-----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, JI4NWj0RZk7tmS85kOfLszMaWIBDYfa92Bv3o9XGEd2bowJXeSwWn7o0FZGKbZnF o7XRG7hhsibBoXrPld+1RA== 0000023675-99-000007.txt : 19990812 0000023675-99-000007.hdr.sgml : 19990812 ACCESSION NUMBER: 0000023675-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 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: 99683305 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, 1999 OR ___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A COMMISSION FILE NUMBER 1-5046 CNF TRANSPORTATION INC. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 3240 Hillview Avenue, Palo Alto, California 94304 Telephone Number (650) 494-2900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes xx No Number of shares of Common Stock, $.625 par value, outstanding as of July 31, 1999: 48,343,312 PAGE 2 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended June 30, 1999 ____________________________________________________________________________ ____________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3 Statements of Consolidated Income - Three and Six and Months Ended June 30, 1999 and 1998 5 Statements of Consolidated Cash Flows - Six Months Ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 PAGE 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 108,471 $ 73,897 Trade accounts receivable, net of allowances 795,588 810,550 Other accounts receivable 45,154 51,865 Operating supplies, at lower of average cost or market 40,168 41,764 Prepaid expenses 48,535 32,741 Deferred income taxes 91,029 89,544 Total Current Assets 1,128,945 1,100,361 PROPERTY, PLANT AND EQUIPMENT, NET Land 112,272 114,146 Buildings and leasehold improvements 518,019 468,123 Revenue equipment 766,915 714,195 Other equipment 449,042 425,476 1,846,248 1,721,940 Accumulated depreciation and amortization (803,495) (737,464) 1,042,753 984,476 OTHER ASSETS Deferred charges and other assets 136,000 128,627 Capitalized software, net 80,711 64,285 Unamortized aircraft maintenance, net 151,067 143,349 Goodwill, net 271,468 268,314 639,246 604,575 TOTAL ASSETS $2,810,944 $2,689,412 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, 1999 1998 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 273,433 $ 285,832 Accrued liabilities 461,176 446,171 Accrued claims costs 116,402 108,028 Current maturities of long-term debt and capital leases 6,460 5,259 Short-term borrowings 6,000 43,000 Accrued income taxes 39,224 12,340 Total Current Liabilities 902,695 900,630 LONG-TERM LIABILITIES Long-term debt and guarantees (Note 2) 350,505 356,905 Long-term obligations under capital leases 110,682 110,730 Accrued claims costs 69,135 58,388 Employee benefits 206,147 190,268 Other liabilities and deferred credits 48,072 55,268 Deferred income taxes 131,257 115,868 Total Liabilities 1,818,493 1,788,057 COMMITMENTS AND CONTINGENCIES (Note 7) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES OF THE COMPANY (Note 6) 125,000 125,000 SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized 5,000,000 shares: Series B, 8.5% cumulative, convertible, $.01 stated value; designated 1,100,000 shares; issued 846,035 and 854,191 shares, respectively 8 9 Additional paid-in capital, preferred stock 128,673 129,914 Deferred compensation (91,218) (94,836) Total Preferred Shareholders' Equity 37,463 35,087 Common stock, $.625 par value; authorized 100,000,000 shares; issued 55,211,611 and 54,797,707 shares, respectively 34,507 34,249 Additional paid-in capital, common stock 321,735 314,440 Retained earnings 662,346 584,991 Deferred compensation, restricted stock (2,442) (4,599) Cost of repurchased common stock (6,883,335 and 6,922,285 shares, respectively) (169,717) (170,678) 846,429 758,403 Accumulated foreign currency translation adjustments (8,446) (9,140) Minimum pension liability adjustment (7,995) (7,995) Accumulated Other Comprehensive Loss (16,441) (17,135) Total Common Shareholders' Equity 829,988 741,268 Total Shareholders' Equity 867,451 776,355 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,810,944 $2,689,412 The accompanying notes are an integral part of these statements. PAGE 5 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED INCOME (Dollars in thousands except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 REVENUES $ 1,361,637 $ 1,199,654 $ 2,616,960 $ 2,289,520 Costs and Expenses Operating expenses 1,105,296 966,461 2,134,446 1,867,787 General and administrative 129,718 113,317 250,800 224,177 Depreciation 41,401 35,873 80,363 68,748 Net gain on sale of assets of parts distribution operation (10,112) - (10,112) - Net gain on legal settlement - - (16,466) - 1,266,303 1,115,651 2,439,031 2,160,712 OPERATING INCOME 95,334 84,003 177,929 128,808 Other Income (Expense) Interest expense (7,352) (8,449) (14,478) (16,981) Dividend requirement on preferred securities of subsidiary trust (Note 6) (1,563) (1,563) (3,126) (3,126) Miscellaneous, net (76) 542 879 (91) (8,991) (9,470) (16,725) (20,198) Income before Income Taxes 86,343 74,533 161,204 108,610 Income Taxes 37,559 33,167 70,124 48,331 Net Income 48,784 41,366 91,080 60,279 Preferred Stock Dividends 2,061 2,040 4,088 4,047 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 46,723 $ 39,326 $ 86,992 $ 56,232 Weighted-Average Common Shares Outstanding (Note 5) Basic 48,158,898 47,612,373 48,042,740 47,561,179 Diluted 55,951,658 55,506,056 55,897,549 55,536,847 Earnings per Common Share (Note 5) Basic $ 0.97 $ 0.83 $ 1.81 $ 1.18 Diluted $ 0.86 $ 0.73 $ 1.60 $ 1.06 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, 1999 1998 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 73,897 $ 97,617 OPERATING ACTIVITIES Net income 91,080 60,279 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 91,832 77,901 Increase in deferred income taxes 13,904 1,243 Amortization of deferred compensation 5,923 3,822 Provision for doubtful accounts 5,665 5,248 Gains on sales of property, net (317) (1,876) Net gain on sale of assets of parts distribution operation (10,112) - Changes in assets and liabilities: Receivables 11,995 (33,964) Prepaid expenses (15,851) (9,069) Accounts payable (11,674) (16,592) Accrued liabilities 14,226 33,172 Accrued claims costs 17,701 3,834 Income taxes 26,884 27,766 Employee benefits 15,879 15,551 Deferred charges and credits (23,706) (23,676) Other (15,098) (11,470) Net Cash Provided by Operating Activities 218,331 132,169 INVESTING ACTIVITIES Capital expenditures (143,274) (125,345) Software expenditures (21,633) (24,304) Proceeds from sales of property 3,922 9,181 Proceeds from sale of assets of parts distribution operation 27,961 - Net Cash Used in Investing Activities (133,024) (140,468) FINANCING ACTIVITIES Repayment of long-term debt and capital lease obligations (5,247) (5,421) Proceeds from (repayment of) short-term borrowings, net (37,000) 7,000 Proceeds from exercise of stock options 6,707 3,136 Payments of common dividends (9,637) (9,518) Payments of preferred dividends (5,556) (5,616) Net Cash Used in Financing Activities (50,733) (10,419) Increase (decrease) in Cash and Cash Equivalents 34,574 (18,718) CASH AND CASH EQUIVALENTS, END OF PERIOD $ 108,471 $ 78,899 The accompanying notes are an integral part of these statements. PAGE 7 CNF TRANSPORTATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying consolidated financial statements of CNF Transportation Inc. and subsidiaries (the Company) have been prepared by the Company, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements included in the Company's 1998 Annual Report to Shareholders. Certain amounts in prior year financial statements have been reclassified to conform to current year presentation. 2. Long-term Debt and Guarantees The aggregate principal amount of the Company's unsecured 9 1/8% notes is repayable on August 15, 1999. The Company has the ability and intent to refinance the outstanding principal of $117.7 million on a long-term basis and the notes are therefore included in Long-term Debt and Guarantees in the Consolidated Balance Sheet as of June 30, 1999. The Company guarantees the restructured and non-restructured notes issued by the Company's Thrift and Stock Plan (TASP). On July 1, 1999, the Company refinanced $45.25 million of Series "A" and $27.15 million of Series "A restructured" TASP notes. These notes, with respective interest rates of 8.42% and 9.04%, were replaced with $72.4 million of new TASP notes with a rate of 6.0% and a maturity date of January 1, 2006. 3. Comprehensive Income SFAS 130, "Reporting Comprehensive Income", requires companies to report a measure of all changes in equity except those resulting from investments by owners and distributions to owners. Comprehensive income was as follows: Three Months Ended Six Months Ended (Dollars in thousands) June 30, June 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net Income $ 48,784 $ 41,366 $ 91,080 $ 60,279 Foreign currency translation adjustment 854 (651) 694 (1,343) ---------- ---------- ---------- ---------- $ 49,638 $ 40,715 $ 91,774 $ 58,936 ========== ========== ========== ========== PAGE 8 4. Business Segments SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", established standards for reporting information about operating segments in annual financial statements and requires selected information in interim financial statements. Selected financial information is reported below: Three Months Ended Six Months Ended (Dollars in thousands) June 30, June 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenues Con-Way Transportation $ 469,100 $ 429,263 $ 907,611 $ 824,775 Emery Worldwide 588,808 532,475 1,121,635 1,060,992 Menlo Logistics 184,850 151,145 347,837 274,102 Other 139,463 111,081 283,591 176,640 ---------- ---------- ---------- ---------- 1,382,221 1,223,964 2,660,674 2,336,509 Intercompany Eliminations Con-Way Transportation (5,553) (4,645) (10,685) (6,552) Emery Worldwide (2,954) (5,749) (6,360) (12,633) Menlo Logistics (3,247) (2,577) (5,675) (5,459) Other (8,830) (11,339) (20,994) (22,345) ---------- ---------- ---------- ---------- (20,584) (24,310) (43,714) (46,989) External Revenues Con-Way Transportation 463,547 424,618 896,926 818,223 Emery Worldwide 585,854 526,726 1,115,275 1,048,359 Menlo Logistics 181,603 148,568 342,162 268,643 Other 130,633 99,742 262,597 154,295 ---------- ---------- ---------- ---------- $1,361,637 $1,199,654 $2,616,960 $2,289,520 ========== ========== ========== ========== Operating Income (Loss) Con-Way Transportation $ 60,830 $ 53,990 $ 114,777 $ 104,491 Emery Worldwide 17,425 22,213 20,976 29,726 Menlo Logistics 5,273 4,986 9,829 8,798 Other (1) 11,806 2,814 32,347 (14,207) ---------- ---------- ---------- ---------- $ 95,334 $ 84,003 $ 177,929 $ 128,808 ========== ========== ========== ========== (1)For the three months ended June 30, 1999, the Other segment included a $10.1 million net gain recognized in June 1999 from the sale of the assets of VantageParts, the Company's wholesale parts distribution operation. For the six months ended June 30, 1999, the Other segment included the net gain on the VantageParts asset sale and a $16.5 million net gain on a lawsuit settled in January 1999. PAGE 9 5. Earnings Per Share Basic earnings per share was computed by dividing net income available to common shareholders by the weighted-average common shares outstanding. Diluted earnings per share was calculated as follows: Three Months Ended Six Months Ended (Dollars in thousands except June 30, June 30, per share data) 1999 1998 1999 1998 ---------- ---------- --------- ---------- Earnings: Net Income Available to Common Shareholders $ 46,723 $ 39,326 $ 86,992 $ 56,232 Add-backs: Dividends on Series B preferred stock, net of replacement funding 339 337 671 663 Dividends on preferred securities of subsidiary trust, net of tax 954 954 1,908 1,908 ---------- ---------- ---------- ---------- $ 48,016 $ 40,617 $ 89,571 $ 58,803 ---------- ---------- ---------- ---------- Shares: Basic shares (weighted- average common shares outstanding) 48,158,898 47,612,373 48,042,740 47,561,179 Stock option and restricted stock dilution 684,627 722,628 746,676 804,613 Series B preferred stock 3,983,133 4,046,055 3,983,133 4,046,055 Preferred securities of subsidiary trust 3,125,000 3,125,000 3,125,000 3,125,000 ---------- ---------- ---------- ---------- 55,951,658 55,506,056 55,897,549 55,536,847 ---------- ---------- ---------- ---------- Diluted Earnings Per Share $ 0.86 $ 0.73 $ 1.60 $ 1.06 ========== ========== ========== ========== 6. Preferred Securities of Subsidiary Trust On June 11, 1997, CNF Trust I (the Trust), a Delaware business trust wholly owned by the Company, issued 2,500,000 of its $2.50 Term Convertible Securities, Series A (TECONS) to the public for gross proceeds of $125 million. The combined proceeds from the issuance of the TECONS and the issuance to the Company of the common securities of the Trust were invested by the Trust in $128.9 million aggregate principal amount of 5% convertible subordinated debentures due June 1, 2012 (the Debentures) issued by the Company. The Debentures are the sole assets of the Trust. Holders of the TECONS are entitled to receive cumulative cash distributions at an annual rate of $2.50 per TECONS (equivalent to a rate of 5% per annum of the stated liquidation amount of $50 per TECONS). The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TECONS, to the extent the Trust has funds available therefor and subject to certain other limitations (the Guarantee). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Declaration of Trust of the Trust (including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust (other than with respect to the TECONS and the common securities of the Trust)), provide a full and unconditional guarantee of amounts due on the TECONS. PAGE 10 The Debentures are redeemable for cash, at the option of the Company, in whole or in part, on or after June 1, 2000, at a price equal to 103.125% of the principal amount, declining annually to par if redeemed on or after June 1, 2005, plus accrued and unpaid interest. In certain circumstances relating to federal income tax matters, the Debentures may be redeemed by the Company at 100% of the principal plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of TECONS will be redeemed. The TECONS do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 1, 2012, or upon earlier redemption. Each TECONS is convertible at any time prior to the close of business on June 1, 2012, at the option of the holder into shares of the Company's common stock at a conversion rate of 1.25 shares of the Company's common stock for each TECONS, subject to adjustment in certain circumstances. 7. Contingencies In connection with the spin-off of Consolidated Freightways Corporation (CFC) on December 2, 1996, the Company agreed to indemnify certain states, insurance companies and sureties against the failure of CFC to pay certain worker's compensation, tax and public liability claims that were pending as of September 30, 1996. In some cases, these indemnities are supported by letters of credit under which the Company is liable to the issuing bank and by bonds issued by surety companies. In order to secure CFC's obligation to reimburse and indemnify the Company against liability with respect to these claims, as of June 30, 1999 CFC had provided the Company with approximately $13.5 million of letters of credit and $22.0 million of real property collateral. The Company has entered into a Transition Services Agreement to provide CFC with certain information systems, data processing and other administrative services and administers CFC's retirement and benefits plans. The agreement has a three-year term, which expires on December 2, 1999. Services performed by the Company under the agreement are paid by CFC on an arm's-length negotiated basis. The Company is currently under examination by the Internal Revenue Service (IRS) for tax years 1987 through 1996 on various issues. In connection with those examinations, the IRS is seeking additional taxes, plus interest, for certain matters relating to CFC for periods prior to its spin-off from the Company in 1996. Although the Company is currently contesting these additional taxes proposed by the IRS, the Company may elect to pay a substantial portion of these taxes in 1999. As the former parent of CFC, the Company is liable to the IRS for CFC's tax liability relating to such periods. However, as part of the spin- off, the Company and CFC entered into a tax sharing agreement that provides a mechanism for the allocation of any additional tax liability and related interest that arise due to adjustments by the IRS for years prior to the spin-off. The Company believes it is entitled to and will pursue reimbursement from CFC under the tax sharing agreement for any payments that the Company makes to the IRS with respect to these additional taxes. PAGE 11 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 has filed a protest concerning the proposed adjustment for tax years 1987 through 1990 and is engaged in discussions with the Appeals Office of the IRS. The Company is unable to predict whether or not it will be able to resolve this issue with the Appeals Office. The Company expects that, if it is unable to resolve this issue with the Appeals Office, it will receive a statutory notice of assessment from the IRS before the end of 1999. If this occurs, the Company intends to contest the assessment by appropriate legal proceedings. The Company believes that its practice of expensing these types of aircraft maintenance costs is consistent with industry practice and intends to continue to vigorously contest the proposed adjustment. However, if this matter is determined adversely to the Company, there can be no assurance that the Company will not be liable for substantial additional taxes, plus accrued interest. As a result, the Company is unable to predict the ultimate outcome of this matter and there can be no assurance that this matter will not have a material adverse effect on the Company. The IRS has proposed adjustments that would require Emery Worldwide to pay substantial additional aviation excise taxes for the period from January 1, 1990 through September 30, 1995. The Company has filed protests contesting these proposed adjustments and is engaged in discussions with the Appeals Office of the IRS. However, the Company believes it is unlikely that the issue will be resolved with the Appeals Office and expects to receive a statutory notice of assessment from the IRS before the end of 2000. Upon receipt of the notice, the Company will be required to pay all or a portion of the adjustment with accrued interest before seeking a refund of that payment through appropriate legal proceedings. The Company believes that there is legal authority to support the manner in which it has calculated and paid the aviation excise taxes and, accordingly, the Company intends to continue to vigorously challenge the proposed adjustments. Nevertheless, the Company is unable to predict the ultimate outcome of this matter. As a result, there can be no assurance that the Company will not be liable for a substantial amount of additional aviation excise taxes for the 1990 through 1995 tax period, plus interest. In addition, it is possible that the IRS may seek to increase the amount of the aviation excise tax payable by Emery Worldwide for periods subsequent to September 30, 1995. As a result, there can be no assurance that this matter will not have a material adverse effect on the Company. In addition to the matters discussed above, the Company and its subsidiaries are defendants in various lawsuits incidental to their businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material impact on the Company's financial position or results of operations. PAGE 12 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net income available to common shareholders for the second quarter of 1999 increased 18.8% from last year's second quarter to a record $46.7 million, resulting in basic earnings per share of $0.97 and diluted earnings per share of $0.86. The 1999 second quarter results included a $10.1 million non-recurring net gain equal to $.12 per basic share and $.10 per diluted share on the sale of the assets of VantageParts, the Company's wholesale parts distribution operation. Excluding that sale, net income available to common shareholders increased 4.3% over the second quarter of 1998 and diluted earnings per share was $0.76, the best second quarter in the Company's history. Net income available to common shareholders for the first half of 1999 increased 54.7% over the first half of last year, resulting in basic earnings per share of $1.81 and diluted earnings per share of $1.60. In addition to the net gain on the sale of assets of VantageParts in the second quarter, the first half of 1999 also included a $16.5 million non- recurring net gain on the settlement of a lawsuit. Excluding both non- recurring net gains, net income available to common shareholders for the first half of 1999 was 28.0% higher than the first half of last year and resulted in basic earnings per share of $1.50 and diluted earnings per share of $1.33. Revenue for the second quarter and first half of 1999 increased 13.5% and 14.3%, respectively, over the second quarter and first half of last year due to higher revenue from all reporting segments. Revenue in the second quarter and first half of 1999 reflects full operations under the Priority Mail contract. Operating income for the second quarter and first half of 1999 increased 13.5% and 38.1%, respectively, from the comparable periods of 1998. Emery, which improved its operating income by $13.9 million from the first quarter of 1999, was the only segment not reporting higher second- quarter and first-half operating income when compared to the same periods last year. In the second quarter of 1999, the Other segment included the net gain on the sale of assets of VantageParts. The first half of 1999 included both the VantageParts net gain and the net gain on the settlement of a lawsuit in the first quarter of 1999. In the first half of last year, the Other segment included losses during the start-up phase of the Priority Mail operations. Other net expense in the second quarter and first half of 1999 decreased 5.1% and 17.2%, respectively, from the same periods last year due primarily to lower interest expense. The interest decline was primarily attributable to lower average short-term borrowings and the July 1998 refinancing of a capital lease obligation at a lower interest rate. The effective tax rate for the first quarter and first half of 1999 was 43.5% compared to 44.5% in 1998. The reduction was primarily the result of higher income in 1999. Con-Way Transportation Services Con-Way's revenue in the second quarter and first six months of 1999 increased 9.2% and 9.6%, respectively, over the comparable periods last year due primarily to higher freight volume and revenue per hundredweight. PAGE 13 In the second quarter of 1999, total and less-than-truckload (LTL) weight increased 5.2% and 5.6%, respectively, over the second quarter of 1998. Total and LTL weight in the first six months of 1999 increased 4.7% and 5.3%, respectively, over the same period last year. The higher freight volumes reflect growth in core regional service and interregional joint services. The entire first half of 1999 benefited from inter-regional joint services between all of Con-Way's regional carriers. Only the second quarter of last year benefited from the new inter-regional joint services between the western and central carriers. The first half of last year included benefits received from freight diverted by shippers concerned about a possible strike at unionized national carriers. In the second quarter of 1999, revenue per hundredweight for the regional LTL carriers increased 4.6% over the second quarter of last year and the regional carriers' revenue per hundredweight for the first half of 1999 was 6.1% higher than the first half of 1998. The increased yields were primarily due to higher rates obtained for Con-Way's core premium service and a larger percentage of inter-regional joint services, which yield higher rates on longer lengths of haul. Con-Way's operating income in the second quarter and first half of 1999 increased 12.7% and 9.8%, respectively, over the same periods of 1998 due primarily to higher revenue. Other factors contributing to improved operating income for both the second quarter and first half of 1999 were increased load factor, greater emphasis on operating efficiencies and better cost control. The first half of 1999 was adversely impacted by start-up costs associated with Con-Way's new multi-client warehousing and logistics business and the first half of last year benefited from the strike concerns of shippers mentioned above. Emery Worldwide Emery's revenue in the second quarter and first half of 1999 was 11.2% and 6.4% higher, respectively, than the same periods last year due primarily to higher revenue from the Express Mail contract with the U.S. Postal Service and increased international airfreight revenue. North American airfreight revenue was higher in the second quarter of 1999 but was lower for the first half of 1999 when compared to the respective periods last year. North American airfreight revenue for the second quarter of 1999 increased 2.9% over the same quarter of last year due primarily to a 5.3% increase in yield partially offset by a 2.3% decline in freight volume. Although yields for the first half of 1999 were 4.8% higher than the same period last year, a 6.2% decline in weight contributed to a 2.0% decrease in North American airfreight revenue. Lower freight volume was partially attributable to decreased demand from certain industries serviced by Emery and an increase in competitive ground-based transportation. Factors contributing to improved revenue per pound were continued emphasis on renegotiating certain low margin business and the introduction on January 1, 1999 of a new higher yielding guaranteed delivery service. International airfreight revenue for the second quarter of 1999 was 13.1% higher than the second quarter of last year due primarily to freight volume and yield increases of 10.8% and 2.1%, respectively. In the first half of 1999, a 3.2% increase in weight and 1.7% higher yield contributed to a 4.9% improvement in international airfreight revenue over the same period last year. Freight volume and yield in the second quarter and first half of 1999 were favorably impacted by improved economic conditions in the international markets served by Emery. PAGE 14 Emery's second-quarter 1999 operating income declined 21.6% from last year's second quarter and 1999 first-half operating income was down 29.4% from last year's first half. Although revenue was higher, operating income for the second quarter and first half of 1999 declined from the comparable periods last year due primarily to higher airfreight costs in part related to an ongoing initiative to reposition Emery as a premium service carrier. This initiative is intended to improve service by, among other things, improving infrastructure and aircraft dependability and modifying freight handling processes. Management will continue to focus on positioning Emery as a premium service provider. In North America, management intends to continue to develop an infrastructure capable of servicing a higher volume of premium and guaranteed delivery services and to reduce the costs associated with its infrastructure by replacing older and less reliable aircraft with newer aircraft having lower maintenance costs and greater freight capacity, including wide-body aircraft. Internationally, Emery's management will focus on expanding its variable-cost-based operations. In an effort to increase the international revenue as a percentage of total revenue, management will continue its marketing efforts and will seek to convert more of Emery's agent locations to owned locations. Menlo Logistics Menlo's revenue in the second quarter and first half of 1999 exceeded the same periods last year by 22.2% and 27.4%, respectively. Results for the first half of 1999 included revenue generated from several large logistics contracts secured in the first half of 1998. The second quarter and first half of 1999 also include higher revenue from existing contracts compared with the same periods last year. Operating income for Menlo in the second quarter and first half of 1999 increased 5.8% and 11.7%, respectively, over the comparable periods last year. Higher operating income was primarily attributable to increased revenue. However, higher business development and information system costs incurred during the second quarter and first half of 1999 contributed to lower operating income as a percentage of revenue than in the same periods last year. Other Segment The Other segment consists primarily of the operations under a Priority Mail contract with the U.S. Postal Service, and includes the operating results of Road Systems and, prior to its sale of assets by the Company in May 1999, VantageParts. Also included in the Other segment were net gains on the settlement of a lawsuit and on the VantageParts asset sale. Second-quarter and first-half revenue for the Other segment increased 31.0% and 70.2% over the respective periods last year due substantially to higher revenue from the Priority Mail operations. Second-quarter revenue from the Priority Mail contract increased 34.9% from the second quarter of last year and 1999 first-half revenue increased 81.1% from the first half of 1998. The Priority Mail operations were not fully implemented until late in the second quarter of last year. For the second quarter of 1999, operating income for the Other segment increased by $9.0 million over the second quarter of 1998 due primarily to a $10.1 million net gain from the VantageParts asset sale in May 1999. For the first half of 1999, operating results improved by $46.6 million over the first half of 1998 due primarily to a $20.2 million improvement in the Priority Mail operating results, the VantageParts net gain, and a $16.5 million net gain from a lawsuit settled in January 1999. The first half of last year included losses incurred during the start-up phase of the Priority Mail contract. PAGE 15 For the second quarter and first half of 1999, results for the Priority Mail operations reflect pricing that may be subject to retroactive adjustment at a later date. The Company has proposed to the Postal Service increased pricing that the Company feels is well founded and justifiable based upon its experience of operating the Priority Mail contract in 1998. The Postal Service is reviewing the Company's proposal. Any adjustments to contract revenue for prior periods resulting from future changes in contract pricing will be recognized in the then current quarter. LIQUIDITY AND CAPITAL RESOURCES In the first half of 1999, the Company's cash and cash equivalents increased $34.6 million to $108.5 million. Cash from operations of $218.3 million provided substantially all of the funding for $164.9 million of capital and software expenditures, $42.2 million of debt reduction and $15.2 million of dividend payments. Cash flow from operations in the first half of 1999 increased $86.2 million over the same period last year primarily due to higher net income, depreciation and amortization, and the net effect of changes in receivables and accrued liabilities. Capital expenditures of $143.3 million in the first half of 1999 increased $17.9 million from the same period last year due primarily to a $45.6 million increase in Con-Way's capital expenditures partially offset by a $28.6 million decline in capital expenditures for the Priority Mail contract. For the first half of 1999, Con-Way spent $89.5 million on primarily revenue equipment and infrastructure in connection with its capital reinvestment program. For the remainder of 1999, additional expenditures of approximately $100 million are expected under Con-Way's reinvestment program. Capital expenditures related to the Priority Mail contract in the first half of 1999 declined compared to the first half of last year given required capital expenditures in the prior period related to the start-up phase of the Priority Mail contract. The sale of assets of VantageParts in the second quarter of 1999 generated proceeds of $28.0 million and a non-recurring net gain of $10.1 million. During the first half of 1999, the Company repaid $42.2 million of net short-term debt compared to the borrowing of $1.6 million of net short-term debt during the first half of 1998. At June 30, 1999, the Company had no borrowings under its $350 million unsecured credit facility and $6.0 million outstanding under $95.0 million of uncommitted lines of credit. The $350 million facility is also available for issuance of letters of credit. Under that facility, outstanding letters of credit totaled $63.6 million at June 30, 1999, which left available capacity of $286.4 million. In addition, the Company had available capacity of $89.0 million under other uncommitted lines of credit. Under several other unsecured facilities, $49.3 million of letters of credit were outstanding at June 30, 1999. The aggregate principal amount of the Company's unsecured 9 1/8% Notes is repayable on August 15, 1999. The Company has the ability and intent to refinance the outstanding principal on these notes on a long-term basis. Refer to Note 2 of the Notes to Consolidated Financial Statements. PAGE 16 The Company filed a shelf registration statement with the Securities and Exchange Commission in June 1998 that covers $250 million of debt and equity securities for future issuance with terms to be decided when and if issued. The Company's ratio of total debt to capital decreased to 32.3% at June 30, 1999, from 36.4% at December 31, 1998, primarily due to lower short-term borrowings and higher shareholders' equity from net income. Market Risk There have been no material changes in the Company's market risk sensitive instruments and positions since its disclosure in its Annual Report on Form 10-K for the year ended December 31, 1998. Cyclicality and Seasonality The Company operates in industries that are affected directly by general economic conditions and seasonal fluctuations, both of which affect demand for transportation services. In the trucking and airfreight industries, the months of September and October of each year usually have the highest business levels while the months of January and February of each year usually have the lowest business levels. Operations under the Priority Mail contract peak in December due primarily to higher shipping demand related to the holiday season. Year 2000 Renovation of all business-critical Information Technology (IT) Systems was substantially complete at June 30, 1999. Validation, which is currently in process for the Company's systems and software applications, is scheduled for completion by the end of the third quarter of 1999. Like many other companies, an issue affecting the Company is the ability of its computer systems and software to process the year 2000 (Y2K or Year 2000). To ensure that the Company's systems are Year 2000 compliant, a team of IT professionals began preparing for the Y2K issue in 1996. In 1997, the Company formed a Steering Committee composed of senior executives to address compliance issues. The Y2K team developed, and the Steering Committee approved, a Company-wide initiative to address issues associated with the year 2000. Company management has designated the Y2K project as the highest priority of the Company's Information Technology Department. The Company's Y2K compliance efforts are focused on business-critical items. Systems and software are considered "business-critical" if a failure would either have a material adverse impact on the Company's business, financial condition or results of operations or involve a safety exposure to employees or customers. State of Readiness The Company has identified distinct categories for its Y2K compliance efforts: (1) IT Systems, (2) Non-IT Systems, and (3) third parties with which the Company has major relationships. The Company intends to fix or replace non-compliant software and systems through a process that involves taking inventory of its systems, assessing risks and impact, correcting non- compliant systems through renovation or replacement, and validating compliance through testing. The Company intends to commit the resources necessary to bring the project to scheduled completion. PAGE 17 IT Systems - IT Systems include mainframes, mid-range computers and servers, networks and workstations, related operating systems and application software. The Company has inventoried and assessed all business- critical IT Systems. Renovation efforts are substantially complete. Mainframe hardware has been fully renovated. Certain peripheral mainframe hardware is approximately 96% renovated. Mainframe operating systems and mainframe applications software are approximately 95% and 86% renovated, respectively. Mid-range computers and servers are estimated to be 98% renovated while approximately 99% of related operating systems and application software programs have been renovated. Network hardware (excluding servers) and computer workstations are approximately 98% renovated. An estimated 50% of the network hardware and computer workstation operating systems and application software programs have been upgraded. However, the portion of non-compliant network hardware and computer workstation operating systems and application software programs represents vendor software that is being remedied as compliant upgrades are provided by the vendor. Non-IT Systems - Non-IT Systems include operating equipment, security systems, and other equipment that may contain microcontrollers with embedded technology. Certain IT Systems may also include embedded technology. The Company has contacted all business-critical operating and support facilities to identify the extent of its embedded technology and has received responses from essentially all of those surveyed locations. Approximately 97% of the embedded technology the Company is aware of has been confirmed as Y2K compliant. The Company's remaining systems will be replaced if determined to be non-compliant. These systems are expected to be validated by the end of the third quarter of 1999. Third Party Systems - In addition to its own IT and Non-IT Systems, the Company is also reliant upon system capabilities of third parties (including, among others, customers, vendors, domestic and international government agencies, and U.S. and international airports). The Company believes these third party risks are inherent in the industry and not specific to the Company. The Company has communicated with third parties with which the Company has material business relationships to determine the extent to which the Company's systems are vulnerable to those third parties' failure to make necessary changes related to Y2K issues. Essentially all of the Company's critical vendors have been contacted and approximately 99% have responded to the surveys. If a vendor is determined to be non-compliant, the Company is working to identify a Y2K-compliant vendor as a replacement. In an effort to mitigate risks related to the system capabilities of certain customers, the Company developed Y2K-compliant software upgrades to its tracking and tracing software and other proprietary software utilized by its customers. The International Air Transport Association and the Air Transport Association of America are involved in global and industry-wide studies aimed at assessing the Y2K compliance status of airports and other U.S. and international government agencies. As a member of these associations, Emery Worldwide is analyzing the results of these studies as they become available. Costs to Address Y2K Compliance Since 1996, the Company has expensed approximately $34.5 million on Y2K compliance and expects that approximately $5.9 million of additional Y2K compliance costs will be expensed through December 31, 1999. All Y2K costs have been and are expected to be funded from operations. In the first half of 1999, the Company capitalized $4.8 million of purchased software costs and $16.8 million of internally developed software costs. A portion of the capitalized software costs was for new financial and administrative systems that are Y2K compliant. These systems have replaced or are expected to replace certain non-compliant systems. PAGE 18 Risks While the Company believes its efforts to address the Year 2000 issue will be successful in avoiding any material adverse effect on the Company's operations or financial condition, it recognizes that failing to resolve Year 2000 issues on a timely basis would, in a most reasonably likely worst case scenario, significantly limit its ability to provide its services for a period of time, especially if such failure is coupled with a third-party failure. As a result, there can be no assurance that this matter will not have a material adverse effect on the Company. Contingency Plans The Company has established Y2K business resumption contingency plans by evaluating business disruption scenarios and identifying and implementing preemptive strategies. Detailed contingency plans for critical business processes have been completed by all of the Company's operations facilities. The testing of potential scenarios, which is expected to occur in the third quarter of 1999, may result in modifications to the contingency plans. Business resumption contingency plans are expected to be incorporated into the Company's normal and future risk management activities. Forward-Looking Statements Certain statements included herein constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties. Any such forward-looking statements contained herein should not be relied upon as predictions of future events. Certain such forward- looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. In that regard, the following factors, among others and in addition to the matters discussed below and elsewhere in this document, could cause actual results and other matters to differ materially from those in such forward-looking statements: changes in general business and economic conditions; increasing domestic and international competition and pricing pressure; changes in fuel prices; uncertainty regarding the Company's Priority Mail contract with the United States Postal Service; labor matters, including changes in labor costs, renegotiations of labor contracts and the risk of work stoppages or strikes; changes in governmental regulation; environmental and tax matters, including the aviation excise tax and aircraft maintenance tax matters discussed herein; and matters relating to the spin-off of CFC. In that regard, the Company is or may be subject to substantial liabilities with respect to certain matters relating to CFC's business and operations, including, without limitation, guarantees of certain indebtedness of CFC and liabilities for employment-related, tax and environmental matters, including the tax matters described herein. Although CFC is, in general, either the primary or secondary obligor or jointly and severally liable with the Company with respect to these matters, a failure to pay or other default by CFC with respect to the obligations as to which the Company is or may be, or may be perceived to be, liable, whether because of CFC's bankruptcy or insolvency or otherwise, could lead to substantial claims against the Company. As a result of the foregoing, no assurance can be given as to future results of operations or financial condition. PAGE 19 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings As previously reported, the Company has been designated a potentially responsible party (PRP) by the EPA with respect to the disposal of hazardous substances at various sites. The Company expects its share of the clean-up costs will not have a material adverse effect on the Company's financial position or results of operations. The Company expects the costs of complying with existing and future federal, state and local environmental regulations to continue to increase. On the other hand, it does not anticipate that such cost increases will have a material adverse effect on the Company. The Department of Transportation, through its Office of Inspector General, and the Federal Aviation Administration are conducting an investigation relating to the handling of so-called hazardous materials by Emery. The investigation is ongoing and Emery is cooperating fully. Because the investigation is at a preliminary stage, the Company is unable to predict the outcome of this investigation. Certain legal matters are discussed in Note 7 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 4.2x and 3.4x for the six months ended June 30, 1999 and 1998, respectively. (b) Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends -- the ratios of earnings to combined fixed charges and preferred stock dividends were 4.0x and 3.2x for the six months ended June 30, 1999 and 1998, respectively. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1999. PAGE 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company (Registrant) has duly caused this Form 10-Q Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. CNF Transportation Inc. (Registrant) August 10, 1999 /s/Chutta Ratnathicam Chutta Ratnathicam Senior Vice President and Chief Financial Officer EX-27 2
5 1000 6-MOS DEC-31-1999 JUN-30-1999 108,471 0 817,726 (22,138) 40,168 1,128,945 1,846,248 (803,495) 2,810,944 902,695 461,187 125,000 128,681 356,242 382,528 2,810,944 0 2,616,960 0 2,439,031 16,725 0 14,478 161,204 70,124 91,080 0 0 0 86,992 1.81 1.60
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, 1999 1998 Fixed Charges: Interest Expense $ 14,478 $ 16,981 Capitalized Interest 2,508 969 Dividend Requirement on Series B Preferred Stock [1] 5,556 5,616 Interest Component of Rental Expense [2] 25,406 19,134 $ 47,948 $ 42,700 Earnings: Income before Taxes $ 161,204 $ 108,610 Fixed Charges 47,948 42,700 Capitalized Interest (2,508) (969) Preferred Dividend Requirements [3] (5,556) (5,616) $ 201,088 $ 144,725 Ratio of Earnings to Fixed Charges: 4.2x 3.4x [1] Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt service on notes issued by the Company's Thrift and Stock Plan. [2] Estimate of the interest portion of lease payments. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. EX-99 4 Exhibit 99(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands) Six Months Ended June 30, 1999 1998 Combined Fixed Charges and Preferred Stock Dividends: Interest Expense $ 14,478 $ 16,981 Capitalized Interest 2,508 969 Dividend Requirement on Series B Preferred Stock [1] 5,556 5,616 Dividend Requirement on Preferred Securities of Subsidiary Trust 3,126 3,126 Interest Component of Rental Expense [2] 25,406 19,134 $ 51,074 $ 45,826 Earnings: Income before Taxes $ 161,204 $ 108,610 Fixed Charges 51,074 45,826 Capitalized Interest (2,508) (969) Preferred Dividend Requirements [3] (5,556) (5,616) $ 204,214 $ 147,851 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: 4.0x 3.2x [1] Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt service on notes issued by the Company's Thrift and Stock Plan. [2] Estimate of the interest portion of lease payments. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income before Taxes. -----END PRIVACY-ENHANCED MESSAGE-----