,034 190,971 Operating Income 6,935 6,093 13,471 12,278 Operating Margin on Revenue 2.1% 1.8% 2.1% 1.8% Operating Margin on Net Revenue 6.5% 6.3% 6.4% 6.4% Logistics' revenue in the second quarter and first half of 2007 decreased 6.3% and 7.4%, respectively, due principally to decreases in carrier- management services, partially offset by increases in warehouse-management services. In 2007, revenue from carrier-management services in the second quarter and first half decreased 10.5% and 12.4%, respectively, while revenue from warehouse-management services rose 5.0% and 7.9%, respectively. Logistics' net revenue in the second quarter and first half of 2007 increased 9.7% and 10.0%, respectively. Higher net revenue in 2007 reflects reductions in purchased transportation costs and an increase in the percentage of revenue derived from warehouse-management services, which has the effect of increasing gross revenues without an associated increase in purchased transportation. In the second quarter and first half of 2007, purchased transportation costs decreased 12.5% and 13.9%, respectively, due primarily to decreases in carrier-management volumes and lower carrier rates. Logistics' operating income in the second quarter and first half of 2007 increased 13.8% and 9.7%, respectively, over the same periods of last year, due primarily to the growth in net revenue. Operating margins were positively impacted by income from information-technology services provided to GM, as more fully discussed in Note 3, "Sale of Unconsolidated Joint Venture," of Item 1, "Financial Statements." Operating margins were negatively impacted by increases in employee costs and allocated corporate costs, and from higher expenses for rent and supplies. Employee costs in the second quarter and first half of 2007 increased 8.2% and 10.1% respectively, which reflect increases in base compensation and employee benefits. Base compensation in the second quarter and first half of 2007 rose 9.2% and 9.9%, due primarily to growth in headcount and, to a lesser extent, wage and salary rate increases. Headcount increases were due in part to growth in warehouse- management services. Employee benefits expense increased 15.2% and 17.7% in the second quarter and first half of 2007, respectively, due principally from higher self-insurance expense for health-care benefits. The cost of health- care benefits in the first half of 2007 was significantly affected by a single large first-quarter claim. Excluding the unusually large first- quarter claim, health-care expenses in both the second quarter and first half of 2007 were adversely affected by higher overall claims activity, due to an increase in the cost per claim and in the number of claims. Corporate administrative costs allocated to Logistics in the second quarter and first half of 2007 increased by $3.2 million and $6.2 million, respectively, due primarily to the allocation of costs associated with corporate information- technology personnel who were retained by Con-way following the sale of Vector to GM in December 2006. The associated costs of these employees were allocated to Vector prior to its sale, but were allocated to Logistics subsequent to the sale. The retained employees were utilized in providing information-technology services to GM, as described above, and also to provide services on other Logistics' information-technology initiatives. Rent expense increased 10.4% and 12.2% in the second quarter and first half of 2007, respectively, as a result of new warehouse customer space requirements as well as facilities expansion with existing customers. Supplies expense increased 18.9% and 20.4% in the second quarter and first half of 2007, respectively, due to existing and new warehouse customer service requirements. Vector In December 2006, Con-way recognized the sale to GM of Con-way's membership interest in Vector. The sale of Vector did not qualify as a discontinued operation due to its classification as an equity-method investment, and accordingly, Vector's income or losses are reported in net income from continuing operations. In 2007, segment results reported from Con-way's equity investment in Vector included a $2.7 million first-quarter loss compared to income of $4.7 million and $8.9 million in the second quarter and first half of 2006, respectively. The first-quarter loss in 2007 was due to the write-off of a business-case receivable from GM, as more fully discussed in Note 3, "Sale of Unconsolidated Joint Venture," of Item 1, "Financial Statements." Con-way Other The Con-way Other reporting segment consists of certain corporate activities for which the related income (loss) has not been allocated to other reporting segments. The table below summarizes the operating results for the Con-way Other reporting segment: (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Con-way re-insurance activities $ 584 $ (976) $ (1,247) $ (622) Con-way corporate properties (271) (463) (725) (888) Sales of non-operating assets -- 280 -- 1,260 Other 45 (42) 291 (225) ----------- ----------- ----------- ----------- $ 358 $ (1,201) $ (1,681) $ (475) =========== =========== =========== =========== Liquidity and Capital Resources ------------------------------- Cash and cash equivalents rose to $345.4 million at June 30, 2007 from $260.0 million at December 31, 2006, as $208.1 million provided by operating activities exceeded $126.8 million used in investing and financing activities. Investing activities in the first half of 2007 used $12.5 million, as capital expenditures and increased investments in marketable securities were partially offset by $51.9 million of proceeds received from the sale of Con-way's membership interest in Vector. In the first half of 2007, financing activities used $114.2 million, primarily for the repurchase of $89.9 million of common stock. Con-way's cash flows are summarized in the table below. Discontinued operations in the periods presented relate to the closure of Con-way Forwarding, the sale of MWF, the shut-down of EWA, and the spin-off of CFC, as more fully discussed in Note 2, "Discontinued Operations," of Item 1, "Financial Statements." Six Months Ended (Dollars in thousands) June 30, -------------------------- 2007 2006 ------------ ------------ Operating Activities Net income $ 81,778 $ 117,166 Discontinued operations (1,609) 6,779 Non-cash adjustments (1) 94,129 73,644 ------------ ------------ Net income before non-cash items 174,298 197,589 Changes in assets and liabilities 33,752 71,606 Net Cash Provided by Operating Activities 208,050 269,195 ------------ ------------ Net Cash Used in Investing Activities (12,526) (179,541) ------------ ------------ Net Cash Used in Financing Activities (114,238) (277,355) ------------ ------------ Net Cash Provided by (Used in) Continuing Operations 81,286 (187,701) Net Cash Provided by (Used in) Discontinued Operations 4,048 (12,670) ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents $ 85,334 $ (200,371) ============ ============= (1) "Non-cash adjustments" refer to depreciation, amortization, deferred income taxes, provision for uncollectible accounts, equity-method income or loss, and other non-cash income and expenses. Operating Activities Cash flow from operating activities in the first half of 2007 was $208.1 million, a $61.1 million decrease from the first half of 2006, due to a decrease in net income before non-cash items and a decline in cash provided by changes in assets and liabilities. In the first half of 2007, receivables used $30.0 million, compared to $18.1 million provided in the same prior-year period. Cash provided from income taxes increased to $37.6 million in the first half of 2007 from $23.3 million in the same prior-year period, due primarily to tax refunds received in March 2007. Employee benefits used $8.7 million in the first half of 2007 compared to $5.7 million in the same period of 2006. Under benefit plan amendments that were effective on January 1, 2007, an increase in the obligation for Con-way's defined contribution pension plan was largely offset by a decline in the obligation related to Con-way's defined benefit pension plans, as more fully discussed in Note 5, "Employee Benefit Plans," of Item 1, "Financial Statements." Cash provided by deferred charges and credits decreased to $2.0 million in the first six months of 2007 from $13.9 million provided in the same period of 2006, primarily due to the sale of Con-way's membership interest in Vector. In the first six months of 2006, cash provided by deferred charges and credits reflects variations in Con-way's affiliate payable to Vector. Investing Activities Cash used in investing activities decreased to $12.5 million in the first half of 2007 from $179.5 million in the first half of 2006 due primarily to a decline in capital expenditures and to $51.9 million in proceeds received in January 2007 from the sale of Con-way's membership interest in Vector. Capital expenditures in the first half of 2007 decreased $106.8 million from the same prior-year period due primarily to fewer tractor and trailer expenditures at Con-way Freight and Transportation. The prior year includes an above-average number of tractors acquired in advance of new governmental emission standards. Proceeds from the sale of properties and equipment increased $6.2 million in the first half of 2007 compared to the same period of 2006 due primarily to the sale of Con-way Truckload tractors. In both periods presented, investing activities also reflect increases in short-term marketable securities, which used $13.0 million and $13.1 million in the first half of 2007 and 2006, respectively. Financing Activities Financing activities used cash of $114.2 million in the first half of 2007 compared to $277.4 million in the same period of 2006, due substantially to a decline in common stock repurchases made under Con-way's repurchase program. Under the program, common stock repurchases fell to $89.9 million in the first half of 2007 from $261.8 million in the first half of 2006. The repurchase program concluded on June 29, 2007 and no additional purchases will be made under the program. Financing activities in both periods presented also reflect proceeds from the exercise of stock options, dividend payments and scheduled principal payments for notes related to Con-way's defined contribution retirement plan. Con-way has a $400 million revolving credit facility that matures on September 30, 2011. The revolving credit facility is available for cash borrowings and for the issuance of letters of credit up to $400 million. At June 30, 2007, no borrowings were outstanding under Con-way's revolving credit facility and $202.6 million of letters of credit were outstanding, leaving $197.4 million of available capacity for additional letters of credit or cash borrowings, subject to compliance with financial covenants and other customary conditions to borrowing. Con-way had other uncommitted unsecured credit facilities totaling $40.0 million. Under these facilities, a total of $17.5 million of letters of credit, bank guarantees, and overdraft facilities were outstanding at June 30, 2007. As more fully discussed in Note 10, "Acquisitions," of Item 1, "Financial Statements," Con-way on July 13, 2007 entered into an agreement to acquire the common stock of Transportation Resources, Inc. ("TRI"), the privately held holding company for Contract Freighters, Inc. and other affiliated companies (collectively, "CFI"). Con-way intends to fund the acquisition with existing cash resources together with proceeds from debt financing, either through the sale of debt securities in the public markets or through bridge financing. Con-way has obtained a commitment to provide bridge financing of up to $500 million, which is subject to certain conditions including satisfactory completion of the lender's due diligence review of CFI. See "- Forward-Looking Statements" below; Item 1A, "Risk Factors" of Part II, "Other Information;" and Note 5, "Debt and Other Financing Arrangements," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K for additional information concerning Con-way's $400 million credit facility and its other debt instruments. Contractual Cash Obligations Con-way's contractual cash obligations as of December 31, 2006 are summarized in Con-way's 2006 Annual Report on Form 10-K under Item 7, "Management's Discussion and Analysis - Liquidity and Capital Resources - Contractual Cash Obligations." In the first six months of 2007, there have been no material changes in Con-way's contractual obligations outside the ordinary course of business. In 2007, Con-way anticipates capital and software expenditures of approximately $185 million or approximately $123 million of additional expenditures in the remaining half of 2007. Con-way's estimate for capital expenditures primarily includes acquisitions of additional tractor and trailer equipment, land, and development of new and existing facilities. Con- way's actual 2007 capital expenditures may differ from the estimated amount, depending on factors such as availability and timing of delivery of equipment, the availability of land in desired locations for new facilities, and the timing of obtaining permits, environmental studies and other approvals necessary for the development of new and existing facilities. The planned expenditures do not represent contractual obligations. Other Con-way's ratio of total debt to capital decreased to 42.6% at June 30, 2007 from 43.8% at December 31, 2006, due primarily to the increase in retained earnings from net income earned in 2007, the net increase in common shareholders' equity on adoption of the measurement-date provisions of SFAS 158, and an $18.6 million debt repayment in January of 2007. The increases in common shareholders' equity were partially offset by the share repurchases in 2007. Con-way believes that its working capital requirements and capital expenditure plans in the foreseeable future will be adequately met with various sources of liquidity and capital, including Con-way's cash and cash equivalents, marketable securities, cash flow from operations, credit facilities and access to capital markets. At June 30, 2007, Con-way's senior unsecured debt was rated as investment grade by Standard and Poor's (BBB), Fitch Ratings (BBB), and Moody's (Baa3). Critical Accounting Policies and Estimates ------------------------------------------ The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to adopt accounting policies and make significant judgments and estimates. In many cases, there are alternative policies or estimation techniques that could be used. Con-way maintains a process to evaluate the appropriateness of its accounting policies and estimation techniques, including discussion with and review by the Audit Committee of its Board of Directors and its independent registered public accounting firm. Accounting policies and estimates may require adjustment based on changing facts and circumstances and actual results could differ from estimates. Information concerning Con-way's "Critical Accounting Policies and Estimates" are included in Item 7, "Management's Discussion and Analysis," in Con-way's 2006 Annual Report on Form 10-K. Con-way believes that the accounting policies that are most judgmental and material to the financial statements are those related to the following: * Employee Retirement Benefit Plans * Self-Insurance Accruals * Income Taxes * Disposition and Restructuring Estimates * Revenue Recognition * Property, Plant and Equipment and Other Long-Lived Assets Other than the recent adoption of the accounting pronouncements described below, there have been no significant changes to Con-way's critical accounting policies and estimates during the first six months of 2007. Employee Retirement Benefit Plans In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of SFAS 87, 88, 106, and 132R." Effective on December 31, 2006, Con-way adopted the recognition and related disclosure provisions of SFAS 158, as more fully discussed in Note 9, "Employee Benefit Plans," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K. Effective January 1, 2007, Con-way adopted the measurement-date provisions of SFAS 158, which require employers to measure plan assets and obligations as of the end of the fiscal year. Accordingly, Con-way changed its measurement date to December 31 from November 30 for all of its defined benefit pension plans. Under the transition provisions of SFAS 158, Con-way recognized a $21.3 million decrease in plan-related liabilities, an $8.3 million decline in related deferred tax assets, and a $13.0 million increase in shareholders' equity. The beginning-of-period increase to shareholders' equity consisted of a $2.6 million decline in retained earnings to recognize service cost for December 2006 and a $15.6 million decline in accumulated other comprehensive loss to recognize the effect of an increase in the plan- related discount rate. The effect of adoption of SFAS 158's measurement-date provisions to Con-way's financial statements as of and for the six months ended June 30, 2007 was primarily the result of an increase in the discount rate (used to measure plan-related obligations) to 5.95% at December 31, 2006 from 5.85% at November 30, 2006. This increase in discount rate reduced Con-way's estimated plan obligation, as described above, and will also increase estimated annual pension income in 2007 by $7.7 million. Following completion of final actuarial calculations, Con-way estimates that the defined benefit pension plans in 2007 will result in annual pension income of $25 million, based primarily on an expected return on plan assets that exceeds the interest cost on plan benefit obligations. Income Taxes Effective on January 1, 2007, Con-way adopted the provisions of FIN 48, "Accounting for Uncertainty in Income Taxes," as more fully discussed in Note 9, "Income Taxes," of Item 1, "Financial Statements." Con-way assesses its income tax positions and records tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those positions where it is more likely than not that a tax benefit will be sustained, Con-way has recorded the largest amount of tax benefit with a greater-than-50-percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. 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, and should not be relied upon as predictions of future events. All statements other than statements of historical fact are forward-looking statements, including: * any projections of earnings, revenues, weight, yield, volumes, income or other financial or operating items; * any statements of the plans, strategies, expectations or objectives of Con-way's management for future operations or other future items; * any statements concerning proposed new products or services; * any statements regarding Con-way's estimated future contributions to pension plans; * any statements as to the adequacy of reserves; * any statements regarding the outcome of any claims that may be brought against Con-way by CFC's multi-employer pension plans; * any statements regarding future economic conditions or performance; * any statements regarding the proposed acquisition of Transportation Resources, Inc. and proposed related financing; * any statements regarding the outcome of legal and other claims and proceedings against Con-way, and * any statements of estimates or belief and any statements or assumptions underlying the foregoing. 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 of those terms or other variations of those terms or comparable terminology or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data and methods that may be incorrect or imprecise and there can be no assurance that they will be realized. In that regard, the following factors, among others and in addition to the matters discussed elsewhere in this document and other reports and documents filed by Con-way with the Securities and Exchange Commission, could cause actual results and other matters to differ materially from those discussed in such forward- looking statements: * changes in general business and economic conditions, including the global economy; * the creditworthiness of Con-way's customers and their ability to pay for services rendered; * increasing competition and pricing pressure; * availability of fuel and changes in fuel prices or fuel surcharges; * the effects of the cessation of EWA's air-carrier operations; * the possibility that Con-way may, from time to time, be required to record impairment charges for long-lived assets; * the proposed acquisition of Transportation Resources, Inc. and proposed related financing (including without limitation the possibility that such acquisition may not be consummated due to failure of regulatory approval or other closing conditions to be satisfied, risks relating to the financing, integration risks and risks that acquisition synergies are not realized); * the possibility of defaults under Con-way's $400 million credit agreement and other debt instruments (including without limitation defaults resulting from unusual charges); * the possibility that Con-way may be required to repay certain indebtedness in the event that the ratings assigned to its long-term senior debt by credit rating agencies are reduced; * labor matters, including the grievances by furloughed EWA pilots and crew members, labor-organizing activities, work stoppages or strikes; * enforcement of and changes in governmental regulations, including the effects of new regulations issued by the Department of Homeland Security; * environmental and tax matters; * matters relating to Con-way's 1996 spin-off of CFC, including the possibility that CFC's multi-employer pension plans may assert claims against Con-way, that Con-way may not prevail in those proceedings and that Con-way may not have the financial resources necessary to satisfy amounts payable to those plans; * matters relating to the sale of MWF, including Con-way's obligation to indemnify UPS for certain losses in connection with the sale, and * matters relating to Con-way's defined benefit and defined contribution pension plans. As a result of the foregoing, no assurance can be given as to future financial condition, results of operations, or cash flows. See Note 11, "Commitments and Contingencies," of Item 1, "Financial Statements." ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Con-way is exposed to a variety of market risks, including the effects of interest rates, fuel prices, and foreign currency exchange rates. Con-way enters into derivative financial instruments only in circumstances that warrant the hedge of an underlying asset, liability or future cash flow against exposure to some form of interest rate, commodity or currency-related risk. Additionally, the designated hedges should have high correlation to the underlying exposure such that fluctuations in the value of the derivatives offset reciprocal changes in the underlying exposure. Derivative financial instruments held by Con-way at June 30, 2007 did not have a material effect on Con-way's financial statements. Interest Rates Con-way is subject to the effect of interest rate fluctuations on the fair value of its long-term debt and on the amount of interest income earned on cash-equivalent investments and short-term marketable securities, as more fully discussed in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of Con-way's 2006 Annual Report on Form 10-K. Fuel Con-way is exposed to the effects of changes in the availability and price of diesel fuel. Generally, fuel can be obtained from various sources and in the desired quantities. However, an inability to obtain fuel could have a material adverse effect on Con-way. Con-way Freight and Transportation is subject to the risk of price fluctuations. Like other LTL carriers, Con-way Freight assesses many of its customers with a fuel surcharge. The fuel surcharge is a part of Con-way Freight's overall rate structure for customers and is intended to compensate Con-way Freight for the adverse effects of higher fuel costs. In periods of rising fuel prices, the fuel surcharge typically increases Con-way Freight's yields and revenue, and Con-way Freight generally recovers more than the cost of higher fuel and fuel-related increases in purchased transportation. Con-way cannot predict the future movement of fuel prices, Con-way Freight's ability to recover higher fuel costs through fuel surcharges, or the effect that changes in fuel surcharges may have on Con-way Freight's overall rate structure. Con-way Freight's operating income may be adversely affected by a decline in fuel prices as lower fuel surcharges would reduce its yield and revenue. Whether fuel prices increase, decrease, or remain constant, Con-way's operating income may be adversely affected if market pressures limited Con-way Freight's ability to assess its fuel surcharges. Foreign Currency The assets and liabilities of Con-way's foreign subsidiaries are denominated in foreign currencies, which create exposure to changes in foreign currency exchange rates. However, the market risk related to foreign currency exchange rates is not material to Con-way's financial condition, results of operations, or cash flows. ITEM 4. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. Con-way's management, with the participation of Con-way's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Con- way's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, Con-way's Chief Executive Officer and Chief Financial Officer have concluded that Con-way's disclosure controls and procedures are effective as of the end of such period. (b) Internal Control Over Financial Reporting. There have not been any changes in Con-way's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Con- way's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Certain legal proceedings of Con-way are also discussed in Note 2, "Discontinued Operations," and Note 11, "Commitments and Contingencies," of Part 1 Item 1, "Financial Statements." Con-way, along with 11 other companies engaged in the LTL trucking business, has been named as a defendant in a purported class-action lawsuit filed on July 30, 2007 in the United States District Court for the Southern District of California. The named plaintiffs, Farm Water Technological Services Inc. d/b/a Water Tech. and C.B.J.T. d/b/a Agricultural Supply, allege that the defendants have conspired to fix fuel surcharges for LTL shipments in violation of Federal antitrust laws and are seeking treble damages, injunctive relief, attorneys' fees and costs. Con-way is currently reviewing the allegations made in the complaint. In 2003, prior to the sale of MWF to UPS, Con-way became aware of information that Emery Transnational, a Philippines-based joint venture in which MWF, Inc. may be deemed to be a controlling partner, may have made certain payments in violation of the Foreign Corrupt Practices Act. Con-way promptly notified the Department of Justice and the Securities and Exchange Commission of this matter, and MWF, Inc. instituted policies and procedures in the Philippines designed to prevent such payments from being made in the future. Con-way was subsequently advised by the Department of Justice that it is not pursuing an investigation of this matter. Con-way conducted an internal investigation of approximately 40 other MWF, Inc. international locations and has shared the results of the internal investigation with the SEC. The internal investigation revealed that Menlo Worldwide Forwarding (Thailand) Limited, a Thailand-based joint venture, also may have made certain payments in violation of the Foreign Corrupt Practices Act. MWF, Inc. made certain personnel changes and instituted policies and procedures in Thailand designed to prevent such payments from being made in the future. In December 2004, Con-way completed the sale of its air freight forwarding business (including the stock of MWF, Inc., Emery Transnational and Menlo Worldwide Forwarding (Thailand) Limited) to an affiliate of UPS. In connection with that sale, Con-way agreed to indemnify UPS for certain losses resulting from violations of the Foreign Corrupt Practices Act. Con-way is currently unable to predict whether it will be required to make payments under the indemnity or whether the SEC will impose fines or other penalties directly on Con-way as of result of the actions of Emery Transnational. ITEM 1A. RISK FACTORS There are no material changes to the risk factors previously disclosed in Item 1A, "Risk Factors," of Con-way's 2006 Annual Report on Form 10-K, except for risks related to the acquisition of TRI, as more fully discussed herein below and in Note 10, "Acquisitions," of Part 1 Item 1, "Financial Statements." TRI is the privately held holding company for Contract Freighters, Inc. and other affiliated companies (collectively, "CFI"). Con-way's acquisition of CFI is subject to various risks, including the possibility that the acquisition will not be completed and the possibility that the expected benefits of the acquisition will not be realized. Con-way's acquisition of CFI is subject to the satisfaction or waiver of specified conditions to closing, as set forth in the merger agreement, and the acquisition also requires that Con-way obtain financing to fund a portion of the transaction, either through the sale of debt securities in the public markets or through bridge financing. Con-way has obtained a commitment from Goldman Sachs Credit Partners LP ("Goldman") to provide bridge financing of up to $500 million, which is subject to certain conditions, including satisfactory completion of Goldman's due diligence review of CFI. If Con-way is unable to obtain the required financing at closing or if any of the conditions to closing are not satisfied or waived, the acquisition will not be completed. If the acquisition is not completed, the price of Con-way's common stock may decline. Con-way will also be obligated to pay certain transaction-related fees, including legal and accounting fees incurred in connection with the acquisition, whether or not the acquisition is completed, and such costs would be recognized as expense in the period in which such a determination is made. Furthermore, if the acquisition is not completed, Con-way's operations could be adversely affected by cost increases and deterioration in service performance at Con-way Truckload, due in part to above-average employee turnover at Con-way Truckload following Con-way's announcement of the CFI acquisition. While Con-way currently expects that CFI's management team and its customer base will remain with CFI after closing, there can be no assurance in this regard. The departure of one or more key CFI executives or the loss of one or more significant customers could have an adverse effect on the acquired business. Con-way has entered into employee-retention agreements with certain key CFI executives that provide for the forfeiture of escrowed funds if the executive leaves the employ of CFI prior to specified dates following the closing of the acquisition. In addition, Con-way may not be able to realize all of the operating efficiencies, synergies, cost savings or other benefits expected from the acquisition, and may incur higher-than-expected costs and encounter other difficulties when integrating CFI into the Con-way organization. The success of the acquisition depends, in part, on Con-way's ability to realize the anticipated synergies, cost savings and growth opportunities from integrating CFI's business with Con-way's existing businesses. Con-way's success in realizing these benefits and the timing of this realization depend upon the successful integration of the operations of CFI. The integration process may be complex, costly and time-consuming. The difficulties of integrating the operations of CFI include, among others: * unanticipated issues in integrating information, communications and other systems; * retaining key employees; * consolidating corporate and administrative infrastructures; and * the diversion of management's attention from ongoing business concerns. Con-way and CFI may not accomplish this integration smoothly or successfully. The diversion of the attention of management from its current operations to the integration effort and any difficulties encountered in combining operations could prevent Con-way from realizing the full benefits anticipated to result from the acquisition. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table provides a summary of shares repurchased during the quarter ended June 30, 2007: Total Average Total Number of Maximum Dollar Value Number of Price Shares Purchased as of Shares that May Shares Paid per Part of Publicly Yet be Purchased Purchased Share Announced Program Under the Program [1] [1] [1] ---------- --------- ------------------- --------------------- April 1, 2007- April 30, 2007 218,000 $54.67 218,000 $ 33,341,779 May 1, 2007- May 31, 2007 471,000 $55.34 471,000 $ 7,274,297 June 1, 2007- June 30, 2007 126,000 $54.00 126,000 $ 470,677 ---------- ---------- Total 815,000 $54.96 815,000 $ -- =========== ========== [1] In April 2006, the Board of Directors authorized the repurchase of up to $400 million in Con-way's common stock through open-market transactions and privately negotiated transactions. Con-way concluded the repurchase program on June 29, 2007. ITEM 6. EXHIBITS Exhibit No. ----------- (10) Material Contracts 10.1 Agreement and Plan of Merger dated as of July 13, 2007, by and among the Company, Seattle Acquisition Corporation, a Missouri corporation and a wholly owned subsidiary of the Company, Transportation Resources, Inc., a Missouri corporation, the Shareholders' Agent (as defined therein) and the Principal Shareholders (as defined therein).* (31) Certification of Officers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32) Certification of Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (99) Additional documents: 99.1 Computation of Ratios of Earnings to Fixed Chares * Confidential treatment has been requested for portions of the signature page to this exhibit. The copy filed herewith omits the information subject to the confidentiality requested. Omissions are designated with [***]. A complete version of this exhibit has been filed separately with the United States Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Con-way Inc. ------------ (Registrant) August 7, 2007 /s/ Kevin C. Schick ------------------- Kevin C. Schick Senior Vice President and Chief Financial Officer