UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 1-12149
CONSOLIDATED FREIGHTWAYS CORPORATION
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 77-0425334
175 Linfield Drive, Menlo Park, CA 94025
Telephone Number (650) 326-1700
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes___X___ No_______
Number of shares of Common Stock, $.01 par value,
outstanding as of April 30, 1998: 23,048,754
Page 1
CONSOLIDATED FREIGHTWAYS CORPORATION
FORM 10-Q
Quarter Ended March 31, 1998
_____________________________________________________________________
_____________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Statements of Consolidated Income -
Three Months Ended March 31, 1998 and 1997 5
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 134,302 $ 107,721
Trade accounts receivable, net of allowances 309,673 310,601
Other receivables 4,591 10,300
Operating supplies, at lower of average
cost or market 8,543 8,741
Prepaid expenses 47,856 39,696
Deferred income taxes 15,715 16,554
Total Current Assets 520,680 493,613
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 78,503 78,227
Buildings and improvements 343,438 342,413
Revenue equipment 560,070 559,610
Other equipment and leasehold improvements 117,774 116,390
1,099,785 1,096,640
Accumulated depreciation and amortization (725,384) (713,653)
374,401 382,987
OTHER ASSETS
Deposits and other assets 11,308 9,468
Deferred income taxes 14,227 11,728
25,535 21,196
TOTAL ASSETS $ 920,616 $ 897,796
The accompanying notes are an integral part of these statements.
Page 3
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 78,104 $ 83,127
Accrued liabilities 225,610 212,644
Accrued claims costs 79,213 82,023
Federal and other income taxes 14,749 7,706
Total Current Liabilities 397,676 385,500
LONG-TERM LIABILITIES
Long-term debt 15,100 15,100
Accrued claims costs 113,840 112,173
Employee benefits 115,646 115,220
Other liabilities and deferred credits 27,878 26,356
Total Liabilities 670,140 654,349
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
5,000,000 shares; issued none -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued 23,062,631
and 23,038,437 shares, respectively 231 230
Additional paid-in capital 71,484 71,461
Accumulated other comprehensive income (6,584) (6,572)
Retained earnings 185,590 178,573
Treasury stock (18,151 shares) (245) (245)
Total Shareholders' Equity 250,476 243,447
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 920,616 $ 897,796
The accompanying notes are an integral part of these statements.
Page 4
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in thousands except per share amounts)
Three Months Ended
March 31,
1998 1997
REVENUES $ 545,648 $ 545,633
COSTS AND EXPENSES
Salaries, wages and benefits 353,571 357,997
Operating expenses 88,320 90,742
Purchased transportation 45,936 43,337
Operating taxes and licenses 17,103 18,041
Claims and insurance 13,284 13,799
Depreciation 12,634 13,180
530,848 537,096
OPERATING INCOME 14,800 8,537
OTHER INCOME (EXPENSE)
Investment income 952 194
Interest expense (995) (299)
Miscellaneous, net (438) (433)
(481) (538)
Income before income taxes 14,319 7,999
Income taxes 7,302 4,745
NET INCOME $ 7,017 $ 3,254
Basic average shares outstanding 23,029,695 22,025,323
Diluted average shares outstanding 24,118,668 22,128,619
Basic Earnings per Share: $ 0.30 $ 0.15
Diluted Earnings per Share: $ 0.29 $ 0.15
The accompanying notes are an integral part of these statements.
Page 5
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended
March 31,
1998 1997
(Dollars in thousands)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 107,721 $ 48,679
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 7,017 3,254
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 13,079 13,628
Increase (decrease) in deferred income taxes (1,660) 1,483
Gains from property disposals, net (6) (298)
Changes in assets and liabilities:
Receivables 6,637 (23,625)
Prepaid expenses (8,160) (10,560)
Accounts payable (5,023) (8,728)
Accrued liabilities 12,966 28,714
Accrued claims costs (1,143) (5,754)
Income taxes 7,043 1,878
Employee benefits 426 1,210
Other (797) (1,125)
Net Cash Provided by Operating Activities 30,379 77
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,960) (8,058)
Proceeds from sales of property 162 507
Net Cash Used by Investing Activities (3,798) (7,551)
Increase (Decrease) in Cash and Cash Equivalents 26,581 (7,474)
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 134,302 $ 41,205
The accompanying notes are an integral part of these statements.
Page 6
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of
Consolidated Freightways Corporation 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 on Form 10-K.
2. Stock Compensation
The Company previously granted 3,203,477 shares of restricted
stock to its regular, full-time employees under its Stock Option and
Incentive Plan. On December 16, 1997, 1,059,355 of these shares
vested and were issued to employees. As of March 31, 1998, there
were 2,144,122 granted but unissued shares remaining which had an
aggregate market value of $36.5 million. The shares vest in two
installments as early as December 16, 1998 and 1999, but are
contingent upon the Company's stock price achieving pre-determined
increases over the price at the time of grant in December 1996. If
performance conditions are met, approximately 1,072,000 shares of
common stock will be issued in December 1998 and compensation
expense will be recognized based on the then market price of the
stock. Based on the market price of the stock on March 31, 1998, the
Company would recognize a $10.9 million non-cash charge, net of
related tax benefits.
Page 7
3. Earnings per Share
The following chart reconciles basic to diluted earnings per
share for the quarters ended March 31, 1998 and 1997:
Weighted
Average Earnings
Quarter Ended Net Income Shares Per Share
March 31, 1998
Basic $7,017 23,029,695 $0.30
Dilutive effect
of restricted
stock -- 1,088,973 (0.01)
Diluted $7,017 24,118,668 $0.29
March 31, 1997
Basic $3,254 22,025,323 $0.15
Dilutive effect
of restricted
stock -- 103,296 --
Diluted $3,254 22,128,619 $0.15
4. Comprehensive Income
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" in the quarter
ended March 31, 1998. Comprehensive income for the quarters ended
March 31, 1998 and 1997 is as follows:
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
Net Income $7,017 $3,254
Other Comprehensive Income:
Foreign currency translation
adjustments, net of taxes (7) (13)
Comprehensive Income $7,010 $3,241
5. Accounting for Software Costs
The Company adopted the provisions of American Institute of
Certified Public Accountants Statement of Position 98-1 (SOP 98-1)
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" in the quarter ended March 31, 1998. SOP 98-1
standardizes which costs related to computer software developed or
obtained for internal use are to be capitalized and those that are to
be expensed as incurred. Adoption of this statement did not have a
material effect on the results of operations for the quarter ended
March 31, 1998.
Page 8
6. Contingencies
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 adverse effect on the Company's consolidated financial
position or results of operations.
Page 9
CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company earned net income of $7.0 million or $0.30 per basic
share in the quarter ended March 31, 1998. This was a 115.6%
improvement over net income of $3.3 million or $0.15 per basic share
earned in the same period last year. This significant improvement
was due primarily to higher revenue yields, despite elimination of a
fuel surcharge in early February 1998. Revenue per hundred weight
increased 6.5% as the Company benefited from a 5.5% January rate
increase and improved freight mix. Less-than-truckload tonnage
decreased 4.2% and total tonnage decreased 6.2%, due to shippers
diverting freight pending renewal of the Teamsters' contract, which
was subsequently ratified on April 8, 1998, and the Company's
program to improve freight mix.
Salaries, wages and benefits decreased 1.2% reflecting lower
business volumes, increased use of rail services as discussed below,
continued cost savings from workers' compensation claims containment
programs and increased efficiencies in cross-dock freight handling.
These cost savings were partially offset by higher contractual wage
and benefit rates compared with the same period last year. Operating
expenses decreased 2.7% also due to lower business volumes and
increased use of rail services. Additionally, the Company benefited
from lower fuel prices as the average fuel cost per gallon decreased
26.9% from the same period last year. Purchased transportation
increased 6.0% as the Company continued to increase its use of lower
cost rail service in strategic lanes. Rail miles as a percentage of
total inter-city miles were 26.8% for the quarter ended March 31,
1998 compared with 25.9% in the same period last year. The
combination of lower business volumes and increased use of rail
services also resulted in a 5.2% decrease in operating taxes and
licenses. Additionally, the lower business volumes resulted in a
3.7% decrease in claims and insurance expense. Depreciation
decreased 4.1% due to more fully depreciated equipment in the quarter
ended March 31, 1998.
The combination of enhanced yields and lower operating costs
resulted in operating income of $14.8 million, a $6.3 million or
73.4% increase over the same period last year. The operating ratio
improved to 97.3% from 98.4%.
Other expense, net decreased 10.6% due to increased investment
income on the Company's short-term investments.
The Company's effective income tax rates of 51.0% and 59.3% for
the quarters ended March 31, 1998 and 1997, respectively, differ from
the statutory Federal rate due to foreign taxes and non-deductible
items.
Page 10
Management is currently in the process of replacing or
converting the Company's financial and operational systems and
applications for Year 2000 compliance. Based upon a current
assessment of systems and applications requiring modification,
management expects to spend approximately $25 to $30 million. Of
this amount, approximately $11 million relates to the purchase and
implementation of new hardware and software, which will be
capitalized and amortized over their estimated useful lives.
Management expects to have all of its financial and operational
systems replaced or converted by mid 1999. However, to the extent
systems are not converted by the year 2000, there could be a material
adverse effect on the Company's operations.
On April 8, 1998, the International Brotherhood of Teamsters
ratified a new, five year National Master Freight Agreement with
Consolidated Freightways Corporation of Delaware (CFCD), a wholly-
owned subsidiary of the Company, and three other national motor
freight carriers. The agreement provides for, among other things,
increased wage and pension benefits for CFCD's union employees. A
provision of the agreement grants a one-time, $750 signing bonus in
lieu of a wage increase in the first year of the contract. The
Company expects to pay $13.3 million in signing bonuses in June 1998.
With the new five year contract ratified and a current stable pricing
environment, management is focusing on improving yield management and
cost containment programs. Prior to ratification of the agreement,
many shippers diverted freight to non-union carriers to avoid
repercussions of a possible strike. Since ratification, those
shippers have begun returning freight, although at a slower rate than
anticipated by management. Management is actively working to
recapture only that freight which enhances the Company's
profitability.
As discussed in Footnote 2, the Company has a restricted stock
program. If performance conditions are met, approximately 1,072,000
shares of common stock will be issued in December 1998, and
compensation recognized based on the then market price of the stock.
Based on the market price of the stock at March 31, 1998, the Company
would recognize a $10.9 million non-cash charge, net of related tax
benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had $134.3 million in cash and
cash equivalents. Net cash flow from operations for the quarter
ended March 31, 1998 was $30.4 million due primarily to net income
and depreciation and amortization. Management expects cash flow
from operations for 1998 will be sufficient for working capital and
capital expenditure requirements. Capital expenditures for the
quarter ended March 31, 1998 were $4.0 million compared with $8.1
million in the same period last year. Management expects capital
expenditures to be approximately $66 million for the remainder of
1998, primarily for replacement of the Company's aging fleet of
truck, tractors and trailers. Management expects to fund these
expenditures with cash from operations supplemented by financing
arrangements, if necessary.
Page 11
The Company has a $225.0 million secured credit facility with
several banks to provide for working capital and letter of credit
needs. Working capital borrowings are limited to $100.0 million
while letters of credit are limited to $150.0 million. Borrowings
under the agreement, which expires in 2000, bear interest based upon
either prime or LIBOR, plus a margin dependent on the Company's
financial performance. Borrowings and letters of credit are secured
by substantially all of the assets (excluding real property and
certain rolling stock) of CFCD, all of the outstanding stock of CFCD
and 65% of the outstanding capital stock of Canadian Freightways
Limited, a wholly owned subsidiary of CFCD. As of March 31, 1998,
the Company had no short-term borrowings and $93.1 million of letters
of credit outstanding under this facility. The continued availability
of funds under this credit facility will require that the Company
remain in compliance with certain financial covenants. The most
restrictive covenants require the Company to maintain a minimum level
of earnings before interest, taxes, depreciation and amortization,
minimum amounts of tangible net worth and fixed charge coverage, and
limit capital expenditures. The Company is in compliance as of
March 31, 1998 and expects to be in compliance with these covenants
for the remainder of the year.
INFLATION
Significant increases in fuel prices, to the extent not offset
by increases in transportation rates, would have a material adverse
effect on the profitability of the Company. Historically, the
Company has responded to periods of sharply higher fuel prices by
implementing fuel surcharge programs or base rate increases, or both,
to recover additional costs. However, there can be no assurance that
the Company will be able to successfully implement such surcharges or
increases in response to increased fuel costs in the future.
OTHER
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 various Superfund
sites. Under CERCLA, PRP's are jointly and severally liable for all
site remediation and expenses. 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 its
financial condition or results of operations.
Page 12
Certain statements included or incorporated by reference herein
constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and 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 included 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," "pro forma,"
"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 matters discussed elsewhere herein and in documents incorporated
by reference herein, could cause actual results and other matters to
differ materially from those in such forward-looking statements:
changes in general business and economic conditions; increases in
domestic and international competition and pricing pressure;
increases in fuel prices; uncertainty regarding the Company's ability
to improve results of operations; labor matters, including shortages
of drivers and increases in labor costs; changes in governmental
regulation; environmental and tax matters; increases in costs
associated with the conversion of financial and operational systems
and applications for Year 2000 compliance and failure to convert all
systems by the year 2000. As a result of the foregoing, no assurance
can be given as to future results of operations or financial
condition.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously disclosed, 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 various
Superfund 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 its financial
condition or results of operations.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter
ended March 31, 1998.
Page 13
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.
Consolidated Freightways Corporation
(Registrant)
May 13, 1998 /s/David F. Morrison
David F. Morrison
Executive Vice President and
Chief Financial Officer
May 13, 1998 /s/Robert E. Wrightson
Robert E. Wrightson
Senior Vice President and
Controller
Page 14
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