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, 1999
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, 1999: 48,122,833
CNF TRANSPORTATION INC.
FORM 10-Q
Quarter Ended March 31, 1999
____________________________________________________________________________
____________________________________________________________________________
PAGE 2
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Statements of Consolidated Income -
Three Months Ended March 31, 1999 and 1998 5
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CNF TRANSPORTATION INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 79,531 $ 73,897
Trade accounts receivable, net of allowances 776,567 810,550
Other accounts receivable 29,099 51,865
Operating supplies, at lower of average
cost or market 41,215 41,764
Prepaid expenses 54,648 32,741
Deferred income taxes 90,740 89,544
Total Current Assets 1,071,800 1,100,361
PROPERTY, PLANT AND EQUIPMENT, NET
Land 113,198 114,146
Buildings and leasehold improvements 490,157 468,123
Revenue equipment 727,461 714,195
Other equipment 434,828 425,476
1,765,644 1,721,940
Accumulated depreciation and amortization (766,719) (737,464)
998,925 984,476
OTHER ASSETS
Deferred charges and other assets 120,773 128,627
Capitalized software, net 73,219 64,285
Unamortized aircraft maintenance, net 156,156 143,349
Goodwill, net 275,036 268,314
625,184 604,575
TOTAL ASSETS $2,695,909 $2,689,412
The accompanying notes are an integral part of these statements.
PAGE 4
CNF TRANSPORTATION INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 264,715 $ 285,832
Accrued liabilities 421,116 446,171
Accrued claims costs 114,266 108,028
Current maturities of long-term debt and
capital leases 6,460 5,259
Short-term borrowings 29,000 43,000
Federal and other income taxes 35,182 12,340
Total Current Liabilities 870,739 900,630
LONG-TERM LIABILITIES
Long-term debt and guarantees (Note 2) 350,505 356,905
Long-term obligations under capital leases 110,706 110,730
Accrued claims costs 58,238 58,388
Employee benefits 198,260 190,268
Other liabilities and deferred credits 47,153 55,268
Deferred income taxes 117,454 115,868
Total Liabilities 1,753,055 1,788,057
COMMITMENTS AND CONTINGENCIES (Note 7)
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
CONVERTIBLE DEBENTURES OF THE COMPANY (Note 6) 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 849,232 and
854,191 shares, respectively 8 9
Additional paid-in capital, preferred stock 129,160 129,914
Deferred compensation (93,027) (94,836)
Total Preferred Shareholders' Equity 36,141 35,087
Common stock, $.625 par value; authorized
100,000,000 shares; issued 55,014,444
and 54,797,707 shares, respectively 34,384 34,249
Additional paid-in capital, common stock 318,123 314,440
Retained earnings 620,453 584,991
Deferred compensation, restricted stock (3,850) (4,599)
Cost of repurchased common stock
(6,898,938 and 6,922,285 shares,
respectively) (170,102) (170,678)
799,008 758,403
Accumulated foreign currency
translation adjustments (9,300) (9,140)
Minimum pension liability adjustment (7,995) (7,995)
Accumulated Other Comprehensive Loss (17,295) (17,135)
Total Common Shareholders' Equity 781,713 741,268
Total Shareholders' Equity 817,854 776,355
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,695,909 $2,689,412
The accompanying notes are an integral part of these statements.
PAGE 5
CNF TRANSPORTATION INC.
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in thousands except per share amounts)
Three Months Ended
March 31,
1999 1998
REVENUES $1,255,323 $1,089,866
Costs and Expenses
Operating expenses 1,029,150 901,326
General and administrative 121,082 110,860
Depreciation 38,962 32,875
Net gain on legal settlement (16,466) -
1,172,728 1,045,061
OPERATING INCOME 82,595 44,805
Other Income (Expense)
Interest expense (7,126) (8,532)
Dividend requirement on preferred securities (1,563) (1,563)
of subsidiary trust (Note 6)
Miscellaneous, net 955 (633)
(7,734) (10,728)
Income before Income Taxes 74,861 34,077
Income Taxes 32,565 15,164
Net Income 42,296 18,913
Preferred Stock Dividends 2,027 2,007
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 40,269 $ 16,906
Weighted-Average Common
Shares Outstanding (Note 5)
Basic 47,925,476 47,509,416
Diluted 55,814,095 55,476,583
Earnings per Common Share (Note 5)
Basic $ 0.84 $ 0.36
Diluted $ 0.74 $ 0.33
The accompanying notes are an integral part of these statements.
PAGE 6
CNF TRANSPORTATION INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31,
1999 1998
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 73,897 $ 97,617
OPERATING ACTIVITIES
Net income 42,296 18,913
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 44,528 37,019
Increase in deferred income taxes 390 766
Amortization of deferred compensation 2,707 1,885
Provision for doubtful accounts 2,711 2,703
Gains from sales of property, net (417) (1,465)
Changes in assets and liabilities:
Receivables 54,038 11,256
Prepaid expenses (21,907) (24,443)
Accounts payable (18,322) (23,485)
Accrued liabilities (7,498) 31,322
Accrued incentive compensation (17,557) (26,989)
Accrued claims costs 6,088 403
Income taxes 22,842 13,725
Employee benefits 7,992 7,550
Deferred charges and credits (13,722) (38,089)
Other (7,796) 4,292
Net Cash Provided by Operating Activities 96,373 15,363
INVESTING ACTIVITIES
Capital expenditures (55,799) (69,663)
Software expenditures (11,381) (12,081)
Proceeds from sales of property 2,540 6,364
Net Cash Used in Investing Activities (64,640) (75,380)
FINANCING ACTIVITIES
Repayment of long-term debt and capital
lease obligations (5,223) (5,399)
Proceeds from (repayment of) net
short-term borrowings (14,000) 71,000
Proceeds from exercise of stock options 3,488 2,473
Payments of common dividends (4,808) (4,757)
Payments of preferred dividends (5,556) (5,616)
Net Cash Provided by (Used in) Financing
Activities (26,099) 57,701
Increase (decrease) in Cash and
Cash Equivalents 5,634 (2,316)
CASH AND CASH EQUIVALENTS, END OF YEAR $ 79,531 $ 95,301
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 1998 Annual
Report to Shareholders.
Certain amounts in prior year financial statements have been
reclassified to conform to current year presentation.
2. Long-term Debt and Guarantees
The aggregate principal amount of the Company's unsecured 9 1/8% notes
is repayable on August 15, 1999. The Company has the ability and intent to
refinance the outstanding principal of $117.7 million on a long-term basis
and the notes are therefore included in Long-term Debt and Guarantees in
the Consolidated Balance Sheet as of March 31, 1999.
The Company guarantees the restructured and non-restructured notes
issued by the Company's Thrift and Stock Plan. Holders of the Series A
restructured and non-restructured notes have the right to require the
Company to purchase the notes, in whole or in part, on July 1, 1999. The
Company has the ability and intent to refinance the outstanding principal
of $72.4 million on a long-term basis and the notes are therefore included
in Long-term Debt and Guarantees in the Consolidated Balance Sheet as of
March 31, 1999.
3. Comprehensive Income
The Company's comprehensive income was $42.1 million and $18.2 million
for the three-month periods ended March 31, 1999 and 1998, respectively.
The only adjustment made to net income in the periods was for foreign
currency translation losses of $0.2 million and $0.7 million for the three
months ended March 31, 1999 and 1998, respectively.
PAGE 8
4. Business Segments
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information" established standards for reporting information about
operating segments in annual financial statements and requires selected
information in interim financial statements. Selected financial
information is reported below for the three-month periods ended March 31,
1999 and 1998:
(Thousands) Con-Way Emery Menlo Other Total
---------- ---------- ---------- ---------- ----------
1999
Revenues $ 438,511 $ 532,827 $ 162,987 $ 144,128 $1,278,453
Inter-company
Eliminations (5,132) (3,406) (2,428) (12,164) (23,130)
---------- ---------- ---------- ---------- ----------
Net Revenues 433,379 529,421 160,559 131,964 1,255,323
---------- ---------- ---------- ---------- ----------
Operating
Income 53,947 3,551 4,556 20,541 82,595
1998
Revenues 395,512 528,517 122,957 65,559 1,112,545
Inter-company
Eliminations (1,907) (6,884) (2,882) (11,006) (22,679)
---------- ---------- ---------- ---------- ----------
Net Revenues 393,605 521,633 120,075 54,553 1,089,866
---------- ---------- ---------- ---------- ----------
Operating
Income (Loss) 50,501 7,513 3,812 (17,021) 44,805
PAGE 9
5. Earnings Per Share
Basic earnings per share was computed by dividing net income available
to common shareholders by the weighted-average common shares outstanding.
Diluted earnings per share was calculated as follows:
Three Months Ended
(Dollars in thousands except March 31,
per share data) 1999 1998
----------------------
Earnings:
Net Income Available
to Common Shareholders $ 40,269 $ 16,906
Add-backs:
Dividends on Series B
preferred stock, net
of replacement funding 332 326
Dividends on preferred
securities of subsidiary
trust, net of tax 954 954
---------- ----------
$ 41,555 $ 18,186
---------- ----------
Shares:
Basic shares (weighted-average
common shares outstanding) 47,925,476 47,509,416
Stock option and restricted
stock dilution 765,435 780,797
Series B preferred stock 3,998,184 4,061,370
Preferred securities of
subsidiary trust 3,125,000 3,125,000
---------- ----------
55,814,095 55,476,583
---------- ----------
Diluted Earnings Per Share $ 0.74 $ 0.33
========== ==========
6. 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 10
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.
7. 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, tax 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 $13.5 million of letters of credit and $22.0 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, which expires on December 2,
1999, 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 with six months
notice. Services performed by the Company under the agreement are paid by
CFC on an arm's-length negotiated basis.
The Company is currently under examination by the Internal Revenue
Service (IRS) for tax years 1987 through 1996 on various issues. In
connection with those examinations, the IRS is seeking additional taxes,
plus interest, for certain matters relating to CFC for periods prior to its
spin-off from the Company in 1996. Although the Company is currently
contesting these additional taxes proposed by the IRS, the Company may
elect to pay a substantial portion of these taxes in 1999.
As the former parent of CFC, the Company is liable to the IRS for
CFC's tax liability relating to such periods. However, as part of the spin-
off, the Company and CFC entered into a tax sharing agreement that provides
a mechanism for the allocation of any additional tax liability and related
interest that arise due to adjustments by the IRS for years prior to the
spin-off. The Company believes it is entitled to and will pursue
reimbursement from CFC under the tax sharing agreement for any payments
that the Company makes to the IRS with respect to these additional taxes.
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.
PAGE 11
The Company has filed a protest concerning the proposed adjustment for
tax years 1987 through 1990 and is engaged in discussions with the Appeals
Office of the IRS. The Company is unable to predict whether or not it will
be able to resolve this issue with the Appeals Office. The Company expects
that, if it is unable to resolve this issue with the Appeals Office, it
will receive a statutory notice of assessment from the IRS before the end
of 1999. If this occurs, the Company intends to contest the assessment by
appropriate legal proceedings.
The Company believes that its practice of expensing these types of
aircraft maintenance costs is consistent with industry practice and intends
to continue to vigorously contest the proposed adjustment. However, if
this matter is determined adversely to the Company, there can be no
assurance that the Company will not be liable for substantial additional
taxes, plus accrued interest. As a result, the Company is unable to
predict the ultimate outcome of this matter and there can be no assurance
that this matter will not have a material adverse effect on the Company.
The IRS has proposed adjustments that would require Emery Worldwide to
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 Appeals Office of the IRS. However, the Company believes it is unlikely
that the issue will be resolved with the Appeals Office and expects to
receive a statutory notice of assessment from the IRS before the end of
2000. Upon receipt of the notice, the Company will be required to pay all
or a portion of the adjustment with accrued interest before seeking a
refund of that payment through appropriate legal proceedings.
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 be liable for a substantial amount of additional
aviation excise taxes for the 1990 through 1995 tax period, plus interest.
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.
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.
PAGE 12
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total Company net income available to common shareholders for the
first quarter of 1999 increased 138.2% to $40.3 million from $16.9 million
in the first quarter of 1998. Earnings per share for the first quarter of
1999 were $0.84 basic and $0.74 diluted compared to $0.36 basic and $0.33
diluted for the same period in 1998. Net income in the first quarter of
1999 included a net gain from the settlement of a lawsuit of $0.19 per
basic share and $0.16 per diluted share. Excluding the non-recurring net
gain, net income available to common shareholders would have increased
83.2% over the prior year quarter with diluted earnings per share of $0.58.
Revenues for the first quarter of 1999 increased at all four of the
Company's operating segments with the largest increase coming from the
Priority Mail operations, which was in the start-up phase during the first
quarter of last year and is included in the operating results of the Other
segment. Emery's revenue increased in the 1999 first quarter compared to
the same quarter last year following two quarters of year-over-year revenue
declines.
First quarter operating income in 1999 increased over the prior-year
first quarter at three of the four operating segments. The Other segment
consists primarily of the Priority Mail operations, but in the 1999 first
quarter also included a $16.5 million non-recurring net gain from the
settlement of a lawsuit. In addition, the Priority Mail operations reported
operating income in the first quarter of 1999 in contrast to start-up
losses in the first quarter of last year. Higher operating income at Con-
Way and Menlo was partially offset by lower operating income at Emery.
Other net expense for the first quarter was down 27.9% due primarily
to lower interest expense and gains on the sale of properties. Lower
interest expense was primarily the result of lower average short-term
borrowings and the refinancing of a capital lease obligation at a lower
interest rate in October 1998. The first quarter of the prior year also
included a loss on the sale of property.
The effective tax rate for the first quarter of 1999 was 43.5%
compared to 44.5% in 1998. The reduction was primarily the result of
higher income in the 1999 first quarter.
PAGE 13
Con-Way Transportation Services
Con-Way's revenue in the first quarter of 1999 increased 10.1% over
the prior year first quarter primarily as a result of increased freight
volume and revenue per hundredweight.
In the first quarter of 1999, total and less-than-truckload (LTL)
weight increased 3.5% and 4.2%, respectively, over the same quarter of last
year. Total and LTL shipments increased 5.2% and 5.3%, respectively. The
higher weight and shipment volumes reflect growth in core regional service
and interregional joint services. Net revenue per hundredweight in the
first quarter of 1999 increased 7.5% over the first quarter of last year
due primarily to higher rates obtained for Con-Way's core premium service
and a larger percentage of interregional joint services, which yield higher
rates on longer lengths of haul. The prior year first quarter included
benefits received from freight diverted by shippers concerned about a
possible strike at unionized national carriers.
Con-Way's first quarter operating income in 1999 was 6.8% above
operating income in the first quarter of 1998 primarily as a result of
higher revenue, which was partially offset by higher costs associated with
severe winter storms. Other factors contributing to improved operating
income in the first quarter of 1999 were increased emphasis on operating
efficiencies, better cost control, and lower fuel costs, which were
partially offset by start-up costs associated with Con-Way's new multi-
client warehousing and logistics business. The first quarter of last year
experienced lower weather related costs due to an unusually mild winter and
benefited from the strike concerns of shippers mentioned above.
Emery Worldwide
Emery's 1999 first-quarter revenue increased 1.5% from the 1998 first
quarter. Higher revenue from the Express Mail contract with the U.S.
Postal Service and Emery Global Logistics was partially offset by lower
airfreight revenue.
North American airfreight revenue in the 1999 first quarter decreased
6.6% from the same quarter of last year due primarily to a 10.0% decline in
freight volume partially offset by a yield increase of 4.2%. Lower freight
volume was partially attributable to decreased demand from certain
industries serviced by Emery and an increase in competitive ground-based
transportation. Emery's yield management program, which was designed to
reprice or eliminate certain low margin business, also contributed to lower
volume but was also a factor in achieving higher revenue per pound.
Improved revenue per pound in the first quarter of 1999 was also partially
due to a new higher yielding guaranteed service introduced in January 1999.
International airfreight revenue in the 1999 first quarter decreased
3.3% due primarily to a 4.4% decline in freight volume partially offset by
a 1.1% increase in yield. International freight volume in the 1999 first
quarter was lower than the same quarter last year due primarily to
continued adverse economic conditions in the international markets served
by Emery.
Emery's 1999 first quarter operating income decline of 52.7% from the
same quarter last year was primarily the result of lower airfreight revenue
and higher airfreight costs in part related to the repositioning of Emery
as a premium service carrier. Better service in the 1999 first quarter was
attained in part by maintaining its infrastructure and incurring quality-
related costs of improving aircraft dependability and modifying freight
handling processes. Lower fuel costs in the 1999 first quarter partially
offset the higher costs of the service initiatives.
PAGE 14
Management will continue to focus on positioning Emery as a premium
service provider. In North America, management intends to maintain an
infrastructure capable of servicing a higher volume of premium and
guaranteed services and to reduce the costs associated with its
infrastructure by replacing older and less reliable aircraft with newer
aircraft having lower maintenance costs and greater freight capacity,
including wide-body aircraft. Internationally, Emery's management will
focus on expanding its variable-cost-based operations. In an effort to
increase the international revenue as a percentage of total revenue,
management will continue its marketing efforts and convert more agent
locations to owned locations.
Menlo Logistics
Menlo's revenue in the first quarter of 1999 was 33.7% above the same
quarter of 1998. The 1999 first quarter results included revenue generated
from logistics contracts secured after the first quarter of 1998 and higher
revenue from existing contracts.
Operating income for Menlo in the 1999 first quarter was up 19.5% over
the first quarter of 1998. Higher operating income was primarily
attributable to increased revenue, the addition of higher-margin contracts
and moderation of operating costs. However, higher business development
and information system costs in the 1999 first quarter contributed to lower
operating income as a percentage of revenue than in the 1998 first quarter.
Other Segment
First quarter revenues for the Other segment increased 141.9% over the
same quarter last year. The Other segment consists primarily of the
operations under a Priority Mail contract with the U.S. Postal Service, and
includes Road Systems and VantageParts. Priority Mail revenue of $118.2
million increased 175.4% over the first quarter of last year due primarily
to the contract still being in the start-up phase in the first quarter of
1998.
Operating income for the Other segment increased by $37.6 million in
the first quarter of 1999 from a $17.0 million operating loss in the first
quarter of 1998. The increase was primarily the result of a $16.5 million
net gain from the settlement of a lawsuit in the first quarter of 1999 and
improved operating results from the Priority Mail operations. Priority
Mail operating income was $3.5 million in the first quarter of 1999
compared to a $17.6 million operating loss in the same quarter of last
year. First quarter results for the Priority Mail operations reflect
pricing that may be subject to retroactive adjustment at a later date. The
Company has proposed to the Postal Service increased pricing that the
Company feels is well founded and justifiable based upon its experience of
operating the Priority Mail contract in 1998. The Postal Service is
reviewing the Company's proposal. Consequently, the Company has recognized
contract revenues in the 1999 first quarter based upon the pricing actually
paid by the Postal Service. Any adjustments to contract revenue for prior
periods affected by the conclusion of the price re-determination will be
recognized in the then current fiscal quarter.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1999, the Company's cash and cash equivalents
increased by $5.6 million to $79.5 million. Cash from operations of $96.4
million provided substantially all of the funding for $67.2 million of
capital and software expenditures, $19.2 million of debt reduction and
$10.4 million of dividend payments.
Cash flow from operations in the first quarter of 1999 increased $81.0
million over the same quarter last year primarily due to higher net income,
depreciation and amortization, and changes in receivables, accrued liabilities
and deferred charges.
Capital expenditures of $55.8 million in the first quarter of 1999
decreased $13.9 million from the same quarter last year due primarily to
the inclusion in the 1998 first quarter of capital expenditures related to
the start-up phase of the Priority Mail contract. Proceeds from sales of
property were $3.8 million lower in the 1999 first quarter compared to the
same quarter of last year.
PAGE 15
During the first quarter of 1999, the Company repaid $14.0 million of
net short-term debt compared to the borrowing of $71.0 million of net short-
term debt during the first quarter of 1998. At March 31, 1999, the Company
had no borrowings under its $350 million unsecured credit facility and
$29.0 million outstanding under $95.0 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 $69.1
million at March 31, 1999, which left available capacity of $280.9 million.
In addition, the Company had available capacity of $66.0 million under
other uncommitted lines of credit. Under several other unsecured
facilities, $51.5 million of letters of credit were outstanding at March
31, 1999.
The aggregate principal amount of the Company's unsecured 9 1/8% Notes
is repayable on August 15, 1999. In addition, holders of the Series A
restructured and non-structured Thrift and Stock Plan (TASP) notes have the
right to require the Company to repurchase the notes, in whole or in part,
on July 1, 1999. The Company has the ability and intent to refinance the
outstanding principal on both the 9 1/8% Notes and the TASP notes on a long-
term basis. Refer to Note 2 of the Notes to Consolidated Financial
Statements.
The Company filed a shelf registration statement with the Securities
and Exchange Commission in June 1998 that covers $250 million of debt and
equity securities for future issuance with terms to be decided when and if
issued.
The Company's ratio of total debt to capital decreased to 34.5% at
March 31, 1999, from 36.4% at December 31, 1998, primarily due to lower
short-term borrowings and higher shareholders' equity from net income.
Market Risk
There have been no material changes in the Company's market risk
sensitive instruments and positions since its disclosure in its Annual
Report on Form 10-K for the year ended December 31, 1998.
Cyclicality and Seasonality
The Company operates in industries that are affected directly by
general economic conditions and seasonal fluctuations, both of which affect
demand for transportation services. In the trucking and airfreight
industries, 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. Operations under the
Priority Mail contract peak in December due primarily to higher shipping
demand related to the holiday season.
PAGE 16
Year 2000
Renovation of all business-critical Information Technology (IT)
Systems is scheduled to be substantially complete by the end of the second
quarter of 1999. Validation, which is currently in process for the
Company's systems and software applications, is scheduled for completion by
the end of the third quarter of 1999.
Like many other companies, an issue affecting the Company is the
ability of its computer systems and software to process the year 2000 (Y2K
or Year 2000). To ensure that the Company's systems are Year 2000
compliant, a team of IT professionals began preparing for the Y2K issue in
1996. In 1997, the Company formed a Steering Committee composed of senior
executives to address compliance issues. The Y2K team developed, and the
Steering Committee approved, a Company-wide initiative to address issues
associated with the year 2000. Company management has designated the Y2K
project as the highest priority of the Company's Information Technology
Department.
The Company's Y2K compliance efforts are focused on business-critical
items. Systems and software are considered "business-critical" if a failure
would either have a material adverse impact on the Company's business,
financial condition or results of operations or involve a safety exposure
to employees or customers.
State of Readiness
The Company has identified distinct categories for its Y2K compliance
efforts: (1) IT Systems, (2) Non-IT Systems, and (3) third parties with
which the Company has major relationships. The Company intends to fix or
replace non-compliant software and systems through a process that involves
taking inventory of its systems, assessing risks and impact, correcting non-
compliant systems through renovation or replacement, and validating
compliance through testing. The Company intends to commit the resources
necessary to bring the project to scheduled completion.
IT Systems - IT Systems include mainframes, mid-range computers and
servers, networks and workstations, related operating systems and
application software. The Company has inventoried and assessed all business-
critical IT Systems. Renovation efforts are in progress or are
substantially complete, depending on the system or software. The following
percentages of system and software renovations were achieved as of March
31, 1999. Mainframe hardware has been fully renovated. Certain peripheral
mainframe hardware is approximately 95% renovated. Mainframe operating
systems and mainframe applications software are approximately 90% and 70%
renovated, respectively. Mid-range computers and servers are estimated to
be 55% renovated while approximately 50% of related operating systems and
application software programs have been renovated. Network hardware
(excluding servers) and computer workstations are approximately 95%
renovated and an estimated 20% of the related operating systems and
application software programs have been renovated.
Non-IT Systems - Non-IT Systems include operating equipment, security
systems, and other equipment that may contain microcontrollers with
embedded technology. Certain IT Systems may also include embedded
technology. The Company has contacted all business-critical operating and
support facilities to identify the extent of its embedded technology and
has received responses from essentially all of those surveyed locations.
The Company is assessing these results and, when embedded technology is
determined to exist, the Company is surveying the vendor or manufacturer of
the embedded technology or the affected equipment or system to identify
risks related to the Year 2000. Approximately 60% of the embedded
technology the Company is aware of has been confirmed as Y2K compliant. The
Company's remaining systems are being assessed and, if necessary, will be
replaced if determined to be non-compliant. These systems are expected to
be Y2K compliant by the end of the second quarter of 1999 and to be
validated by the end of the third quarter of 1999.
PAGE 17
Third Party Systems - In addition to its own IT and Non-IT Systems,
the Company is also reliant upon system capabilities of third parties
(including, among others, customers, vendors, domestic and international
government agencies, and U.S. and international airports). The Company
believes these third party risks are inherent in the industry and not
specific to the Company.
The Company has communicated with third parties with which the Company
has material business relationships to determine the extent to which the
Company's systems are vulnerable to those third parties' failure to make
necessary changes related to Y2K issues.
Essentially all of the Company's critical vendors have been contacted
and approximately 95% have responded to the surveys. If a vendor is
determined to be non-compliant, the Company is working to identify a Y2K-
compliant vendor as a replacement. In an effort to mitigate risks related
to the system capabilities of certain customers, the Company developed Y2K-
compliant software upgrades to its tracking and tracing software and other
proprietary software utilized by its customers.
The International Air Transport Association and the Air Transport
Association of America are involved in global and industry-wide studies
aimed at assessing the Y2K compliance status of airports and other U.S. and
international government agencies. As a member of these associations, Emery
Worldwide is analyzing the results of these studies as they become
available.
Costs to Address Y2K Compliance
Since 1996, the Company has expensed approximately $29 million on Y2K
compliance and expects that approximately $11 million of additional Y2K
compliance costs will be expensed through December 31, 1999. All Y2K costs
have been and are expected to be funded from operations. In the first
quarter of 1999, the Company capitalized $1.8 million of purchased software
costs and $9.6 million of internally developed software costs. A portion
of the capitalized software costs was for new financial and administrative
systems that are Y2K compliant. These systems have replaced or are expected
to replace certain non-compliant systems.
Risks
While the Company believes its efforts to address the Year 2000 issue
will be successful in avoiding any material adverse effect on the Company's
operations or financial condition, it recognizes that failing to resolve
Year 2000 issues on a timely basis would, in a most reasonably likely worst
case scenario, significantly limit its ability to provide its services for
a period of time, especially if such failure is coupled with a third-party
failure. As a result, there can be no assurance that this matter will not
have a material adverse effect on the Company.
Contingency Plans
The Company is establishing a Y2K contingency plan to evaluate
business disruption scenarios, coordinate the establishment of Y2K
contingency plans, and identify and implement preemptive strategies.
Detailed contingency plans for critical business processes are scheduled to
be formulated by the end of the second quarter of 1999 and, if necessary,
would undergo modification should there be any changes in the status of the
Company's Y2K renovation efforts. At March 31, 1999, draft contingency
plans have been completed by most of the Company's operating and support
facilities.
PAGE 18
Forward-Looking Statements
Certain statements included 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 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,
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, tax and environmental matters, including the tax
matters described herein. Although CFC is, in general, either the primary
or secondary 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 19
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 costs 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 material adverse
effect on the Company. Certain legal matters are discussed in Note 7 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 May 3, 1999, 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 were cast as
follows:
Nominee For Against
Donald E. Moffitt 47,092,789 468,496
Michael J. Murray 47,122,179 439,106
Robert D. Rogers 47,120,248 441,037
William J. Schroeder 47,122,021 439,264
The following directors did not stand for election and continued in
office as directors after the Annual Shareholders Meeting: Robert Alpert,
Richard A. Clarke, Margaret G. Gill, Robert Jaunich II, W. Keith Kennedy,
Jr., Richard B. Madden, Gregory L. Quesnel, and Robert P. Wayman.
Earl Cheit, a member of the Board of Directors since 1976, retired
from office as director effective May 3, 1999.
The appointment of Arthur Andersen LLP as independent public
accountants for the year 1999 was approved by the following vote: For
47,069,178; Against 285,279; Abstain 206,828.
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 3.9x and 2.4x for the three months ended
March 31, 1999 and 1998, 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 3.8x and 2.3x for the three
months ended March 31, 1999 and 1998, respectively.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 1999.
PAGE 20
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, 1999 /s/Chutta Ratnathicam
Chutta Ratnathicam
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 79,531
<SECURITIES> 0
<RECEIVABLES> 799,099
<ALLOWANCES> (22,532)
<INVENTORY> 41,215
<CURRENT-ASSETS> 1,071,800
<PP&E> 1,765,644
<DEPRECIATION> (766,719)
<TOTAL-ASSETS> 2,695,909
<CURRENT-LIABILITIES> 870,739
<BONDS> 461,211
125,000
129,168
<COMMON> 352,507
<OTHER-SE> 336,179
<TOTAL-LIABILITY-AND-EQUITY> 2,695,909
<SALES> 0
<TOTAL-REVENUES> 1,255,323
<CGS> 0
<TOTAL-COSTS> 1,172,728
<OTHER-EXPENSES> 7,734
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,126
<INCOME-PRETAX> 74,861
<INCOME-TAX> 32,565
<INCOME-CONTINUING> 42,296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,269
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.74
</TABLE>
Exhibit 99(a)
CNF TRANSPORTATION INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Three Months Ended
March 31,
1999 1998
Fixed Charges:
Interest Expense $ 7,126 $ 8,532
Capitalized Interest 1,129 490
Dividend Requirement on Series B
Preferred Stock [1] 3,063 3,003
Interest Component of
Rental Expense [2] 12,684 9,863
$ 24,002 $ 21,888
Earnings:
Income before Taxes $ 74,861 $ 34,077
Fixed Charges 24,002 21,888
Capitalized Interest (1,129) (490)
Preferred Dividend Requirements [3] (3,063) (3,003)
$ 94,671 $ 52,472
Ratio of Earnings to Fixed Charges: 3.9x 2.4x
[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.
[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,
1999 1998
Combined Fixed Charges and Preferred
Stock Dividends:
Interest Expense $ 7,126 $ 8,532
Capitalized Interest 1,129 490
Dividend Requirement on Series B
Preferred Stock [1] 3,063 3,003
Dividend Requirement on Preferred
Securities of Subsidiary Trust 1,563 1,563
Interest Component of
Rental Expense [2] 12,684 9,863
$ 25,565 $ 23,451
Earnings:
Income before Taxes $ 74,861 $ 34,077
Fixed Charges 25,565 23,451
Capitalized Interest (1,129) (490)
Preferred Dividend Requirements [3] (3,063) (3,003)
$ 96,234 $ 54,035
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends: 3.8x 2.3x
[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.
[3] Preferred stock dividend requirements included in fixed charges but not
deducted in the determination of Income before Taxes.
