-----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, Tc6IzjaDs0Z29IycZ+oq4xtVwfmxSdAE1X0ESu+pPZ6w+Ohu8LeAOOH0qogAtgKQ 8KiKFX2TChbuYMTKz9XFzQ== 0000023675-98-000009.txt : 19980514 0000023675-98-000009.hdr.sgml : 19980514 ACCESSION NUMBER: 0000023675-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF TRANSPORTATION INC CENTRAL INDEX KEY: 0000023675 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 941444798 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05046 FILM NUMBER: 98617306 BUSINESS ADDRESS: STREET 1: 3240 HILLVIEW AVE CITY: PALO A LTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154942900 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED FREIGHTWAYS INC DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q PAGE 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR ___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A COMMISSION FILE NUMBER 1-5046 CNF TRANSPORTATION INC. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 3240 Hillview Avenue, Palo Alto, California 94304 Telephone Number (650) 494-2900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes xx No ---- ---- Number of shares of Common Stock, $.625 par value, outstanding as of April 30, 1998: 47,580,851 PAGE 2 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended March 31, 1998 ____________________________________________________________________________ ____________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 3 Statements of Consolidated Income - Three Months Ended March 31, 1998 and 1997 5 Statements of Consolidated Cash Flows - Three Months Ended March 31, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 16 PAGE 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1998 1997 ASSETS CURRENT ASSETS Cash and cash equivalents $ 95,301 $ 97,617 Trade accounts receivable, net of allowances 671,259 703,785 Other accounts receivable 50,634 32,067 Operating supplies, at lower of average cost or market 36,573 36,580 Prepaid expenses 60,125 35,682 Deferred income taxes 105,005 103,656 Total Current Assets 1,018,897 1,009,387 PROPERTY, PLANT AND EQUIPMENT, NET Land 110,132 109,768 Buildings and improvements 314,827 301,245 Revenue equipment 691,915 685,618 Other equipment and leasehold improvements 441,334 400,065 1,558,208 1,496,696 Accumulated depreciation and amortization (647,714) (616,854) 910,494 879,842 OTHER ASSETS Restricted funds 10,335 10,601 Deposits and other assets 155,849 120,872 Unamortized aircraft maintenance, net 122,479 123,352 Costs in excess of net assets of businesses acquired, net of accumulated amortization 275,127 277,442 563,790 532,267 TOTAL ASSETS $2,493,181 $2,421,496 The accompanying notes are an integral part of these statements. PAGE 4 CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 241,761 $ 268,064 Accrued liabilities 427,570 423,237 Accrued claims costs 96,325 99,848 Current maturities of long-term debt and capital leases 5,262 4,875 Short-term borrowings 71,000 - Federal and other income taxes 23,839 10,114 Total Current Liabilities 865,757 806,138 LONG-TERM LIABILITIES Long-term debt and guarantees 356,905 362,671 Long-term obligations under capital leases 110,797 110,817 Accrued claims costs 58,956 55,030 Employee benefits 148,901 141,351 Other liabilities and deferred credits 60,872 72,428 Deferred income taxes 92,073 89,958 Total Liabilities 1,694,261 1,638,393 COMMITMENTS AND CONTINGENCIES (Note 5) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES OF THE COMPANY (Note 4) 125,000 125,000 SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized 5,000,000 shares: Series B, 8.5% cumulative, convertible, $.01 stated value; designated 1,100,000 shares; issued 862,653 and 865,602 shares, respectively 9 9 Additional paid-in capital, preferred stock 131,201 131,649 Deferred TASP compensation (100,159) (101,819) Total Preferred Shareholders' Equity 31,051 29,839 Common stock, $.625 par value; authorized 100,000,000 shares; issued 54,539,936 and 54,370,182 shares, respectively 34,087 33,981 Additional paid-in capital, common stock 304,867 302,256 Deferred compensation, restricted stock (2,440) (2,528) Cumulative translation adjustment (Note 2) (7,339) (6,647) Retained earnings 485,399 473,250 Cost of repurchased common stock (6,963,965 and 6,977,848 shares, respectively) (171,705) (172,048) Total Common Shareholders' Equity 642,869 628,264 Total Shareholders' Equity 673,920 658,103 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,493,181 $2,421,496 The accompanying notes are an integral part of these statements. PAGE 5 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED INCOME (Dollars in thousands except per share amounts) Three Months Ended March 31, 1998 1997 REVENUES Con-Way Transportation Services $ 393,605 $ 334,458 Emery Worldwide 521,633 508,552 Other 174,628 99,618 1,089,866 942,628 COSTS AND EXPENSES Con-Way Transportation Services Operating Expenses 274,525 247,913 Selling and Administrative Expenses 50,080 43,271 Depreciation 18,499 14,797 343,104 305,981 Emery Worldwide Operating Expenses 437,295 406,846 Selling and Administrative Expenses 65,686 74,252 Depreciation 11,139 8,947 514,120 490,045 Other Operating Expenses 168,660 88,102 Selling and Administrative Expenses 15,940 6,868 Depreciation 3,237 1,265 187,837 96,235 1,045,061 892,261 OPERATING INCOME (LOSS) Con-Way Transportation Services 50,501 28,477 Emery Worldwide 7,513 18,507 Other (13,209) 3,383 44,805 50,367 OTHER INCOME (EXPENSE) Interest Expense (8,532) (10,805) Dividend Requirement on Preferred Securities of Subsidiary Trust (Note 4) (1,563) - Miscellaneous, Net (633) 610 (10,728) (10,195) Income before Income Taxes 34,077 40,172 Income Taxes 15,164 18,228 Net Income 18,913 21,944 Preferred Dividends 2,007 1,939 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 16,906 $ 20,005 Weighted-Average Shares 47,509,416 45,222,202 EARNINGS PER SHARE (Note 3) Basic $ 0.36 $ 0.44 Diluted $ 0.33 $ 0.40 The accompanying notes are an integral part of these statements. PAGE 6 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands) Three Months Ended March 31, 1998 1997 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 97,617 $ 82,094 CASH FLOWS FROM OPERATING ACTIVITIES Net income 18,913 21,944 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 37,019 28,008 Increase in deferred income taxes 766 5,233 Amortization of deferred compensation 1,885 1,562 Gains from property disposals, net (1,465) (638) Changes in assets and liabilities: Receivables 13,959 5,843 Prepaid expenses (24,443) (18,968) Accounts payable (23,485) (3,984) Accrued liabilities 31,322 28,824 Accrued incentive compensation (26,989) (9,963) Accrued claims costs 403 (4,286) Federal and other income taxes 13,725 362 Employee benefits 7,550 5,124 Deferred charges and credits (38,089) (9,993) Other (7,789) (12,105) Net Cash Provided by Operating Activities 3,282 36,963 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (69,663) (35,156) Proceeds from sales of property 6,364 869 Net Cash Used by Investing Activities (63,299) (34,287) CASH FLOWS FROM FINANCING ACTIVITIES Net payments of long-term debt and capital lease obligations (5,399) (1,797) Net borrowings (payments) under revolving lines of credit 71,000 (10,000) Proceeds from exercises of stock options 2,473 15,956 Payments of common dividends (4,757) (4,534) Payments of preferred dividends (5,616) (6,118) Net Cash Provided (Used) by Financing Activities 57,701 (6,493) Decrease in Cash and Cash Equivalents (2,316) (3,817) CASH AND CASH EQUIVALENTS, END OF PERIOD $ 95,301 $ 78,277 The accompanying notes are an integral part of these statements. PAGE 7 CNF TRANSPORTATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying consolidated financial statements of CNF Transportation Inc. and subsidiaries (the Company) have been prepared by the Company, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements included in the Company's 1997 Annual Report to Shareholders. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1, which provides for the capitalization of the costs of internal-use software if certain criteria are met, is effective for fiscal years beginning after December 15, 1998. As provided by SOP 98-1, the Company has elected to adopt the pronouncement early and has applied the new provisions prospectively as of January 1, 1998. Prior to adoption of SOP 98-1, it was the Company's policy to expense all internally developed internal-use software costs. For the three months ended March 31, 1998, costs of $6.8 million were capitalized as internally developed internal-use software and are included in Other Assets in the Consolidated Balance Sheets. There were no significant changes in the Company's commitments and contingencies as previously described in the 1997 Annual Report to Shareholders and related annual report to the Securities and Exchange Commission Form 10-K. 2. Non-Owner Changes in Equity In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income", which requires companies to report a measure of all changes in equity except those resulting from investments by owners and distributions to owners. Total non-owner changes in equity for the three months ended March 31, 1998 and 1997 were $18,221 and $18,131, respectively, and included net income and foreign currency translation adjustments. PAGE 8 3. Earnings Per Share Effective December 31, 1997, the Company adopted SFAS 128, "Earnings Per Share". SFAS 128 prescribes new Basic and Diluted Earnings Per Share (EPS) calculations that replace the former calculations for Primary and Fully Diluted EPS. Prior years have been restated to conform to the requirements of SFAS 128. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average shares outstanding. Diluted earnings per share was calculated as follows: Three Months Ended March 31, (Dollars in thousands except per share data) 1998 1997 Earnings: Net Income Available to Common Shareholders $ 16,906 $ 20,005 Add-backs: Dividends on Series B preferred stock, net of replacement funding 326 302 Dividends on preferred securities of subsidiary trust, net of tax 954 - $ 18,186 $ 20,307 Shares: Basic shares (weighted-average shares outstanding) 47,509,416 45,222,202 Stock option and restricted stock dilution 780,797 1,243,183 Series B preferred stock 4,061,370 4,258,592 Subsidiary trust preferred securities 3,125,000 - 55,476,583 50,723,977 Diluted Earnings Per Share $ 0.33 $ 0.40 ========== ========== 4. Preferred Securities of Subsidiary Trust On June 11, 1997, CNF Trust I (the Trust), a Delaware business trust wholly owned by the Company, issued 2,500,000 of its $2.50 Term Convertible Securities, Series A TECONS to the public for gross proceeds of $125 million. The combined proceeds from the issuance of the TECONS and the issuance to the Company of the common securities of the Trust were invested by the Trust in $128.9 million aggregate principal amount of 5% convertible subordinated debentures due June 1, 2012 (the Debentures) issued by the Company. The Debentures are the sole assets of the Trust. Holders of the TECONS are entitled to receive cumulative cash distributions at an annual rate of $2.50 per TECONS (equivalent to a rate of 5% per annum of the stated liquidation amount of $50 per TECONS). The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TECONS, to the extent the Trust has funds available therefor and subject to certain other limitations (the Guarantee). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Declaration of Trust of the Trust (including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust [other than with respect to the TECONS and the PAGE 9 common securities of the Trust]), provide a full and unconditional guarantee of amounts due on the TECONS. The Debentures are redeemable for cash, at the option of the Company, in whole or in part, on or after June 1, 2000, at a price equal to 103.125% of the principal amount, declining annually to par if redeemed on or after June 1, 2005, plus accrued and unpaid interest. In certain circumstances relating to federal income tax matters, the Debentures may be redeemed by the Company at 100% of the principal plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of TECONS will be redeemed. The TECONS do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 1, 2012, or upon earlier redemption. Each TECONS is convertible at any time prior to the close of business on June 1, 2012, at the option of the holder into shares of the Company's common stock at a conversion rate of 1.25 shares of the Company's common stock for each TECONS, subject to adjustment in certain circumstances. 5. Contingencies In connection with the spin-off of Consolidated Freightways Corporation (CFC) on December 2, 1996, the Company agreed to indemnify certain states, insurance companies and sureties against the failure of CFC to pay certain worker's compensation and public liability claims that were pending as of September 30, 1996. In some cases, these indemnities are supported by letters of credit under which the Company is liable to the issuing bank and by bonds issued by surety companies. In order to secure CFC's obligation to reimburse and indemnify the Company against liability with respect to these claims, CFC has provided the Company with approximately $30 million of letters of credit and $50 million of real property collateral. The Company has entered into a Transition Services Agreement to provide CFC with certain information systems, data processing and other administrative services and will administer CFC's retirement and benefits plans. The agreement has a three-year term although CFC may terminate any or all services with six months notice. The Company may terminate all services other than the telecommunications and data processing services at any time after the first anniversary of the agreement, with six months notice. Services performed by the Company under the agreement shall be paid by CFC on an arm's-length negotiated basis. The Internal Revenue Service has notified a subsidiary of the Company of proposed adjustments in aviation transportation excise tax caused by a difference in methods used to calculate the tax. The Company intends to vigorously defend against the proposed adjustments. Although the Company is unable to predict the ultimate outcome, it is the opinion of management that this action will not have a material impact on the Company's financial position or results of operations. The IRS has also proposed a substantial adjustment for tax years 1987 through 1990 based on the IRS position that certain aircraft maintenance costs should have been capitalized rather than expensed for federal income tax purposes. In addition, the Company believes it is likely that the IRS will propose an additional adjustment, based on the same IRS position with respect to aircraft maintenance costs, for subsequent tax years. The Company believes that its practice of expensing these types of maintenance costs is consistent with industry practice. However, if this issue is determined adversely to the Company, there can be no assurance that the Company will not have to pay substantial additional tax. The Company is unable to predict the ultimate outcome of this matter and intends to vigorously contest the proposed adjustment. PAGE 10 The Company has received notices from the Environmental Protection Agency and others that it has been identified as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) or other Federal and state environmental statutes at several hazardous waste sites. Under CERCLA, PRPs are jointly and severally liable for all site remediation and expenses. After investigating the Company's involvement at such sites, based upon cost studies performed by independent third parties, the Company believes its obligations with respect to such sites would not have a material adverse effect on the Company's financial position or results of operations. The Company and its subsidiaries are defendants in various lawsuits incidental to their businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material impact on the Company's financial position or results of operations. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Total Company revenues for the first quarter of 1998 increased 15.6% over the first quarter of 1997. The Company's higher revenues were primarily attributable to revenue growth at Con-Way Transportation Services (Con-Way), Menlo Logistics (Menlo), and the Priority Mail operations, which was awarded in April 1997. The Company's operating income for the first quarter of 1998 decreased 11.0% from the first quarter of 1997. Con-Way's operating income of $50.5 million in the first quarter of 1998 represented a new record for the Company's subsidiary. Con-Way's achievement was partially offset by lower income from Emery Worldwide (Emery) and operating losses from the Priority Mail operations. Effective January 1, 1998, the Company adopted early AICPA SOP 98-1. As a result, the Company capitalized $6.8 million of internally developed internal-use software costs that would have been recorded as operating expenses under the Company's previous accounting policies. (See Note 1 of the Notes to Consolidated Financial Statements). Other expenses for the 1998 first quarter increased 5.2% over the first quarter of 1997. First-quarter interest expense in 1998 decreased from the 1997 first quarter due primarily to lower borrowings under the Company's unsecured credit facility. The lower interest expense in the first quarter of 1998 was substantially offset by dividend requirements on the preferred securities of a subsidiary trust issued in June 1997. The effective income tax rate of 44.5% in the 1998 first quarter decreased from the rate of 45.4% in the 1997 first quarter. The decrease was primarily due to estimated lower non-deductible expenses for 1998. PAGE 11 CON-WAY TRANSPORTATION SERVICES Con-Way's revenues for the first quarter of 1998 increased 17.7% over the same quarter of last year due primarily to increased freight volumes and improved yields. Compared to the first quarter of last year, tonnage and revenue per hundredweight in the first quarter of 1998 increased 10.6% and 7.1%, respectively. With strong economic conditions in the first quarter of 1998, less-than-truckload tonnage increased 10.2% over last year's first quarter primarily due to revenue growth in recently-expanded geographic areas, redirected freight from shippers concerned with uncertainty over settlement of the National Master Freight Agreement, and new service offerings, which included an expansion of the premium joint services that link Con-Way's regional carriers. Con-Way's record operating income in the first quarter of 1998 increased 77.3% over the same quarter of last year. The higher operating income was primarily due to increased revenues, a more favorable pricing environment, increased load factor, improved operating efficiencies, and a more profitable service mix. The expansion of higher-margin inter-regional joint services, continued leveraging of the existing infrastructure, and lower fuel costs also contributed to a higher operating margin in the first quarter of 1998. Con-Way's management is continuing its strategic efforts to more efficiently utilize its freight infrastructure while creating and expanding new services it believes will improve operating margins. As part of this strategy, Con-Way recently announced an expansion of joint services between the central and western regional carriers that completes a plan to provide full nationwide coverage among all three regional carriers. EMERY WORLDWIDE Emery's 1998 first-quarter revenues exceeded 1997 first-quarter revenues by 2.6%. The higher revenues reflect growth from several of Emery's specialty operations, as total air freight revenues were essentially flat. Compared to the first quarter of the last year, North American and international tonnage in the first quarter of 1998 grew 1.2% and 8.5%, respectively. North American commercial revenues were down 1.0% compared to the 1997 first quarter and commercial international revenues were flat. In the first quarter of 1998, slow-downs in the automotive and technology industries adversely impacted demand in the airfreight industry. In addition, the first quarter of 1998 was affected by mild winter conditions, which can shift freight demand to competing surface transportation. Emery's operating income for the first quarter of 1998 decreased 59.4% from the first quarter of 1997. The 19.1% decrease in revenues from the fourth quarter of 1997 to the first quarter of 1998 was larger than expected and the suddenness of the revenue decline precluded a commensurate reduction in expense. While 1998 first-quarter revenues were lower than expected, costs had been set at a level designed to ensure that higher projected volumes could be adequately serviced. This relationship between lower revenues and comparably higher costs adversely affected PAGE 12 operating income in the first quarter of 1998 when compared to the same quarter of last year. Emery's management strategy includes measures intended to improve yields and reduce costs in-line with revenue levels. Emery has reduced the size of its air fleet, consolidated certain service center operations, and aligned staff with freight volumes. Emery's management strategy includes efforts to improve yields by re-pricing or replacing low margin business. OTHER OPERATIONS The Other segment is comprised of Menlo, the Priority Mail operations, Road Systems, and VantageParts. For the first quarter of 1998, revenue increases at Menlo and Priority Mail were the primary contributors to the Other segment's 75.3% revenue increase from the first quarter of 1997. The Other segment's $13.2 million operating loss in the first quarter of 1998, which compared unfavorably to operating income of $3.4 million in the first quarter of 1997, was the result of a $17.6 million operating loss from the Priority Mail operations. Menlo, which is the largest component of the Other segment, increased first-quarter revenues in 1998 by $30.3 million or 33.8% over the same quarter of last year while operating income increased 20.8%. Menlo's operating results continue to benefit from a service mix that includes an increasing proportion of higher-margin integrated logistics projects. Menlo's results in the first quarter of 1998 also included additional proposal costs incurred in securing several significant logistics management contracts. Priority Mail revenues in the first quarter of 1998 totaled $42.9 million compared to no Priority Mail operating results in the first quarter of 1997. An operating loss of $17.6 million from the Priority Mail contract included a $6.0 million charge for costs of delaying the start-up of the remaining postal sortation centers. While these costs exceeded early estimates, the Company believes that its strategy to improve productivity while providing quality service should improve operating results for the duration of the contract. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 1998, the Company's cash and cash equivalents declined $2.3 million to $95.3 million. Overall, cash from operations of $3.3 million and $71.0 million of additional short-term borrowings provided most of the funding for $69.7 million of capital expenditures and $10.4 million of dividend payments. Cash flow from operations decreased $33.7 million compared with the first quarter of 1997 primarily due to an increase in deferred costs, incentive compensation payments and changes in other working capital items. In the first quarter of 1998, cash provided by net income and non-cash adjustments to net income increased $1.0 million when compared to the same quarter last year. Adjustments to net income include depreciation and amortization, deferred taxes, and gains from property disposals. PAGE 13 Capital expenditures for the first quarter of $69.7 million were $34.5 million above the expenditures for the same period last year. $23.1 million of the 1998 first-quarter capital expenditures were related to the Priority Mail contract. Proceeds from sales of certain equipment and idle properties generated an added $5.5 million compared to the first quarter of 1997. During the first quarter of 1998, the Company used $71.0 million of short-term borrowings consisting of $46 million under the $350 million unsecured credit facility and $25 million from other uncommitted lines of credit. In the first quarter of last year, net short-term borrowings decreased $10.0 million. Other debt repayments used $5.4 million compared to $1.8 million last year. At March 31, 1998, the Company had available for borrowings and letters of credit $202.9 million from its $350 million unsecured credit facility and another $70.0 million under $95.0 million of uncommitted lines of credit. Proceeds from the exercise of stock options provided $2.5 million of cash compared to $16.0 million provided in the prior year's quarter. Payments of common and preferred stock dividends used $10.4 million of cash and were only slightly below the payments made in the first quarter of last year. The Company's ratio of total debt to capital increased to 40.5% at March 31, 1998 from 37.9% at December 31, 1997. The increase was due to higher short-term borrowings. The current ratio was 1.2 to 1 at March 31, 1998, compared to 1.3 to 1 at December 31, 1997. Outstanding letters of credit totaled $101.1 million at March 31, 1998 under the Company's $350 million unsecured credit facility and $68.0 million was outstanding under several unsecured letter of credit facilities. Other Items The Company is currently replacing or modifying certain information systems to address year 2000 issues, but is unable to predict with certainty the total costs of addressing these issues. However, after expensing approximately $4 million in the first quarter of 1998, the Company currently estimates that remaining expenditures for year 2000 compliance will total approximately $24 million. These costs represent expenditures in addition to normal systems replacement and maintenance. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information". Provisions of the new pronouncement are to be applied in annual financial statements for fiscal years ending after December 15, 1997. SFAS 131 supersedes SFAS 14, which required an entity to report segment information on the basis of industry and geographic area. Under SFAS 131, the criteria for segmentation are based on the way that management organizes the enterprise for making operating decisions and assessing performance. The Company will continue to evaluate its businesses to ensure that the 1998 year-end adoption of the pronouncement results in a meaningful and compliant segment presentation. PAGE 14 In March 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities". This statement requires the costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 does not apply to deferred contract costs. Application of this statement is required for financial statements for fiscal years beginning after December 15, 1998. The Company does not expect adoption of SOP 98-5 to have a material impact on the Company's financial position or results of operations. Forward-Looking Statements Certain statements included or incorporated by reference herein constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties. Any such forward-looking statements contained or incorporated by reference herein should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. In that regard, the following factors, among others and in addition to the matters discussed below and elsewhere in this document and in documents incorporated or deemed to be incorporated by reference herein, could cause actual results and other matters to differ materially from those in such forward-looking statements: changes in general business and economic conditions; increasing domestic and international competition and pricing pressure; changes in fuel prices; uncertainty regarding the Company's Priority Mail contract with the United States Postal Service, including costs of delays in the openings of the Priority Mail Processing Centers; labor matters, including changes in labor costs, renegotiations of labor contracts and the risk of work stoppages or strikes; changes in governmental regulation; environmental and tax matters, including the aviation excise tax and aircraft maintenance tax matters discussed in documents incorporated by reference; Emery's results of operations for the first quarter of 1998 that have been adversely affected by less than planned revenues; and matters relating to the spin-off of CFC. In that regard, the Company is or may be subject to substantial liabilities with respect to certain matters relating to CFC's business and operations, including, without limitation, guarantees of certain indebtedness of CFC and liabilities for employment-related 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 5 in the Notes to Consolidated Financial Statements in Part I of this form. ITEM 4. Submission of Matters to a Vote of Security Holders At the Annual Shareholders Meeting held April 27, 1998, the following proposals were presented with the indicated voting results: For the purpose of electing members of the Board of Directors, the votes representing shares of Common and Preferred stock, respectively, were cast as follows: Nominee For Against Earl F. Cheit 45,730,803 977,376 Richard A. Clarke 45,753,441 954,738 W. Keith Kennedy, Jr. 45,763,155 945,024 Richard B. Madden 45,750,612 957,567 The following directors did not stand for election and continued in office as directors after the Annual Shareholders Meeting: Robert Alpert, Margaret G. Gill, Robert Jaunich II, Donald E. Moffitt, Michael J. Murray, Robert D. Rogers, William J. Schroeder, and Robert P. Wayman The appointment of Arthur Andersen LLP as independent public accountants for the year 1998 was approved by the following vote: For 46,107,769; Against 310,154; Abstain 290,256. ITEM 5. Other Information On May 4, 1998, the Board of Directors elected Gregory L. Quesnel as Chief Executive Officer, succeeding Donald E. Moffitt, who will continue as Chairman of the Board of Directors. Quesnel was also elected a member of the Board of Directors, increasing the Board size to 13. PAGE 16 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27(a) Financial Data Schedule for the quarter ended March 31, 1998. (b) Financial Data Schedule for the periods shown below. The schedules reflect restatement for the implementation of FASB SFAS 128 and the spin-off of Consolidated Freightways Corporation. Three-month period ended March 31, 1997 Six-month period ended June 30, 1997 Nine-month period ended September 30, 1997 Fiscal year ended December 31, 1997 (c) Financial Data Schedule for the periods shown below. The schedules reflect restatement for the implementation of FASB SFAS 128 and the spin-off of Consolidated Freightways Corporation. Fiscal year ended December 31, 1995 Three-month period ended March 31, 1996 Six-month period ended June 30, 1996 Nine-month period ended September 30, 1996 Fiscal year ended December 31, 1996 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges were 2.4 and 2.6 for the three months ended March 31, 1998 and 1997, respectively. (b) Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends -- the ratios of earnings to combined fixed charges and preferred stock dividends were 2.3 and 2.6 for the three months ended March 31, 1998 and 1997, respectively. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company (Registrant) has duly caused this Form 10-Q Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. CNF Transportation Inc. (Registrant) May 12, 1998 /s/Chutta Ratnathicam Chutta Ratnathicam Senior Vice President and Chief Financial Officer EX-27 2
5 1000
Exhibit 27(a) 3-MOS DEC-31-1998 MAR-31-1998 95,301 0 691,085 (19,826) 36,573 1,018,897 1,558,208 (647,714) 2,493,181 865,757 467,702 125,000 131,210 338,954 203,756 2,493,181 0 1,089,866 0 1,045,061 10,728 0 8,532 34,077 15,164 18,913 0 0 0 16,906 0.36 0.33
EX-27 3
5 1000
Exhibit 27(b) 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 78277 136546 163885 97617 0 0 0 0 570626 568480 674350 723940 (19824) (19798) (21169) (20155) 32400 34287 36462 36580 824666 889056 1000756 1009387 1295106 1333503 1396911 1496696 (532630) (558954) (587891) (616854) 2103137 2180344 2334974 2421496 811242 718657 824624 806138 473642 473528 473508 473488 0 125000 125000 125000 132691 132136 131877 131658 291056 303794 310180 336237 109143 136643 167338 190208 2103137 2180344 2334974 2421496 0 0 0 0 942628 1945191 3072553 4266801 0 0 0 0 892261 1827957 2873472 4001934 10195 22035 31139 43053 0 0 0 0 10805 21067 29882 39553 40172 95199 167942 221814 18228 43266 76364 100925 21944 51933 91578 120889 0 0 0 0 0 0 0 0 0 0 0 0 20005 48023 85717 113003 .44 1.03 1.79 2.44 .40 .95 1.65 2.19
EX-27 4
5 1000
Exhibit 27(c) 12-MOS 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 59,787 75,113 85,308 81,584 82,094 0 0 0 0 0 526,899 480,175 519,399 543,978 561,093 (16,870) (16,219) (16,615) (12,971) (18,712) 26,578 25,202 28,772 33,772 32,916 771,986 727,759 756,869 807,711 815,895 980,269 1,025,015 1,069,744 1,122,339 1,259,368 (405,595) (418,974) (431,372) (457,743) (506,719) 2,084,958 2,138,286 2,205,373 2,282,126 2,081,866 593,667 640,393 687,073 756,474 815,086 480,410 477,273 477,253 477,239 477,201 0 0 0 0 0 145,166 144,493 143,932 143,551 133,117 271,853 272,699 272,798 272,732 275,126 305,341 298,322 307,263 321,969 100,036 2,084,958 2,138,286 2,205,373 2,282,126 2,081,866 0 0 0 0 0 3,290,077 847,873 1,742,209 2,677,999 3,662,183 0 0 0 0 0 3,103,390 812,659 1,654,338 2,535,712 3,470,035 33,745 9,531 20,865 33,216 45,016 0 0 0 0 0 33,407 9,664 19,555 29,498 39,766 152,942 25,683 67,006 109,071 147,132 66,723 12,020 29,625 48,391 66,951 86,219 13,663 37,381 60,680 80,181 (28,854) (13,383) (23,445) (26,890) (52,633) 0 0 0 0 0 0 0 0 0 0 46,566 (1,854) 9,619 27,332 18,956 1.79 0.26 0.75 1.23 1.63 1.64 0.24 0.69 1.13 1.48
EX-99 5 Exhibit 99(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Three Months Ended March 31, 1998 1997 Fixed Charges: Interest Expense $ 8,532 $ 10,805 Capitalized Interest 490 702 Dividend Requirement on Series B Preferred Stock [1] 3,003 3,087 Interest Component of Rental Expense [2] 9,863 8,067 $ 21,888 $ 22,661 Earnings: Income before Taxes 34,077 40,172 Fixed Charges 21,888 22,661 Capitalized Interest (490) (702) Preferred Dividend Requirements [3] (3,003) (3,087) $ 52,472 $ 59,044 Ratio of Earnings to Fixed Charges: 2.4 x 2.6 x [1] Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt service on notes issued by the Company's Thrift and Stock Plan. [2] Estimate of the interest portion of lease payments. The three month period ended March 31, 1997 was restated for a change in the estimation method. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. EX-99 6 Exhibit 99(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands) Three Months Ended March 31, 1998 1997 Combined Fixed Charges and Preferred Stock Dividends: Interest Expense $ 8,532 $ 10,805 Capitalized Interest 490 702 Dividend Requirement on Series B Preferred Stock [1] 3,003 3,087 Dividend Requirement on Preferred Securities of Subsidiary Trust 1,563 - Interest Component of Rental Expense [2] 9,863 8,067 $ 23,451 $ 22,661 Earnings: Income before Taxes 34,077 40,172 Fixed Charges 23,451 22,661 Capitalized Interest (490) (702) Preferred Dividend Requirements [3] (3,003) (3,087) $ 54,035 $ 59,044 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: 2.3 x 2.6 x [1] Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt service on notes issued by the Company's Thrift and Stock Plan. [2] Estimate of the interest portion of lease payments. The three month period ended March 31, 1997 was restated for a change in the estimation method. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. -----END PRIVACY-ENHANCED MESSAGE-----