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 September 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 October 31, 1997: 46,823,451
PAGE 2
CNF TRANSPORTATION INC.
FORM 10-Q
Quarter Ended September 30, 1997
___________________________________________________________________________
___________________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Statements of Consolidated Income -
Three and Nine Months Ended September 30, 1997
and 1996 5
Statements of Consolidated Cash Flows -
Nine Months Ended September 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 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)
September 30, December 31,
1997 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 163,885 $ 82,094
Trade accounts receivable, net of allowances 653,181 542,381
Other accounts receivable 26,182 49,278
Operating supplies, at lower of average
cost or market 36,462 32,916
Prepaid expenses 40,566 31,249
Deferred income taxes 80,480 77,977
Total Current Assets 1,000,756 815,895
PROPERTY, PLANT AND EQUIPMENT, net
Land 107,848 104,314
Buildings and improvements 287,305 265,655
Revenue equipment 648,263 586,720
Other equipment and leasehold improvements 353,495 302,679
1,396,911 1,259,368
Accumulated depreciation and amortization (587,891) (506,719)
809,020 752,649
OTHER ASSETS
Restricted funds 13,444 12,685
Deposits and other assets 109,658 95,144
Unamortized aircraft maintenance, net 123,289 119,927
Costs in excess of net assets of businesses
acquired, net of accumulated amortization 278,807 285,566
525,198 513,322
TOTAL ASSETS $2,334,974 $2,081,866
The accompanying notes are an integral part of these statements.
PAGE 4
CNF TRANSPORTATION INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 259,997 $ 210,902
Accrued liabilities 429,043 349,497
Accrued claims costs 98,533 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 32,156 9,162
Total Current Liabilities 824,624 815,086
LONG-TERM LIABILITIES
Long-term debt and guarantees 362,670 366,305
Long-term obligations under capital leases 110,838 110,896
Accrued claims costs 55,599 57,912
Employee benefits 134,182 115,470
Other liabilities and deferred credits 67,569 75,479
Deferred income taxes 45,097 32,439
Total Liabilities 1,600,579 1,573,587
Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities of
Subsidiary, CNF Trust I,Holding Solely
Convertible Debentures of CNF
Transportation Inc. (Note 3) 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 867,041 and
875,191 shares, respectively 9 9
Additional paid-in capital, preferred stock 131,868 133,108
Deferred TASP compensation (103,478) (108,655)
Total Preferred Shareholders' Equity 28,399 24,462
Common stock, $.625 par value; authorized
100,000,000 shares; issued 53,742,691
and 51,595,827 shares, respectively 33,589 32,247
Additional paid-in capital, common stock 276,591 242,879
Cumulative translation adjustment (4,804) 3,279
Retained earnings 450,676 378,744
Cost of repurchased common stock
(6,984,622 and 7,029,917 shares,
respectively) (172,215) (173,332)
Deferred compensation (2,841) -
Total Common Shareholders' Equity 580,996 483,817
Total Shareholders' Equity 609,395 508,279
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,334,974 $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 Nine Months Ended
September 30, September 30,
<S> <C> 1997 <C> 1996 <C> 1997 <C> 1996
REVENUES
Con-Way Transportation Services $ 387,975 $ 331,090 $ 1,087,838 $ 949,584
Emery Worldwide 599,830 497,860 1,627,332 1,420,788
Other 139,557 106,840 357,383 307,627
1,127,362 935,790 3,072,553 2,677,999
COSTS AND EXPENSES
Con-Way Transportation Services
Operating Expenses 275,631 245,261 786,849 708,746
Selling and Administrative Expenses 54,347 43,056 143,946 123,775
Depreciation 16,838 13,588 47,326 37,489
346,816 301,905 978,121 870,010
Emery Worldwide
Operating Expenses 462,476 399,529 1,280,757 1,148,930
Selling and Administrative Expenses 90,938 68,788 241,111 196,810
Depreciation 10,197 8,013 28,637 23,368
563,611 476,330 1,550,505 1,369,108
Other
Operating Expenses 125,873 95,336 318,545 275,323
Selling and Administrative Expenses 7,622 7,236 22,020 19,535
Depreciation 1,593 567 4,281 1,736
135,088 103,139 344,846 296,594
1,045,515 881,374 2,873,472 2,535,712
OPERATING INCOME
Con-Way Transportation Services 41,159 29,185 109,717 79,574
Emery Worldwide 36,219 21,530 76,827 51,680
Other 4,469 3,701 12,537 11,033
81,847 54,416 199,081 142,287
OTHER INCOME (EXPENSE)
Investment Income 516 - 640 52
Interest Expense (8,815) (9,943) (29,882) (29,498)
Dividend requirement on preferred
securities of subsidiary trust (Note 3) (1,561) - (1,908) -
Miscellaneous, net 756 (2,408) 11 (3,770)
(9,104) (12,351) (31,139) (33,216)
Income from Continuing Operations
before Income Taxes 72,743 42,065 167,942 109,071
Income Taxes 33,098 18,766 76,364 48,391
NET INCOME FROM CONTINUING OPERATIONS 39,645 23,299 91,578 60,680
Loss from Discontinued Operations net
of Income Tax Benefits - (3,445) - (26,890)
Net Income 39,645 19,854 91,578 33,790
Preferred Dividends 1,951 2,141 5,861 6,458
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 37,694 $ 17,713 $ 85,717 $ 27,332
Primary Average Shares
Outstanding (Note 2) 51,208,607 44,659,341 48,442,376 44,846,589
Earnings (Loss) Per Share (Note 2)
Primary
Continuing Operations $ 0.75 $ 0.47 $ 1.79 $ 1.21
Discontinued Operations - (0.07) - (0.60)
$ 0.75 $ 0.40 $ 1.79 $ 0.61
Fully Diluted
Continuing Operations $ 0.70 $ 0.44 $ 1.65 $ 1.13
Discontinued Operations - (0.07) - (0.54)
$ 0.70 $ 0.37 $ 1.65 $ 0.59
The accompanying notes are an integral part of these statements.
</TABLE>
PAGE 6
CNF TRANSPORTATION INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
Nine Months Ended
September 30,
1997 1996
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 82,094 $ 59,787
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 91,578 33,790
Adjustments to reconcile income
to net cash provided by operating activities:
Loss from discontinued operations - 26,890
Depreciation and amortization 88,748 69,188
Increase (decrease) in deferred income taxes 10,155 (3,110)
Gains from property disposals, net (456) (1,296)
Changes in assets and liabilities:
Receivables (87,704) (17,180)
Prepaid expenses (9,317) (2,734)
Accounts payable 49,095 22,201
Accrued liabilities 79,546 33,258
Accrued claims costs 8,880 5,095
Federal and other income taxes 22,994 371
Employee benefits 18,712 (8,341)
Deferred charges and credits and other (31,859) (22,564)
Net Cash Provided by Operating Activities 240,372 135,568
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (136,183) (142,145)
Proceeds from sales of property 3,372 5,110
Net Cash Used by Investing Activities (132,811) (137,035)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments of long-term debt
and capital lease obligations (1,983) (2,376)
Net borrowings (payments) under revolving
lines of credit (155,000) 100,000
Proceeds from issuance of subsidiary
preferred securities 125,000 -
Costs of issuance of subsidiary preferred
securities (3,569) -
Proceeds from exercises of stock options 32,025 948
Payments of common dividends (13,777) (13,199)
Payments of preferred dividends (8,466) (9,229)
Net Cash Provided (Used) by Financing Activities (25,770) 76,144
Net Cash Provided by Continuing Operations 81,791 74,677
Net Cash Used by Discontinued Operations - (52,880)
Increase in Cash and Cash Equivalents 81,791 21,797
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 163,885 $ 81,584
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 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, 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. Earnings Per Share
Primary earnings per share (EPS) is based upon the weighted average
number of common shares outstanding during each period after consideration
of the dilutive effect of common stock equivalents. For all periods
presented, common stock equivalents include stock options. For the three
and nine months ended September 30, 1997, Primary EPS also includes the
dilutive effect of restricted stock issued to officers and directors and
convertible preferred securities of a subsidiary trust (TECONS) issued in
June 1997. See Note 3 "Term Convertible Securities (TECONS)". Fully
diluted EPS is similarly computed, but includes the dilutive effect of the
Company's Thrift and Stock Plan (TASP) shares. See Exhibit 11 "Computation
of Per Share Earnings".
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 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, SFAS 128 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.
PAGE 8
Had this statement been adopted January 1, 1997, Basic EPS and Diluted
EPS from continuing operations for the three and nine-month periods ended
September 30, 1997 and September 30, 1996 would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Basic EPS $0.81 $0.48 $1.87 $1.23
Diluted EPS 0.70 0.44 1.67 1.13
3. Term Convertible Securities (TECONS)
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 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.
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.
4. Contingencies
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
PAGE 9
protests contesting these proposed adjustments and is engaged in
discussions with the administrative conference division (Appeals Office) of
the IRS.
The Company believes that there is legal authority to support the manner
in which it has calculated and paid the aviation excise taxes and,
accordingly, the Company intends to continue to vigorously challenge the
proposed adjustments. Nevertheless, the Company is unable to predict the
ultimate outcome of this matter. As a result, there can be no assurance
that the Company will not have to pay a substantial amount of additional
aviation excise taxes for the 1990 through 1995 tax period. In addition,
it is possible that the IRS may seek to increase the amount of the aviation
excise tax payable by 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 also proposed a substantial adjustment for tax years 1987
through 1990 based on the IRS' position that certain aircraft maintenance
costs should have been capitalized rather than expensed for federal income
tax purposes. In addition, the Company believes it is likely that the IRS
will propose an additional adjustment, based on the same IRS position with
respect to aircraft maintenance costs, for subsequent tax years. The
Company believes that its practice of expensing these types of maintenance
costs is consistent with industry practice. However, if this issue is
determined adversely to the Company, there can be no assurance that the
Company will not have to pay substantial additional tax. The Company is
unable to predict the ultimate outcome of this matter and intends to
vigorously contest the proposed adjustment. 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, 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
The Company's total revenues increased 20.5% for the third quarter of
1997 and 14.7% for the first nine months of 1997 compared to the third
quarter and first nine months of the prior year. Total revenues for both
periods were record levels driven by significant revenue increases at all
three reported segments. Factors contributing to the improved revenues
included strong economic conditions, reduced capacity and more stable
pricing within the industry, continued success of marketing strategies, and
additional revenues from the two-week work stoppage at United Parcel
Service of America (UPS) in August 1997.
Operating income, also a record for both the third quarter and first
nine months of 1997, increased 50.4% and 39.9%, respectively, over the
third quarter and first nine months of the prior year. The record revenues
contributed to operating income improvements at all three segments for both
PAGE 10
the quarterly and year-to-date periods. Operating income improvements were
also attributable to a more stable pricing environment, efforts to improve
profitability of the service mix within the reported segments and incentive
programs rewarding profitability. In the first nine months of the prior
year, operating results for 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 expense for the third quarter decreased 26.3% compared with the
same quarter of last year while other expense for the first nine months of
1997 decreased 6.3% from the same period last year. The net decrease in
other expense for the quarter was primarily due to lower interest expense
on short-term borrowings, which were fully repaid in the third quarter of
1997. This repayment resulted primarily from the application of a portion
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 to
temporarily reduce borrowings under the Company's revolving credit
facility, pending application of such net proceeds to pay costs associated
with the USPS contract discussed below. Partially offsetting the lower
interest expense were dividend payments on the TECONS. The decrease in
other expense for the third quarter and first nine months of 1997 was due
in part to lower net miscellaneous expense, which includes bank fees and
losses on sales of non-operating assets.
The effective income tax rate was 45.5% for both the third quarter of
1997 and the first nine months of 1997. The increase from 44.6% in the
prior year's third quarter and 44.4% in the first nine months of the prior
year was partially due to higher tax rates on increased foreign source
income.
Net income available to common shareholders for the third quarter of
1997 was 112.8% above the third quarter of 1996 and, for the first nine
months of 1997, increased 213.6% from the first nine months of 1996. When
compared to the same periods of the prior year, the increased income in
1997 was the result of higher operating income, lower other expense and the
absence of losses from discontinued operations.
Con-Way Transportation Services
Con-Way Transportation Services' (CTS) 1997 third quarter revenues, a
record for any quarter, were 17.2% above the third quarter of 1996 and nine-
month revenues increased 14.6% from the same period last year. The
increase in revenues was attributed primarily to higher tonnage levels and
increased revenue per hundred-weight. Tonnage for the regional carriers in
the third quarter and first nine months of 1997 increased 8.5% and 8.4%,
respectively, when compared to the same periods in 1996. Less-than-
truckload (LTL) tonnage increased 9.2% from the third quarter of 1996 to
the third quarter of 1997 and 9.1% from the first nine months of 1996 to
the first nine months of 1997. The tonnage increases were primarily the
result of a strong economy, increased business from expanded markets, and a
small level of incremental revenues attributed to the UPS strike.
Successful marketing of premium services also contributed to higher revenue
per hundred-weight.
CTS's operating income for the third quarter of 1997 increased 41.0%
to a record $41.2 million compared with the third quarter of 1996.
Operating income for the first nine months of 1997 increased 37.9% from the
first nine months of 1996. Operating margins improved for both the quarter
and the nine months ended September 30, 1997. The operating income
improvements were achieved primarily from revenue increases, higher revenue
per hundred-weight, efforts to improve profitability of the service mix,
greater operating efficiencies from increased utilization of
PAGE 11
infrastructure, and a small amount of incremental income attributed to the
UPS strike. Changes in the service mix and increased revenue per hundred-
weight, both factors contributing to higher operating margins, were most
affected by a higher proportion of LTL tonnage and efforts to market
premium services. Operating income in the first nine months of the prior
year was adversely affected by severe winter weather, in the first quarter
of 1996, and by higher unrecovered fuel costs.
CTS's management will continue with strategies intended to nurture the
business with a focus toward operating margin improvement. Emphasis will
be placed on optimizing the mix of premium transportation services,
replacing or repricing low margin business, increasing the utilization of
existing freight infrastructure, and maintaining stringent cost controls.
Emery Worldwide
Emery's revenues for the third quarter and first nine months of 1997
were 20.5% and 14.5% higher, respectively, than the third quarter and first
nine months of 1996. The increased revenues were due primarily to both
international and domestic tonnage increases, some rate improvements and
incremental revenues attributed to the UPS work stoppage. Compared to the
third quarter of 1996, domestic and international tonnage from commercial
business in the third quarter of 1997 increased 13.7% and 19.2%,
respectively. For the first nine months of 1997, domestic and
international tonnage from commercial business increased 9.9% and 11.6%,
respectively, compared to the first nine months of 1996.
Emery's third quarter 1997 operating income was 68.2% above the third
quarter of 1996 and nine-month 1997 operating income increased 48.7%
compared to the same period in 1996. Operating income for the third
quarter of 1997 was positively affected by increased revenues, an increase
in the proportion of higher margin services, greater use of zone-based
pricing, and incremental income attributed to the UPS strike. Partially
offsetting the improvements in the first nine months of 1997 were the
strikes in the automotive industry and a U.S. air cargo excise tax that was
absent most of 1996. Operating income in the first nine months of the
prior year was adversely affected by severe winter weather, in the first
quarter of 1996, and by higher unrecovered fuel costs.
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, enhancement of the service mix,
technology enhancements, increased use of owned and dedicated international
agent locations and continued emphasis on operating efficiencies to reduce
costs. Efforts to improve operating efficiency and capacity include a
redesign and upgrade of the freight sortation center located at the Dayton
International Airport in Ohio (the Hub), which is estimated to 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%. In addition, the Company is seeking
to improve operating efficiency and capacity with the recent openings of
new international distribution centers in Miami and Singapore. The Miami
center will house Emery's Latin American headquarters and will function as a
regional distribution center for Central and South America. The regional
distribution center in Singapore will serve the Asia-Pacific region.
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 prior to July 1998. The Company is unable to predict
the outcome of these contract negotiations or their effect on its results
of operations.
PAGE 12
On April 23, 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 USPS contract establishes fixed prices per piece, subject to
adjustments based on volume and percentage of on-time and accurate handling
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 USPS 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 November 15, 1997, and for the remaining
five to be fully operational by late February 1998. The Company has
established the first five processing centers within the prescribed time
frame. The contract also provides for the Company to pay liquidated
damages if the remaining centers are not operational on time. 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 fault on the part of EWA), although the USPS would be
required, following termination for convenience, to reimburse the Company
for certain expenditures associated with the contract.
Other Operations
The Other segment, consisting primarily of Menlo Logistics' (Menlo)
operating results, also includes the operating results of Road Systems and
VantageParts. The segment reported a revenue increase of 30.6% for the
third quarter of 1997 over the third quarter of 1996. Nine-month revenues
were 16.2% above the same period last year. Menlo's revenues for the third
quarter of 1997 increased approximately 35% over the third quarter of the
prior year and Menlo's nine-month revenues increased 20.8% over the same
period in 1996. The higher revenues for Menlo were again partially offset
by lower revenues from Road Systems due to lower trailer sales. A majority
of revenues for Road Systems and a portion of revenues for VantageParts are
generated by intercompany sales and are therefore eliminated in
consolidation.
The segment's operating income for the third quarter and first nine
months of 1997 increased 20.8% and 13.6%, respectively, over the same
PAGE 13
periods of 1996. Increased operating income from Menlo was partially offset
by lower income from Road Systems. Menlo's operating income for the third
quarter and first nine months of 1997 increased approximately 50% and 30%
over the respective periods in 1996 as its service 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
For the nine months ended September 30, 1997, the Company's cash and
cash equivalents increased $81.8 million to $163.9 million. Cash was
provided primarily by cash flow from operations of $240.4 million, net
proceeds of $121.4 million from issuance of the TECONS and $32 million from
the proceeds of exercised stock options. Cash provided by these activities
was offset primarily by capital expenditures of $136.2 million and net debt
repayments of $157.0 million.
Cash flow from operations of $240.4 million for the first nine months
of 1997 increased $104.8 million over the first nine months of 1996. The
increase was primarily due to higher net income and depreciation and
amortization in the current year. Increases in receivables, accounts
payable and accrued liabilities for the nine months ended September 30,
1997 were consistent with the increase in 1997 business volumes. The
combined change in these working capital accounts provided operating cash
flow of $40.9 million for the first nine months of 1997 and was consistent
with the $38.3 million provided by the net change in these accounts in the
prior year. Compared to 1996, increases in deferred and accrued income
taxes and employee benefits in 1997 also contributed to cash flow provided
by operations.
Capital expenditures of $136.2 million for the first nine months of
1997 decreased $6.0 million compared to the same period in 1996. Of the
capital expenditures in the first nine months of 1997, $18 million related
to the new USPS contract. The Company expects capital expenditures of
approximately $115 million in the fourth quarter including approximately
$70 million related to the new USPS contract. The remaining capital
expenditures of the original $102 million estimated capital expenditures
for the USPS contract are expected to occur in the first quarter of 1998.
The Company intends to fund the capital expenditure requirements for the
remainder of 1997 with available cash, cash from operations, and borrowings
under unsecured credit facilities.
Proceeds from the exercise of stock options in the first nine months
of 1997 provided $32.0 million compared with less than $1 million in the
first nine months of 1996. Payments of preferred and common dividends were
$22.2 million and $22.4 million for the nine months ended September 30,
1997 and 1996, respectively.
During the first nine months of 1997, the Company reduced debt by
$157.0 million including full repayment of $155.0 million borrowed under
unsecured lines of credit. In the first nine months of the prior year,
borrowings under the unsecured lines of credit increased $100 million. The
net debt repayments in the first nine months of 1997 were funded primarily
from operating cash flow and net proceeds of $121.4 million from the
issuance of the TECONS, which were applied to temporarily reduce debt
pending application of such proceeds to pay costs associated with the USPS
contract.
The Company's debt-to-total capitalization ratio decreased to 39.4% at
September 30, 1997 from 55.6% at December 31, 1996. The improvement
resulted primarily from the issuance of the TECONS, the related interim
repayment of short-term borrowings, and exercises of stock options. Cash
PAGE 14
flow from operations, which partially funded debt repayments during the
first nine months of 1997, also contributed to the improvement of the debt-
to-total capitalization ratio.
At September 30, 1997, letters of credit of $104.8 million were
outstanding under the Company's $350 million unsecured credit facility,
leaving $245.2 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 $72.7 million at September 30, 1997, leaving $12.3 million available for
additional letters of credit. Further, the Company had available $95.0
million of capacity under other short-term uncommitted borrowing lines,
none of which was drawn.
Other Items
The Company is currently replacing or modifying certain information
systems in order to address year 2000 issues. The Company is unable to
predict with certainty the total costs of addressing year 2000 issues,
however the Company estimates that total expenditures for year 2000
compliance, based on current evaluations, will total approximately $20
million through 1999, although there can be no assurance that actual costs
will not exceed this amount. These costs represent expenditures in
addition to normal systems replacement and maintenance. The effect of
year 2000 expenditures on the Company's results of operations and
financial condition will in part depend on whether the Company replaces
or modifies the systems affected by the year 2000 issue.
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 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
PAGE 15
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.
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 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 3.0
and 2.3 for the nine months ended September 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 2.9 and 2.3 for the nine months
ended September 30, 1997 and 1996, respectively.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
PAGE 16
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)
November 12, 1997 /s/Chutta Ratnathicam
Chutta Ratnathicam
Senior Vice President and
Chief Financial Officer
November 12, 1997 /s/Gary D. Taliaferro
Gary D. Taliaferro
Vice President and Controller
<TABLE>
Exhibit 11
CNF TRANSPORTATION INC.
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
The following is the computation of fully-diluted earnings per share:
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 37,694 $ 17,713 $ 85,717 $ 27,332
Non-discretionary adjustments under
the if-converted method:
Addback: Dividends on Series B preferred
stock, net of tax benefits 1,951 2,141 5,861 6,458
Addback: Dividends on preferred stock of
subsidiary trust, net of tax benefits 953 - 1,165 -
Less: Replacement funding adustment on
Series B preferred stock, net of tax
benefits (1) (1,669) (1,721) (4,973) (5,022)
Net income available to common shareholders $ 38,929 $ 18,133 $ 87,770 $ 28,768
WEIGHTED AVERAGE SHARES OUTSTANDING:
Common shares 46,630,121 44,023,076 45,956,459 43,992,127
Equivalents: stock options 1,802,255 953,101 1,802,255 953,101
If converted: Series B preferred stock 4,080,249 4,259,321 4,080,249 4,259,321
If converted: Preferred stock of subsidiary
trust 3,125,000 - 1,273,148 -
Adjustments for restricted stock (65,223) - (37,888) -
55,572,402 49,235,498 53,074,223 49,204,549
FULLY DILUTED EARNINGS PER SHARE $ 0.70 $ 0.37 $ 1.65 $ 0.59
<FN>
(1) Additional payment to the Company's Thrift and Stock Plan to replace the funding lost under the if-converted method.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 163885
<SECURITIES> 0
<RECEIVABLES> 674350
<ALLOWANCES> (21169)
<INVENTORY> 36462
<CURRENT-ASSETS> 1000756
<PP&E> 1396911
<DEPRECIATION> (587891)
<TOTAL-ASSETS> 2334974
<CURRENT-LIABILITIES> 824624
<BONDS> 473508
125000
131877
<COMMON> 310180
<OTHER-SE> 167338
<TOTAL-LIABILITY-AND-EQUITY> 2334974
<SALES> 0
<TOTAL-REVENUES> 3072553
<CGS> 0
<TOTAL-COSTS> 2873472
<OTHER-EXPENSES> 31139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29882
<INCOME-PRETAX> 167942
<INCOME-TAX> 76364
<INCOME-CONTINUING> 91578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85717
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.65
</TABLE>
Exhibit 99(a)
CNF TRANSPORTATION INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Nine Months Ended
September 30,
1997 1996
Fixed Charges:
Interest Expense $ 29,882 $ 29,498
Capitalized Interest 1,786 1,627
Preferred Dividends 8,466 9,481
Total Interest 40,134 40,606
Interest Component of
Rental Expense 40,562 34,121
Fixed Charges 80,696 74,727
Less:
Capitalized Interest 1,786 1,627
Preferred Dividends 8,466 9,481
Net Fixed Charges $ 70,444 $ 63,619
Earnings:
Income from Continuing Operations
before Income Taxes $ 167,942 $ 109,071
Add: Net Fixed Charges 70,444 63,619
Total Earnings Before Fixed Charges $ 238,386 $ 172,690
Ratio of Earnings to Fixed Charges:
Total Earnings $ 238,386 $ 172,690
Fixed Charges (1) 80,696 74,727
Ratio 3.0 x 2.3 x
(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)
Nine Months Ended
September 30,
1997 1996
Fixed Charges:
Interest Expense $ 29,882 $ 29,498
Capitalized Interest 1,786 1,627
Preferred Dividends (1) 10,374 9,481
Total Interest 42,042 40,606
Interest Component of
Rental Expense 40,562 34,121
Fixed Charges 82,604 74,727
Less:
Capitalized Interest 1,786 1,627
Preferred Dividends 8,466 9,481
Net Fixed Charges $ 72,352 $ 63,619
Earnings:
Income from Continuing Operations
before Income Taxes $167,942 $ 109,071
Add: Net Fixed Charges 72,352 63,619
Total Earnings Before Fixed Charges $240,294 $ 172,690
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends:
Total Earnings $240,294 $ 172,690
Combined Fixed Charges and
Preferred Stock Dividends (2) 82,604 74,727
Ratio 2.9 x 2.3 x
(1) For the nine months ended September 30, 1997, dividends of
$1,908,000 on the preferred securities of a subsidiary trust issued
in June 1997 are included as an expense 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 the preferred securities
of a subsidiary trust, and the applicable portion of the
consolidated rent expense which approximates the interest
of lease payments.
