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