-----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, N14zyhKzo2TNwbak5j2qlM6QgnZxOeA5TUnMHS2toJk6iHcAyqob8ZlU3UEDCU8U IBeCBGI0HYXaQSCg703rqA== 0000023675-98-000011.txt : 19980813 0000023675-98-000011.hdr.sgml : 19980813 ACCESSION NUMBER: 0000023675-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 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: 98682758 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, 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 July 31, 1998: 47,699,863 PAGE 2 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended June 30, 1998 ___________________________________________________________________________ ___________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3 Statements of Consolidated Income - Three and Six Months Ended June 30, 1998 and 1997 5 Statements of Consolidated Cash Flows - Six Months Ended June 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 15 PAGE 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 1998 1997 ASSETS CURRENT ASSETS Cash and cash equivalents $ 78,899 $ 97,617 Trade accounts receivable, net of allowances 728,359 703,785 Other accounts receivable 36,209 32,067 Operating supplies, at lower of average cost or market 40,726 36,580 Prepaid expenses 44,751 35,682 Deferred income taxes 107,931 103,656 Total Current Assets 1,036,875 1,009,387 PROPERTY, PLANT AND EQUIPMENT, NET Land 108,767 109,768 Buildings and improvements 320,556 301,245 Revenue equipment 704,712 685,618 Other equipment and leasehold improvements 475,025 400,065 1,609,060 1,496,696 Accumulated depreciation and amortization (681,456) (616,854) 927,604 879,842 OTHER ASSETS Restricted funds 7,186 10,601 Deposits and other assets 167,425 120,872 Unamortized aircraft maintenance, net 122,136 123,352 Costs in excess of net assets of businesses acquired, net of accumulated amortization 272,835 277,442 569,582 532,267 TOTAL ASSETS $2,534,061 $2,421,496 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, 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 251,453 $ 268,064 Accrued liabilities 456,409 423,237 Accrued claims costs 99,172 99,848 Current maturities of long-term debt and capital leases 5,262 4,875 Short-term borrowings 7,000 - Federal and other income taxes 37,880 10,114 Total Current Liabilities 857,176 806,138 LONG-TERM LIABILITIES Long-term debt and guarantees 356,905 362,671 Long-term obligations under capital leases 110,775 110,817 Accrued claims costs 59,540 55,030 Employee benefits 156,902 141,351 Other liabilities and deferred credits 61,829 72,428 Deferred income taxes 95,476 89,958 Total Liabilities 1,698,603 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 859,400 and 865,602 shares, respectively 9 9 Additional paid-in capital, preferred stock 130,706 131,649 Deferred TASP compensation (98,500) (101,819) Total Preferred Shareholders' Equity 32,215 29,839 Common stock, $.625 par value; authorized 100,000,000 shares; issued 54,606,055 and 54,370,182 shares, respectively 34,126 33,981 Additional paid-in capital, common stock 306,586 302,256 Deferred compensation, restricted stock (3,129) (2,528) Cumulative translation adjustment (Note 2) (7,990) (6,647) Retained earnings 519,964 473,250 Cost of repurchased common stock (6,948,075 and 6,977,848 shares, respectively) (171,314) (172,048) Total Common Shareholders' Equity 678,243 628,264 Total Shareholders' Equity 710,458 658,103 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,534,061 $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 Six Months Ended June 30 June 30 1998 1997 1998 1997 REVENUES Con-Way Transportation Services $ 424,618 $ 365,405 $ 818,223 $ 699,863 Emery Worldwide 526,726 518,950 1,048,359 1,027,502 Other 248,310 118,208 422,938 217,826 1,199,654 1,002,563 2,289,520 1,945,191 COSTS AND EXPENSES Con-Way Transportation Services Operating Expenses 295,383 263,305 569,908 511,218 Selling and Administrative Expenses 55,817 46,328 105,897 89,599 Depreciation 19,428 15,691 37,927 30,488 370,628 325,324 713,732 631,305 Emery Worldwide Operating Expenses 401,451 411,435 838,746 818,281 Selling and Administrative Expenses 91,332 75,921 157,018 150,173 Depreciation 11,730 9,493 22,869 18,440 504,513 496,849 1,018,633 986,894 Other Operating Expenses 212,762 104,570 381,422 192,672 Selling and Administrative Expenses 23,033 7,530 38,973 14,398 Depreciation 4,715 1,423 7,952 2,688 240,510 113,523 428,347 209,758 1,115,651 935,696 2,160,712 1,827,957 OPERATING INCOME (LOSS) Con-Way Transportation Services 53,990 40,081 104,491 68,558 Emery Worldwide 22,213 22,101 29,726 40,608 Other 7,800 4,685 (5,409) 8,068 84,003 66,867 128,808 117,234 OTHER INCOME (EXPENSE) Investment Income 62 124 91 124 Interest Expense (8,449) (10,262) (16,981) (21,067) Dividend Requirement on Preferred Securities of Subsidiary Trust (Note 4) (1,563) (347) (3,126) (347) Miscellaneous, Net 480 (1,355) (182) (745) (9,470) (11,840) (20,198) (22,035) Income before Income Taxes 74,533 55,027 108,610 95,199 Income Taxes 33,167 25,038 48,331 43,266 Net Income 41,366 29,989 60,279 51,933 Preferred Dividends 2,040 1,971 4,047 3,910 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 39,326 $ 28,018 $ 56,232 $ 48,023 Weighted-Average Shares 47,612,373 46,001,492 47,561,179 45,614,045 EARNINGS PER SHARE (Note 3) Basic $ 0.83 $ 0.61 $ 1.18 $ 1.05 Diluted $ 0.73 $ 0.55 $ 1.06 $ 0.95 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, 1998 1997 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 97,617 $ 82,094 CASH FLOWS FROM OPERATING ACTIVITIES Net income 60,279 51,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 77,901 57,354 Amortization of deferred compensation 3,822 3,362 Increase in deferred income taxes 1,243 7,987 Gains from property disposals, net (1,876) (625) Changes in assets and liabilities: Receivables (28,716) (6,688) Prepaid expenses (9,069) (10,321) Accounts payable (16,592) (3,401) Accrued liabilities 41,646 44,362 Accrued incentive compensation (8,474) 6,017 Accrued claims costs 3,834 6,747 Federal and other income taxes 27,766 (842) Employee benefits 15,551 12,094 Deferred charges and credits (47,980) (16,860) Other (11,470) (2,202) Net Cash Provided by Operating Activities 107,865 148,917 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (125,345) (74,707) Proceeds from sales of property 9,181 2,417 Net Cash Used by Investing Activities (116,164) (72,290) CASH FLOWS FROM FINANCING ACTIVITIES Net payments of long-term debt and capital lease obligations (5,421) (1,963) Net borrowings (payments) under revolving lines of credit 7,000 (155,000) Net proceeds from issuance of subsidiary preferred stock - 121,431 Proceeds from exercises of stock options 3,136 28,599 Payments of common dividends (9,518) (9,124) Payments of preferred dividends (5,616) (6,118) Net Cash Used by Financing Activities (10,419) (22,175) Increase (Decrease) in Cash and Cash Equivalents (18,718) 54,452 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 78,899 $ 136,546 The accompanying notes are an integral part of these statements PAGE 7 CNF TRANSPORTATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying consolidated financial statements of CNF Transportation Inc. and subsidiaries (the Company) have been prepared by the Company, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements included in the Company's 1997 Annual Report to Shareholders. There were no significant changes in the Company's commitments and contingencies as previously described in the 1997 Annual Report to Shareholders and related annual report to the Securities and Exchange Commission Form 10-K. 2. Non-Owner Changes in Equity In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income", which requires companies to report a measure of all changes in equity except those resulting from investments by owners and distributions to owners. Total non-owner changes in equity were as follows: Three Months Ended Six Months Ended (Dollars in thousands) June 30, June 30, 1998 1997 1998 1997 Net Income $41,366 $29,989 $60,279 $51,933 Foreign currency translation adjustment (651) 2,017 (1,343) (1,796) $40,715 $32,006 $58,936 $50,137 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 Six Months Ended (Dollars in thousands except June 30, June 30, per share data) 1998 1997 1998 1997 Earnings: Net Income Available to Common Shareholders $ 39,326 $ 28,018 $ 56,232 $ 48,023 Add-backs: Dividends on Series B preferred stock, net of replacement funding 337 299 663 601 Dividends on preferred securities of subsidiary trust, net of tax 954 212 1,908 212 $ 40,617 $ 28,529 $ 58,803 $ 48,836 Shares: Basic shares (weighted -average shares outstanding) 47,612,373 46,001,492 47,561,179 45,614,045 Stock option and restricted stock dilution 722,628 1,362,321 804,613 1,184,474 Series B preferred stock 4,046,055 4,090,047 4,046,055 4,090,047 Subsidiary trust preferred securities 3,125,000 694,444 3,125,000 347,222 55,506,056 52,148,304 55,536,847 51,235,788 Diluted Earnings Per Share $ 0.73 $ 0.55 $ 1.06 $ 0.95 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 common securities of the Trust)), provide a full and unconditional guarantee of amounts due on the TECONS. PAGE 9 The Debentures are redeemable for cash, at the option of the Company, in whole or in part, on or after June 1, 2000, at a price equal to 103.125% of the principal amount, declining annually to par if redeemed on or after June 1, 2005, plus accrued and unpaid interest. In certain circumstances relating to federal income tax matters, the Debentures may be redeemed by the Company at 100% of the principal plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of TECONS will be redeemed. The TECONS do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 1, 2012, or upon earlier redemption. Each TECONS is convertible at any time prior to the close of business on June 1, 2012, at the option of the holder into shares of the Company's common stock at a conversion rate of 1.25 shares of the Company's common stock for each TECONS, subject to adjustment in certain circumstances. 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 administers 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 (the "IRS") has proposed adjustments that would require Emery Worldwide pay substantial additional aviation excise taxes for the period from January 1, 1990 through September 30, 1995. The Company has filed protests contesting these proposed adjustments and is engaged in discussions with the administrative conference division (Appeals Office) of the IRS. The Company believes that there is legal authority to support the manner in which it has calculated and paid the aviation excise taxes and, accordingly, the Company intends to continue to vigorously challenge the proposed adjustments. Nevertheless, the Company is unable to predict the ultimate outcome of this matter. As a result, there can be no assurance that the Company will not have to pay a substantial amount of additional aviation excise taxes for the 1990 through 1995 tax period. In addition, it is possible that the IRS may seek to increase the amount of the aviation excise tax payable by Emery Worldwide for periods subsequent to September 30, 1995. As a result, there can be no assurance that this matter will not have a material adverse effect on the Company. PAGE 10 The IRS has also proposed a substantial adjustment for tax years 1987 through 1990 based on the IRS' position that certain aircraft maintenance costs should have been capitalized rather than expensed for federal income tax purposes. In addition, the Company believes it likely that the IRS will propose an additional adjustment, based on the same IRS position with respect to aircraft maintenance costs, for subsequent tax years. The Company believes that its practice of expensing these types of maintenance costs is consistent with industry practice. However, if this issue is determined adversely to the Company, there can be no assurance that the Company will not have to pay substantial additional tax. The Company is unable to predict the ultimate outcome of this matter and intends to vigorously contest the proposed adjustment. There can be no assurance, however, that this matter will not have a material adverse effect on the Company. The Company has received notices from the Environmental Protection Agency and others that it has been identified as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) or other Federal and state environmental statutes at several hazardous waste sites. Under CERCLA, PRPs are jointly and severally liable for all site remediation and expenses. After investigating the Company's involvement at such sites, based upon cost studies performed by independent third parties, the Company believes its obligations with respect to such sites would not have a material adverse effect on the Company's financial position or results of operations. In addition to the matters discussed above, the Company and its subsidiaries are defendants in various lawsuits incidental to their businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material impact on the Company's financial position or results of operations. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total revenues for the second quarter and first six months of 1998, which increased 19.7% and 17.7% over the respective periods last year, were records for the Company. The higher revenues were the result of increased revenues at each of the Company's three operating segments despite signs of a slowing economy in the second quarter of 1998. The Company's second quarter operating income increased 25.6% over the second quarter of 1997 while operating income for the first half of 1998 increased 9.9% over the first half of 1997. The increases resulted in record operating income in both the second quarter and first half of 1998. For the second quarter of 1998, the higher operating income compared to the same period last year was primarily due to improved operating results at the Con-Way and Other operating segments. Compared to the first half of last year, increased operating income in the first half of 1998 was primarily due to significantly higher operating income at the Con-Way operating segment, which offset a decline in operating income from the Company's two other business segments. Effective January 1, 1998, the Company adopted AICPA SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal-Use". For the second quarter and first half of 1998, the Company capitalized $9.0 million and $15.8 million of internally developed internal- use software. Internally developed software costs, as well as costs of externally purchased software, are amortized over 3 years. In prior years, purchased software was capitalized and only the costs of internally developed software were recorded as operating expenses. In the second quarter and first six months of 1998, the Company expensed approximately $7 million and $11 million, respectively, for the costs of replacing or modifying certain information systems to address year 2000 issues. PAGE 11 Other expenses in the second quarter and first half of 1998 decreased 20.0% and 8.3% from the respective periods in 1997. Decreases in both periods were primarily due to lower interest expense on short-term borrowings, which was partially offset by dividend requirements on the preferred securities of a subsidiary trust issued in June 1997. Other miscellaneous costs in both the quarter and year-to-date periods were lower in 1998 than in 1997. The effective income tax rate of 44.5% for the second quarter and first six months of 1998 decreased from the rate of 45.5% for the respective periods last year due primarily to lower estimated non- deductible expenses in 1998. Con-Way Transportation Services Second-quarter revenues for Con-Way Transportation Services (Con-Way) were 16.2% higher than the second quarter of last year and six-month revenues were 16.9% higher than the same period last year. The increased revenues for both the quarter and year-to-date periods were primarily due to tonnage growth and higher yields. Tonnage for the regional carriers in the second quarter and first six months of 1998 increased 6.5% and 8.4% from the respective periods in 1997. Revenue per hundredweight for the second quarter and first half of 1998 increased 11.6% and 9.4%, respectively. The higher tonnage and improved pricing was primarily attributable to increased demand for Con-Way's core regional service as well as inter-regional joint services. New inter-regional joint service between the western and southern carriers contributed to the 1998 second- quarter earnings improvement while new joint services between the western and central carriers benefited the entire first half of 1998. A portion of the tonnage increase in the first half of 1998 was attributable to shippers who redirected freight to Con-Way from unionized motor carriers due to concerns with uncertainty over the National Master Freight Agreement (NMFA) that was ultimately signed in February 1998. The NMFA is a labor agreement applicable to several major unionized motor carriers. Con-Way's operating income in the second quarter and first six months of 1998 increased 34.7% and 52.4%, respectively, over the same periods last year. The operating income improvement for both the quarter and year-to- date periods was primarily due to higher revenues, improved freight system utilization, increased load factor, expanded inter-regional joint service, and lower fuel costs. Emery Worldwide Revenues in the second quarter and first half of 1998 for Emery Worldwide (Emery) were 1.5% and 2.0% higher than the respective periods last year due primarily to growth in international air freight revenues. International revenues for the 1998 second quarter increased 2.6% from the same quarter of 1997 while international revenues for the first half of 1998 increased 3.0% over the same period last year. Increases in international revenues were primarily due to higher tonnage levels. North American revenues in the second quarter of 1998 were essentially flat compared to the 1997 second quarter while revenues in the first six months of 1998 were 1.3% higher than the first six months of 1997. Compared to the same periods last year, lower North American tonnage in the second quarter and first half of 1998 was partially offset by improved yields. Lower tonnage in 1998 was primarily due to strikes in the automotive industry and slow-downs in the automotive and technology industries, general softening of the economy in the second quarter and implementation of Emery's yield management program designed to reprice or eliminate certain low-margin business. The pricing actions for margin improvement contributed to higher yields but constrained revenue growth. PAGE 12 Emery's operating income in the second quarter of 1998 increased 0.5% from the second quarter of last year while operating income in the first half of 1998 decreased 26.8% from the first half of 1997. Lower operating income in the first half of 1998 was primarily related to a larger-than- expected decrease in commercial air freight revenues from the fourth quarter of 1997 to the first quarter of 1998. This decrease was both larger and occurred more quickly than had been anticipated, which prevented Emery from making a corresponding reduction in operating expenses in the first quarter of 1998. Emery subsequently reduced its air fleet by decreasing its use of outside contractor lift capacity, consolidated certain service center operations, and aligned staffing levels with freight volumes. These cost reductions, combined with higher operating margins from international markets, helped to restore second quarter operating income to a level comparable to the same quarter of 1997. In connection with its technology program, Emery incurred costs of $13.2 million in the second quarter of 1998 ($26.4 million in the first half of 1998), compared with $8.0 million in the second quarter of 1997 ($16.7 million in the first half of 1997). Of the amounts incurred in 1998, $4.7 million were capitalized in the second quarter ($8.3 million in the first half). In August 1998, Roger Piazza was promoted to President and Chief Executive Officer of Emery Worldwide. Chutta Ratnathicam, who served as Emery's interim president since July 1998, has returned to his position as Senior Vice President and Chief Financial Officer of the Company. Emery's strategies will continue to focus on improving yields by re-pricing, replacing, or eliminating low-margin business and reducing costs in-line with expected revenue levels. These cost reduction strategies include improving the utilization of the reduced fleet to lower airhaul costs and refining the network modifications to more efficiently provide better customer service. Other Operations The Other segment is comprised of Menlo Logistics (Menlo), operations under the Priority Mail contract with the U.S. Postal Service, Road Systems, and VantageParts. For the second quarter and first half of 1998, revenues from the Other segment increased 110.1% and 94.2%, respectively, over the same periods last year. Higher revenues for both the quarter and first half of 1998 were due primarily to the initiation of Priority Mail operations and increases at Menlo. Operating income for the 1998 second quarter increased 66.5% from the 1997 second quarter due primarily to the first quarterly operating income from the Priority Mail contract and improved operating income from Menlo. Operating results declined from operating income of $8.1 million in the first half of last year to an operating loss of $5.4 million in the first half of 1998 due to 1998 first quarter losses from the start-up phase of the Priority Mail contract. Menlo increased second-quarter and first-half revenues in 1998 by 35.5% and 34.7%, respectively, over the same periods in 1997. Operating income for the second quarter and first six months of 1998 improved 6.5% and 11.0%, respectively, over 1997. Although the second-quarter revenue increase in 1998 is partially attributable to new business, the operating margin in the first half of 1998 was adversely impacted by related project start-up costs. Priority Mail revenues in the second quarter and first half of 1998 were $87.6 million and $130.5 million, respectively. There were no Priority Mail operating results in the first half of 1997. Operating income of $2.1 million in the second quarter of 1998 was the first quarterly operating income from the Priority Mail operations while the 1998 year-to-date operating loss was $15.4 million. During the second quarter of 1998, the full system of 10 Priority Mail Processing Centers was completed and became operational. PAGE 13 LIQUIDITY AND CAPITAL RESOURCES In the first half of 1998, the Company's cash and cash equivalents declined $18.7 million from $97.6 million at December 31, 1997 to $78.9 million at June 30, 1998. Cash flow from operations of $107.9 million in the first half of 1998 provided the primary funding for $125.3 million used for capital expenditures and $15.1 million of dividend payments. Cash flows from operating activities in the first half of 1998 were $41.1 million lower than the first six months of 1997, primarily due to asset and liability changes, which used $33.5 million in the first half of 1998 but provided $28.9 million in the same period of 1997. Net income and non-cash adjustments, which were $21.4 million higher in the first half of 1998 compared to the first half of 1997, partially offset the greater cash requirements related to changes in assets and liabilities. Non-cash adjustments include depreciation, amortization, deferred taxes, and gains from property disposals. Capital expenditures for the first half of 1998 were $50.6 million higher than the same period last year due primarily to expenditures of $33.7 million related to the Priority Mail contract. Proceeds from sales of certain equipment and idle properties generated an additional $6.8 million in the first half of 1998 compared to the first half of 1997. In the first half of 1998, proceeds from the exercise of stock options decreased $25.5 million from the same period last year and common and preferred stock dividend payments of $15.1 million were only slightly lower than the same period last year. Short-term borrowings provided cash of $7.0 million in the first half of 1998, compared to a net payment of $155.0 million in the first half of 1997, which was largely facilitated by $121.4 million in proceeds from the issuance of preferred stock of a subsidiary trust in June 1997. Other net debt repayments used $5.4 million in the first half of 1998 compared to $2.0 million in the same period last year. The Company's ratio of total debt to capital decreased to 36.5% at June 30, 1998 from 37.9% at December 31, 1997 due primarily to higher retained earnings from net income. At June 30, 1998, the Company had available for borrowings $265.6 million under its $350 million unsecured credit facility and another $88.0 million under $95 million of uncommitted lines of credit. The $350 million facility is also available for issuance of letters of credit. Under that facility, outstanding letters of credit totaled $84.4 million at June 30, 1998. Under several other unsecured facilities, $55.4 million of letters of credit were outstanding at that date. Cyclicality and Seasonality The trucking and air freight industries are affected directly by general economic conditions and seasonal fluctuations, both of which affect the amount of freight to be transported. The months of September and October of each year usually have the highest business levels while the months of January and February of each year usually have the lowest business levels. PAGE 14 Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the income statement. SFAS 133 is effective for fiscal years beginning after June 15, 1999. Management is assessing the impact of adopting SFAS 133 on the Company's financial statements and has not determined the timing of adoption. Other Items The Company is currently replacing or modifying certain information systems to address year 2000 issues. At June 30, 1998, the Company's estimate of remaining expenditures for year 2000 compliance was approximately $24 million. These costs represent expenditures in addition to normal systems replacement and maintenance. Forward-Looking Statements Certain statements included or incorporated by reference herein constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties. Any such forward-looking statements contained or incorporated by reference herein should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. In that regard, the following factors, among others and in addition to the matters discussed below and elsewhere in this document and in documents incorporated or deemed to be incorporated by reference herein, could cause actual results and other matters to differ materially from those in such forward-looking statements: changes in general business and economic conditions; increasing domestic and international competition and pricing pressure; changes in fuel prices; uncertainty regarding the Company's Priority Mail contract with the United States Postal Service; labor matters, including changes in labor costs, renegotiations of labor contracts and the risk of work stoppages or strikes; changes in governmental regulation; environmental and tax matters, including the aviation excise tax and aircraft maintenance tax matters discussed herein; and matters relating to the spin-off of CFC. In that regard, the Company is or may be subject to substantial liabilities with respect to certain matters relating to CFC's business and operations, including, without limitation, guarantees of certain indebtedness of CFC and liabilities for employment-related 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 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges were 3.4 and 3.0 for the six months ended June 30, 1998 and 1997, respectively. (b) Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends -- the ratios of earnings to combined fixed charges and preferred stock dividends were 3.2 and 2.9 for the six months ended June 30, 1998 and 1997, respectively. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company (Registrant) has duly caused this Form 10-Q Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. CNF Transportation Inc. (Registrant) August 11, 1998 /s/Chutta Ratnathicam Chutta Ratnathicam Senior Vice President and Chief Financial Officer EX-27 2
5 1000 6-MOS DEC-31-1998 JUN-30-1998 78,899 0 747,644 (19,285) 40,276 1,036,875 1,609,060 (681,456) 2,534,061 857,176 467,680 125,000 130,715 340,712 239,031 2,534,061 0 2,289,520 0 2,160,712 20,198 0 16,981 108,610 48,331 60,279 0 0 0 56,232 1.18 1.06
EX-99 3 Exhibit 99(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Six Months Ended June 30 1998 1997 Fixed Charges: Interest Expense $ 16,981 $ 21,067 Capitalized Interest 969 1,321 Dividend Requirement on Series B Preferred Stock [1] 5,616 6,118 Interest Component of Rental Expense [2] 19,134 16,337 $ 42,700 $ 44,843 Earnings: Income before Taxes $ 108,610 $ 95,199 Fixed Charges 42,700 44,843 Capitalized Interest (969) (1,321) Preferred Dividend Requirements [3] (5,616) (6,118) $ 144,725 $ 132,603 Ratio of Earnings to Fixed Charges: 3.4 x 3.0 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 six month period ended June 30, 1997 was restated for a change in the estimation method. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. EX-99 4 Exhibit 99(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands) Six Months Ended June 30 1998 1997 Combined Fixed Charges and Preferred Stock Dividends: Interest Expense $ 16,981 $ 21,067 Capitalized Interest 969 1,321 Dividend Requirement on Series B Preferred Stock [1] 5,616 6,118 Dividend Requirement on Preferred Securities of Susidiary Trust 3,126 347 Interest Component of Rental Expense [2] 19,134 16,337 $ 45,826 $ 45,190 Earnings: Income before Taxes $ 108,610 $ 95,199 Fixed Charges 45,826 45,190 Capitalized Interest (969) (1,321) Preferred Dividend Requirements [3] (5,616) (6,118) $ 147,851 $ 132,950 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: 3.2 x 2.9 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 six month period ended June 30, 1997 was restated for a change in the estimation method. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. -----END PRIVACY-ENHANCED MESSAGE-----