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, 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 July 31, 1999: 48,343,312
PAGE 2
CNF TRANSPORTATION INC.
FORM 10-Q
Quarter Ended June 30, 1999
____________________________________________________________________________
____________________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Statements of Consolidated Income -
Three and Six and Months Ended June 30, 1999 and 1998 5
Statements of Consolidated Cash Flows -
Six Months Ended June 30, 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 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)
June 30, December 31,
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 108,471 $ 73,897
Trade accounts receivable, net of allowances 795,588 810,550
Other accounts receivable 45,154 51,865
Operating supplies, at lower of average
cost or market 40,168 41,764
Prepaid expenses 48,535 32,741
Deferred income taxes 91,029 89,544
Total Current Assets 1,128,945 1,100,361
PROPERTY, PLANT AND EQUIPMENT, NET
Land 112,272 114,146
Buildings and leasehold improvements 518,019 468,123
Revenue equipment 766,915 714,195
Other equipment 449,042 425,476
1,846,248 1,721,940
Accumulated depreciation and amortization (803,495) (737,464)
1,042,753 984,476
OTHER ASSETS
Deferred charges and other assets 136,000 128,627
Capitalized software, net 80,711 64,285
Unamortized aircraft maintenance, net 151,067 143,349
Goodwill, net 271,468 268,314
639,246 604,575
TOTAL ASSETS $2,810,944 $2,689,412
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,
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 273,433 $ 285,832
Accrued liabilities 461,176 446,171
Accrued claims costs 116,402 108,028
Current maturities of long-term debt and
capital leases 6,460 5,259
Short-term borrowings 6,000 43,000
Accrued income taxes 39,224 12,340
Total Current Liabilities 902,695 900,630
LONG-TERM LIABILITIES
Long-term debt and guarantees (Note 2) 350,505 356,905
Long-term obligations under capital leases 110,682 110,730
Accrued claims costs 69,135 58,388
Employee benefits 206,147 190,268
Other liabilities and deferred credits 48,072 55,268
Deferred income taxes 131,257 115,868
Total Liabilities 1,818,493 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 846,035 and 854,191
shares, respectively 8 9
Additional paid-in capital, preferred stock 128,673 129,914
Deferred compensation (91,218) (94,836)
Total Preferred Shareholders' Equity 37,463 35,087
Common stock, $.625 par value; authorized
100,000,000 shares; issued 55,211,611
and 54,797,707 shares, respectively 34,507 34,249
Additional paid-in capital, common stock 321,735 314,440
Retained earnings 662,346 584,991
Deferred compensation, restricted stock (2,442) (4,599)
Cost of repurchased common stock
(6,883,335 and 6,922,285 shares,
respectively) (169,717) (170,678)
846,429 758,403
Accumulated foreign currency translation
adjustments (8,446) (9,140)
Minimum pension liability adjustment (7,995) (7,995)
Accumulated Other Comprehensive Loss (16,441) (17,135)
Total Common Shareholders' Equity 829,988 741,268
Total Shareholders' Equity 867,451 776,355
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,810,944 $2,689,412
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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES $ 1,361,637 $ 1,199,654 $ 2,616,960 $ 2,289,520
Costs and Expenses
Operating expenses 1,105,296 966,461 2,134,446 1,867,787
General and administrative 129,718 113,317 250,800 224,177
Depreciation 41,401 35,873 80,363 68,748
Net gain on sale of assets of
parts distribution operation (10,112) - (10,112) -
Net gain on legal settlement - - (16,466) -
1,266,303 1,115,651 2,439,031 2,160,712
OPERATING INCOME 95,334 84,003 177,929 128,808
Other Income (Expense)
Interest expense (7,352) (8,449) (14,478) (16,981)
Dividend requirement on
preferred securities of
subsidiary trust (Note 6) (1,563) (1,563) (3,126) (3,126)
Miscellaneous, net (76) 542 879 (91)
(8,991) (9,470) (16,725) (20,198)
Income before Income Taxes 86,343 74,533 161,204 108,610
Income Taxes 37,559 33,167 70,124 48,331
Net Income 48,784 41,366 91,080 60,279
Preferred Stock Dividends 2,061 2,040 4,088 4,047
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 46,723 $ 39,326 $ 86,992 $ 56,232
Weighted-Average Common Shares
Outstanding (Note 5)
Basic 48,158,898 47,612,373 48,042,740 47,561,179
Diluted 55,951,658 55,506,056 55,897,549 55,536,847
Earnings per Common Share (Note 5)
Basic $ 0.97 $ 0.83 $ 1.81 $ 1.18
Diluted $ 0.86 $ 0.73 $ 1.60 $ 1.06
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,
1999 1998
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 73,897 $ 97,617
OPERATING ACTIVITIES
Net income 91,080 60,279
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 91,832 77,901
Increase in deferred income taxes 13,904 1,243
Amortization of deferred compensation 5,923 3,822
Provision for doubtful accounts 5,665 5,248
Gains on sales of property, net (317) (1,876)
Net gain on sale of assets of parts
distribution operation (10,112) -
Changes in assets and liabilities:
Receivables 11,995 (33,964)
Prepaid expenses (15,851) (9,069)
Accounts payable (11,674) (16,592)
Accrued liabilities 14,226 33,172
Accrued claims costs 17,701 3,834
Income taxes 26,884 27,766
Employee benefits 15,879 15,551
Deferred charges and credits (23,706) (23,676)
Other (15,098) (11,470)
Net Cash Provided by Operating Activities 218,331 132,169
INVESTING ACTIVITIES
Capital expenditures (143,274) (125,345)
Software expenditures (21,633) (24,304)
Proceeds from sales of property 3,922 9,181
Proceeds from sale of assets of parts
distribution operation 27,961 -
Net Cash Used in Investing Activities (133,024) (140,468)
FINANCING ACTIVITIES
Repayment of long-term debt and capital
lease obligations (5,247) (5,421)
Proceeds from (repayment of) short-term
borrowings, net (37,000) 7,000
Proceeds from exercise of stock options 6,707 3,136
Payments of common dividends (9,637) (9,518)
Payments of preferred dividends (5,556) (5,616)
Net Cash Used in Financing Activities (50,733) (10,419)
Increase (decrease) in Cash and
Cash Equivalents 34,574 (18,718)
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 108,471 $ 78,899
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 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 June 30, 1999.
The Company guarantees the restructured and non-restructured notes
issued by the Company's Thrift and Stock Plan (TASP). On July 1, 1999, the
Company refinanced $45.25 million of Series "A" and $27.15 million of
Series "A restructured" TASP notes. These notes, with respective interest
rates of 8.42% and 9.04%, were replaced with $72.4 million of new TASP
notes with a rate of 6.0% and a maturity date of January 1, 2006.
3. Comprehensive Income
SFAS 130, "Reporting Comprehensive Income", requires companies to
report a measure of all changes in equity except those resulting from
investments by owners and distributions to owners. Comprehensive income
was as follows:
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net Income $ 48,784 $ 41,366 $ 91,080 $ 60,279
Foreign currency
translation adjustment 854 (651) 694 (1,343)
---------- ---------- ---------- ----------
$ 49,638 $ 40,715 $ 91,774 $ 58,936
========== ========== ========== ==========
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:
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues
Con-Way Transportation $ 469,100 $ 429,263 $ 907,611 $ 824,775
Emery Worldwide 588,808 532,475 1,121,635 1,060,992
Menlo Logistics 184,850 151,145 347,837 274,102
Other 139,463 111,081 283,591 176,640
---------- ---------- ---------- ----------
1,382,221 1,223,964 2,660,674 2,336,509
Intercompany Eliminations
Con-Way Transportation (5,553) (4,645) (10,685) (6,552)
Emery Worldwide (2,954) (5,749) (6,360) (12,633)
Menlo Logistics (3,247) (2,577) (5,675) (5,459)
Other (8,830) (11,339) (20,994) (22,345)
---------- ---------- ---------- ----------
(20,584) (24,310) (43,714) (46,989)
External Revenues
Con-Way Transportation 463,547 424,618 896,926 818,223
Emery Worldwide 585,854 526,726 1,115,275 1,048,359
Menlo Logistics 181,603 148,568 342,162 268,643
Other 130,633 99,742 262,597 154,295
---------- ---------- ---------- ----------
$1,361,637 $1,199,654 $2,616,960 $2,289,520
========== ========== ========== ==========
Operating Income (Loss)
Con-Way Transportation $ 60,830 $ 53,990 $ 114,777 $ 104,491
Emery Worldwide 17,425 22,213 20,976 29,726
Menlo Logistics 5,273 4,986 9,829 8,798
Other (1) 11,806 2,814 32,347 (14,207)
---------- ---------- ---------- ----------
$ 95,334 $ 84,003 $ 177,929 $ 128,808
========== ========== ========== ==========
(1)For the three months ended June 30, 1999, the Other segment included a
$10.1 million net gain recognized in June 1999 from the sale of the
assets of VantageParts, the Company's wholesale parts distribution
operation. For the six months ended June 30, 1999, the Other segment
included the net gain on the VantageParts asset sale and a $16.5 million
net gain on a lawsuit settled in January 1999.
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 Six Months Ended
(Dollars in thousands except June 30, June 30,
per share data) 1999 1998 1999 1998
---------- ---------- --------- ----------
Earnings:
Net Income Available
to Common Shareholders $ 46,723 $ 39,326 $ 86,992 $ 56,232
Add-backs:
Dividends on Series B
preferred stock,
net of replacement
funding 339 337 671 663
Dividends on preferred
securities of
subsidiary trust,
net of tax 954 954 1,908 1,908
---------- ---------- ---------- ----------
$ 48,016 $ 40,617 $ 89,571 $ 58,803
---------- ---------- ---------- ----------
Shares:
Basic shares (weighted-
average common shares
outstanding) 48,158,898 47,612,373 48,042,740 47,561,179
Stock option and
restricted stock
dilution 684,627 722,628 746,676 804,613
Series B preferred stock 3,983,133 4,046,055 3,983,133 4,046,055
Preferred securities of
subsidiary trust 3,125,000 3,125,000 3,125,000 3,125,000
---------- ---------- ---------- ----------
55,951,658 55,506,056 55,897,549 55,536,847
---------- ---------- ---------- ----------
Diluted Earnings
Per Share $ 0.86 $ 0.73 $ 1.60 $ 1.06
========== ========== ========== ==========
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, as of June 30, 1999 CFC had 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. 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.
PAGE 11
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 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
Net income available to common shareholders for the second quarter of
1999 increased 18.8% from last year's second quarter to a record $46.7
million, resulting in basic earnings per share of $0.97 and diluted
earnings per share of $0.86. The 1999 second quarter results included a
$10.1 million non-recurring net gain equal to $.12 per basic share and $.10
per diluted share on the sale of the assets of VantageParts, the Company's
wholesale parts distribution operation. Excluding that sale, net income
available to common shareholders increased 4.3% over the second quarter of
1998 and diluted earnings per share was $0.76, the best second quarter in
the Company's history.
Net income available to common shareholders for the first half of 1999
increased 54.7% over the first half of last year, resulting in basic
earnings per share of $1.81 and diluted earnings per share of $1.60. In
addition to the net gain on the sale of assets of VantageParts in the
second quarter, the first half of 1999 also included a $16.5 million non-
recurring net gain on the settlement of a lawsuit. Excluding both non-
recurring net gains, net income available to common shareholders for the
first half of 1999 was 28.0% higher than the first half of last year and
resulted in basic earnings per share of $1.50 and diluted earnings per
share of $1.33.
Revenue for the second quarter and first half of 1999 increased 13.5%
and 14.3%, respectively, over the second quarter and first half of last
year due to higher revenue from all reporting segments. Revenue in the
second quarter and first half of 1999 reflects full operations under the
Priority Mail contract.
Operating income for the second quarter and first half of 1999
increased 13.5% and 38.1%, respectively, from the comparable periods of
1998. Emery, which improved its operating income by $13.9 million from the
first quarter of 1999, was the only segment not reporting higher second-
quarter and first-half operating income when compared to the same periods
last year. In the second quarter of 1999, the Other segment included the
net gain on the sale of assets of VantageParts. The first half of 1999
included both the VantageParts net gain and the net gain on the settlement
of a lawsuit in the first quarter of 1999. In the first half of last year,
the Other segment included losses during the start-up phase of the Priority
Mail operations.
Other net expense in the second quarter and first half of 1999
decreased 5.1% and 17.2%, respectively, from the same periods last year due
primarily to lower interest expense. The interest decline was primarily
attributable to lower average short-term borrowings and the July 1998
refinancing of a capital lease obligation at a lower interest rate.
The effective tax rate for the first quarter and first half of 1999
was 43.5% compared to 44.5% in 1998. The reduction was primarily the
result of higher income in 1999.
Con-Way Transportation Services
Con-Way's revenue in the second quarter and first six months of 1999
increased 9.2% and 9.6%, respectively, over the comparable periods last
year due primarily to higher freight volume and revenue per hundredweight.
PAGE 13
In the second quarter of 1999, total and less-than-truckload (LTL)
weight increased 5.2% and 5.6%, respectively, over the second quarter of
1998. Total and LTL weight in the first six months of 1999 increased 4.7%
and 5.3%, respectively, over the same period last year. The higher freight
volumes reflect growth in core regional service and interregional joint
services. The entire first half of 1999 benefited from inter-regional
joint services between all of Con-Way's regional carriers. Only the second
quarter of last year benefited from the new inter-regional joint services
between the western and central carriers. The first half of last year
included benefits received from freight diverted by shippers concerned
about a possible strike at unionized national carriers.
In the second quarter of 1999, revenue per hundredweight for the
regional LTL carriers increased 4.6% over the second quarter of last year
and the regional carriers' revenue per hundredweight for the first half of
1999 was 6.1% higher than the first half of 1998. The increased yields
were primarily due to higher rates obtained for Con-Way's core premium
service and a larger percentage of inter-regional joint services, which
yield higher rates on longer lengths of haul.
Con-Way's operating income in the second quarter and first half of
1999 increased 12.7% and 9.8%, respectively, over the same periods of 1998
due primarily to higher revenue. Other factors contributing to improved
operating income for both the second quarter and first half of 1999 were
increased load factor, greater emphasis on operating efficiencies and
better cost control. The first half of 1999 was adversely impacted by
start-up costs associated with Con-Way's new multi-client warehousing and
logistics business and the first half of last year benefited from the
strike concerns of shippers mentioned above.
Emery Worldwide
Emery's revenue in the second quarter and first half of 1999 was 11.2%
and 6.4% higher, respectively, than the same periods last year due
primarily to higher revenue from the Express Mail contract with the U.S.
Postal Service and increased international airfreight revenue. North
American airfreight revenue was higher in the second quarter of 1999 but
was lower for the first half of 1999 when compared to the respective
periods last year.
North American airfreight revenue for the second quarter of 1999
increased 2.9% over the same quarter of last year due primarily to a 5.3%
increase in yield partially offset by a 2.3% decline in freight volume.
Although yields for the first half of 1999 were 4.8% higher than the same
period last year, a 6.2% decline in weight contributed to a 2.0% decrease
in North American airfreight revenue. Lower freight volume was partially
attributable to decreased demand from certain industries serviced by Emery
and an increase in competitive ground-based transportation. Factors
contributing to improved revenue per pound were continued emphasis on
renegotiating certain low margin business and the introduction on January
1, 1999 of a new higher yielding guaranteed delivery service.
International airfreight revenue for the second quarter of 1999 was
13.1% higher than the second quarter of last year due primarily to freight
volume and yield increases of 10.8% and 2.1%, respectively. In the first
half of 1999, a 3.2% increase in weight and 1.7% higher yield contributed
to a 4.9% improvement in international airfreight revenue over the same
period last year. Freight volume and yield in the second quarter and first
half of 1999 were favorably impacted by improved economic conditions in the
international markets served by Emery.
PAGE 14
Emery's second-quarter 1999 operating income declined 21.6% from last
year's second quarter and 1999 first-half operating income was down 29.4%
from last year's first half. Although revenue was higher, operating income
for the second quarter and first half of 1999 declined from the comparable
periods last year due primarily to higher airfreight costs in part related
to an ongoing initiative to reposition Emery as a premium service carrier.
This initiative is intended to improve service by, among other things,
improving infrastructure and aircraft dependability and modifying freight
handling processes.
Management will continue to focus on positioning Emery as a premium
service provider. In North America, management intends to continue to
develop an infrastructure capable of servicing a higher volume of premium
and guaranteed delivery 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 will seek to convert
more of Emery's agent locations to owned locations.
Menlo Logistics
Menlo's revenue in the second quarter and first half of 1999 exceeded
the same periods last year by 22.2% and 27.4%, respectively. Results for
the first half of 1999 included revenue generated from several large
logistics contracts secured in the first half of 1998. The second quarter
and first half of 1999 also include higher revenue from existing contracts
compared with the same periods last year.
Operating income for Menlo in the second quarter and first half of
1999 increased 5.8% and 11.7%, respectively, over the comparable periods
last year. Higher operating income was primarily attributable to increased
revenue. However, higher business development and information system costs
incurred during the second quarter and first half of 1999 contributed to
lower operating income as a percentage of revenue than in the same periods
last year.
Other Segment
The Other segment consists primarily of the operations under a
Priority Mail contract with the U.S. Postal Service, and includes the
operating results of Road Systems and, prior to its sale of assets by the
Company in May 1999, VantageParts. Also included in the Other segment were
net gains on the settlement of a lawsuit and on the VantageParts asset
sale.
Second-quarter and first-half revenue for the Other segment increased
31.0% and 70.2% over the respective periods last year due substantially to
higher revenue from the Priority Mail operations. Second-quarter revenue
from the Priority Mail contract increased 34.9% from the second quarter of
last year and 1999 first-half revenue increased 81.1% from the first half
of 1998. The Priority Mail operations were not fully implemented until
late in the second quarter of last year.
For the second quarter of 1999, operating income for the Other segment
increased by $9.0 million over the second quarter of 1998 due primarily to
a $10.1 million net gain from the VantageParts asset sale in May 1999. For
the first half of 1999, operating results improved by $46.6 million over
the first half of 1998 due primarily to a $20.2 million improvement in the
Priority Mail operating results, the VantageParts net gain, and a $16.5
million net gain from a lawsuit settled in January 1999. The first half of
last year included losses incurred during the start-up phase of the
Priority Mail contract.
PAGE 15
For the second quarter and first half of 1999, 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. Any adjustments to
contract revenue for prior periods resulting from future changes in
contract pricing will be recognized in the then current quarter.
LIQUIDITY AND CAPITAL RESOURCES
In the first half of 1999, the Company's cash and cash equivalents
increased $34.6 million to $108.5 million. Cash from operations of $218.3
million provided substantially all of the funding for $164.9 million of
capital and software expenditures, $42.2 million of debt reduction and
$15.2 million of dividend payments.
Cash flow from operations in the first half of 1999 increased $86.2
million over the same period last year primarily due to higher net income,
depreciation and amortization, and the net effect of changes in receivables
and accrued liabilities.
Capital expenditures of $143.3 million in the first half of 1999
increased $17.9 million from the same period last year due primarily to a
$45.6 million increase in Con-Way's capital expenditures partially offset
by a $28.6 million decline in capital expenditures for the Priority Mail
contract. For the first half of 1999, Con-Way spent $89.5 million on
primarily revenue equipment and infrastructure in connection with its
capital reinvestment program. For the remainder of 1999, additional
expenditures of approximately $100 million are expected under Con-Way's
reinvestment program. Capital expenditures related to the Priority Mail
contract in the first half of 1999 declined compared to the first half of
last year given required capital expenditures in the prior period related
to the start-up phase of the Priority Mail contract.
The sale of assets of VantageParts in the second quarter of 1999
generated proceeds of $28.0 million and a non-recurring net gain of $10.1
million.
During the first half of 1999, the Company repaid $42.2 million of net
short-term debt compared to the borrowing of $1.6 million of net short-term
debt during the first half of 1998. At June 30, 1999, the Company had no
borrowings under its $350 million unsecured credit facility and $6.0
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 $63.6
million at June 30, 1999, which left available capacity of $286.4 million.
In addition, the Company had available capacity of $89.0 million under
other uncommitted lines of credit. Under several other unsecured
facilities, $49.3 million of letters of credit were outstanding at June 30,
1999.
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 on these notes on a long-term basis.
Refer to Note 2 of the Notes to Consolidated Financial Statements.
PAGE 16
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 32.3% at
June 30, 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.
Year 2000
Renovation of all business-critical Information Technology (IT)
Systems was substantially complete at June 30, 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.
PAGE 17
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 substantially complete.
Mainframe hardware has been fully renovated. Certain peripheral mainframe
hardware is approximately 96% renovated. Mainframe operating systems and
mainframe applications software are approximately 95% and 86% renovated,
respectively. Mid-range computers and servers are estimated to be 98%
renovated while approximately 99% of related operating systems and
application software programs have been renovated. Network hardware
(excluding servers) and computer workstations are approximately 98%
renovated. An estimated 50% of the network hardware and computer
workstation operating systems and application software programs have been
upgraded. However, the portion of non-compliant network hardware and
computer workstation operating systems and application software programs
represents vendor software that is being remedied as compliant upgrades are
provided by the vendor.
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.
Approximately 97% of the embedded technology the Company is aware of has
been confirmed as Y2K compliant. The Company's remaining systems will be
replaced if determined to be non-compliant. These systems are expected to
be validated by the end of the third quarter of 1999.
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 99% 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 $34.5 million on
Y2K compliance and expects that approximately $5.9 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
half of 1999, the Company capitalized $4.8 million of purchased software
costs and $16.8 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.
PAGE 18
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 has established Y2K business resumption contingency plans
by evaluating business disruption scenarios and identifying and
implementing preemptive strategies. Detailed contingency plans for
critical business processes have been completed by all of the Company's
operations facilities. The testing of potential scenarios, which is
expected to occur in the third quarter of 1999, may result in modifications
to the contingency plans. Business resumption contingency plans are
expected to be incorporated into the Company's normal and future risk
management activities.
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.
The Department of Transportation, through its Office of Inspector
General, and the Federal Aviation Administration are conducting an
investigation relating to the handling of so-called hazardous materials by
Emery. The investigation is ongoing and Emery is cooperating fully.
Because the investigation is at a preliminary stage, the Company is unable
to predict the outcome of this investigation.
Certain legal matters are discussed in Note 7 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 4.2x and 3.4x for the six months ended
June 30, 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 4.0x and 3.2x for
the six months ended June 30, 1999 and 1998,
respectively.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 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)
August 10, 1999 /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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 108,471
<SECURITIES> 0
<RECEIVABLES> 817,726
<ALLOWANCES> (22,138)
<INVENTORY> 40,168
<CURRENT-ASSETS> 1,128,945
<PP&E> 1,846,248
<DEPRECIATION> (803,495)
<TOTAL-ASSETS> 2,810,944
<CURRENT-LIABILITIES> 902,695
<BONDS> 461,187
125,000
128,681
<COMMON> 356,242
<OTHER-SE> 382,528
<TOTAL-LIABILITY-AND-EQUITY> 2,810,944
<SALES> 0
<TOTAL-REVENUES> 2,616,960
<CGS> 0
<TOTAL-COSTS> 2,439,031
<OTHER-EXPENSES> 16,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,478
<INCOME-PRETAX> 161,204
<INCOME-TAX> 70,124
<INCOME-CONTINUING> 91,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,992
<EPS-BASIC> 1.81
<EPS-DILUTED> 1.60
</TABLE>
Exhibit 99(a)
CNF TRANSPORTATION INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Six Months Ended
June 30,
1999 1998
Fixed Charges:
Interest Expense $ 14,478 $ 16,981
Capitalized Interest 2,508 969
Dividend Requirement on Series B
Preferred Stock [1] 5,556 5,616
Interest Component of
Rental Expense [2] 25,406 19,134
$ 47,948 $ 42,700
Earnings:
Income before Taxes $ 161,204 $ 108,610
Fixed Charges 47,948 42,700
Capitalized Interest (2,508) (969)
Preferred Dividend Requirements [3] (5,556) (5,616)
$ 201,088 $ 144,725
Ratio of Earnings to Fixed Charges: 4.2x 3.4x
[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)
Six Months Ended
June 30,
1999 1998
Combined Fixed Charges and Preferred
Stock Dividends:
Interest Expense $ 14,478 $ 16,981
Capitalized Interest 2,508 969
Dividend Requirement on Series B
Preferred Stock [1] 5,556 5,616
Dividend Requirement on Preferred
Securities of Subsidiary Trust 3,126 3,126
Interest Component of
Rental Expense [2] 25,406 19,134
$ 51,074 $ 45,826
Earnings:
Income before Taxes $ 161,204 $ 108,610
Fixed Charges 51,074 45,826
Capitalized Interest (2,508) (969)
Preferred Dividend Requirements [3] (5,556) (5,616)
$ 204,214 $ 147,851
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends: 4.0x 3.2x
[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.
