-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Plj6ndUG+KALlTZ+pNn+rEwr2+slHfkEcW3f+e5BApnGhQNwpsQfxMNSsiwVkQFb U59U5z+GSwT2UlXqV3BO/A== 0000023675-97-000020.txt : 19970814 0000023675-97-000020.hdr.sgml : 19970814 ACCESSION NUMBER: 0000023675-97-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF TRANSPORTATION INC CENTRAL INDEX KEY: 0000023675 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 941444798 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05046 FILM NUMBER: 97658405 BUSINESS ADDRESS: STREET 1: 3240 HILLVIEW AVE CITY: PALO A LTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154942900 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED FREIGHTWAYS INC DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q PAGE 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A COMMISSION FILE NUMBER 1-5046 CNF TRANSPORTATION INC. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 3240 Hillview Avenue, Palo Alto, California 94304 Telephone Number (415) 494-2900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes xx No Number of shares of Common Stock, $.625 par value, outstanding as of July 31, 1997: 46,542,234 PAGE 2 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended June 30, 1997 ___________________________________________________________________________ ___________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 3 Statements of Consolidated Income - Three and Six Months Ended June 30, 1997 and 1996 5 Statements of Consolidated Cash Flows - Six Months Ended June 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 PAGE 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 1997 1996 ASSETS CURRENT ASSETS Cash and cash equivalents $ 136,546 $ 82,094 Trade accounts receivable, net of allowances 548,682 542,381 Other accounts receivable 49,665 49,278 Operating supplies, at lower of average cost or market 34,287 32,916 Prepaid expenses 41,570 31,249 Deferred income taxes 78,306 77,977 Total Current Assets 889,056 815,895 PROPERTY, PLANT AND EQUIPMENT, at cost Land 107,924 104,314 Buildings and improvements 280,623 265,655 Revenue equipment 617,162 586,720 Other equipment and leasehold improvements 327,794 302,679 1,333,503 1,259,368 Accumulated depreciation and amortization (558,954) (506,719) 774,549 752,649 OTHER ASSETS Restricted funds 12,296 12,685 Deposits and other assets 99,835 95,144 Unamortized aircraft maintenance, net 123,541 119,927 Costs in excess of net assets of businesses acquired, net of accumulated amortization 281,067 285,566 516,739 513,322 TOTAL ASSETS $2,180,344 $2,081,866 The accompanying notes are an integral part of these statements. PAGE 4 CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 211,686 $ 210,902 Accrued liabilities 399,876 349,497 Accrued claims costs 93,880 87,340 Current maturities of long-term debt and capital leases 4,895 3,185 Short-term borrowings - 155,000 Federal and other income taxes 8,320 9,162 Total Current Liabilities 718,657 815,086 LONG-TERM LIABILITIES Long-term debt and guarantees 362,670 366,305 Long-term obligations under capital leases 110,858 110,896 Accrued claims costs 58,119 57,912 Employee benefits 127,564 115,470 Other liabilities and deferred credits 64,148 75,479 Deferred income taxes 40,755 32,439 Total Liabilities 1,482,771 1,573,587 Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary, CNF Trust I, Holding Solely Convertible Debentures 125,000 - SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized 5,000,000 shares: Series B, 8.5% cumulative, convertible, $.01 stated value; designated 1,100,000 shares; issued 868,745 and 875,191 shares, respectively 9 9 Additional paid-in capital, preferred stock 132,127 133,108 Deferred TASP compensation (105,418) (108,655) Total Preferred Shareholders' Equity 26,718 24,462 Common stock, $.625 par value; authorized 100,000,000 shares; issued 53,440,106 and 51,595,827 shares, respectively 33,400 32,247 Additional paid-in capital, common stock 270,394 242,879 Cumulative translation adjustment 1,483 3,279 Retained earnings 412,998 378,744 Cost of repurchased common stock (6,992,944 and 7,029,917 shares, respectively) (172,420) (173,332) Total Common Shareholders' Equity 545,855 483,817 Total Shareholders' Equity 572,573 508,279 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,180,344 $2,081,866 The accompanying notes are an integral part of these statements. PAGE 5 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED INCOME (Dollars in thousands except per share amounts)
Three Months Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 REVENUES Con-Way Transportation Services $ 365,405 $ 316,653 $ 699,863 $ 618,494 Emery Worldwide 518,950 476,329 1,027,502 922,928 Other 118,208 101,354 217,826 200,787 1,002,563 894,336 1,945,191 1,742,209 COSTS AND EXPENSES Con-Way Transportation Services Operating Expenses 263,305 233,433 511,218 463,485 Selling and Administrative Expenses 46,328 40,668 89,599 80,719 Depreciation 15,691 12,547 30,488 23,901 325,324 286,648 631,305 568,105 Emery Worldwide Operating Expenses 411,435 383,698 818,281 749,401 Selling and Administrative Expenses 75,921 66,174 150,173 128,022 Depreciation 9,493 7,807 18,440 15,355 496,849 457,679 986,894 892,778 Other Operating Expenses 104,570 90,154 192,672 179,987 Selling and Administrative Expenses 7,530 6,560 14,398 12,299 Depreciation 1,423 638 2,688 1,169 113,523 97,352 209,758 193,455 935,696 841,679 1,827,957 1,654,338 OPERATING INCOME Con-Way Transportation Services 40,081 30,005 68,558 50,389 Emery Worldwide 22,101 18,650 40,608 30,150 Other 4,685 4,002 8,068 7,332 66,867 52,657 117,234 87,871 OTHER INCOME (EXPENSE) Investment Income 124 52 124 52 Interest Expense (10,262) (9,891) (21,067) (19,555) Miscellaneous, net (1,702) (1,495) (1,092) (1,362) (11,840) (11,334) (22,035) (20,865) Income from Continuing Operations before Income Taxes 55,027 41,323 95,199 67,006 Income Taxes 25,038 17,605 43,266 29,625 Net Income from Continuing Operations 29,989 23,718 51,933 37,381 Loss from Discontinued Operations net of Income Tax Benefits - (10,062) - (23,445) Net Income 29,989 13,656 51,933 13,936 Preferred Dividends 1,971 2,183 3,910 4,317 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $28,018 $11,473 $48,023 $9,619 Primary Average Shares Outstanding (1) 47,363,813 44,876,168 46,798,519 44,898,563 PRIMARY EARNINGS (LOSS) PER SHARE Continuing Operations $0.59 $0.48 $1.03 $0.74 Discontinued Operations - (0.22) - (0.53) $0.59 $0.26 $1.03 $0.21 FULLY DILUTED EARNINGS (LOSS) PER SHARE Continuing Operations $0.55 $0.45 $0.95 $0.69 Discontinued Operations - (0.21) - (0.48) $0.55 $0.24 $0.95 $0.21 (1) Includes the dilutive effect of common stock equivalents The accompanying notes are an integral part of these statements.
PAGE 6 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands) Six Months Ended June 30, 1997 1996 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 82,094 $ 59,787 CASH FLOWS FROM OPERATING ACTIVITIES Net income 51,933 13,936 Adjustments to reconcile income to net cash provided by operating activities: Loss from discontinued operations - 23,445 Depreciation and amortization 57,354 44,184 Increase in deferred income taxes 7,987 9,650 Losses (Gains) from property disposals, net (625) 179 Changes in assets and liabilities: Receivables (6,688) 27,860 Prepaid expenses (10,321) (9,698) Accounts payable 784 16,696 Accrued liabilities 50,379 2,369 Accrued claims costs 6,747 3,844 Federal and other income taxes (842) (4,978) Employee benefits 12,094 6,790 Other (20,345) (20,651) Net Cash Provided by Operating Activities 148,457 113,626 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (74,707) (100,376) Proceeds from sales of property 2,417 2,213 Net Cash Used by Investing Activities (72,290) (98,163) CASH FLOWS FROM FINANCING ACTIVITIES Net repayment of long-term debt and capital lease obligations (1,963) (2,356) Net borrowings (payments) under revolving lines of credit (155,000) 72,000 Proceeds from issuance of subsidiary preferred stock 125,000 - Costs of issuance of subsidiary preferred stock (3,569) - Proceeds from exercises of stock options 28,599 948 Payments of common dividends (9,124) (8,796) Payments of preferred dividends (5,658) (6,170) Net Cash Provided (Used) by Financing Activities (21,715) 55,626 Net Cash Provided by Continuing Operations 54,452 71,089 Net Cash Used by Discontinued Operations - (45,568) Increase in Cash and Cash Equivalents 54,452 25,521 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 136,546 $ 85,308 The accompanying notes are an integral part of these statements. PAGE 7 CNF TRANSPORTATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying consolidated financial statements of CNF Transportation Inc. and subsidiaries (the Company) have been prepared by the Company, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements included in the Company's 1996 Annual Report to Shareholders. There have been no significant changes in the accounting policies of the Company. There were no significant changes in the Company's commitments and contingencies as previously described in the 1996 Annual Report to Shareholders and related annual report to the Securities and Exchange Commission Form 10-K except as indicated in Note 4. Operating results for 1996 have been restated to exclude the results of Consolidated Freightways Corporation (CFC), the Company's former long-haul, less-than-truckload carrier which was spun-off to shareholders on December 2, 1996, and is reported as discontinued operations in the prior year. 2. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). The statement replaces Primary Earnings Per Share (EPS) with Basic EPS. Basic EPS is computed by dividing reported earnings available to common shareholders by the weighted average shares outstanding; no dilution for any potentially dilutive securities is included. In addition, Diluted EPS under the new statement is calculated differently than the Fully Diluted EPS calculation under existing authoritative guidance. When applying the treasury stock method for Diluted EPS to compute dilution for options, the new statement requires use of the average share price for the period, rather than the greater of the average share price or end-of-period share price required by APB Opinion 15. Adoption of SFAS 128 is required in financial statements issued after December 15, 1997. Although early application is prohibited, prior periods will be restated. Had this statement been adopted January 1, 1997, Basic EPS and Diluted EPS from continuing operations for the three and six-month periods ended June 30, 1997 and June 30, 1996 would have been as follows: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 Basic EPS $0.61 $0.49 $1.05 $0.75 Diluted EPS 0.55 0.45 0.95 0.69 PAGE 8 3. On June 11, 1997, CNF Trust I, a Delaware business trust wholly owned by the Company (the Trust), issued 2,500,000 of its $2.50 Term Convertible Securities, Series A (TECONS) to the public for gross proceeds of $125 million. The combined proceeds from the issuance of the TECONS and the issuance to the Company of the common securities of the Trust were invested by the Trust in $128.9 million aggregate principal amount of 5% convertible subordinated debentures due June, 2012 (the Debentures) issued by the Company. The Debentures represent the sole assets of the Trust. After paying underwriting compensation and other expenses associated with the offering of the TECONS, the net proceeds from the sale of the Debentures are intended to be used to pay costs associated with the recently signed contract with the United States Postal Service (USPS). These include costs to acquire surface transportation equipment and to equip ten Priority Mail processing centers. Any remaining net proceeds will be applied by the Company for other general corporate purposes, which may include repayment of indebtedness. As of June 30, 1997, the net proceeds were temporarily applied to reduce short-term borrowings. Holders of the TECONS are entitled to receive cumulative cash distributions at an annual rate of $2.50 per TECONS (equivalent to a rate of 5% per annum of the stated liquidation amount of $50 per TECONS). With certain limitations, the Company has guaranteed, on a subordinated basis, distributions and other payments due on the TECONS, to the extent the Company has funds available therefor and subject to certain further limitations (the "Guarantee"). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Declaration of Trust of the Trust (including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust (other than with respect to the TECONS and the common securities of the Trust)), provide a full and unconditional guarantee of amounts due on the TECONS. The Company has the right to defer payments of interest on the Debentures for successive periods not exceeding 20 consecutive quarters, and quarterly distributions on the TECONS would be deferred by the Trust (but would continue to accumulate) until the end of any such extension period. The Company does not currently anticipate exercising such right to extend payments. The Debentures are redeemable for cash, at the option of the Company, in whole or in part, on or after June 1, 2000 at a price equal to 103.125% of the principal amount, declining annually to par if redeemed on or after June 1, 2005, plus accrued and unpaid interest. In certain circumstances relating to federal income tax matters, the Debentures may be redeemed by the Company at 100% of the principal plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of TECONS will be redeemed. The TECONS do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 1, 2012, or earlier redemption. Each TECONS is convertible at any time prior to the close of business on June 1, 2012 at the option of the holder into shares of the Company's common stock at an initial conversion price of $40.00 per share (equivalent to an initial conversion rate of 1.25 shares of the Company's common stock for each TECONS), subject to adjustment in certain circumstances. Except under limited circumstances, the TECONS have no voting rights. PAGE 9 4. The Internal Revenue Service (IRS) has proposed adjustments that would require that Emery Air Freight Corporation (EAFC), a subsidiary of the Company, pay substantial additional aviation excise taxes for the period from January 1, 1990 through September 30, 1995. The Company has filed protests contesting these proposed adjustments and is engaged in discussions with the administrative conference division (Appeals Office) of the IRS. The Company believes that there is legal authority to support the manner in which it has calculated and paid the aviation excise taxes and, accordingly, the Company intends vigorously to continue to challenge the proposed adjustments. Nevertheless, the Company is unable to predict the ultimate outcome of this matter. As a result, there can be no assurance that the Company will not have to pay a substantial amount of additional aviation excise taxes for the 1990 through 1995 tax period. In addition, it is possible that the IRS may seek to increase the amount of the airline excise tax payable by EAFC for periods subsequent to September 30, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Statements". The IRS has proposed an adjustment for tax years 1987 through 1990 based on the IRS' position that certain aircraft maintenance costs should have been capitalized rather than expensed for federal income tax purposes. In addition, the Company believes it likely that the IRS will propose an additional adjustment, based on the same IRS position with respect to aircraft maintenance costs, for subsequent tax years. The Company believes that its practice of expensing these types of maintenance costs is consistent with industry practice. Accordingly, the Company intends to vigorously challenge the proposed adjustment. Nevertheless, the Company is unable to predict the ultimate outcome of this matter. As a result, there can be no assurance that the Company will not have to pay substantial additional tax. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Statements". The Company and its subsidiaries are defendants in various other lawsuits incidental to their businesses. It is the opinion of management that the ultimate outcome of these incidental lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating results for 1996 have been restated to exclude the results of Consolidated Freightways Corporation (CFC), the Company's former long- haul, less-than-truckload carrier which was spun-off to shareholders on December 2, 1996, and is reported as discontinued operations in the prior year. GENERAL Total second quarter revenues in 1997 of CNF Transportation Inc. increased 12.1% over the second quarter of 1996. The six-month revenues in 1997 were 11.7% above the six-month results of the prior year. The quarter's record revenues and six-month revenues resulted from significant revenue increases at all three operating segments. Successful marketing strategies were enhanced by improved global economic conditions and a more stable pricing environment resulting in record revenues for the Company. PAGE 10 The Company's second quarter total operating income increased 27.0% over the second quarter of 1996 while operating income for the six months improved 33.4% over the same period in 1996. The record results for the quarter and the increased six-month operating income were the result of significantly higher operating income at all three of the operating segments. The higher operating income is attributable to the increased revenue levels at all segments combined with improved operating efficiencies among the segments. The prior year, six-month results of Con- Way Transportation Service ("CTS") and Emery Worldwide ("Emery") included the adverse effects of severe winter storms in the first quarter of 1996 and higher, unrecovered fuel costs. Other expenses for the second quarter and first half of 1997 increased 4.5% and 5.6% over the second quarter and first half of last year, respectively, and were caused primarily by higher interest expense. Interest expense was higher as a result of increased borrowings under the unsecured credit facility partially offset by a reduction in the borrowing balance beginning June 11, 1997, from the temporary application of the net proceeds from securities issued by a subsidiary trust. The effective income tax rate for the quarter and first six months of 45.5% was higher than last year's rates of 42.6% and 44.2%, respectively, due in part to higher foreign taxes on foreign source income and other nondeductible items. Net income applicable to common stock for the second quarter and first six months of 1997 was $16.5 million and $38.4 million higher than the respective periods in the prior year due to higher operating income in 1997 and losses from discontinued operations of $10.1 million and $23.4 million reported in the second quarter and first six months of 1996, respectively. Significant variations in segment revenues and operating income are as follows: CON-WAY TRANSPORTATION SERVICES Second quarter revenues for CTS were 15.4% higher than the second quarter of 1996 and six-month revenues were 13.2% higher than the same period last year. The increased revenues in both the quarter and year-to- date periods resulted primarily from increased tonnage and improved pricing conditions in the industry amid stronger economic conditions compared with the same periods in 1996. Total tonnage for the regional carriers in the second quarter and first six months of 1997 increased 11.0% and 8.4% over the respective periods in 1996, with less-than-truckload tonnage, which typically has higher rates than truckload tonnage, up 6.3% and 4.4% over the second quarter and first six months of 1996, respectively. CTS's record operating income in the second quarter of 1997 was 33.6% higher than the second quarter of last year. The six-month operating income was 36.1% above the same period in 1996. The higher operating income was primarily attributable to increased revenues, improved freight system utilization in newer geographic regions and markets served by CTS, lower costs from improved operating efficiencies, and improved pricing conditions in the industry. The improvement in the first half 1997 operating income was also attributable in part to severe winter weather in the first quarter of 1996 and by higher unrecovered fuel costs in the first half of 1996. PAGE 11 CTS underwent certain management changes near the end of the second quarter of 1997. The new management's strategies will continue to focus on improving operating margins. These strategies include efforts to increase the utilization of the freight system in the Pacific northwest and northeastern United States, continued emphasis on market penetration in light of the withdrawal of a major competitor from several key regional markets, and efforts to reprice or replace low margin business. EMERY WORLDWIDE Emery's revenues for the second quarter and first six months of 1997 were up 8.9% and 11.3% compared to the same periods in 1996. The increased revenues were primarily attributable to higher tonnage levels in both domestic and international markets. The higher tonnage combined with a relatively stable pricing environment more than offset lower business levels from the automotive industry caused by strikes. Domestic commercial tonnage in the second quarter of 1997 was 6.6% higher than the second quarter last year and international tonnage was up 4.8% for the same period. Domestic and international commercial tonnage was up 7.9% and 7.7% for the six-month period in 1997 compared with the same period last year. Emery's second quarter operating income in 1997 was 18.5% above the second quarter of 1996 and six-month operating income was up 34.7% compared to the same period in 1996. The improvement in operating income was attributable in part to increased revenues, a fuel index fee intended to recover a portion of higher fuel costs from customers, a more profitable mix of services and improved pricing. In addition, operating income for the first six months of 1996 was adversely affected by severe winter storms in the first quarter and slightly higher fuel costs. Partially offsetting the improvements in the second quarter and six months of 1997 were the strikes in the automotive industry and, for the six month comparison, the renewal of the U.S. air cargo excise tax in mid-March 1997. The excise tax was not in effect during the first quarter of 1996. Emery's management strategies continue to be directed toward the improvement of operating margins. Among the strategies to improve margins are increased use of zone based pricing, evaluating and modifying the service mix, technology enhancements, increased use of owned and dedicated international agent locations and continued emphasis on operating efficiencies to reduce costs. Among the operating efficiency improvements Emery has undertaken is a redesign and upgrade of the sortation center located at its leased air cargo facility (the "Hub") at the Dayton International Airport in Ohio, which it estimates will be completed in the year 2000 at a cost of approximately $56 million. This redesign and upgrade, when completed, is expected to increase sortation capacity at the Hub by more than 30%. On July 2, 1997, Emery's pilots at the Hub voted to approve representation by the Airline Pilots Association. Contract negotiations are expected to begin in six months to one year. The Company is unable to predict the outcome of these contract negotiations or their effect on its results of operations. PAGE 12 On April 24, 1997, Emery Worldwide Airlines (EWA), a subsidiary of the Company, was awarded a new contract with the U.S. Postal Service (USPS) to provide Priority Mail sortation and transportation. The USPS has indicated that the Company could receive revenues of approximately $1.7 billion over the initial 58 month term of the contract. However, the foregoing amount is subject to a number of uncertainties and assumptions (including assumptions regarding Priority Mail volumes to be handled under the contract and a projected growth rate for that volume over the life of the contract, and further assumes that the Company meets the performance standards established by the contract), and there can be no assurance that the revenues realized by the Company will not be less than this amount. In that regard, the contract does not specifically set forth a minimum volume of Priority Mail to be handled by the Company. The initial term of the contract ends in February 2002, although the contract may be renewed by the USPS for two successive three-year terms. The contract establishes fixed prices per piece, subject to adjustments based on volume and percentage of on-time performance and for increases in certain wage costs, and provides for EWA to be reimbursed for fuel costs. In addition, the contract contains a number of specific service standards that the Company is required to meet (including a benchmark of 96.5% on-time and accurate handling by the Company) and provides for financial disincentives, which could be substantial, if the Company fails to meet those standards. As a result, the effect of the contract on the Company's results of operations will depend largely on its ability to control costs of performance under the contract and to meet the performance standards under the contract. The contract calls for the Company to obtain, equip and fully staff ten Priority Mail processing centers in major metropolitan areas along the eastern seaboard. The contract calls for five of the processing centers to be fully operational by late October 1997, and for the remaining five to be fully operational by late February 1998. The contract also provides for the Company to pay liquidated damages if the centers are not operational on time, and provides for the Company to receive incentive bonuses if completed by required dates. The Company has begun the process of establishing the first five processing centers. For 1997, the Company has budgeted approximately $102 million for capital expenditures associated with the new contract plus approximately $17 million for other associated costs. The contract may be terminated by the USPS for failure by the Company to perform its obligations thereunder and, as is common in government contracts, may be terminated by the USPS "for convenience" (i.e., without cause), although the USPS is required, following termination for convenience, to reimburse the Company for certain expenditures associated with the contract. OTHER OPERATIONS The Other segment, consisting of Menlo Logistics (Menlo), Road Systems and VantageParts, reported a revenue increase of 16.6% for the second quarter of 1997 over the second quarter of 1996. Six-month revenues were 8.5% above the same period last year. The majority of the segment's revenues originate from Menlo which increased approximately 20% for the quarter and 13% for the six months over the respective periods of 1996. The higher revenues for Menlo were again offset by significantly lower revenues from Road Systems due to lower trailer sales. PAGE 13 The segment's operating income for the second quarter and first six months of 1997 increased 17.1% and 10.0%, respectively, over the same periods of 1996. Like last quarter, increased operating income from Menlo was partially offset by lower income from Road Systems due to lower trailer sales. Menlo's operating income for the second quarter and six months ended 1997 increased 34.9% and 41.9% over the respective periods in 1996 as its revenue mix continued to shift to higher margin dedicated logistics management services from the lower margin, but higher revenue generating, transportation management services. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had $136.5 million in cash and cash equivalents. Net cash flow from operations during the first six months of 1997 was $148.5 million, the primary components of which were net income, depreciation and amortization and an increase in accrued liabilities. Cash flow from operations in the first six months of 1996 was $113.6 million and was attributable primarily to income from continuing operations, depreciation and amortization and a reduction of accounts receivable. Capital expenditures for the first half of 1997 were $74.7 million, which were $25.7 million lower than the same period in 1996. As discussed below, the proceeds from the issuance of the TECONS will be used primarily to pay costs associated with the recently signed contract with the USPS, including costs to acquire surface transportation equipment and equip ten Priority Mail processing centers. The Company expects to fund capital expenditure requirements for the remainder of 1997 with cash from operations, $121.4 million of the net proceeds from the offering of 2,500,000, $2.50 Term Convertible Securities, Series A ("TECONS") issued by a subsidiary trust in June 1997, and if necessary, borrowings under credit facilities. Proceeds from the exercise of stock options provided $28.6 million of cash compared with less than $1 million in the first six months of 1996. Additionally, payments of preferred and common dividends were approximately $14.8 million and $15.0 million in the first six months of 1997 and 1996, respectively. Net debt repayments for the first half of 1997 totaled $157.0 million, including full repayment of borrowings under the unsecured lines of credit, compared to a $69.6 million net increase in debt in the first half of 1996. The borrowings under the unsecured lines of credit were temporarily repaid with proceeds from the issuance of the TECONS pending application of such net proceeds to pay costs associated with the USPS contract. At June 30, 1997, under its $350 million unsecured credit facility, the Company had outstanding letters of credit of $121.9 million, leaving $228.1 million available for additional short-term borrowings and letters of credit under this facility. Under several other unsecured letter of credit facilities, the Company had outstanding letters of credit of $69.6 million at June 30, 1997, leaving $5.4 million available for additional letters of credit. Further, the Company had available $90.0 million of capacity under other short-term uncommitted borrowing lines, none of which was drawn. PAGE 14 Other Items The Company's operations necessitate the storage of fuel in underground tanks as well as the disposal of substances regulated by various federal and state laws. The Company adheres to a stringent site-by- site tank testing and maintenance program performed by qualified independent parties to protect the environment and comply with regulations. Where clean-up is necessary, the Company takes appropriate action. Forward-Looking Statements Certain statements included or incorporated by reference herein constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties. Any such forward-looking statements contained or incorporated by reference herein should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks" or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. In that regard, the following factors, among others and in addition to the matters discussed elsewhere herein and in any documents incorporated by reference herein, could cause actual results and other matters to differ materially from those in such forward-looking statements: changes in general business and economic conditions; increasing domestic and international competition and pricing pressure; changes in fuel prices; uncertainties regarding the Company's new contract with the USPS; labor matters, including changes in labor costs, negotiation and renegotiation of labor contracts and the risk of work stoppages or strikes; changes in governmental regulation; environmental and tax matters, including the aviation excise tax and aircraft maintenance cost matters discussed above; and matters relating to the recently completed spin-off of Consolidated Freightways Corporation (CFC). In that regard, the Company is or may be subject to substantial liabilities with respect to certain matters relating to CFC's business and operations, including, without limitation, guarantees of certain indebtedness of CFC and liabilities for employment-related and environmental matters. Although CFC is, in general, either the primary obligor or jointly and severally liable with the Company with respect to these matters, a failure to pay or other default by CFC with respect to the obligations as to which the Company is or may be, or may be perceived to be, liable, whether because of CFC's bankruptcy or insolvency or otherwise, could lead to substantial claims against the Company. As a result of the foregoing, no assurance can be given as to future results of operations or financial condition. PAGE 15 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings As previously reported, the Company has been designated a Potentially Responsible Party (PRP) by the EPA with respect to the disposal of hazardous substances at various sites. The Company expects its share of the clean-up cost will not have a material adverse effect on the Company's financial position or results of operations. The Company expects the costs of complying with existing and future federal, state and local environmental regulations to continue to increase. On the other hand, it does not anticipate that such cost increases will have a materially adverse effect on the Company. Certain legal matters are discussed in Note 4 in the Notes to Consolidated Financial Statements in Part I of this form. ITEM 5. Other Information In July 1997, Gregory L. Quesnel was elected by the Board of Directors as President and Chief Operating Officer of the Company. Prior to the election, Mr. Quesnel was the Company's Executive Vice President and Chief Financial Officer. Chutta Ratnathicam, who was previously Vice President-International for Emery Worldwide, was promoted to Senior Vice President of the Company and has succeeded Mr. Quesnel as Chief Financial Officer of the Company. Also in July, Gerald L. Detter was named President and Chief Executive Officer of Con-Way Transportation Services (CTS). Detter most recently was President of Con-Way Central Express, the largest of CTS's three regional trucking companies. Detter succeeds Robert T. Robertson, who is leaving the Company after more than 27 years of service. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Computation of Per Share Earnings 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges were 2.6 and 2.2 for the six months ended June 30, 1997 and 1996, respectively. (b) Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends -- the ratios of earnings to combined fixed charges and preferred stock dividends were 2.6 and 2.2 for the six months ended June 30, 1997 and 1996, respectively. PAGE 16 (b) Reports on Form 8-K A Form 8K was filed on May 27, 1997, under Item 5, Other Events, to report the proposed public offering of $2.50 Term Convertible Securities, Series A ("TECONS"), and to make available certain information set forth in the prospectus supplement relating to the TECONS. A Form 8K was filed on June 11, 1997, under Item 5, Other Events, to report the execution of an underwriting agreement in connection with the previously announced public offering of TECONS. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company (Registrant) has duly caused this Form 10-Q Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. CNF Transportation Inc. (Registrant) August 13, 1997 /s/Chutta Ratnathicam Chutta Ratnathicam Senior Vice President and Chief Financial Officer August 13, 1997 /s/Gary D. Taliaferro Gary D. Taliaferro Vice President and Controller EX-11 2 Exhibit 11 ---------- CNF TRANSPORTATION INC. COMPUTATION OF PER SHARE EARNINGS The following is the computation of fully-diluted earnings per share:
Three Months Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 (Dollars in thousands except per share data) Net income available to common shareholders $ 28,018 $ 11,473 $ 48,023 $ 9,619 Non-discretionary adjustments under the if-converted method: Addback: Dividends on Series B preferred stock, net of tax benefits 1,971 2,183 3,910 4,317 Addback: Dividends on preferred stock of subsidiary trust, net of tax benefits 212 - 212 - Less: Replacement funding adjustment on Series B preferred stock, net of tax benefits (1) (1,672) (1,633) (3,309) (3,301) Net income available to common shareholders $ 28,529 $ 12,023 $ 48,836 $ 10,635 WEIGHTED AVERAGE SHARES OUTSTANDING: Common shares 46,001,492 44,004,494 45,614,045 43,976,483 Equivalents: stock options 1,425,908 871,674 1,425,908 922,080 If converted: Series B preferred stock 4,090,047 4,473,885 4,090,047 4,473,885 If converted: Preferred stock of subsidiary trust 694,444 - 347,222 - 52,211,891 49,350,053 51,477,222 49,372,448 FULLY DILUTED EARNINGS PER SHARE (2) $ 0.55 $ 0.24 $ 0.95 $ 0.22 (1) Additional payment to the Company's Thrift and Stock Plan to replace the funding lost under the if-converted method. (2) Fully diluted earnings per share was reported at $.21 per share on the Statements of Consolidated Income for the six months ended June 30, 1996, as this computation indicates that the items included under the if-converted method were anti-dilutive.
EX-27 3
5 1000 6-MOS DEC-31-1997 JUN-30-1997 136546 0 568480 (19798) 34287 889056 1333503 (558954) 2180344 718657 473528 125000 132136 303794 136643 2180344 0 1945191 0 1827957 22035 0 21067 95199 43266 51933 0 0 0 48023 1.03 .95
EX-99 4 Exhibit 99(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Six Months Ended June 30, 1997 1996 Fixed Charges: Interest Expense $ 21,067 $ 19,555 Capitalized Interest 1,321 1,056 Preferred Dividends 5,658 6,170 Total Interest 28,046 26,781 Interest Component of Rental Expense 26,769 22,587 Fixed Charges 54,815 49,368 Less: Capitalized Interest 1,321 1,056 Preferred Dividends 5,658 6,170 Net Fixed Charges $ 47,836 $ 42,142 Earnings: Income from Continuing Operations before Income Taxes $ 95,199 $ 67,006 Add: Net Fixed Charges 47,836 42,142 Total Earnings Before Fixed Charges $143,035 $109,148 Ratio of Earnings to Fixed Charges: Total Earnings $143,035 $109,148 Fixed Charges (1) 54,815 49,368 Ratio 2.6x 2.2x (1) Fixed charges represent interest on capital leases and short-term and long-term debt, capitalized interest, dividends on shares of the Series B cumulative convertible preferred stock used to pay debt service on notes issued by the Company's Thrift and Stock Plan (the "TASP"), and the applicable portion of the consolidated rent expense which approximates the interest of lease payments. EX-99 5 Exhibit 99(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands) Six Months Ended June 30, 1997 1996 Fixed Charges: Interest Expense $ 21,067 $ 19,555 Capitalized Interest 1,321 1,056 Preferred Dividends (1) 6,005 6,170 Total Interest 28,393 26,781 Interest Component of Rental Expense 26,769 22,587 Fixed Charges 55,162 49,368 Less: Capitalized Interest 1,321 1,056 Preferred Dividends 5,658 6,170 Net Fixed Charges $ 48,183 $ 42,142 Earnings: Income from Continuing Operations before Income Taxes $ 95,199 $ 67,006 Add: Net Fixed Charges 48,183 42,142 Total Earnings Before Fixed Charges $143,382 $109,148 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: Total Earnings $143,382 $109,148 Combined Fixed Charges and Preferred Stock Dividends (2) 55,162 49,368 Ratio 2.6x 2.2x (1) For the six months ended June 30, 1997, dividends of $347,000 on the preferred stock of a subsidiary trust issued in June 1997 are included as an expense in Miscellaneous, net in the Statements of Consolidated Income; these dividends are shown as fixed charges in the Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (2) Fixed charges represent interest on capital leases and short-term and long-term debt, capitalized interest, dividends on shares of the Series B cumulative convertible preferred stock used to pay debt service on notes issued by the Company's Thrift and Stock Plan (the "TASP"), dividends on shares of the preferred securities of a subsidiary trust, and the applicable portion of the consolidated rent expense which approximates the interest of lease payments. -----END PRIVACY-ENHANCED MESSAGE-----