PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
COMMISSION FILE NUMBER 1-5046
CNF TRANSPORTATION INC.
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 94-1444798
3240 Hillview Avenue, Palo Alto, California 94304
Telephone Number (650) 494-2900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes xx No
Number of shares of Common Stock, $.625 par value,
outstanding as of July 31, 1998: 47,699,863
PAGE 2
CNF TRANSPORTATION INC.
FORM 10-Q
Quarter Ended June 30, 1998
___________________________________________________________________________
___________________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Statements of Consolidated Income -
Three and Six Months Ended June 30, 1998 and 1997 5
Statements of Consolidated Cash Flows -
Six Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CNF TRANSPORTATION INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 78,899 $ 97,617
Trade accounts receivable, net of allowances 728,359 703,785
Other accounts receivable 36,209 32,067
Operating supplies, at lower of average
cost or market 40,726 36,580
Prepaid expenses 44,751 35,682
Deferred income taxes 107,931 103,656
Total Current Assets 1,036,875 1,009,387
PROPERTY, PLANT AND EQUIPMENT, NET
Land 108,767 109,768
Buildings and improvements 320,556 301,245
Revenue equipment 704,712 685,618
Other equipment and leasehold improvements 475,025 400,065
1,609,060 1,496,696
Accumulated depreciation and amortization (681,456) (616,854)
927,604 879,842
OTHER ASSETS
Restricted funds 7,186 10,601
Deposits and other assets 167,425 120,872
Unamortized aircraft maintenance, net 122,136 123,352
Costs in excess of net assets of businesses
acquired, net of accumulated amortization 272,835 277,442
569,582 532,267
TOTAL ASSETS $2,534,061 $2,421,496
The accompanying notes are an integral part of these statements.
PAGE 4
CNF TRANSPORTATION INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 251,453 $ 268,064
Accrued liabilities 456,409 423,237
Accrued claims costs 99,172 99,848
Current maturities of long-term debt and
capital leases 5,262 4,875
Short-term borrowings 7,000 -
Federal and other income taxes 37,880 10,114
Total Current Liabilities 857,176 806,138
LONG-TERM LIABILITIES
Long-term debt and guarantees 356,905 362,671
Long-term obligations under capital leases 110,775 110,817
Accrued claims costs 59,540 55,030
Employee benefits 156,902 141,351
Other liabilities and deferred credits 61,829 72,428
Deferred income taxes 95,476 89,958
Total Liabilities 1,698,603 1,638,393
COMMITMENTS AND CONTINGENCIES (Note 5)
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY CONVERTIBLE DEBENTURES
OF THE COMPANY (Note 4) 125,000 125,000
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized
5,000,000 shares:
Series B, 8.5% cumulative, convertible,
$.01 stated value; designated 1,100,000
shares; issued 859,400 and 865,602 shares,
respectively 9 9
Additional paid-in capital, preferred stock 130,706 131,649
Deferred TASP compensation (98,500) (101,819)
Total Preferred Shareholders' Equity 32,215 29,839
Common stock, $.625 par value; authorized
100,000,000 shares; issued 54,606,055
and 54,370,182 shares, respectively 34,126 33,981
Additional paid-in capital, common stock 306,586 302,256
Deferred compensation, restricted stock (3,129) (2,528)
Cumulative translation adjustment (Note 2) (7,990) (6,647)
Retained earnings 519,964 473,250
Cost of repurchased common stock
(6,948,075 and 6,977,848 shares,
respectively) (171,314) (172,048)
Total Common Shareholders' Equity 678,243 628,264
Total Shareholders' Equity 710,458 658,103
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,534,061 $2,421,496
The accompanying notes are an integral part of these statements.
PAGE 5
<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
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Con-Way Transportation Services $ 424,618 $ 365,405 $ 818,223 $ 699,863
Emery Worldwide 526,726 518,950 1,048,359 1,027,502
Other 248,310 118,208 422,938 217,826
1,199,654 1,002,563 2,289,520 1,945,191
COSTS AND EXPENSES
Con-Way Transportation Services
Operating Expenses 295,383 263,305 569,908 511,218
Selling and Administrative Expenses 55,817 46,328 105,897 89,599
Depreciation 19,428 15,691 37,927 30,488
370,628 325,324 713,732 631,305
Emery Worldwide
Operating Expenses 401,451 411,435 838,746 818,281
Selling and Administrative Expenses 91,332 75,921 157,018 150,173
Depreciation 11,730 9,493 22,869 18,440
504,513 496,849 1,018,633 986,894
Other
Operating Expenses 212,762 104,570 381,422 192,672
Selling and Administrative Expenses 23,033 7,530 38,973 14,398
Depreciation 4,715 1,423 7,952 2,688
240,510 113,523 428,347 209,758
1,115,651 935,696 2,160,712 1,827,957
OPERATING INCOME (LOSS)
Con-Way Transportation Services 53,990 40,081 104,491 68,558
Emery Worldwide 22,213 22,101 29,726 40,608
Other 7,800 4,685 (5,409) 8,068
84,003 66,867 128,808 117,234
OTHER INCOME (EXPENSE)
Investment Income 62 124 91 124
Interest Expense (8,449) (10,262) (16,981) (21,067)
Dividend Requirement on Preferred
Securities of Subsidiary Trust (Note 4) (1,563) (347) (3,126) (347)
Miscellaneous, Net 480 (1,355) (182) (745)
(9,470) (11,840) (20,198) (22,035)
Income before Income Taxes 74,533 55,027 108,610 95,199
Income Taxes 33,167 25,038 48,331 43,266
Net Income 41,366 29,989 60,279 51,933
Preferred Dividends 2,040 1,971 4,047 3,910
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS $ 39,326 $ 28,018 $ 56,232 $ 48,023
Weighted-Average Shares 47,612,373 46,001,492 47,561,179 45,614,045
EARNINGS PER SHARE (Note 3)
Basic $ 0.83 $ 0.61 $ 1.18 $ 1.05
Diluted $ 0.73 $ 0.55 $ 1.06 $ 0.95
The accompanying notes are an integral part of these statements.
</TABLE>
PAGE 6
CNF TRANSPORTATION INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
Six Months Ended
June 30,
1998 1997
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 97,617 $ 82,094
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 60,279 51,933
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 77,901 57,354
Amortization of deferred compensation 3,822 3,362
Increase in deferred income taxes 1,243 7,987
Gains from property disposals, net (1,876) (625)
Changes in assets and liabilities:
Receivables (28,716) (6,688)
Prepaid expenses (9,069) (10,321)
Accounts payable (16,592) (3,401)
Accrued liabilities 41,646 44,362
Accrued incentive compensation (8,474) 6,017
Accrued claims costs 3,834 6,747
Federal and other income taxes 27,766 (842)
Employee benefits 15,551 12,094
Deferred charges and credits (47,980) (16,860)
Other (11,470) (2,202)
Net Cash Provided by Operating Activities 107,865 148,917
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (125,345) (74,707)
Proceeds from sales of property 9,181 2,417
Net Cash Used by Investing Activities (116,164) (72,290)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments of long-term debt
and capital lease obligations (5,421) (1,963)
Net borrowings (payments) under revolving
lines of credit 7,000 (155,000)
Net proceeds from issuance of subsidiary preferred
stock - 121,431
Proceeds from exercises of stock options 3,136 28,599
Payments of common dividends (9,518) (9,124)
Payments of preferred dividends (5,616) (6,118)
Net Cash Used by Financing Activities (10,419) (22,175)
Increase (Decrease) in Cash and Cash
Equivalents (18,718) 54,452
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 78,899 $ 136,546
The accompanying notes are an integral part of these statements
PAGE 7
CNF TRANSPORTATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of CNF Transportation
Inc. and subsidiaries (the Company) have been prepared by the Company,
without audit by independent public accountants, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the consolidated financial statements include all normal
recurring adjustments necessary to present fairly the information required
to be set forth therein. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted from these
statements pursuant to such rules and regulations and, accordingly, should
be read in conjunction with the consolidated financial statements included
in the Company's 1997 Annual Report to Shareholders.
There were no significant changes in the Company's commitments and
contingencies as previously described in the 1997 Annual Report to
Shareholders and related annual report to the Securities and Exchange
Commission Form 10-K.
2. Non-Owner Changes in Equity
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", which requires companies to report a measure of all
changes in equity except those resulting from investments by owners and
distributions to owners. Total non-owner changes in equity were as
follows:
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
1998 1997 1998 1997
Net Income $41,366 $29,989 $60,279 $51,933
Foreign currency
translation adjustment (651) 2,017 (1,343) (1,796)
$40,715 $32,006 $58,936 $50,137
PAGE 8
3. Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS 128, "Earnings Per
Share". SFAS 128 prescribes new Basic and Diluted Earnings Per Share (EPS)
calculations that replace the former calculations for Primary and Fully
Diluted EPS. Prior years have been restated to conform to the requirements
of SFAS 128.
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted-average shares outstanding. Diluted
earnings per share was calculated as follows:
Three Months Ended Six Months Ended
(Dollars in thousands except June 30, June 30,
per share data) 1998 1997 1998 1997
Earnings:
Net Income Available
to Common Shareholders $ 39,326 $ 28,018 $ 56,232 $ 48,023
Add-backs:
Dividends on Series B
preferred stock, net
of replacement funding 337 299 663 601
Dividends on preferred
securities of subsidiary
trust, net of tax 954 212 1,908 212
$ 40,617 $ 28,529 $ 58,803 $ 48,836
Shares:
Basic shares (weighted
-average shares
outstanding) 47,612,373 46,001,492 47,561,179 45,614,045
Stock option and restricted
stock dilution 722,628 1,362,321 804,613 1,184,474
Series B preferred stock 4,046,055 4,090,047 4,046,055 4,090,047
Subsidiary trust preferred
securities 3,125,000 694,444 3,125,000 347,222
55,506,056 52,148,304 55,536,847 51,235,788
Diluted Earnings
Per Share $ 0.73 $ 0.55 $ 1.06 $ 0.95
4. Preferred Securities of Subsidiary Trust
On June 11, 1997, CNF Trust I (the Trust), a Delaware business trust
wholly owned by the Company, issued 2,500,000 of its $2.50 Term Convertible
Securities, Series A (TECONS) to the public for gross proceeds of $125
million. The combined proceeds from the issuance of the TECONS and the
issuance to the Company of the common securities of the Trust were invested
by the Trust in $128.9 million aggregate principal amount of 5% convertible
subordinated debentures due June 1, 2012 (the Debentures) issued by the
Company. The Debentures are the sole assets of the Trust.
Holders of the TECONS are entitled to receive cumulative cash
distributions at an annual rate of $2.50 per TECONS (equivalent to a rate
of 5% per annum of the stated liquidation amount of $50 per TECONS). The
Company has guaranteed, on a subordinated basis, distributions and other
payments due on the TECONS, to the extent the Trust has funds available
therefor and subject to certain other limitations (the Guarantee). The
Guarantee, when taken together with the obligations of the Company under
the Debentures, the Indenture pursuant to which the Debentures were issued,
and the Amended and Restated Declaration of Trust of the Trust (including
its obligations to pay costs, fees, expenses, debts and other obligations
of the Trust (other than with respect to the TECONS and the common
securities of the Trust)), provide a full and unconditional guarantee of
amounts due on the TECONS.
PAGE 9
The Debentures are redeemable for cash, at the option of the Company, in
whole or in part, on or after June 1, 2000, at a price equal to 103.125% of
the principal amount, declining annually to par if redeemed on or after
June 1, 2005, plus accrued and unpaid interest. In certain circumstances
relating to federal income tax matters, the Debentures may be redeemed by
the Company at 100% of the principal plus accrued and unpaid interest. Upon
any redemption of the Debentures, a like aggregate liquidation amount of
TECONS will be redeemed. The TECONS do not have a stated maturity date,
although they are subject to mandatory redemption upon maturity of the
Debentures on June 1, 2012, or upon earlier redemption.
Each TECONS is convertible at any time prior to the close of business on
June 1, 2012, at the option of the holder into shares of the Company's
common stock at a conversion rate of 1.25 shares of the Company's common
stock for each TECONS, subject to adjustment in certain circumstances.
5. Contingencies
In connection with the spin-off of Consolidated Freightways Corporation
(CFC) on December 2, 1996, the Company agreed to indemnify certain states,
insurance companies and sureties against the failure of CFC to pay certain
worker's compensation and public liability claims that were pending as of
September 30, 1996. In some cases, these indemnities are supported by
letters of credit under which the Company is liable to the issuing bank and
by bonds issued by surety companies. In order to secure CFC's obligation
to reimburse and indemnify the Company against liability with respect to
these claims, CFC has provided the Company with approximately $30 million
of letters of credit and $50 million of real property collateral.
The Company has entered into a Transition Services Agreement to provide
CFC with certain information systems, data processing and other
administrative services and administers CFC's retirement and benefits
plans. The agreement has a three-year term although CFC may terminate any
or all services with six months notice. The Company may terminate all
services other than the telecommunications and data processing services at
any time after the first anniversary of the agreement, with six months
notice. Services performed by the Company under the agreement shall be
paid by CFC on an arm's-length negotiated basis.
The Internal Revenue Service (the "IRS") has proposed adjustments that
would require Emery Worldwide pay substantial additional aviation excise
taxes for the period from January 1, 1990 through September 30, 1995. The
Company has filed protests contesting these proposed adjustments and is
engaged in discussions with the administrative conference division (Appeals
Office) of the IRS.
The Company believes that there is legal authority to support the manner
in which it has calculated and paid the aviation excise taxes and,
accordingly, the Company intends to continue to vigorously challenge the
proposed adjustments. Nevertheless, the Company is unable to predict the
ultimate outcome of this matter. As a result, there can be no assurance
that the Company will not have to pay a substantial amount of additional
aviation excise taxes for the 1990 through 1995 tax period. In addition,
it is possible that the IRS may seek to increase the amount of the aviation
excise tax payable by Emery Worldwide for periods subsequent to September
30, 1995. As a result, there can be no assurance that this matter will not
have a material adverse effect on the Company.
PAGE 10
The IRS has also proposed a substantial adjustment for tax years 1987
through 1990 based on the IRS' position that certain aircraft maintenance
costs should have been capitalized rather than expensed for federal income
tax purposes. In addition, the Company believes it likely that the IRS will
propose an additional adjustment, based on the same IRS position with
respect to aircraft maintenance costs, for subsequent tax years. The
Company believes that its practice of expensing these types of maintenance
costs is consistent with industry practice. However, if this issue is
determined adversely to the Company, there can be no assurance that the
Company will not have to pay substantial additional tax. The Company is
unable to predict the ultimate outcome of this matter and intends to
vigorously contest the proposed adjustment. There can be no assurance,
however, that this matter will not have a material adverse effect on the
Company.
The Company has received notices from the Environmental Protection
Agency and others that it has been identified as a potentially responsible
party (PRP) under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) or other Federal and state environmental statutes at
several hazardous waste sites. Under CERCLA, PRPs are jointly and
severally liable for all site remediation and expenses. After
investigating the Company's involvement at such sites, based upon cost
studies performed by independent third parties, the Company believes its
obligations with respect to such sites would not have a material adverse
effect on the Company's financial position or results of operations.
In addition to the matters discussed above, the Company and its
subsidiaries are defendants in various lawsuits incidental to their
businesses. It is the opinion of management that the ultimate outcome of
these actions will not have a material impact on the Company's financial
position or results of operations.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues for the second quarter and first six months of 1998,
which increased 19.7% and 17.7% over the respective periods last year, were
records for the Company. The higher revenues were the result of increased
revenues at each of the Company's three operating segments despite signs of
a slowing economy in the second quarter of 1998.
The Company's second quarter operating income increased 25.6% over the
second quarter of 1997 while operating income for the first half of 1998
increased 9.9% over the first half of 1997. The increases resulted in
record operating income in both the second quarter and first half of 1998.
For the second quarter of 1998, the higher operating income compared to the
same period last year was primarily due to improved operating results at
the Con-Way and Other operating segments. Compared to the first half of
last year, increased operating income in the first half of 1998 was
primarily due to significantly higher operating income at the Con-Way
operating segment, which offset a decline in operating income from the
Company's two other business segments.
Effective January 1, 1998, the Company adopted AICPA SOP 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal-Use". For the second quarter and first half of 1998, the Company
capitalized $9.0 million and $15.8 million of internally developed internal-
use software. Internally developed software costs, as well as costs of
externally purchased software, are amortized over 3 years. In prior years,
purchased software was capitalized and only the costs of internally
developed software were recorded as operating expenses. In the second
quarter and first six months of 1998, the Company expensed approximately $7
million and $11 million, respectively, for the costs of replacing or
modifying certain information systems to address year 2000 issues.
PAGE 11
Other expenses in the second quarter and first half of 1998 decreased
20.0% and 8.3% from the respective periods in 1997. Decreases in both
periods were primarily due to lower interest expense on short-term
borrowings, which was partially offset by dividend requirements on the
preferred securities of a subsidiary trust issued in June 1997. Other
miscellaneous costs in both the quarter and year-to-date periods were lower
in 1998 than in 1997.
The effective income tax rate of 44.5% for the second quarter and
first six months of 1998 decreased from the rate of 45.5% for the
respective periods last year due primarily to lower estimated non-
deductible expenses in 1998.
Con-Way Transportation Services
Second-quarter revenues for Con-Way Transportation Services (Con-Way)
were 16.2% higher than the second quarter of last year and six-month
revenues were 16.9% higher than the same period last year. The increased
revenues for both the quarter and year-to-date periods were primarily due
to tonnage growth and higher yields. Tonnage for the regional carriers in
the second quarter and first six months of 1998 increased 6.5% and 8.4%
from the respective periods in 1997. Revenue per hundredweight for the
second quarter and first half of 1998 increased 11.6% and 9.4%,
respectively. The higher tonnage and improved pricing was primarily
attributable to increased demand for Con-Way's core regional service as
well as inter-regional joint services. New inter-regional joint service
between the western and southern carriers contributed to the 1998 second-
quarter earnings improvement while new joint services between the western
and central carriers benefited the entire first half of 1998. A portion of
the tonnage increase in the first half of 1998 was attributable to shippers
who redirected freight to Con-Way from unionized motor carriers due to
concerns with uncertainty over the National Master Freight Agreement (NMFA)
that was ultimately signed in February 1998. The NMFA is a labor agreement
applicable to several major unionized motor carriers.
Con-Way's operating income in the second quarter and first six months
of 1998 increased 34.7% and 52.4%, respectively, over the same periods last
year. The operating income improvement for both the quarter and year-to-
date periods was primarily due to higher revenues, improved freight system
utilization, increased load factor, expanded inter-regional joint service,
and lower fuel costs.
Emery Worldwide
Revenues in the second quarter and first half of 1998 for Emery
Worldwide (Emery) were 1.5% and 2.0% higher than the respective periods
last year due primarily to growth in international air freight revenues.
International revenues for the 1998 second quarter increased 2.6% from the
same quarter of 1997 while international revenues for the first half of
1998 increased 3.0% over the same period last year. Increases in
international revenues were primarily due to higher tonnage levels. North
American revenues in the second quarter of 1998 were essentially flat
compared to the 1997 second quarter while revenues in the first six months
of 1998 were 1.3% higher than the first six months of 1997. Compared to
the same periods last year, lower North American tonnage in the second
quarter and first half of 1998 was partially offset by improved yields.
Lower tonnage in 1998 was primarily due to strikes in the automotive
industry and slow-downs in the automotive and technology industries,
general softening of the economy in the second quarter and implementation
of Emery's yield management program designed to reprice or eliminate
certain low-margin business. The pricing actions for margin improvement
contributed to higher yields but constrained revenue growth.
PAGE 12
Emery's operating income in the second quarter of 1998 increased 0.5%
from the second quarter of last year while operating income in the first
half of 1998 decreased 26.8% from the first half of 1997. Lower operating
income in the first half of 1998 was primarily related to a larger-than-
expected decrease in commercial air freight revenues from the fourth
quarter of 1997 to the first quarter of 1998. This decrease was both
larger and occurred more quickly than had been anticipated, which prevented
Emery from making a corresponding reduction in operating expenses in the
first quarter of 1998. Emery subsequently reduced its air fleet by
decreasing its use of outside contractor lift capacity, consolidated
certain service center operations, and aligned staffing levels with freight
volumes. These cost reductions, combined with higher operating margins from
international markets, helped to restore second quarter operating income to
a level comparable to the same quarter of 1997. In connection with its
technology program, Emery incurred costs of $13.2 million in the second
quarter of 1998 ($26.4 million in the first half of 1998), compared with
$8.0 million in the second quarter of 1997 ($16.7 million in the first
half of 1997). Of the amounts incurred in 1998, $4.7 million were
capitalized in the second quarter ($8.3 million in the first half).
In August 1998, Roger Piazza was promoted to President and Chief
Executive Officer of Emery Worldwide. Chutta Ratnathicam, who served as
Emery's interim president since July 1998, has returned to his position as
Senior Vice President and Chief Financial Officer of the Company. Emery's
strategies will continue to focus on improving yields by re-pricing,
replacing, or eliminating low-margin business and reducing costs in-line
with expected revenue levels. These cost reduction strategies include
improving the utilization of the reduced fleet to lower airhaul costs and
refining the network modifications to more efficiently provide better
customer service.
Other Operations
The Other segment is comprised of Menlo Logistics (Menlo), operations
under the Priority Mail contract with the U.S. Postal Service, Road
Systems, and VantageParts. For the second quarter and first half of 1998,
revenues from the Other segment increased 110.1% and 94.2%, respectively,
over the same periods last year. Higher revenues for both the quarter and
first half of 1998 were due primarily to the initiation of Priority Mail
operations and increases at Menlo. Operating income for the 1998 second
quarter increased 66.5% from the 1997 second quarter due primarily to the
first quarterly operating income from the Priority Mail contract and improved
operating income from Menlo. Operating results declined from operating
income of $8.1 million in the first half of last year to an operating loss
of $5.4 million in the first half of 1998 due to 1998 first quarter losses
from the start-up phase of the Priority Mail contract.
Menlo increased second-quarter and first-half revenues in 1998 by
35.5% and 34.7%, respectively, over the same periods in 1997. Operating
income for the second quarter and first six months of 1998 improved 6.5%
and 11.0%, respectively, over 1997. Although the second-quarter revenue
increase in 1998 is partially attributable to new business, the operating
margin in the first half of 1998 was adversely impacted by related project
start-up costs.
Priority Mail revenues in the second quarter and first half of 1998
were $87.6 million and $130.5 million, respectively. There were no
Priority Mail operating results in the first half of 1997. Operating
income of $2.1 million in the second quarter of 1998 was the first
quarterly operating income from the Priority Mail operations while the 1998
year-to-date operating loss was $15.4 million. During the second quarter of
1998, the full system of 10 Priority Mail Processing Centers was completed
and became operational.
PAGE 13
LIQUIDITY AND CAPITAL RESOURCES
In the first half of 1998, the Company's cash and cash equivalents
declined $18.7 million from $97.6 million at December 31, 1997 to $78.9
million at June 30, 1998. Cash flow from operations of $107.9 million in
the first half of 1998 provided the primary funding for $125.3 million used
for capital expenditures and $15.1 million of dividend payments.
Cash flows from operating activities in the first half of 1998 were
$41.1 million lower than the first six months of 1997, primarily due to
asset and liability changes, which used $33.5 million in the first half of
1998 but provided $28.9 million in the same period of 1997. Net income and
non-cash adjustments, which were $21.4 million higher in the first half of
1998 compared to the first half of 1997, partially offset the greater cash
requirements related to changes in assets and liabilities. Non-cash
adjustments include depreciation, amortization, deferred taxes, and gains
from property disposals.
Capital expenditures for the first half of 1998 were $50.6 million
higher than the same period last year due primarily to expenditures of
$33.7 million related to the Priority Mail contract. Proceeds from sales
of certain equipment and idle properties generated an additional $6.8
million in the first half of 1998 compared to the first half of 1997.
In the first half of 1998, proceeds from the exercise of stock options
decreased $25.5 million from the same period last year and common and
preferred stock dividend payments of $15.1 million were only slightly lower
than the same period last year.
Short-term borrowings provided cash of $7.0 million in the first half
of 1998, compared to a net payment of $155.0 million in the first half of
1997, which was largely facilitated by $121.4 million in proceeds from the
issuance of preferred stock of a subsidiary trust in June 1997. Other net
debt repayments used $5.4 million in the first half of 1998 compared to
$2.0 million in the same period last year.
The Company's ratio of total debt to capital decreased to 36.5% at
June 30, 1998 from 37.9% at December 31, 1997 due primarily to higher
retained earnings from net income.
At June 30, 1998, the Company had available for borrowings $265.6
million under its $350 million unsecured credit facility and another $88.0
million under $95 million of uncommitted lines of credit.
The $350 million facility is also available for issuance of letters of
credit. Under that facility, outstanding letters of credit totaled $84.4
million at June 30, 1998. Under several other unsecured facilities, $55.4
million of letters of credit were outstanding at that date.
Cyclicality and Seasonality
The trucking and air freight industries are affected directly by
general economic conditions and seasonal fluctuations, both of which affect
the amount of freight to be transported. The months of September and
October of each year usually have the highest business levels while the
months of January and February of each year usually have the lowest
business levels.
PAGE 14
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133 establishes
accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Qualifying hedges allow a derivative's gains and losses to offset related
results on the hedged item in the income statement. SFAS 133 is effective
for fiscal years beginning after June 15, 1999. Management is assessing
the impact of adopting SFAS 133 on the Company's financial statements and
has not determined the timing of adoption.
Other Items
The Company is currently replacing or modifying certain information
systems to address year 2000 issues. At June 30, 1998, the Company's
estimate of remaining expenditures for year 2000 compliance was
approximately $24 million. These costs represent expenditures in addition
to normal systems replacement and maintenance.
Forward-Looking Statements
Certain statements included or incorporated by reference herein
constitute "forward-looking statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, and are subject to a
number of risks and uncertainties. Any such forward-looking statements
contained or incorporated by reference herein should not be relied upon as
predictions of future events. Certain such forward-looking statements can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "estimates" or "anticipates" or the negative thereof or other
variations thereof or comparable terminology, or by discussions of
strategy, plans or intentions. Such forward-looking statements are
necessarily dependent on assumptions, data or methods that may be incorrect
or imprecise and they may be incapable of being realized. In that regard,
the following factors, among others and in addition to the matters
discussed below and elsewhere in this document and in documents
incorporated or deemed to be incorporated by reference herein, could cause
actual results and other matters to differ materially from those in such
forward-looking statements: changes in general business and economic
conditions; increasing domestic and international competition and pricing
pressure; changes in fuel prices; uncertainty regarding the Company's
Priority Mail contract with the United States Postal Service; labor
matters, including changes in labor costs, renegotiations of labor
contracts and the risk of work stoppages or strikes; changes in
governmental regulation; environmental and tax matters, including the
aviation excise tax and aircraft maintenance tax matters discussed herein;
and matters relating to the spin-off of CFC. In that regard, the Company
is or may be subject to substantial liabilities with respect to certain
matters relating to CFC's business and operations, including, without
limitation, guarantees of certain indebtedness of CFC and liabilities for
employment-related matters. Although CFC is, in general, either the
primary obligor or jointly and severally liable with the Company with
respect to these matters, a failure to pay or other default by CFC with
respect to the obligations as to which the Company is or may be, or may be
perceived to be, liable, whether because of CFC's bankruptcy or insolvency
or otherwise, could lead to substantial claims against the Company. As a
result of the foregoing, no assurance can be given as to future results of
operations or financial condition.
PAGE 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously reported, the Company has been designated a potentially
responsible party (PRP) by the EPA with respect to the disposal of
hazardous substances at various sites. The Company expects its share of
the clean-up cost will not have a material adverse effect on the Company's
financial position or results of operations. The Company expects the costs
of complying with existing and future federal, state and local
environmental regulations to continue to increase. On the other hand, it
does not anticipate that such cost increases will have a materially adverse
effect on the Company. Certain legal matters are discussed in Note 5 in
the Notes to Consolidated Financial Statements in Part I of this form.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
99(a) Computation of Ratios of Earnings to Fixed Charges
-- the ratios of earnings to fixed charges were 3.4
and 3.0 for the six months ended June 30, 1998 and
1997, respectively.
(b) Computation of Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividends -- the ratios
of earnings to combined fixed charges and preferred
stock dividends were 3.2 and 2.9 for the six months
ended June 30, 1998 and 1997, respectively.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company (Registrant) has duly caused this Form
10-Q Quarterly Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CNF Transportation Inc.
(Registrant)
August 11, 1998 /s/Chutta Ratnathicam
Chutta Ratnathicam
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 78,899
<SECURITIES> 0
<RECEIVABLES> 747,644
<ALLOWANCES> (19,285)
<INVENTORY> 40,276
<CURRENT-ASSETS> 1,036,875
<PP&E> 1,609,060
<DEPRECIATION> (681,456)
<TOTAL-ASSETS> 2,534,061
<CURRENT-LIABILITIES> 857,176
<BONDS> 467,680
125,000
130,715
<COMMON> 340,712
<OTHER-SE> 239,031
<TOTAL-LIABILITY-AND-EQUITY> 2,534,061
<SALES> 0
<TOTAL-REVENUES> 2,289,520
<CGS> 0
<TOTAL-COSTS> 2,160,712
<OTHER-EXPENSES> 20,198
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,981
<INCOME-PRETAX> 108,610
<INCOME-TAX> 48,331
<INCOME-CONTINUING> 60,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,232
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.06
</TABLE>
Exhibit 99(a)
CNF TRANSPORTATION INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Six Months Ended
June 30
1998 1997
Fixed Charges:
Interest Expense $ 16,981 $ 21,067
Capitalized Interest 969 1,321
Dividend Requirement on Series B
Preferred Stock [1] 5,616 6,118
Interest Component of
Rental Expense [2] 19,134 16,337
$ 42,700 $ 44,843
Earnings:
Income before Taxes $ 108,610 $ 95,199
Fixed Charges 42,700 44,843
Capitalized Interest (969) (1,321)
Preferred Dividend
Requirements [3] (5,616) (6,118)
$ 144,725 $ 132,603
Ratio of Earnings to Fixed Charges: 3.4 x 3.0 x
[1] Dividends on shares of the Series B cumulative convertible preferred
stock are used to pay debt service on notes issued by the Company's
Thrift and Stock Plan.
[2] Estimate of the interest portion of lease payments. The six month
period ended June 30, 1997 was restated for a change in the estimation
method.
[3] Preferred stock dividend requirements included in fixed charges but not
deducted in the determination of Income before Taxes.
Exhibit 99(b)
CNF TRANSPORTATION INC.
COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in thousands)
Six Months Ended
June 30
1998 1997
Combined Fixed Charges and Preferred
Stock Dividends:
Interest Expense $ 16,981 $ 21,067
Capitalized Interest 969 1,321
Dividend Requirement on Series B
Preferred Stock [1] 5,616 6,118
Dividend Requirement on Preferred
Securities of Susidiary Trust 3,126 347
Interest Component of
Rental Expense [2] 19,134 16,337
$ 45,826 $ 45,190
Earnings:
Income before Taxes $ 108,610 $ 95,199
Fixed Charges 45,826 45,190
Capitalized Interest (969) (1,321)
Preferred Dividend Requirements [3] (5,616) (6,118)
$ 147,851 $ 132,950
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends: 3.2 x 2.9 x
[1] Dividends on shares of the Series B cumulative convertible preferred
stock are used to pay debt service on notes issued by the Company's
Thrift and Stock Plan.
[2] Estimate of the interest portion of lease payments. The six month
period ended June 30, 1997 was restated for a change in the estimation
method.
[3] Preferred stock dividend requirements included in fixed charges but not
deducted in the determination of Income before Taxes.
