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 March 31, 1998
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
COMMISSION FILE NUMBER 1-5046
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 April 30, 1998: 47,580,851
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CNF TRANSPORTATION INC.
FORM 10-Q
Quarter Ended March 31, 1998
____________________________________________________________________________
____________________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Statements of Consolidated Income -
Three Months Ended March 31, 1998 and 1997 5
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CNF TRANSPORTATION INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 95,301 $ 97,617
Trade accounts receivable, net of allowances 671,259 703,785
Other accounts receivable 50,634 32,067
Operating supplies, at lower of average
cost or market 36,573 36,580
Prepaid expenses 60,125 35,682
Deferred income taxes 105,005 103,656
Total Current Assets 1,018,897 1,009,387
PROPERTY, PLANT AND EQUIPMENT, NET
Land 110,132 109,768
Buildings and improvements 314,827 301,245
Revenue equipment 691,915 685,618
Other equipment and leasehold improvements 441,334 400,065
1,558,208 1,496,696
Accumulated depreciation and amortization (647,714) (616,854)
910,494 879,842
OTHER ASSETS
Restricted funds 10,335 10,601
Deposits and other assets 155,849 120,872
Unamortized aircraft maintenance, net 122,479 123,352
Costs in excess of net assets of businesses
acquired, net of accumulated amortization 275,127 277,442
563,790 532,267
TOTAL ASSETS $2,493,181 $2,421,496
The accompanying notes are an integral part of these statements.
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CNF TRANSPORTATION INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 241,761 $ 268,064
Accrued liabilities 427,570 423,237
Accrued claims costs 96,325 99,848
Current maturities of long-term debt and
capital leases 5,262 4,875
Short-term borrowings 71,000 -
Federal and other income taxes 23,839 10,114
Total Current Liabilities 865,757 806,138
LONG-TERM LIABILITIES
Long-term debt and guarantees 356,905 362,671
Long-term obligations under capital leases 110,797 110,817
Accrued claims costs 58,956 55,030
Employee benefits 148,901 141,351
Other liabilities and deferred credits 60,872 72,428
Deferred income taxes 92,073 89,958
Total Liabilities 1,694,261 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 862,653 and 865,602 shares,
respectively 9 9
Additional paid-in capital, preferred stock 131,201 131,649
Deferred TASP compensation (100,159) (101,819)
Total Preferred Shareholders' Equity 31,051 29,839
Common stock, $.625 par value; authorized
100,000,000 shares; issued 54,539,936
and 54,370,182 shares, respectively 34,087 33,981
Additional paid-in capital, common stock 304,867 302,256
Deferred compensation, restricted stock (2,440) (2,528)
Cumulative translation adjustment (Note 2) (7,339) (6,647)
Retained earnings 485,399 473,250
Cost of repurchased common stock
(6,963,965 and 6,977,848 shares,
respectively) (171,705) (172,048)
Total Common Shareholders' Equity 642,869 628,264
Total Shareholders' Equity 673,920 658,103
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,493,181 $2,421,496
The accompanying notes are an integral part of these statements.
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CNF TRANSPORTATION INC.
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in thousands except per share amounts)
Three Months Ended
March 31,
1998 1997
REVENUES
Con-Way Transportation Services $ 393,605 $ 334,458
Emery Worldwide 521,633 508,552
Other 174,628 99,618
1,089,866 942,628
COSTS AND EXPENSES
Con-Way Transportation Services
Operating Expenses 274,525 247,913
Selling and Administrative Expenses 50,080 43,271
Depreciation 18,499 14,797
343,104 305,981
Emery Worldwide
Operating Expenses 437,295 406,846
Selling and Administrative Expenses 65,686 74,252
Depreciation 11,139 8,947
514,120 490,045
Other
Operating Expenses 168,660 88,102
Selling and Administrative Expenses 15,940 6,868
Depreciation 3,237 1,265
187,837 96,235
1,045,061 892,261
OPERATING INCOME (LOSS)
Con-Way Transportation Services 50,501 28,477
Emery Worldwide 7,513 18,507
Other (13,209) 3,383
44,805 50,367
OTHER INCOME (EXPENSE)
Interest Expense (8,532) (10,805)
Dividend Requirement on Preferred
Securities of Subsidiary Trust (Note 4) (1,563) -
Miscellaneous, Net (633) 610
(10,728) (10,195)
Income before Income Taxes 34,077 40,172
Income Taxes 15,164 18,228
Net Income 18,913 21,944
Preferred Dividends 2,007 1,939
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS $ 16,906 $ 20,005
Weighted-Average Shares 47,509,416 45,222,202
EARNINGS PER SHARE (Note 3)
Basic $ 0.36 $ 0.44
Diluted $ 0.33 $ 0.40
The accompanying notes are an integral part of these statements.
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CNF TRANSPORTATION INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31,
1998 1997
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 97,617 $ 82,094
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 18,913 21,944
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 37,019 28,008
Increase in deferred income taxes 766 5,233
Amortization of deferred compensation 1,885 1,562
Gains from property disposals, net (1,465) (638)
Changes in assets and liabilities:
Receivables 13,959 5,843
Prepaid expenses (24,443) (18,968)
Accounts payable (23,485) (3,984)
Accrued liabilities 31,322 28,824
Accrued incentive compensation (26,989) (9,963)
Accrued claims costs 403 (4,286)
Federal and other income taxes 13,725 362
Employee benefits 7,550 5,124
Deferred charges and credits (38,089) (9,993)
Other (7,789) (12,105)
Net Cash Provided by Operating Activities 3,282 36,963
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (69,663) (35,156)
Proceeds from sales of property 6,364 869
Net Cash Used by Investing Activities (63,299) (34,287)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments of long-term debt
and capital lease obligations (5,399) (1,797)
Net borrowings (payments) under revolving
lines of credit 71,000 (10,000)
Proceeds from exercises of stock options 2,473 15,956
Payments of common dividends (4,757) (4,534)
Payments of preferred dividends (5,616) (6,118)
Net Cash Provided (Used) by Financing Activities 57,701 (6,493)
Decrease in Cash and Cash Equivalents (2,316) (3,817)
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 95,301 $ 78,277
The accompanying notes are an integral part of these statements.
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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.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". SOP 98-1,
which provides for the capitalization of the costs of internal-use software
if certain criteria are met, is effective for fiscal years beginning after
December 15, 1998. As provided by SOP 98-1, the Company has elected to
adopt the pronouncement early and has applied the new provisions
prospectively as of January 1, 1998. Prior to adoption of SOP 98-1, it was
the Company's policy to expense all internally developed internal-use
software costs. For the three months ended March 31, 1998, costs of $6.8
million were capitalized as internally developed internal-use software and
are included in Other Assets in the Consolidated Balance Sheets.
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 for the three
months ended March 31, 1998 and 1997 were $18,221 and $18,131,
respectively, and included net income and foreign currency translation
adjustments.
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
March 31,
(Dollars in thousands except per share data) 1998 1997
Earnings:
Net Income Available to Common
Shareholders $ 16,906 $ 20,005
Add-backs:
Dividends on Series B preferred stock,
net of replacement funding 326 302
Dividends on preferred
securities of subsidiary
trust, net of tax 954 -
$ 18,186 $ 20,307
Shares:
Basic shares (weighted-average shares
outstanding) 47,509,416 45,222,202
Stock option and restricted
stock dilution 780,797 1,243,183
Series B preferred stock 4,061,370 4,258,592
Subsidiary trust preferred
securities 3,125,000 -
55,476,583 50,723,977
Diluted Earnings Per Share $ 0.33 $ 0.40
========== ==========
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
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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.
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 will administer 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 has notified a subsidiary of the Company of
proposed adjustments in aviation transportation excise tax caused by a
difference in methods used to calculate the tax. The Company intends to
vigorously defend against the proposed adjustments. Although the Company
is unable to predict the ultimate outcome, it is the opinion of management
that this action will not have a material impact on the Company's financial
position or results of operations.
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.
PAGE 10
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.
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
GENERAL
Total Company revenues for the first quarter of 1998 increased 15.6%
over the first quarter of 1997. The Company's higher revenues were
primarily attributable to revenue growth at Con-Way Transportation Services
(Con-Way), Menlo Logistics (Menlo), and the Priority Mail operations, which
was awarded in April 1997.
The Company's operating income for the first quarter of 1998 decreased
11.0% from the first quarter of 1997. Con-Way's operating income of $50.5
million in the first quarter of 1998 represented a new record for the
Company's subsidiary. Con-Way's achievement was partially offset by lower
income from Emery Worldwide (Emery) and operating losses from the Priority
Mail operations.
Effective January 1, 1998, the Company adopted early AICPA SOP 98-1.
As a result, the Company capitalized $6.8 million of internally developed
internal-use software costs that would have been recorded as operating
expenses under the Company's previous accounting policies. (See Note 1 of
the Notes to Consolidated Financial Statements).
Other expenses for the 1998 first quarter increased 5.2% over the
first quarter of 1997. First-quarter interest expense in 1998 decreased
from the 1997 first quarter due primarily to lower borrowings under the
Company's unsecured credit facility. The lower interest expense in the
first quarter of 1998 was substantially offset by dividend requirements on
the preferred securities of a subsidiary trust issued in June 1997.
The effective income tax rate of 44.5% in the 1998 first quarter
decreased from the rate of 45.4% in the 1997 first quarter. The decrease
was primarily due to estimated lower non-deductible expenses for 1998.
PAGE 11
CON-WAY TRANSPORTATION SERVICES
Con-Way's revenues for the first quarter of 1998 increased 17.7% over
the same quarter of last year due primarily to increased freight volumes
and improved yields. Compared to the first quarter of last year, tonnage
and revenue per hundredweight in the first quarter of 1998 increased 10.6%
and 7.1%, respectively. With strong economic conditions in the first
quarter of 1998, less-than-truckload tonnage increased 10.2% over last
year's first quarter primarily due to revenue growth in recently-expanded
geographic areas, redirected freight from shippers concerned with
uncertainty over settlement of the National Master Freight Agreement, and
new service offerings, which included an expansion of the premium joint
services that link Con-Way's regional carriers.
Con-Way's record operating income in the first quarter of 1998
increased 77.3% over the same quarter of last year. The higher operating
income was primarily due to increased revenues, a more favorable pricing
environment, increased load factor, improved operating efficiencies, and a
more profitable service mix. The expansion of higher-margin inter-regional
joint services, continued leveraging of the existing infrastructure, and
lower fuel costs also contributed to a higher operating margin in the first
quarter of 1998.
Con-Way's management is continuing its strategic efforts to more
efficiently utilize its freight infrastructure while creating and expanding
new services it believes will improve operating margins. As part of this
strategy, Con-Way recently announced an expansion of joint services between
the central and western regional carriers that completes a plan to provide
full nationwide coverage among all three regional carriers.
EMERY WORLDWIDE
Emery's 1998 first-quarter revenues exceeded 1997 first-quarter
revenues by 2.6%. The higher revenues reflect growth from several of
Emery's specialty operations, as total air freight revenues were
essentially flat. Compared to the first quarter of the last year, North
American and international tonnage in the first quarter of 1998 grew 1.2%
and 8.5%, respectively. North American commercial revenues were down 1.0%
compared to the 1997 first quarter and commercial international revenues
were flat. In the first quarter of 1998, slow-downs in the automotive and
technology industries adversely impacted demand in the airfreight industry.
In addition, the first quarter of 1998 was affected by mild winter
conditions, which can shift freight demand to competing surface
transportation.
Emery's operating income for the first quarter of 1998 decreased 59.4%
from the first quarter of 1997. The 19.1% decrease in revenues from the
fourth quarter of 1997 to the first quarter of 1998 was larger than
expected and the suddenness of the revenue decline precluded a commensurate
reduction in expense. While 1998 first-quarter revenues were lower than
expected, costs had been set at a level designed to ensure that higher
projected volumes could be adequately serviced. This relationship between
lower revenues and comparably higher costs adversely affected
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operating income in the first quarter of 1998 when compared to the same
quarter of last year.
Emery's management strategy includes measures intended to improve
yields and reduce costs in-line with revenue levels. Emery has reduced the
size of its air fleet, consolidated certain service center operations, and
aligned staff with freight volumes. Emery's management strategy includes
efforts to improve yields by re-pricing or replacing low margin business.
OTHER OPERATIONS
The Other segment is comprised of Menlo, the Priority Mail operations,
Road Systems, and VantageParts. For the first quarter of 1998, revenue
increases at Menlo and Priority Mail were the primary contributors to the
Other segment's 75.3% revenue increase from the first quarter of 1997. The
Other segment's $13.2 million operating loss in the first quarter of 1998,
which compared unfavorably to operating income of $3.4 million in the first
quarter of 1997, was the result of a $17.6 million operating loss from the
Priority Mail operations.
Menlo, which is the largest component of the Other segment, increased
first-quarter revenues in 1998 by $30.3 million or 33.8% over the same
quarter of last year while operating income increased 20.8%. Menlo's
operating results continue to benefit from a service mix that includes an
increasing proportion of higher-margin integrated logistics projects.
Menlo's results in the first quarter of 1998 also included additional
proposal costs incurred in securing several significant logistics
management contracts.
Priority Mail revenues in the first quarter of 1998 totaled $42.9
million compared to no Priority Mail operating results in the first quarter
of 1997. An operating loss of $17.6 million from the Priority Mail
contract included a $6.0 million charge for costs of delaying the start-up
of the remaining postal sortation centers. While these costs exceeded
early estimates, the Company believes that its strategy to improve
productivity while providing quality service should improve operating
results for the duration of the contract.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1998, the Company's cash and cash equivalents
declined $2.3 million to $95.3 million. Overall, cash from operations of
$3.3 million and $71.0 million of additional short-term borrowings provided
most of the funding for $69.7 million of capital expenditures and $10.4
million of dividend payments.
Cash flow from operations decreased $33.7 million compared with the
first quarter of 1997 primarily due to an increase in deferred costs,
incentive compensation payments and changes in other working capital items.
In the first quarter of 1998, cash provided by net income and non-cash
adjustments to net income increased $1.0 million when compared to the same
quarter last year. Adjustments to net income include depreciation and
amortization, deferred taxes, and gains from property disposals.
PAGE 13
Capital expenditures for the first quarter of $69.7 million were $34.5
million above the expenditures for the same period last year. $23.1
million of the 1998 first-quarter capital expenditures were related to the
Priority Mail contract. Proceeds from sales of certain equipment and idle
properties generated an added $5.5 million compared to the first quarter of
1997.
During the first quarter of 1998, the Company used $71.0 million of
short-term borrowings consisting of $46 million under the $350 million
unsecured credit facility and $25 million from other uncommitted lines of
credit. In the first quarter of last year, net short-term borrowings
decreased $10.0 million. Other debt repayments used $5.4 million compared
to $1.8 million last year. At March 31, 1998, the Company had available
for borrowings and letters of credit $202.9 million from its $350 million
unsecured credit facility and another $70.0 million under $95.0 million of
uncommitted lines of credit.
Proceeds from the exercise of stock options provided $2.5 million of
cash compared to $16.0 million provided in the prior year's quarter.
Payments of common and preferred stock dividends used $10.4 million of cash
and were only slightly below the payments made in the first quarter of last
year.
The Company's ratio of total debt to capital increased to 40.5% at
March 31, 1998 from 37.9% at December 31, 1997. The increase was due to
higher short-term borrowings. The current ratio was 1.2 to 1 at March 31,
1998, compared to 1.3 to 1 at December 31, 1997.
Outstanding letters of credit totaled $101.1 million at March 31, 1998
under the Company's $350 million unsecured credit facility and $68.0
million was outstanding under several unsecured letter of credit
facilities.
Other Items
The Company is currently replacing or modifying certain information
systems to address year 2000 issues, but is unable to predict with
certainty the total costs of addressing these issues. However, after
expensing approximately $4 million in the first quarter of 1998, the
Company currently estimates that remaining expenditures for year 2000
compliance will total approximately $24 million. These costs represent
expenditures in addition to normal systems replacement and maintenance.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information". Provisions of the new pronouncement
are to be applied in annual financial statements for fiscal years ending
after December 15, 1997. SFAS 131 supersedes SFAS 14, which required an
entity to report segment information on the basis of industry and
geographic area. Under SFAS 131, the criteria for segmentation are based
on the way that management organizes the enterprise for making operating
decisions and assessing performance. The Company will continue to evaluate
its businesses to ensure that the 1998 year-end adoption of the
pronouncement results in a meaningful and compliant segment presentation.
PAGE 14
In March 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities". This statement requires the costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5
does not apply to deferred contract costs. Application of this statement
is required for financial statements for fiscal years beginning after
December 15, 1998. The Company does not expect adoption of SOP 98-5 to
have a material impact on the Company's financial position or results of
operations.
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, including
costs of delays in the openings of the Priority Mail Processing Centers;
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 in
documents incorporated by reference; Emery's results of operations for the
first quarter of 1998 that have been adversely affected by less than
planned revenues; 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 4. Submission of Matters to a Vote of Security Holders
At the Annual Shareholders Meeting held April 27, 1998, the following
proposals were presented with the indicated voting results:
For the purpose of electing members of the Board of Directors, the
votes representing shares of Common and Preferred stock, respectively, were
cast as follows:
Nominee For Against
Earl F. Cheit 45,730,803 977,376
Richard A. Clarke 45,753,441 954,738
W. Keith Kennedy, Jr. 45,763,155 945,024
Richard B. Madden 45,750,612 957,567
The following directors did not stand for election and continued in
office as directors after the Annual Shareholders Meeting: Robert Alpert,
Margaret G. Gill, Robert Jaunich II, Donald E. Moffitt, Michael J. Murray,
Robert D. Rogers, William J. Schroeder, and Robert P. Wayman
The appointment of Arthur Andersen LLP as independent public
accountants for the year 1998 was approved by the following vote: For
46,107,769; Against 310,154; Abstain 290,256.
ITEM 5. Other Information
On May 4, 1998, the Board of Directors elected Gregory L. Quesnel as
Chief Executive Officer, succeeding Donald E. Moffitt, who will continue as
Chairman of the Board of Directors. Quesnel was also elected a member of
the Board of Directors, increasing the Board size to 13.
PAGE 16
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27(a) Financial Data Schedule for the quarter ended March 31,
1998.
(b) Financial Data Schedule for the periods shown below.
The schedules reflect restatement for the
implementation of FASB SFAS 128 and the spin-off of
Consolidated Freightways Corporation.
Three-month period ended March 31, 1997
Six-month period ended June 30, 1997
Nine-month period ended September 30, 1997
Fiscal year ended December 31, 1997
(c) Financial Data Schedule for the periods shown below.
The schedules reflect restatement for the
implementation of FASB SFAS 128 and the spin-off of
Consolidated Freightways Corporation.
Fiscal year ended December 31, 1995
Three-month period ended March 31, 1996
Six-month period ended June 30, 1996
Nine-month period ended September 30, 1996
Fiscal year ended December 31, 1996
99(a) Computation of Ratios of Earnings to Fixed Charges --
the ratios of earnings to fixed charges were 2.4 and
2.6 for the three months ended March 31, 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 2.3 and 2.6 for the three months
ended March 31, 1998 and 1997, respectively.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March
31, 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)
May 12, 1998 /s/Chutta Ratnathicam
Chutta Ratnathicam
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CAPTION>
Exhibit 27(a)
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 95,301
<SECURITIES> 0
<RECEIVABLES> 691,085
<ALLOWANCES> (19,826)
<INVENTORY> 36,573
<CURRENT-ASSETS> 1,018,897
<PP&E> 1,558,208
<DEPRECIATION> (647,714)
<TOTAL-ASSETS> 2,493,181
<CURRENT-LIABILITIES> 865,757
<BONDS> 467,702
125,000
131,210
<COMMON> 338,954
<OTHER-SE> 203,756
<TOTAL-LIABILITY-AND-EQUITY> 2,493,181
<SALES> 0
<TOTAL-REVENUES> 1,089,866
<CGS> 0
<TOTAL-COSTS> 1,045,061
<OTHER-EXPENSES> 10,728
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,532
<INCOME-PRETAX> 34,077
<INCOME-TAX> 15,164
<INCOME-CONTINUING> 18,913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,906
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CAPTION>
Exhibit 27(b)
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 78277 136546 163885 97617
<SECURITIES> 0 0 0 0
<RECEIVABLES> 570626 568480 674350 723940
<ALLOWANCES> (19824) (19798) (21169) (20155)
<INVENTORY> 32400 34287 36462 36580
<CURRENT-ASSETS> 824666 889056 1000756 1009387
<PP&E> 1295106 1333503 1396911 1496696
<DEPRECIATION> (532630) (558954) (587891) (616854)
<TOTAL-ASSETS> 2103137 2180344 2334974 2421496
<CURRENT-LIABILITIES> 811242 718657 824624 806138
<BONDS> 473642 473528 473508 473488
0 125000 125000 125000
132691 132136 131877 131658
<COMMON> 291056 303794 310180 336237
<OTHER-SE> 109143 136643 167338 190208
<TOTAL-LIABILITY-AND-EQUITY> 2103137 2180344 2334974 2421496
<SALES> 0 0 0 0
<TOTAL-REVENUES> 942628 1945191 3072553 4266801
<CGS> 0 0 0 0
<TOTAL-COSTS> 892261 1827957 2873472 4001934
<OTHER-EXPENSES> 10195 22035 31139 43053
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 10805 21067 29882 39553
<INCOME-PRETAX> 40172 95199 167942 221814
<INCOME-TAX> 18228 43266 76364 100925
<INCOME-CONTINUING> 21944 51933 91578 120889
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 20005 48023 85717 113003
<EPS-PRIMARY> .44 1.03 1.79 2.44
<EPS-DILUTED> .40 .95 1.65 2.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CAPTION>
Exhibit 27(c)
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 59,787 75,113 85,308 81,584 82,094
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 526,899 480,175 519,399 543,978 561,093
<ALLOWANCES> (16,870) (16,219) (16,615) (12,971) (18,712)
<INVENTORY> 26,578 25,202 28,772 33,772 32,916
<CURRENT-ASSETS> 771,986 727,759 756,869 807,711 815,895
<PP&E> 980,269 1,025,015 1,069,744 1,122,339 1,259,368
<DEPRECIATION> (405,595) (418,974) (431,372) (457,743) (506,719)
<TOTAL-ASSETS> 2,084,958 2,138,286 2,205,373 2,282,126 2,081,866
<CURRENT-LIABILITIES> 593,667 640,393 687,073 756,474 815,086
<BONDS> 480,410 477,273 477,253 477,239 477,201
0 0 0 0 0
145,166 144,493 143,932 143,551 133,117
<COMMON> 271,853 272,699 272,798 272,732 275,126
<OTHER-SE> 305,341 298,322 307,263 321,969 100,036
<TOTAL-LIABILITY-AND-EQUITY> 2,084,958 2,138,286 2,205,373 2,282,126 2,081,866
<SALES> 0 0 0 0 0
<TOTAL-REVENUES> 3,290,077 847,873 1,742,209 2,677,999 3,662,183
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 3,103,390 812,659 1,654,338 2,535,712 3,470,035
<OTHER-EXPENSES> 33,745 9,531 20,865 33,216 45,016
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 33,407 9,664 19,555 29,498 39,766
<INCOME-PRETAX> 152,942 25,683 67,006 109,071 147,132
<INCOME-TAX> 66,723 12,020 29,625 48,391 66,951
<INCOME-CONTINUING> 86,219 13,663 37,381 60,680 80,181
<DISCONTINUED> (28,854) (13,383) (23,445) (26,890) (52,633)
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 46,566 (1,854) 9,619 27,332 18,956
<EPS-PRIMARY> 1.79 0.26 0.75 1.23 1.63
<EPS-DILUTED> 1.64 0.24 0.69 1.13 1.48
</TABLE>
Exhibit 99(a)
CNF TRANSPORTATION INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Three Months Ended
March 31,
1998 1997
Fixed Charges:
Interest Expense $ 8,532 $ 10,805
Capitalized Interest 490 702
Dividend Requirement on Series B
Preferred Stock [1] 3,003 3,087
Interest Component of
Rental Expense [2] 9,863 8,067
$ 21,888 $ 22,661
Earnings:
Income before Taxes 34,077 40,172
Fixed Charges 21,888 22,661
Capitalized Interest (490) (702)
Preferred Dividend Requirements [3] (3,003) (3,087)
$ 52,472 $ 59,044
Ratio of Earnings to Fixed Charges: 2.4 x 2.6 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 three month
period ended March 31, 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)
Three Months Ended
March 31,
1998 1997
Combined Fixed Charges and Preferred
Stock Dividends:
Interest Expense $ 8,532 $ 10,805
Capitalized Interest 490 702
Dividend Requirement on Series B
Preferred Stock [1] 3,003 3,087
Dividend Requirement on Preferred
Securities of Subsidiary Trust 1,563 -
Interest Component of
Rental Expense [2] 9,863 8,067
$ 23,451 $ 22,661
Earnings:
Income before Taxes 34,077 40,172
Fixed Charges 23,451 22,661
Capitalized Interest (490) (702)
Preferred Dividend Requirements [3] (3,003) (3,087)
$ 54,035 $ 59,044
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends: 2.3 x 2.6 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 three month
period ended March 31, 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.
